[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2023 Edition]
[From the U.S. Government Publishing Office]



[[Page i]]

          
          
          Title 26

Internal Revenue


________________________

Part 1 (Sec. Sec.  1.1401 to 1.1550)

                         Revised as of April 1, 2023

          Containing a codification of documents of general 
          applicability and future effect

          As of April 1, 2023
                    Published by the Office of the Federal Register 
                    National Archives and Records Administration as a 
                    Special Edition of the Federal Register

[[Page ii]]

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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........................    1143
      Alphabetical List of Agencies Appearing in the CFR......    1163
      Table of OMB Control Numbers............................    1173
      List of CFR Sections Affected...........................    1191

[[Page iv]]





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

                     Cite this Code: CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus, 26 CFR 1.1401-1 
                       refers to title 26, part 
                       1, section 1401-1.

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

[[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, 2023), 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 
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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 
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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 
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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 
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not dropped in error.

INCORPORATION BY REFERENCE

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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 
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    (b) The matter incorporated is in fact available to the extent 
necessary to afford fairness and uniformity in the administrative 
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CFR INDEXES AND TABULAR GUIDES

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and Finding Aids. This volume contains the Parallel Table of Authorities 
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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 
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the revision dates of the 50 CFR titles.

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INQUIRIES

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the top of odd-numbered pages.
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or write to the Director, Office of the Federal Register, National 
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Connect to NARA's website at www.archives.gov/federal-register.
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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, 2023







[[Page ix]]



                               THIS TITLE

    Title 26--Internal Revenue is composed of twenty-two volumes. The 
contents of these volumes represent all current regulations codified 
under this title by the Internal Revenue Service, Department of the 
Treasury, as of April 1, 2023. 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, Gabrielle E. Burns 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. Sec.  1.1401 to 1.1550)

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



                      Tax on Self-Employment Income

Sec.
1.1401-1 Tax on self-employment income.
1.1402(a)-1 Definition of net earnings from self-employment.
1.1402(a)-2 Computation of net earnings from self-employment.
1.1402(a)-3 Special rules for computing net earnings from self-
          employment.
1.1402(a)-4 Rentals from real estate.
1.1402(a)-5 Dividends and interest.
1.1402(a)-6 Gain or loss from disposition of property.
1.1402(a)-7 Net operating loss deduction.
1.1402(a)-8 Community income.
1.1402(a)-9 Puerto Rico.
1.1402(a)-10 Personal exemption deduction.
1.1402(a)-11 Ministers and members of religious orders.
1.1402(a)-12 Continental shelf and certain possessions of the United 
          States.
1.1402(a)-13 Income from agricultural activity.
1.1402(a)-14 Options available to farmers in computing net earnings from 
          self-employment for taxable years ending after 1954 and before 
          December 31, 1956.
1.1402(a)-15 Options available to farmers in computing net earnings from 
          self-employment for taxable years ending on or after December 
          31, 1956.
1.1402(a)-16 Exercise of option.
1.1402(a)-17 Retirement payments to retired partners.
1.1402(a)-18 Split-dollar life insurance arrangements.
1.1402(b)-1 Self-employment income.
1.1402(c)-1 Trade or business.
1.1402(c)-2 Public office.
1.1402(c)-3 Employees.
1.1402(c)-4 Individuals under Railroad Retirement System.
1.1402(c)-5 Ministers and members of religious orders.
1.1402(c)-6 Members of certain professions.
1.1402(c)-7 Members of religious groups opposed to insurance.
1.1402(d)-1 Employee and wages.
1.1402(e)-1A Application of regulations under section 1402(e).
1.1402(e)-2A Ministers, members of religious orders and Christian 
          Science practitioners; application for exemption from self-
          employment tax.
1.1402(e)-3A Time limitation for filing application for exemption.
1.1402(e)-4A Period for which exemption is effective.
1.1402(e)-5A Applications for exemption from self-employment taxes filed 
          after December 31, 1986, by ministers, certain members of 
          religious orders, and Christian Science practitioners.
1.1402(e)(1)-1 Election by ministers, members of religious orders, and 
          Christian Science practitioners for self-employment coverage.
1.1402(e)(2)-1 Time limitation for filing waiver certificate.
1.1402(e)(3)-1 Effective date of waiver certificate.
1.1402(e)(4)-1 Treatment of certain remuneration paid in 1955 and 1956 
          as wages.
1.1402(e)(5)-1 Optional provision for certain certificates filed before 
          April 15, 1962.
1.1402(e)(5)-2 Optional provisions for certain certificates filed on or 
          before April 17, 1967.
1.1402(e)(6)-1 Certificates filed by fiduciaries or survivors on or 
          before April 15, 1962.
1.1402(f)-1 Computation of partner's net earnings from self-employment 
          for taxable year which ends as result of his death.
1.1402(g)-1 Treatment of certain remuneration erroneously reported as 
          net earnings from self-employment.
1.1402(h)-1 Members of certain religious groups opposed to insurance.
1.1403-1 Cross references.

                        Net Investment Income Tax

Sec.  1.1411-0 Table of contents of provisions applicable to section 
          1411.
1.1411-1 General rules.
1.1411-2 Application to individuals.
1.1411-3 Application to estates and trusts.
1.1411-4 Definition of net investment income.
1.1411-5 Trades or businesses to which tax applies.
1.1411-6 Income on investment of working capital subject to tax.
1.1411-7 [Reserved]
1.1411-8 Exception for distributions from qualified plans.
1.1411-9 Exception for self-employment income.
1.1411-10 Controlled foreign corporations and passive foreign investment 
          companies.

 Withholding of Tax on Nonresident Aliens and Foreign Corporations and 
                         Tax-Free Covenant Bonds

               NONRESIDENT ALIENS AND FOREIGN CORPORATIONS

1.1441-0 Outline of regulation provisions for section 1441.

[[Page 6]]

1.1441-1 Requirement for the deduction and withholding of tax on 
          payments to foreign persons.
1.1441-2 Amounts subject to withholding.
1.1441-3 Determination of amounts to be withheld.
1.1441-4 Exemptions from withholding for certain effectively connected 
          income and other amounts.
1.1441-5 Withholding on payments to partnerships, trusts, and estates.
1.1441-6 Claim of reduced withholding under an income tax treaty.
1.1441-7 General provisions relating to withholding agents.
1.1441-8 Exemption from withholding for payments to foreign governments, 
          international organizations, foreign central banks of issue, 
          and the Bank for International Settlements.
1.1441-9 Exemption from withholding on exempt income of a foreign tax-
          exempt organization, including foreign private foundations.
1.1441-10 Withholding agents with respect to fact-pay arrangements.
1.1442-1 Withholding of tax on foreign corporations.
1.1442-2 Exemption under a tax treaty.
1.1442-3 Tax exempt income of a foreign tax-exempt corporation.
1.1443-1 Foreign tax-exempt organizations.
1.1445-1 Withholding on dispositions of U.S. real property interests by 
          foreign persons: In general.
1.1445-2 Situations in which withholding is not required under section 
          1445(a).
1.1445-3 Adjustments to amount required to be withheld pursuant to 
          withholding certificate.
1.1445-4 Liability of agents.
1.1445-5 Special rules concerning distributions and other transactions 
          by corporations, partnerships, trusts, and estates.
1.1445-6 Adjustments pursuant to withholding certificate of amount 
          required to be withheld under section 1445(e).
1.1445-7 Treatment of foreign corporation that has made an election 
          under section 897(i) to be treated as a domestic corporation.
1.1445-8 Special rules regarding publicly traded partnerships, publicly 
          traded trusts and real estate investment trusts (REITs).
1.1445-10T Special rule for Foreign governments (temporary).
1.1445-11T Special rules requiring withholding under Sec.  1.1445-5 
          (temporary).
1.1446-0 Table of contents.
1.1446-1 Withholding tax on foreign partners' share of effectively 
          connected taxable income.
1.1446-2 Determining a partnership's effectively connected taxable 
          income allocable to foreign partners under section 704.
1.1446-3 Time and manner of calculating and paying over the 1446 tax.
1.1446-4 Publicly traded partnerships.
1.1446-5 Tiered partnership structures.
1.1446-6 Special rules to reduce a partnership's 1446 tax with respect 
          to a foreign partner's allocable share of effectively 
          connected taxable income.
1.1446-7 Applicability dates.
1.1446(f)-1 General rules.
1.1446(f)-2 Withholding on the transfer of a non-publicly traded 
          partnership interest.
1.1446(f)-3 Partnership's requirement to withhold under section 
          1446(f)(4) on distributions to transferee.
1.1446(f)-4 Withholding on the transfer of a publicly traded partnership 
          interest.
1.1446(f)-5 Liability for failure to withhold.

                         Tax-Free Covenant Bonds

1.1451-1 Tax-free covenant bonds issued before January 1, 1934.
1.1451-2 Exemptions from withholding under section 1451.

                  Application of Withholding Provisions

1.1461-1 Payment and returns of tax withheld.
1.1461-2 Adjustments for overwithholding or underwithholding of tax.
1.1461-3 Withholding under section 1446.
1.1462-1 Withheld tax as credit to recipient of income.
1.1463-1 Tax paid by recipient of income.
1.1464-1 Refunds or credits.

         Information Reporting by Foreign Financial Institutions

1.1471-0 Outline of regulation provisions for sections 1471 through 
          1474.
1.1471-1 Scope of chapter 4 and definitions.
1.1471-2 Requirement to deduct and withhold tax on withholdable payments 
          to certain FFIs.
1.1471-3 Identification of payee.
1.1471-4 FFI agreement.
1.1471-5 Definitions applicable to section 1471.
1.1471-6 Payments beneficially owned by exempt beneficial owners.
1.1472-1 Withholding on NFFEs.
1.1473-1 Section 1473 definitions.
1.1474-1 Liability for withheld tax and withholding agent reporting.
1.1474-2 Adjustments for overwithholding or underwithholding of tax.
1.1474-3 Withheld tax as credit to beneficial owner of income.
1.1474-4 Tax paid only once.
1.1474-5 Refunds or credits.
1.1474-6 Coordination of chapter 4 with other withholding provisions.
1.1474-7 Confidentiality of information.

[[Page 7]]

      Mitigation of Effect of Renegotiation of Government Contracts

1.1481-1 [Reserved]

                          Consolidated Returns

                       RETURNS AND PAYMENT OF TAX

                     Consolidated Return Regulations

1.1502-0 Effective dates.
1.1502-1 Definitions.

                       Consolidated Tax Liability

1.1502-2 Computation of tax liability.
1.1502-3 Consolidated tax credits.
1.1502-4 Consolidated foreign tax credit.
1.1502-5 Estimated tax.
1.1502-6 Liability for tax.
1.1502-9 Consolidated overall foreign losses, separate limitation 
          losses, and overall domestic losses.

               Computation of Consolidated Taxable Income

1.1502-11 Consolidated taxable income.

                 Computation of Separate Taxable Income

1.1502-12 Separate taxable income.
1.1502-13 Intercompany transactions.
1.1502-14Z Application of opportunity zone rules to members of a 
          consolidated group.
1.1502-15 SRLY limitation on built-in losses.
1.1502-16 Mine exploration expenditures.
1.1502-17 Methods of accounting.
1.1502-18 Inventory adjustment.
1.1502-19 Excess loss accounts.

                    Computation of Consolidated Items

1.1502-21 Net operating losses.
1.1502-21T Net operating losses (temporary).
1.1502-22 Consolidated capital gain and loss.
1.1502-23 Consolidated net section 1231 gain or loss.
1.1502-24 Consolidated charitable contributions deduction.
1.1502-26 Consolidated dividends received deduction.
1.1502-27 Consolidated section 247 deduction.
1.1502-28 Consolidated section 108.

         Basis, Stock Ownership, and Earnings and Profits Rules

1.1502-30 Stock basis after certain triangular reorganizations.
1.1502-31 Stock basis after a group structure change.
1.1502-32 Investment adjustments.
1.1502-33 Earnings and profits.
1.1502-34 Special aggregate stock ownership rules.
1.1502-35 Transfers of subsidiary stock and deconsolidations of 
          subsidiaries.
1.1502-36 Unified loss rule.

                       Special Taxes and Taxpayers

1.1502-42 Mutual savings banks, etc.
1.1502-43 Consolidated accumulated earnings tax.
1.1502-44 Percentage depletion for independent producers and royalty 
          owners.
1.1502-47 Consolidated returns by life-nonlife groups.
1.1502-50 Consolidated section 250.
1.1502-51 Consolidated section 951A.
1.1502-55 Computation of alternative minimum tax of consolidated groups.
1.1502-59A Application of section 59A to consolidated groups.
1.1502-68 Additional first year depreciation deduction for property 
          acquired and placed in service after September 27, 2017.

                Administrative Provisions and Other Rules

1.1502-75 Filing of consolidated returns.
1.1502-76 Taxable year of members of group.
1.1502-77 Agent for the group.
1.1502-78 Tentative carryback adjustments.
1.1502-79 Separate return years.
1.1502-80 Applicability of other provisions of law.
1.1502-81T Alaska Native Corporations.
1.1502-90 Table of contents.
1.1502-91 Application of section 382 with respect to a consolidated 
          group.
1.1502-92 Ownership change of a loss group or a loss subgroup.
1.1502-93 Consolidated section 382 limitation (or subgroup section 382 
          limitation).
1.1502-94 Coordination with section 382 and the regulations thereunder 
          when a corporation becomes a member of a consolidated group.
1.1502-95 Rules on ceasing to be a member of a consolidated group (or 
          loss subgroup).
1.1502-96 Miscellaneous rules.
1.1502-97 Special rules under section 382 for members under the 
          jurisdiction of a court in a title 11 similar case. [Reserved]
1.1502-98 Coordination with sections 383 and 163(j).
1.1502-99 Effective/applicability dates.
1.1502-100 Corporations exempt from tax.
1.1503-1 Computation and payment of tax.
1.1503-2 Dual consolidated loss.
1.1503(d)-0 Table of contents.
1.1503(d)-1 Definitions and special rules for filings under section 
          1503(d).
1.1503(d)-2 Domestic use.
1.1503(d)-3 Foreign use.
1.1503(d)-4 Domestic use limitation and related operating rules.
1.1503(d)-5 Attribution of items and basis adjustments.
1.1503(d)-6 Exceptions to the domestic use limitation rule.
1.1503(d)-7 Examples.
1.1503(d)-8 Effective dates.
1.1504-0 Outline of provisions.

[[Page 8]]

1.1504-1 Definitions.
1.1504-2 [Reserved]
1.1504-3 Treatment of stock in a QOF C corporation for purposes of 
          consolidation.
1.1504-4 Treatment of warrants, options, convertible obligations, and 
          other similar interests.

  Regulations Applicable for Tax Years for Which a Return Is Due on or 
                         Before August 11, 1999

1.1502-9A Applications of overall foreign loss recapture rules to 
          corporations filing consolidated returns due on or before 
          August 11, 1999.

     Regulations Applicable to Taxable Years Before January 1, 1997

1.1502-15A Limitations on the allowance of built-in deductions for 
          consolidated return years beginning before January 1, 1997.
1.1502-21A Consolidated net operating loss deduction generally 
          applicable for consolidated return years beginning before 
          January 1, 1997.
1.1502-22A Consolidated net capital gain or loss generally applicable 
          for consolidated return years beginning before January 1, 
          1997.
1.1502-23A Consolidated net section 1231 gain or loss generally 
          applicable for consolidated return years beginning before 
          January 1, 1997.
1.1502-41A Determination of consolidated net long-term capital gain and 
          consolidated net short-term capital loss generally applicable 
          for consolidated return years beginning before January 1, 
          1997.

 Regulations Applicable to Taxable Years Beginning Before June 28, 2002

1.1502-77A Common parent agent for subsidiaries applicable for 
          consolidated return years beginning before June 28, 2002.

 Regulations Applicable to Taxable Years Beginning on or After June 28, 
                     2002, and Before April 1, 2015

1.1502-77B Agent for the group applicable for consolidated return years 
          beginning on or after June 28, 2002, and before April 1, 2015.

     Regulations Applicable to Taxable Years Before January 1, 1997

1.1502-79A Separate return years generally applicable for consolidated 
          return years beginning before January 1, 1997.

  Regulations Applying Section 382 with Respect to Testing Dates (And 
  Corporations Joining Or Leaving Consolidated Groups) Before June 25, 
                                  1999

1.1502-90A Table of contents.
1.1502-91A Application of section 382 with respect to a consolidated 
          group generally applicable for testing dates before June 25, 
          1999.
1.1502-92A Ownership change of a loss group or a loss subgroup generally 
          applicable for testing dates before June 25, 1999.
1.1502-93A Consolidated section 382 limitation (or subgroup section 382 
          limitation) generally applicable for testing dates before June 
          25, 1999.
1.1502-94A Coordination with section 382 and the regulations thereunder 
          when a corporation becomes a member of a consolidated group 
          generally applicable for corporations becoming members of a 
          group before June 25, 1999.
1.1502-95A Rules on ceasing to be a member of a consolidated group 
          generally applicable for corporations ceasing to be members 
          before June 25, 1999.
1.1502-96A Miscellaneous rules generally applicable for testing dates 
          before June 25, 1999.
1.1502-97A Special rules under section 382 for members under the 
          jurisdiction of a court in a title 11 similar case. [Reserved]
1.1502-98A Coordination with section 383 generally applicable for 
          testing dates (or members joining or leaving a group) before 
          June 25, 1999.
1.1502-99A Effective dates.

  Dual Consolidated Losses Incurred in Taxable Years Beginning Before 
                             October 1, 1992

    Authority: 26 U.S.C. 7805, unless otherwise noted.
    Section 1.1402 (e)-5T also is issued under 26 U.S.C. 1402(e)(1) and 
(2).
    Section 1.1441-2 also issued under 26 U.S.C. 1441(c)(4) and 26 
U.S.C. 3401(a)(6).
    Section 1.1441-3 also issued under 26 U.S.C. 1441(c)(4), 26 U.S.C. 
3401(a)(6) and 26 U.S.C. 7701(l).
    Section 1.1441-4 also issued under 26 U.S.C. 1441(c)(4) and 26 
U.S.C. 3401(a)(6).
    Section 1.1441-5 also issued under 26 U.S.C. 1441(c)(4), 26 U.S.C. 
3401(a)(6) and 26 U.S.C. 7701(b)(11).
    Section 1.1441-6 also issued under 26 U.S.C. 1441(c)(4) and 26 
U.S.C. 3401(a)(6).
    Section 1.1441-7 also issued under 26 U.S.C. 1441(c)(4), 26 U.S.C. 
3401(a)(6) and 26 U.S.C. 7701(l).
    Section 1.1443-1 also issued under 26 U.S.C. 1443(a).
    Section 1.1445-5 also issued under 26 U.S.C. 1445(e)(7).
    Section 1.1445-8 also issued under 26 U.S.C. 1445(e)(7).
    Section 1.1446-3 also issued under 26 U.S.C. 1446(g).
    Section 1.1446-4 also issued under 26 U.S.C. 1446(g).

[[Page 9]]

    Section 1.1446(f)-1 also issued under 26 U.S.C. 1446(f)(6) and 
1446(g).
    Section 1.1446(f)-2 also issued under 26 U.S.C. 1446(f)(6) and 
1446(g).
    Section 1.1446(f)-3 also issued under 26 U.S.C. 1446(f)(6) and 
1446(g).
    Section 1.1446(f)-4 also issued under 26 U.S.C. 1446(f)(6) and 
1446(g).
    Section 1.1446(f)-5 also issued under 26 U.S.C. 1446(f)(6) and 
1446(g).
    Section 1.1461-1 also issued under 26 U.S.C. 1441(c)(4) and 26 
U.S.C. 3401(a)(6).
    Section 1.1461-2 also issued under 26 U.S.C. 1441(c)(4) and 26 
U.S.C. 3401(a)(6).
    Section 1.1462-1 also issued under 26 U.S.C. 1441(c)(4) and 26 
U.S.C. 3401(a)(6).
    Section 1.1471-1 is also issued under 26 U.S.C. 1471
    Section 1.1471-2 is also issued under 26 U.S.C. 1471
    Section 1.1471-3 is also issued under 26 U.S.C. 1471
    Section 1.1471-4 is also issued under 26 U.S.C. 1471
    Section 1.1471-5 is also issued under 26 U.S.C. 1471
    Section 1.1471-6 is also issued under 26 U.S.C. 1471
    Section 1.1472-1 is also issued under 26 U.S.C. 1472
    Section 1.1473-1 is also issued under 26 U.S.C. 1473
    Section 1.1474-1 is also issued under 26 U.S.C. 1474
    Section 1.1474-2 is also issued under 26 U.S.C. 1474
    Section 1.1474-3 is also issued under 26 U.S.C. 1474
    Section 1.1474-4 is also issued under 26 U.S.C. 1474
    Section 1.1474-5 is also issued under 26 U.S.C. 1474
    Section 1.1474-6 is also issued under 26 U.S.C. 1474
    Section 1.1474-7 is also issued under 26 U.S.C. 1474
    Section 1.1502-0 also issued under 26 U.S.C. 1502.
    Section 1.1502-1 also issued under 26 U.S.C. 1502.
    Section 1.1502-2 also issued under 26 U.S.C. 1502.
    Section 1.1502-3 also issued under 26 U.S.C. 1502.
    Section 1.1502-4 also issued under 26 U.S.C. 1502.
    Section 1.1502-9 also issued under 26 U.S.C. 1502.
    Section 1.1502-11 also issued under 26 U.S.C. 1502.
    Section 1.1502-12 also issued under 26 U.S.C. 250(c) and 1502.
    Section 1.1502-13 also issued under 26 U.S.C. 250(c) and 1502.
    Section 1.1502-14Z also issued under 26 U.S.C. 1400Z-2(e)(4) and 
1502.
    Section 1.1502-15 also issued under 26 U.S.C. 1502.
    Section 1.1502-17 also issued under 26 U.S.C. 446 and 1502.
    Section 1.1502-18 also issued under 26 U.S.C. 1502.
    Section 1.1502-19 also issued under 26 U.S.C. 301, 1502, and 1503.
    Section 1.1502-20 also issued under 26 U.S.C. 337(d) and 1502.
    Section 1.1502-20T also issued under 26 U.S.C. 337(d) and 1502.
    Section 1.1502-21 also issued under 26 U.S.C. 1502 and 6402(i).
    Section 1.1502-21(b)(1) and (b)(3)(v) also issued under 26 U.S.C. 
1502.
    Section 1.1502-21T also issued under 26 U.S.C. 1502.
    Section 1.1502-21T(b)(1) and (b)(3)(v) also issued under 26 U.S.C. 
1502.
    Section 1.1502-22 also issued under 26 U.S.C. 1502.
    Section 1.1502-23 also issued under 26 U.S.C. 1502.
    Section 1.1502-26 also issued under 26 U.S.C. 1502.
    Section 1.1502-28 also issued under 26 U.S.C. 1502.
    Section 1.1502-30 also issued under 26 U.S.C. 1502.
    Section 1.1502-31 also issued under 26 U.S.C. 1502.
    Section 1.1502-32 also issued under 26 U.S.C. 301, 1502, and 1503.
    Section 1.1502-32 also issued under 26 U.S.C. 1502.
    Section 1.1502-32(a)(2), (b)(3)(iii)(C), (b)(3)(iii)(D), and 
(b)(4)(vi) also issued under 26 U.S.C. 1502.
    Section 1.1502-32T also issued under 26 U.S.C. 1502.
    Section 1.1502-33 also issued under 26 U.S.C. 1502.
    Section 1.1502-34 also issued under 26 U.S.C. 1502.
    Section 1.1502-35 also issued under 26 U.S.C. 1502.
    Section 1.1502-35T also issued under 26 U.S.C. 1502.
    Section 1.1502-36 also issued under 26 U.S.C. 1502.
    Section 1.1502-36 also issued under 26 U.S.C. 337(d).
    Section 1.1502-43 also issued under 26 U.S.C. 1502.
    Section 1.1502-47 also issued under 26 U.S.C. 1502, 1503(c) and 
1504(c).
    Section 1.1502-50 also issued under 26 U.S.C. 250(c) and 1502.
    Section 1.1502-51 also issued under 26 U.S.C. 1502.
    Section 1.1502-55 also issued under 26 U.S.C. 1502.
    Section 1.1502-59A also issued under 26 U.S.C. 1502.
    Section 1.1502-68 also issued under 26 U.S.C. 1502.

[[Page 10]]

    Section 1.1502-75 also issued under 26 U.S.C. 1502.
    Section 1.1502-76 also issued under 26 U.S.C. 1502.
    Section 1.1502-77 also issued under 26 U.S.C. 1502 and 6402(j).
    Section 1.1502-78 also issued under 26 U.S.C. 1502, 6402(j), and 
6411(c).
    Section 1.1502-79 also issued under 26 U.S.C. 1502.
    Section 1.1502-80 also issued under 26 U.S.C. 1502.
    Section 1.1502-81T also issued under 26 U.S.C. 1502.
    Section 1.1502-90 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-91 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-92 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-93 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-94 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-95 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-96 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-98 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-99 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-100 also issued under 26 U.S.C. 1502.
    Section 1.1503-2 also issued under 26 U.S.C. 1502.
    Section 1.1503(d) also issued under 26 U.S.C. 953(d) and 26 U.S.C. 
1502.
    Section 1.1503-2T also issued under 26 U.S.C. 1503(d).
    Section 1.1504-3 also issued under 26 U.S.C. 1400Z-2(e)(4) and 
1504(a)(5).
    Section 1.1504-4 also issued under 26 U.S.C. 1504(a)(5).
    Section 1.1502-9A also issued under 26 U.S.C. 1502.
    Section 1.1502-15A also issued under 26 U.S.C. 1502.
    Section 1.1502-21A also issued under 26 U.S.C. 1502.
    Section 1.1502-22A also issued under 26 U.S.C. 1502.
    Section 1.1502-23A also issued under 26 U.S.C. 1502.
    Section 1.1502-41A also issued under 26 U.S.C. 1502.
    Section 1.1502-77A also issued under 26 U.S.C. 1502 and 6402(j).
    Section 1.1502-77B also issued under 26 U.S.C. 1502 and 6402(j).
    Section 1.1502-79A also issued under 26 U.S.C. 1502.
    Section 1.1502-91A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-92A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-93A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-94A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-95A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-96A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-98A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-99A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.

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

                      Tax on Self-Employment Income



Sec.  1.1401-1  Tax on self-employment income.

    (a) There is imposed, in addition to other taxes, a tax upon the 
self-employment income of every individual at the rates prescribed in 
section 1401(a) (old-age, survivors, and disability insurance) and (b) 
(hospital insurance). (See subparagraphs (1) and (2) of paragraph (b) of 
this section.) This tax shall be levied, assessed, and collected as part 
of the income tax imposed by subtitle A of the Code and, except as 
otherwise expressly provided, will be included with the tax imposed by 
section 1 or 3 in computing any deficiency or overpayment and in 
computing the interest and additions to any deficiency, overpayment, or 
tax. Since the tax on self-employment income is part of the income tax, 
it is subject to the jurisdiction of the Tax Court of the United States 
to the same extent and in the same manner as the other taxes under 
subtitle A of the Code. Furthermore, with respect to taxable years 
beginning after December 31, 1966, this tax must be taken into account 
in computing any estimate of the taxes required to be declared under 
section 6015.
    (b) The rates of tax on self-employment income are as follows (these 
regulations do not reflect off-Code revisions to the following rates):
    (1) For Old-age, Survivors, and Disability Insurance:

------------------------------------------------------------------------
                         Taxable year                           Percent
------------------------------------------------------------------------
Beginning after December 31, 1983 and before January 1, 1988.      11.40
Beginning after December 31, 1987 and before January 1, 1990.      12.12
Beginning after December 31, 1989............................      12.40
------------------------------------------------------------------------


[[Page 11]]

    (2)(i) For Hospital Insurance:

------------------------------------------------------------------------
                         Taxable year                           Percent
------------------------------------------------------------------------
Beginning after December 31, 1983 and before January 1, 1985.       2.60
Beginning after December 31, 1984 and before January 1, 1986.       2.70
Beginning after December 31, 1985............................       2.90
------------------------------------------------------------------------

    (ii) For Additional Medicare Tax:

------------------------------------------------------------------------
                         Taxable year                           Percent
------------------------------------------------------------------------
Beginning after December 31, 2012............................        0.9
------------------------------------------------------------------------

    (c) In general, self-employment income consists of the net earnings 
derived by an individual (other than a nonresident alien) from a trade 
or business carried on by him as sole proprietor or by a partnership of 
which he is a member, including the net earnings of certain employees as 
set forth in Sec.  1.1402(c)-3, and of crew leaders, as defined in 
section 3121(o) (see such section and the regulations thereunder in part 
31 of this chapter (Employment Tax Regulations)). See, however, the 
exclusions, exceptions, and limitations set forth in Sec. Sec.  
1.1402(a)-1 through 1.1402(h)-1.
    (d) Special rules regarding Additional Medicare Tax. (1) General 
rule. An individual is liable for Additional Medicare Tax to the extent 
that his or her self-employment income exceeds the following threshold 
amounts.

------------------------------------------------------------------------
                        Filling status                         Threshold
------------------------------------------------------------------------
Married individual filing a joint return.....................   $250,000
Married individual filing a separate return..................    125,000
Any other case...............................................    200,000
------------------------------------------------------------------------


    Note: These threshold amounts are specified under section 
1401(b)(2)(A).

    (2) Coordination with Federal Insurance Contributions Act. (i) 
General rule. Under section 1401(b)(2)(B), the applicable threshold 
specified under section 1401(b)(2)(A) is reduced (but not below zero) by 
the amount of wages (as defined in section 3121(a)) taken into account 
in determining Additional Medicare Tax under section 3101(b)(2) with 
respect to the taxpayer. This rule does not apply to Railroad Retirement 
Tax Act (RRTA) compensation (as defined in section 3231(e)).
    (ii) Examples. The rules provided in paragraph (d)(2)(i) of this 
section are illustrated by the following examples:

    Example 1. A, a single filer, has $130,000 in self-employment income 
and $0 in wages. A is not liable to pay Additional Medicare Tax.
    Example 2. B, a single filer, has $220,000 in self-employment income 
and $0 in wages. B is liable to pay Additional Medicare Tax on $20,000 
($220,000 in self-employment income minus the threshold of $200,000).
    Example 3. C, a single filer, has $145,000 in self-employment income 
and $130,000 in wages. C's wages are not in excess of $200,000 so C's 
employer did not withhold Additional Medicare Tax. However, the $130,000 
of wages reduces the self-employment income threshold to $70,000 
($200,000 threshold minus the $130,000 of wages). C is liable to pay 
Additional Medicare Tax on $75,000 of self-employment income ($145,000 
in self-employment income minus the reduced threshold of $70,000).
    Example 4. E, who is married and files a joint return, has $140,000 
in self-employment income. F, E's spouse, has $130,000 in wages. F's 
wages are not in excess of $200,000 so F's employer did not withhold 
Additional Medicare Tax. However, the $130,000 of F's wages reduces E's 
self-employment income threshold to $120,000 ($250,000 threshold minus 
the $130,000 of wages). E and F are liable to pay Additional Medicare 
Tax on $20,000 of E's self-employment income ($140,000 in self-
employment income minus the reduced threshold of $120,000).
    Example 5. D, who is married and files married filing separately, 
has $150,000 in self-employment income and $200,000 in wages. D's wages 
are not in excess of $200,000 so D's employer did not withhold 
Additional Medicare Tax. However, the $200,000 of wages reduces the 
self-employment income threshold to $0 ($125,000 threshold minus the 
$200,000 of wages). D is liable to pay Additional Medicare Tax on 
$75,000 of wages ($200,000 in wages minus the $125,000 threshold for a 
married filing separately return) and on $150,000 of self-employment 
income ($150,000 in self-employment income minus the reduced threshold 
of $0).

    (e) Effective/applicability date. Paragraphs (b) and (d) of this 
section apply to quarters beginning on or after November 29, 2013.

[T.D. 6993, 34 FR 828, Jan. 18, 1969, as amended by T.D. 7333, 39 FR 
44445, Dec. 24, 1974; T.D. 9645, 78 FR 71471, Nov. 29, 2013]



Sec.  1.1402(a)-1  Definition of net earnings from self-employment.

    (a) Subject to the special rules set forth in Sec. Sec.  1.1402(a)-3 
to 1.1402(a)-17, inclusive, and to the exclusions set forth in 
Sec. Sec.  1.1402(c)-2 to 1.1402(c)-7, inclusive, the term ``net 
earnings from self-employment'' means:

[[Page 12]]

    (1) The gross income derived by an individual from any trade or 
business carried on by such individual, less the deductions allowed by 
chapter 1 of the Code which are attributable to such trade or business, 
plus
    (2) His distributive share (whether or not distributed), as 
determined under section 704, of the income (or minus the loss), 
described in section 702(a)(9) and as computed under section 703, from 
any trade or business carried on by any partnership of which he is a 
member.
    (b) Gross income derived by an individual from a trade or business 
includes payments received by him from a partnership of which he is a 
member for services rendered to the partnership or for the use of 
capital by the partnership, to the extent the payments are determined 
without regard to the income of the partnership. However, such 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 do not constitute 
gross income derived by an individual from a trade or business. See 
section 707(c) and the regulations thereunder, relating to guaranteed 
payments to a member of a partnership for services or the use of 
capital. See also section 706(a) and the regulations thereunder, 
relating to the taxable year of the partner in which such guaranteed 
payments are to be included in computing taxable income.
    (c) Gross income derived by an individual from a trade or business 
includes gross income received (in the case of an individual reporting 
income on the cash receipts and disbursements method) or accrued (in the 
case of an individual reporting income on the accrual method) in the 
taxable year from a trade or business even though such income may be 
attributable in whole or in part to services rendered or other acts 
performed in a prior taxable year as to which the individual was not 
subject to the tax on self-employment income.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 7333, 39 FR 
44445, Dec. 24, 1974]



Sec.  1.1402(a)-2  Computation of net earnings from self-employment.

    (a) General rule. In general, the gross income and deductions of an 
individual attributable to a trade or business (including a trade or 
business conducted by an employee referred to in paragraphs (b), (c), 
(d), or (e) of Sec.  1.1402(c)-3), for the purpose of ascertaining his 
net earnings from self-employment, are to be determined by reference to 
the provisions of law and regulations applicable with respect to the 
taxes imposed by sections 1 and 3. Thus, if an individual uses the 
accrual method of accounting in computing taxable income from a trade or 
business for the purpose of the tax imposed by section 1 or 3, he must 
use the same method in determining net earnings from self-employment. 
Likewise, if a taxpayer engaged in a trade or business of selling 
property on the installment plan elects, under the provisions of section 
453, to use the installment method in computing income for purposes of 
the tax under section 1 or 3, he must use the same method in determining 
net earnings from self-employment. Income which is excludable from gross 
income under any provision of subtitle A of the Internal Revenue Code is 
not taken into account in determining net earnings from self-employment 
except as otherwise provided in Sec.  1.1402(a)-9, relating to certain 
residents of Puerto Rico, in Sec.  1.1402(a)-11, relating to ministers 
or members of religious orders, and in Sec.  1.1402(a)-12, relating to 
the term ``possession of the United States'' as used for purposes of the 
tax on self-employment income. Thus, in the case of a citizen of the 
United States conducting, in a foreign country, a trade or business in 
which both personal services and capital are material income-producing 
factors, any part of the income therefrom which is excluded from gross 
income as earned income under the provisions of section 911 and the 
regulations thereunder is not taken into account in determining net 
earnings from self-employment.
    (b) Trade or business carried on. The trade or business must be 
carried on by the individual, either personally or through agents or 
employees. Accordingly, income derived from a trade or business carried 
on by an estate or trust is not included in determining the net earnings 
from self-employment of the individual beneficiaries of such estate or 
trust.

[[Page 13]]

    (c) Aggregate net earnings. Where an individual is engaged in more 
than one trade or business within the meaning of section 1402(c) and 
Sec.  1.1402(c)-1, his net earnings from self-employment consist of the 
aggregate of the net income and losses (computed subject to the special 
rules provided in Sec. Sec.  1.1402(a)-1 to 1.1402(a)-17 inclusive) of 
all such trades or businesses carried on by him. Thus, a loss sustained 
in one trade or business carried on by an individual will operate to 
offset the income derived by him from another trade or business.
    (d) Partnerships. The net earnings from self-employment of an 
individual include, in addition to the earnings from a trade or business 
carried on by him, his distributive share of the income or loss, 
described in section 702(a)(9), from any trade or business carried on by 
each partnership of which he is a member. An individual's distributive 
share of such income or loss of a partnership shall be determined as 
provided in section 704, subject to the special rules set forth in 
section 1402(a) and in Sec. Sec.  1.1402(a)-1 to 1.1402(a)-17, 
inclusive, and to the exclusions provided in section 1402(c) and 
Sec. Sec.  1.1402(c)-2 to 1.1402(c)-7, inclusive. For provisions 
relating to the computation of the taxable income of a partnership, see 
section 703.
    (e) Different taxable years. If the taxable year of a partner 
differs from that of the partnership, the partner shall include, in 
computing net earnings from self-employment, his distributive share of 
the income or loss, described in section 702(a)(9), of the partnership 
for its taxable year ending with or within the taxable year of the 
partner. For the special rule in case of the termination of a partner's 
taxable year as result of death, see Sec. Sec.  1.1402(f) and 1.1402(f)-
1.
    (f) Meaning of partnerships. For the purpose of determining net 
earnings from self-employment, a partnership is one which is recognized 
as such for income tax purposes. For income tax purposes, the term 
``partnership'' includes not only a partnership as known at common law, 
but, also a syndicate, group, pool, joint venture, or other 
unincorporated organization which carries on any trade or business, 
financial operation, or venture, and which is not, within the meaning of 
the Code, a trust, estate, or a corporation. An organization described 
in the preceding sentence shall be treated as a partnership for purposes 
of the tax on self-employment income even though such organization has 
elected, pursuant to section 1361 and the regulations thereunder, to be 
taxed as a domestic corporation.
    (g) Nature of partnership interest. The net earnings from self-
employment of a partner include his distributive share of the income or 
loss, described in section 702(a)(9), of the partnership of which he is 
a member, irrespective of the nature of his membership. Thus, in 
determining his net earnings from self-employment, a limited or inactive 
partner includes his distributive share of such partnership income or 
loss. In the case of a partner who is a member of a partnership with 
respect to which an election has been made pursuant to section 1361 and 
the regulations thereunder to be taxed as a domestic corporation, net 
earnings from self-employment include his distributive share of the 
income or loss, described in section 702(a)(9), from the trade or 
business carried on by the partnership computed without regard to the 
fact that the partnership has elected to be taxed as a domestic 
corporation.
    (h) Proprietorship taxed as domestic corporation. A proprietor of an 
unincorporated business enterprise with respect to which an election has 
been made pursuant to section 1361 and the regulations thereunder to be 
taxed as a domestic corporation shall compute his net earnings from 
self-employment without regard to the fact that such election has been 
made.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 7333, 39 FR 
44445, Dec. 24, 1974]



Sec.  1.1402(a)-3  Special rules for computing net earnings from 
self-employment.

    For the purpose of computing net earnings from self-employment, the 
gross income derived by an individual from a trade or business carried 
on by him, the allowable deductions attributable to such trade or 
business, and the individual's distributive share of the income or loss, 
described in section 702(a)(9), from any trade or business

[[Page 14]]

carrier on by a partnership of which he is a member shall be computed in 
accordance with the special rules set forth in Sec. Sec.  1.1402(a)-4 to 
1.1402(a)-17, inclusive.

[T.D. 7333, 39 FR 44445, Dec. 24, 1974]



Sec.  1.1402(a)-4  Rentals from real estate.

    (a) In general. Rentals from real estate and from personal property 
leased with the real estate (including such rentals paid in crop shares) 
and the deductions attributable thereto, unless such rentals are 
received by an individual in the course of a trade or business as a 
real-estate dealer, are excluded. Whether or not an individual is 
engaged in the trade or business of a real-estate dealer is determined 
by the application of the principles followed in respect of the taxes 
imposed by sections 1 and 3. In general, an individual who is engaged in 
the business of selling real estate to customers with a view to the 
gains and profits that may be derived from such sales is a real-estate 
dealer. On the other hand, an individual who merely holds real estate 
for investment or speculation and receives rentals therefrom is not 
considered a real-estate dealer. Where a real-estate dealer holds real 
estate for investment or speculation in addition to real estate held for 
sale to customers in the ordinary course of his trade or business as a 
real-estate dealer, only the rentals from the real estate held for sale 
to customers in the ordinary course of his trade or business as a real-
estate dealer, and the deductions attributable thereto, are included in 
determining net earnings from self-employment; the rentals from the real 
estate held for investment or speculation, and the deductions 
attributable thereto, are excluded. Rentals paid in crop shares include 
income derived by an owner or lessee of land under an agreement entered 
into with another person pursuant to which such other person undertakes 
to produce a crop or livestock on such land and pursuant to which (1) 
the crop or livestock, or the proceeds thereof, are to be divided 
between such owner or lessee and such other person, and (2) the share of 
the owner or lessee depends on the amount of the crop or livestock 
produced. See, however, paragraph (b) of this section.
    (b) Special rule for ``includible farm rental income''--(1) In 
general. Notwithstanding the rules set forth in paragraph (a) of this 
section, there shall be included in determining net earnings from self-
employment for taxable years ending after 1955 any income derived by an 
owner or tenant of land, if the following requirements are met with 
respect to such income:
    (i) The income is derived under an arrangement between the owner or 
tenant of land and another person which provides that such other person 
shall produce agricultural or horticultural commodities on such land, 
and that there shall be material participation by the owner or tenant in 
the production or the management of the production of such agricultural 
or horticultural commodities; and
    (ii) There is material participation by the owner or tenant with 
respect to any such agricultural or horticultural commodity.

Income so derived shall be referred to in this section as ``includible 
farm rental income''.
    (2) Requirement that income be derived under an arrangement. In 
order for rental income received by an owner or tenant of land to be 
treated as includible farm rental income, such income must be derived 
pursuant to a share-farming or other rental arrangement which 
contemplates material participation by the owner or tenant in the 
production or management of production of agricultural or horticultural 
commodities.
    (3) Nature of arrangement. (i) The arrangement between the owner or 
tenant and the person referred to in subparagraph (1) of this paragraph 
may be either oral or written. The arrangement must impose upon such 
other person the obligation to produce one or more agricultural or 
horticultural commodities (including livestock, bees, poultry, and fur-
bearing animals and wildlife) on the land of the owner or tenant. In 
addition, it must be within the contemplation of the parties that the 
owner or tenant will participate in the production or the management of 
the production of the agricultural or horticultural commodities required 
to be produced by the other person under such arrangement to an extent 
which is material with respect either to the

[[Page 15]]

production or to the management of production of such commodities or is 
material with respect to the production and management of production 
when the total required participation in connection with both is 
considered.
    (ii) The term ``production'', wherever used in this paragraph, 
refers to the physical work performed and the expenses incurred in 
producing a commodity. It includes such activities as the actual work of 
planting, cultivating, and harvesting crops, and the furnishing of 
machinery, implements, seed, and livestock. An arrangement will be 
treated as contemplating that the owner or tenant will materially 
participate in the ``production'' of the commodities required to be 
produced by the other person under the arrangement if under the 
arrangement it is understood that the owner or tenant is to engage to a 
material degree in the physical work related to the production of such 
commodities. The mere undertaking to furnish machinery, implements, and 
livestock and to incur expenses is not, in and of itself, sufficient. 
Such factors may be significant, however, in cases where the degree of 
physical work intended of the owner or tenant is not material. For 
example, if under the arrangement it is understood that the owner or 
tenant is to engage periodically in physical work to a degree which is 
not material in and of itself and, in addition, to furnish a substantial 
portion of the machinery, implements, and livestock to be used in the 
production of the commodities or to furnish or advance funds or assume 
financial responsibility for a substantial part of the expense involved 
in the production of the commodities, the arrangement will be treated as 
contemplating material participation of the owner or tenant in the 
production of such commodities.
    (iii) The term ``management of the production'', wherever used in 
this paragraph, refers to services performed in making managerial 
decisions relating to the production, such as when to plant, cultivate, 
dust, spray, or harvest the crop, and includes advising and consulting, 
making inspections, and making decisions as to matters such as rotation 
of crops, the type of crops to be grown, the type of livestock to be 
raised, and the type of machinery and implements to be furnished. An 
arrangement will be treated as contemplating that the owner or tenant is 
to participate materially in the ``management of the production'' of the 
commodities required to be produced by the other person under the 
arrangement if the owner or tenant is to engage to a material degree in 
the management decisions related to the production of such commodities. 
The services which are considered of particular importance in making 
such management decisions are those services performed in making 
inspections of the production activities and in advising and consulting 
with such person as to the production of the commodities. Thus, if under 
the arrangement it is understood that the owner or tenant is to advise 
or consult periodically with the other person as to the production of 
the commodities required to be produced by such person under the 
arrangement and to inspect periodically the production activities on the 
land, a strong inference will be drawn that the arrangement contemplates 
participation by the owner or tenant in the management of the production 
of such commodities. The mere undertaking to select the crops or 
livestock to be produced or the type of machinery and implements to be 
furnished or to make decisions as to the rotation of crops generally is 
not, in and of itself, sufficient. Such factors may be significant, 
however, in making the overall determination of whether the arrangement 
contemplates that the owner or tenant is to participate materially in 
the management of the production of the commodities. Thus, if in 
addition to the understanding that the owner or tenant is to advise or 
consult periodically with the other person as to the production of the 
commodities and to inspect periodically the production activities on the 
land, it is also understood that the owner is to select the type of 
crops and livestock to be produced and the type of machinery and 
implements to be furnished and to make decisions as to the rotation of 
crops, the arrangement will be treated

[[Page 16]]

as contemplating material participation of the owner or tenant in the 
management of production of such commodities.
    (4) Actual participation. In order for the rental income received by 
the owner or tenant of land to be treated as includible farm rental 
income, not only must it be derived pursuant to the arrangement 
described in subparagraph (1) of this paragraph, but also the owner or 
tenant must actually participate to a material degree in the production 
or in the management of the production of any of the commodities 
required to be produced under the arrangement, or he must actually 
participate in both the production and the management of the production 
to an extent that his participation in the one when combined with his 
participation in the other will be considered participation to a 
material degree. If the owner or tenant shows that he periodically 
advises or consults with the other person, who under the arrangement 
produces the agricultural or horticultural commodities, as to the 
production of any of these commodities and also shows that he 
periodically inspects the production activities on the land, he will 
have presented strong evidence of the existence of the degree of 
participation contemplated by section 1402(a)(1). If, in addition to the 
foregoing, the owner or tenant shows that he furnishes a substantial 
portion of the machinery, implements, and livestock used in the 
production of the commodities or that he furnishes or advances funds, or 
assumes financial responsibility, for a substantial part of the expense 
involved in the production of the commodities, he will have established 
the existence of the degree of participation contemplated by section 
1402(a)(1) and this paragraph.
    (5) Employees or agents. An agreement entered into by an employee or 
agent of an owner or tenant and another person is considered to be an 
arrangement entered into by the owner or tenant for purposes of 
satisfying the requirement set forth in paragraph (b)(2) that the income 
must be derived under an arrangement between the owner or tenant and 
another person. For purposes of determining whether the arrangement 
satisfies the requirement set forth in paragraph (b)(3) that the parties 
contemplate that the owner or tenant will materially participate in the 
production or management of production of a commodity, services which 
will be performed by an employee or agent of the owner or tenant are not 
considered to be services which the arrangement contemplates will be 
performed by the owner or tenant. Services actually performed by such 
employee or agent are not considered services performed by the owner or 
tenant in determining the extent to which the owner or tenant has 
participated in the production or management of production of a 
commodity. For taxable years beginning before January 1, 1974, 
contemplated or actual services of an agent or an employee of the owner 
or tenant are deemed to be contemplated or actual services of the owner 
or tenant under paragraphs (b)(3) and (b)(4) of this section.
    (6) Examples. Application of the rules prescribed in this paragraph 
may be illustrated by the following examples:

    Example (1). After the death of her husband, Mrs. A rents her farm, 
together with its machinery and equipment, to B for one-half of the 
proceeds from the commodities produced on such farm by B. It is agreed 
that B will live in the tenant house on the farm and be responsible for 
the over-all operation of the farm, such as planting, cultivating, and 
harvesting the field crops, caring for the orchard and harvesting the 
fruit and caring for the livestock and poultry. It also is agreed that 
Mrs. A will continue to live in the farm residence and help B operate 
the farm. Under the agreement it is contemplated that Mrs. A will 
regularly operate and clean the cream separator and feed the poultry 
flock and collect the eggs. When possible she will assist B in such work 
as spraying the fruit trees, penning livestock, culling the poultry, and 
controlling weeds. She will also assist in preparing the meals when B 
engages seasonal workers. The agreement between Mrs. A and B clearly 
provides that she will materially participate in the over-all production 
operations to be conducted on her farm by B. In actual practice, Mrs. A 
performs such regular and intermittent services. The regularly performed 
services are material to the production of an agricultural commodity, 
and the intermittent services performed are material to the production 
operations to which they relate. The furnishing of a substantial portion 
of the farm machinery and equipment also adds support to a conclusion 
that Mrs. A has materially participated. Accordingly, the rental income

[[Page 17]]

Mrs. A receives from her farm should be included in net earnings from 
self-employment.
    Example (2). D agrees to produce a crop on C's cotton farm under an 
arrangement providing that C and D will each receive one-half of the 
proceeds from such production. C agrees to furnish all the necessary 
equipment, and it is understood that he is to advise D when to plant the 
cotton and when it needs to be chopped, plowed, sprayed, and picked. It 
is also understood that during the growing season C is to inspect the 
crop every few days to determine whether D is properly taking care of 
the crop. Under the arrangement, D is required to furnish all labor 
needed to grow and harvest the crop. C, in fact, renders such advice, 
makes such inspections, and furnishes such equipment. C's contemplated 
participation in management decisions is considered material with 
respect to the management of the cotton production operation. C's actual 
participation pursuant to the arrangement is also considered to be 
material with respect to the management of the production of cotton. 
Accordingly, the income C receives from his cotton farm is to be 
included in computing his net earnings from self-employment.
    Example (3). E owns a grain farm and turns its operation over to his 
son, F. By the oral rental arrangement between E and F, the latter 
agrees to produce crops of grain on the farm, and E agrees that he will 
be available for consultation and advice and will inspect and help to 
harvest the crops. E furnishes most of the equipment, including a 
tractor, a combine, plows, wagons, drills, and harrows; he continues to 
live on the farm and does some of the work such as repairing barns and 
farm machinery, going to town for supplies, cutting weeds, etc.; he 
regularly inspects the crops during the growing season; and he helps F 
to harvest the crops. Although the final decisions are made by F, he 
frequently consults with his father regarding the production of the 
crops. An evaluation of all of E's actual activities indicates that they 
are sufficiently substantial and regular to support a conclusion that he 
is materially participating in the crop production operations and the 
management thereof. If it can be shown that the degree of E's actual 
participation was contemplated by the arrangement, E's income from the 
grain farm will be included in computing net earnings from self-
employment.
    Example (4). G owns a fully-equipped farm which he rents to H under 
an arrangement which contemplates that G shall materially participate in 
the management of the production of crops raised on the farm pursuant to 
the arrangement. G lives in town about 5 miles from the farm. About 
twice a month he visits the farm and looks over the buildings and 
equipment. G may occasionally, in an emergency, discuss with H some 
phase of a crop production activity. In effect, H has complete charge of 
the management of farming operations regardless of the understanding 
between him and G. Although G pays one-half of the cost of the seed and 
fertilizer and is charged for the cost of materials purchased by H to 
make all necessary repairs, G's activities do not constitute material 
participation in the crop production activities. Accordingly, G's income 
from the crops is not included in computing net earnings from self-
employment.
    Example (5). I owned a farm several miles from the town in which he 
lived. He rented the farm to J under an arrangement which contemplated 
I's material participation in the management of production of wheat. I 
furnished one-half of the seed and fertilizer and all the farm equipment 
and livestock. He employed K to perform all the services in advising, 
consulting, and inspecting contemplated by the arrangement. I is not 
materially participating in the management of production of wheat by J. 
The work done by I's employee, K, is not attributable to I in 
determining the extent of I's participation. I's rental income from the 
arrangement is, therefore, not to be included in computing his net 
earnings from self-employment. For taxable years beginning before 
January 1, 1974, however, I's rental income would be includible in those 
earnings.
    Example (6). L, a calendar-year taxpayer, appointed M as his agent 
to rent his fully equipped farm for 1974. M entered into a rental 
arrangement with N under which M was to direct the planting of crops, 
inspect them weekly during the growing season, and consult with N on any 
problems that might arise in connection with irrigation, etc., while N 
furnished all the labor needed to grow and harvest the crops. M did in 
fact fulfill its responsibilities under the arrangement. Although the 
arrangement entered into by M and N is considered to have been made by 
L, M's services are not attributable to L, and L's furnishing of a fully 
equipped farm is insufficient by itself to constitute material 
participation in the production of the crops. Accordingly, L's rental 
income from the arrangement is not included in his net earnings from 
self-employment for that year. For taxable years beginning before 
January 1, 1974, however, L's rental income would be includible in those 
earnings.

    (c) Rentals from living quarters--(1) No services rendered for 
occupants. Payments for the use or occupancy of entire private 
residences or living quarters in duplex or multiple-housing units are 
generally rentals from real estate. Except in the case of real-estate 
dealers, such payments are excluded in determining net earnings from 
self-employment even though such payments

[[Page 18]]

are in part attributable to personal property furnished under the lease.
    (2) Services rendered for occupants. Payments for the use or 
occupancy of rooms or other space where services are also rendered to 
the occupant, such as for the use or occupancy of rooms or other 
quarters in hotels, boarding houses, or apartment houses furnishing 
hotel services, or in tourist camps or tourist homes, or payments for 
the use or occupancy of space in parking lots, warehouses, or storage 
garages, do not constitute rentals from real estate; consequently, such 
payments are included in determining net earnings from self-employment. 
Generally, services are considered rendered to the occupant if they are 
primarily for his convenience and are other than those usually or 
customarily rendered in connection with the rental of rooms or other 
space for occupancy only. The supplying of maid service, for example, 
constitutes such service; whereas the furnishing of heat and light, the 
cleaning of public entrances, exits, stairways and lobbies, the 
collection of trash, and so forth, are not considered as services 
rendered to the occupant.
    (3) Example. The application of this paragraph may be illustrated by 
the following example:

    Example. A, an individual, owns a building containing four 
apartments. During the taxable year, he receives $1,400 from apartments 
numbered 1 and 2, which are rented without services rendered to the 
occupants, and $3,600 from apartments numbered 3 and 4, which are rented 
with services rendered to the occupants. His fixed expenses for the four 
apartments aggregate $1,200 during the taxable year. In addition, he has 
$500 of expenses attributable to the services rendered to the occupants 
of apartments 3 and 4. In determining his net earnings from self-
employment, A includes the $3,600 received from apartments 3 and 4, and 
the expenses of $1,100 ($500 plus one-half of $1,200) attributable 
thereto. The rentals and expenses attributable to apartments 1 and 2 are 
excluded. Therefore, A has $2,500 of net earnings from self-employment 
for the taxable year from the building.

    (d) Treatment of business income which includes rentals from real 
estate. Except in the case of a real-estate dealer, where an individual 
or a partnership is engaged in a trade or business the income of which 
is classifiable in part as rentals from real estate, only that portion 
of such income which is not classifiable as rentals from real estate, 
and the expenses attributable to such portion, are included in 
determining net earnings from self-employment.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 7710, 45 FR 
50739, July 31, 1980]



Sec.  1.1402(a)-5  Dividends and interest.

    (a) All dividends on shares of stock are excluded unless they are 
received by an individual in the course of his trade or business as a 
dealer in stocks or securities.
    (b) Interest on any bond, debenture, note, or certificate, or other 
evidence of indebtedness, issued with interest coupons or in registered 
form by any corporation (including one issued by a government or 
political subdivision thereof) is excluded unless such interest is 
received in the course of a trade or business as a dealer in stocks or 
securities. However, interest with respect to which a credit against tax 
is allowable as provided in section 35, that is, interest on certain 
obligations of the United States and its instrumentalities, is not 
included in net earnings from self-employment even though received in 
the course of a trade or business as a dealer in stocks or securities. 
Only interest on bonds, debentures, notes, or certificates, or other 
evidence of indebtedness, issued with interest coupons or in registered 
form by a corporation, is excluded in the case of all persons other than 
dealers in stocks or securities; other interest received in the course 
of any trade or business (such as interest received by a pawnbroker on 
his loans or interest received by a merchant on his accounts or notes 
receivable) is not excluded.
    (c) Dividends and interest of the character excludable under 
paragraphs (a) and (b) of this section received by an individual on 
stocks or securities held for speculation or investment are excluded 
whether or not the individual is a dealer in stocks or securities.
    (d) A dealer in stocks or securities is a merchant of stocks or 
securities with an established place of business, regularly engaged in 
the business of purchasing stocks or securities and reselling them to 
customers; that is, he is one who as a merchant buys stocks or 
securities and sells them to customers

[[Page 19]]

with a view to the gains and profits that may be derived therefrom. 
Persons who buy and sell or hold stocks or securities for investment or 
speculation, irrespective of whether such buying or selling constitutes 
the carrying on of a trade or business, are not dealers in stocks or 
securities.



Sec.  1.1402(a)-6  Gain or loss from disposition of property.

    (a) There is excluded any gain or loss: (1) Which is considered as 
gain or loss from the sale or exchange of a capital asset; (2) from the 
cutting of timber or the disposal of timber, coal, or iron ore, even 
though held primarily for sale to customers, if section 631 is 
applicable to such gain or loss; and (3) from the sale, exchange, 
involuntary conversion, or other disposition of property if such 
property is neither (i) stock in trade or other property of a kind which 
would properly be includible in inventory if on hand at the close of the 
taxable year, nor (ii) property held primarily for sale to customers in 
the ordinary course of a trade or business. For the purpose of the 
special rule in subparagraph (3) of this paragraph, it is immaterial 
whether a gain or loss is treated as a capital gain or loss or as an 
ordinary gain or loss for purposes other than determining net earnings 
from self-employment. For instance, where the character of a loss is 
governed by the provisions of section 1231, such loss is excluded in 
determining net earnings from self-employment even though such loss is 
treated under section 1231 as an ordinary loss. For the purposes of this 
special rule, the term ``involuntary conversion'' means a compulsory or 
involuntary conversion of property into other property or money as a 
result of its destruction in whole or in part, theft or seizure, or an 
exercise of the power of requisition or condemnation or the threat or 
imminence thereof; and the term ``other dispostion'' includes the 
destruction or loss, in whole or in part, of property by fire, storm, 
shipwreck, or other casualty, or by theft, even though there is no 
conversion of such property into other property or money.
    (b) The application of this section may be illustrated by the 
following example:

    Example. During the taxable year 1954, A, who owns a grocery store, 
realized a net profit of $1,500 from the sale of groceries and a gain of 
$350 from the sale of a refrigerator case. During the same year, he 
sustained a loss of $2,000 as a result of damage by fire to the store 
building. In computing taxable income, all of these items are taken into 
account. In determining net earnings from self-employment, however, only 
the $1,500 of profit derived from the sale of groceries is included. The 
$350 gain and the $2,000 loss are excluded.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6841, 30 FR 
9309, July 27, 1965]



Sec.  1.1402(a)-7  Net operating loss deduction.

    The deduction provided by section 172, relating to net operating 
losses sustained in years other than the taxable year, is excluded.



Sec.  1.1402(a)-8  Community income.

    (a) In case of an individual. If any of the income derived by an 
individual from a trade or business (other than a trade or business 
carried on by a partnership) is community income under community 
property laws applicable to such income, all of the gross income, and 
the deductions attributable to such income, shall be treated as the 
gross income and deductions of the husband unless the wife exercises 
substantially all of the management and control of such trade or 
business, in which case all of such gross income and deductions shall be 
treated as the gross income and deductions of the wife. For the purpose 
of this special rule, the term ``management and control'' means 
management and control in fact, not the management and control imputed 
to the husband under the community property laws. For example, a wife 
who operates a beauty parlor without any appreciable collaboration on 
the part of her husband will be considered as having substantially all 
of the management and control of such business despite the provision of 
any community property law vesting in the husband the right of 
management and control of community property; and the income and 
deductions attributable to the operation of such beauty parlor will be 
considered the income and deductions of the wife.

[[Page 20]]

    (b) In case of a partnership. Even though a portion of a partner's 
distributive share of the income or loss, described in section 
702(a)(9), from a trade or business carried on by a partnership is 
community income or loss under the community property laws applicable to 
such share, all of such distributive share shall be included in 
computing the net earnings from self-employment of such partner; no part 
of such share shall be taken into account in computing the net earnings 
from self-employment of the spouse of such partner. In any case in which 
both spouses are members of the same partnership, the distributive share 
of the income or loss of each spouse is included in computing the net 
earnings from self-employment of that spouse.



Sec.  1.1402(a)-9  Puerto Rico.

    (a) Residents. A resident of Puerto Rico, whether or not a bona fide 
resident thereof during the entire taxable year, and whether or not an 
alien, a citizen of the United States, or a citizen of Puerto Rico, 
shall compute his net earnings from self-employment in the same manner 
as would a citizen of the United States residing in the United States. 
See paragraph (d) of Sec.  1.1402(b)-1 for regulations relating to 
nonresident aliens. For the purpose of the tax on self-employment 
income, the gross income of such a resident of Puerto Rico also includes 
income from Puerto Rican sources. Thus, under this special rule, income 
from Puerto Rican sources will be included in determining net earnings 
from self-employment of a resident of Puerto Rico engaged in the active 
conduct of a trade or business in Puerto Rico despite the fact that, 
under section 933, such income may not be taken into account for 
purposes of the tax under section 1 or 3.
    (b) Nonresidents. A citizen of Puerto Rico who is also a citizen of 
the United States and who is not a resident of Puerto Rico will compute 
his net earnings from self-employment in the same manner and subject to 
the same provisions of law and regulations as other citizens of the 
United States.



Sec.  1.1402(a)-10  Personal exemption deduction.

    The deduction provided by section 151, relating to personal 
exemptions, is excluded.



Sec.  1.1402(a)-11  Ministers and members of religious orders.

    (a) In general. For each taxable year ending after 1954 in which a 
minister or member of a religious order is engaged in a trade or 
business, within the meaning of section 1402(c) and Sec.  1.1402(c)-5, 
with respect to service performed in the exercise of his ministry or in 
the exercise of duties required by such order, net earnings from self-
employment from such trade or business include the gross income derived 
during the taxable year from any such service, less the deductions 
attributable to such gross income. For each taxable year ending on or 
after December 31, 1957, such minister or member of a religious order 
shall compute his net earnings from self-employment derived from the 
performance of such service without regard to the exclusions from gross 
income provided by section 107 (relating to rental value of parsonages) 
and section 119 (relating to meals and lodging furnished for the 
convenience of the employer). Thus, a minister who is subject to self-
employment tax with respect to his services as a minister will include 
in the computation of his net earnings from self-employment for a 
taxable year ending on or after December 31, 1957, the rental value of a 
home furnished to him as remuneration for services performed in the 
exercise of his ministry or the rental allowance paid to him as 
remuneration for such services irrespective of whether such rental value 
or rental allowance is excluded from gross income by section 107. 
Similarly, the value of any meals or lodging furnished to a minister or 
to a member of a religious order in connection with service performed in 
the exercise of his ministry or as a member of such order will be 
included in the computation of his net earnings from self-employment for 
a taxable year ending on or after December 31, 1957, notwithstanding the 
exclusion of such value from gross income by section 119.
    (b) In employ of American employer. If a minister or member of a 
religious

[[Page 21]]

order engaged in a trade or business described in section 1402(c) and 
Sec.  1.1402(c)-5 is a citizen of the United States and performs 
service, in his capacity as a minister or member of a religious order, 
as an employee of an American employer, as defined in section 3121(h) 
and the regulations thereunder in part 31 of this chapter (Employment 
Tax Regulations), his net earnings from self-employment derived from 
such service shall be computed as provided in paragraph (a) of this 
section but without regard to the exclusions from gross income provided 
in section 911, relating to earned income from sources without the 
United States, and section 931, relating to income from sources within 
certain possessions of the United States. Thus, even though all the 
income of the minister or member for service of the character to which 
this paragraph is applicable was derived from sources without the United 
States, or from sources within certain possessions of the United States, 
and therefore may be excluded from gross income, such income is included 
in computing net earnings from self-employment.
    (c) Minister in a foreign country whose congregation is composed 
predominantly of citizens of the United States--(1) Taxable years ending 
after 1956. For any taxable year ending after 1956, a minister of a 
church, who is engaged in a trade or business within the meaning of 
section 1402(c) and Sec.  1.1402(c)-5, is a citizen of the United 
States, is performing service in the exercise of his ministry in a 
foreign country, and has a congregation composed predominantly of United 
States citizens, shall compute his net earnings from self-employment 
derived from his services as a minister for such taxable year without 
regard to the exclusion from gross income provided in section 911, 
relating to earned income from sources without the United States. For 
taxable years ending on or after December 31, 1957, such minister shall 
also disregard sections 107 and 119 in the computation of his net 
earnings from self-employment. (See paragraph (a) of this section.) For 
purposes of section 1402(a)(8) and this paragraph a ``congregation 
composed predominantly of citizens of the United States'' means a 
congregation the majority of which throughout the greater portion of its 
minister's taxable year were United States citizens.
    (2) Election for taxable years ending after 1954 and before 1957. 
(i) A minister described in subparagraph (1) of this paragraph who, for 
a taxable year ending after 1954 and before 1957, had income from 
service described in such subparagraph which would have been included in 
computing net earnings from self-employment if such income had been 
derived in a taxable year ending after 1956 by an individual who had 
filed a waiver certificate under section 1402(e), may elect to have 
section 1402(a)(8) and subparagraph (1) of this paragraph apply to his 
income from such service for his taxable years ending after 1954 and 
before 1957. If such minister filed a waiver certificate prior to August 
1, 1956, in accordance with Sec.  1.1402(e)(1)-1, or he files such a 
waiver certificate on or before the due date of his return (including 
any extensions thereof) for his last taxable year ending before 1957, he 
must make such election on or before the due date of his return 
(including any extensions thereof) for such taxable year or before April 
16, 1957, whichever is the later. If the waiver certificate is not so 
filed, the minister must make his election on or before the due date of 
the return (including any extensions thereof) for his first taxable year 
ending after 1956. Notwithstanding the expiration of the period 
prescribed by section 1402(e)(2) for filing such waiver, the minister 
may file a waiver certificate at the time he makes the election. In no 
event shall an election be valid unless the minister files prior to or 
at the time of the election a waiver certificate in accordance with 
Sec.  1.1402(e)(1)-1.
    (ii) The election shall be made by filing with the district director 
of internal revenue with whom the waiver certificate, Form 2031, is 
filed a written statement indicating that, by reason of the Social 
Security Amendments of 1956, the minister desires to have the Federal 
old-age, survivors, and disability insurance system established by title 
II of the Social Security Act extended to his services performed in a 
foreign country as a minister of a congregation composed predominantly 
of United States citizens beginning with

[[Page 22]]

the first taxable year ending after 1954 and prior to 1957 for which he 
had income from such services. The statement shall be dated and signed 
by the minister and shall clearly state that it is an election for 
retroactive self-employment tax coverage under the Self-Employment 
Contributions Act of 1954. In addition, the statement shall include the 
following information:
    (a) The name and address of the minister.
    (b) His social security account number, if he has one.
    (c) That he is a duly ordained, commissioned, or licensed minister 
of a church.
    (d) That he is a citizen of the United States.
    (e) That he is performing services in the exercise of his ministry 
in a foreign country.
    (f) That his congregation is composed predominantly of citizens of 
the United States.
    (g)(1) That he has filed a waiver certificate and, if so, where and 
under what circumstances the certificate was filed and the taxable year 
for which it is effective; or (2) that he is filing a waiver certificate 
with his election for retroactive coverage and, if so, the taxable year 
for which it is effective.
    (h) That he has or has not filed income tax returns for his taxable 
years ending after 1954 and before 1957. If he has filed such returns, 
he shall state the years for which they were filed and indicate the 
district director of internal revenue with whom they were filed.
    (iii) Notwithstanding section 1402(e)(3), a waiver certificate filed 
pursuant to Sec.  1.1402(e)(1)-1 by a minister making an election under 
this paragraph shall be effective (regardless of when such certificate 
is filed) for such minister's first taxable year ending after 1954 in 
which he had income from service described in subparagraph (1) of this 
paragraph or for the taxable year of the minister prescribed by section 
1402(e)(3), if such taxable year is earlier, and for all succeeding 
taxable years.
    (iv) No interest or penalty shall be assessed or collected for 
failure to file a return within the time prescribed by law if such 
failure arises solely by reason of an election made by a minister 
pursuant to this paragraph or for any underpayment of self-employment 
income tax arising solely by reason of such election, for the period 
ending with the date such minister makes an election pursuant to this 
paragraph.
    (d) Treatment of certain remuneration paid in 1955 and 1956 as 
wages. For treatment of remuneration paid to an individual for service 
described in section 3121(b)(8)(A) which was erroneously treated by the 
organization employing him as employment with-in the meaning of chapter 
21 of the Internal Revenue Code, see Sec.  1.1402(e)(4)-1.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 9194, 70 FR 
18946, Apr. 11, 2005]



Sec.  1.1402(a)-12  Continental shelf and certain possessions of the 
United States.

    (a) Certain possessions. For purposes of the tax on self-employment 
income, the exclusion from gross income provided by section 931 
(relating to bona fide residents of certain possessions of the United 
States) will not apply. Net earnings from self-employment are subject to 
the tax on self-employment income even if such amounts are excluded from 
gross income under section 931.
    (b) Continental shelf. For the definition of the term ``United 
States'' and for other geographical definitions relating to the 
continental shelf, see section 638 and Sec.  1.638-1.
    (c) Effective/applicability date. This section applies to taxable 
years ending after April 9, 2008.

[T.D. 9391, 73 FR 19376, Apr. 9, 2008]



Sec.  1.1402(a)-13  Income from agricultural activity.

    (a) Agricultural trade or business. (1) An agricultural trade or 
business is one in which, if the trade or business were carried on 
exclusively by employees, the major portion of the services would 
constitute agricultural labor as defined in section 3121(g) and the 
regulations thereunder in part 31 of this chapter (Employment Tax 
Regulations). In case the services are in part agricultural and in part 
nonagricultural, the time devoted to the performance of each type of 
service is the test to be used to determine whether the major portion

[[Page 23]]

of the services would constitute agricultural labor. If more than half 
of the time spent in performing all the services is spent in performing 
services which would constitute agricultural labor under section 
3121(g), the trade or business is agricultural. If only half, or less, 
of the time spent in performing all the services is spent in performing 
services which would constitute agricultural labor under section 
3121(g), the trade or business is not agricultural. In every case the 
time spent in performing the services will be computed by adding the 
time spent in the trade or business during the taxable year by every 
individual (including the individual carrying on such trade or business 
and the members of his family) in performing such services. The 
operation of this special rule is not affected by section 3121(c), 
relating to the included-excluded rule for determining employment.
    (2) The rules prescribed in subparagraph (1) of this paragraph have 
no application where the nonagricultural services are performed in 
connection with an enterprise which constitutes a trade or business 
separate and distinct from the trade or business conducted as an 
agricultural enterprise. Thus, the operation of a roadside automobile 
service station on farm premises constitutes a trade or business 
separate and distinct from the agricultural enterprise, and the gross 
income derived from such service station, less the deductions 
attributable thereto, is to be taken into account in determining net 
earnings from self-employment.
    (b) Farm operator's income for taxable years ending before 1955. 
Income derived in a taxable year ending before 1955 from any 
agricultural trade or business (see paragraph (a) of this section), and 
all deductions attributable to such income, are excluded in computing 
net earnings from self-employment.
    (c) Farm operator's income for taxable years ending after 1954. 
Income derived in a taxable year ending after 1954 from an agricultural 
trade or business (see paragraph (a) of this section) is includible in 
computing net earnings from self-employment. Income derived from an 
agricultural trade or business includes income derived by an individual 
under an agreement entered into by such individual with another person 
pursuant to which such individual undertakes to produce agricultural or 
horticultural commodities (including livestock, bees, poultry, and fur-
bearing animals and wildlife) on land owned or leased by such other 
person and pursuant to which the agricultural or horticultural 
commodities produced by such individual, or the proceeds therefrom, are 
to be divided between such individual and such other person, and the 
amount of such individual's share depends on the amount of the 
agricultural or horticultural commodities produced. However, except as 
provided in paragraph (d) of this section, relating to arrangements 
involving material participation, the income derived under such an 
agreement by the owner or lessee of the land is not includible in 
computing net earnings from self-employment. See Sec.  1.1402(a)-4. For 
options relating to the computation of net earnings from self-
employment, see Sec. Sec.  1.1402(a)-14 and 1.1402(a)-15.
    (d) Includible farm rental income for taxable years ending after 
1955. For taxable years ending after 1955, income derived from an 
agricultural trade or business (see paragraph (a) of this section) 
includes also income derived by the owner or tenant of land under an 
arrangement between such owner or tenant and another person, if such 
arrangement provides that such other person shall produce agricultural 
or horticultural commodities (including livestock, bees, poultry, and 
fur-bearing animals and wildlife) on such land, and that there shall be 
material participation by the owner or tenant in the production or the 
management of the production of such agricultural or horticultural 
commodities, and if there is material participation by the owner or 
tenant with respect to any such agricultural or horticultural commodity. 
See paragraph (b) of Sec.  1.1402(a)-4. For options relating to the 
computation of net earnings from self-employment, see Sec. Sec.  
1.1402(a)-14 and 1.1402(a)-15.
    (e) Income from service performed after 1956 as a crew leader. 
Income derived by a crew leader (see section 3121(o) and the regulations 
thereunder in Part 31 of this chapter (Employment Tax Regulations)) from 
service performed after

[[Page 24]]

1956 in furnishing individuals to perform agricultural labor for another 
person and from service performed after 1956 in agricultural labor as a 
member of the crew is considered to be income derived from a trade or 
business for purposes of Sec.  1.1402(c)-1. Whether such trade or 
business is an agricultural trade or business shall be determined by 
applying the rules set forth in this section.



Sec.  1.1402(a)-14  Options available to farmers in computing net earnings 
from self-employment for taxable years ending after 1954 and before 
December 31, 1956.

    (a) Computation of net earnings. In the case of any trade or 
business which is carried on by an individual who reports his income on 
the cash receipts and disbursements method, and in which, if it were 
carried on exclusively by employees, the major portion of the services 
would constitute agricultural labor as defined in section 3121(g) (see 
paragraph (a) of Sec.  1.1402(a)-13), net earnings from self-employment 
may, for a taxable year ending after 1954, at the option of the 
taxpayer, be computed as follows:
    (1) Gross income $1,800 or less. If the gross income, computed as 
provided in paragraph (b) of this section, from such trade or business 
is $1,800 or less, the taxpayer may, at his option, treat as net 
earnings from self-employment from such trade or business an amount 
equal to 50 percent of such gross income. If the taxpayer so elects, the 
amount equal to 50 percent of such gross income shall be used in 
computing his self-employment income in lieu of his actual net earnings 
from such trade or business, if any.
    (2) Gross income in excess of $1,800. If the gross income, computed 
as provided in paragraph (b) of this section, from such trade or 
business is more than $1,800, and the actual net earnings from self-
employment from such trade or business are less than $900, the taxpayer 
may, at his option, treat $900 as net earnings from self-employment. If 
the taxpayer so elects, $900 shall be used in computing his self-
employment income in lieu of his actual net earnings from such trade or 
business, if any. However, if the taxpayer's actual net earnings from 
such trade or business, as computed in accordance with Sec. Sec.  
1.1402(a)-1 through 1.1402(a)-3 are $900 or more, such actual net 
earnings shall be used in computing his self-employment income.
    (b) Computation of gross income. For purposes of paragraph (a) of 
this section, gross income shall consist of the gross receipts from such 
trade or business reduced by the cost or other basis of property which 
was purchased and sold in carrying on such trade or business, adjusted 
(after such reduction) in accordance with the provisions of Sec.  
1.1402(a)-3, relating to income and deductions not included in computing 
net earnings from self-employment.
    (c) Two or more agricultural activities. If an individual is engaged 
in more than one agricultural trade or business within the meaning of 
paragraph (a) of Sec.  1.1402(a)-13 (for example, the business of 
ordinary farming and the business of cotton ginning), the gross income 
derived from each agricultural trade or business shall be aggregated for 
purposes of the optional method provided in paragraph (a) of this 
section for computing net earnings from self-employment.
    (d) Examples. Application of the regulations prescribed in 
paragraphs (a) and (b) of this section may be illustrated by the 
following examples:

    Example (1). F, a farmer, uses the cash receipts and disbursements 
method of accounting in making his income tax returns. F's books and 
records show that during the calendar year 1955 he received $1,200 from 
the sale of produce raised on the farm, $200 from the sale of livestock 
raised on the farm and not held for breeding or dairy purposes, and $600 
from the sale of a tractor. The income from the sale of the tractor is 
of a type which is excluded from net earnings from self-employment by 
section 1402(a). F's actual net earnings from self-employment, computed 
in accordance with the provisions of Sec. Sec.  1.1402(a)-1 through 
1.1402(a)-3, are $450. F may report $450 as his net earnings from self-
employment or he may elect to report $700 (one-half of $1,400).
    Example (2). C, a cattleman, uses the cash receipts and 
disbursements method of accounting in making his income tax returns. C 
had actual net earnings from self-employment, computed in accordance 
with the provisions of Sec. Sec.  1.1402(a)-1 through 1.1402(a)-3, of 
$725. His gross receipts were $1,000 from the sale of produce raised on 
the farm and $1,200 from the sale of feeder cattle, which C bought for 
$500. The income from the sale of

[[Page 25]]

the feeder cattle is of a type which is included in computing net 
earnings from self-employment. Therefore, C may report $725 as his net 
earnings from self-employment or he may elect to report $850, one-half 
of $1,700 ($2,200 minus $500).
    Example (3). R, a rancher, has gross income of $3,000 from the 
operation of his ranch, computed as provided in paragraph (b) of this 
section. His actual net earnings from self-employment from farming 
activities are less than $900. R, nevertheless, may elect to report $900 
as net earnings from self-employment from such trade or business. If R 
had actual net earnings from self-employment from his farming activities 
in the amount of $900 or more, he would be required to report such 
amount in computing his self-employment income.

    (e) Members of farm partnerships. The optional method provided by 
paragraph (a) of this section for computing net earnings from self-
employment is not available to a member of a partnership with respect to 
his distributive share of the income or loss from any trade or business 
carried on by any partnership of which he is a member.



Sec.  1.1402(a)-15  Options available to farmers in computing net earnings
from self-employment for taxable years ending on or after December 31, 1956.

    (a) Computation of net earnings. In the case of any trade or 
business which is carried on by an individual or by a partnership and in 
which, if such trade or business were carried on exclusively by 
employees, the major portion of the services would constitute 
agricultural labor as defined in section 3121(g) (see paragraph (a) of 
Sec.  1.1402(a)-13), net earnings from self-employment may, for a 
taxable year ending on or after December 31, 1956, at the option of the 
taxpayer, be computed as follows:
    (1) In case of an individual--(i) Gross income of less than 
specified amount. If the gross income, computed as provided in paragraph 
(b) of this section, from such trade or business is $2,400 or less 
($1,800 or less for a taxable year ending on or after December 31, 1956, 
and beginning before January 1, 1966), the taxpayer may, at his option, 
treat as net earnings from self-employment from such trade or business 
an amount equal to 66\2/3\ percent of such gross income. If the taxpayer 
so elects, the amount equal to 66\2/3\ percent of such gross income 
shall be used in computing his self-employment income in lieu of his 
actual net earnings from such trade or business, if any.
    (ii) Gross income in excess of specified amount. If the gross 
income, computed as provided in paragraph (b) of this section, from such 
trade or business is more than $2,400 ($1,800 for a taxable year ending 
on or after December 31, 1956, and beginning before January 1, 1966), 
and the net earnings from self-employment from such trade or business 
(computed without regard to this section) are less than $1,600 ($1,200 
for a taxable year ending on or after December 31, 1956, and beginning 
before January 1, 1966), the taxpayer may, at his option, treat $1,600 
($1,200 for a taxable year ending on or after December 31, 1956, and 
beginning before January 1, 1966) as net earnings from self-employment. 
If the taxpayer so elects, $1,600 ($1,200 for a taxable year ending on 
or after December 31, 1956, and beginning before January 1, 1966) shall 
be used in computing his self-employment income in lieu of his actual 
net earnings from such trade or business, if any. However, if the 
taxpayer's actual net earnings from such trade or business, as computed 
in accordance with the applicable provisions of Sec. Sec.  1.1402(a)-1 
to 1.1402(a)-13, inclusive, are $1,600 or more ($1,200 or more for a 
taxable year ending on or after December 31, 1956, and beginning before 
January 1, 1966) such actual net earnings shall be used in computing his 
self-employment income.
    (2) In case of a member of a partnership--(i) Distributive share of 
gross income of less than specified amount. If a taxpayer's distributive 
share of the gross income of a partnership (as such gross income is 
computed under the provisions of paragraph (b) of this section) derived 
from such trade or business (after such gross income has been reduced by 
the sum of all payments to which section 707(c) applies) is $2,400 or 
less ($1,800 or less for a taxable year ending on or after December 31, 
1956, and beginning before January 1, 1966), the taxpayer may, at his 
option, treat as his distributive share of income described in section 
702(a)(9) derived from such trade or business an amount equal to 66\2/3\ 
percent of his distributive share

[[Page 26]]

of such gross income (after such gross income has been reduced by the 
sum of all payments to which section 707(c) applies). If the taxpayer so 
elects, the amount equal to 66\2/3\ percent of his distributive share of 
such gross income shall be used by him in the computation of his net 
earnings from self-employment in lieu of the actual amount of his 
distributive share of income described in section 702(a)(9) from such 
trade or business, if any.
    (ii) Distributive share of gross income in excess of specified 
amount. If a taxpayer's distributive share of the gross income of the 
partnership (as such gross income is computed under the provisions of 
paragraph (b) of this section) derived from such trade or business 
(after such gross income has been reduced by the sum of all payments to 
which section 707(c) applies) is more than $2,400 ($1,800 for a taxable 
year ending on or after December 31, 1956, and beginning before January 
1, 1966) and the actual amount of his distributive share (whether or not 
distributed) of income described in section 702(a)(9) derived from such 
trade or business (computed without regard to this section) is less than 
$1,600 ($1,200 for a taxable year ending on or after December 31, 1956, 
and beginning before January 1, 1966), the taxpayer may, at his option, 
treat $1,600 ($1,200 for a taxable year ending on or after December 31, 
1956, and beginning before January 1, 1966) as his distributive share of 
income described in section 702(a)(9) derived from such trade or 
business. If the taxpayer so elects, $1,600 ($1,200 for a taxable year 
ending on or after December 31, 1956, and beginning before January 1, 
1966) shall be used by him in the computation of his net earnings from 
self-employment in lieu of the actual amount of his distributive share 
of income described in section 702(a)(9) from such trade or business, if 
any. However, if the actual amount of the taxpayer's distributive share 
of income described in section 702(a)(9) from such trade or business, as 
computed in accordance with the applicable provisions of Sec. Sec.  
1.1402(a)-1 to 1.1402(a)-13, inclusive, is $1,600 or more ($1,200 or 
more for a taxable year ending on or after December 31, 1956, and 
beginning before January 1, 1966), such actual amount of the taxpayer's 
distributive share shall be used in computing his net earnings from 
self-employment.
    (iii) Cross reference. For a special rule in the case of certain 
deceased partners, see paragraph (c) of Sec.  1.1402(f)-1.
    (b) Computation of gross income. For purposes of this section gross 
income has the following meanings:
    (1) In the case of any such trade or business in which the income is 
computed under a cash receipts and disbursements method, the gross 
receipts from such trade or business reduced by the cost or other basis 
of property which was purchased and sold in carrying on such trade or 
business (see paragraphs (a) and (c), other than paragraph (a)(5), of 
Sec.  1.61-4), adjusted (after such reduction) in accordance with the 
applicable provisions of Sec. Sec.  1.1402(a)-3 to 1.1402(a)-13, 
inclusive.
    (2) In the case of any such trade or business in which the income is 
computed under an accrual method (see paragraphs (b) and (c), other than 
paragraph (b)(5), of Sec.  1.61-4), the gross income from such trade or 
business, adjusted in accordance with the applicable provisions of 
Sec. Sec.  1.1402(a)-3 to 1.1402(a)-13, inclusive.
    (c) Two or more agricultural activities. If an individual (including 
a member of a partnership) derives gross income (as defined in paragraph 
(b) of this section) from more than one agricultural trade or business, 
such gross income (including his distributive share of the gross income 
of any partnership derived from any such trade or business) shall be 
deemed to have been derived from one trade or business. Thus, such an 
individual shall aggregate his gross income derived from each 
agricultural trade or business carried on by him (which includes, under 
paragraph (b) of Sec.  1.1402(a)-1, any guaranteed payment, within the 
meaning of section 707(c), received by him from a farm partnership of 
which he is a member) and his distributive share of partnership gross 
income (after such gross income has been reduced by any guaranteed 
payment within the meaning of section 707(c)) derived from each farm 
partnership of which he is a member. Such gross income is the amount to 
be considered for purposes of the optional method provided in this 
section for

[[Page 27]]

computing net earnings from self-employment. If the aggregate gross 
income of an individual includes income derived from an agricultural 
trade or business carried on by him and a distributive share of 
partnership income derived from an agricultural trade or business 
carried on by a partnership of which he is a member, such aggregate 
gross income shall be treated as income derived from a single trade or 
business carried on by him, and such individual shall apply the optional 
method applicable to individuals set forth in paragraph (a)(1) of this 
section for purposes of computing his net earnings from self-employment.
    (d) Examples. The application of this section may be illustrated by 
the following examples:

    Example (1). F is engaged in the business of farming and computes 
his income under the cash receipts and disbursements method. He files 
his income tax returns on the basis of the calendar year. During the 
year 1966, F's gross income from the business of farming (computed in 
accordance with paragraph (b) (1) of this section) is $2,325. His actual 
net earnings from self-employment derived from such business are $1,250. 
As his net earnings from self-employment, F may report $1,250 or, by the 
optional computation method, he may report $1,550 (66\2/3\ percent of 
$2,325).
    Example (2). G is engaged in the business of farming and computes 
his income under the accrual method. His income tax returns are filed on 
the calendar year basis. For the year 1966, G's gross income from the 
operation of his farm (computed in accordance with paragraph (b)(2) of 
this section) is $2,800. He has actual net earnings from self-employment 
derived from such farm in the amount of $1,250. As his net earnings from 
self-employment derived from his farm, G may report his actual net 
earnings of $1,250, or by the optional method he may report $1,600. If 
G's actual net earnings from self-employment from his farming activities 
for 1966 were in an amount of $1,600 or more, he would be required to 
report such amount in computing his self-employment income.
    Example (3). M, who files his income tax returns on a calendar year 
basis, is one of the three partners of the XYZ Company, a partnership, 
engaged in the business of farming. The taxable year of the partnership 
is the calendar year, and its income is computed under the cash receipts 
and disbursements method. For M's services in connection with the 
planting, cultivating, and harvesting of the crops during the year 1966 
the partnership agrees to pay him $500, the full amount of which is 
determined without regard to the income of the partnership and 
constitutes a guaranteed payment within the meaning of section 707(c). 
This guaranteed payment to M is the only such payment made during such 
year. The gross income derived from the business for the year 1966 
computed in accordance with paragraph (b)(1) of this section and after 
being reduced by the guaranteed payment of $500 made to M, is $3,000. 
One-third of the $3,000 ($1,000), is M's distributive share of such 
gross income. Under paragraph (c) of this section, the guaranteed 
payment ($500) received by M and his distributive share of the 
partnership gross income ($1,000) are deemed to have been derived from 
one trade or business, and such amounts must be aggregated for purposes 
of the optional method of computing net earnings from self-employment. 
Since M's combined gross income from his two agricultural businesses 
($1,000 and $500) is not more than $2,400 and since such income is 
deemed to be derived from one trade or business, M's net earnings from 
self-employment derived from such farming business may, at his option, 
be deemed to be $1,000 (66\2/3\ percent of $1,500).
    Example (4). A is one of the two partners of the AB partnership 
which is engaged in the business of farming. The taxable year of the 
partnership is the calendar year and its income is computed under the 
accrual method. A files his income tax returns on the calendar year 
basis. The partnership agreement provides for an equal sharing in the 
profits and losses of the partnership by the two partners. A is an 
experienced farmer and for his services as manager of the partnership's 
farm activities during the year 1966 he receives $6,000 which amount 
constitutes a guaranteed payment within the meaning of section 707(c). 
The gross income of the partnership derived from such business for the 
year 1966, computed in accordance with paragraph (b)(2) of this section 
and after being reduced by the guaranteed payment made to A, is $9,600. 
A's distributive share of such gross income is $4,800 and his 
distributive share of income described in section 702(a)(9) derived from 
the partnership's business is $1,900. Under paragraph (c) of this 
section, the guaranteed payment received by A and his distributive share 
of the partnership gross income are deemed to have been derived from one 
trade or business, and such amounts must be aggregated for purposes of 
the optional method of computing his net earnings from self-employment. 
Since the aggregate of A's guaranteed payment ($6,000) and his 
distributive share of partnership gross income ($4,800) is more than 
$2,400 and since the aggregate of A's guaranteed payment ($6,000) and 
his distributive share ($1,900) of partnership income described in 
section 702(a)(9) is not less than $1,600, the optional method of 
computing net earnings from self-employment is not available to A.
    Example (5). F is a member of the EFG partnership which is engaged 
in the business

[[Page 28]]

of farming. F files his income tax returns on the calendar year basis. 
The taxable year of the partnership is the calendar year, and its income 
is computed under a cash receipts and disbursements method. Under the 
partnership agreement the partners are to share equally the profits or 
losses of the business. The gross income derived from the partnership 
business for the year 1966, computed in accordance with paragraph (b)(1) 
of this section is $7,500. F's share of such gross income is $2,500. Due 
to drought and an epidemic among the livestock, the partnership sustains 
a net loss of $7,800 for the year 1966 of which loss F's share is 
$2,600. Since F's distributive share of gross income derived from such 
business is in excess of $2,400 and since F does not receive income 
described in section 702(a)(9) of $1,600 or more from such business, he 
may, at his option, be deemed to have received $1,600 as his 
distributive share of income described in section 702(a)(9) from such 
business.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6993, 34 FR 
828, Jan. 18, 1969]



Sec.  1.1402(a)-16  Exercise of option.

    A taxpayer shall, for each taxable year with respect to which he is 
eligible to use the optional method described in Sec.  1.1402(a)-14 or 
Sec.  1.1402(a)-15, make a determination as to whether his net earnings 
from self-employment are to be computed in accordance with such method. 
If the taxpayer elects the optional method for a taxable year, he shall 
signify such election by computing net earnings from self-employment 
under the optional method as set forth in Schedule F (Form 1040) of the 
income tax return filed by the taxpayer for such taxable year. If the 
optional method is not elected at the time of the filing of the return 
for a taxable year with respect to which the taxpayer is eligible to 
elect such optional method, such method may be elected on an amended 
return (or on such other form as may be prescribed for such use) filed 
within the period prescribed by section 6501 and the regulations 
thereunder for the assessment of the tax for such taxable year. If the 
optional method is elected on a return for a taxable year, the taxpayer 
may revoke such election by filing an amended return (or such other form 
as may be prescribed for such use) for the taxable year within the 
period prescribed by section 6501 and the regulations thereunder for the 
assessment of the tax for such taxable year. If the taxpayer is deceased 
or unable to make an election, the person designated in section 6012(b) 
and the regulations thereunder may, within the period prescribed in this 
section elect the optional method for any taxable year with respect to 
which the taxpayer is eligible to use the optional method and revoke an 
election previously made by or for the taxpayer.



Sec.  1.1402(a)-17  Retirement payments to retired partners.

    (a) In general. There shall be excluded, in computing net earnings 
from self-employment for taxable years ending on or after December 31, 
1967, certain payments made on a periodic basis by a partnership, 
pursuant to a written plan of the partnership, to a retired partner on 
account of his retirement. The exclusion applies only if the payments 
are made pursuant to a plan which meets the requirements prescribed in 
paragraph (b) of this section, and, in addition, the conditions set 
forth in paragraph (c) of this section are met.
    (b) Retirement plan of partnership. (1) To meet the requirements of 
section 1402(a)(10), the written plan of the partnership must set forth 
the terms and conditions of the program or system established by the 
partnership for the purpose of making payments to retired partners on 
account of their retirement. To qualify as payments on account of 
retirement, the payments must constitute bona fide retirement income. 
Thus, payments of benefits not customarily included in a pension or 
retirement plan such as layoff benefits are not payments on account of 
retirement. Eligibility for retirement generally is established on the 
basis of age, physical condition, or a combination of age or physical 
condition and years of service. Generally, retirement benefits are 
measured by, and based on, such factors as years of service and 
compensation received. In determining whether the plan of the 
partnership provides for payments on account of retirement, factors, 
formulas, etc., reflected in public, and in broad based private, pension 
or retirement plans in prescribing eligibility requirements

[[Page 29]]

and in computing benefits may be taken into account.
    (2) The plan of the partnership must provide for payments on account 
of retirement:
    (i) To partners generally or to a class or classes of partners,
    (ii) On a periodic basis, and
    (iii) Which continue at least until the partner's death.

For purposes of subdivision (i) of this subparagraph, a class of 
partners may, in an appropriate case, contain only one member. Payments 
are made on a periodic basis if made at regularly recurring intervals 
(usually monthly) not exceeding one year.
    (c) Conditions relating to exclusion--(1) In general. A payment made 
pursuant to a written plan of a partnership which meets the requirements 
of paragraph (b) of this section shall be excluded, in computing net 
earnings from self-employment, only if:
    (i) The retired partner to whom the payment is made rendered no 
service with respect to any trade or business carried on by the 
partnership (or its successors) during the taxable year of the 
partnership (or its successors), which ends within or with the taxable 
year of the retired partner and in which the payment was received by 
him;
    (ii) No obligation (whether certain in amount or contingent on a 
subsequent event) exists (as of the close of the partnership's taxable 
year referred to in subdivision (i) of this subparagraph) from the other 
partners to the retired partner except with respect to retirement 
payments under the plan or rights such as benefits payable on account of 
sickness, accident, hospitalization, medical expenses, or death; and
    (iii) The retired partner's share (if any) of the capital of the 
partnership has been paid to him in full before the close of the 
partnership's taxable year referred to in subdivision (i) of this 
subparagraph.

By application of the conditions set forth in this subparagraph, either 
all payments on account of retirement received by a retired partner 
during the taxable year of the partnership ending within or with his 
taxable year are excluded or none of the payments are excluded. 
Subdivision (ii) of this subparagraph has application only to 
obligations from other partners in their capacity as partners as 
distinguished from an obligation which arose and exists from a 
transaction unrelated to the partnership or to a trade or business 
carried on by the partnership. The effect of the conditions set forth in 
subdivisions (ii) and (iii) of this subparagraph is that the exclusion 
may apply with respect to payments received by a retired partner during 
the taxable year of the partnership ending within or with his taxable 
year only if at the close of the partnership's taxable year the retired 
partner had no financial interest in the partnership except for the 
right to retirement payments.
    (2) Examples. The application of subparagraph (1) of this paragraph 
may be illustrated by the following examples. Each example assumes that 
the partnership plan pursuant to which the payments are made meets the 
requirements of paragraph (b) of this section.

    Example (1). A, who files his income tax returns on a calendar year 
basis, is a partner in the ABC partnership. The taxable year of the 
partnership is the period July 1 to June 30, inclusive. A retired from 
the partnership on January 1, 1973, and receives monthly payments on 
account of his retirement. As of June 30, 1973, no obligation existed 
from the other partners to A (except with respect to retirement payments 
under the plan) and A's share of the capital of the partnership had been 
paid to him in full. The monthly retirement payments received by A from 
the partnership in his taxable year ending on December 31, 1973, are not 
excluded from net earnings from self-employment since A rendered service 
to the partnership during a portion of the partnership's taxable year 
(July 1, 1972, through June 30, 1973) which ends within A's taxable year 
ending on December 31, 1973.
    Example (2). D, a partner in the DEF partnership, retired from the 
partnership as of the close of December 31, 1972. The taxable year of 
both D and the partnership is the calendar year. During the 
partnership's taxable year ending December 31, 1973, D rendered no 
service with respect to any trade or business carried on by the 
partnership. On or before December 31, 1973, all obligations (other than 
with respect to retirement payments under the plan) from the other 
partners to D have been liquidated, and D's share of the capital of the 
partnership has been paid to him. Retirement payments received by D 
pursuant to the partnership's plan in his taxable year

[[Page 30]]

ending December 31, 1973, are excluded in determining his net earnings 
from self-employment (if any) for that taxable year.
    Example (3). Assume the same facts as in example (2) except that as 
of the close of December 31, 1973, D has a right to a fixed percentage 
of any amounts collected by the partnership after that date which are 
attributable to services rendered by him prior to his retirement for 
clients of the partnership. The monthly payments received by D in his 
taxable year ending December 31, 1973, are not excluded from net 
earnings from self-employment since as of the close of the partnership's 
taxable year which ends with D's taxable year, an obligation (other than 
an obligation with respect to retirement payments) exists from the other 
partners to D.

[T.D. 7333, 39 FR 44446, Dec. 24, 1974]



Sec.  1.1402(a)-18  Split-dollar life insurance arrangements.

    See Sec. Sec.  1.61-22 and 1.7872-15 for rules relating to the 
treatment of split-dollar life insurance arrangements.

[T.D. 9092, 68 FR 54352, Sept. 17, 2003]



Sec.  1.1402(b)-1  Self-employment income.

    (a) In general. Except for the exclusions in paragraphs (b) and (c) 
of this section and the exception in paragraph (d) of this section, the 
term ``self-employment income'' means the net earnings from self-
employment derived by an individual during a taxable year.
    (b) Maximum self-employment income--(1) General rule. Subject to the 
special rules described in subparagraph (2) of this paragraph, the 
maximum self-employment income of an individual for a taxable year 
(whether a period of 12 months or less) is:
    (i) For any taxable year beginning in a calendar year 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 such 
calendar year; and
    (ii) For any taxable year:

Ending before 1955................................................$3,600
Ending after 1954 and before 1959..................................4,200
Ending after 1958 and before 1966..................................4,800
Ending after 1965 and before 1968..................................6,600
Ending after 1967 and beginning before 1972........................7,800
Beginning after 1971 and before 1973...............................9,000
Beginning after 1972 and before 1974..............................10,800
Beginning after 1973 and before 1975..............................13,200

    (2) Special rules. (i) If an individual is paid wages as defined in 
subparagraph (3) of this paragraph in a taxable year, the maximum self-
employment income for such taxable year is computed as provided in 
subdivision (ii) or (iii) of this subparagraph.
    (ii) If an individual is paid wages as defined in subparagraph (3) 
(i) or (ii) of this paragraph in a taxable year, the maximum self-
employment income of such individual for such taxable year is the excess 
of the amounts indicated in subparagraph (1) of this paragraph over the 
amount of the wages, as defined in subparagraph (3) (i) and (ii) of this 
paragraph, paid to him during the taxable year. For example, if for his 
taxable year beginning in 1974, an individual has $15,000 of net 
earnings from self-employment and during such taxable year is paid 
$1,000 of wages as defined in section 3121(a) (see subparagraph (3)(i) 
of this paragraph), he has $12,200 ($13,200 -$1,000) of self-employment 
income for the taxable year.
    (iii) For taxable years ending on or after December 31, 1968, wages, 
as defined in subparagraph (3)(iii) of this paragraph, are taken into 
account in determining the maximum self-employment income of an 
individual for purposes of the tax imposed under section 1401(b) 
(hospital insurance), but not for purposes of the tax imposed under 
section 1401(a) (old-age survivors, and disability insurance). If an 
individual is paid wages as defined in subparagraph (3)(iii) of this 
paragraph in a taxable year, his maximum self-employment income for such 
taxable year for purposes of the tax imposed under section 1401(a) is 
computed under subparagraph (1) of this paragraph or subdivision (ii) of 
this subparagraph (whichever is applicable), and his maximum self-
employment income for such taxable year for purposes of the tax imposed 
under section 1401(b) is the excess of his section 1401(a) maximum self-
employment income over the amount of wages, as defined in subparagraph 
(3)(iii) of this paragraph, paid to him during the taxable year. For 
purposes of this subdivision, wages as defined in subparagraph (3)(iii) 
of this paragraph are deemed paid to an individual in the period with 
respect to which the payment is made, that is, the period in which the 
compensation was earned or deemed earned within

[[Page 31]]

the meaning of section 3231(e). For an explanation of the term 
``compensation'' and for provisions relating to when compensation is 
earned, see the regulations under section 3231(e) in part 31 of this 
chapter (Employment Tax Regulations). The application of the rules set 
forth in this subdivision may be illustrated by the following example:

    Example. M, a calendar-year taxpayer, has $15,000 of net earnings 
from self-employment for 1974 and during the taxable year is paid $1,000 
of wages as defined in section 3121(a) (see subparagraph (3)(i) of this 
paragraph) and $1,600 of compensation subject to tax under section 3201 
(see subparagraph (3)(iii) of this paragraph). Of the $1,600 of taxable 
compensation, $1,200 represents compensation for services rendered in 
1974 and the balance ($400) represents compensation which pursuant to 
the provisions of section 3231(e) is earned or deemed earned in 1973. 
M's maximum self-employment income for 1974 for purposes of the tax 
imposed under section 1401(a), computed as provided in subdivision (ii) 
of this subparagraph, is $12,200 ($13,200-$1,000), and for purposes of 
the tax imposed under section 1401(b) is $11,000 ($12,200-$1,200). 
However, M may recompute his maximum self-employment income for 1973 for 
purposes of the tax imposed under section 1401(b) by taking into account 
the $400 of compensation which is deemed paid in 1973.

    (3) Meaning of term ``wages''. For the purpose of the computation 
described in subparagraph (2) of this paragraph, the term ``wages'' 
includes:
    (i) Wages as defined in section 3121(a);
    (ii) Such remuneration paid to an employee for services covered by:
    (a) An agreement entered into pursuant to section 218 of the Social 
Security Act (42 U.S.C. 418), which section provides for extension of 
the Federal old-age, survivors and disability insurance system to State 
and local government employees under voluntary agreements between the 
States and the Secretary of Health, Education, and Welfare (Federal 
Security Administrator before April 11, 1953), or
    (b) An agreement entered into pursuant to the provisions of section 
3121(1), relating to coverage of citizens of the United States who are 
employees of foreign subsidiaries of domestic corporations,

as would be wages under section 3121(a) if such services constituted 
employment under section 3121(b). For an explanation of the term 
``wages'', see the regulations under section 3121(a) in part 31 of this 
chapter (Employment Tax Regulations); and
    (iii) Compensation, as defined in section 3231(e), which is subject 
to the employee tax imposed by section 3201 or the employee 
representative tax imposed by section 3211.
    (c) Minimum net earnings from self-employment. Self-employment 
income does not include the net earnings from self-employment of an 
individual when the amount of such earnings for the taxable year is less 
than $400. Thus, an individual having only $300 of net earnings from 
self-employment for the taxable year would not have any self-employment 
income. However, an individual having net earnings from self-employment 
of $400 or more for the taxable year may, by application of paragraph 
(b)(2) of this section, have less than $400 of self-employment income 
for purposes of the tax imposed under section 1401(a) and the tax 
imposed under section 1401(b) or may have self-employment income of $400 
or more for purposes of the tax imposed under section 1401(a) and of 
less than $400 for purposes of the tax imposed under section 1401(b). 
This could occur in a case in which the amount of the individual's net 
earnings from self-employment is $400 or more for a taxable year and the 
amount of such net earnings from self-employment plus the amount of 
wages, as defined in paragraph (b)(3) of this section, paid to him 
during the taxable year exceed the maximum self-employment income, as 
set forth in paragraph (b)(1) of this section, for the taxable year. 
However, the result occurs only if such maximum self-employment income 
exceeds the amount of such wages. The application of this paragraph may 
be illustrated by the following example:

    Example. For 1974 M, a calendar-year taxpayer, has net earnings from 
self-employment of $2,000 and wages (as defined in paragraph (b)(3) (i) 
and (ii) of this section) of $12,500. Since M's net earnings from self-
employment plus his wages exceed the maximum self-employment income for 
1974 ($13,200), his self-employment income for 1974 is $700 ($13,200-
$12,500). If M also had wages,

[[Page 32]]

as defined in paragraph (b)(3)(iii) of this section, of $200, his self-
employment income would be $700 for purposes of the tax imposed under 
section 1401(a) and $500 ($13,200-$12,700 ($12,500 + $200)) for purposes 
of the tax imposed under section 1401(b).


For provisions relating to when wages as defined in paragraph 
(b)(3)(iii) of this section are treated as paid, see paragraph 
(b)(2)(iii) of this section.
    (d) Nonresident aliens. A nonresident alien individual never has 
self-employment income. While a nonresident alien individual who derives 
income from a trade or business carried on within the United States, 
Puerto Rico, the Virgin Islands, Guam, or American Samoa (whether by 
agents or employees, or by a partnership of which he is a member) may be 
subject to the applicable income tax provisions on such income, such 
nonresident alien individual will not be subject to the tax on self-
employment income, since any net earnings which he may have from self-
employment do not constitute self-employment income. For the purpose of 
the tax on self-employment income, an individual who is not a citizen of 
the United States but who is a resident of the Commonwealth of Puerto 
Rico, the Virgin Islands, or, for taxable years beginning after 1960, of 
Guam or American Samoa is not considered to be a nonresident alien 
individual.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 7333, 39 FR 
44447, Dec. 24, 1974]



Sec.  1.1402(c)-1  Trade or business.

    In order for an individual to have net earnings from self-
employment, he must carry on a trade or business, either as an 
individual or as a member of a partnership. Except for the exclusions 
discussed in Sec. Sec.  1.1402(c)-2 to 1.1402(c)-7, inclusive, the term 
``trade or business'', for the purpose of the tax on self-employment 
income, shall have the same meaning as when used in section 162. An 
individual engaged in one of the excluded activities specified in such 
sections of the regulations may also be engaged in carrying on 
activities which constitute a trade or business for purposes of the tax 
on self-employment income. Whether or not he is also engaged in carrying 
on a trade or business will be dependent upon all of the facts and 
circumstances in the particular case. An individual who is a crew 
leader, as defined in section 3121(o) (see such section and the 
regulations thereunder in part 31 of this chapter (Employment Tax 
Regulations)), is considered to be engaged in carrying on a trade or 
business with respect to services performed by him after 1956 in 
furnishing individuals to perform agricultural labor for another person 
or services performed by him after 1956 as a member of the crew.

[T.D. 6978, 33 FR 15937, Oct. 30, 1968]



Sec.  1.1402(c)-2  Public office.

    (a) In general--(1) General rule. Except as otherwise provided in 
subparagraph (2) of this paragraph, the performance of the functions of 
a public office does not constitute a trade or business.
    (2) Fee basis public officials--(i) In general. If an individual 
receives fees after 1967 for the performance of the functions of a 
public office of a State or a political subdivision thereof for which he 
is compensated solely on a fee basis, and if the service performed in 
such office is eligible for (but is not made the subject of) an 
agreement between the State and the Secretary of Health, Education, and 
Welfare pursuant to section 218 of the Social Security Act to extend 
social security coverage thereto, the service for which such fees are 
received constitutes a trade or business within the meaning of section 
1402(c) and Sec.  1.1402(c)-1. If an individual performs service for a 
State or a political subdivision thereof in any period in more than one 
position, each position is treated separately for purposes of the 
preceding sentence. See also paragraph (f) of Sec.  1.1402(c)-3 relating 
to the performance of service by an individual as an employee of a State 
or a political subdivision thereof in a position compensated solely on a 
fee basis.
    (ii) Election with respect to fees received in 1968. (A) Any 
individual who in 1968 receives fees for service performed by him with 
respect to the functions of a public office of a State or a political 
subdivision thereof in any period in which the functions are performed 
in a position compensated solely on a fee basis may elect, if the 
performance of the service for which such fees are received constitutes 
a trade or business

[[Page 33]]

pursuant to the provisions of subdivision (i) of this subparagraph, to 
have such performance of service treated as excluded from the term 
``trade or business'' for the purpose of the tax on self-employment 
income, pursuant to the provisions of section 122(c)(2) of the Social 
Security Amendments of 1967 (as quoted in Sec.  1.1402(c)). Such 
election shall not be limited to service to which the fees received in 
1968 are attributable but must also be applicable to service (if any) in 
subsequent years which, except for the election, would constitute a 
trade or business pursuant to the provisions of subdivision (i) of this 
subparagraph. An election made pursuant to the provisions of this 
subparagraph is irrevocable.
    (B) The election referred to in subdivision (ii)(A) of this 
subparagraph shall be made by filing a certificate of election of 
exemption (Form 4415) on or before the due date of the income tax return 
(see section 6072), including any extension thereof (see section 6081), 
for the taxable year of the individual making the election which begins 
in 1968. The certificate of election of exemption shall be filed with an 
internal revenue office in accordance with the instructions on the 
certificate.
    (b) Meaning of public office. The term ``public office'' includes 
any elective or appointive office of the United States or any possession 
thereof, of the District of Columbia, of a State or its political 
subdivisions, or a wholly-owned instrumentality of any one or more of 
the foregoing. For example, the President, the Vice President, a 
governor, a mayor, the Secretary of State, a member of Congress, a State 
representative, a county commissioner, a judge, a justice of the peace, 
a county or city attorney, a marshal, a sheriff, a constable, a 
registrar of deeds, or a notary public performs the functions of a 
public office. (However, the service of a notary public could not be 
made the subject of a section 218 agreement under the Social Security 
Act because notaries are not ``employees'' within the meaning of that 
section. Accordingly, such service does not constitute a trade or 
business.)

[T.D. 7333, 39 FR 44448, Dec. 24, 1974, as amended by T.D. 7372, 40 FR 
30945, July 24, 1975]



Sec.  1.1402(c)-3  Employees.

    (a) General rule. Generally, the performance of service by an 
individual as an employee, as defined in the Federal Insurance 
Contributions Act (Chapter 21 of the Internal Revenue Code) does not 
constitute a trade or business within the meaning of section 1402(c) and 
Sec.  1.1402(c)-1. However, in six cases set forth in paragraphs (b) to 
(g), inclusive, of this section, the performance of service by an 
individual is considered to constitute a trade or business within the 
meaning of section 1402(c) and Sec.  1.1402(c)-1. (As to when an 
individual is an employee, see section 3121 (d) and (o) and section 3506 
and the regulations under those sections in part 31 of this chapter 
(Employment Tax Regulations).)
    (b) Newspaper vendors. Service performed by an individual who has 
attained the age of 18 constitutes a trade or business for purposes of 
the tax on self-employment income within the meaning of section 1402(c) 
and Sec.  1.1402(c)-1 if performed in, and at the time of, the sale of 
newspapers or magazines to ultimate consumers, under an arrangement 
under which the newspapers or magazines are to be sold by him at a fixed 
price, his compensation being based on the retention of the excess of 
such price over the amount at which the newspapers or magazines are 
charged to him, whether or not he is guaranteed a minimum amount of 
compensation for such service, or is entitled to be credited with the 
unsold newspapers or magazines turned back.
    (c) Sharecroppers. Service performed by an individual under an 
arrangement with the owner or tenant of land pursuant to which:
    (1) Such individual undertakes to produce agricultural or 
horticultural commodities (including livestock, bees, poultry, and fur-
bearing animals and wildlife) on such land,
    (2) The agricultural or horticultural commodities produced by such 
individual, or the proceeds therefrom, are to be divided between such 
individual and such owner or tenant, and
    (3) The amount of such individual's share depends on the amount of 
the agricultural or horticultural commodities produced, constitutes a 
trade or

[[Page 34]]

business within the meaning of section 1402(c) and Sec.  1.1402(c)-1.
    (d) Employees of foreign government, instrumentality wholly owned by 
foreign government, or international organization. Service performed in 
the United States, as defined in section 3121(e)(2) (see such section 
and the regulations thereunder in part 31 of this chapter (Employment 
Tax Regulations)), by an individual who is a citizen of the United 
States constitutes a trade or business within the meaning of section 
1402(c) and Sec.  1.1402(c)-1 if such service is excepted from 
employment, for purposes of the Federal Insurance Contributions Act 
(chapter 21 of the Code), by:
    (1) Section 3121(b)(11), relating to service in the employ of a 
foreign government (for regulations under section 3121(b)(11), see Sec.  
31.3121(b)(11)-1 of this chapter);
    (2) Section 3121(b)(12), relating to service in the employ of an 
instrumentality wholly owned by a foreign government (for regulations 
under section 3121(b)(12), see Sec.  31.3121(b)(12)-1 of this chapter); 
or
    (3) Section 3121(b)(15), relating to service in the employ of an 
international organization (for regulations under section 3121(b)(15), 
see Sec.  31.3121(b)(15)-1 of this chapter).

This paragraph is applicable to service performed in any taxable year 
ending on or after December 31, 1960, except that it does not apply to 
service performed before 1961 in Guam or American Samoa.
    (e) Ministers and members of religious orders--(1) Taxable years 
ending before 1968. Service described in section 1402(c)(4) performed by 
an individual during taxable years ending before 1968 for which a 
certificate filed pursuant to section 1402(e) is in effect constitutes a 
trade or business within the meaning of section 1402(c) and Sec.  
1.1402(c)-1. See also Sec.  1.1402(c)-5.
    (2) Taxable years ending after 1967. Service described in section 
1402(c)(4) performed by an individual during taxable years ending after 
1967 constitutes a trade or business within the meaning of section 
1402(c) and Sec.  1.1402(c)-1 unless an exemption under section 1402(e) 
(see Sec. Sec.  1.1402(e)-1A through 1.1402(e)-4A) is effective with 
respect to such individual for the taxable year during which the service 
is performed. See also Sec.  1.1402(c)-5.
    (f) State and local government employees compensated on fee basis--
(1) In general. (i) Section 1402(c)(2)(E) and this paragraph are 
applicable only with respect to fees received by an individual after 
1967 for service performed by him as an employee of a State or a 
political subdivision thereof in a position compensated solely on a fee 
basis. If an individual performs service for a State or a political 
subdivision thereof in more than one position, each position is treated 
separately for purposes of determining whether the service performed in 
such position is performed by an employee and whether compensation for 
service performed in the position is solely on a fee basis.
    (ii) If an individual receives fees after 1967 for service performed 
by him as an employee of a State or a political subdivision thereof in a 
position compensated solely on a fee basis, the service for which such 
fees are received constitutes a trade or business within the meaning of 
section 1402(c) and Sec.  1.1402(c)-1 except that if service performed 
in such position is covered under an agreement entered into by the State 
and the Secretary of Health, Education, and Welfare pursuant to section 
218 of the Social Security Act at the time a fee is received, the 
service to which such fee relates does not constitute a trade or 
business. See also paragraph (a) of Sec.  1.1402(c)-2, relating, in 
part, to the performance of the functions of a public office of a State 
or a political subdivision thereof by an individual.
    (2) Election with respect to fees received in 1968. (i) Any 
individual who in 1968 receives fees for service as an employee of a 
State or a political subdivision thereof in a position compensated 
solely on a fee basis may elect, if the performance of the service for 
which such fees are received constitutes a trade or business pursuant to 
the provisions of subparagraph (1) of this paragraph, to have such 
performance of service treated as excluded from the term ``trade or 
business'' for the purpose of the tax on self-employment income, 
pursuant to the provisions of section 122(c)(2) of the Social Security 
Amendments of 1967 (as

[[Page 35]]

quoted in Sec.  1.1402(c)). Such election shall not be limited to 
service to which the fees received in 1968 are attributable but must 
also be applicable to service (if any) in subsequent years which, except 
for the election, would constitute a trade or business pursuant to the 
provisions of subparagraph (1) of this paragraph. An election made 
pursuant to the provisions of this subparagraph is irrevocable.
    (ii) The election referred to in subdivision (i) of this 
subparagraph shall be made by filing a certificate of election of 
exemption (Form 4415) on or before the due date of the income tax return 
(see section 6072), including any extension thereof (see section 6081), 
for the taxable year of the individual making the election which begins 
in 1968. The certificate of election of exemption shall be filed with an 
internal revenue office in accordance with the instructions on the 
certificate.
    (g) Individuals engaged in fishing. For taxable years ending after 
December 31, 1954, service performed by an individual on a boat engaged 
in catching fish or other forms of aquatic animal life (hereinafter 
``fish'') constitutes a trade or business within the meaning of section 
1402(c) and Sec.  1.1402(c)-1 if the service is excepted from the 
definition of employment by section 3121(b)(20) and Sec.  
31.3121(b)(20)-1(a). However, the preceding sentence does not apply to 
services performed after December 31, 1954, and before October 4, 1976, 
on a boat engaged in catching fish if the owner or operator of the boat 
treated the individual as an employee in the manner described in Sec.  
31.3121(b)(20)-1(b).

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR 
15937, Oct. 30, 1968; T.D. 7333, 39 FR 44448, Dec. 24, 1974; T.D. 7691, 
45 FR 24129, Apr. 9, 1980; T.D. 7716, 45 FR 57123, Aug. 27, 1980]



Sec.  1.1402(c)-4  Individuals under Railroad Retirement System.

    The performance of service by an individual as an employee or 
employee representative as defined in section 3231(b) and (c), 
respectively (see Sec. Sec.  31.3231(b)-1 and 31.3231(c)-1 of Part 31 of 
this chapter (Employment Tax Regulations)), that is, an individual 
covered under the railroad retirement system, does not constitute a 
trade or business.



Sec.  1.1402(c)-5  Ministers and members of religious orders.

    (a) In general--(1) Taxable years ending before 1968. For taxable 
years ending before 1955, a duly ordained, commissioned, or licensed 
minister of a church or a member of a religious order is not engaged in 
carrying on a trade or business with respect to service performed by him 
in the exercise of his ministry or in the exercise of duties required by 
such order. However, for taxable years ending after 1954 and before 
1968, any individual who is a duly ordained, commissioned, or licensed 
minister of a church or a member of a religious order (other than a 
member of a religious order who has taken a vow of poverty as a member 
of such order) may elect, as provided in Sec.  1.1402(e)(1)-1, to have 
the Federal old-age, survivors, and disability insurance system 
established by title II of the Social Security Act extended to service 
performed by him in his capacity as such a minister or member. If such a 
minister or a member of a religious order makes an election pursuant to 
Sec.  1.1402(e)(1)-1 he is, with respect to service performed by him in 
such capacity, engaged in carrying on a trade or business for each 
taxable year to which the election is effective. An election by a 
minister or member of a religious order has no application to service 
performed by such minister or member which is not in the exercise of his 
ministry or in the exercise of duties required by such order.
    (2) Taxable years ending after 1967. For any taxable year ending 
after 1967, a duly ordained, commissioned, or licensed minister of a 
church or a member of a religious order (other than a member of a 
religious order who has taken a vow of poverty as a member of such 
order) is engaged in carrying on a trade or business with respect to 
service performed by him in the exercise of his ministry or in the 
exercise of duties required by such order unless an exemption under 
section 1402(e) (see Sec. Sec.  1.1402(e)-1A through 1.1402(e)-4A) is 
effective with respect to such individual for the taxable year during 
which the service is performed. An exemption which is effective with 
respect

[[Page 36]]

to a minister or a member of a religious order has no application to 
service performed by such minister or member which is not in the 
exercise of his ministry or in the exercise of duties required by such 
order.
    (b) Service by a minister in the exercise of his ministry. (1)(i) A 
certificate of election filed by a duly ordained, commissioned, or 
licensed minister of a church under the provisions of Sec.  
1.1402(e)(1)-1 has application only to service performed by him in the 
exercise of his ministry.
    (ii) An exemption under section 1402(e) (see Sec. Sec.  1.1402(e)-1A 
through 1.1402(e)-4A) which is effective with respect to a duly 
ordained, commissioned, or licensed minister of a church has application 
only to service performed by him in the exercise of his ministry.
    (2) Except as provided in paragraph (c)(3) of this section, service 
performed by a minister in the exercise of his ministry includes the 
ministration of sacerdotal functions and the conduct of religious 
worship, and the control, conduct, and maintenance of religious 
organizations (including the religious boards, societies, and other 
integral agencies of such organizations), under the authority of a 
religious body constituting a church or church denomination. The 
following rules are applicable in determining whether services performed 
by a minister are performed in the exercise of his ministry:
    (i) Whether service performed by a minister constitutes the conduct 
of religious worship or the ministration of sacerdotal functions depends 
on the tenets and practices of the particular religious body 
constituting his church or church denomination.
    (ii) Service performed by a minister in the control, conduct, and 
maintenance of a religious organization relates to directing, managing, 
or promoting the activities of such organization. Any religious 
organization is deemed to be under the authority of a religious body 
constituting a church or church denomination if it is organized and 
dedicated to carrying out the tenets and principles of a faith in 
accordance with either the requirements or sanctions governing the 
creation of institutions of the faith. The term ``religious 
organization'' has the same meaning and application as is given to the 
term for income tax purposes.
    (iii) If a minister is performing service in the conduct of 
religious worship or the ministration of sacerdotal functions, such 
service is in the exercise of his ministry whether or not it is 
performed for a religious organization. The application of this rule may 
be illustrated by the following example:

    Example. M, a duly ordained minister, is engaged to perform service 
as chaplain at N University. M devotes his entire time to performing his 
duties as chaplain which include the conduct of religious worship, 
offering spiritual counsel to the university students, and teaching a 
class in religion. M is performing service in the exercise of his 
ministry.

    (iv) If a minister is performing service for an organization which 
is operated as an integral agency of a religious organization under the 
authority of a religious body constituting a church or church 
denomination, all service performed by the minister in the conduct of 
religious worship, in the ministration of sacerdotal functions, or in 
the control, conduct, and maintenance of such organization (see 
subparagraph (2)(ii) of this paragraph) is in the exercise of his 
ministry. The application of this rule may be illustrated by the 
following example:

    Example. M, a duly ordained minister, is engaged by the N Religious 
Board to serve as director of one of its departments. He performs no 
other service. The N Religious Board is an integral agency of O, a 
religious organization operating under the authority of a religious body 
constituting a church denomination. M is performing service in the 
exercise of his ministry.

    (v) If a minister, pursuant to an assignment or designation by a 
religious body constituting his church, performs service for an 
organization which is neither a religious organization nor operated as 
an integral agency of a religious organization, all service performed by 
him, even though such service may not involve the conduct of religious 
worship or the ministration of sacerdotal functions, is in the exercise 
of his ministry. The application of this rule may be illustrated by the 
following example:


[[Page 37]]


    Example. M, a duly ordained minister, is assigned by X, the 
religious body constituting his church, to perform advisory service to Y 
Company in connection with the publication of a book dealing with the 
history of M's church denomination. Y is neither a religious 
organization nor operated as an integral agency of a religious 
organization. M performs no other service for X or Y. M is performing 
service in the exercise of his ministry.

    (c) Service by a minister not in the exercise of his ministry. 
(1)(i) A certificate filed by a duly ordained, commissioned, or licensed 
minister of a church under the provisions of Sec.  1.1402(e)(1)-1 has no 
application to service performed by him which is not in the exercise of 
his ministry.
    (ii) An exemption under section 1402(e) (see Sec. Sec.  1.1402(e)-1A 
through 1.1402(e)-4A) which is effective with respect to a duly 
ordained, commissioned, or licensed minister of a church has no 
application to service performed by him which is not in the exercise of 
his ministry.
    (2) If a minister is performing service for an organization which is 
neither a religious organization nor operated as an integral agency of a 
religious organization and the service is not performed pursuant to an 
assignment or designation by his ecclesiastical superiors, then only the 
service performed by him in the conduct of religious worship or the 
ministration of sacerdotal functions is in the exercise of his ministry. 
See, however, subparagraph (3) of this paragraph. The application of the 
rule in this subparagraph may be illustrated by the following example:

    Example. M, a duly ordained minister, is engaged by N University to 
teach history and mathematics. He performs no other service for N 
although from time to time he performs marriages and conducts funerals 
for relatives and friends. N University is neither a religious 
organization nor operated as an integral agency of a religious 
organization. M is not performing the service for N pursuant to an 
assignment or designation by his ecclesiastical superiors. The service 
performed by M for N University is not in the exercise of his ministry. 
However, service performed by M in performing marriages and conducting 
funerals is in the exercise of his ministry.

    (3) Service performed by a duly ordained, commissioned, or licensed 
minister of a church as an employee of the United States, or a State, 
Territory, or possession of the United States, or the District of 
Columbia, or a foreign government, or a political subdivision of any of 
the foregoing, is not considered to be in the exercise of his ministry 
for purposes of the tax on self-employment income, even though such 
service may involve the ministration of sacerdotal functions or the 
conduct of religious worship. Thus, for example, service performed by an 
individual as a chaplain in the Armed Forces of the United States is 
considered to be performed by a commissioned officer in his capacity as 
such, and not by a minister in the exercise of his ministry. Similarly, 
service performed by an employee of a State as a chaplain in a State 
prison is considered to be performed by a civil servant of the State and 
not by a minister in the exercise of his ministry.
    (d) Service in the exercise of duties required by a religious 
order--(1) Certificate of election. A certificate of election filed by a 
member of a religious order (other than a member of a religious order 
who has taken a vow of poverty as a member of such order) under the 
provisions of Sec.  1.1402(e)(1)-1 has application to all duties 
required of him by such order.
    (2) Exemption. An exemption under section 1402(e) (see Sec. Sec.  
1.1402(e)-1A through 1.1402(e)-4A) which is effective with respect to a 
member of a religious order (other than a member of a religious order 
who has taken a vow of poverty as a member of such order) has 
application only to the duties required of him by such order.
    (3) Service. For purposes of subparagraphs (1) and (2) of this 
paragraph, the nature or extent of the duties required of the member by 
the order is immaterial so long as it is a service which he is directed 
or required to perform by his ecclesiastical superiors.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR 
15937, Oct. 30, 1968]



Sec.  1.1402(c)-6  Members of certain professions.

    (a) Periods of exclusion--(1) Taxable years ending before 1955. For 
taxable years ending before 1955, an individual is not engaged in 
carrying on a trade or business with respect to the performance of 
service in the exercise of his

[[Page 38]]

profession as a physician, lawyer, dentist, osteopath, veterinarian, 
chiropractor, naturopath, optometrist, Christian Science practitioner, 
architect, certified public accountant, accountant registered or 
licensed as an accountant under State or municipal law, full-time 
practicing public accountant, funeral director, or professional 
engineer.
    (2) Taxable years ending in 1955. Except as provided in paragraph 
(b) of this section, for a taxable year ending in 1955 an individual is 
not engaged in carrying on a trade or business with respect to the 
performance of service in the exercise of his profession as a physician, 
lawyer, dentist, osteopath, veterinarian, chiropractor, naturopath, 
optometrist, or Christian Science practitioner.
    (3) Taxable years ending after 1955--(i) Doctors of medicine. For 
taxable years ending after 1955 and before December 31, 1965, and 
individual is not engaged in carrying on a trade or business with 
respect to the performance of service in the exercise of his profession 
as a doctor of medicine. For taxable years ending after December 30, 
1965, an individual is engaged in carrying on a trade or business with 
respect to the performance of service in the exercise of his profession 
as a doctor of medicine.
    (ii) Christian Science practitioners. Except as provided in 
paragraph (b)(1) of this section, for taxable years ending after 1955 
and before 1968, an individual is not engaged in carrying on a trade or 
business with respect to the performance of service in the exercise of 
his profession as a Christian Science practitioner. For provisions 
relating to the performance of service in taxable years ending after 
1967 by an individual in the exercise of his profession as a Christian 
Science practitioner, see paragraph (b)(2) of this section.
    (b) Christian Science practitioner--(1) Certain taxable years ending 
before 1968; election. For taxable years ending after 1954 and before 
1968, a Christian Science practitioner may elect, as provided in Sec.  
1.1402(e)(1)-1, to have the Federal old-age, survivors, and disability 
insurance system established by title II of the Social Security Act 
extended to service performed by him in the exercise of his profession 
as a Christian Science practitioner. If an election is made pursuant to 
Sec.  1.1402(e)(1)-1, the Christian Science practitioner is, with 
respect to the performance of service in the exercise of such 
profession, engaged in carrying on a trade or business for each taxable 
year for which the election is effective. An election by a Christian 
Science practitioner has no application to service performed by him 
which is not in the exercise of his profession as a Christian Science 
practitioner.
    (2) Taxable years ending after 1967; exemption. For a taxable year 
ending after 1967, a Christian Science practitioner is, with respect to 
the performance of service in the exercise of his profession as a 
Christian Science practitioner, engaged in carrying on a trade or 
business unless an exemption under section 1402(e) (see Sec. Sec.  
1.1402(e)-1A through 1.1402(e)-4A) is effective with respect to him for 
the taxable year during which the service is performed. An exemption 
which is effective with respect to a Christian Science practitioner has 
no application to service performed by him which is not in the exercise 
of his profession as a Christian Science practitioner.
    (c) Meaning of terms. The designations in this section are to be 
given their commonly accepted meanings. For taxable years ending after 
1955, an individual who is a doctor of osteopathy, and who is not a 
doctor of medicine within the commonly accepted meaning of that term, is 
deemed, for purposes of this section, not to be engaged in carrying on a 
trade or business in the exercise of the profession of doctor of 
medicine.
    (d) Legal requirements. The exclusions specified in paragraph (a) of 
this section apply only if the individuals meet the legal requirements, 
if any, for practicing their professions in the place where they perform 
the service.
    (e) Partnerships. In the case of a partnership engaged in the 
practice of any of the designated excluded professions, the partnership 
shall not be considered as carrying on a trade or business for the 
purpose of the tax on self-employment income, and none of the 
distributive shares of the income or loss, described in section 
702(a)(9), of such

[[Page 39]]

partnership shall be included in computing net earnings from self-
employment of any member of the partnership. On the other hand, where a 
partnership is engaged in a trade or business not within any of the 
designated excluded professions, each partner must include his 
distributive share of the income or loss, described in section 
702(a)(9), of such partnership in computing his net earnings from self-
employment, irrespective of whether such partner is engaged in the 
practice of one or more of such professions and contributes his 
professional services to the partnership.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR 
15938, Oct. 30, 1968]



Sec.  1.1402(c)-7  Members of religious groups opposed to insurance.

    The performance of service by an individual:
    (a) Who is a member of a recognized religious sect or division 
thereof, and
    (b) Who is an adherent of established tenets or teachings of such 
sect or division by reason of which he is conscientiously opposed to 
acceptance of the benefits of any private or public insurance which 
makes payments in the event of death, disability, old age, or retirement 
or makes payments toward the cost of, or provides services for, medical 
care (including the benefits of any insurance system established by the 
Social Security Act),

during any taxable year for which he is granted a tax exemption, 
pursuant to section 1402(h), does not constitute a trade or business 
within the meaning of section 1402(c) and Sec.  1.1402(c)-1. See also 
Sec. Sec.  1.1402(h) and 1.1402(h)-1.

[T.D. 6993, 34 FR 830, Jan. 18, 1969]



Sec.  1.1402(d)-1  Employee and wages.

    For the purpose of the tax on self-employment income, the term 
``employee'' and the term ``wages'' shall have the same meaning as when 
used in the Federal Insurance Contributions Act. For an explanation of 
these terms, see Subpart B of Part 31 of this chapter (Employment Tax 
Regulations).



Sec.  1.1402(e)-1A  Application of regulations under section 1402(e).

    The regulations in Sec. Sec.  1.1402(e)-2A through 1.1402(e)-4A 
relate to section 1402(e) as amended by section 115(b)(2) of the Social 
Security Amendments of 1967 (81 Stat. 839) and apply to taxable years 
ending after 1967. Section 1.1402(e)-5A reflects changes made by section 
1704(a) of the Tax Reform Act of 1986 (100 Stat. 2085, 2779) and applies 
to applications for exemption under section 1402(e) filed after December 
31, 1986. For regulations under section 1402(e) (as in effect prior to 
amendment by the Social Security Amendments of 1967) applicable to 
taxable years ending before 1968, see Sec. Sec.  1.1402(e)(1)-1 through 
1.1402(e)(6)-1.

[T.D. 8221, 53 FR 33461, Aug. 31, 1988]



Sec.  1.1402(e)-2A  Ministers, members of religious orders and 
Christian Science practitioners; application for exemption from 
self-employment tax.

    (a) In general. (1) Subject to the limitations set forth in 
subparagraphs (2) and (3) of this paragraph, any individual who is (i) a 
duly ordained, commissioned, or licensed minister of a church or a 
member of a religious order (other than a member of a religious order 
who has taken a vow of poverty as a member of such order) or (ii) a 
Christian Science practitioner may request an exemption from the tax on 
self-employment income (see section 1401 and Sec.  1.1401-1) with 
respect to services performed by him in his capacity as a minister or 
member, or as a Christian Science practitioner, as the case may be. Such 
a request shall be made by filing an application for exemption on Form 
4361 in the manner provided in paragraph (b) of this section and within 
the time specified in Sec.  1.1402(e)-3A. For provisions relating to the 
taxable year or years for which an exemption from the tax on self-
employment income with respect to service performed by a minister or 
member or a Christian Science practitioner in his capacity as such is 
effective, see Sec.  1.1402(e)-4A. For additional provisions applicable 
to services performed by individuals referred to in this subparagraph, 
see paragraph (e) of Sec.  1.1402(c)-3 and Sec.  1.1402(c)-5 relating to 
ministers and

[[Page 40]]

members of religious orders, and paragraphs (a)(3)(ii) and (b) of Sec.  
1.1402(c)-6 relating to Christian Science practitioners.
    (2) The application for exemption shall contain, or there shall be 
filed with such application, a statement to the effect that the 
individual making application for exemption is conscientiously opposed 
to, or because of religious principles is opposed to, the acceptance 
(with respect to services performed by him in his capacity as a 
minister, member, or Christian Science practitioner) of any public 
insurance which makes payments in the event of death, disability, old 
age, or retirement or makes payments toward the cost of, or provides 
services for, medical care (including the benefits of any insurance 
system established by the Social Security Act). Thus, ministers, members 
of religious orders, and Christian Science practitioners requesting 
exemption from social security coverage must meet either of two 
alternative tests: (1) A religious principles test which refers to the 
institutional principles and discipline of the particular religious 
denomination to which he belongs, or (2) a conscientious opposition test 
which refers to the opposition because of religious considerations of 
individual ministers, members of religious orders, and Christian Science 
practitioners (rather than opposition based upon the general conscience 
of any such individual or individuals). The term ``public insurance'', 
as used in section 1402(e) and this paragraph, refers to governmental, 
as distinguished from private, insurance and does not include insurance 
carried with a commercial insurance carrier. To be eligible to file an 
application for exemption on Form 4361, a minister, member, or Christian 
Science practitioners need not be opposed to the acceptance of all 
public insurance making payments of this specified type; he must, 
however, be opposed on religious grounds to the acceptance of any such 
payment which, in whole or in part, is based on, or measured by earnings 
from, services performed by in his capacity as a minister or member (see 
Sec.  1.1402(c)-5) or in his capacity as a Christian Science 
practitioner (see paragraph (b)(2) of Sec.  1.1402(c)-6). For example, a 
minister performing service in the exercise of his ministry may be 
eligible to file an application for exemption on Form 4361 even though 
he is not opposed to the acceptance of benefits under the Social 
Security Act with respect to service performed by him which is not in 
the exercise of his ministry.
    (3) An exemption from the tax imposed on self-employment income with 
respect to service performed by a minister, member, or Christian Science 
practitioner in his capacity as such may not be granted to a minister, 
member, or practitioner who (in accordance with the provisions of 
section 1402(e) as in effect prior to amendment by section 115(b)(2) of 
the Social Security Amendments of 1967 (81 Stat. 839)) filed a valid 
waiver certificate on Form 2031 electing to have the Federal old-age, 
survivors, and disability insurance system establish by title II of the 
Social Security Act extended to service performed by him in the exercise 
of his ministry or in the exercise of duties required by the order of 
which he is a member, or in the exercise of his profession as a 
Christian Science practitioner. For provisions relating to waiver 
certificates on Form 2031, see Sec. Sec.  1.1402(e)(1)-1 through 
1.1402(e)(6)-1.
    (b) Application for exemption. An application for exemption on Form 
4361 shall be filed in triplicate with the internal revenue officer or 
the internal revenue office, as the case may be, designated in the 
instructions relating to the application for exemption. The application 
for exemption must be filed within the time prescribed in Sec.  
1.1402(e)-3A. If the last original Federal income tax return of an 
individual to whom paragraph (a) of this section applies which was filed 
before the expiration of such time limitation for filing an application 
for exemption shows no liability for tax on self-employment income, such 
return will be treated as an application for exemption, provided that 
before February 28, 1975 such individual also files a properly executed 
Form 4361.
    (c) Approval of application for exemption. The filing of an 
application for exemption on Form 4361 by a minister, a

[[Page 41]]

member of a religious order, or a Christian Science practitioner does 
not constitute an exemption from the tax on self-employment income with 
respect to services performed by him in his capacity as a minister, 
member, or practitioner. The exemption is granted only if the 
application is approved by an appropriate internal revenue officer. See 
Sec.  1.1402(e)-4A relating to the period for which an exemption is 
effective.

[T.D. 7333, 39 FR 44448, Dec. 24, 1974; 39 FR 45216, Dec. 31, 1974]



Sec.  1.1402(e)-3A  Time limitation for filing application for exemption.

    (a) General rule. (1) Any individual referred to in paragraph (a) of 
Sec.  1.1402(e)-2A who desires an exemption from the tax on self-
employment income with respect to service performed by him in his 
capacity as a minister or member of a religious order or as a Christian 
Science practitioner must file the application for exemption (Form 4361) 
prescribed by Sec.  1.1402(e)-2A on or before whichever of the following 
dates is later:
    (i) The due date of the income tax return (see section 6072), 
including any extension thereof (see section 6081), for his second 
taxable year ending after 1967, or
    (ii) The due date of the income tax return, including any extension 
thereof, for his second taxable year beginning after 1953 for which he 
has net earnings from self-employment of $400 or more, any part of 
which:
    (a) In the case of a duly ordained, commissioned, or licensed 
minister of a church, consists of remuneration for service performed in 
the exercise of his ministry,
    (b) In the case of a member of a religious order who has not taken a 
vow of poverty as a member of such order, consists of remuneration for 
service performed in the exercise of duties required by such order, or
    (c) In the case of a Christian Science practitioner, consists of 
remuneration for service performed in the exercise of his profession as 
a Christian Science practitioner.


See paragraph (c) of this section for provisions relating to the 
computation of net earnings from self-employment.
    (2) If a minister, a member of a religious order, or a Christian 
Science practitioner derives gross income in a taxable year both from 
service performed in such capacity and from the conduct of another trade 
or business, and the deductions allowed by Chapter 1 of the Internal 
Revenue Code which are attributable to the gross income derived from 
service performed in such capacity equal or exceed the gross income 
derived from service performed in such capacity, no part of the net 
earnings from self-employment (computed as prescribed in paragraph (c) 
of this section) for the taxable year shall be considered as derived 
from service performed in such capacity.
    (3) The application of the rules set forth in subparagraphs (1) and 
(2) of this paragraph may be illustrated by the following examples:

    Example (1). M, who makes his income tax returns on a calendar year 
basis, was ordained as a minister in January 1960. During each of two or 
more taxable years ending before 1968 M has net earnings from self-
employment in excess of $400 some part of which is from service 
performed in the exercise of his ministry. M has not filed an effective 
waiver certificate on Form 2031 (see paragraph (a)(3) of Sec.  
1.1402(e)-2A). If M desires an exemption from the tax on self-employment 
income with respect to service performed in the exercise of his 
ministry, he must file an application for exemption on or before the due 
date of his income tax return for 1969 (his second taxable year ending 
after 1967), or any extension thereof.
    Example (2). M, who makes his income tax returns on a calendar year 
basis, was ordained as a minister in January 1966. M has net earnings of 
$350 for the taxable year 1966 and has net earnings in excess of $400 
for each of his taxable years 1967 and 1968 (some part or all of which 
is derived from service performed in the exercise of his ministry). M 
has not filed an effective waiver certificate on Form 2031 (see 
paragraph (a)(3) of Sec.  1.1402(e)-2A). If M desires an exemption from 
the tax on self-employment income with respect to service performed in 
the exercise of his ministry, he must file an application for exemption 
on or before the due date of his income tax return for 1969 (his second 
taxable year ending after 1967), or any extension thereof.
    Example (3). Assume the same facts as in example (2) except that M 
has net earnings in excess of $400 for each of his taxable years 1967 
and 1969 (but less than $400 in 1968). The application for exemption 
must be filed on or

[[Page 42]]

before the due date of his income tax return for 1969, or any extension 
thereof.
    Example (4). M was ordained as a minister in May 1973. During each 
of the taxable years 1973 and 1975, M, who makes his income tax returns 
on a calendar year basis, derives net earnings in excess of $400 from 
his activities as a minister. M has net earnings of $350 for the taxable 
year 1974, $200 of which is derived from service performed by him in the 
exercise of his ministry. If M desires an exemption from the tax on 
self-employment income with respect to service performed in the exercise 
of his ministry, he must file an application for exemption on or before 
the due date of his income tax return for 1975, or any extension 
thereof.
    Example (5). M, who was ordained a minister in January 1973, is 
employed as a toolmaker by the XYZ Corporation for the taxable years 
1973 and 1974 and also engages in activities as a minister on weekends. 
M makes his income tax returns on the basis of a calendar year. During 
each of the taxable years 1973 and 1974 M receives wages of $14,000 from 
the XYZ Corporation and derives net earnings of $400 from his activities 
as a minister. If M desires an exemption from the tax on self-employment 
income with respect to service performed in the exercise of his 
ministry, he must file an application for exemption on or before the due 
date of his income tax return for 1974, or any extension thereof. It 
should be noted that although by reason of section 1402(b)(1) (G) and 
(H) no part of the $400 represents ``self-employment income'', 
nevertheless the entire $400 constitutes ``net earnings from self-
employment'' for purposes of fulfilling the requirements of section 
1402(e)(2).
    Example (6). M, who files his income tax returns on a calendar year 
basis, was ordained as a minister in March 1973. During 1973 he receives 
$410 for service performed in the exercise of his ministry. In addition 
to his ministerial services, M is engaged during the year 1973 in a 
mercantile venture from which he derives net earnings from self-
employment in the amount of $4,000. The expenses incurred by him in 
connection with his ministerial services during 1973 and which are 
allowable deductions under Chapter 1 of the Internal Revenue Code amount 
to $410. During 1974 and 1975, M has net earnings from self-employment 
in amounts of $4,600 and $4,800, respectively, and some part of each of 
these amounts is from the exercise of his ministry. The deductions 
allowed in each of the years 1974 and 1975 by Chapter 1 which are 
attributable to the gross income derived by M from the exercise of his 
ministry in each of such years, respectively, do not equal or exceed 
such gross income in such year. If M desires an exemption from the tax 
on self-employment income with respect to service performed in the 
exercise of his ministry, he must file an application for exemption on 
or before the due date of his income tax return for 1975, or an 
extension thereof.

    (b) Effect of death. The right of an individual to file an 
application for exemption shall cease upon his death. Thus, the 
surviving spouse, administrator, or executor of a decedent shall not be 
permitted to file an application for exemption for such decedent.
    (c) Computation of net earnings--(1) Taxable years ending before 
1968. For purposes of this section net earnings from self-employment for 
taxable years ending before 1968 shall be determined without regard to 
the fact that, without an election under section 1402(e) (as in effect 
prior to amendment by section 115(b)(2) of the Social Security 
Amendments of 1967, see Sec.  1.1402(e)-1A), the performance of services 
by a duly ordained, commissioned, or licensed minister of a church in 
the exercise of his ministry, or by a member of a religious order in the 
exercise of duties required by such order, or the performance of service 
by an individual in the exercise of his profession as a Christian 
Science practitioner, does not constitute a trade or business for 
purposes of the tax on self-employment income.
    (2) Taxable years ending after 1967. For purposes of this section 
and Sec.  1.1402(e)-4A net earnings from self-employment for taxable 
years ending after 1967 shall be determined without regard to section 
1402(c) (4) and (5). See Sec.  1.1402(c)-3(e)(2) and Sec.  1.1402(c)-5 
relating to ministers and members of religious orders, and paragraphs 
(a)(3)(ii) and (b) of Sec.  1.1402(c)-6 relating to Christian Science 
practitioners.

[T.D. 7333, 39 FR 44449, Dec. 24, 1974]



Sec.  1.1402(e)-4A  Period for which exemption is effective.

    (a) In general. If an application for exemption on Form 4361:
    (1) Is filed by a minister, a member of a religious order, or a 
Christian Science practitioner eligible to file such an application (see 
particularly paragraph (a) (2) and (3) of Sec.  1.1402(e)-2A), and
    (2) Is approved (see paragraph (c) of Sec.  1.1402(e)-2A),

the exemption from the tax on self-employment income shall be effective 
for the first taxable year ending after 1967

[[Page 43]]

for which such minister, member, or practitioner has net earnings from 
self-employment of $400 or more any part of which was derived from the 
performance of service in his capacity as a minister, member, or 
practitioner, and for all succeeding taxable years. See, however, 
paragraphs (b)(1)(ii) and (d)(2) of Sec.  1.1402(c)-5 relating to 
ministers and members of religious orders and paragraph (b)(2) of Sec.  
1.1402(c)-6 relating to Christian Science practitioners.
    (b) Exemption irrevocable. An exemption granted to a minister, a 
member of a religious order, or a Christian Science practitioner 
pursuant to the provisions of section 1402(e) is irrevocable.

[T.D. 7333, 39 FR 44450, Dec. 24, 1974]



Sec.  1.1402(e)-5A  Applications for exemption from self-employment taxes
filed after December 31, 1986, by ministers, certain members of religious
orders, and Christian Science practitioners.

    (a) In general. (1) Except as provided in paragraph (a)(2) of this 
section, this section applies to any individual who is a duly ordained, 
commissioned, or licensed minister of a church, member of a religious 
order (other than a member of a religious order who has taken a vow of 
poverty as a member of such order), or a Christian Science practitioner 
who files an application after December 31, 1986, for exemption from the 
tax on self-employment income (see section 1401 and 1.1401-1) with 
respect to services performed by him or her in his or her capacity as a 
minister, member, or practitioner pursuant to Sec. Sec.  1.1402(e)-2A 
through 1.1402(e)-4A. This section does not apply to applications for 
exemption under section 1402(e) that are filed before January 1, 1987.
    (2) Application of this section to Christian Science practitioners. 
Paragraph (b) of this section does not apply to Christian Science 
practitioners. Thus, Christian Science practitioners filing applications 
for exemption from self-employment taxes under section 1402(e) should 
follow the procedures set forth in Sec. Sec.  1.1402(e)-2A through 
1.1402(e)-4A, and are not required to include the statement described in 
paragraph (b)(1)(ii) of this section. However, see paragraph (c) of this 
section for verification procedures with respect to applications for 
exemption from self-employment taxes filed after December 31, 1986, by 
Christian Science practitioners.
    (b) Church or order must be informed--(1) In general. Any 
individual, other than a Christian Science practitioner, who files an 
application for exemption from the tax on self-employment income under 
section 1402(e) after December 31, 1986:
    (i) Shall file such application in accordance with the procedures 
set forth in Sec. Sec.  1.1402(e)-2A through 1.1402(e)-4A, and
    (ii) Shall include with such application a statement to the effect 
that the individual making application for exemption has informed the 
ordaining, commissioning, or licensing body of the church or order that 
he or she is opposed to the acceptance (for services performed as a 
minister or member of a religious order not under a vow of poverty) of 
any public insurance that makes payments in the event of death, 
disability, old age, or retirement, or that makes payments toward the 
cost of, or provides services for, medical care (including the benefits 
of any insurance system established by the Social Security Act).
    (2) Statement to be filed with form. If the form provided by the 
Service for applying for exemption under 1402(e) does not contain the 
statement set forth in paragraph (b)(1)(ii) of this section, any 
individual required to include this statement with his or her 
application under this paragraph (b) shall file such statement with the 
individual's application at the time and place prescribed for filing 
such application under Sec. Sec.  1.1402(e)-2A and 1.1402(e)-3A. The 
statement shall contain the information set forth in paragraph 
(b)(1)(ii) of this section and shall be signed by such individual under 
penalties of perjury.
    (c) Verification of application--(1) In general. The Service will 
approve an application for an exemption filed by an individual to whom 
this section applies only after verifying that the individual applying 
for the exemption is aware of the grounds on which the individual may 
receive an exemption under section 1402(e) (See Sec.  1.1402(e)-2A) and 
that

[[Page 44]]

the individual seeks exemption on such grounds in accordance with the 
procedures set forth in paragraph (c)(2) of this section.
    (2) Verification procedure. Upon receipt of an application for 
exemption from self-employment taxes under section 1402(e) and this 
section, the Service will mail to the applicant a statement that 
describes the grounds on which an individual may receive an exemption 
under section 1402(e). The individual filing the application shall 
certify that he or she has read the statement and that he or she seeks 
exemption from self-employment taxes on the grounds listed in the 
statement. The certification shall be made by signing a copy of the 
statement under penalties of perjury and mailing the signed copy to the 
Service Center from which the statement was issued not later than 90 
days after the date on which the statement was mailed to the individual. 
If the signed copy of the statement is not mailed to the Service Center 
within 90 days of the date on which the statement was mailed to the 
individual, that individual's exemption will not be effective until the 
date that the signed copy of the statement is received at the Service 
Center.

[T.D. 8136, 52 FR 12162, Apr. 15, 1987. Redesignated and amended by T.D. 
8221, 53 FR 33461, Aug. 31, 1988]



Sec.  1.1402(e)(1)-1  Election by ministers, members of religious orders,
and Christian Science practitioners for self-employment coverage.

    (a) In general. Any individual who is (1) a duly ordained, 
commissioned, or licensed minister of a church or a member of a 
religious order (other than a member of a religious order who has taken 
a vow of poverty as a member of such order) or (2) a Christian Science 
practitioner may elect to have the Federal old-age, survivors, and 
disability insurance system established by title II of the Social 
Security Act extended to service performed by him in the exercise of his 
ministry or in the exercise of duties required by such order, or in the 
exercise of his profession as a Christian Science practitioner, as the 
case may be. Such an election shall be made by filing a certificate on 
Form 2031 in the manner provided in paragraph (b) of this section and 
within the time specified in Sec.  1.1402(e)(2)-1. If a minister or 
member to whom this section has application, or a Christian Science 
practitioner, makes an election by filing Form 2031 such individual 
shall, for each taxable year for which the election is effective (see 
Sec.  1.1402(e)(3)-1), be considered as carrying on a trade or business 
with respect to the performance of service in his capacity as a minister 
or member, or as a Christian Science practitioner, as the case may be.
    (b) Waiver certificate. The certificate on Form 2031 shall be filed 
in triplicate with the district director of internal revenue for the 
internal revenue district in which is located the legal residence or 
principal place of business of the individual who executes the 
certificate. If such individual has no legal residence or principal 
place of business in any internal revenue district, the certificate 
shall be filed with the Director of International Operations, Internal 
Revenue Service, Washington, DC 20225, or at such other address as is 
designated in the instructions relating to the certificate. The 
certificate must be filed within the time prescribed in Sec.  
1.1402(e)(2)-1. If an individual to whom paragraph (a) of this section 
has application submits to a district director of internal revenue a 
dated and signed statement indicating that he desires to have the 
Federal old-age, survivors, and disability insurance system established 
by title II of the Social Security Act extended to his services, such 
statement will be treated as a waiver certificate, if filed within the 
time specified in Sec.  1.1402(e)(2)-1, provided that without 
unnecessary delay such statement is supplemented by a properly executed 
Form 2031. An application for a social security account number filed on 
Form SS-5 or the filing of an income tax return showing an amount 
representing self-employment income or self-employment tax shall not be 
construed to constitute an election referred to in Sec.  1.1402(e)(1)-1.



Sec.  1.1402(e)(2)-1  Time limitation for filing waiver certificate.

    (a) General rule. (1) Any individual referred to in Sec.  
1.1402(e)(1)-1 who desires to have the Federal old-age, survivors,

[[Page 45]]

and disability insurance system established by title II of the Social 
Security Act extended to his services must file the waiver certificate 
(Form 2031) prescribed by Sec.  1.1402(e)(1)-1 on or before whichever of 
the following dates is later:
    (i) The due date of the income tax return (see section 6072), 
including any extension thereof (see section 6081), for his second 
taxable year ending after 1963; or
    (ii) The due date of the income tax return, including any extension 
thereof, for his second taxable year ending after 1954 for which he has 
net earnings from self-employment (computed as prescribed in paragraph 
(c) of this section) of $400 or more, any part of which:
    (a) In the case of a duly ordained, commissioned, or licensed 
minister of a church, consists of remuneration for service performed in 
the exercise of his ministry,
    (b) In the case of a member of a religious order who has not taken a 
vow of poverty as a member of such order, consists of remuneration for 
service performed in the exercise of duties required by such order, or
    (c) In the case of a Christian Science practitioner, consists of 
remuneration for service performed in the exercise of his profession as 
a Christian Science practitioner.
    (2) If a minister, a member of a religious order, or a Christian 
Science practitioner derives gross income in a taxable year both from 
service performed in such capacity and from the conduct of another trade 
or business, and the deductions allowed by chapter 1 of the Internal 
Revenue Code which are attributable to the gross income derived from 
service performed in such capacity equal or exceed the gross income 
derived from service performed in such capacity, no part of the net 
earnings from self-employment (computed as prescribed in paragraph (c) 
of this section) for the taxable year shall be considered as derived 
from service performed in such capacity.
    (3) The application of the rules set forth in subparagraphs (1) and 
(2) of this paragraph may be illustrated by the following examples:

    Example (1). M was ordained as a minister in May 1963. During each 
of the taxable years 1963 and 1966, M, who makes his income tax returns 
on a calendar year basis, derives net earnings in excess of $400 from 
his activities as a minister. M has net earnings of $350 for each of the 
taxable years 1964 and 1965, $200 of which is derived from service 
performed by him as a minister. If M wishes to have the Federal old-age, 
survivors, and disability insurance system established by title II of 
the Social Security Act extended to his service as a minister, he must 
file the waiver certificate on or before the due date of his income tax 
return for 1966, or any extension thereof.
    Example (2). M, who was ordained a minister in January 1965, is 
employed as a toolmaker by the XYZ Corporation for the taxable years 
1965 and 1966 and also engages in activities as a minister on weekends. 
M makes his income tax return on the basis of a calendar year. During 
each of the taxable years 1965 and 1966, M receives wages of $4,800 from 
the XYZ Corporation and derives $400 (all of which constitutes net 
earnings from self-employment computed as prescribed in paragraph (c) of 
this section) from his activities as a minister. In such case if M 
wishes to have the Federal old-age, survivors, and disability insurance 
system established by title II of the Social Security Act extended to 
his services as a minister, he must file the waiver certificate on or 
before the due date of his income tax return for 1966, or any extension 
thereof. A waiver certificate filed after such date will be invalid. It 
should be noted that although by reason of section 1402(b)(1)(C) no part 
of the $400 for the taxable year 1965 represents ``self-employment 
income'', nevertheless the entire $400 constitutes ``net earnings from 
self-employment'' for purposes of fulfilling the requirements of section 
1402(e)(2).
    Example (3). M, who files his income tax returns on a calendar year 
basis, was ordained as a minister in June 1964. During 1964 he receives 
$410 for services performed in the exercise of his ministry. In addition 
to his ministerial services, M is engaged during the year 1964 in a 
mercantile venture from which he derives net earnings from self-
employment in the amount of $1,000. The expenses incurred by him in 
connection with his ministerial services during 1964 and which are 
allowable deductions under Chapter 1 of the Internal Revenue Code amount 
to $410. During 1965 and 1966, M has net earnings from self-employment 
in amounts of $1,200 and $1,500, respectively, and some part of each of 
these amounts is from the exercise of his ministry. The deductions 
allowed in each of the years 1965 and 1966 by Chapter 1 which are 
attributable to the gross income derived by M from the exercise of his 
ministry in each of such years, respectively, do not equal or exceed 
such gross income in such year. If M

[[Page 46]]

wishes to have the Federal old-age, survivors, and disability insurance 
system established by title II of the Social Security Act extended to 
his service as a minister, he must file a waiver certificate on or 
before the due date of his income tax return (including any extension 
thereof) for 1966.
    Example (4). M, a licensed minister who makes his income tax returns 
on the basis of a calendar year, derived net earnings of $400 or more 
from the exercise of his ministry for two or more of the taxable years 
1955 to 1965, inclusive. In such case, if M wishes to have the Federal 
old-age, survivors, and disability insurance system established by title 
II of the Social Security Act extended to his services as a minister, he 
must file the waiver certificate on or before the due date (April 15, 
1966) prescribed for filing his income tax return for 1965, or any 
extension thereof. A waiver certificate filed after such date will be 
invalid.

    (b) Effect of death. Except as provided in Sec. Sec.  1.1402(e)(5)-
1, 1.1402(e) (5)-2, and 1.1402(e)(6)-1, the right of an individual to 
file a waiver certificate shall cease from his death. Thus, except as 
provided in such sections, the surviving spouse, administrator, or 
executor of a decedent shall not be permitted to file a waiver 
certificate for such decedent.
    (c) Computation of net earnings without regard to election. For the 
purpose of this section net earnings from self-employment shall be 
determined without regard to the fact that, without an election under 
section 1402(e), the performance of services by a duly ordained, 
commissioned, or licensed minister of a church in the exercise of his 
ministry, or by a member of a religious order in the exercise of duties 
required by such order, or the performance of service by an individual 
in the exercise of his profession as a Christian Science practitioner, 
does not constitute a trade or business for purposes of the tax on self-
employment income.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR 
15938, Oct. 30, 1968]



Sec.  1.1402(e)(3)-1  Effective date of waiver certificate.

    (a) Filed before August 31, 1957--(1) In general. A certificate on 
Form 2031 filed by an individual before August 31, 1957, in accordance 
with the provisions of section 1402(e) in effect at the time the 
certificate is filed, shall be effective for the first taxable year with 
respect to which it is filed, and all subsequent taxable years. In order 
for a certificate filed by an individual before August 31, 1957, to be 
effective under section 1402(e), the certificate must be made effective 
for either the first or second taxable year ending after 1954 in which 
the individual has net earnings from self-employment of $400 or more 
(determined as provided in paragraph (c) of Sec.  1.1402(e)(2)-1) some 
part of which is derived from service of the character with respect to 
which an election may be made. However, a certificate on Form 2031, 
filed before August 31, 1957, even though filed within the time 
specified in paragraph (a)(1)(ii) of Sec.  1.1402(e)(2)-1, may not be 
effective, except as provided in subparagraph (2) of this paragraph, for 
any taxable year with respect to which the due date for filing the 
individual's income tax return (including any extension thereof) has 
expired at the time such certificate is filed. Further, a certificate on 
Form 2031 may not be effective for any taxable year ending before 1955. 
In order for a certificate filed before August 31, 1957, except for the 
filing of a supplemental certificate, to be effective for the first or 
second taxable year ending after 1954 in which the individual has net 
earnings from self-employment (determined as provided in paragraph (c) 
of Sec.  1.1402(e)(2)-1) some part of which is derived from service of 
the character with respect to which an election may be made, the 
certificate on Form 2031 must be filed on or before the due date for 
filing the income tax return of the individual for such first or second 
taxable year, respectively, or any extension thereof.
    (2) Supplemental certificates--(i) Filed before due date of 1958 
return. If under subparagraph (1) of this paragraph the certificate is 
effective only for the individual's third or fourth taxable year ending 
after 1954 and all succeeding taxable years, the individual may make 
such a certificate effective for his first taxable year ending after 
1955 and all succeeding taxable years by filing a supplemental 
certificate on Form 2031. To be valid the supplemental certificate must 
be filed after August 30, 1957, and on or before the due date of the 
return (including any extension thereof) for his second taxable year

[[Page 47]]

ending after 1956 and must be otherwise in accordance with Sec.  
1.1402(e)(1)-1.

    Example. M, who files his income tax returns on a calendar year 
basis, was ordained as a minister in 1956, and his net earnings from 
service performed in the exercise of his ministry during such year were 
$400 or more. M had no net earnings from the exercise of his ministry 
during 1957. On July 15, 1957, M filed a waiver certificate and 
indicated thereon that it was to become effective for the taxable year 
1958. At the time of filing, the certificate was effective for 1958 and 
all succeeding taxable years. Since the certificate was not filed on or 
before April 15, 1957 (the due date of M's income tax return for the 
taxable year 1956), and since there was no extension of time for filing 
his 1956 income tax return, the certificate was not, at the time of 
filing, effective for the taxable year 1956. M files a supplemental 
certificate on April 15, 1958. By the filing of the supplemental 
certificate, the certificate filed by M on July 15, 1957, was made 
effective for the year 1956 and all succeeding taxable years.

    (ii) Filed after September 13, 1960, and on or before April 16, 
1962. If under subparagraph (1) of this paragraph the certificate is 
effective only for the individual's first taxable year ending after 1956 
and all succeeding taxable years, the individual may make such 
certificate effective for his first taxable year ending after 1955 and 
all succeeding taxable years by:
    (a) Filing a supplemental certificate on Form 2031 after September 
13, 1960, and before April 17, 1962;
    (b) Paying on or before April 16, 1962, the tax under section 1401 
in respect of all the individual's self-employment income (except for 
underpayments of tax attributable to errors made in good faith) for his 
first taxable year ending after 1955; and
    (c) By repaying on or before April 16, 1962, the amount of any 
refund (including any interest paid under section 6611) that has been 
made of any such tax which (but for section 1402(e)(3)(B)) is an 
overpayment.


Any payment or repayment described in section 1402(e)(3)(B) and in this 
subparagraph shall not constitute an overpayment within the meaning of 
section 6401 which relates to amounts treated as overpayments. See 
section 6401 and the regulations thereunder in part 301 of this chapter 
(Regulations on Procedure and Administration).

    Example. M, who files his income tax returns on a calendar year 
basis, was ordained as a minister in 1956, and his net earnings from 
service performed in the exercise of his ministry during each of the 
years 1956 and 1957 were $400 or more. On July 15, 1957, M filed a 
waiver certificate which became effective, at the time of filing, for 
1957 and all succeeding taxable years. Since the certificate was not 
filed on or before April 15, 1957 (the due date of M's income tax return 
for the taxable year 1956), and since there was no extension of time for 
filing his 1956 income tax return, the certificate was not, at the time 
of filing, effective for the taxable year 1956. M files a supplemental 
certificate on April 17, 1961. If, in addition to the filing of the 
supplemental certificate, M pays on or before April 16, 1962, the self-
employment tax in respect of all his self-employment income (except for 
underpayments of tax attributable to errors made in good faith) for his 
taxable year 1956, and repays, on or before April 16, 1962, the amount 
of any refund (including any interest paid under section 6611) that has 
been made of any such tax which (but for section 1402(e)(3)(B)) is an 
overpayment, the certificate filed by M on July 15, 1957, becomes 
effective for the year 1956 and all succeeding taxable years.

    (b) Filed after August 30, 1957, and before the due date of the 1958 
return. A certificate on Form 2031 filed by an individual after August 
30, 1957, but on or before the due date of the return (including any 
extension thereof) for his second taxable year ending after 1956, in 
accordance with the provisions of section 1402(e) in effect at the time 
the certificate is filed, shall be effective for his first taxable year 
ending after 1955, and all subsequent taxable years.
    (c) Filed after due date of 1958 return--(1) In general. Except as 
otherwise provided in Sec.  1.1402(e)(5)-1 (applicable to certificates 
filed within the period September 14, 1960, to April 16, 1962, 
inclusive) and in subparagraphs (2) and (3) of this paragraph, a 
certificate on Form 2031 filed by an individual in accordance with the 
provisions of Sec. Sec.  1.1402(e)(1)-1 and 1.1402(e)(2)-1, inclusive, 
after the due date of the return (including any extension thereof) for 
his second taxable year ending after 1956 shall be effective for the 
taxable year immediately preceding the earliest taxable year for which, 
at the time the certificate is filed, the period for filing a return 
(including any extension thereof) has not expired, and for all 
succeeding taxable years.


[[Page 48]]


    Example. M, a duly ordained minister of a church, makes his income 
tax returns on the basis of a calendar year. M has not been granted an 
extension of time for filing any return. On April 15, 1963, the due date 
of his income tax return for 1962, M files a waiver certificate pursuant 
to Sec.  1.1402(e)(1)-1 and within the time limitation set forth in 
Sec.  1.1402(e)(2)-1. On April 15, 1963, the year 1962 is the earliest 
taxable year for which the period for filing a return has not expired. 
Consequently, M's certificate is effective for 1961 and all succeeding 
taxable years. M must report and pay any self-employment tax due for 
1961 and 1962. (The tax, if any, for 1962 is due on April 15, 1963.) 
Inasmuch as the due date of the tax for 1961 is April 16, 1962, M must 
pay interest on any tax due for 1961. For provisions relating to such 
interest, see Sec.  301.6601-1 of Part 301 of this chapter (Regulations 
on Procedure and Administration).

    (2) Filed after October 13, 1964, and on or before the due date of 
return for second taxable year ending after 1962. A certificate on Form 
2031 filed by an individual in accordance with the provisions of 
Sec. Sec.  1.1402(e)(1)-1 and 1.1402(e)(2)-1, inclusive, after October 
13, 1964, and on or before the due date of the return (including any 
extension thereof) for his second taxable year ending after 1962 (April 
15, 1965, in the case of a calendar year taxpayer who has not been 
granted an extension of time for filing his income tax return for 1964) 
shall be effective for his first taxable year ending after 1961 and all 
succeeding taxable years.

    Example. M, a duly ordained minister of a church, makes his income 
tax returns on the basis of a calendar year. M has not been granted an 
extension of time for filing any return. On April 15, 1965, the due date 
of his income tax return for 1964, M files a waiver certificate pursuant 
to Sec.  1.1402(e)(1)-1 and within the time limitation set forth in 
Sec.  1.1402(e)(2)-1. M's certificate is effective for 1962 and all 
succeeding taxable years, and he must report and pay any self-employment 
tax due for 1962, 1963, and 1964. (The tax, if any, for 1964 is due on 
April 15, 1965.) Inasmuch as the due dates of the tax for 1962 and 1963 
are April 15, 1963, and April 15, 1964, respectively, M must pay 
interest on any tax due for 1962 or 1963. For provisions relating to 
such interest, see Sec.  301.6601-1 of Part 301 of this chapter 
(Regulations on Procedure and Administration).

    (3) Filed after July 30, 1965, and on or before the due date of 
return for second taxable year ending after 1963. A certificate on Form 
2031 filed by an individual in accordance with the provisions of 
Sec. Sec.  1.1402(e)(1)-1 and 1.1402(e)(2)-1, inclusive, after July 30, 
1965, and on or before the due date of the return (including any 
extension thereof) for his second taxable year ending after 1963 (Apr. 
15, 1966, in the case of a calendar year taxpayer who has not been 
granted an extension of time for filing his income tax return for 1965) 
shall be effective for his first taxable year ending after 1962 and all 
succeeding taxable years.

    Example. M, a duly ordained minister of a church, makes his income 
tax returns on the basis of a calendar year. M has not been granted an 
extension of time for filing any return. On April 15, 1966, the due date 
of his income tax return for 1965, M files a waiver certificate pursuant 
to Sec.  1.1402(e)(1)-1 and within the time limitation set forth in 
Sec.  1.1402(e)(2)-1. M's certificate is effective for 1963 and all 
succeeding taxable years, and he must report and pay any self-employment 
tax due for 1963, 1964, and 1965. (The tax, if any, for 1965 is due on 
April 15, 1966.) Inasmuch as the due dates of the tax for 1963 and 1964 
are April 15, 1964, and April 15, 1965, respectively, M must pay 
interest on any tax due for 1963 or 1964. For provisions relating to 
such interest, see Sec.  301.6601-1 of Part 301 of this chapter 
(Regulations on Procedure and Administration).

    (d) Election irrevocable. An election which has become effective 
pursuant to this section is irrevocable. A certificate may not be 
withdrawn after June 30, 1961.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR 
15939, Oct. 30, 1968]



Sec.  1.1402(e)(4)-1  Treatment of certain remuneration paid in 1955 
and 1956 as wages.

    If in 1955 or 1956 an individual was paid remuneration for service 
described in section 3121(b)(8)(A) which was erroneously treated by the 
organization employing him (under a certificate filed by such 
organization pursuant to section 3121(k) or the corresponding section of 
prior law) as employment, within the meaning of the Federal Insurance 
Contributions Act (Chapter 21 of the Internal Revenue Code), and if on 
or before August 30, 1957, the taxes imposed by sections 3101 and 3111 
were

[[Page 49]]

paid (in good faith and upon the assumption that the insurance system 
established by title II of the Social Security Act had been extended to 
such service) with respect to any part of the remuneration paid to such 
individual for such service, then the remuneration with respect to which 
such taxes were paid, and with respect to which no credit or refund of 
such taxes (other than a credit or refund which would be allowable if 
such service had constituted employment) has been obtained either by the 
employer or the employee on or before August 30, 1957, shall be deemed, 
for purposes of the Self-Employment Contributions Act of 1954 and the 
Federal Insurance Contributions Act, to constitute remuneration paid for 
employment and not net earnings from self-employment. For regulations 
relating to section 3121(b)(8)(A) and (k), see Sec.  31.3121(b)(8)-1 of 
subpart B of part 31 of this chapter (Employment Tax Regulations).

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 9849, 84 FR 
9237, Mar. 14, 2019]



Sec.  1.1402(e)(5)-1  Optional provision for certain certificates 
filed before April 15, 1962.

    (a) Certificates. (1) The optional provision contained in section 
1402(e)(5)(A) may be applied to a certificate on Form 2031 filed within 
the period September 14, 1960, to April 16, 1962, inclusive, in the case 
of a duly ordained, commissioned, or licensed minister of a church, a 
member of a religious order (other than a member of a religious order 
who has taken a vow of poverty as a member of such order), or a 
Christian Science practitioner, who has derived net earnings, in any 
taxable year ending after 1954 and before 1960, from the performance of 
service in the exercise of his ministry, in the exercise of duties 
required by his religious order, or in the exercise of his profession as 
a Christian Science practitioner, respectively, and who has reported 
such earnings as self-employment income on a return filed before 
September 14, 1960, and on or before the date prescribed for filing such 
return (including any extension thereof). The certificate may be filed 
by such minister, member of a religious order, or Christian Science 
practitioner or by a fiduciary acting for such individual or his estate, 
or by his survivor within the meaning of section 205(c)(1)(C) of the 
Social Security Act, and it must be filed after September 13, 1960, and 
on or before April 16, 1962. Subject to the conditions stated in 
subparagraph (2) of this paragraph, such certificate may be effective at 
the election of the person filing it, for the first taxable year ending 
after 1954 and before 1960 for which a return, as described in the first 
sentence of this subparagraph, was filed, and for all succeeding taxable 
years, rather than for the period prescribed in Sec.  1.1402(e)(3)-1. 
The election for retroactive application of the certificate may be made 
by indicating on the certificate the first taxable year for which it is 
to be effective and that such year is the first taxable year ending 
after 1954 and before 1960 for which the minister, member of a religious 
order, or Christian Science practitioner filed an income tax return on 
which he reported net earnings for such year from the exercise of his 
ministry, the exercise of duties required by his religious order, or the 
exercise of his profession as a Christian Science practitioner, as the 
case may be, and by fulfilling the conditions prescribed in subparagraph 
(2) of this paragraph.
    (2) A certificate to which subparagraph (1) of this paragraph 
relates may be effective for a taxable year prior to the taxable year 
immediately preceding the earliest taxable year for which, at the time 
the certificate is filed, the period for filing a return (including any 
extension thereof) has not expired, only if the following conditions are 
met:
    (i) The tax under section 1401 is paid on or before April 16, 1962, 
in respect of all self-employment income (whether or not derived from 
the performance of service by the individual in the exercise of his 
ministry, in the exercise of duties required by his religious order, or 
in the exercise of his profession as a Christian Science practitioner, 
as the case may be) for the first taxable year ending after 1954 and 
before 1960 for which such individual has filed a return, as described 
in subparagraph (1)

[[Page 50]]

of this paragraph, and for each succeeding taxable year ending before 
1960; and
    (ii) In any case where refund has been made of any such tax which 
(but for section 1402(e)(5)) is an overpayment, the amount refunded 
(including any interest paid under section 6611) is repaid on or before 
April 16, 1962. For regulations under section 6611 (relating to interest 
on overpayments), see Sec.  301.6611-1 of part 301 of this chapter 
(Regulations on Procedure and Administration).
    (b) Supplemental certificates. (1) Subject to the conditions stated 
in subparagraph (2) of this paragraph, a certificate on Form 2031 filed 
on or before September 13, 1960, by a minister, member of a religious 
order, or a Christian Science practitioner described in paragraph (a)(1) 
of this section and which (but for section 1402(e)(5)(B)) is ineffective 
for the first taxable year ending after 1954 and before 1959 for which 
such a return as described in paragraph (a)(1) of this section was filed 
by such individual, shall be effective for such first taxable year and 
for all succeeding taxable years, provided a supplemental certificate is 
filed by such individual or by a fiduciary acting for him or his estate, 
or by his survivor (within the meaning of section 205(c)(1)(C) of the 
Social Security Act), after September 13, 1960 and on or before April 
16, 1962.
    (2) The filing of a supplemental certificate pursuant to 
subparagraph (1) of this paragraph will give retroactive effect to a 
certificate to which such subparagraph applies only if the following 
conditions are met:
    (i) The tax under section 1401 is paid on or before April 16, 1962, 
in respect of all self-employment income (whether or not attributable to 
earnings as a minister, member of a religious order, or Christian 
Science practitioner) for the first taxable year for which the 
certificate is retroactively effective and for each subsequent year 
ending before 1959; and
    (ii) In any case where refund has been made of any such tax which 
(but for section 1402(d)(5)) is an overpayment, the amount refunded 
(including any interest paid under section 6611) is repaid on or before 
April 16, 1962.
    (c) Underpayment of tax. For purposes of this section, any 
underpayment of the tax which is attributable to an error made in good 
faith will not invalidate an election which is otherwise valid.
    (d) Nonapplicability of section 6401. Any payment or repayment 
described in paragraph (a)(2) or paragraph (b)(2) of this section shall 
not constitute an overpayment within the meaning of section 6401 which 
relates to amounts treated as overpayments. For the provisions of 
section 6401 and the regulations thereunder, see section 6401 and Sec.  
301.6401-1 of part 301 of this chapter (Regulations on Procedure and 
Administration).



Sec.  1.1402(e)(5)-2  Optional provisions for certain certificates 
filed on or before April 17, 1967.

    (a) In general--(1) General rule. Section 1402(e)(5), as amended by 
the Social Security Amendments of 1965, applies only in the case of a 
duly ordained, commissioned, or licensed minister of a church, a member 
of a religious order (other than a member of a religious order who has 
taken a vow of poverty as a member of such order), or a Christian 
Science practitioner, who has derived net earnings in any taxable year 
ending after 1954 from the performance of service in the exercise of his 
ministry, in the exercise of duties required by his religious order, or 
in the exercise of his profession as a Christian Science practitioner, 
respectively, and who has reported such earnings as self-employment 
income on a return filed on or before the date prescribed for filing 
such return (including any extension thereof).
    (2) Supplemental certificate. Subject to the conditions stated in 
subparagraph (4) of this paragraph, a certificate on Form 2031 filed on 
or before April 15, 1966, by a minister, member of a religious order, or 
a Christian Science practitioner described in subparagraph (1) of this 
paragraph and which (but for section 1402(e)(5)(A)) is ineffective for 
the first taxable year ending after 1954 for which a return described in 
subparagraph (1) of this paragraph was filed by such individual, shall 
be effective for such first taxable year and for all succeeding taxable 
years, provided

[[Page 51]]

a supplemental certificate is filed by such individual or by a fiduciary 
acting for him or his estate, or by his survivor (within the meaning of 
section 205(c)(1)(C) of the Social Security Act), after July 30, 1965 
(the date of enactment of the Social Security Amendments of 1965), and 
on or before April 17, 1967.
    (3) Certificate filed by survivor. A survivor (within the meaning of 
section 205(c)(1)(C) of the Social Security Act) of an individual who:
    (i) Died on or before April 15, 1966,
    (ii) Was a minister, member of a religious order, or a Christian 
Science practitioner described in subparagraph (1) of this paragraph,
    (iii) Has filed a return as described in subparagraph (1) of this 
paragraph for a taxable year ending after 1954, and
    (iv) Had not filed a valid waiver certificate on Form 2031,

may file a certificate on Form 2031 on behalf of such individual. The 
certificate must be filed after July 30, 1965 (the date of enactment of 
the Social Security Amendments of 1965), and on or before April 17, 
1967. Subject to the conditions stated in subparagraph (4) of this 
paragraph, such certificate shall be effective for the first taxable 
year ending after 1954 for which a return, as described in subparagraph 
(1) of this paragraph, was filed by such individual and for all 
succeeding taxable years.
    (4) Applicable conditions. A supplemental certificate referred to in 
subparagraph (2) of this paragraph and a certificate referred to in 
subparagraph (3) of this paragraph shall be effective only if the 
following conditions are met:
    (i) The tax under section 1401 is paid on or before April 17, 1967, 
in respect of all self-employment income (whether or not attributable to 
earnings as a minister, member of a religious order, or Christian 
Science practitioner) for the first taxable year ending after 1954 for 
which the individual (by or in respect of whom the supplemental 
certificate or certificate is filed) has filed a return, as described in 
paragraph (1) of this paragraph, and for each succeeding taxable year 
ending before January 1, 1966; and
    (ii) In any case where refund has been made of any such tax which 
(but for section 1402(e)(5)) is an overpayment, the amount refunded 
(including any interest paid under section 6611) is repaid on or before 
April 17, 1967. For regulations under section 6611 (relating to interest 
on overpayments), see Sec.  301.6611-1 of part 301 of this chapter 
(Regulations on Procedure and Administration).
    (b) Underpayment of tax. For purposes of this section, any 
underpayment of the tax which is attributable to an error made in good 
faith will not invalidate an election which is otherwise valid.
    (c) Nonapplicability of section 6401. Any payment or repayment 
described in paragraph (a)(4) of this section shall not constitute an 
overpayment within the meaning of section 6401 which relates to amounts 
treated as overpayments. For the provisions of section 6401 and the 
regulations thereunder, see section 6401 and Sec.  301.6401-1 of part 
301 of this chapter (Regulations on Procedure and Administration).
    (d) Applicability of Sec. Sec.  1.1402(e) (5)-1 and 1.1402(e)(6)-1. 
The provisions of section 1402(e) (5) and (6) (in effect prior to July 
30, 1965, the date of enactment of the Social Security Amendments of 
1965) and Sec. Sec.  1.1402(e) (5)-1 and 1.1402(e)(6)-1 shall apply with 
respect to any certificate filed pursuant to such sections if a 
supplemental certificate is not filed with respect to such certificate 
as provided in this section.

[T.D. 6978, 33 FR 15939, Oct. 30, 1968]



Sec.  1.1402(e)(6)-1  Certificates filed by fiduciaries or survivors 
on or before April 15, 1962.

    In any case in which an individual whose death has occurred after 
September 12, 1960, and before April 16, 1962, derived earnings from the 
performance of services as a duly ordained, commissioned, or licensed 
minister of a church in the exercise of his ministry, as a member of a 
religious order (other than a member of a religious order who has taken 
a vow of poverty as a member of such order) in the exercise of duties 
required by such order, or in the exercise of his profession as a 
Christian Science practitioner, a waiver certificate on Form 2031 may be 
filed after June 30, 1961 (the date of enactment of the Social

[[Page 52]]

Security Amendments of 1961), and on or before April 16, 1962, by a 
fiduciary acting for such individual's estate or by such individual's 
survivor within the meaning of section 205(c)(1)(C) of the Social 
Security Act. Such certificates shall be effective for the period 
prescribed in section 1402(e)(3)(A) (see Sec.  1.1402(e)(3)-1(c)) as if 
filed by the individual on the date of his death.



Sec.  1.1402(f)-1  Computation of partner's net earnings from 
self-employment for taxable year which ends as result of his death.

    (a) Taxable years ending after August 28, 1958--(1) In general. The 
rules for the computation of a partner's net earnings from self-
employment are set forth in paragraphs (d) to (g), inclusive, of Sec.  
1.1402(a)-2. In addition to the net earnings from self-employment 
computed under such rules for the last taxable year of a deceased 
partner, if a partner's taxable year ends after August 28, 1958, solely 
because of death, and on a day other than the last day of the 
partnership's taxable year, the deceased partner's net earnings from 
self-employment for such year shall also include so much of the deceased 
partner's distributive share of partnership ordinary income or loss (see 
subparagraph (3) of this paragraph) for the taxable year of the 
partnership in which his death occurs as is attributable to an interest 
in the partnership prior to the month following the month of his death.
    (2) Computation. (i) The deceased partner's distributive share of 
partnership ordinary income or loss for the partnership taxable year in 
which he died shall be determined by applying the rules contained in 
paragraphs (d) to (g), inclusive, of Sec.  1.1402(a)-2, except that 
paragraph (e) shall not apply.
    (ii) The portion of such distributive share to be included under 
this section in the deceased partner's net earnings from self-employment 
for his last taxable year shall be determined by treating the ordinary 
income or loss constituting such distributive share as having been 
realized or sustained ratably over the period of the partnership taxable 
year during which the deceased partner had an interest in the 
partnership and during which his estate, or any other person succeeding 
by reason of his death to rights with respect to his partnership 
interest, held such interest in the partnership or held a right with 
respect to such interest. The amount to be included under this section 
in the deceased partner's net earnings from self-employment for his last 
taxable year will, therefore, be determined by multiplying the deceased 
partner's distributive share of partnership ordinary income or loss for 
the partnership taxable year in which he died, as determined under 
subdivision (i) of this subparagraph, by a fraction, the denominator of 
which is the number of calendar months in the partnership taxable year 
over which the ordinary income or loss constituting the deceased 
partner's distributive share of partnership income or loss for such year 
is treated as having been realized or sustained under the preceding 
sentence and the numerator of which is the number of calendar months in 
such partnership taxable year that precede the month following the month 
of his death.
    (3) Definition of ``deceased partner's distributive share''. For the 
purpose of this section, the term ``deceased partner's distributive 
share'' includes the distributive share of his estate or of any other 
person succeeding, by reason of his death, to rights with respect to his 
partnership interest. It does not include any share attributable to a 
partnership interest which was not held by the deceased partner at the 
time of his death. Thus, if a deceased partner's estate should acquire 
an interest in a partnership additional to the interest to which it 
succeeded upon the death of the deceased partner, the amount of the 
distributive share attributable to such additional interest acquired by 
the estate would not be included in computing the ``deceased partner's 
distributive share'' of the partnership's ordinary income or loss for 
the partnership taxable year.
    (4) Examples. The application of this paragraph may be illustrated 
by the following examples:

    Example (1). B, an individual who files his income tax returns on 
the calendar year basis, is a member of the ABC partnership, the taxable 
year of which ends on June 30. B

[[Page 53]]

dies on October 17, 1958, and his estate succeeds to his partnership 
interest and continues as a partner in its own right under local law 
until June 30, 1959. B's distributive share of the partnership's 
ordinary income, as determined under paragraphs (d) to (g), inclusive, 
of Sec.  1.1402(a)-2, for the taxable year of the partnership ended June 
30, 1958 is $2,400. His distributive share, including the share of his 
estate, of such partnership's ordinary income, as determined under 
paragraphs (d) to (g), inclusive, of Sec.  1.1402(a)-2 (with the 
exception of paragraph (e)), for the taxable year of the partnership 
ended June 30, 1959 is $4,500. The portion of such $4,500 attributable 
to an interest in the partnership prior to the month following the month 
in which he died is $4,500 x 4/12 (4 being the number of months in the 
partnership taxable year in which B died which precede the month 
following the month of his death and 12 being the number of months in 
such partnership taxable year in which B and his estate had an interest 
in the partnership) or $1,500. The amount to be included in the deceased 
partner's net earnings from self-employment for his last taxable year is 
$3,900 ($2,400 plus $1,500).
    Example (2). If in the preceding example B's estate is entitled to 
only $1,000, the amount of B's distributive share of partnership 
ordinary income for the period July 1, 1958 through October 17, 1958, 
such $1,000 is considered to have been realized ratably over the period 
preceding B's death and will be included in B's net earnings from self-
employment for his last taxable year.
    Example (3). X, who reports his income on a calendar year basis, is 
a member of a partnership which also reports its income on a calendar 
year basis. X dies on June 30, 1959, and his estate succeeds to his 
partnership interest and continues as a partner in its own right under 
local law. On September 15, 1959, X's estate sells the partnership 
interest to which it succeeded on the death of X. X's distributive share 
of partnership income for 1959 is $5,500. $600 of such amount is X's 
share of the gain from the sale of a capital asset which occurs on May 
1, 1959, and $400 of such amount is the estate's share of the gain from 
the sale of a capital asset which occurs on July 15, 1959. The remainder 
of such amount is income from services rendered. X's distributive share 
of partnership ordinary income for 1959, as determined under paragraphs 
(d) to (g), inclusive, of Sec.  1.1402(a)-2 (with the exception of 
paragraph (e)), is $4,500 ($5,500 minus $1,000). The portion of such 
share attributable to an interest in the partnership prior to the month 
following the month of his death is $4,500 x 6/8.5 (6 being the number 
of months in the partnership taxable year in which X died as precede the 
month following the month of his death and 8.5 being the number of 
months in such partnership taxable year in which X and his estate had an 
interest in the partnership) or $3,176.47.

    (b) Options available to farmers--(1) Special rule. In determining 
whether the optional method available to a member of a farm partnership 
in computing his net earnings from self-employment may be applied, and 
in applying such method, it is necessary to determine the partner's 
distributive share of partnership gross income and the partner's 
distributive share of income described in section 702(a)(9). See section 
1402(a) and Sec.  1.1402(a)-15. If section 1402(f) and this section 
apply, or may be made applicable under section 403(b)(2) of the Social 
Security Amendments of 1958 and paragraph (c) of this section, for the 
last taxable year of a deceased partner, such partner's distributive 
share of income described in section 702(a)(9) for his last taxable year 
shall be determined by including therein any amount which is included 
under section 1402(f) and this section in his net earnings from self-
employment for such taxable year. Such a partner's distributive share of 
partnership gross income for his last taxable year shall be determined 
by including therein so much of the deceased partner's distributive 
share (see paragraph (a)(3) of this section) of partnership gross 
income, as defined in section 1402(a) and paragraph (b) of Sec.  
1.1402(a)-15, for the partnership taxable year in which he died as is 
attributable to an interest in the partnership prior to the month 
following the month of his death. Such allocation shall be made in the 
same manner as is prescribed in paragraph (a)(2) of this section for 
determining the portion of a deceased partner's distributive share of 
partnership ordinary income or loss to be included under section 1402(f) 
and this section in his net earnings from self-employment for his last 
taxable year.
    (2) Examples. The principles set forth in this paragraph may be 
illustrated by the following examples:

    Example (1). X, an individual who files his income tax returns on a 
calendar year basis, is a member of the XYZ farm partnership, the 
taxable year of which ends on March 31. X dies on May 31, 1967, and his 
estate succeeds to his partnership interest and continues as a partner 
in its own right under

[[Page 54]]

local law until March 31, 1968. X's distributive share of the 
partnership's ordinary income, determined under paragraphs (d) to (g), 
inclusive, of Sec.  1.1402(a)-2, for the taxable year of the partnership 
ended March 31, 1967, is $1,600. His distributive share, including the 
share of his estate, of such partnership's ordinary loss as determined 
under paragraphs (d) to (g), inclusive, of Sec.  1.1402(a)-2 (with the 
exception of paragraph (e)), for the taxable year of the partnership 
ended March 31, 1968, is $1,200. The portion of such $1,200 attributable 
to an interest in the partnership prior to the month following the month 
in which he died is $1,200 x 2/12 (2 being the number of months in the 
partnership taxable year in which X died which precede the month 
following the month of his death and 12 being the number of months in 
such partnership taxable year in which X and his estate had an interest 
in the partnership) or $200. X is also a member of the ABX farm 
partnership, the taxable year of which ends on May 31. His distributive 
share of the partnership loss described in section 702(a)(9) for the 
partnership taxable year ending May 31, 1967, is $300. Section 1402(f) 
and this section do not apply with respect to such $300 since X's last 
taxable year ends, as a result of his death, with the taxable year of 
the ABX partnership. Under this paragraph the $200 loss must be included 
in determining X's distributive share of XYZ partnership income 
described in section 702(a)(9) for the purpose of applying the optional 
method available to farmers for computing net earnings from self-
employment. Further, the resulting $1,400 of income must be aggregated, 
pursuant to paragraph (c) of Sec.  1.1402(a)-15, with the $300 loss, X's 
distributive share of ABX partnership loss described in section 
702(a)(9), for purposes of applying such option. The representative of 
X's estate may exercise the option described in paragraph (a)(2)(ii) of 
Sec.  1.1402(a)-15, provided the portion of X's distributive share of 
XYZ partnership gross income for the taxable year ended March 31, 1968, 
attributable to an interest in the partnership prior to the month 
following the month in which he died (the allocation being made in the 
manner prescribed for allocating his $1,200 distributive share of XYZ 
partnership loss for such year), when aggregated with his distributive 
share of XYZ partnership gross income for the partnership taxable year 
ended March 31, 1967, and with his distributive share of ABX partnership 
gross income for the partnership taxable year ended May 31, 1967, 
results in X having more than $2,400 of gross income from the trade or 
business of farming. If such aggregate amount of gross income is not 
more than $2,400, the option described in paragraph (a)(2)(i) of Sec.  
1.1402(a)-15, is available.
    Example (2). A, a sole proprietor engaged in the business of 
farming, files his income tax returns on a calendar year basis. A is 
also a member of a partnership engaged in an agricultural activity. The 
partnership files its returns on the basis of a fiscal year ending March 
31. A dies June 29, 1967. A's gross income from farming as a sole 
proprietor for the 6-month period comprising his taxable year which ends 
because of death is $1,600 and his actual net earnings from self-
employment based thereon are $400. As of March 31, 1967, A's 
distributive share of the gross income of the farm partnership is $2,200 
and his distributive share of income described in section 702(a)(9) 
based thereon is $1,000. The amount of A's distributive share of the 
partnership's ordinary income for its taxable year ended March 31, 1968, 
which may be included in his net earnings from self-employment under 
section 1402(f) and paragraph (a) of this section is $300. The amount of 
the deceased partner's distributive share of partnership gross income 
attributable to an interest in the partnership prior to the month 
following the month of his death as is determined, pursuant to 
subparagraph (1) of this paragraph, under paragraph (a) of this section 
is $2,000. An aggregation of the above figures produces a gross income 
from farming of $5,800 and actual net earnings from self-employment of 
$1,700. Under these circumstances none of the options provided by 
section 1402(a) may be used. If the actual net earnings from self-
employment had been less than $1,600, the option described in paragraph 
(a)(2)(ii) of Sec.  1.1402(a)-15 would have been available.

    (c) Taxable years ending after 1955 and on or before August 28, 
1958--(1) Requirement of election. If a partner's taxable year ended, as 
a result of his death, after 1955 and on or before August 28, 1958, the 
rules set forth in paragraph (a) of this section may be made applicable 
in computing the deceased partner's net earnings from self-employment 
for his last taxable year provided that:
    (i) Before January 1, 1960, there is filed, by the person designated 
in section 6012(b)(1) and paragraph (b)(1) of Sec.  1.6012-3, a return 
(or amended return) of the tax imposed by chapter 2 for the taxable year 
ending as a result of death, and
    (ii) Such return, if filed solely for the purpose of reporting net 
earnings from self-employment resulting from the enactment of section 
1402(f), is accompanied by the amount of tax attributable to such net 
earnings.
    (2) Administrative rule of special application. Notwithstanding the 
provisions of sections 6601, 6651, and 6653 (see such

[[Page 55]]

sections and the regulations thereunder) no interest or penalty shall be 
assessed or collected on the amount of any self-employment tax due 
solely by reason of the operation of section 1402(f) in the case of an 
individual who died after 1955 and before August 29, 1958.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6993, 34 FR 
830, Jan. 18, 1969]



Sec.  1.1402(g)-1  Treatment of certain remuneration erroneously reported 
as net earnings from self-employment.

    (a) General rule. If an amount is erroneously paid as self-
employment tax, for any taxable year ending after 1954 and before 1962, 
with respect to remuneration for service (other than service described 
in section 3121(b)(8)(A)) performed in the employ of an organization 
described in section 501(c)(3) and exempt from income tax under section 
501(a), and if such remuneration is reported as self-employment income 
on a return filed on or before the due date prescribed for filing such 
return (including any extension thereof), the individual who paid such 
amount (or a fiduciary acting for such individual or his estate, or his 
survivor (within the meaning of section 205(c)(1)(C) of the Social 
Security Act)), may request that such remuneration be deemed to 
constitute net earnings from self-employment. If such request is filed 
during the period September 14, 1960, to April 16, 1962, inclusive, and 
on or after the date on which the organization which paid such 
remuneration to such individual for services performed in its employ has 
filed, pursuant to section 3121(k), a certificate waiving exemption from 
taxes under the Federal Insurance Contributions Act, and if no credit or 
refund of any portion of the amount erroneously paid for such taxable 
year as self-employment tax (other than a credit or refund which would 
be allowable if such tax were applicable with respect to such 
remuneration) has been obtained before the date on which such request is 
filed or, if obtained, the amount credited or refunded (including any 
interest under section 6611) is repaid on or before such date, then, for 
purposes of the Self-Employment Contributions Act of 1954 and the 
Federal Insurance Contributions Act, any amount of such remuneration 
which is paid to such individual before the calendar quarter in which 
such request is filed (or before the succeeding quarter if such 
certificate first becomes effective with respect to services performed 
by such individual in such succeeding quarter) and with respect to which 
no tax (other than an amount erroneously paid as tax) has been paid 
under the Federal Insurance Contributions Act, shall be deemed to 
constitute net earnings from self-employment and not remuneration for 
employment. If the certificate filed by such organization pursuant to 
section 3121(k) is not effective with respect to services performed by 
such individual on or before the first day of the calendar quarter in 
which the request is filed, then, for purposes of section 3121(b)(8)(B) 
(ii) and (iii), such individual shall be deemed to have become an 
employee of such organization (or to have become a member of a group, 
described in section 3121(k)(1)(E), of employees of such organization) 
on the first day of the succeeding quarter.
    (b) Request for validation. (1) No particular form is prescribed for 
making a request under paragraph (a) of this section. The request should 
be in writing, should be signed and dated by the person making the 
request, and should indicate clearly that it is a request that, pursuant 
to section 1402(g) of the Code, remuneration for service described in 
section 3121(b)(8) (other than service described in section 
3121(b)(8)(A)) erroneously reported as self-employment income for one or 
more specified years be deemed to constitute net earnings from self-
employment and not remuneration for employment. In addition, the 
following information shall be shown in connection with the request:
    (i) The name, address, and social security account number of the 
individual with respect to whose remuneration the request is made.
    (ii) The taxable year or years (ending after 1954 and before 1962) 
to which the request relates.
    (iii) A statement that the remuneration was erroneously reported as 
self- employment income on the individual's return for each year 
specified and that

[[Page 56]]

the return was filed on or before its due date (including any extension 
thereof).
    (iv) Location of the office of the district director with whom each 
return was filed.
    (v) A statement that no portion of the amount erroneously paid by 
the individual as self-employment tax with respect to the remuneration 
has been credited or refunded (other than a credit or refund which would 
have been allowable if the tax had been applicable with respect to the 
remuneration); or, if a credit or refund of any portion of such amount 
has been obtained, a statement identifying the credit or refund and 
showing how and when the amount credited or refunded, together with any 
interest received in connection therewith, was repaid.
    (vi) The name and address of the organization which paid the 
remuneration to the individual.
    (vii) The date on which the organization filed a waiver certificate 
on Form SS-15, and the location of the office of the district director 
with whom it was filed.
    (viii) The date on which the certificate became effective with 
respect to services performed by the individual.
    (ix) If the request is made by a person other than the individual to 
whom the remuneration was paid, the name and address of that person and 
evidence which shows the authority of such person to make the request.
    (2) The request should be filed with the district director of 
internal revenue with whom the latest of the returns specified in the 
request pursuant to subparagraph (1)(iii) of this paragraph was filed.
    (c) Cross references. For regulations relating to exemption from 
income tax of an organization described in section 501(c)(3), see Sec.  
1.501(c)(3)-1.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 9849, 84 FR 
9237, Mar. 14, 2019]



Sec.  1.1402(h)-1  Members of certain religious groups opposed to insurance.

    (a) In general. An individual--(1) Who is a member of a recognized 
religious sect or division thereof and,
    (2) Who is an adherent of established tenets or teachings of such 
sect or division and by reason thereof is conscientiously opposed to 
acceptance of the benefits of any private or public insurance which 
makes payments in the event of death, disability, old age, or retirement 
or makes payments toward the cost of, or provides services for, medical 
care (including the benefits of any insurance system established by the 
Social Security Act),

may file an application for exemption from the tax under section 1401. 
The form of insurance to which section 1402(h) and this section refer 
does not include liability insurance of a kind that provides only for 
the protection of other persons, or property of other persons, who may 
be injured or damaged by or on property belonging to, or by an action 
of, an individual who otherwise meets the requirements of this section. 
An application for exemption under section 1402(h) and this section 
shall be made in the manner provided in paragraph (b) of this section 
and within the time specified in paragraph (c) of this section. For 
provisions relating to the filing of an application for exemption by a 
fiduciary or survivor, see paragraph (d) of this section.
    (b) Application for exemption. The application for exemption shall 
be filed on Form 4029 in duplicate with the internal revenue official or 
office designated on the form. The filing of a return by a member of a 
religious group opposed to insurance showing no self-employment income 
or self-employment tax shall not be construed as an application for 
exemption referred to in paragraph (a) of this section.
    (c) Time limitation for filing application for exemption--(1) 
Taxable years ending before December 31, 1967. A member of a religious 
group opposed to insurance within the meaning of paragraph (a) of this 
section:
    (i) Who has self-employment income (determined without regard to 
subsections (c)(6) and (h) of section 1402 and this section) for one or 
more taxable years ending before December 31, 1967, and
    (ii) Who desires to be exempt from the payment of the self-
employment tax under section 1401,

must file the application for exemption on or before December 31, 1968.
    (2) Taxable year ending on or after December 31, 1967--(i) General 
rule. Except

[[Page 57]]

as provided in subdivision (ii) of this subparagraph, a member of a 
religious group opposed to insurance within the meaning of paragraph (a) 
of this section:
    (a) Who has no self-employment income (determined without regard to 
subsections (c)(6) and (h) of section 1402 and this section) for any 
taxable year ending before December 31, 1967, and
    (b) Who desires to be exempt from the payment of the self-employment 
tax under section 1401 for any taxable year ending on or after December 
31, 1967,


must file the application for exemption on or before the due date of the 
income tax return (see section 6072), including any extension thereof 
(see section 6081), for the first taxable year ending on or after 
December 31, 1967, for which he has self-employment income (determined 
without regard to subsections (c)(6) and (h) of section 1402 and this 
section.
    (ii) Exception to general rule. If an individual to whom subdivision 
(i) of this subparagraph applies:
    (a) Is notified in writing by a district director of internal 
revenue or the Director of International Operations that he has not 
filed the application for exemption on or before the date specified in 
such subdivision (i), and
    (b) Files the application for exemption on or before the last day of 
the third calendar month following the calendar month in which he is so 
notified,


such application shall be considered a timely filed application for 
exemption.
    (d) Application by fiduciary or survivor. If an individual who was a 
member of a religious group opposed to insurance dies before the 
expiration of the time prescribed in section 1402(h)(2) and paragraph 
(c) of this section during which an application could have been filed by 
him, an application for exemption with respect to such deceased 
individual may be filed by a fiduciary acting for such individual's 
estate or by such individual's survivor within the meaning of section 
205(c)(1)(C) of the Social Security Act. An application for exemption 
with respect to a deceased individual executed by a fiduciary or 
survivor may be approved only if it could have been approved if the 
individual were not deceased and had filed the application on the date 
the application was filed by the fiduciary or executor.
    (e) Approval of application for exemption--(1) In general. The 
filing of an application for exemption on Form 4029 by a member of a 
religious group opposed to insurance does not constitute an exemption 
from the payment of the tax on self-employment income. An individual who 
files such an application is exempt from the payment of the tax only if 
the application is approved by the official with whom the application is 
required to be filed (see paragraph (b) of this section).
    (2) Conditions relating to approval or disapproval of application. 
An application for exemption on Form 4029 will not be approved unless 
the Secretary of Health, Education, and Welfare finds with respect to 
the religious sect or division thereof of which the individual filing 
the application is a member:
    (i) That the sect or division thereof has the established tenets or 
teachings by reason of which the individual applicant is conscientiously 
opposed to the benefits of insurance of the type referred to in section 
1402(h) (see paragraph (a) of this section),
    (ii) That it is the practice, and has been for a period of time 
which the Secretary of Health, Education, and Welfare deems to be 
substantial, for members of such sect or division thereof to make 
provisions for their dependent members which, in the judgment of such 
Secretary, is reasonable in view of the general level of living of the 
members of the sect or division thereof; and
    (iii) That the sect or division thereof has been in existence 
continuously since December 31, 1950.

In addition, an application for exemption on Form 4029 will not be 
approved if any benefit or other payment under title II of title XVIII 
of the Social Security Act became payable (or, but for section 203, 
relating to reduction of insurance benefits, or 222(b), relating to 
reduction of insurance benefits on account of refusal to accept 
rehabilitation services, of the Social Security Act would have been 
payable) at or before the time of the filing of the application for 
exemption. Any determination required to be made pursuant to the 
preceding sentence will be made by

[[Page 58]]

the Secretary of Health, Education, and Welfare.
    (f) Period for which exemption is effective--(1) General rule. An 
application for exemption shall be in effect (if approved as provided in 
paragraph (e) of this section) for all taxable years beginning after 
December 31, 1950, except as otherwise provided in subparagraph (2) of 
this paragraph.
    (2) Exceptions. An application for exemption referred to in 
subparagraph (1) of this paragraph shall not be effective for any 
taxable year which:
    (i) Begins (a) before the taxable year in which the individual 
filing the application first met the requirements of subparagraphs (1) 
and (2) of paragraph (a) of this section, or (b) before the time as of 
which the Secretary of Health, Education, and Welfare finds that the 
sect or division thereof of which the individual is a member met the 
requirements of subparagraphs (C) and (D) of section 1402(h)(1) (see 
subdivisions (i) and (ii) of paragraph (e)(2) of this section), or
    (ii) Ends (a) after the time at which the individual filing the 
application ceases to meet the requirements of subparagraphs (1) and (2) 
of paragraph (a) of this section, or (b) after the time as of which the 
Secretary of Health, Education, and Welfare finds that the sect or 
division thereof of which the individual is a member ceases to meet the 
requirements of subparagraphs (C) and (D) of section 1402(h)(1) (see 
subdivisions (i) and (ii) of paragraph (e)(2) of this section).
    (g) Refund or credit. An application for exemption on Form 4029 
filed on or before December 31, 1968 (if approved as provided in 
paragraph (e) of this section), shall constitute a claim for refund or 
credit of any tax on self-employment income under section 1401 (or under 
section 480 of the Internal Revenue Code of 1939) paid or incurred in 
respect of any taxable year beginning after December 31, 1950, and 
ending before December 31, 1967, for which an exemption is granted. 
Refund or credit of any tax referred to in the preceding sentence may be 
made, pursuant to the provisions of section 501(c) of the Social 
Security Amendments of 1967 (81 Stat. 933), notwithstanding that the 
refund or credit would otherwise be prevented by operation of any law or 
rule of law. No interest shall be allowed or paid in respect of any 
refund or credit made or allowed in connection with a claim for refund 
or credit made on Form 4029.

[T.D. 6993, 34 FR 831, Jan. 18, 1969]



Sec.  1.1403-1  Cross references.

    For provisions relating to the requirement for filing returns with 
respect to net earnings from self-employment, see Sec.  1.6017-1. For 
provisions relating to declarations of estimated tax on self-employment 
income, see Sec. Sec.  1.6015(a) to 1.6015(j)-1, inclusive. For other 
administrative provisions relating to the tax on self-employment income, 
see the applicable sections of the regulations in this part (Sec.  
1.6001-1 et seq.) and the applicable sections of the regulations in part 
301 of this chapter (Regulations on Procedure and Administration).

[T.D. 7427, 41 FR 34026, Aug. 12, 1976]

                        Net Investment Income Tax



Sec.  1.1411-0  Table of contents of provisions applicable to section 1411.

    This section lists the table of contents for Sec. Sec.  1.1411-1 
through 1.1411-10.

                      Sec.  1.1411-1 General rules.

    (a) General rule.
    (b) Adjusted gross income.
    (c) Effect of section 1411 and the regulations thereunder for other 
purposes.
    (d) Definitions.
    (e) Disallowance of certain credits against the section 1411 tax.
    (f) Application to taxable years beginning before January 1, 2014.
    (1) Retroactive application of regulations.
    (2) Reliance and transitional rules.
    (g) Effective/applicability date.

               Sec.  1.1411-2 Application to individuals.

    (a) Individual to whom tax applies.
    (1) In general.
    (2) Special rules.
    (i) Dual resident individuals treated as residents of a foreign 
country under an income tax treaty.
    (ii) Dual-status resident aliens.
    (iii) Joint returns in the case of a nonresident alien individual 
married to a United States citizen or resident.
    (A) Default treatment.
    (B) Taxpayer election.
    (1) Effect of election.

[[Page 59]]

    (2) Procedural requirements for making election.
    (3) Ineffective elections.
    (iv) Joint returns for a year in which nonresident alien married to 
a United States citizen or resident becomes a United States resident.
    (A) Default treatment.
    (B) Taxpayer election.
    (1) Effect of election.
    (2) Procedural requirements for making election.
    (v) Grantor trusts.
    (vi) Bankruptcy estates.
    (vii) Bona fide residents of United States territories.
    (A) Applicability.
    (B) Coordination with exception for nonresident aliens.
    (C) Definitions.
    (1) Bona fide resident.
    (2) United States territory.
    (b) Calculation of tax.
    (1) In general.
    (2) Example.
    (c) Modified adjusted gross income.
    (1) General rule.
    (2) Rules with respect to CFCs and PFICs.
    (d) Threshold amount.
    (1) In general.
    (2) Taxable year of less than twelve months.
    (i) General rule.
    (ii) Change of annual accounting period.
    (e) Effective/applicability date.

            Sec.  1.1411-3 Application to Estates and Trusts

    (a) Estates and trusts to which tax applies.
    (1) In general.
    (i) General application.
    (ii) Calculation of tax.
    (2) Taxable year of less than twelve months.
    (i) General rule.
    (ii) Change of annual accounting period.
    (3) Rules with respect to CFCs and PFICs.
    (b) Application to certain trusts and estates.
    (1) Exception for certain trusts and estates.
    (2) Special rules for certain taxable trusts and estates.
    (i) Qualified funeral trusts.
    (ii) Bankruptcy estates.
    (c) Application to electing small business trusts (ESBTs).
    (1) General application.
    (2) Computation of tax.
    (i) Step one.
    (ii) Step two.
    (iii) Step three.
    (3) Example.
    (d) Application to charitable remainder trusts (CRTs).
    (1) Operational rules.
    (i) Treatment of annuity or unitrust distributions.
    (ii) Apportionment among multiple beneficiaries.
    (iii) Accumulated net investment income.
    (2) Application of section 664.
    (i) General rule.
    (ii) Special rules for CRTs with income from CFCs or PFICs 
[Reserved]
    (iii) Examples.
    (3) Elective simplified method. [Reserved]
    (e) Calculation of undistributed net investment income.
    (1) In general.
    (2) Undistributed net investment income.
    (3) Distributions of net investment income to beneficiaries.
    (4) Deduction for amounts paid or permanently set aside for a 
charitable purpose.
    (5) Examples.
    (f) Effective/applicability date.

           Sec.  1.1411-4 Definition of Net Investment Income

    (a) In general.
    (b) Ordinary course of a trade or business exception.
    (c) Other gross income from a trade or business described in Sec.  
1.1411-5.
    (d) Net gain.
    (1) Definition of disposition.
    (2) Limitation.
    (3) Net gain attributable to the disposition of property.
    (i) General rule.
    (ii) Examples.
    (4) Gains and losses excluded from net investment income.
    (i) Exception for gain or loss attributable to property held in a 
trade or business not described in Sec.  1.1411-5.
    (A) General rule.
    (B) Special rules for determining whether property is held in a 
trade or business.
    (C) Examples.
    (ii) Adjustments to gain or loss attributable to the disposition of 
interests in a partnership or S corporation.
    (iii) Adjustment for capital loss carryforwards for previously 
excluded income. [Reserved]
    (e) Net investment income attributable to certain entities.
    (1) Distributions from estates and trusts.
    (i) In general.
    (ii) Distributions of accumulated net investment income from foreign 
nongrantor trusts to United States beneficiaries. [Reserved]
    (2) CFCs and PFICs.
    (3) Treatment of income from common trust funds. [Reserved]
    (f) Properly allocable deductions.
    (1) General rule.
    (i) In general.
    (ii) Limitations.
    (2) Properly allocable deductions described in section 62.
    (i) Deductions allocable to gross income from rents and royalties.

[[Page 60]]

    (ii) Deductions allocable to gross income from trades or businesses 
described in Sec.  1.1411-5.
    (iii) Penalty on early withdrawal of savings.
    (iv) Net operating loss.
    (v) Examples.
    (3) Properly allocable deductions described in section 63(d).
    (i) Investment interest expense.
    (ii) Investment expenses.
    (iii) Taxes described in section 164(a)(3).
    (iv) Items described in section 72(b)(3).
    (v) Items described in section 691(c).
    (vi) Items described in section 212(3).
    (vii) Amortizable bond premium.
    (viii) Fiduciary expenses.
    (4) Loss deductions.
    (i) General rule.
    (ii) Examples.
    (5) Ordinary loss deductions for certain debt instruments.
    (6) Other deductions.
    (7) Application of limitations under sections 67 and 68.
    (i) Deductions subject to section 67.
    (ii) Deductions subject to section 68.
    (iii) Itemized deductions.
    (iv) Example.
    (g) Special rules.
    (1) Deductions allocable to both net investment income and excluded 
income.
    (2) Recoveries of properly allocable deductions.
    (i) General rule.
    (ii) Recoveries of items allocated between net investment income and 
excluded income.
    (iii) Recoveries with no prior year benefit.
    (iv) Examples.
    (3) Deductions described in section 691(b).
    (4) Amounts described in section 642(h).
    (5) Treatment of self-charged interest income.
    (6) Treatment of certain nonpassive rental activities.
    (i) Gross income from rents.
    (ii) Gain or loss from the disposition of property.
    (7) Treatment of certain real estate professionals.
    (i) Safe harbor.
    (ii) Definitions.
    (A) Participation.
    (B) Rental real estate activity.
    (iii) Effect of safe harbor.
    (8) Treatment of former passive activities.
    (i) Section 469(f)(1)(A) losses.
    (ii) Section 469(f)(1)(C) losses.
    (iii) Examples.
    (9) Treatment of section 469(g)(1) losses.
    (10) Treatment of section 707(c) guaranteed payments. [Reserved]
    (11) Treatment of section 736 payments. [Reserved]
    (12) Income and deductions from certain notional principal 
contracts. [Reserved]
    (13) Treatment of income or loss from REMIC residual interests. 
[Reserved]
    (h) Net operating loss.
    (1) In general.
    (2) Applicable portion of a net operating loss.
    (3) Section 1411 NOL amount of a net operating loss carried to and 
deducted in a taxable year.
    (4) Total section 1411 NOL amount of a net operating loss deduction.
    (5) Examples.
    (i) Effective/applicability date.

        Sec.  1.1411-5 Trades and Businesses to Which Tax Applies

    (a) In general.
    (b) Passive activity.
    (1) In general.
    (2) Application of income recharacterization rules.
    (i) Income and gain recharacterization.
    (ii) Gain recharacterization.
    (iii) Exception for certain portfolio recharacterizations.
    (3) Examples.
    (c) Trading in financial instruments or commodities.
    (1) Definition of financial instruments.
    (2) Definition of commodities.
    (d) Effective/applicability date.

  Sec.  1.1411-6 Income on Investment of Working Capital Subject to Tax

    (a) General rule.
    (b) Example.
    (c) Effective/applicability date.

Sec.  1.1411-7 Exception for Dispositions of Certain Active Interests in 
               Partnerships and S Corporations [Reserved]

     Sec.  1.1411-8 Exception for Distributions From Qualified Plans

    (a) General rule.
    (b) Rules relating to distributions.
    (1) Actual distributions.
    (2) Amounts treated as distributed.
    (3) Amounts includible in gross income.
    (4) Amounts related to employer securities.
    (i) Dividends related to employer securities.
    (ii) Amounts related to the net unrealized appreciation in employer 
securities.
    (c) Effective/applicability date.

           Sec.  1.1411-9 Exception for Self-Employment Income

    (a) General rule.
    (b) Special rule for traders.
    (c) Examples.
    (d) Effective/applicability date.

  Sec.  1.1411-10 Controlled Foreign Corporations and Passive Foreign 
                          Investment Companies

    (a) In general.

[[Page 61]]

    (b) Amounts derived from a trade or business described in Sec.  
1.1411-5.
    (1) In general.
    (2) Coordination rule for changes in trade or business status.
    (c) Calculation of net investment income.
    (1) Dividends.
    (i) Distributions of previously taxed earnings and profits.
    (A) Rules when an election under paragraph (g) of this section is 
not in effect with respect to the shareholder.
    (1) General rule.
    (2) Exception for distributions attributable to earnings and profits 
previously taken into account for purposes of section 1411.
    (B) Rule when an election under paragraph (g) of this section is in 
effect with respect to the shareholder.
    (C) Special rule for certain distributions related to 2013 taxable 
years.
    (1) Scope.
    (2) Rule.
    (3) Ordering rule.
    (ii) Excess distributions that constitute dividends.
    (2) Net gain.
    (i) Gains treated as excess distributions.
    (ii) Inclusions and deductions with respect to section 1296 mark to 
market elections.
    (iii) Gain or loss attributable to the disposition of stock of CFCs 
and QEFs.
    (iv) Gain or loss attributable to the disposition of interests in 
domestic partnerships or S corporations that own directly or indirectly 
stock of CFCs or QEFs.
    (3) Application of section 1248.
    (4) Amounts distributed by an estate or trust.
    (5) Properly allocable deductions.
    (i) General rule.
    (ii) Additional rules.
    (d) Conforming basis adjustments.
    (1) Basis adjustments under sections 961 and 1293.
    (i) Stock held by individuals, estates, or trusts.
    (ii) Stock held by domestic partnerships or S corporations.
    (A) Rule when an election under paragraph (g) of this section is not 
in effect.
    (B) Rules when an election under paragraph (g) of this section is in 
effect.
    (2) Special rules for partners that own interests in domestic 
partnerships that own directly or indirectly stock of CFCs or QEFs.
    (3) Special rules for S corporation shareholders that own interests 
in S corporations that own directly or indirectly stock of CFCs or QEFs.
    (4) Special rules for participants in common trust funds.
    (e) Conforming adjustments to modified adjusted gross income and 
adjusted gross income.
    (1) Individuals.
    (2) Estates and trusts.
    (f) Application to estates and trusts.
    (g) Election with respect to CFCs and QEFs.
    (1) Effect of election.
    (2) Years to which election applies.
    (i) In general.
    (ii) Termination of interest in CFC or QEF.
    (iii) Termination of partnership.
    (3) Who may make the election.
    (4) Time and manner for making the election.
    (i) Individuals, estates, and trusts.
    (A) General rule.
    (B) Special rule for charitable remainder trusts (CRTs).
    (ii) Certain domestic passthrough entities.
    (iii) Taxable years that begin before January 1, 2014.
    (A) Individuals, estates, or trusts.
    (B) Certain domestic passthrough entities.
    (iv) Time for making election.
    (h) Examples.
    (i) Effective/applicability date.

[T.D. 9644, 78 FR 72422, Dec. 2, 2013, as amended at 79 FR 18160, Apr. 
1, 2014]



Sec.  1.1411-1  General rules.

    (a) General rule. Except as otherwise provided, all Internal Revenue 
Code (Code) provisions that apply for chapter 1 purposes in determining 
taxable income (as defined in section 63(a)) of a taxpayer also apply in 
determining the tax imposed by section 1411.
    (b) Adjusted gross income. All references to an individual's 
adjusted gross income are treated as references to adjusted gross income 
as defined in section 62, and all references to an estate's or trust's 
adjusted gross income are treated as references to adjusted gross income 
as defined in section 67(e). However, there may be additional 
adjustments to adjusted gross income because of investments in 
controlled foreign corporations (CFCs) or passive foreign investment 
companies (PFICs). See Sec.  1.1411-10(e).
    (c) Effect of section 1411 and the regulations thereunder for other 
purposes. The inclusion or exclusion of items of income, gain, loss, or 
deduction in determining net investment income for purposes of section 
1411, and the assignment of items of income, gain, loss, or deduction to 
a particular category of net investment income under section 
1411(c)(1)(A), does not affect the treatment of any item of income, 
gain, loss, or deduction under any provision of the Code other than 
section 1411.

[[Page 62]]

    (d) Definitions. The following definitions apply for purposes of 
calculating net investment income under section 1411 and the regulations 
thereunder--
    (1) The term gross income from annuities under section 1411(c)(1)(A) 
includes the amount received as an annuity under an annuity, endowment, 
or life insurance contract that is includible in gross income as a 
result of the application of section 72(a) and section 72(b), and an 
amount not received as an annuity under an annuity contract that is 
includible in gross income under section 72(e). In the case of a sale of 
an annuity, to the extent the sales price of the annuity does not exceed 
its surrender value, the gain recognized would be treated as gross 
income from an annuity within the meaning of section 1411(c)(1)(A)(i) 
and Sec.  1.1411-4(a)(1)(i). However, if the sales price of the annuity 
exceeds its surrender value, the seller would treat the gain equal to 
the difference between the basis in the annuity and the surrender value 
as gross income from an annuity described in section 1411(c)(1)(A)(i) 
and Sec.  1.1411-4(a)(1)(i) and the excess of the sales price over the 
surrender value as gain from the disposition of property included in 
section 1411(c)(1)(A)(iii) and Sec.  1.1411-4(a)(1)(iii). The term gross 
income from annuities does not include amounts paid in consideration for 
services rendered. For example, distributions from a foreign retirement 
plan that are paid in the form of an annuity and include investment 
income that was earned by the retirement plan does not constitute income 
from an annuity within the meaning of section 1411(c)(1)(A)(i).
    (2) The term controlled foreign corporation (CFC) is as defined in 
section 953(c)(1)(B) or 957(a).
    (3) The term gross income from dividends includes any item treated 
as a dividend for purposes of chapter 1. See also Sec.  1.1411-10 for 
additional amounts that constitute gross income from dividends. The term 
gross income from dividends includes, but is not limited to, amounts 
treated as dividends--
    (i) Pursuant to subchapter C that are included in gross income 
(including constructive dividends);
    (ii) Pursuant to section 1248(a), other than as provided in Sec.  
1.1411-10;
    (iii) Pursuant to Sec.  1.367(b)-2(e)(2);
    (iv) Pursuant to section 1368(c)(2); and
    (v) Substitute dividends that represent payments made to the 
transferor of a security in a securities lending transaction or a sale-
repurchase transaction.
    (4) The term excluded income means:
    (i) Items of income excluded from gross income in chapter 1. For 
example, interest on state and local bonds excluded from gross income 
under section 103 and gain from the sale of a principal residence 
excluded from gross income under section 121.
    (ii) Items of income not included in net investment income, as 
determined under Sec. Sec.  1.1411-4 and 1.1411-10. For example, wages, 
unemployment compensation, Alaska Permanent Fund Dividends, alimony, and 
Social Security Benefits.
    (iii) Items of gross income and net gain specifically excluded by 
section 1411, the regulations thereunder, or other guidance published in 
the Internal Revenue Bulletin. For example, gains from the disposition 
of property used in a trade of business not described in section 
1411(c)(2) under Sec.  1.1411-4(d)(4)(i), distributions from certain 
Qualified Plans described in section 1411(c)(5) and Sec.  1.1411-8, 
income taken into account in determining self-employment income that is 
subject to tax under section 1401(b) described in section 1411(c)(6) and 
Sec.  1.1411-9, and section 951(a) inclusions from a CFC for which a 
Sec.  1.1411-10(g) election is not in effect.
    (5) The term individual means any natural person.
    (6) The term gross income from interest includes any item treated as 
interest income for purposes of chapter 1 and substitute interest that 
represents payments made to the transferor of a security in a securities 
lending transaction or a sale-repurchase transaction.
    (7) The term married and married taxpayer has the same meaning as in 
section 7703.
    (8) The term net investment income (NII) means net investment income 
as defined in section 1411(c) and Sec.  1.1411-4, as adjusted pursuant 
to the rules described in Sec.  1.1411-10(c).

[[Page 63]]

    (9) The term passive foreign investment company (PFIC) is as defined 
in section 1297(a).
    (10) The term gross income from rents includes amounts paid or to be 
paid principally for the use of (or the right to use) tangible property.
    (11) The term gross income from royalties includes amounts received 
from mineral, oil, and gas royalties, and amounts received for the 
privilege of using patents, copyrights, secret processes and formulas, 
goodwill, trademarks, tradebrands, franchises, and other like property.
    (12) The term trade or business refers to a trade or business within 
the meaning of section 162.
    (13) The term United States person is as defined in section 
7701(a)(30).
    (14) The term United States shareholder is as defined in section 
951(b).
    (e) Disallowance of certain credits against the section 1411 tax. 
Amounts that may be credited against only the tax imposed by chapter 1 
of the Code may not be credited against the section 1411 tax imposed by 
chapter 2A of the Code unless specifically provided in the Code. For 
example, the foreign income, war profits, and excess profits taxes that 
are allowed as a foreign tax credit by section 27(a), section 642(a), 
and section 901, respectively, are not allowed as a credit against the 
section 1411 tax.
    (f) Application to taxable years beginning before January 1, 2014--
(1) Retroactive application of regulations. Taxpayers that are subject 
to section 1411, and any other taxpayer to which these regulations may 
apply (such as partnerships and S corporations), may apply Sec. Sec.  
1.1411-1 through 1.1411-10 (including the ability to make any 
election(s) contained therein) in any taxable year that begins after 
December 31, 2012, but before January 1, 2014, for which the period of 
limitation under section 6501 has not expired.
    (2) Reliance and transitional rules. For taxable years beginning 
before January 1, 2014, the Internal Revenue Service will not challenge 
a taxpayer's computation of tax under section 1411 if the taxpayer has 
made a reasonable, good faith effort to comply with the requirements of 
section 1411. For example, a taxpayer's compliance with the provisions 
of the proposed and final regulations under section 1411 (REG-130507-11 
or REG-130843-13), generally, will be considered a reasonable, good 
faith effort to comply with the requirements of section 1411 if reliance 
on such regulation projects under section 1411 are applied in their 
entirety, and the taxpayer makes reasonable adjustments to ensure that 
their section 1411 tax liability in the taxable years beginning after 
December 31, 2013, is not inappropriately distorted by the positions 
taken in taxable years beginning after December 31, 2012, but before 
January 1, 2014. A similar rule applies to any other taxpayer to which 
these regulations may apply (such as partnerships and S corporations).
    (g) Effective/applicability date. This section applies to taxable 
years beginning after December 31, 2013. However, taxpayers may apply 
this section to taxable years beginning after December 31, 2012, in 
accordance with paragraph (f) of this section.

[T.D. 9644, 78 FR 72424, Dec. 2, 2013]



Sec.  1.1411-2  Application to individuals.

    (a) Individual to whom tax applies--(1) In general. Section 1411 
applies to an individual who is a citizen or resident of the United 
States (within the meaning of section 7701(a)(30)(A)). Section 1411 does 
not apply to nonresident alien individuals (within the meaning of 
section 7701(b)(1)(B)). See paragraph (a)(2)(vi) of this section for 
special rules regarding bona fide residents of United States 
territories.
    (2) Special rules--(i) Dual resident individuals treated as 
residents of a foreign country under an income tax treaty. A dual 
resident taxpayer (as defined in Sec.  301.7701(b)-7(a)(1)) who 
determines that he or she is a resident of a foreign country for treaty 
purposes pursuant to an income tax treaty between the United States and 
the foreign country and who claims benefits of the treaty as a 
nonresident of the United States will be treated as a nonresident alien 
of the United States for purposes of paragraph (a)(1) of this section.
    (ii) Dual-status resident aliens. A dual-status individual who is a 
resident of the United States for a portion of a taxable year and a 
nonresident alien for the other portion of the taxable year will not be 
subject to section 1411

[[Page 64]]

with respect to the portion of the year for which that individual is 
treated as a nonresident alien. The only income the individual must take 
into account for purposes of section 1411 is the income he or she 
receives during the portion of the year for which he or she is treated 
as a resident of the United States. The threshold amount under paragraph 
(d)(1) of this section applies.
    (iii) Joint returns in the case of a nonresident alien individual 
married to a United States citizen or resident--(A) Default treatment. 
In the case of a United States citizen or resident who is married to a 
nonresident alien individual, the spouses will be treated as married 
filing separately for purposes of section 1411. For purposes of 
calculating the tax imposed under section 1411(a)(1), the United States 
citizen or resident spouse will be subject to the threshold amount for a 
married taxpayer filing a separate return in paragraph (d)(1)(ii) of 
this section, and the nonresident alien spouse will not be subject to 
tax under section 1411. In accordance with the rules for married 
individuals filing separate returns, the spouse that is a United States 
citizen or resident must determine his or her own net investment income 
and modified adjusted gross income.
    (B) Taxpayer election. Married taxpayers who file a joint Federal 
income tax return pursuant to a section 6013(g) election for purposes of 
chapter 1 and chapter 24 also may elect to be treated as making a 
section 6013(g) election for purposes of chapter 2A (relating to the tax 
imposed by section 1411).
    (1) Effect of election. For purposes of calculating the tax imposed 
under section 1411(a)(1), the effect of an election under section 
6013(g) is to include the combined income of the United States citizen 
or resident spouse and the nonresident spouse in the section 1411(a)(1) 
calculation and to apply the threshold amount for a taxpayer making a 
joint return as set out in paragraph (d)(1)(i) of this section.
    (2) Procedural requirements for making election. Taxpayers with a 
section 6013(g) election in effect for chapter 1 and chapter 24 purposes 
for any taxable year beginning after December 31, 2012, or taxpayers 
making a section 6013(g) election for chapter 1 and chapter 24 purposes 
in any taxable year beginning after December 31, 2012, who want to apply 
their section 6013(g) election for purposes of chapter 2A must make the 
election for the first taxable year beginning after December 31, 2013, 
in which the United States taxpayer is subject to tax under section 
1411. The determination of whether the United States taxpayer is subject 
to tax under section 1411 is made without regard to the effect of the 
section 6013(g) election described in paragraph (a)(2)(iii)(B) of this 
section. The election, if made, must be made in the manner prescribed by 
forms, instructions, or in other guidance on an original or amended 
return for the taxable year for which the election is made. An election 
can be made on an amended return only if the taxable year for which the 
election is made, and all taxable years that are affected by the 
election, are not closed by the period of limitations on assessments 
under section 6501. Further, once made, the duration and termination of 
the section 6013(g) election for chapter 2A is governed by the rules of 
section 6013(g)(2) through (g)(6) and the regulations thereunder.
    (3) Ineffective elections. In the event a taxpayer makes an election 
described in paragraph (a)(2)(iii)(B) of this section and subsequently 
determines that such taxpayer does not meet the criteria for making such 
election in such tax year described in paragraph (a)(2)(iii)(B)(2) of 
this section, then such original election will have no effect for that 
year and all future years. In such a case, the taxpayer should make 
appropriate adjustments to properly reflect the ineffective election. 
However, notwithstanding the previous sentence, if a taxpayer meets the 
criteria for the same election in a subsequent year, such taxpayer is 
deemed to treat such original election as being made in that subsequent 
year unless the taxpayer files (or amends) the return for such 
subsequent year to report the taxpayer's net investment income tax 
without the original election. Furthermore, this paragraph 
(a)(2)(iii)(B)(3) shall not apply if a taxpayer does not meet the 
criteria described in paragraph (a)(2)(iii)(B)(2) of this section for 
making such election in such tax year solely as a result of

[[Page 65]]

the carryback of a net operating loss pursuant to section 172.
    (iv) Joint returns for a year in which nonresident alien married to 
a United States citizen or resident becomes a United States resident--
(A) Default treatment. In the case of a United States citizen or 
resident who is married to an individual who is a nonresident alien 
individual at the beginning of any taxable year, but is a United States 
resident at the close of such taxable year, each spouse will be treated 
as married filing separately for the entire year for purposes of section 
1411. For purposes of calculating the tax imposed under section 
1411(a)(1), each spouse will be subject to the threshold amount for a 
married taxpayer filing a separate return in paragraph (d)(1)(ii) of 
this section. The spouse who becomes a United States resident during the 
tax year will be subject to section 1411 only with respect to income 
received for the portion of the year for which he or she is treated as a 
United States resident. Each spouse must determine his or her own net 
investment income and modified adjusted gross income.
    (B) Taxpayer election. Married taxpayers who file a joint Federal 
income tax return pursuant to a section 6013(h) election for purposes of 
chapter 1 and chapter 24 also may elect to be treated as making a 
section 6013(h) election for purposes of chapter 2A for such tax year.
    (1) Effect of election. For purposes of calculating the tax imposed 
under section 1411(a)(1), the effect of an election under section 
6013(h) is to include the combined income of the United States citizen 
or resident spouse and the dual-status resident spouse in the section 
1411(a)(1) calculation and to apply the threshold amount for a taxpayer 
making a joint return as set out in paragraph (d)(1)(i) of this section.
    (2) Procedural requirements for making election. Taxpayers who make 
a section 6013(h) election for purposes of chapter 1 and chapter 24 for 
any taxable year beginning after December 31, 2012, may elect to have 
their section 6013(h) election apply for purposes of chapter 2A. The 
election, if made, must be made in the manner prescribed by forms, 
instructions, or in other guidance on an original or amended return for 
the taxable year for which the election is made. An election can be made 
on an amended return only if the taxable year for which the election is 
made, and all taxable years that are affected by the election, are not 
closed by the period of limitations on assessments under section 6501. 
Further, in all cases, once made, the section 6013(h) election is 
governed by the rules of section 6013(h)(2) and the regulations 
thereunder.
    (iv) Grantor trusts. For rules regarding the treatment of owners of 
grantor trusts, see Sec.  1.1411-3(b)(1)(v).
    (v) Bankruptcy estates. A bankruptcy estate administered under 
chapter 7 (relating to liquidations) or chapter 11 (relating to 
reorganizations) of the Bankruptcy Code (Title 11 of the United States 
Code) of a debtor who is an individual is treated as a married taxpayer 
filing a separate return for purposes of section 1411. See Sec.  1.1411-
2(d)(1)(ii).
    (vi) Bona fide residents of United States territories--(A) 
Applicability. An individual who is a bona fide resident of a United 
States territory is subject to the tax imposed by section 1411(a)(1) 
only if the individual is required to file an income tax return with the 
United States upon application of section 931, 932, 933, or 935 and the 
regulations thereunder. With respect to an individual described in this 
paragraph (a)(2)(vi)(A), the amount excluded from gross income under 
section 931 or 933 and any deduction properly allocable or chargeable 
against amounts excluded from gross income under section 931 or 933, 
respectively, is not taken into account in computing modified adjusted 
gross income under paragraph (c) of this section or net investment 
income (within the meaning of Sec.  1.1411-1(d)).
    (B) Coordination with exception for nonresident aliens. An 
individual who is both a bona fide resident of a United States territory 
and a nonresident alien individual with respect to the United States is 
not subject to taxation under section 1411(a)(1).
    (C) Definitions. For purposes of this section--
    (1) Bona fide resident. The term bona fide resident has the meaning 
provided under section 937(a).

[[Page 66]]

    (2) United States territory. The term United States territory means 
American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the 
United States Virgin Islands.
    (b) Calculation of tax--(1) In general. In the case of an individual 
described in paragraph (a)(1) of this section, the tax imposed by 
section 1411(a)(1) for each taxable year is equal to 3.8 percent of the 
lesser of--
    (i) Net investment income for such taxable year; or
    (ii) The excess (if any) of--
    (A) The modified adjusted gross income (as defined in paragraph (c) 
of this section) for such taxable year; over
    (B) The threshold amount (as defined in paragraph (d) of this 
section).
    (2) Example. During Year 1 (a year in which section 1411 is in 
effect), A, an unmarried United States citizen, has modified adjusted 
gross income (as defined in paragraph (c) of this section) of $190,000, 
which includes $50,000 of net investment income. A has a zero tax 
imposed under section 1411 because the threshold amount for a single 
individual is $200,000 (as provided in paragraph (d)(1)(iii) of this 
section). If during Year 2, A has modified adjusted gross income of 
$220,000, which includes $50,000 of net investment income, then the 
individual has a section 1411 tax of $760 (3.8% multiplied by $20,000, 
the lesser of $50,000 net investment income or $20,000 excess of 
modified adjusted gross income over the threshold amount).
    (c) Modified adjusted gross income--(1) General rule. For purposes 
of section 1411, the term modified adjusted gross income means adjusted 
gross income increased by the excess of--
    (i) The amount excluded from gross income under section 911(a)(1); 
over
    (ii) The amount of any deductions (taken into account in computing 
adjusted gross income) or exclusions disallowed under section 911(d)(6) 
with respect to the amounts described in paragraph (c)(1)(i) of this 
section.
    (2) Rules with respect to CFCs and PFICs. Additional rules in Sec.  
1.1411-10(e)(1) apply to an individual that is a United States 
shareholder of a controlled foreign corporation (CFC) or that is a 
United States person that directly or indirectly owns an interest in a 
passive foreign investment company (PFIC).
    (d) Threshold amount--(1) In general. The term threshold amount 
means--
    (i) In the case of a taxpayer making a joint return under section 
6013 or a surviving spouse (as defined in section 2(a)), $250,000;
    (ii) In the case of a married taxpayer filing a separate return, 
$125,000; and
    (iii) In the case of any other individual, $200,000.
    (2) Taxable year of less than twelve months--(i) General rule. In 
the case of an individual who has a taxable year consisting of less than 
twelve months (short taxable year), the threshold amount under paragraph 
(d)(1) of this section is not reduced or prorated. For example, in the 
case of an unmarried decedent who dies on June 1, the threshold amount 
is $200,000 for the decedent's short taxable year that begins on January 
1 and ends on June 1.
    (ii) Change of annual accounting period. Notwithstanding paragraph 
(d)(2)(i) of this section, an individual who has a short taxable year 
resulting from a change of annual accounting period reduces the 
threshold amount to an amount that bears the same ratio to the full 
threshold amount provided under paragraph (d)(1) of this section as the 
number of months in the short taxable year bears to twelve.
    (e) Effective/applicability date. This section applies to taxable 
years beginning after December 31, 2013. However, taxpayers may apply 
this section to taxable years beginning after December 31, 2012, in 
accordance with Sec.  1.1411-1(f).

[T.D. 9644, 78 FR 72424, Dec. 2, 2013, as amended at 79 FR 18160, Apr. 
1, 2014]



Sec.  1.1411-3  Application to estates and trusts.

    (a) Estates and trusts to which tax applies--(1) In general--(i) 
General application. Section 1411 and the regulations thereunder apply 
to all estates and trusts that are subject to the provisions of part I 
of subchapter J of chapter 1 of subtitle A of the Internal Revenue Code, 
unless specifically exempted under paragraph (b) of this section.

[[Page 67]]

    (ii) Calculation of tax. The tax imposed by section 1411(a)(2) for 
each taxable year is equal to 3.8 percent of the lesser of--
    (A) The estate's or trust's undistributed net investment income for 
such taxable year; or
    (B) The excess (if any) of--
    (1) The estate's or trust's adjusted gross income (as defined in 
section 67(e) and as adjusted under Sec.  1.1411-10(e)(2), if 
applicable) for such taxable year; over
    (2) The dollar amount at which the highest tax bracket in section 
1(e) begins for such taxable year.
    (2) Taxable year of less than twelve months--(i) General rule. In 
the case of an estate or trust that has a taxable year consisting of 
less than twelve months (short taxable year), the dollar amount 
described in paragraph (a)(1)(ii)(B)(2) of this section is not reduced 
or prorated.
    (ii) Change of annual accounting period. Notwithstanding paragraph 
(a)(2)(i) of this section, an estate or trust that has a short taxable 
year resulting from a change of annual accounting period (but not from 
an individual's death) reduces the dollar amount described in paragraph 
(a)(1)(ii)(B)(2) of this section to an amount that bears the same ratio 
to that dollar amount as the number of months in the short taxable year 
bears to twelve.
    (3) Rules with respect to CFCs and PFICs. Additional rules in Sec.  
1.1411-10 apply to an estate or trust that holds an interest in a 
controlled foreign corporation (CFC) or a passive foreign investment 
company (PFIC).
    (b) Application to certain trusts and estates--(1) Exception for 
certain trusts and estates. The following trusts are not subject to the 
tax imposed by section 1411:
    (i) A trust or decedent's estate all of the unexpired interests in 
which are devoted to one or more of the purposes described in section 
170(c)(2)(B).
    (ii) A trust exempt from tax under section 501.
    (iii) A charitable remainder trust described in section 664. 
However, see paragraph (d) of this section for special rules regarding 
the treatment of annuity or unitrust distributions from such a trust to 
persons subject to tax under section 1411.
    (iv) Any other trust, fund, or account that is statutorily exempt 
from taxes imposed in subtitle A. For example, see sections 220(e)(1), 
223(e)(1), 529(a), and 530(a).
    (v) A trust, or a portion thereof, that is treated as a grantor 
trust under subpart E of part I of subchapter J of chapter 1. However, 
in the case of any such trust or portion thereof, each item of income or 
deduction that is included in computing taxable income of a grantor or 
another person under section 671 is treated as if it had been received 
by, or paid directly to, the grantor or other person for purposes of 
calculating such person's net investment income.
    (vi) Electing Alaska Native Settlement Trusts subject to taxation 
under section 646.
    (vii) Cemetery Perpetual Care Funds to which section 642(i) applies.
    (viii) Foreign trusts (as defined in section 7701(a)(31)(B) and 
Sec.  301.7701-7(a)(2)) (but see Sec. Sec.  1.1411-3(e)(3)(ii) and 
1.1411-4(e)(1)(ii) for rules related to distributions from foreign 
trusts to United States beneficiaries).
    (ix) Foreign estates (as defined in section 7701(a)(31)(A)) (but see 
Sec.  1.1411-3(e)(3)(ii) for rules related to distributions from foreign 
estates to United States beneficiaries).
    (2) Special rules for certain taxable trusts and estates--(i) 
Qualified funeral trusts. For purposes of the calculation of any tax 
imposed by section 1411, section 1411 and the regulations thereunder are 
applied to each qualified funeral trust (within the meaning of section 
685) by treating each beneficiary's interest in each such trust as a 
separate trust.
    (ii) Bankruptcy estates. A bankruptcy estate in which the debtor is 
an individual is treated as a married taxpayer filing a separate return 
for purposes of section 1411. See Sec.  1.1411-2(a)(2)(v) and 
(d)(1)(ii).
    (c) Application to electing small business trusts (ESBTs)--(1) 
General application. The S portion and non-S portion (as defined in 
Sec.  1.641(c)-1(b)(2) and (3), respectively) of a trust that has made 
an ESBT election under section 1361(e)(3) and Sec.  1.1361-1(m)(2) are 
treated

[[Page 68]]

as separate trusts for purposes of the computation of undistributed net 
investment income in the manner described in paragraph (e) of this 
section, but are treated as a single trust for purposes of determining 
the amount subject to tax under section 1411. If a grantor or another 
person is treated as the owner of a portion of the ESBT, the items of 
income and deduction attributable to the grantor portion (as defined in 
Sec.  1.641(c)-1(b)(1)) are included in the grantor's calculation of net 
investment income and are not included in the ESBT's computation of tax 
described in paragraph (c)(1)(ii) of this section.
    (2) Computation of tax. This paragraph (c)(2) provides the method 
for an ESBT to compute the tax under section 1411.
    (i) Step one. The S portion and non-S portion computes each 
portion's undistributed net investment income as separate trusts in the 
manner described in paragraph (e) of this section and then combine these 
amounts to calculate the ESBT's undistributed net investment income.
    (ii) Step two. The ESBT calculates its adjusted gross income (as 
defined in paragraph (a)(1)(ii)(B)(1) of this section). The ESBT's 
adjusted gross income is the adjusted gross income of the non-S portion, 
increased or decreased by the net income or net loss of the S portion, 
after taking into account all deductions, carryovers, and loss 
limitations applicable to the S portion, as a single item of ordinary 
income (or ordinary loss).
    (iii) Step three. The ESBT pays tax on the lesser of--
    (A) The ESBT's total undistributed net investment income; or
    (B) The excess of the ESBT's adjusted gross income (as calculated in 
paragraph (c)(2)(ii) of this section) over the dollar amount at which 
the highest tax bracket in section 1(e) begins for the taxable year.
    (3) Example. (i) In Year 1 (a year that section 1411 is in effect), 
the non-S portion of Trust, an ESBT, has dividend income of $15,000, 
interest income of $10,000, and capital loss of $5,000. Trust's S 
portion has net rental income of $21,000 and a capital gain of $7,000. 
The Trustee's annual fee of $1,000 is allocated 60% to the non-S portion 
and 40% to the S portion. Trust makes a distribution from income to a 
single beneficiary of $9,000.
    (ii) Step one. (A) Trust must compute the undistributed net 
investment income for the S portion and non-S portion in the manner 
described in paragraph (c) of this section.
    The undistributed net investment income for the S portion is $27,600 
and is determined as follows:

Net Rental Income...........................................    $21,000
Capital Gain................................................      7,000
Trustee Annual Fee..........................................       (400)
                                                             -----------
  Total S portion undistributed net investment income.......     27,600
 

    (B) The undistributed net investment income for the non-S portion is 
$12,400 and is determined as follows:

Dividend Income.............................................    $15,000
Interest Income.............................................     10,000
Deductible Capital Loss.....................................     (3,000)
Trustee Annual Fee..........................................       (600)
Distributable net income distribution.......................     (9,000)
                                                             -----------
  Total non-S portion undistributed net investment income...     12,400
 

    (C) Trust combines the undistributed net investment income of the S 
portion and non-S portion from (ii)(A) and (B) to arrive at Trust's 
combined undistributed net investment income.

S portion's undistributed net investment income.............    $27,600
Non-S portion's undistributed net investment income.........     12,400
                                                             -----------
  Combined undistributed net investment income..............     40,000
 

    (iii) Step two. (A) The ESBT calculates its adjusted gross income. 
Pursuant to paragraph (c)(2)(ii) of this section, the ESBT's adjusted 
gross income is the non-S portion's adjusted gross income increased or 
decreased by the net income or net loss of the S portion.
    (B) The adjusted gross income for the ESBT is $40,000 and is 
determined as follows:

Dividend Income.............................................    $15,000
Interest Income.............................................     10,000
Deductible Capital Loss.....................................     (3,000)
Trustee Annual Fee..........................................       (600)
Distributable net income distribution.......................     (9,000)
S Portion Income............................................     27,600
                                                             -----------
  Adjusted gross income.....................................     40,000
 


[[Page 69]]

    (C) The S portion's single item of ordinary income used in the 
ESBT's adjusted gross income calculation is $27,600. This item of income 
is determined by starting with net rental income of $21,000 and capital 
gain of $7,000 and reducing it by the S portion's $400 share of the 
annual trustee fee.
    (iv) Step three. Trust pays tax on the lesser of--
    (A) The combined undistributed net investment income ($40,000); or
    (B) The excess of adjusted gross income ($40,000) over the dollar 
amount at which the highest tax bracket in section 1(e) applicable to a 
trust begins for the taxable year.
    (d) Application to charitable remainder trusts (CRTs)--(1) 
Operational rules--(i) Treatment of annuity or unitrust distributions. 
If one or more items of net investment income comprise all or part of an 
annuity or unitrust distribution from a CRT, such items retain their 
character as net investment income in the hands of the recipient of that 
annuity or unitrust distribution.
    (ii) Apportionment among multiple beneficiaries. In the case of a 
CRT with more than one annuity or unitrust beneficiary, the net 
investment income is apportioned among such beneficiaries based on their 
respective shares of the total annuity or unitrust amount paid by the 
CRT for that taxable year.
    (iii) Accumulated net investment income. The accumulated net 
investment income of a CRT is the total amount of net investment income 
received by a CRT for all taxable years that begin after December 31, 
2012, less the total amount of net investment income distributed for all 
prior taxable years of the trust that begin after December 31, 2012.
    (2) Application of Section 664--(i) General rule. The Federal income 
tax rate of the item of net investment income, to be used to determine 
the proper classification of that item within the appropriate income 
category as described in Sec.  1.664-1(d)(1)(i)(b), is the sum of the 
income tax rate applicable to that item under chapter 1 and the tax rate 
under section 1411. Thus, the accumulated net investment income and 
excluded income (as defined in Sec.  1.1411-1(d)(4)) of a CRT in the 
same income category constitute separate classes of income within that 
category as described in Sec.  1.664-1(d)(1)(i)(b).
    (ii) Special rules for CRTs with income from CFCs or PFICs. 
[Reserved]
    (iii) Examples. The following examples illustrate the provisions of 
this paragraph (d)(2).

    Example 1. (i) In 2009, A formed CRT as a charitable remainder 
annuity trust. The trust document requires an annual annuity payment of 
$50,000 to A for 15 years. For purposes of this example, assume that CRT 
is a valid charitable remainder trust under section 664 and has not 
received any unrelated business taxable income during any taxable year.
    (ii) As of January 1, 2013, CRT has the following items of 
undistributed income within its Sec.  1.664-1(d)(1) categories and 
classes:

------------------------------------------------------------------------
                                                     Tax rate
            Category                   Class        (percent)    Amount
------------------------------------------------------------------------
Ordinary Income................  Interest.........       39.6     $4,000
                                 Net Rental Income       39.6      8,000
                                 Non-Qualified           39.6      2,000
                                  Dividend Income.
                                 Qualified               20.0     10,000
                                  Dividend Income.
Capital Gain...................  Short-Term.......       39.6     39,000
                                 Unrecaptured            25.0      1,000
                                  Section 1250
                                  Gain.
                                 Long-Term........       20.0    560,000
Other Income...................  .................  .........       None
    Total undistributed income   .................  .........    624,000
     as of January 1, 2013.
------------------------------------------------------------------------


Pursuant to Sec.  1.1411-3(d)(1)(iii), none of the $624,000 of 
undistributed income is accumulated net investment income (ANII) because 
none of it was received by CRT after December 31, 2012. Thus, the entire 
$624,000 of undistributed income is excluded income (as defined in Sec.  
1.1411-1(d)(4)).
    (iii) During 2013, CRT receives $7,000 of interest income, $9,000 of 
qualified dividend income, $4,000 of short-term capital gain, and 
$11,000 of long-term capital gain. Prior to the 2013 distribution of 
$50,000 to A, CRT has the following items of undistributed income

[[Page 70]]

within its Sec.  1.664-1(d)(1) categories and classes after the 
application of paragraph (d)(2) of this section:

----------------------------------------------------------------------------------------------------------------
                                                                                             Tax rate
               Category                           Class                 Excluded/ANII       (percent)    Amount
----------------------------------------------------------------------------------------------------------------
Ordinary Income.......................  Interest................  NII.....................       43.4     $7,000
                                        Interest................  Excluded................       39.6      4,000
                                        Net Rental Income.......  Excluded................       39.6      8,000
                                        Non-Qualified Dividend    Excluded................       39.6      2,000
                                         Income.
                                        Qualified Dividend        NII.....................       23.8      9,000
                                         Income.
                                        Qualified Dividend        Excluded................       20.0     10,000
                                         Income.
Capital Gain..........................  Short-Term..............  NII.....................       43.4      4,000
                                        Short-Term..............  Excluded................       39.6     39,000
                                        Unrecaptured Section      Excluded................       25.0      1,000
                                         1250 Gain.
                                        Long-Term...............  NII.....................       23.8     11,000
                                        Long-Term...............  Excluded................       20.0    560,000
Other Income..........................  ........................  ........................  .........       None
----------------------------------------------------------------------------------------------------------------

    (iv) The $50,000 distribution to A for 2013 will include the 
following amounts:

----------------------------------------------------------------------------------------------------------------
                                                                                             Tax rate
               Category                           Class                 Excluded/ANII       (percent)    Amount
----------------------------------------------------------------------------------------------------------------
Ordinary Income.......................  Interest................  NII.....................       43.4     $7,000
                                        Interest................  Excluded................       39.6      4,000
                                        Net Rental Income.......  Excluded................       39.6      8,000
                                        Non-Qualified Dividend    Excluded................       39.6      2,000
                                         Income.
                                        Qualified Dividend        NII.....................       23.8      9,000
                                         Income.
                                        Qualified Dividend        Excluded................       20.0     10,000
                                         Income.
Capital Gain..........................  Short-Term..............  NII.....................       43.4      4,000
                                        Short-Term..............  Excluded................       39.6      6,000
                                        Unrecaptured Section      Excluded................       25.0       None
                                         1250 Gain.
                                        Long-Term...............  NII.....................       23.8       None
                                        Long-Term...............  Excluded................       20.0       None
----------------------------------------------------------------------------------------------------------------

    The amount included in A's 2013 net investment income is $20,000. 
This amount is comprised of $7,000 of interest income, $9,000 of 
qualified dividend income, and $4,000 of short-term capital gain.
    (v) As a result, as of January 1, 2014, CRT has the following items 
of undistributed income within its Sec.  1.664-1(d)(1) categories and 
classes:

----------------------------------------------------------------------------------------------------------------
                                                                                             Tax rate
               Category                           Class                 Excluded/ANII       (percent)    Amount
----------------------------------------------------------------------------------------------------------------
Ordinary Income.......................  Interest................  ........................  .........       None
                                        Net Rental Income.......  ........................  .........       None
                                        Non-Qualified Dividend    ........................  .........       None
                                         Income.
                                        Qualified Dividend        ........................  .........       None
                                         Income.
Capital Gain..........................  Short-Term..............  Excluded................       39.6    $33,000
                                        Unrecaptured Section      Excluded................       25.0      1,000
                                         1250 Gain.
                                        Long-Term...............  ANII....................       23.8     11,000
                                        Long-Term...............  Excluded................       20.0    560,000
Other Income..........................  ........................  ........................  .........       None
----------------------------------------------------------------------------------------------------------------

    Example 2. [Reserved]

    (3) Elective simplified method. [Reserved]
    (e) Calculation of undistributed net investment income--(1) In 
general. This paragraph (e) provides special rules for the computation 
of certain deductions and for the allocation of net investment income 
between an estate or trust and its beneficiaries. Generally, an estate's 
or trust's net investment income is calculated in the same manner as 
that of an individual. See Sec.  1.1411-10(c) for special rules 
regarding CFCs, PFICs, and estates and trusts holding interests in such 
entities.
    (2) Undistributed net investment income. An estate's or trust's 
undistributed net investment income is the estate's or trust's net 
investment income reduced by distributions of net investment income to 
beneficiaries and by

[[Page 71]]

deductions under section 642(c) in the manner described in paragraphs 
(e)(3) and (e)(4) of this section.
    (3) Distributions of net investment income to beneficiaries. (i) In 
computing the estate's or trust's undistributed net investment income, 
net investment income is reduced by distributions of net investment 
income made to beneficiaries. The deduction allowed under this paragraph 
(e)(3) is limited to the lesser of the amount deductible to the estate 
or trust under section 651 or section 661, as applicable, or the net 
investment income of the estate or trust. In the case of a deduction 
under section 651 or section 661 that consists of both net investment 
income and excluded income (as defined in Sec.  1.1411-1(d)(4)), the 
distribution must be allocated between net investment income and 
excluded income in a manner similar to Sec.  1.661(b)-1 as if net 
investment income constituted gross income and excluded income 
constituted amounts not includible in gross income. See Sec.  1.661(c)-1 
and Example 1 in paragraph (e)(5) of this section.
    (ii) If one or more items of net investment income comprise all or 
part of a distribution for which a deduction is allowed under paragraph 
(e)(3)(i) of this section, such items retain their character as net 
investment income under section 652(b) or section 662(b), as applicable, 
for purposes of computing net investment income of the recipient of the 
distribution who is subject to tax under section 1411. The provisions of 
this paragraph (e)(3)(ii) also apply to distributions to United States 
beneficiaries of current year income described in section 652 or section 
662, as applicable, from foreign estates and foreign nongrantor trusts.
    (4) Deduction for amounts paid or permanently set aside for a 
charitable purpose. In computing the estate's or trust's undistributed 
net investment income, the estate or trust is allowed a deduction for 
amounts of net investment income that are allocated to amounts allowable 
under section 642(c). In the case of an estate or trust that has items 
of income consisting of both net investment income and excluded income, 
the allowable deduction under this paragraph (e)(4) must be allocated 
between net investment income and excluded income in accordance with 
Sec.  1.642(c)-2(b) as if net investment income constituted gross income 
and excluded income constituted amounts not includible in gross income. 
For an estate or trust with deductions under both sections 642(c) and 
661, see Sec.  1.662(b)-2 and Example 2 in paragraph (e)(5) of this 
section.
    (5) Examples. The following examples illustrate the provisions of 
this paragraph (e). In each example, Year 1 is a year in which section 
1411 is in effect and the taxpayer is not a foreign estate or trust:

    Example 1. Calculation of undistributed net investment income (with 
no deduction under section 642(c)). (i) In Year 1, Trust has dividend 
income of $15,000, interest income of $10,000, capital gain of $5,000, 
and $75,000 of taxable income relating to a distribution from an 
individual retirement account (as defined under section 408). Trust has 
no expenses. Trust distributes $10,000 of its current year trust 
accounting income to A, a beneficiary of Trust.
    (ii) Trust's distributable net income is $100,000 ($15,000 in 
dividends plus $10,000 in interest plus $75,000 of taxable income from 
an individual retirement account), from which the $10,000 distribution 
to A is paid. Trust's deduction under section 661 is $10,000. Under 
Sec.  1.662(b)-1, the deduction reduces each class of income comprising 
distributable net income on a proportional basis. The $10,000 
distribution equals 10% of distributable net income ($10,000 divided by 
$100,000). Therefore, the distribution consists of dividend income of 
$1,500, interest income of $1,000, and ordinary income attributable to 
the individual retirement account of $7,500. Because the $5,000 of 
capital gain allocated to principal for trust accounting purposes did 
not enter into distributable net income, no portion of that amount is 
included in the $10,000 distribution, nor does it qualify for the 
deduction under section 661.
    (iii) Trust's net investment income is $30,000 ($15,000 in dividends 
plus $10,000 in interest plus $5,000 in capital gain). Trust's $75,000 
of taxable income attributable to the individual retirement account is 
excluded income under Sec.  1.1411-1(d)(4). Trust's undistributed net 
investment income under paragraph (e)(2) of this section is $27,500, 
which is Trust's net investment income ($30,000) less the amount of 
dividend income ($1,500) and interest income ($1,000) distributed to A. 
The $27,500 of undistributed net investment income is comprised of the 
capital gain allocated to principal ($5,000), the remaining 
undistributed dividend income ($13,500), and the remaining undistributed 
interest income ($9,000).

[[Page 72]]

    (iv) Under paragraph (e)(3) of this section and pursuant to Sec.  
1.1411-4(a)(1), A's net investment income includes dividend income of 
$1,500 and interest income of $1,000, but does not include the $7,500 of 
ordinary income attributable to the individual retirement account 
because it is excluded from net investment income under Sec.  1.1411-8.
    Example 2. Calculation of undistributed net investment income (with 
deduction under section 642(c)). (i) Same facts as Example 1, except 
Trust is required to distribute $30,000 to A. In addition, Trust has a 
$10,000 deduction under section 642(c) (deduction for amounts paid for a 
charitable purpose). Trust also makes an additional discretionary 
distribution of $20,000 to B, a beneficiary of Trust. As in Example 1, 
Trust's net investment income is $30,000 ($15,000 in dividends plus 
$10,000 in interest plus $5,000 in capital gain). In accordance with 
Sec. Sec.  1.661(b)-2 and 1.662(b)-2, the items of income must be 
allocated between the mandatory distribution to A, the discretionary 
distribution to B, and the $10,000 distribution to a charity.
    (ii) For purposes of the mandatory distribution to A, Trust's 
distributable net income is $100,000. See Sec.  1.662(b)-2, Example 
1(b). Trust's deduction under section 661 for the distribution to A is 
$30,000. Under Sec.  1.662(b)-1, the deduction reduces each class of 
income comprising distributable net income on a proportional basis. The 
$30,000 distribution equals 30% of distributable net income ($30,000 
divided by $100,000). Therefore, the distribution consists of dividend 
income of $4,500, interest income of $3,000, and ordinary income 
attributable to the individual retirement account of $22,500. A's 
mandatory distribution thus consists of $7,500 of net investment income 
and $22,500 of excluded income.
    (iii) Trust's remaining distributable net income is $70,000. Trust's 
remaining undistributed net investment income is $22,500. The $10,000 
deduction under section 642(c) is allocated in the same manner as the 
distribution to A, where the $10,000 distribution equals 10% of 
distributable net income ($10,000 divided by $100,000). For purposes of 
determining undistributed net investment income, Trust's net investment 
income is reduced by $2,500 under paragraph (e)(4) of this section 
(dividend income of $1,500, interest income of $1,000, but with no 
reduction for amounts attributable to the individual retirement account 
of $7,500).
    (iv) With respect to the discretionary distribution to B, Trust's 
remaining distributable net income is $60,000. Trust's remaining 
undistributed net investment income is $20,000. Trust's deduction under 
section 661 for the distribution to B is $20,000. The $20,000 
distribution equals 20% of distributable net income ($20,000 divided by 
$100,000). Therefore, the distribution consists of dividend income of 
$3,000, interest income of $2,000, and ordinary income attributable to 
the individual retirement account of $15,000. B's distribution consists 
of $5,000 of net investment income and $15,000 of excluded income.
    (v) Trust's undistributed net investment income is $15,000 after 
taking into account distribution deductions and section 642(c) in 
accordance with paragraphs (e)(3) and (e)(4) of this section, 
respectively. To arrive at Trust's undistributed net investment income 
of $15,000, Trust's net investment income of $30,000 is reduced by 
$7,500 of the mandatory distribution to A, $2,500 of the section 642(c) 
deduction, and $5,000 of the discretionary distribution to B. The 
undistributed net investment income consists of the remaining dividend 
income of $6,000 ($15,000 less $4,500 less $1,500 less $3,000), interest 
income of $4,000 ($10,000 less $1,000 less $3,000 less $2,000), and the 
$5,000 of undistributed capital gain.
    Example 3. Fiscal Year Estate. (i) D died in 2011. D's estate 
(Estate) filed its first return that established its fiscal year ending 
October 31, 2011. During Estate's fiscal year ending October 31, 2013, 
it earned $10,000 of interest, $1,000 of dividends, and $15,000 of 
short-term gains. The Estate distributed its interest and dividends to 
S, D's spouse and sole beneficiary, on a quarterly basis; the last 
quarter's payment for that taxable year was made to S on December 5, 
2013. Pursuant to Sec.  1.662(c)-1, S is deemed to have received the 
first three payments for that taxable year, regardless of the actual 
payment dates, on October 31, 2013, the last day of Estate's taxable 
year. Estate makes a timely section 663(b) election to treat the fourth 
quarter distribution to S as having been made on October 31, 2013, the 
last day of Estate's preceding taxable year. Accordingly, S is deemed to 
have received $10,000 of interest and $1,000 of dividends on October 31, 
2013.
    (ii) Because Estate's fiscal year ending October 31, 2013, began on 
November 1, 2012, the Estate is not subject to section 1411 on income 
received during that taxable year. Therefore, none of the income 
received by Estate during its fiscal year ending October 31, 2013, is 
net investment income. Pursuant to paragraph (e)(3)(ii) of this section, 
because none of the distributed interest or dividend income constituted 
net investment income to Estate, the $10,000 of interest and $1,000 of 
dividends that Estate distributed to S does not constitute net 
investment income to S.

    (f) Effective/applicability date. This section applies to taxable 
years beginning after December 31, 2013, except that paragraph (d) of 
this section applies to taxable years of CRTs that begin after December 
31, 2012. However, taxpayers other than CRTs may apply this section to 
taxable years beginning

[[Page 73]]

after December 31, 2012, in accordance with Sec.  1.1411-1(f).

[T.D. 9644, 78 FR 72424, Dec. 2, 2013, as amended at 79 FR 18160, Apr. 
1, 2014]



Sec.  1.1411-4  Definition of net investment income.

    (a) In general. For purposes of section 1411 and the regulations 
thereunder, net investment income means the excess (if any) of--
    (1) The sum of--
    (i) Gross income from interest, dividends, annuities, royalties, and 
rents, except to the extent excluded by the ordinary course of a trade 
or business exception described in paragraph (b) of this section;
    (ii) Other gross income derived from a trade or business described 
in Sec.  1.1411-5; and
    (iii) Net gain (to the extent taken into account in computing 
taxable income) attributable to the disposition of property, except to 
the extent excluded by the exception described in paragraph (d)(4)(i)(A) 
of this section for gain or loss attributable to property held in a 
trade or business not described in Sec.  1.1411-5; over
    (2) The deductions allowed by subtitle A that are properly allocable 
to such gross income or net gain (as determined in paragraph (f) of this 
section).
    (b) Ordinary course of a trade or business exception. Gross income 
described in paragraph (a)(1)(i) of this section is excluded from net 
investment income if it is derived in the ordinary course of a trade or 
business not described in Sec.  1.1411-5. See Sec.  1.1411-6 for rules 
regarding working capital. To determine whether gross income described 
in paragraph (a)(1)(i) of this section is derived in a trade or 
business, the following rules apply.
    (1) In the case of an individual, estate, or trust that owns or 
engages in a trade or business directly (or indirectly through ownership 
of an interest in an entity that is disregarded as an entity separate 
from its owner under Sec.  301.7701-3), the determination of whether 
gross income described in paragraph (a)(1)(i) of this section is derived 
in a trade or business is made at the individual, estate, or trust 
level.
    (2) In the case of an individual, estate, or trust that owns an 
interest in a passthrough entity (for example, a partnership or S 
corporation), and that entity is engaged in a trade or business, the 
determination of whether gross income described in paragraph (a)(1)(i) 
of this section is--
    (i) Derived in a trade or business described in Sec.  1.1411-5(a)(1) 
is made at the owner level; and
    (ii) Derived in a trade or business described in Sec.  1.1411-
5(a)(2) is made at the entity level.
    (3) The following examples illustrate the provisions of this 
paragraph (b). For purposes of these examples, assume that the taxpayer 
is a United States citizen, uses a calendar taxable year, and Year 1 and 
all subsequent years are taxable years in which section 1411 is in 
effect:

    Example 1. Multiple passthrough entities. A, an individual, owns an 
interest in UTP, a partnership, which is engaged in a trade or business. 
UTP owns an interest in LTP, also a partnership, which is not engaged in 
a trade or business. LTP receives $10,000 in dividends, $5,000 of which 
is allocated to A through UTP. The $5,000 of dividends is not derived in 
a trade or business because LTP is not engaged in a trade or business. 
This is true even though UTP is engaged in a trade or business. 
Accordingly, the ordinary course of a trade or business exception 
described in paragraph (b) of this section does not apply, and A's 
$5,000 of dividends is net investment income under paragraph (a)(1)(i) 
of this section.
    Example 2. Multiple passthrough entities. B, an individual, owns an 
interest in UTP2, a partnership, which is not engaged in a trade or 
business. UTP2 owns an interest in LTP2, also a partnership, which is 
engaged in a commercial lending trade or business. LTP2 is not engaged 
in a trade or business described in Sec.  1.1411-5(a)(2). LTP2's trade 
or business is not a passive activity (within the meaning of section 
469) with respect to B. LTP2 earns $10,000 of interest income from its 
trade or business which is allocated to B through UTP2. Although UTP2 is 
not engaged in a trade or business, the $10,000 of interest income is 
derived in the ordinary course of LTP2's lending trade or business. 
Because LTP2 is not engaged in a trade or business described in Sec.  
1.1411-5(a)(2) and because LTP2's trade or business is not a passive 
activity with respect to B (as described in Sec.  1.1411-5(a)(1)), the 
ordinary course of a trade or business exception described in paragraph 
(b) of this section applies, and B's

[[Page 74]]

$10,000 of interest is not included as net investment income under 
paragraph (a)(1)(i) of this section.
    Example 3. Entity engaged in trading in financial instruments. C, an 
individual, owns an interest in PRS, a partnership, which is engaged in 
a trade or business of trading in financial instruments (as defined in 
Sec.  1.1411-5(a)(2)). PRS' trade or business is not a passive activity 
(within the meaning of section 469) with respect to C. In addition, C is 
not directly engaged in a trade or business of trading in financial 
instruments or commodities. PRS earns interest of $50,000, and C's 
distributive share of the interest is $25,000. Because PRS is engaged in 
a trade or business described in Sec.  1.1411-5(a)(2), the ordinary 
course of a trade or business exception described in paragraph (b) of 
this section does not apply, and C's $25,000 distributive share of the 
interest is net investment income under paragraph (a)(1)(i) of this 
section.
    Example 4. Application of ordinary course of a trade or business 
exception. D, an individual, owns stock in S corporation, S. S is 
engaged in a banking trade or business (that is not a trade or business 
of trading in financial instruments or commodities), and S's trade or 
business is not a passive activity (within the meaning of section 469) 
with respect to D because D materially participates in the activity. S 
earns $100,000 of interest in the ordinary course of its trade or 
business, of which $5,000 is D's pro rata share. For purposes of 
paragraph (b) of this section, the interest income is derived in the 
ordinary course of S's banking business because it is not working 
capital under section 1411(c)(3) and Sec.  1.1411-6(a) (because it is 
considered to be derived in the ordinary course of a trade or business 
under the principles of Sec.  1.469-2T(c)(3)(ii)(A)). Because S is not 
engaged in a trade or business described in Sec.  1.1411-5(a)(2) and 
because S's trade or business is not a passive activity with respect to 
D (as described in Sec.  1.1411-5(a)(1)), the ordinary course of a trade 
or business exception described in paragraph (b) of this section 
applies, and D's $5,000 of interest is not included under paragraph 
(a)(1)(i) of this section.

    (c) Other gross income from a trade or business described in Sec.  
1.1411-5. For a trade or business described in Sec.  1.1411-5, paragraph 
(a)(1)(ii) of this section includes all other gross income (within the 
meaning of section 61) that is not gross income described in paragraph 
(a)(1)(i) of this section or net gain described in paragraph (a)(1)(iii) 
of this section.
    (d) Net gain. This paragraph (d) describes special rules for 
purposes of paragraph (a)(1)(iii) of this section.
    (1) Definition of disposition. For purposes of section 1411 and the 
regulations thereunder, the term disposition means a sale, exchange, 
transfer, conversion, cash settlement, cancellation, termination, lapse, 
expiration, or other disposition (including a deemed disposition, for 
example, under section 877A).
    (2) Limitation. The calculation of net gain may not be less than 
zero. Losses allowable under section 1211(b) are permitted to offset 
gain from the disposition of assets other than capital assets that are 
subject to section 1411.
    (3) Net gain attributable to the disposition of property--(i) 
General rule. Net gain attributable to the disposition of property is 
the gain described in section 61(a)(3) recognized from the disposition 
of property reduced, but not below zero, by losses deductible under 
section 165, including losses attributable to casualty, theft, and 
abandonment or other worthlessness. The rules in subchapter O of chapter 
1 and the regulations thereunder apply. See, for example, Sec.  1.61-
6(b). For purposes of this paragraph, net gain includes, but is not 
limited to, gain or loss attributable to the disposition of property 
from the investment of working capital (as defined in Sec.  1.1411-6); 
gain or loss attributable to the disposition of a life insurance 
contract; and gain attributable to the disposition of an annuity 
contract to the extent the sales price of the annuity exceeds the 
annuity's surrender value.
    (ii) Examples. The following examples illustrate the provisions of 
this paragraph (d)(3). For purposes of these examples, assume that the 
taxpayer is a United States citizen, uses a calendar taxable year, and 
Year 1 and all subsequent years are taxable years in which section 1411 
is in effect:

    Example 1. Calculation of net gain. (i) In Year 1, A, an unmarried 
individual, realizes a capital loss of $40,000 on the sale of P stock 
and realizes a capital gain of $10,000 on the sale of Q stock, resulting 
in a net capital loss of $30,000. Both P and Q are C corporations. A has 
no other capital gain or capital loss in Year 1. In addition, A receives 
wages of $300,000 and earns $5,000 of gross income from interest. For 
income tax purposes, under section 1211(b), A may use $3,000 of the net 
capital loss against other income. Under section 1212(b)(1), the 
remaining $27,000 is a capital

[[Page 75]]

loss carryover. For purposes of determining A's Year 1 net gain under 
paragraph (a)(1)(iii) of this section, A's gain of $10,000 on the sale 
of the Q stock is reduced by A's loss of $40,000 on the sale of the P 
stock. In addition, A may reduce net investment income by the $3,000 of 
the excess of capital losses over capital gains allowed for income tax 
purposes under section 1211(b).
    (ii) In Year 2, A has a capital gain of $30,000 on the sale of Y 
stock. Y is a C corporation. A has no other capital gain or capital loss 
in Year 2. For income tax purposes, A may reduce the $30,000 gain by the 
Year 1 section 1212(b) $27,000 capital loss carryover. For purposes of 
determining A's Year 2 net gain under paragraph (a)(1)(iii) of this 
section, A's $30,000 gain may also be reduced by the $27,000 capital 
loss carryover from Year 1. Therefore, in Year 2, A has $3,000 of net 
gain for purposes of paragraph (a)(1)(iii) of this section.
    Example 2. Calculation of net gain. The facts are the same as in 
Example 1, except that in Year 1, A also realizes a gain of $20,000 on 
the sale of Rental Property D, all of which is treated as ordinary 
income under section 1250. For income tax purposes, under section 
1211(b), A may use $3,000 of the net capital loss against other income. 
Under section 1212(b)(1) the remaining $27,000 is a capital loss 
carryover. For purposes of determining A's net gain under paragraph 
(a)(1)(iii) of this section, A's gain of $10,000 on the sale of the Q 
stock is reduced by A's loss of $40,000 on the sale of the P stock. A's 
$20,000 gain on the sale of Rental Property D is reduced to the extent 
of the $3,000 loss allowed under section 1211(b). Therefore, A's net 
gain for Year 1 is $17,000 ($20,000 gain treated as ordinary income on 
the sale of Rental Property D reduced by $3,000 loss allowed under 
section 1211).
    Example 3. Section 121(a) exclusion. (i) In Year 1, A, an unmarried 
individual, sells a house that A has owned and used as A's principal 
residence for the five years preceding the sale and realizes $200,000 in 
gain. In addition to the gain realized from the sale of A's principal 
residence, A also realizes $7,000 in long-term capital gain. A has a 
$5,000 short-term capital loss carryover from a year preceding the 
effective date of section 1411.
    (ii) For income tax purposes, under section 121(a), A excludes the 
$200,000 gain realized from the sale of A's principal residence from A's 
Year 1 gross income. In determining A's Year 1 adjusted gross income, A 
also reduces the $7,000 capital gain by the $5,000 capital loss 
carryover allowed under section 1211(b).
    (iii) For section 1411 purposes, under section 121(a), A excludes 
the $200,000 gain realized from the sale of A's principal residence from 
A's Year 1 gross income and, consequently, from A's net investment 
income. In determining A's Year 1 net gain under paragraph (a)(1)(iii) 
of this section, A reduces the $7,000 capital gain by the $5,000 capital 
loss carryover allowed under section 1211(b).
    Example 4. Section 1031 like-kind exchange. (i) In Year 1, A, an 
unmarried individual who is not a dealer in real estate, purchases 
Greenacre, a piece of undeveloped land, for $10,000. A intends to hold 
Greenacre for investment.
    (ii) In Year 3, A enters into an exchange in which A transfers 
Greenacre, now valued at $20,000, and $5,000 cash for Blackacre, another 
piece of undeveloped land, which has a fair market value of $25,000. The 
exchange is a transaction for which no gain or loss is recognized under 
section 1031.
    (iii) In Year 3, for income tax purposes, A does not recognize any 
gain from the exchange of Greenacre for Blackacre. A's basis in 
Blackacre is $15,000 ($10,000 substituted basis in Greenacre plus $5,000 
additional cost of acquisition). For purposes of section 1411, A's net 
investment income for Year 3 does not include any realized gain from the 
exchange of Greenacre for Blackacre.
    (iv) In Year 5, A sells Blackacre to an unrelated party for $35,000 
in cash.
    (v) In Year 5, for income tax purposes, A recognizes capital gain of 
$20,000 ($35,000 sale price minus $15,000 basis). For purposes of 
section 1411, A's net investment income includes the $20,000 gain 
recognized from the sale of Blackacre.

    (4) Gains and losses excluded from net investment income--(i) 
Exception for gain or loss attributable to property held in a trade or 
business not described in Sec.  1.1411-5--(A) General rule. Net gain 
does not include gain or loss attributable to property (other than 
property from the investment of working capital (as described in Sec.  
1.1411-6)) held in a trade or business not described in Sec.  1.1411-5.
    (B) Special rules for determining whether property is held in a 
trade or business. To determine whether net gain described in paragraph 
(a)(1)(iii) of this section is from property held in a trade or 
business--
    (1) A partnership interest or S corporation stock generally is not 
property held in a trade or business. Therefore, gain from the sale of a 
partnership interest or S corporation stock is generally gain described 
in paragraph (a)(1)(iii) of this section. However, net gain does not 
include certain gain or loss attributable to the disposition of certain 
interests in partnerships and S corporations as provided in Sec.  
1.1411-7.
    (2) In the case of an individual, estate, or trust that owns or 
engages in a trade or business directly (or indirectly

[[Page 76]]

through ownership of an interest in an entity that is disregarded as an 
entity separate from its owner under Sec.  301.7701-3), the 
determination of whether net gain described in paragraph (a)(1)(iii) of 
this section is attributable to property held in a trade or business is 
made at the individual, estate, or trust level.
    (3) In the case of an individual, estate, or trust that owns an 
interest in a passthrough entity (for example, a partnership or S 
corporation), and that entity is engaged in a trade or business, the 
determination of whether net gain described in paragraph (a)(1)(iii) of 
this section from such entity is attributable to--
    (i) Property held in a trade or business described in Sec.  1.1411-
5(a)(1) is made at the owner level; and
    (ii) Property held in a trade or business described in Sec.  1.1411-
5(a)(2) is made at the entity level.
    (C) Examples. The following examples illustrate the provisions of 
this paragraph (d)(4)(i). For purposes of these examples, assume the 
taxpayer is a United States citizen, uses a calendar taxable year, and 
Year 1 and all subsequent years are taxable years in which section 1411 
is in effect:

    Example 1. Gain from rental activity. A, an unmarried individual, 
rents a boat to B for $100,000 in Year 1. A's rental activity does not 
involve the conduct of a section 162 trade or business, and under 
section 469(c)(2), A's rental activity is a passive activity. In Year 2, 
A sells the boat to B, and A realizes and recognizes taxable gain 
attributable to the disposition of the boat of $500,000. Because the 
exception provided in paragraph (d)(4)(i)(A) of this section requires a 
trade or business, this exception is inapplicable, and therefore, A's 
$500,000 gain will be taken into account under Sec.  1.1411-
4(a)(1)(iii).
    Example 2. Installment sale. (i) PRS, a partnership for Federal 
income tax purposes, operates an automobile dealership. B and C, 
unmarried individuals, each own a 40% interest in PRS and both 
materially participate in the activities of PRS for all relevant years. 
Therefore, with respect to B and C, PRS is not a trade or business 
described in section 1411(c)(2) and Sec.  1.1411-5. D owns the remaining 
20% of PRS. Assume, for purposes of this example, that PRS is a passive 
activity with respect to D, and therefore is a trade or business 
described in section 1411(c)(2)(A) and Sec.  1.1411-5(a)(1).
    (ii)(A) In Year 0, a year preceding the effective date of section 
1411, PRS relocates its dealership to a larger location. As a result of 
the relocation, PRS sells its old dealership facility to a real estate 
developer in exchange for $1,000,000 cash and a $4,500,000 promissory 
note, fully amortizing over the subsequent 15 years, and bearing 
adequate stated interest. PRS reports the sale transaction under section 
453. PRS's adjusted tax basis in the old dealership facility is 
$1,075,000. Assume for purposes of this example that PRS has $300,000 of 
recapture income (within the meaning of section 453(i)); the buyer is 
not related to PRS, B, C, or D; and the buyer is not assuming any 
liabilities of PRS in the transaction.
    (B) For chapter 1 purposes, PRS has realized gain on the transaction 
of $4,425,000 ($5,500,000 less $1,075,000). Pursuant to section 453(i), 
PRS will take into account $300,000 of the recapture income in Year 0, 
and the gain in excess of the recapture income ($4,125,000) will be 
taken into account under the installment method. For purposes of section 
453, PRS's profit percentage is 75% ($4,125,000 gain divided by 
$5,500,000 gross selling price). In Year 0, PRS will take into account 
$750,000 of capital gain attributable to the $1,000,000 cash payment. In 
the subsequent 15 years, PRS will receive annual payments of $300,000 
(plus interest). Each payment will result in PRS recognizing $225,000 of 
capital gain (75% of $300,000).
    (iii)(A) In Year 1, PRS receives a payment of $300,000 plus the 
applicable amount of interest. For purposes of chapter 1, PRS recognizes 
$225,000 of capital gain. B and C's distributive share of the gain is 
$90,000 each and D's distributive share of the gain is $45,000.
    (B) The old dealership facility constituted property held in PRS's 
trade or business. In the case of section 453 installment sales, section 
453 governs the timing of the gain recognition, but does not alter the 
character of the gain. See Sec.  1.1411-1(a). The determination of 
whether the gain is attributable to the disposition of property used in 
a trade or business described in paragraph (d)(4)(i) of this section 
constitutes an element of the gain's character for Federal tax purposes. 
As a result, the applicability of paragraph (d)(4)(i) of this section is 
determined in Year 0 and applies to all gain received on the promissory 
note during the 15 year payment period. This result is consistent with 
the section 469 determination of the passive or nonpassive 
classification of the gain under Sec.  1.469-2T(c)(2)(i)(A).
    (C) In the case of D, PRS's trade or business is described in 
section 1411(c)(2)(A) and Sec.  1.1411-5(a)(1). Therefore, the exclusion 
in paragraph (d)(4)(i) of this section does not apply, and D must 
include the $45,000 of gain in D's net investment income.
    (D) In the case of B and C, PRS's trade or business is not described 
in section 1411(c)(2) or Sec.  1.1411-5. Therefore, B and C exclude the

[[Page 77]]

$90,000 gain from net investment income pursuant to paragraph (d)(4)(i) 
of this section.
    (iv) In Year 2, C dies and C's 40% interest in PRS passes to Estate.
    (v)(A) In Year 3, PRS receives a payment of $300,000 plus the 
applicable amount of interest. For purposes of chapter 1, PRS recognizes 
$225,000 of capital gain. B and Estate each have a distributive share of 
the gain equal to $90,000 and D's distributive share of the gain is 
$45,000.
    (B) The calculation of net investment income for B and D in Year 3 
is the same as in (iii) for Year 1.
    (C) In the case of Estate, the distributive share of the $90,000 
gain constitutes income in respect of a decedent (IRD) under section 
691(a)(4) and subchapter K. See Sec.  1.1411-1(a). Assume that Estate 
paid estate taxes of $5,000 that were attributable to the $90,000 of 
IRD. Pursuant to section 691(c)(4), the amount of gain taken into 
account in computing Estate's taxable income in Year 3 is $85,000 
($90,000 reduced by the $5,000 of allocable estate taxes). Pursuant to 
section 691(a)(3) and Sec.  1.691(a)-3(a), the character of the gain to 
the Estate is the same character as the gain would have been if C had 
survived to receive it. Although the amount of taxable gain for chapter 
1 has been reduced, the remaining $85,000 retains its character 
attributable to the disposition of property used in a trade or business 
described in paragraph (d)(4)(i) of this section. Therefore, Estate may 
exclude the $85,000 gain from net investment income pursuant to 
paragraph (d)(4)(i) of this section.

    (ii) Other gains and losses excluded from net investment income. Net 
gain, as determined under paragraph (d) of this section, does not 
include gains and losses excluded from net investment income by any 
other provision in Sec. Sec.  1.1411-1 through 1.1411-10. For example, 
see Sec.  1.1411-7 (certain gain or loss attributable to the disposition 
of certain interests in partnerships and S corporations) and Sec.  
1.1411-8(b)(4)(ii) (net unrealized appreciation attributable to employer 
securities realized on a disposition of those employer securities).
    (iii) Adjustment for capital loss carryforwards for previously 
excluded income. [Reserved]
    (e) Net investment income attributable to certain entities--(1) 
Distributions from estates and trusts--(i) In general. Net investment 
income includes a beneficiary's share of distributable net income, as 
described in sections 652(a) and 662(a), to the extent that, under 
sections 652(b) and 662(b), the character of such income constitutes 
gross income from items described in paragraphs (a)(1)(i) and (ii) of 
this section or net gain attributable to items described in paragraph 
(a)(1)(iii) of this section, with further computations consistent with 
the principles of this section, as provided in Sec.  1.1411-3(e).
    (ii) Distributions of accumulated net investment income from foreign 
nongrantor trusts to United States beneficiaries. [Reserved]
    (2) CFCs and PFICs. For purposes of calculating net investment 
income, additional rules in Sec.  1.1411-10(c) apply to an individual, 
an estate, or a trust that is a United States shareholder that owns an 
interest in a controlled foreign corporation (CFC) or that is a United 
States person that directly or indirectly owns an interest in a passive 
foreign investment company (PFIC).
    (3) Treatment of income from common trust funds. [Reserved]
    (f) Properly allocable deductions--(1) General rule--(i) In general. 
Unless provided elsewhere in Sec. Sec.  1.1411-1 through 1.1411-10, only 
properly allocable deductions described in this paragraph (f) may be 
taken into account in determining net investment income.
    (ii) Limitations. Any deductions described in this paragraph (f) in 
excess of gross income and net gain described in section 1411(c)(1)(A) 
are not taken into account in determining net investment income in any 
other taxable year, except as allowed under chapter 1.
    (2) Properly allocable deductions described in section 62--(i) 
Deductions allocable to gross income from rents and royalties. 
Deductions described in section 62(a)(4) allocable to rents and 
royalties described in paragraph (a)(1)(i) of this section are taken 
into account in determining net investment income.
    (ii) Deductions allocable to gross income from trades or businesses 
described in Sec.  1.1411-5. Deductions described in section 62(a)(1) 
allocable to income from a trade or business described in Sec.  1.1411-5 
are taken into account in determining net investment income to the 
extent the deductions have not been taken into account in determining 
self-employment income within the meaning of Sec.  1.1411-9.

[[Page 78]]

    (iii) Penalty on early withdrawal of savings. Deductions described 
in section 62(a)(9) are taken into account in determining net investment 
income.
    (iv) Net operating loss. The total section 1411 NOL amount of a net 
operating loss deduction allowed under section 172 is allowed as a 
properly allocable deduction in determining net investment income for 
any taxable year. See paragraph (h) of this section for the calculation 
of the total section 1411 NOL amount of a net operating loss deduction.
    (v) Examples. The following examples illustrate the provisions of 
this paragraph (f)(2). For purposes of these examples, assume the 
taxpayer is a United States citizen, uses a calendar taxable year, and 
Year 1 and all subsequent years are taxable years in which section 1411 
is in effect:

    Example 1. (i) A, an individual, is a 40% shareholder in SCo, an S 
corporation. SCo is engaged in a trade or business described in section 
1411(c)(2)(A). SCo is the only passive activity owned by A. In Year 1, 
SCo reported a loss of $11,000 to A which was comprised of gross 
operating income of $29,000 and operating deductions of $40,000. A's at 
risk amount at the beginning of Year 1 is $7,000. There were no other 
events that affected A's at risk amount in Year 1.
    (ii) For purposes of calculating A's net investment income, A's 
$29,000 distributive share of SCo's gross operating income is income 
within the meaning of section 1411(c)(1)(A)(ii).
    (iii) As a result of A's at risk limitation, for chapter 1 purposes, 
A may only deduct $7,000 of the operating deductions in excess of the 
gross operating income. The remaining $4,000 deductions are suspended 
because A's amount at risk at the end of Year 1 is zero.
    (iv) For purposes of section 469, A has passive activity gross 
income of $29,000 and passive activity deductions of $36,000 ($40,000 of 
operating deductions allocable to A less $4,000 suspended under section 
465). Because A has no other passive activity income from any other 
source, section 469 limits A's passive activity deductions to A's 
passive activity gross income. As a result, section 469 allows A to 
deduct $29,000 of SCo's operating deductions and suspends the remaining 
$7,000.
    (v) For purposes of calculating A's net investment income, A has 
$29,000 of properly allocable deductions allowed by section 
1411(c)(1)(B) and paragraph (f)(2)(ii) of this section.
    Example 2. (i) Same facts as Example 1. In Year 2, SCo reported net 
income of $13,000 to A, which was comprised of gross operating income of 
$43,000 and operating deductions of $30,000. There were no other events 
that affected A's at risk amount in Year 2.
    (ii) For purposes of calculating A's net investment income, A's 
$43,000 distributive share of gross operating income is income within 
the meaning of section 1411(c)(1)(A)(ii).
    (iii) Pursuant to section 465(a)(2), A's deductions attributable to 
the gross income of SCo include the $30,000 deduction allocable to A in 
Year 2 plus the $4,000 loss that was suspended and carried over to Year 
2 from Year 1 pursuant to section 465(a)(2). Under section 465(a)(2), 
the $4,000 of losses from Year 1 are treated as deductions from the 
activity in Year 2. As a result, A's net operating income from SCo in 
Year 2 is $9,000 ($43,000-$30,000-$4,000) in Year 2. A's amount at risk 
at the end of Year 2 is $9,000.
    (iv) For purposes of section 469, A has passive activity gross 
income of $43,000. A's passive activity deductions attributable to SCo 
are the sum of the Year 2 operating deductions allocable to A from S 
($30,000), deductions formerly suspended by section 465 ($4,000), and 
passive activity losses suspended by section 469 ($7,000). Therefore, in 
Year 2, A has passive activity deductions of $41,000. Because A's 
passive activity gross income exceeds A's passive activity deductions, 
section 469 does not limit any of the deductions in Year 2. At the end 
of Year 2, A has no suspended passive activity losses.
    (v) Although A's distributive share of Year 2 deductions allocable 
to SCo's operating income was $30,000; the operative provisions of 
sections 465 and 469 do not change the character of the deductions when 
such amounts are suspended under either section. Furthermore, section 
465(a)(2) and Sec. Sec.  1.469-1(f)(4) and 1.469-2T(d)(1) treat amounts 
suspended from prior years as deductions in the current year. See Sec.  
1.1411-1(a). Therefore, for purposes of calculating A's net investment 
income, A has $41,000 of properly allocable deductions allowed by 
section 1411(c)(1)(B) and paragraph (f)(2)(ii) of this section.

    (3) Properly allocable deductions described in section 63(d). In 
determining net investment income, the following itemized deductions are 
taken into account:
    (i) Investment interest expense. Investment interest (as defined in 
section 163(d)(3)) to the extent allowed under section 163(d)(1). Any 
investment interest not allowed under section 163(d)(1) is treated as 
investment interest paid or accrued by the taxpayer in the succeeding 
taxable year. The following example illustrates the provisions of this

[[Page 79]]

paragraph. For purposes of this example, assume that the taxpayer uses a 
calendar taxable year, and Year 1 and all subsequent years are taxable 
years in which section 1411 is in effect:
    (A) In Year 1, A, an unmarried individual, pays interest of $4,000 
on debt incurred to purchase stock. Under Sec.  1.163-8T, this interest 
is allocable to the stock and is investment interest within the meaning 
of section 163(d)(3). A has no investment income as defined by section 
163(d)(4). A has $10,000 of income from a trade or business that is a 
passive activity (as defined in Sec.  1.1411-5(a)(1)) with respect to A. 
For income tax purposes, under section 163(d)(1), A may not deduct the 
$4,000 investment interest in Year 1 because A does not have any section 
163(d)(4) net investment income. Under section 163(d)(2), the $4,000 
investment interest is a carryforward of disallowed interest that is 
treated as investment interest paid by A in the succeeding taxable year. 
Similarly, for purposes of determining A's Year 1 net investment income, 
A may not deduct the $4,000 investment interest.
    (B) In Year 2, A has $5,000 of section 163(d)(4) net investment 
income. For both income tax purposes and for determining section 1411 
net investment income, A's $4,000 carryforward of interest expense 
disallowed in Year 1 may be deducted in Year 2.
    (ii) Investment expenses. Investment expenses (as defined in section 
163(d)(4)(C)).
    (iii) Taxes described in section 164(a)(3). State, local, and 
foreign income, war profits, and excess profit taxes described in 
section 164(a)(3) that are allocable to net investment income pursuant 
to paragraph (g)(1) of this section. Except to the extent specifically 
expected from section 275(a)(4), foreign income, war profits, and excess 
profit taxes are not allowed as deductions under section 164(a)(3) in 
determining net investment income if the taxpayer claims the benefit of 
the foreign tax credit under section 901 with respect to the same 
taxable year. For rules applicable to refunds of taxes described in this 
paragraph, see paragraph (g)(2) of this section.
    (iv) Items described in section 72(b)(3). In the case of an amount 
allowed as a deduction to the annuitant for the annuitant's last taxable 
year under section 72(b)(3), such amount is allowed as a properly 
allocable deduction in the same taxable year if the income from the 
annuity (had the annuitant lived to receive such income) would have been 
included in net investment income under paragraph (a)(1)(i) of this 
section (and not excluded from net investment income by reason of Sec.  
1.1411-8).
    (v) Items described in section 691(c). Deductions for estate and 
generation-skipping taxes allowed by section 691(c) that are allocable 
to net investment income; provided, however, that any portion of the 
section 691(c) deduction described in section 691(c)(4) is taken into 
account instead in computing net gain under paragraph (d) and not under 
this paragraph (f)(3)(v).
    (vi) Items described in section 212(3). Amounts described in section 
212(3) and Sec.  1.212-1(l) to the extent they are allocable to net 
investment income pursuant to paragraph (g)(1) of this section.
    (vii) Amortizable bond premium. A deduction allowed under section 
171(a)(1) for the amortizable bond premium on a taxable bond (for 
example, see Sec.  1.171-2(a)(4)(i)(C) for the treatment of a bond 
premium carryforward as a deduction under section 171(a)(1)).
    (viii) Fiduciary expenses. In the case of an estate or trust, 
amounts described in Sec.  1.212-1(i) to the extent they are allocable 
to net investment income pursuant to paragraph (g)(1) of this section.
    (4) Loss deductions--(i) General rule. Losses described in section 
165, whether described in section 62 or section 63(d), are allowed as 
properly allocable deductions to the extent such losses exceed the 
amount of gain described in section 61(a)(3) and are not taken into 
account in computing net gain by reason of paragraph (d) of this 
section.
    (ii) Examples. The following examples illustrate the provisions of 
this paragraph (f)(4). For purposes of these examples, assume the 
taxpayer is a United States citizen, uses a calendar taxable year, and 
Year 1 and all subsequent years are taxable years in which section 1411 
is in effect:

    Example 1. (i) A, an unmarried individual, owns an interest in PRS, 
a partnership for Federal income tax purposes. PRS is engaged

[[Page 80]]

in a trading business described in section 1411(c)(2)(B) and Sec.  
1.1411-5(a)(2) and has made a valid and timely election under section 
475(f)(2). A's distributive share from PRS in Year 1 consists of 
$125,000 of interest and dividends and $60,000 of ordinary losses from 
the trading business. In addition to A's investment in PRS, A sold 
undeveloped land in Year 1 for a long-term capital gain of $50,000. A 
has no capital losses carried over from a preceding year.
    (ii) For purposes of chapter 1, A includes the $125,000 of interest 
and dividends, $60,000 of ordinary loss, and $50,000 of long-term 
capital gain in the computation of A's adjusted gross income.
    (iii) For purposes of calculating net investment income, A includes 
the $125,000 of interest and dividends. Pursuant to paragraph (d) of 
this section, A takes into account the $60,000 at ordinary loss from PRS 
and the $50,000 of long term capital gain in the computation of A's net 
gain. A's losses ($60,000) exceed A's gains ($50,000). Therefore, A's 
net gain under paragraph (d) of this section is zero. Additionally, A is 
allowed a deduction under paragraph (f)(4)(i) of this section for 
$10,000 (the amount of ordinary losses that were allowable under chapter 
1 in excess of the amounts taken into account in computing net gain). 
A's net investment income in Year 1 is $115,000.
    Example 2. (i) In Year 1, T, a nongrantor trust, incurs a capital 
loss of $5,000 on the sale of publicly traded stocks. In addition, T 
receives $17,000 of interest and dividend income. T has no capital 
losses carried over from a preceding year.
    (ii) For purposes of chapter 1, T includes the $17,000 of interest 
and dividends and only $3,000 of the capital loss in the computation of 
adjusted gross income. The remaining $2,000 capital loss is carried over 
to Year 2.
    (iii) For purposes of calculating net investment income, T includes 
the $17,000 of interest and dividends in net investment income. Pursuant 
to paragraph (d) of this section, T takes into account the $3,000 
capital loss allowed by chapter 1. T's losses ($3,000) exceed T's gains 
($0). Therefore, T's net gain under paragraph (d) of this section is 
zero. However, T is allowed a deduction under paragraph (f)(4)(i) of 
this section for $3,000 (the amount of losses that were allowable under 
chapter 1 in excess of the amounts taken into account in computing net 
gain). T's net investment income in Year 1 is $14,000.
    Example 3. (i) In Year 1, B, an unmarried individual, incurs a 
short-term capital loss of $15,000 on the sale of publicly traded 
stocks. B also receives annuity income of $50,000. In addition, B 
disposes of property used in his sole proprietorship (which is not a 
trade or business described in section 1411(c)(2) or Sec.  1.1411-5(a) 
for a gain of $21,000. Pursuant to section 1231, the gain of $21,000 is 
treated as a long-term capital gain for purposes of chapter 1. B has no 
capital losses carried over from a preceding year.
    (ii) For purposes of chapter 1, B includes the $50,000 of annuity 
income in the computation of adjusted gross income. The $21,000 long-
term capital gain is offset by the $15,000 short-term capital loss, so B 
includes $6,000 of net long-term capital gain in the computation of 
adjusted gross income.
    (iii) For purposes of calculating net investment income, B includes 
the $50,000 of annuity income in net investment income. Pursuant to 
paragraph (d)(4)(i) of this section, B's net gain does not include the 
$21,000 long-term capital gain because it is attributable to property 
held in B's sole proprietorship (a nonpassive activity). Pursuant to 
paragraph (d) of this section, T takes into account the $15,000 capital 
loss allowed by chapter 1. B's losses ($15,000) exceed B's gains ($0). 
Therefore, A's net gain under paragraph (d) of this section is zero. 
However, B is allowed a deduction under paragraph (f)(4)(i) of this 
section for $15,000 (the amount of losses that were allowable under 
chapter 1 in excess of the amounts taken into account in computing net 
gain). B's net investment income in Year 1 is $35,000.

    (5) Ordinary loss deductions for certain debt instruments. An amount 
treated as an ordinary loss by a holder of a contingent payment debt 
instrument under Sec.  1.1275-4(b) or an inflation-indexed debt 
instrument under Sec.  1.1275-7(f)(1).
    (6) Other deductions. Any other deduction allowed by subtitle A that 
is identified in published guidance in the Federal Register or in the 
Internal Revenue Bulletin (see Sec.  601.601(d)(2)(ii)(b) of this 
chapter) as properly allocable to gross income or net gain under this 
section.
    (7) Application of limitations under sections 67 and 68. Any 
deductions described in this paragraph (f) that are subject to section 
67 (the 2-percent floor on miscellaneous itemized deductions) or section 
68 (the overall limitation on itemized deductions) are allowed in 
determining net investment income only to the extent the items are 
deductible for chapter 1 purposes after the application of sections 67 
and 68. For this purpose, section 67 applies before section 68. The 
amount of deductions subject to sections 67 and 68 that may be deducted 
in determining net investment income after the application of sections 
67 and 68 is determined as described in paragraph (f)(7)(i) and 
(f)(7)(ii) of this section.

[[Page 81]]

    (i) Deductions subject to section 67. The amount of miscellaneous 
itemized deductions (as defined in section 67(b)) tentatively deductible 
in determining net investment income after applying section 67 (but 
before applying section 68) is the lesser of:
    (A) The portion of the taxpayer's miscellaneous itemized deductions 
(before the application of section 67) that is properly allocable to 
items of income or net gain included in determining net investment 
income, or
    (B) The taxpayer's total miscellaneous itemized deductions allowed 
after the application of section 67, but before the application of 
section 68.
    (ii) Deductions subject to section 68. The amount of itemized 
deductions allowed in determining net investment income after applying 
sections 67 and 68 is the lesser of:
    (A) The sum of the amount determined under paragraph (f)(7)(i) of 
this section and the amount of itemized deductions not subject to 
section 67 that are properly allocable to items of income or net gain 
included in determining net investment income, or
    (B) The total amount of itemized deductions allowed after the 
application of sections 67 and 68.
    (iii) Itemized deductions. For purposes of paragraph (f)(7)(ii), 
itemized deductions do not include any deduction described in section 
68(c).
    (iv) Example. The following example illustrates the provisions of 
this paragraph (f)(7). For purposes of these examples, assume the 
taxpayer is a United States citizen, uses a calendar taxable year, and 
Year 1 and all subsequent years are taxable years in which section 1411 
is in effect:
    (A) A, an unmarried individual, has adjusted gross income in Year 1 
as follows:

Wages...................................................      $1,600,000
Interest income.........................................         400,000
                                                         ---------------
    Adjusted gross income...............................       2,000,000
 

    In addition, A has the following items of expense qualifying as 
itemized deductions:

Investment expenses........................................      $70,000
Job-related expenses.......................................       30,000
Investment interest expense................................       75,000
State income taxes.........................................      120,000
 

    A's investment expenses and job-related expenses are miscellaneous 
itemized deductions. In addition, A's investment interest expense and 
investment expenses are properly allocable to net investment income 
(within the meaning of this section). A's job-related expenses are not 
properly allocable to net investment income. Of the state income tax 
expense, A applied a reasonable method pursuant to paragraph (g)(1) of 
this section to properly allocate $20,000 to net investment income.
    (B) A's 2-percent floor under section 67 is $40,000 (2% of 
$2,000,000). For Year 1, assume the section 68 limitation starts at 
adjusted gross income of $200,000. The section 68 overall limitation 
disallows $54,000 of A's itemized deductions that are subject to section 
68 (3% of the excess of the $2,000,000 adjusted gross income over the 
$200,000 limitation threshold).
    (C)(1) A's total miscellaneous itemized deductions allowable before 
the application of section 67 is $100,000 ($70,000 in investment 
expenses plus $30,000 in job-related expenses), and the total 
miscellaneous deductions allowed after the application of section 67 is 
$60,000 ($100,000 minus $40,000).
    (2) The amount of the miscellaneous itemized deductions properly 
allocable to net investment income after the application of section 67 
is $60,000 (the lesser of $70,000 in investment expenses that are 
deductible as a miscellaneous itemized deduction and properly allocable 
to net investment income or $60,000 of miscellaneous itemized deductions 
allocable to net investment income allowed after the application of 
section 67).
    (D)(1) The amount of itemized deductions allocable to net investment 
income after applying section 67 to deductions that are also 
miscellaneous itemized deductions but before applying section 68 is 
$155,000. This amount is the sum of $60,000 of miscellaneous itemized 
deductions determined in (C)(2), plus $20,000 in state income tax 
properly allocable to net investment income, plus $75,000 of investment 
interest expense. However, under section 68(c)(2), the $75,000 deduction 
for investment interest expenses is not subject to the section 68 
limitation on

[[Page 82]]

itemized deductions and is excluded from the computation under Sec.  
1.1411-4(f)(7). Thus, the amount of itemized deductions allocable to net 
investment income and subject to section 68, after applying section 67 
but before applying section 68, is $80,000.
    (2) A's total itemized deductions allowed subject to the limitation 
under section 68 and after application of section 67, but before the 
application of section 68, are the following:

Miscellaneous itemized deductions..........................      $60,000
State income tax...........................................      120,000
                                                            ------------
  Deductions subject to section 68.........................      180,000
 

    (3) Of A's itemized deductions that are subject to the limitation 
under section 68, the amount allowed after the application of section 68 
is $126,000 ($180,000 minus the $54,000 disallowed in (B)).
    (E) Under paragraph (f)(7)(ii) of this section, the amount of 
itemized deductions allowed in determining net investment income after 
applying sections 67 and 68 is the lesser of $80,000 (the sum of $60,000 
determined under paragraph (C)(2) and $20,000 state income tax allocable 
to net investment income) or $126,000 (determined under (D)(3)). 
Therefore, A's itemized deductions that are properly allocable to net 
investment income are $155,000 ($80,000 of properly allocable itemized 
deductions subject to section 67 or 68 plus $75,000 of investment 
interest expense (which is not subject to either section 67 or section 
68 limitations)).
    (g) Special rules--(1) Deductions allocable to both net investment 
income and excluded income. In the case of a properly allocable 
deduction described in section 1411(c)(1)(B) and paragraph (f) of this 
section that is allocable to both net investment income and excluded 
income, the portion of the deduction that is properly allocable to net 
investment income may be determined by taxpayers using any reasonable 
method. Examples of reasonable methods of allocation include, but are 
not limited to, an allocation of the deduction based on the ratio of the 
amount of a taxpayer's gross income (including net gain) described in 
Sec.  1.1411-4(a)(1) to the amount of the taxpayer's adjusted gross 
income (as defined under section 62 (or section 67(e) in the case of an 
estate or trust)). In the case of an estate or trust, an allocation of a 
deduction pursuant to rules described in Sec.  1.652(b)-3(b) (and Sec.  
1.641(c)-1(h) in the case of an ESBT) is also a reasonable method.
    (2) Recoveries of properly allocable deductions--(i) General rule. 
If a taxpayer is refunded, reimbursed, or otherwise recovers any portion 
of an amount deducted as a section 1411(c)(1)(B) properly allocable 
deduction in a prior year, and such amount is not otherwise included in 
net investment income in the year of recovery under section 
1411(c)(1)(A), the amount of the recovery will reduce the taxpayer's 
total section 1411(c)(1)(B) properly allocable deductions in the year of 
recovery (but not below zero). The preceding sentence applies regardless 
of whether the amount of the recovery is excluded from gross income by 
reason of section 111.
    (ii) Recoveries of items allocated between net investment income and 
excluded income. In the case of a refund of any item that was deducted 
under section 1411(c)(1)(B) in a prior year and the gross amount of the 
deduction was allocated between items of net investment income and 
excluded income pursuant to paragraph (g)(1) of this section, the amount 
of the reduction in section 1411(c)(1)(B) properly allocable deductions 
in the year of receipt under this paragraph (g)(2) is the total amount 
of the refund multiplied by a fraction. The numerator of the fraction is 
the amount of the total deduction allocable to net investment income in 
the prior year to which the refund relates. The denominator of the 
fraction is the total amount of the deduction in the prior year to which 
the refund relates.
    (iii) Recoveries with no prior year benefit. For purposes of this 
paragraph (g)(2), section 111 applies to reduce the amount of any 
reduction required by paragraph (g)(2)(i) of this section to the extent 
that such previously deducted amount did not reduce the tax imposed by 
section 1411. To the extent a deduction is taken into account in 
computing a taxpayer's net operating loss deduction under paragraph (h) 
of this section, section 111(c) applies. Except

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as provided in the preceding sentence, for purposes of this paragraph 
(g)(2), no reduction of section 1411(c)(1)(B) properly allocable 
deductions is required in a year when such recovered item is 
attributable to an amount deducted in a taxable year--
    (A) Preceding the effective date of section 1411, or
    (B) In which the taxpayer was not subject to section 1411 solely 
because that individual's (as defined in Sec.  1.1411-2(a)) modified 
adjusted gross income (as defined in Sec.  1.1411-2(c)) does not exceed 
the applicable threshold in Sec.  1.1411-2(d) or such estate's or 
trust's (as defined in Sec.  1.1411-3(a)(1)(i)) adjusted gross income 
does not exceed the amount described in section 1411(a)(2)(B)(ii) and 
Sec.  1.1411-3(a)(1)(ii)(B)(2).
    (iv) Examples. The following examples illustrate the provisions of 
this paragraph (g)(2). For purposes of these examples, assume the 
taxpayer is a United States citizen, uses a calendar taxable year, and 
Year 1 and all subsequent years are taxable years in which section 1411 
is in effect:

    Example 1. Recovery of amount included in income. A, an individual, 
is a 40% limited partner in LP. LP is a passive activity to A. In Year 
1, A's distributable share of section 1411(c)(1)(A)(ii) income and 
properly allocable deductions described in Sec.  1.1411-4(f)(2)(ii) were 
$50,000 and $37,000, respectively. In Year 2, LP received a refund of a 
properly allocable deduction described in Sec.  1.1411-4(f)(2)(ii). A's 
distributable share of the recovered deduction is $2,000. Since the 
$2,000 recovery constitutes gross income described in section 
1411(c)(1)(A)(ii) in Year 2, A does not reduce any properly allocable 
deductions attributable to Year 2.
    Example 2. State income tax refund. In Year 1, D, an individual, 
allocated $15,000 of taxes out of a total of $75,000 to net investment 
income under paragraph (f)(3)(iii) of this section. D received no tax 
benefit from the deduction in Year 1 for chapter 1 purposes due to the 
alternative minimum tax, but it did reduce D's section 1411 tax. In Year 
3, D received a refund of $5,000. For chapter 1 purposes, D excludes the 
$5,000 refund from gross income in Year 3 by reason of section 111. In 
Year 3, D allocated $30,000 of state income taxes out of a total of 
$90,000 to net investment income under paragraph (f)(3)(iii) of this 
section. Although the refund is excluded from D's gross income, D must 
nonetheless reduce Year 3's section 1411(c)(1)(B) properly allocable 
deductions by $1,000 ($5,000 x ($15,000/$75,000)). D's allocation of 
33\1/3%\ of section 164(a)(3) taxes in Year 3 to net investment income 
is irrelevant to the calculation of the amount of the reduction required 
by this paragraph (g)(2).
    Example 3. State income tax refund with no prior year benefit. Same 
facts as Example 2, except in Year 1, D's section 1411(c)(1)(B) properly 
allocable deductions exceeded D's section 1411(c)(1)(A) income by $300. 
As a result, D was not subject to section 1411 in Year 1. Pursuant to 
paragraph (g)(2)(iii) of this section, D does not reduce Year 3's 
section 1411(c)(1)(B) properly allocable deductions for recoveries of 
amounts to the extent that such deductions did not reduce the tax 
imposed by section 1411. Therefore, D must reduce Year 3's section 
1411(c)(1)(B) properly allocable deductions by $700 ($1,000 less $300).

    (3) Deductions described in section 691(b). For purposes of 
paragraph (f) of this section, properly allocable deductions include 
items of deduction described in section 691(b), provided that the item 
otherwise would have been deductible to the decedent under Sec.  1.1411-
4(f). For example, an estate may deduct the decedent's unpaid investment 
interest expense in computing its net investment income because section 
691(b) specifically allows the deduction under section 163, and Sec.  
1.1411-4(f)(3)(i) allows those deductions as well. However, an estate or 
trust may not deduct a payment of real estate taxes on the decedent's 
principal residence that were unpaid at death in computing its net 
investment income because, although real estate taxes are deductible 
under section 164 and specifically are allowed by section 691(b), the 
real estate taxes would not have been a properly allocable deduction of 
the decedent under Sec.  1.1411-4(f).
    (4) Amounts described in section 642(h). For purposes of the 
calculation of net investment income under this section, one or more 
beneficiaries succeeding to the property of the estate or trust, within 
the meaning of section 642(h), shall--
    (i) Treat excess capital losses of the estate or trust described in 
section 642(h)(1) as capital losses of the beneficiary in the 
calculation of net gain in paragraph (d) and paragraph (f)(4) of this 
section, as applicable, in a manner consistent with section 642(h)(1);
    (ii) Treat excess net operating losses of the estate or trust 
described in section 642(h)(1) as net operating losses of

[[Page 84]]

the beneficiary in the calculation of net investment income in 
paragraphs (f)(2)(iv) and (h) of this section in a manner consistent 
with section 642(h)(1); and
    (iii) Treat the deductions described in paragraph (f) of this 
section (other than those taken into account under paragraph (g)(4)(i) 
or (ii) of this section) that exceed the gross investment income 
described in paragraph (a)(1) of this section (after taking into account 
any modifications, adjustments, and special rules for calculating net 
investment income in section 1411 and the regulations thereunder) of a 
terminating estate or trust as a section 1411(c)(1)(B) deduction of the 
beneficiary in a manner consistent with section 642(h)(2).
    (5) Treatment of self-charged interest income. Gross income from 
interest (within the meaning of section 1411(c)(1)(A)(i) and paragraph 
(a)(1)(i) of this section) that is received by the taxpayer from a 
nonpassive activity of such taxpayer, solely for purposes of section 
1411, is treated as derived in the ordinary course of a trade or 
business not described in Sec.  1.1411-5. The amount of interest income 
that is treated as derived in the ordinary course of a trade or business 
not described in Sec.  1.1411-5, and thus excluded from the calculation 
of net investment income, under this paragraph (g)(5) is limited to the 
amount that would have been considered passive activity gross income 
under the rules of Sec.  1.469-7 if the payor was a passive activity of 
the taxpayer. For purposes of this rule, the term nonpassive activity 
does not include a trade or business described in Sec.  1.1411-5(a)(2). 
However, this rule does not apply to the extent the corresponding 
deduction is taken into account in determining self-employment income 
that is subject to tax under section 1401(b).
    (6) Treatment of certain nonpassive rental activities--(i) Gross 
income from rents. To the extent that gross rental income described in 
paragraph (a)(1)(i) of this section is treated as not derived from a 
passive activity by reason of Sec.  1.469-2(f)(6) or as a consequence of 
a taxpayer grouping a rental activity with a trade or business activity 
under Sec.  1.469-4(d)(1), such gross rental income is deemed to be 
derived in the ordinary course of a trade or business within the meaning 
of paragraph (b) of this section.
    (ii) Gain or loss from the disposition of property. To the extent 
that gain or loss resulting from the disposition of property is treated 
as nonpassive gain or loss by reason of Sec.  1.469-2(f)(6) or as a 
consequence of a taxpayer grouping a rental activity with a trade or 
business activity under Sec.  1.469-4(d)(1), then such gain or loss is 
deemed to be derived from property used in the ordinary course of a 
trade or business within the meaning of paragraph (d)(4)(i) of this 
section.
    (7) Treatment of certain real estate professionals--(i) Safe Harbor. 
In the case of a real estate professional (as defined in section 
469(c)(7)(B)) that participates in a rental real estate activity for 
more than 500 hours during such year, or has participated in such real 
estate activities for more than 500 hours in any five taxable years 
(whether or not consecutive) during the ten taxable years that 
immediately precede the taxable year, then--
    (A) Such gross rental income from that rental activity is deemed to 
be derived in the ordinary course of a trade or business within the 
meaning of paragraph (b) of this section; and
    (B) Gain or loss resulting from the disposition of property used in 
such rental real estate activity is deemed to be derived from property 
used in the ordinary course of a trade or business within the meaning of 
paragraph (d)(4)(i) of this section.
    (ii) Definitions--(A) Participation. For purposes of establishing 
participation under this paragraph (g)(7), any participation in the 
activity that would count towards establishing material participation 
under section 469 shall be considered.
    (B) Rental real estate activity. The term rental real estate 
activity used in this paragraph (g)(7) is a rental activity within the 
meaning of Sec.  1.469-1T(e)(3). An election to treat all rental real 
estate as a single rental activity under Sec.  1.469-9(g) also applies 
for purposes of this paragraph (g)(7). However, any rental real estate 
that the taxpayer grouped with a trade or business activity under Sec.  
1.469-4(d)(1)(i)(A) or

[[Page 85]]

(d)(1)(i)(C) is not a rental real estate activity.
    (iii) Effect of safe harbor. The inability of a real estate 
professional to satisfy the safe harbor in this paragraph (g)(7) does 
not preclude such taxpayer from establishing that such gross rental 
income and gain or loss from the disposition of property, as applicable, 
is not included in net investment income under any other provision of 
section 1411.
    (8) Treatment of former passive activities--(i) Section 469(f)(1)(A) 
losses. Losses allowed in computing taxable income by reason of the 
rules governing former passive activities in section 469(f)(1)(A) are 
taken into account in computing net gain under paragraph (d) of this 
section or as properly allocable deductions under paragraph (f) of this 
section, as applicable, in the same manner as such losses are taken into 
account in computing taxable income (as defined in section 63). The 
preceding sentence applies only to the extent the net income or net gain 
from the former passive activity (as defined in section 469(f)(3)) is 
included in net investment income.
    (ii) Section 469(f)(1)(C) losses. Losses allowed in computing 
taxable income by reason of section 469(f)(1)(C) are taken into account 
in computing net gain under paragraph (d) of this section or as properly 
allocable deductions under paragraph (f) of this section, as applicable, 
in the same manner as such losses are taken into account in computing 
taxable income (as defined in section 63).
    (iii) Examples. The following examples illustrate the provisions of 
this paragraph (g)(8). For purposes of these examples, assume the 
taxpayer is a United States citizen, uses a calendar taxable year, and 
Year 1 and all subsequent years are taxable years in which section 1411 
is in effect:

    Example 1. (i) B, an individual taxpayer, owns a 50% interest in 
SCorp, an S corporation engaged in the trade or business of retail 
clothing sales. B also owns a single family rental property, a passive 
activity. B materially participates in the retail sales activity of 
SCorp, but B has $10,000 of suspended losses from prior years when the 
retail sales activity of SCorp was a passive activity of B. Therefore, 
the retail sales activity of SCorp is a former passive activity within 
the meaning of section 469(f)(3).
    (ii) In Year 1, B reports $205,000 of wages, $7,000 of nonpassive 
net income, $500 of interest income (attributable to working capital) 
from SCorp's retail sales activity, and $1,000 of net rental income from 
the single family rental property. B's Year 1 modified adjusted gross 
income (as defined in Sec.  1.1411-2(c)) is $205,500; which includes 
$205,000 of wages, $500 of interest income, $7,000 of nonpassive income 
from SCorp, $7,000 of section 469(f)(1)(A) losses, $1,000 of passive 
income from the single family rental property and $1,000 of section 
469(f)(1)(C) losses.
    (iii) For purposes of the calculation of B's Year 1 net investment 
income, B includes the $500 of interest income and $1,000 of net passive 
income from the single family rental property. The $7,000 of nonpassive 
income from SCorp's retail sales activity is excluded from net 
investment income because the income is not attributable to a trade or 
business described in Sec.  1.1411-5. Therefore, pursuant to the rules 
of paragraph (g)(8)(i) of this section, the $7,000 of section 
469(f)(1)(A) losses are not taken into account in computing B's net 
investment income. However, pursuant to the rules of paragraph 
(g)(8)(ii) of this section, the $1,000 of passive losses allowed by 
reason of section 469(f)(1)(C), which are allowed as a deduction in Year 
1 by reason of B's $1,000 of passive income from the single family 
rental property are allowed in computing B's net investment income. As a 
result, B's net investment income is $500 ($500 of interest income plus 
$1,000 of passive rental income less $1,000 of section 469(f)(1)(C) 
losses). Although the $500 of interest income is attributable to SCorp 
and includable in B's net investment income, such income is not taken 
into account when calculating the amount of section 469(f)(1)(A) losses 
allowed in the current year. Therefore, such income is not taken into 
account in computing the amount of section 469(f)(1)(A) losses allowed 
by reason of paragraph (g)(8)(i) of this section. Pursuant to section 
469(b), B carries forward $2,000 of suspended passive losses 
attributable to SCorp's retail sales activity to Year 2.
    Example 2. Same facts as Example 1. In Year 2, B materially 
participates in the retail sales activity of SCorp, and disposes of his 
entire interest in SCorp for a $9,000 long-term capital gain. Pursuant 
to Sec.  1.469-2T(e)(3), the $9,000 gain is characterized as nonpassive 
income. Pursuant to section 469(f)(1)(A), the remaining $2,000 of 
suspended passive loss is allowed because the $9,000 gain is treated as 
nonpassive income. Assume that under section 1411(c)(4) and Sec.  
1.1411-7, B takes into account only $700 of the $9,000 gain in computing 
net investment income for Year 2. Pursuant to paragraph (g)(8)(i) of 
this section, B may take into account $700 of the $2,000 loss allowed by 
section 469(f)(1)(A) in

[[Page 86]]

computing net investment income for Year 2. Pursuant to paragraph 
(g)(8)(i) of this section, B may not deduct the remaining $1,300 passive 
loss allowed for chapter 1 in calculating net investment income for Year 
2.

    (9) Treatment of section 469(g)(1) losses. Losses allowed in 
computing taxable income by reason of section 469(g) are taken into 
account in computing net gain under paragraph (d) of this section or as 
properly allocable deductions under paragraph (f) of this section, as 
applicable, in the same manner as such losses are taken into account in 
computing taxable income (as defined in section 63).
    (10) Treatment of section 707(c) guaranteed payments. [Reserved]
    (11) Treatment of section 736 payments. [Reserved]
    (12) Income and deductions from certain notional principal 
contracts. [Reserved]
    (13) Treatment of income or loss from REMIC residual interests. 
[Reserved]
    (h) Net operating loss--(1) General rule. For purposes of paragraph 
(f)(2)(iv) of this section, the total section 1411 NOL amount of a net 
operating loss deduction for a taxable year is calculated by first 
determining the applicable portion of the taxpayer's net operating loss 
for each loss year under paragraph (h)(2) of this section. Next, the 
applicable portion for each loss year is used to determine the section 
1411 NOL amount for each net operating loss carried from a loss year and 
deducted in the taxable year as provided in paragraph (h)(3) of this 
section. The section 1411 NOL amounts of each net operating loss carried 
from a loss year and deducted in the taxable year are then added 
together as provided in paragraph (h)(4) of this section. This sum is 
the total section 1411 NOL amount of the net operating loss deduction 
for the taxable year that is allowed as a properly allocable deduction 
in determining net investment income for the taxable year. For purposes 
of this paragraph (h), both the amount of a net operating loss for a 
loss year and the amount of a net operating loss deduction refer to such 
amounts as determined for purposes of chapter 1.
    (2) Applicable portion of a net operating loss. In any taxable year 
beginning after December 31, 2012, in which a taxpayer incurs a net 
operating loss, the applicable portion of such loss is the lesser of:
    (i) The amount of the net operating loss for the loss year that the 
taxpayer would incur if only items of gross income that are used to 
determine net investment income and only properly allocable deductions 
are taken into account in determining the net operating loss in 
accordance with section 172(c) and (d); or
    (ii) The amount of the taxpayer's net operating loss for the loss 
year.
    (3) Section 1411 NOL amount of a net operating loss carried to and 
deducted in a taxable year. The section 1411 NOL amount of each net 
operating loss that is carried from a loss year that is allowed as a 
deduction is the total amount of such net operating loss carried from 
the loss year allowed as a deduction under section 172(a) in the taxable 
year multiplied by a fraction. The numerator of the fraction is the 
applicable portion of the net operating loss for that loss year, as 
determined under paragraph (h)(2) of this section. The denominator of 
the fraction is the total amount of the net operating loss for the same 
loss year.
    (4) Total section 1411 NOL amount of a net operating loss deduction. 
The section 1411 NOL amounts of each net operating loss carried to and 
deducted in the taxable year as determined under paragraph (h)(3) of 
this section are added together to determine the total section 1411 NOL 
amount of the net operating loss deduction for the taxable year that is 
properly allocable to net investment income.
    (5) Examples. The following examples illustrate the provisions of 
this paragraph (h). For purposes of these examples, assume the taxpayer 
is a United States citizen, uses a calendar taxable year, and Year 1 and 
all subsequent years are taxable years in which section 1411 is in 
effect:

    Example 1. (i)(A) In Year 1, A, an unmarried individual, has the 
following items of income and deduction: $200,000 in wages, $50,000 in 
gross income from a trade or business of trading in financial 
instruments or commodities (as defined in Sec.  1.1411-5(a)(2)) (trading 
activity), $10,000 of dividends, $1,000,000 in loss from his sole 
proprietorship (which is not a trade or business described in Sec.  
1.1411-

[[Page 87]]

5), $12,000 of non-business investment expenses, and $250,000 in trading 
loss deductions. As a result, for income tax purposes A sustains a 
section 172(c) net operating loss of $1,000,000. A makes an election 
under section 172(b)(3) to waive the carryback period for this net 
operating loss.
    (B) For purposes of section 1411, A's net investment income for Year 
1 is the excess (if any) of $60,000 ($50,000 trading activity gross 
income plus $10,000 dividend income) over $262,000 ($250,000 trading 
loss deductions plus $12,000 nonbusiness expenses).
    (C) The amount of the net operating loss for Year 1 determined under 
section 172 that A would incur if only items of gross income that are 
used to determine net investment income and only properly allocable 
deductions are taken into account is $200,000. This amount is the excess 
of $250,000 trading loss deductions, over $50,000 trading activity gross 
income. Under section 172(d)(4), in determining the net operating loss, 
the $12,000 nonbusiness expenses are allowed only to the extent of the 
$10,000 dividend income. The $200,000 net operating loss determined 
using only properly allocable deductions and gross income items used in 
determining net investment income is less than A's actual net operating 
loss for Year 1 of $1,000,000, and accordingly the applicable portion 
for Year 1 is $200,000. The ratio used to calculate section 1411 NOL 
amounts of A's Year 1 net operating loss is $200,000 (net operating loss 
determined using only properly allocable deductions and gross income 
items used in determining net investment income)/$1,000,000 (net 
operating loss), or 0.2.
    (ii) For Year 2, A has $250,000 of wages, no gross income from the 
trading activity, $300,000 of income from his sole proprietorship, and 
$10,000 in trading loss deductions. For income tax purposes, A deducts 
$540,000 of the net operating loss carried over from Year 1. In 
addition, under Sec.  1.1411-2(c), the $540,000 net operating loss will 
be allowed as a deduction in computing A's Year 2 modified adjusted 
gross income. Because A's modified adjusted gross income is $0, A is not 
subject to net investment income tax. For purposes of A's net investment 
income calculation, the section 1411 NOL amount of the $540,000 net 
operating loss from Year 1 that A deducts in Year 2 is $108,000 
($540,000 multiplied by 0.2 (the fraction determined based on the 
applicable portion of the net operating loss in the loss year)). The 
amount of the Year 1 net operating loss carried over to Year 3 is 
$460,000. For purposes of A's net investment income calculation, this 
net operating loss carryover amount includes a section 1411 NOL amount 
of $92,000 ($460,000 multiplied by 0.2). The section 1411 NOL amount may 
be applied in determining A's net investment income in Year 3.
    (iii)(A) For Year 3, A has $400,000 of wages, $200,000 in trading 
gains which are gross income from the trading activity, $250,000 of 
income from his sole proprietorship, and $10,000 in trading loss 
deductions. For income tax purposes, A deducts the remaining $460,000 of 
the net operating loss from Year 1. In addition, under Sec.  1.1411-
2(c), the $460,000 net operating loss deduction reduces A's Year 3 
modified adjusted gross income to $380,000.
    (B) A's section 1411 NOL amount of the net operating loss deduction 
for Year 3 is $92,000, which is the $460,000 net operating loss 
deduction for Year 3 multiplied by 0.2.
    (C) A's net investment income for Year 3 before the application of 
paragraph (f)(2)(iv) of this section is $190,000 ($200,000 in gross 
income from the trading activity, minus $10,000 in trading loss 
deductions). After the application of paragraph (f)(2)(iv) of this 
section, A's net investment income for Year 3 is $98,000 ($190,000 minus 
$92,000, the total section 1411 NOL amount of the net operating loss 
deduction).
    Example 2. (i) The facts for Year 1 are the same as in Example 1.
    (ii)(A) For Year 2, A has $100,000 in wages, $200,000 in gross 
income from the trading activity, $15,000 of dividends, $250,000 in 
losses from the sole proprietorship, $10,000 of non-business investment 
expenses, and $355,000 in trading loss deductions. As a result, for 
income tax purposes A sustains a section 172(c) net operating loss of 
$300,000. A makes an election under section 172(b)(3) to waive the 
carryback period for the Year 2 net operating loss.
    (B) For purposes of section 1411, A's net investment income for Year 
2 is the excess (if any) of $215,000 ($200,000 trading activity gross 
income plus $15,000 dividend income) over $365,000 ($355,000 trading 
loss deductions plus $10,000 nonbusiness expenses).
    (C) The amount of the net operating loss for Year 2 determined under 
section 172 that A would incur if only items of gross income that are 
used to determine net investment income and only properly allocable 
deductions are taken into account is $150,000. This amount is the excess 
of $365,000 ($355,000 trading loss deductions plus $10,000 nonbusiness 
expenses) over $215,000 ($200,000 trading activity gross income plus 
$15,000 dividend income). Under section 172(d)(4), in determining the 
net operating loss, the $10,000 nonbusiness expenses are allowed in full 
against the $15,000 dividend income. The $150,000 net operating loss 
determined using only properly allocable deductions and gross income 
items used in determining net investment income is less than A's actual 
net operating loss for Year 2 of $300,000, and accordingly the 
applicable portion is $150,000. The ratio used to calculate the section 
1411 NOL amount of A's Year 2 net operating loss is $150,000 (the 
applicable portion)/$300,000 (net operating loss), or 0.5.

[[Page 88]]

    (iii) For Year 3, A has $250,000 of wages, no gross income from the 
trading activity, $300,000 of income from his sole proprietorship, and 
$10,000 in trading loss deductions. For income tax purposes, A deducts 
$540,000 of the net operating loss from Year 1. In addition, under Sec.  
1.1411-2(c), the $540,000 net operating loss will be allowed as a 
deduction in computing A's Year 3 modified adjusted gross income. 
Because A's modified adjusted gross income is $0, A is not subject to 
net investment income tax. The section 1411 NOL amount of the $540,000 
net operating loss from Year 1 that A deducts in Year 3 is $108,000 
($540,000 multiplied by 0.2 (the fraction used to calculate the section 
1411 NOL amount of the net operating loss)), and this is also the total 
section 1411 NOL amount for Year 3. The amount of the Year 1 net 
operating loss carried over to Year 4 is $460,000. This net operating 
loss carryover amount includes a section 1411 NOL amount of $92,000 
($460,000 multiplied by 0.2) that may be applied in determining net 
investment income in Year 4. None of the Year 2 net operating loss is 
deducted in Year 3 so that the $300,000 Year 2 net operating loss 
(including the section 1411 NOL amount of $150,000) is carried to Year 
4.
    (iv)(A) For Year 4, A has $150,000 of wages, $450,000 in trading 
gains which are gross income from the trading activity, $250,000 of 
income from his sole proprietorship, and $10,000 in trading loss 
deductions. For income tax purposes, A deducts the remaining $460,000 of 
the net operating loss carryover from Year 1 and the $300,000 net 
operating loss carryover from Year 2, for a total net operating loss 
deduction in Year 4 of $760,000. In addition, under Sec.  1.1411-2(c), 
the $760,000 net operating loss deduction reduces A's Year 4 modified 
adjusted gross income to $80,000.
    (B) A's total section 1411 NOL amount of the net operating loss 
deduction for Year 4 is $242,000, which is the sum of the $92,000 
($460,000 net operating loss carryover from Year 1 and deducted in Year 
4 multiplied by 0.2 (the ratio used to calculate the section 1411 NOL 
amount of the Year 1 net operating loss)) plus $150,000 ($300,000 net 
operating loss carryover from Year 2 and deducted in Year 4 multiplied 
by 0.5 (the ratio used to calculate the section 1411 NOL amount of the 
Year 2 net operating loss)).
    (C) A's net investment income for Year 4 before the application of 
paragraph (f)(2)(iv) of this section is $440,000 ($450,000 in gross 
income from the trading activity, minus $10,000 in trading loss 
deductions). After the application of paragraph (f)(2)(iv) of this 
section, A's net investment income for Year 4 is $198,000 ($440,000 
minus $242,000, the total section 1411 NOL amount of the Year 4 net 
operating loss deduction).

    (i) Effective/applicability date. This section applies to taxable 
years beginning after December 31, 2013. However, taxpayers may apply 
this section to taxable years beginning after December 31, 2012, in 
accordance with Sec.  1.1411-1(f).

[T.D. 9644, 78 FR 72424, Dec. 2, 2013, as amended at 79 FR 18160, Apr. 
1, 2014]



Sec.  1.1411-5  Trades or businesses to which tax applies.

    (a) In general. A trade or business is described in this section if 
such trade or business involves the conduct of a trade or business, and 
such trade or business is either--
    (1) A passive activity (within the meaning of paragraph (b) of this 
section) with respect to the taxpayer; or
    (2) The trade or business of a trader trading in financial 
instruments (as defined in paragraph (c)(1) of this section) or 
commodities (as defined in paragraph (c)(2) of this section).
    (b) Passive activity--(1) In general. A passive activity is 
described in this section if--
    (i) Such activity is a trade or business; and
    (ii) Such trade or business is a passive activity with respect to 
the taxpayer within the meaning of section 469 and the regulations 
thereunder.
    (2) Application of income recharacterization rules--(i) Income and 
gain recharacterization. To the extent that any income or gain from a 
trade or business is recharacterized as ``not from a passive activity'' 
by reason of Sec.  1.469-2T(f)(2), Sec.  1.469-2(f)(5), or Sec.  1.469-
2(f)(6), such trade or business does not constitute a passive activity 
within the meaning of paragraph (b)(1)(ii) of this section solely with 
respect to such recharacterized income or gain.
    (ii) Gain recharacterization. To the extent that any gain from a 
trade or business is recharacterized as ``not from a passive activity'' 
by reason of Sec.  1.469-2(c)(2)(iii) and does not constitute portfolio 
income under Sec.  1.469-2(c)(2)(iii)(F), such trade or business does 
not constitute a passive activity within the meaning of paragraph 
(b)(1)(ii) of this section solely with respect to such recharacterized 
gain.
    (iii) Exception for certain portfolio recharacterizations. To the 
extent that

[[Page 89]]

any income or gain from a trade or business is recharacterized as ``not 
from a passive activity'' and is further characterized as portfolio 
income under Sec.  1.469-2(f)(10) or Sec.  1.469-2(c)(2)(iii)(F), then 
such trade or business constitutes a passive activity within the meaning 
of paragraph (b)(1)(ii) of this section solely with respect to such 
recharacterized income or gain.
    (3) Examples. The following examples illustrate the principles of 
paragraph (b)(1) of this section and the ordinary course of a trade or 
business exception in Sec.  1.1411-4(b). In each example, unless 
otherwise indicated, the taxpayer uses a calendar taxable year, the 
taxpayer is a United States citizen, and Year 1 and all subsequent years 
are taxable years in which section 1411 is in effect:

    Example 1. Rental activity. A, an unmarried individual, rents a 
commercial building to B for $50,000 in Year 1. A is not involved in the 
activity of the commercial building on a regular and continuous basis, 
therefore, A's rental activity does not involve the conduct of a trade 
or business, and under section 469(c)(2), A's rental activity is a 
passive activity. Because paragraph (b)(1)(i) of this section is not 
satisfied, A's rental income of $50,000 is not derived from a trade or 
business described in paragraph (b)(1) of this section. However, A's 
rental income of $50,000 still constitutes gross income from rents 
within the meaning of Sec.  1.1411-4(a)(1)(i) because rents are included 
in the determination of net investment income under Sec.  1.1411-
4(a)(1)(i) whether or not derived from a trade or business described in 
paragraph (b)(1) of this section.
    Example 2. Application of grouping rules under section 469. In Year 
1, A, an unmarried individual, owns an interest in PRS, a partnership 
for Federal income tax purposes. PRS is engaged in two activities, X and 
Y, which constitute trades or businesses, and neither of which 
constitute trading in financial instruments or commodities (within the 
meaning of paragraph (a)(2) of this section). Pursuant to Sec.  1.469-4, 
A has properly grouped X and Y together as one activity (the grouped 
activity). A participates in X for more than 500 hours during Year 1 and 
would be treated as materially participating in activity X within the 
meaning of Sec.  1.469-5T(a)(1) if A's material participation were 
determined only with respect to activity X. A only participates in Y for 
50 hours during Year 1. If not for the grouping of the X and Y 
activities together, A would not be treated as materially participating 
in Y within the meaning of Sec.  1.469-5T(a). However, pursuant to 
Sec. Sec.  1.469-4 and 1.469-5T(a)(1), A materially participates in the 
grouped activity. Therefore, for purposes of paragraph (b)(1)(ii) of 
this section, neither X nor Y is a passive activity with respect to A. 
Accordingly, with respect to A, neither X nor Y is a trade or business 
described in paragraph (b)(1) of this section.
    Example 3. Application of the rental activity exceptions. B, an 
unmarried individual, is a partner in PRS, which is engaged in an 
equipment leasing activity. The average period of customer use of the 
equipment is seven days or less (and therefore meets the exception in 
Sec.  1.469-1T(e)(3)(ii)(A)). B materially participates in the equipment 
leasing activity (within the meaning of Sec.  1.469-5T(a)). The 
equipment leasing activity constitutes a trade or business. In Year 1, B 
has modified adjusted gross income (as defined in Sec.  1.1411-2(c)) of 
$300,000, all of which is derived from PRS. All of the income from PRS 
is derived in the ordinary course of the equipment leasing activity, and 
all of PRS's property is held in the equipment leasing activity. Of B's 
allocable share of income from PRS, $275,000 constitutes gross income 
from rents (within the meaning of Sec.  1.1411-4(a)(1)(i)). While 
$275,000 of the gross income from the equipment leasing activity meets 
the definition of rents in Sec.  1.1411-4(a)(1)(i), the activity meets 
one of the exceptions to rental activity in Sec.  1.469-1T(e)(3)(ii) and 
B materially participates in the activity. Therefore, the trade or 
business is not a passive activity with respect to B for purposes of 
paragraph (b)(1)(ii) of this section. Because the rents are derived in 
the ordinary course of a trade or business not described in paragraph 
(a) of this section, the ordinary course of a trade or business 
exception in Sec.  1.1411-4(b) applies, and the rents are not described 
in Sec.  1.1411-4(a)(1)(i). Furthermore, because the equipment leasing 
trade or business is not a trade or business described in paragraph 
(a)(1) or (a)(2) of this section, the $25,000 of other gross income is 
not net investment income under Sec.  1.1411-4(a)(1)(ii). However, the 
$25,000 of other gross income may be net investment income by reason of 
section 1411(c)(3) and Sec.  1.1411-6 if it is attributable to PRS's 
working capital. Finally, gain or loss from the sale of the property 
held in the equipment leasing activity will not be subject to Sec.  
1.1411-4(a)(1)(iii) because, although it is attributable to a trade or 
business, it is not a trade or business to which the section 1411 tax 
applies.
    Example 4. Application of section 469 and other gross income under 
Sec.  1.1411-4(a)(1)(ii). Same facts as Example 3, except B does not 
materially participate in the equipment leasing trade or business and 
therefore the trade or business is a passive activity with respect to B 
for purposes of paragraph (b)(1)(ii) of this section. Accordingly, the

[[Page 90]]

$275,000 of gross income from rents is described in Sec.  1.1411-
4(a)(1)(i) because the rents are derived from a trade or business that 
is a passive activity with respect to B. Furthermore, the $25,000 of 
other gross income from the equipment leasing trade or business is 
described in Sec.  1.1411-4(a)(1)(ii) because the gross income is 
derived from a trade or business described in paragraph (a)(1) of this 
section. Finally, gain or loss from the sale of the property used in the 
equipment leasing trade or business is subject to Sec.  1.1411-
4(a)(1)(iii) because the trade or business is a passive activity with 
respect to B, as described in paragraph (b)(1)(ii) of this section.
    Example 5. Application of the portfolio income rule and section 469. 
C, an unmarried individual, is a partner in PRS, a partnership engaged 
in a trade or business that does not involve a rental activity. C does 
not materially participate in PRS within the meaning of Sec.  1.469-
5T(a). Therefore, the trade or business of PRS is a passive activity 
with respect to C for purposes of paragraph (a)(1) of this section. C's 
$500,000 allocable share of PRS's income consists of $450,000 of gross 
income from a trade or business and $50,000 of gross income from 
dividends and interest (within the meaning of Sec.  1.1411-4(a)(1)(i)) 
that is not derived in the ordinary course of the trade or business of 
PRS. Therefore, C's $500,000 allocable share of PRS's income is subject 
to section 1411. C's $50,000 allocable share of PRS's income from 
dividends and interest is subject to Sec.  1.1411-4(a)(1)(i) because the 
share is gross income from dividends and interest that is not derived in 
the ordinary course of a trade or business (that is, the ordinary course 
of a trade or business exception in Sec.  1.1411-4(b) is inapplicable). 
C's $450,000 allocable share of PRS's income is subject to Sec.  1.1411-
4(a)(1)(ii) because it is gross income from a trade or business that is 
a passive activity.

    (c) Trading in financial instruments or commodities--(1) Definition 
of financial instruments. For purposes of section 1411 and the 
regulations thereunder, the term financial instruments includes stocks 
and other equity interests, evidences of indebtedness, options, forward 
or futures contracts, notional principal contracts, any other 
derivatives, or any evidence of an interest in any of the items 
described in this paragraph (c)(1). An evidence of an interest in any of 
the items described in this paragraph (c)(1) includes, but is not 
limited to, short positions or partial units in any of the items 
described in this paragraph (c)(1).
    (2) Definition of commodities. For purposes of section 1411 and the 
regulations thereunder, the term commodities refers to items described 
in section 475(e)(2).
    (d) Effective/applicability date. This section applies to taxable 
years beginning after December 31, 2013. However, taxpayers may apply 
this section to taxable years beginning after December 31, 2012, in 
accordance with Sec.  1.1411-1(f).

[T.D. 9644, 78 FR 72424, Dec. 2, 2013, as amended at 79 FR 18160, Apr. 
1, 2014]



Sec.  1.1411-6  Income on investment of working capital subject to tax.

    (a) General rule. For purposes of section 1411, any item of gross 
income from the investment of working capital will be treated as not 
derived in the ordinary course of a trade or business, and any net gain 
that is attributable to the investment of working capital will be 
treated as not derived in the ordinary course of a trade or business. In 
determining whether any item is gross income from or net gain 
attributable to an investment of working capital, principles similar to 
those described in Sec.  1.469-2T(c)(3)(ii) apply. See Sec.  1.1411-4(f) 
for rules regarding properly allocable deductions with respect to an 
investment of working capital and Sec.  1.1411-7 for rules relating to 
the adjustment to net gain on the disposition of interests in a 
partnership or S corporation.
    (b) Example. The following example illustrates the principles of 
this section. Assume for purposes of the example that the taxpayer uses 
a calendar taxable year, the taxpayer is a United States citizen, and 
Year 1 and all subsequent years are taxable years in which section 1411 
is in effect:

    Example. (i) A, an unmarried individual, operates a restaurant, 
which is a section 162 trade or business but is not a trade or business 
described in Sec.  1.1411-5(a)(1) with respect to A. A owns and conducts 
the restaurant business through S, an S corporation wholly-owned by A. S 
is able to pay all of the restaurant's current obligations with cash 
flow generated by the restaurant. S utilizes an interest-bearing 
checking account at a local bank to make daily deposits of cash receipts 
generated by the restaurant, and also to pay the recurring ordinary and 
necessary business expenses of the restaurant. The average daily balance 
of the checking account is approximately $2,500, but at any given time 
the balance may be significantly more or less than this amount depending 
on the short-

[[Page 91]]

term cash flow needs of the business. In addition, S has set aside 
$20,000 for the potential future needs of the business in case the daily 
cash flow into and from the checking account becomes insufficient to pay 
the restaurant's recurring business expenses. S does not currently need 
to spend or use the $20,000 capital to conduct the restaurant business, 
and S deposits and maintains the $20,000 in an interest-bearing savings 
account at a local bank.
    (ii) Both the $2,500 average daily balance of the checking account 
and the $20,000 savings account balance constitute working capital under 
Sec.  1.469-2T(c)(3)(ii) and, pursuant to paragraph (a) of this section, 
the interest generated by this working capital will not be treated as 
derived in the ordinary course of S's restaurant business. Accordingly, 
the interest income derived by S from its checking and savings accounts 
and allocated to A under section 1366 constitutes gross income from 
interest under Sec.  1.1411-4(a)(1)(i).

    (c) Effective/applicability date. This section applies to taxable 
years beginning after December 31, 2013. However, taxpayers may apply 
this section to taxable years beginning after December 31, 2012, in 
accordance with Sec.  1.1411-1(f).

[T.D. 9644, 78 FR 72424, Dec. 2, 2013]



Sec.  1.1411-7  Exception for dispositions of interests in partnerships 
and S corporations. [Reserved]



Sec.  1.1411-8  Exception for distributions from qualified plans.

    (a) General rule. Net investment income does not include any 
distribution from a qualified plan or arrangement. For this purpose, the 
term qualified plan or arrangement means any plan or arrangement 
described in section 401(a), 403(a), 403(b), 408, 408A, or 457(b).
    (b) Rules relating to distributions. This paragraph (b) provides 
rules for purposes of paragraph (a) of this section. For purposes of 
section 1411(c)(5) and this section, a distribution means the following:
    (1) Actual distributions. Any amount actually distributed from a 
qualified plan or arrangement, as defined in paragraph (a) of this 
section, is a distribution within the meaning of section 1411(c)(5), and 
thus is not included in net investment income. Examples include a 
rollover to an eligible retirement plan within the meaning of section 
402(c)(8)(B), a distribution of a plan loan offset amount within the 
meaning of Q&A-13(b) of Sec.  1.72(p)-1, and certain corrective 
distributions under the Internal Revenue Code (Code).
    (2) Amounts treated as distributed. Any amount that is treated as 
distributed from a qualified plan or arrangement under the Code for 
purposes of income tax is a distribution within the meaning of section 
1411(c)(5), and thus is not included in net investment income. Examples 
include a conversion to a Roth IRA described in section 408A and a 
deemed distribution under section 72(p).
    (3) Amounts includible in gross income. Any amount that is not 
treated as a distribution but is otherwise includible in gross income 
pursuant to a rule relating to amounts held in a qualified plan or 
arrangement described in paragraph (a) of this section is a distribution 
within the meaning of section 1411(c)(5), and thus is not included in 
net investment income. For example, any income of the trust of a 
qualified plan or arrangement that is applied to purchase a 
participant's life insurance coverage (the P.S. 58 costs) is a 
distribution within the meaning of section 1411(c)(5), and thus is not 
included in net investment income.
    (4) Amounts related to employer securities--(i) Dividends related to 
employer securities. Any dividend that is deductible under section 
404(k) and is paid in cash directly to plan participants or 
beneficiaries is a distribution within the meaning of section 
1411(c)(5), and thus is not included in net investment income. However, 
any amount paid as a dividend after the employer securities have been 
distributed from a qualified plan is not a distribution within the 
meaning of section 1411(c)(5), and thus is included in net investment 
income.
    (ii) Amounts related to the net unrealized appreciation in employer 
securities. The amount of any net unrealized appreciation attributable 
to employer securities (within the meaning of section 402(e)(4)) 
realized on a disposition of those employer securities is a distribution 
within the meaning of section 1411(c)(5), and thus is not included in 
net investment income. However, any appreciation in value of the 
employer securities after the distribution from the qualified plan is 
not a distribution

[[Page 92]]

within the meaning of section 1411(c)(5), and is included in net 
investment income.
    (c) Effective/applicability date. This section applies to taxable 
years beginning after December 31, 2013. However, taxpayers may apply 
this section to taxable years beginning after December 31, 2012, in 
accordance with Sec.  1.1411-1(f).

[T.D. 9644, 78 FR 72424, Dec. 2, 2013]



Sec.  1.1411-9  Exception for self-employment income.

    (a) General rule. Except as provided in paragraph (b) of this 
section, net investment income does not include any item taken into 
account in determining self-employment income that is subject to tax 
under section 1401(b) for such taxable year. For purposes of section 
1411(c)(6) and this section, taken into account means income included 
and deductions allowed in determining net earnings from self-employment. 
However, amounts excepted in determining net earnings from self-
employment under section 1402(a)(1)-(17), and thus excluded from self-
employment income under section 1402(b), are not taken into account in 
determining self-employment income and thus may be included in net 
investment income if such amounts are described in Sec.  1.1411-4. 
Except as provided in paragraph (b) of this section, if net earnings 
from self-employment consist of income or loss from more than one trade 
or business, all items taken into account in determining the net 
earnings from self-employment with respect to these trades or businesses 
(see Sec.  1.1402(a)-2(c)) are considered taken into account in 
determining the amount of self-employment income that is subject to tax 
under section 1401(b) and therefore not included in net investment 
income.
    (b) Special rule for traders. In the case of gross income described 
in Sec. Sec.  1.1411-4(a)(1)(ii) and (a)(1)(iii) derived from a trade or 
business of trading in financial instruments or commodities (as 
described in Sec.  1.1411-5(a)(2)), the deductions described in Sec.  
1.1411-4(f)(2)(ii) properly allocable to the taxpayer's trade or 
business of trading in financial instruments or commodities are taken 
into account in determining the taxpayer's self-employment income only 
to the extent that such deductions reduce the taxpayer's net earnings 
from self-employment (after aggregating under Sec.  1.1402(a)-2(c) the 
net earnings from self-employment from any trade or business carried on 
by the taxpayer as an individual or as a member of a partnership). Any 
deductions described in Sec.  1.1411-4(f)(2)(ii) that exceed the amount 
of net earnings from self-employment, in the aggregate (if applicable), 
are allowed in determining the taxpayer's net investment income under 
section 1411 and the regulations thereunder.
    (c) Examples. The following examples illustrate the provisions of 
this section. For purposes of these examples, assume the taxpayer is a 
United States citizen, uses a calendar taxable year, and Year 1 and all 
subsequent years are taxable years in which section 1411 is in effect:

    Example 1. Exclusion from self-employment income. A is a general 
partner in PRS, a partnership carrying on a trade or business that is 
not a trade or business of trading in financial instruments or 
commodities (within the meaning of Sec.  1.1411-5(a)(2)). During Year 1, 
A's distributive share from PRS is $1 million, $300,000 of which is 
attributable to the gain on the sale of PRS's capital assets. Section 
1402(a)(3)(A) provides an exclusion from net earnings from self-
employment for any gain or loss from the sale or exchange of a capital 
asset. For Year 1, A has $700,000 self-employment income subject to 
self-employment tax. This $700,000 subject to self-employment tax is not 
included as part of net investment income under paragraph (a) of this 
section. However, the $300,000 attributable to the gain on PRS's sale of 
a capital asset is excluded from net earnings from self-employment, and 
from self-employment income, and thus is not covered by the exception in 
section 1411(c)(6). Therefore, the $300,000 attributable to the gain on 
PRS's sale of a capital asset is included as net investment income if 
the other requirements of section 1411 are satisfied.
    Example 2. Two trades or businesses. B is an individual engaged in 
two trades or businesses, Business X and Business Y, neither of which is 
the trade or business of trading in financial instruments or commodities 
(as described in Sec.  1.1411-5(a)(2)). B carries on Business X as a 
sole proprietor and B is also a general partner in a partnership that 
carries on Business Y. Business Y is a nonpassive activity of B. During 
Year 1, B had net earnings from self-employment consisting of the 
aggregate of a $50,000 loss (that is, after application of the 
exclusions under section

[[Page 93]]

1402(a)(1)-(17)) from Business X, and $70,000 in income (after 
application of the exclusions under section 1402(a)(1)-(17)) from B's 
distributive share from the partnership from carrying on Business Y. 
Thus, B's net earnings from self-employment in Year 1 are $20,000. For 
Year 1, all of B's income, deductions, gains, and losses from Business X 
and distributive share from the partnership carrying on Business Y, 
other than those amounts excluded due to application of section 
1402(a)(1)-(17), are taken into account in determining B's net earnings 
from self-employment and self-employment income for such taxable year. 
Accordingly, in calculating B's net investment income (as defined in 
Sec.  1.1411-4) for Year 1, B will not take into account the items of 
income, loss, gain, and deduction that comprise B's $50,000 loss 
attributable to Business X (after application of the exclusions under 
section 1402(a)(1)-(17)), and the items of income, loss, gain, and 
deduction that comprise B's $70,000 distributable share attributable to 
B's general partnership interest (after application of the exclusions 
under section 1402(a)(1)-(17)). Rather, only items of income, loss, 
gain, and deduction from the two separate businesses that were excluded 
from the calculation of B's net earnings from self-employment income due 
to the application of the exclusions under section 1402(a)(1)-(17), such 
as any capital gains and losses excluded under section 1402(a)(3), are 
considered for purposes of calculating B's net investment income for 
Year 1 in connection with these two trades or businesses.
    Example 3. Special rule for trader with single trade or business. D 
is an individual engaged in the trade or business of trading in 
commodities (as described in Sec.  1.1411-5(a)(2)). D made a valid and 
timely election under section 475(f)(2). D derives $400,000 of trading 
gains, which are gross income described in Sec.  1.1411-4(a)(1) and 
$15,000 of expenses described in Sec.  1.1411-4(f)(2)(ii) from carrying 
on the trade or business. Pursuant to sections 475(f)(1)(D) and 
1402(a)(3)(A), none of the gross income is taken into account in 
determining D's net earnings from self-employment and self-employment 
income. Therefore, under paragraph (a) of this section, the $400,000 of 
gross income is not covered by the exception in section 1411(c)(6). 
Because D had $0 net earnings from self-employment, the $15,000 of 
deductions did not reduce D's net earnings from self-employment under 
paragraph (b) of this section and Sec.  1.1411-(4)(f)(2)(ii). Therefore, 
the $15,000 of deductions may reduce D's gross income of $400,000 for 
purposes of section 1411.
    Example 4. Special rule for trader with multiple trades or 
businesses. E is an individual engaged in two trades or businesses, 
Business X (which is not a trade or business of trading in financial 
instruments or commodities) and Business Y (which is a trade or business 
of trading in financial instruments or commodities (as described in 
Sec.  1.1411-5(a)(2)). E made a valid and timely election under section 
475(f) with respect to Business Y. During Year 1, E had net earnings 
from self-employment from Business X of $35,000. During Year 1, E also 
had $300,000 of trading gains, which are gross income described in Sec.  
1.1411-4(a)(1) and $40,000 of expenses described in Sec.  1.1411-
4(f)(2)(ii) from Business Y. E's $300,000 of gross income from Business 
Y is excluded from net earnings from self-employment and self-employment 
income pursuant to sections 475(f)(1)(D) and 1402(a)(3)(A). E's $40,000 
of deductions from Business Y reduce E's $35,000 of net earnings from 
self-employment from Business X to $0. Pursuant to paragraph (b) of this 
section and Sec.  1.1411-4(f)(2)(ii), the remaining $5,000 of deductions 
from Business Y are taken into account in determining E's net investment 
income (by reducing E's gross income of $300,000 from Business Y to 
$295,000) for purposes of section 1411.

    (d) Effective/applicability date. This section applies to taxable 
years beginning after December 31, 2013. However, taxpayers may apply 
this section to taxable years beginning after December 31, 2012, in 
accordance with Sec.  1.1411-1(f).

[T.D. 9644, 78 FR 72424, Dec. 2, 2013]



Sec.  1.1411-10  Controlled foreign corporations and passive foreign 
investment companies.

    (a) In general. This section provides rules that apply to an 
individual, estate, or trust that is a United States shareholder of a 
controlled foreign corporation (CFC), or that is a United States person 
that directly or indirectly owns an interest in a passive foreign 
investment company (PFIC). In addition, this section provides rules that 
apply to an individual, estate, or trust that owns an interest in a 
domestic partnership or an S corporation that is either a United States 
shareholder of a CFC or that has made an election under section 1295 to 
treat a PFIC as a qualified electing fund (QEF). References in this 
section to an election under paragraph (g) of this section being in 
effect relate to an election that is applicable to the person that is 
determining the section 1411 consequences with respect to holding a 
particular CFC or QEF.
    (b) Amounts derived from a trade or business described in Sec.  
1.1411-5--(1) In

[[Page 94]]

general. Except as provided in paragraph (b)(2) of this section, an 
amount included in gross income under section 951(a) or section 1293(a) 
that is also income derived from a trade or business described in 
section 1411(c)(2) and Sec.  1.1411-5 (applying the relevant rules in 
Sec.  1.1411-4(b)) is taken into account as net investment income under 
section 1411(c)(1)(A)(ii) and Sec.  1.1411-4(a)(1)(ii) for purposes of 
section 1411 and the regulations thereunder when it is taken into 
account for purposes of chapter 1, and the rules in paragraphs (c) 
through (g) of this section do not apply to that amount. For purposes of 
section 1411 and the regulations thereunder, an amount included in gross 
income under section 1296(a) that is also income derived from a trade or 
business described in section 1411(c)(2) and Sec.  1.1411-5 (applying 
the relevant rules in Sec.  1.1411-4(b)), is net investment income 
within the meaning of section 1411(c)(1)(A)(ii) and Sec.  1.1411-
4(a)(1)(ii), and the rules in paragraph (c)(2)(ii) of this section do 
not apply to that amount.
    (2) Coordination rule for changes in trade or business status. With 
respect to stock of a CFC or QEF for which an election under paragraph 
(g) of this section is not in effect, the rules in paragraphs (c) 
through (f) of this section apply to a distribution of earnings and 
profits described in paragraph (c)(1)(i)(A) of this section that was not 
taken into account as net investment income under paragraph (b) of this 
section.
    (c) Calculation of net investment income--(1) Dividends. For 
purposes of section 1411(c)(1)(A)(i) and Sec.  1.1411-4(a)(1)(i), net 
investment income is calculated by taking into account the amount of 
dividends described in this paragraph (c)(1).
    (i) Distributions of previously taxed earnings and profits--(A) 
Rules when an election under paragraph (g) of this section is not in 
effect with respect to the shareholder--(1) General rule. Except as 
otherwise provided in this paragraph (c)(1)(i), with respect to stock of 
a CFC or QEF for which an election under paragraph (g) of this section 
is not in effect, a distribution of earnings and profits that is not 
treated as a dividend for chapter 1 purposes under section 959(d) or 
section 1293(c) is a dividend for purposes of section 1411(c)(1)(A)(i) 
and Sec.  1.1411-4(a)(1)(i) if the distribution is attributable to 
amounts that are or have been included in gross income for chapter 1 
purposes under section 951(a) or section 1293(a) in a taxable year 
beginning after December 31, 2012. Solely, for this purpose, 
distributions of earnings and profits attributable to amounts that are 
or have been included in gross income for chapter 1 purposes under 
section 951(a) or section 1293(a) are considered first attributable to 
those earnings and profits, if any, derived from the current taxable 
year, and then from prior taxable years beginning with the most recent 
prior taxable year, and with respect to amounts included under section 
951(a), without regard to whether the earnings and profits are described 
in section 959(c)(1) or section 959(c)(2).
    (2) Exception for distributions attributable to earnings and profits 
previously taken into account for purposes of section 1411. A 
distribution of earnings and profits that is not treated as a dividend 
for chapter 1 purposes under section 959(d) or section 1293(c) is not 
treated as a dividend for purposes of section 1411(c)(1)(A)(i) and Sec.  
1.1411-4(a)(1)(i), to the extent that an individual, estate, or trust 
establishes, by providing information that is similar to, and in the 
same manner as, the information described in Sec.  1.959-1(d) (relating 
to previously taxed earnings and profits), that the distribution is 
attributable to--
    (i) Amounts included in gross income by any person for chapter 1 
purposes under section 951(a) or section 1293(a) that have been taken 
into account by any person as net investment income by reason of 
paragraph (b) of this section or an election under paragraph (g) of this 
section; or
    (ii) Amounts included in gross income by any person as a dividend 
pursuant to section 1248(a) that, by reason of paragraph (c)(3)(ii) of 
this section, have been taken into account by any person as net 
investment income under section 1411(c)(1)(A)(i) and Sec.  1.1411-
4(a)(1)(i).
    (B) Rule when an election under paragraph (g) of this section is in 
effect with

[[Page 95]]

respect to the shareholder. Except as otherwise provided in this 
paragraph (c)(1)(i), if an election under paragraph (g) of this section 
is in effect, a distribution of earnings and profits that is not treated 
as a dividend for chapter 1 purposes under section 959(d) or section 
1293(c) is not treated as a dividend for purposes of section 
1411(c)(1)(A)(i) and Sec.  1.1411-4(a)(1)(i).
    (C) Special rule for certain distributions related to 2013 taxable 
years--(1) Scope. The rule in this paragraph (c)(1)(i)(C) applies to 
individuals, estates, and trusts that were subject to section 1411 
during a taxable year that began after December 31, 2012, and before 
January 1, 2014, and that satisfy all of the conditions set forth in 
paragraph (c)(1)(i)(C)(2) of this section. This rule also applies to all 
domestic partnerships and S corporations that satisfy all of the 
conditions set forth in paragraph (c)(1)(i)(C)(2) of this section.
    (2) Rule. A distribution of earnings and profits from a CFC or QEF, 
with respect to which an election under paragraph (g) is in effect, that 
is not treated as a dividend for chapter 1 purposes under section 959(d) 
or section 1293(c) is a dividend for purposes of section 
1411(c)(1)(A)(i) and Sec.  1.1411-4(a)(1)(i) to the extent that--
    (i) The distribution of earnings and profits is attributable to an 
amount included by an individual, estate, trust, domestic partnership, S 
corporation or common trust fund in gross income for chapter 1 purposes 
under section 951(a) or section 1293(a) with respect to the CFC or QEF 
for a taxable year that began after December 31, 2012, and before 
January 1, 2014;
    (ii) The individual, estate, trust, domestic partnership, S 
corporation, or common trust fund made the election under paragraph (g) 
of this section with respect to the CFC or QEF in a taxable year that 
began after December 31, 2013; and
    (iii) The individual, estate, trust, domestic partnership, S 
corporation, or common trust fund did not make the election described in 
paragraph (g)(4)(iii) of this section (concerning making an election 
under paragraph (g) of this section for a taxable year that begins 
before January 1, 2014).
    (3) Ordering rule. Solely, for purposes of this paragraph 
(c)(1)(i)(C)(3), distributions of earnings and profits attributable to 
amounts that have been included in gross income for chapter 1 purposes 
under section 951(a) or section 1293(a) are considered first 
attributable to the earnings and profits derived from a taxable year 
that began after December 31, 2012, and before January 1, 2014.
    (ii) Excess distributions that constitute dividends. To the extent 
an excess distribution within the meaning of section 1291(b) constitutes 
a dividend within the meaning of section 316(a), the amount is included 
in net investment income for purposes of section 1411(c)(1)(A)(i) and 
Sec.  1.1411-4(a)(1)(i).
    (2) Net gain. For purposes of section 1411(c)(1)(A)(iii) and Sec.  
1.1411-4(a)(1)(iii), the rules in this paragraph (c)(2) apply in 
determining net gain attributable to the disposition of property.
    (i) Gains treated as excess distributions. Gains treated as excess 
distributions under section 1291(a)(2) are included in determining net 
gain attributable to the disposition of property for purposes of section 
1411(c)(1)(A)(iii) and Sec.  1.1411-4(a)(1)(iii).
    (ii) Inclusions and deductions with respect to section 1296 mark to 
market elections. Amounts included in gross income under section 
1296(a)(1) and amounts allowed as a deduction under section 1296(a)(2) 
are taken into account in determining net gain attributable to the 
disposition of property for purposes of section 1411(c)(1)(A)(iii) and 
Sec.  1.1411-4(a)(1)(iii).
    (iii) Gain or loss attributable to the disposition of stock of CFCs 
and QEFs. With respect to stock of a CFC or QEF for which an election 
under paragraph (g) of this section is not in effect, for purposes of 
calculating the net gain under Sec. Sec.  1.1411-4(a)(1)(iii) and 
1.1411-4(d) that is attributable to the direct or indirect disposition 
of that stock (including for purposes of determining gain or loss on the 
direct or indirect disposition of that stock by a domestic partnership, 
S corporation, or common trust fund), basis is determined in accordance 
with the provisions of paragraph (d) of this section.

[[Page 96]]

    (iv) Gain or loss attributable to the disposition of interests in 
domestic partnerships or S corporations that own directly or indirectly 
stock of CFCs or QEFs. With respect to stock of a CFC or QEF for which 
an election under paragraph (g) of this section is not in effect, for 
purposes of calculating the net gain under Sec. Sec.  1.1411-
4(a)(1)(iii) and 1.1411-4(d) that is attributable to the disposition of 
an interest in a domestic partnership or S corporation that directly or 
indirectly owns that stock, basis is determined in accordance with the 
provisions of paragraph (d) of this section.
    (3) Application of section 1248. With respect to stock of a CFC or 
QEF for which an election under paragraph (g) of this section is not in 
effect, for purposes of section 1411 and Sec.  1.1411-4--
    (i) In determining the gain recognized on the sale or exchange of 
stock of a foreign corporation for section 1248(a) purposes, basis is 
determined in accordance with the provisions of paragraph (d) of this 
section; and
    (ii) Section 1248(a) applies without regard to the exclusion for 
certain earnings and profits under sections 1248(d)(1) and (d)(6), 
except that those exclusions will apply with respect to the earnings and 
profits of a foreign corporation that are attributable to:
    (A) Amounts taken into account as net investment income under 
paragraph (b) of this section; and
    (B) Amounts previously included in gross income for chapter 1 
purposes under section 951(a) or section 1293(a) in a taxable year 
beginning before December 31, 2012, and that have not yet been 
distributed. For this purpose, the determination of whether earnings and 
profits that are attributable to amounts previously taxed in a taxable 
year beginning before December 31, 2012, have been distributed is 
determined based on the rules described in paragraph (c)(1)(i) of this 
section.
    (4) Amounts distributed by an estate or trust. Net investment income 
of a beneficiary of an estate or trust includes the beneficiary's share 
of distributable net income, as described in sections 652 and 662 and as 
modified by paragraph (f) of this section, to the extent that the 
beneficiary's share of distributable net income includes items that, if 
they had been received directly by the beneficiary, would have been 
described in this paragraph (c).
    (5) Properly allocable deductions--(i) General rule. For purposes of 
section 1411(c)(1)(B) and Sec.  1.1411-4(f), the section 163(d)(1) 
investment expense deduction may be calculated by--
    (A) Increasing the amount of investment income determined for 
chapter 1 purposes under section 163(d)(4)(B) by the amount of dividends 
described in Sec.  1.1411-10(c) that are derived from a CFC or QEF with 
respect to which an election under paragraph (g) of this section is not 
in effect;
    (B) Decreasing the amount of investment income determined for 
chapter 1 purposes under section 163(d)(4)(B) by the amount included in 
gross income for chapter 1 purposes under section 951(a) or section 
1293(a) that is attributable to a CFC or QEF with respect to which an 
election under paragraph (g) of this section is not in effect; and
    (C) Increasing or decreasing, as applicable, the amount of 
investment income for chapter 1 purposes under section 163(d)(4)(B) by 
the difference between the amount calculated with respect to a 
disposition under paragraphs (c)(2)(iii) and (c)(2)(iv) of this section 
and the amount of the gain or loss attributable to the relevant 
disposition as calculated for chapter 1 purposes.
    (ii) Additional rules. For purposes of section 1411(c)(1)(B) and 
Sec.  1.1411-4(f), if the method of calculation described in paragraph 
(c)(5)(i) of this section is applied:
    (A) The amount of investment interest not allowed as a deduction 
under section 163(d)(2) must be calculated consistent with the method of 
calculation described in paragraph (c)(5)(i).
    (B) The method of calculation must be adopted by an individual, 
estate, or trust no later than the first year in which the individual, 
estate, or trust is subject to section 1411.
    (C) The method of calculation must be applied with respect to all 
CFCs and QEFs for all taxable years with respect to which an election 
under paragraph (g) of this section is not in effect.
    (D) A method of calculation under this paragraph is a method of 
accounting, which must be applied consistently, and may only be changed 
by the taxpayer by securing the consent of the

[[Page 97]]

Commissioner in accordance with Sec.  1.446-1(e) and following the 
administrative procedures issued under Sec.  1.446-1(e)(3)(ii).
    (d) Conforming basis adjustments--(1) Basis adjustments under 
sections 961 and 1293--(i) Stock held by individuals, estates, or 
trusts. With respect to stock of a CFC or QEF which is held by an 
individual, estate, or trust, either directly or indirectly through one 
or more entities each of which is foreign, for which an election under 
paragraph (g) of this section is not in effect--
    (A) The basis increases made pursuant to sections 961(a) and 1293(d) 
for amounts included in gross income for chapter 1 purposes under 
sections 951(a) and 1293(a) in taxable years beginning after December 
31, 2012, are not taken into account for purposes of section 1411 and 
the regulations thereunder; and
    (B) The basis decreases made pursuant to sections 961(b) and 1293(d) 
attributable to amounts treated as dividends for purposes of section 
1411 under paragraph (c)(1)(i) of this section are not taken into 
account for purposes of section 1411 and the regulations thereunder.
    (ii) Stock held by domestic partnerships or S corporations--(A) Rule 
when an election under paragraph (g) of this section is not in effect. 
The rules of this paragraph (d)(1)(ii)(A) apply with respect to stock of 
a CFC or QEF held directly by a domestic partnership or S corporation, 
or indirectly through one or more entities each of which is foreign, for 
which an election under paragraph (g) of this section is not in effect. 
If an individual, estate, or trust is a shareholder of an S corporation, 
or if an individual, estate, or trust directly, or through one or more 
tiers of passthrough entities (including an S corporation), owns an 
interest in a domestic partnership, the S corporation or domestic 
partnership, as the case may be, will not take into account for purposes 
of section 1411 and the regulations thereunder the basis increases made 
by the domestic partnership or S corporation pursuant to sections 961(a) 
and 1293(d) for amounts included in gross income for chapter 1 purposes 
under sections 951(a) and 1293(a) for taxable years beginning after 
December 31, 2012, and the basis decreases made by the domestic 
partnership or S corporation pursuant to sections 961(b) and 1293(d) 
attributable to amounts treated as dividends for purposes of section 
1411 under paragraph (c)(1)(i) of this section (the section 1411 
recalculated basis). If the domestic partnership or S corporation 
disposes of the stock of a CFC or QEF, the section 1411 recalculated 
basis will be used to determine the distributive share or pro rata share 
of the gain or loss for purposes of section 1411 for partners or 
shareholders.
    (B) Rules when an election under paragraph (g) of this section is in 
effect. If an election under paragraph (g) of this section is in effect 
with respect to stock of a CFC or QEF held directly or indirectly by a 
domestic partnership or S corporation, the partner's distributive share 
or the shareholder's pro rata share of the gain or loss for purposes of 
section 1411 is the same as the distributive share or pro rata share of 
the gain or loss for purposes of chapter 1. See Example 6 of paragraph 
(h) of this section.
    (2) Special rules for partners that own interests in domestic 
partnerships that own directly or indirectly stock of CFCs or QEFs. The 
rules of this paragraph (d)(2) apply with respect to stock of a CFC or 
QEF for which an election under paragraph (g) of this section is not in 
effect, and that is held by a domestic partnership, either directly or 
indirectly through one or more entities each of which is foreign. In 
such a case, the basis increases provided under section 705(a)(1)(A) to 
the partners for purposes of chapter 1 that are attributable to amounts 
that the domestic partnership includes or included in gross income under 
section 951(a) or section 1293(a) for a taxable year beginning after 
December 31, 2012, are not taken into account for purposes of section 
1411. Instead, each partner's adjusted basis in the partnership interest 
is increased by its share of any distributions to the partnership from 
the CFC or QEF that are treated as dividends for purposes of section 
1411 under paragraph (c)(1)(i) of this section. Similar rules apply when 
the stock of the CFC or QEF is held in a tiered partnership structure. 
For purposes of determining net investment

[[Page 98]]

income under section 1411 and the regulations thereunder, the partner's 
adjusted basis in the partnership interest as calculated under this 
paragraph (d)(2) is used to determine all tax consequences related to 
tax basis (for example, loss limitation rules and the characterization 
of partnership distributions).
    (3) Special rules for S corporation shareholders that own interests 
in S corporations that own directly or indirectly stock of CFCs or QEFs. 
The rules of this paragraph (d)(3) apply with respect to stock of a CFC 
or QEF for which an election under paragraph (g) of this section is not 
in effect, and that is held by an S corporation, directly or indirectly 
through one or more entities each of which is foreign. In such case, the 
basis increases provided in section 1367(a)(1)(A) to its shareholders 
for chapter 1 purposes that are attributable to amounts that the S 
corporation includes or included in gross income for chapter 1 purposes 
under section 951(a) or section 1293(a) for taxable years beginning 
after December 31, 2012, are not taken into account for purposes of 
section 1411. Instead, each shareholder's adjusted basis of stock in the 
S corporation is increased by its share of the distributions to the S 
corporation from the CFC or QEF that are treated as dividends for 
purposes of section 1411 under paragraph (c)(1)(i) of this section. 
Similar rules apply when the S corporation holds an interest in a CFC or 
QEF through a partnership. For purposes of determining net investment 
income under section 1411 and the regulations thereunder, the 
shareholder's adjusted basis in the stock of the S corporation as 
calculated under this paragraph (d)(3) is used to determine all tax 
consequences related to tax basis (for example, loss limitation rules 
and the characterization of S corporation distributions).
    (4) Special rules for participants in common trust funds. Rules 
similar to the rules in paragraphs (d)(2) and (3) of this section apply 
to ownership interests in common trust funds (as defined in section 
584).
    (e) Conforming adjustments to modified adjusted gross income and 
adjusted gross income--(1) Individuals. Solely for purposes of section 
1411(a)(1)(B)(i) and the regulations thereunder, the term modified 
adjusted gross income means modified adjusted gross income as defined in 
Sec.  1.1411-2(c)(1)--
    (i) Increased by amounts included in net investment income under 
paragraphs (c)(1)(i), (c)(1)(ii), (c)(2)(i), and (c)(4) of this section 
that are not otherwise included in gross income for chapter 1 purposes;
    (ii) Increased or decreased, as applicable, by the difference 
between the amount calculated with respect to a disposition under 
paragraphs (c)(2)(iii) and (iv) of this section and the amount of the 
gain or loss attributable to the relevant disposition as calculated for 
chapter 1 purposes;
    (iii) Decreased by any amount included in gross income for chapter 1 
purposes under section 951(a) or section 1293(a) attributable to a CFC 
or QEF with respect to which no election under paragraph (g) of this 
section is in effect; and
    (iv) To the extent the section 163(d)(1) investment interest expense 
deduction is calculated using the method of calculation set forth in 
paragraph (c)(5) of this section and the deduction is taken into account 
under Sec.  1.1411-4(f)(2), increased or decreased, as appropriate, by 
the difference between the amount of the section 163(d)(1) investment 
interest expense deduction calculated under paragraph (c)(5) of this 
section and the amount calculated for chapter 1 purposes.
    (2) Estates and trusts. Solely for purposes of section 
1411(a)(2)(B)(i) and the regulations thereunder, the term adjusted gross 
income means adjusted gross income as defined in Sec.  1.1411-
3(a)(1)(ii)(B)(1) adjusted by the following amounts to the extent those 
amounts are not distributed by the estate or trust--
    (i) Increased by amounts included in net investment income under 
paragraphs (c)(1)(i), (c)(1)(ii), (c)(2)(i), and (c)(4) of this section 
that are not otherwise included in gross income for chapter 1 purposes;
    (ii) Increased or decreased, as applicable, by the difference 
between the amount calculated with respect to a disposition under 
paragraphs (c)(2)(iii) and (iv) of this section and the amount of the 
gain or loss attributable to the

[[Page 99]]

relevant disposition as calculated for chapter 1 purposes;
    (iii) Decreased by any amount included in gross income for chapter 1 
purposes under section 951(a) or section 1293(a) attributable to a CFC 
or QEF with respect to which no election under paragraph (g) of this 
section is in effect; and
    (iv) To the extent the section 163(d)(1) investment interest expense 
deduction is calculated using the method of calculation set forth in 
paragraph (c)(5) of this section and taken into account under Sec.  
1.1411-4(f)(2), increased or decreased, as appropriate, by the 
difference between the amount of the section 163(d)(1) investment 
interest expense deduction calculated under paragraph (c)(5) of this 
section and the amount calculated for chapter 1 purposes.
    (f) Application to estates and trusts. All of the items described in 
paragraph (c) of this section are included in the net investment income 
of an estate or trust or its beneficiaries. The amounts described in 
paragraphs (e)(2)(i) through (iv) of this section, regardless of whether 
the estate or trust receives those amounts directly or indirectly 
through another estate or trust, increase or decrease, as applicable, 
the estate's or trust's distributable net income for purposes of section 
1411. The estate or trust, or the beneficiaries thereof, must take those 
amounts into account in a manner reasonably consistent with the general 
operating rules for estates and trusts in Sec.  1.1411-3 and subchapter 
J in computing the undistributed net investment income of the estate or 
trust and the net investment income of the beneficiaries.
    (g) Election with respect to CFCs and QEFs--(1) Effect of election. 
If an election under paragraph (g) of this section is made with respect 
to a CFC or QEF, amounts included in gross income for chapter 1 purposes 
under section 951(a) or section 1293(a)(1)(A) with respect to the CFC or 
QEF in taxable years beginning with the taxable year for which the 
election is made are treated as net investment income for purposes of 
Sec.  1.1411-4(a)(1)(i), and amounts included in gross income under 
section 1293(a)(1)(B) with respect to the QEF in taxable years beginning 
with the taxable year for which the election is made are taken into 
account in calculating net gain attributable to the disposition of 
property under Sec.  1.1411-4(a)(1)(iii). See paragraphs (c)(1)(i)(B) 
and (c)(1)(i)(C) of this section for the effect of this election on 
certain distributions of previously taxed earnings and profits.
    (2) Years to which election applies--(i) In general. An election 
under paragraph (g) of this section applies to the taxable year for 
which it is made and all subsequent taxable years, and applies to all 
subsequently acquired interests in the CFC or QEF. An election under 
paragraph (g) of this section is irrevocable.
    (ii) Termination of interest in CFC or QEF. Complete termination of 
a person's interest in the CFC or QEF does not terminate the person's 
election under paragraph (g) of this section with respect to the CFC or 
QEF. Thus, if the person reacquires stock of the CFC or QEF, that stock 
is considered to be stock for which an election under paragraph (g) of 
this section has been made and is in effect.
    (iii) Termination of partnership. If a domestic partnership that 
makes the election under paragraph (g) of this section is terminated 
pursuant to section 708(b)(1)(B), the election is binding on the new 
partnership.
    (3) Who may make the election. An individual, estate, trust, 
domestic partnership, S corporation, or common trust fund may make an 
election under paragraph (g) of this section with respect to each CFC or 
QEF that it holds directly or indirectly through one or more entities, 
each of which is foreign. In addition, an individual, estate, trust, 
domestic partnership, S corporation, or common trust fund may make an 
election under paragraph (g) of this section with respect to a CFC or 
QEF that it holds indirectly through a domestic partnership, S 
corporation, estate, trust, or common trust fund if the domestic 
partnership, S corporation, estate, trust, or common trust fund does not 
make the election. The election, if made, for an estate or trust must be 
made by the fiduciary of that estate or trust.
    (4) Time and manner for making the election--(i) Individuals, 
estates, and

[[Page 100]]

trusts--(A) General rule. Except as otherwise provided in this 
paragraph, in order for an election under paragraph (g) of this section 
by an individual, estate, or trust (other than a CRT) with respect to a 
CFC or QEF to be effective, the election must be made no later than the 
first taxable year beginning after December 31, 2013, during which the 
individual, estate, or trust--
    (1) Includes an amount in gross income for chapter 1 purposes under 
section 951(a) or section 1293(a) with respect to the CFC or QEF; and
    (2) Is subject to tax under section 1411 or would be subject to tax 
under section 1411 if the election were made with respect to the stock 
of the CFC or QEF.
    (B) Special rule for charitable remainder trusts (CRTs). Except as 
otherwise provided in this paragraph, in order for an election under 
paragraph (g) of this section by a CRT with respect to a CFC or QEF to 
be effective, the election must be made no later than the first taxable 
year beginning after December 31, 2013, during which the CRT includes an 
amount in gross income for chapter 1 purposes under section 951(a) or 
section 1293(a) with respect to the CFC or QEF.
    (ii) Certain domestic passthrough entities. Except as otherwise 
provided in this paragraph, in order for an election under paragraph (g) 
of this section by a domestic partnership, S corporation, or common 
trust fund with respect to a CFC or a QEF to be effective, the election 
must be made no later than the first taxable year beginning after 
December 31, 2013, during which the domestic partnership S corporation, 
or common trust fund--
    (A) Includes an amount in gross income for chapter 1 purposes under 
section 951(a) or section 1293(a) with respect to the CFC or QEF; and
    (B) Has a direct or indirect owner that is subject to tax under 
section 1411 or would be subject to tax under section 1411 if the 
election were made.
    (iii) Taxable years that begin before January 1, 2014--(A) 
Individuals, estates, or trusts. An individual, estate, or trust may 
make an election under paragraph (g) of this section for a taxable year 
that begins before January 1, 2014.
    (B) Certain domestic passthrough entities. A domestic partnership, S 
corporation, or common trust fund may make an election under paragraph 
(g) of this section for a taxable year that begins before January 1, 
2014, provided that all of its partners, shareholders, or participants, 
as the case may be, consent to the election. In the case of a partner, 
shareholder, or participant that is a partnership, S corporation, or 
common trust fund, all of the partners, shareholders, and participants 
also must consent to the election.
    (iv) Time for making election. In all cases, the election under 
paragraph (g) of this section must be made in the manner prescribed by 
forms, instructions, or in other guidance on the individual's, estate's, 
trust's, domestic partnership's, S corporation's, or common trust fund's 
original or amended return for the taxable year for which the election 
is made. An election can be made on an amended return only if the 
taxable year for which the election is made, and all taxable years that 
are affected by the election, are not closed by the period of 
limitations on assessments under section 6501. An individual, estate, 
trust, domestic partnership, S corporation, or common trust fund may not 
seek an extension of time to make the election under any other provision 
of the law, including Sec.  301.9100 of this chapter.
    (h) Examples. The following examples illustrate the rules of this 
section. In each example, unless otherwise indicated, the individuals, 
the foreign corporation (FC), the QEF (QEF), and the partnership (PRS) 
use a calendar taxable year. Further, the gross income or gain with 
respect to an interest in FC is not derived in a trade or business 
described in Sec.  1.1411-5.

    Example 1. (i) Facts. A, a United States citizen, is the sole 
shareholder of FC, a controlled foreign corporation (within the meaning 
of section 957). A is a United States shareholder (within the meaning of 
section 951(b)) with respect to FC. In 2012, A includes $40,000 in gross 
income for chapter 1 purposes under section 951(a)(1)(A) with respect to 
FC. On December 31, 2012, A's basis in the stock of FC for chapter 1 
purposes is $500,000, which includes an increase to basis under section 
961(a) of $40,000. The amount of FC's earnings and profits that are 
described in section

[[Page 101]]

959(c)(2) is $40,000, the amount of FC's earnings and profits that are 
described in section 959(c)(3) is $20,000, and FC does not have any 
earnings and profits that are described in section 959(c)(1). No 
election is made under paragraph (g) of this section. During 2013, A 
does not include any amounts in income under section 951(a) with respect 
to FC, A does not receive any distributions from FC, and there is no 
change in the amount of FC's earnings and profits. In 2014, A includes 
$10,000 in gross income for chapter 1 purposes under section 
951(a)(1)(A) with respect to FC. As a result, A's basis in the stock of 
FC for chapter 1 purposes increases by $10,000 to $510,000 pursuant to 
section 961(a). During 2015, FC distributes $30,000 to A, which is not 
treated as a dividend for purposes of chapter 1 under section 959(d). As 
a result, A's basis in the stock of FC for chapter 1 purposes is 
decreased by $30,000 to $480,000 pursuant to section 961(b).
    (ii) Results for section 1411 purposes. In 2014, A does not include 
the $10,000 section 951(a) income inclusion in A's net investment income 
under section 1411(c)(1)(A)(i) and Sec.  1.1411-4(a)(1)(i). Pursuant to 
paragraph (e)(1)(iii) of this section, A decreases A's modified adjusted 
gross income for section 1411 purposes by $10,000 in 2014, and pursuant 
to paragraph (d)(1)(i) of this section, A's adjusted basis is not 
increased by $10,000 and remains at $500,000. In 2015, pursuant to 
paragraph (c)(2)(i) of this section, A includes $10,000 of the 
distribution of previously taxed earnings and profits as a dividend for 
purposes of determining A's net investment income because $10,000 of the 
$30,000 distribution is attributable to amounts that A included in gross 
income for chapter 1 purposes under section 951(a) in a tax year that 
began after December 31, 2012. Pursuant to paragraph (e)(1)(i) of this 
section, A increases A's modified adjusted gross income for section 1411 
purposes by $10,000 in 2015. Under paragraph (d)(1)(i) of this section, 
A's adjusted basis is not decreased by the $10,000 that is treated as a 
dividend for section 1411 purposes, and thus, A's adjusted basis in FC 
for section 1411 purposes is decreased under section 961 only by $20,000 
to $480,000.
    Example 2. (i) Facts. Same facts as Example 1. In addition, during 
2016, A includes $15,000 in gross income for chapter 1 purposes under 
section 951(a)(1)(A) with respect to FC. As a result, A's basis in the 
stock of FC for chapter 1 purposes increases by $15,000 to $495,000 
pursuant to section 961(a). During 2017, A sells all of A's shares of FC 
for $550,000 and, prior to the application of section 1248, recognizes 
$55,000 ($550,000 minus $495,000) of long-term capital gain for chapter 
1 purposes. For purposes of calculating the amount included in income as 
a dividend pursuant to section 1248(a) for chapter 1 purposes, the 
earnings and profits of FC attributable to A's shares in FC which were 
accumulated after December 31,1962 and during the period which A held 
the stock while FC was a controlled foreign corporation is $55,000, 
$35,000 of which is excluded pursuant to section 1248(d)(1). Therefore, 
after the application of section 1248, for chapter 1 purposes, upon the 
sale of the FC stock, A recognizes $35,000 of long-term capital gain and 
a $20,000 dividend.
    (ii) Results for section 1411 purposes. (A) In 2016, A does not 
include the $15,000 section 951(a)(1)(A) income inclusion in A's net 
investment income under section 1411(c)(1)(A)(i) and Sec.  1.1411-
1(a)(1)(i). Pursuant to paragraph (e)(1)(ii) of this section, A 
decreases A's modified adjusted gross income for section 1411 purposes 
by $15,000, and, pursuant to paragraph (d)(1)(i) of this section, A's 
adjusted basis remains at $480,000.
    (B) During 2017, prior to the application of section 1248, A 
recognizes $70,000 ($550,000 minus $480,000) of gain for section 1411 
purposes. Pursuant to paragraph (c)(3) of this section, for section 1411 
purposes, section 1248(a) applies to the gain on the sale of FC 
calculated for section 1411 purposes ($70,000) and section 1248(d)(1) 
does not apply, except with respect to the $20,000 of earnings and 
profits of FC that are attributable to amounts previously included in 
income for chapter 1 purposes under section 951 for a taxable year 
beginning before December 31, 2012. Accordingly, for purposes of 
calculating the amount of income includible as a dividend under section 
1248(a), A has $55,000 of earnings and profits, $20,000 of which is 
excluded pursuant to section 1248(d)(1). Therefore, after the 
application of section 1248, for section 1411 purposes A has $35,000 of 
long-term capital gain and a $35,000 dividend. For purposes of 
calculating net investment income in 2017, A includes $35,000 as a 
dividend under section 1411(c)(1)(A)(i) and Sec.  1.1411-4(a)(1)(i) and 
$35,000 as a gain under section 1411(c)(1)(A)(iii) and Sec.  1.1411-
4(a)(1)(iii).
    Example 3. (i) Facts. Same facts as Example 2, except that A timely 
makes an election under paragraph (g)(4)(i) of this section for 2014 
(and thus for all subsequent years).
    (ii) Results for section 1411 purposes. A does not have any 
adjustments to A's modified adjusted gross income for section 1411 
purposes for 2014, 2015, 2016 or 2017 because the election under 
paragraph (g)(4)(i) of this section was timely made. Pursuant to 
paragraph (g)(2) of this section, for purposes of calculating A's net 
investment income in 2014, the $10,000 that A included in income for 
chapter 1 purposes under section 951(a) is net investment income for 
purposes of section 1411(c)(1)(A)(i) and Sec.  1.1411-4(a)(1)(i). A has 
no amount of net investment income with respect to FC in 2015. Pursuant 
to paragraph (g)(2) of this section, for purposes of calculating A's net 
investment income in 2016, the $15,000 that A included in income for 
chapter

[[Page 102]]

1 purposes under section 951(a) is net investment income for purposes of 
section 1411(c)(1)(A)(i) and Sec.  1.1411-4(a)(1)(i). For purposes of 
calculating A's net investment income in 2017, the amount of gain on the 
disposition of the FC shares is the same as the amount calculated for 
chapter 1 purposes. Applying section 1248, A includes $35,000 as a gain 
under section 1411(c)(1)(A)(iii) and Sec.  1.1411-4(a)(1)(iii), and 
$20,000 as a dividend under section 1411(c)(1)(A)(i) and Sec.  1.1411-
4(a)(1)(i).
    Example 4. Domestic partnership holding QEF stock. (i) Facts. (A) C, 
a United States citizen, owns a 50% interest in PRS, a domestic 
partnership. D, a United States citizen, and E, a United States citizen, 
each own a 25% interest in PRS. All allocations of partnership income 
and losses are pro rata based on ownership interests. PRS owns an 
interest in QEF, a foreign corporation that is a passive foreign 
investment company (within the meaning of section 1297(a)). PRS, a 
United States person, made an election under section 1295 with respect 
to QEF applicable to the first year of its holding period in QEF. As of 
December 31, 2012, for chapter 1 purposes, C's basis in his partnership 
interest is $100,000, D's basis in his partnership interest is $50,000, 
E's basis in his partnership interest is $50,000, and PRS's adjusted 
basis in its QEF stock is $80,000, which includes an increase in basis 
under section 1293(d) of $40,000. As of December 31, 2012, the amount of 
QEF's earnings that have been included in income by PRS under section 
1293(a), but have not been distributed by QEF, is $40,000. PRS also has 
cash of $60,000 and domestic C corporation stock with an adjusted basis 
of $60,000. During 2013, PRS does not include any amounts in income 
under section 1293(a) with respect to QEF, PRS does not receive any 
distributions from QEF, and there are no adjustments to the basis of C, 
D, or E in their interests in PRS.
    (B) During 2014, PRS has income of $40,000 under section 1293(a) 
with respect to QEF and has no other partnership income. PRS does not 
make an election under paragraph (g) of this section.
    (C) During 2015, QEF distributes $60,000 to PRS. PRS has no income 
for the year.
    (ii) Results for 2014. (A) For chapter 1 purposes, as a result of 
the $40,000 income inclusion under section 1293(a), PRS's basis in its 
QEF stock is increased by $40,000 under section 1293(d)(1) to $120,000. 
Under Sec.  1.1293-1(c)(1) and section 702, C's, D's, and E's 
distributive shares of the section 1293(a) income inclusion are $20,000, 
$10,000, and $10,000, respectively. Under section 705(a)(1)(A), C 
increases his adjusted basis in his partnership interest by $20,000 to 
$120,000, and D and E each increase his adjusted basis in his 
partnership interest by $10,000 to $60,000.
    (B) For section 1411 purposes, pursuant to paragraph (d)(1)(ii) of 
this section, PRS's basis in QEF is not increased by the $40,000 income 
inclusion (it remains at $80,000). Because PRS did not make an election 
under paragraph (g) of this section, C, D and E do not have net 
investment income with respect to the income inclusion, and pursuant to 
paragraph (d)(2) of this section, they do not increase their adjusted 
bases in their interests in PRS (each remains at $50,000). Pursuant to 
paragraph (e)(1)(ii) of this section, C reduces his modified adjusted 
gross income by $20,000, and D and E each reduce their modified adjusted 
gross income by $10,000.
    (iii) Results for 2015. (A) For chapter 1 purposes, the distribution 
of $60,000 from QEF to PRS is not a dividend under section 1293(c), and 
PRS decreases its basis in QEF by $60,000 under section 1293(d)(2) to 
$60,000.
    (B) Pursuant to paragraph (c)(1)(i) of this section, $40,000 of the 
distribution is a dividend for section 1411 purposes because PRS 
included $40,000 in gross income for chapter 1 purposes under section 
1293(a) in a tax year that began after December 31, 2012. For section 
1411 purposes, pursuant to paragraph (d)(1)(ii) of this section, section 
1293(d) will not apply to reduce PRS's basis in QEF to the extent of the 
$40,000 of the distribution that is treated as a dividend under 
paragraph (c)(2)(i) of this section. Thus, PRS's basis in QEF is 
decreased only by $20,000 for purposes of section 1411 and is $60,000. 
The $40,000 distribution of previously taxed earnings and profits that 
is treated as a dividend for section 1411 purposes is allocated $20,000 
to C, $10,000 to D, and $10,000 to E. Because PRS did not make an 
election under paragraph (g) of this section, pursuant to paragraph 
(c)(2)(i) of this section, C has $20,000 of net investment income, and D 
and E each has $10,000 of net investment income as a result of the 
distribution by QEF, and pursuant to paragraph (d)(2) of this section, C 
increases his adjusted basis in PRS by $20,000 to $120,000, and D and E 
each increases his adjusted basis in PRS by $10,000 to $60,000. Pursuant 
to paragraph (e)(1)(i) of this section, C increases his modified 
adjusted gross income by $20,000, and D and E each increases his 
modified adjusted gross income by $10,000.
    Example 5. Sale of partnership interest. (i) Facts. Same facts as 
Example 4. In addition, in 2016, D sells his entire interest in PRS to F 
for $100,000.
    (ii) Results for 2016. For chapter 1 purposes, D has a gain of 
$40,000 ($100,000 minus $60,000). For section 1411 purposes, D has a 
gain of $40,000 ($100,000 minus $60,000), and thus, has net investment 
income of $40,000. No adjustments to modified adjusted gross income are 
necessary under paragraph (e) of this section.
    Example 6. Domestic partnership's sale of QEF stock. (i) Facts. Same 
facts as Example 4. In addition, in 2016 PRS has income of $60,000 under 
section 1293(a) with respect to QEF,

[[Page 103]]

and in 2017, PRS sells its entire interest in QEF for $170,000.
    (ii) Results for 2016. (A) For chapter 1 purposes, as a result of 
the $60,000 income inclusion under section 1293(a), PRS's basis in its 
QEF stock is increased by $60,000 under section 1293(d)(1) to $120,000. 
Under Sec.  1.1293-1(c)(1) and section 702, C's, D's, and E's 
distributive shares of the section 1293(a) income inclusion are $30,000, 
$15,000, and $15,000 respectively. Under section 705(a)(1)(A), C 
increases his adjusted basis in his partnership interest by $30,000 to 
$150,000, and D and E each increases his adjusted basis in his 
partnership interest by $15,000 to $75,000.
    (B) For section 1411 purposes, pursuant to paragraph (d)(1)(ii) of 
this section, PRS's basis in QEF is not increased by the $60,000 income 
inclusion (it remains at $60,000). Because PRS did not make an election 
under paragraph (g) of this section, C, D and E do not have net 
investment income with respect to the income inclusion, and pursuant to 
paragraph (d)(2) of this section, they do not increase their adjusted 
bases in their interests in PRS (C remains at $120,000, and D and E each 
remain at $60,000). Pursuant to paragraph (e)(1)(ii) of this section, C 
reduces his modified adjusted gross income by $30,000, and D and E each 
reduce their modified adjusted gross income by $15,000.
    (iii) Results for 2017. (A) For chapter 1 purposes, PRS has a gain 
of $50,000 ($170,000 minus $120,000), which is allocated 50% ($25,000) 
to C, 25% ($12,500) to D, and 25% ($12,500) to E.
    (B) Based on PRS's basis in the stock of QEF for section 1411 
purposes, PRS has a gain for section 1411 purposes of $110,000 ($170,000 
minus $60,000), which in the absence of an election by PRS under 
paragraph (g) of this section, results in gain of $55,000 to C, $27,500 
to D, and $27,500 to E. Therefore, C has net investment income of 
$55,000, and D and E each have net investment income of $27,500. 
Pursuant to paragraph (e)(1)(ii) of this section, C increases his 
modified adjusted gross income by $30,000, and D and E each increase 
their modified adjusted gross income by $15,000.

    (i) Effective/applicability date. This section applies to taxable 
years beginning after December 31, 2013. However, taxpayers may apply 
this section to taxable years beginning after December 31, 2012, in 
accordance with Sec.  1.1411-1(f).

[T.D. 9644, 78 FR 72424, Dec. 2, 2013, as amended at 79 FR 18160, Apr. 
1, 2014]

 Withholding of Tax on Nonresident Aliens and Foreign Corporations and 
                         Tax-Free Covenant Bonds

               NONRESIDENT ALIENS AND FOREIGN CORPORATIONS



Sec.  1.1441-0  Outline of regulation provisions for section 1441.

    This section lists captions contained in Sec. Sec.  1.1441-1 through 
1.1441-9.

 Sec.  1.1441-1 Requirement for the deduction and withholding of tax on 
                      payments to foreign persons.

    (a) Purpose and scope.
    (b) General rules of withholding.
    (1) Requirement to withhold on payments to foreign persons.
    (2) Determination of payee and payee's status.
    (i) In general.
    (ii) Payments to a U.S. agent of a foreign person.
    (iii) Payments to wholly-owned entities.
    (A) Foreign-owned domestic entity.
    (B) Foreign entity.
    (iv) Payments to a U.S. branch of certain foreign banks or foreign 
insurance companies.
    (A) U.S. branch treated as a U.S. person in certain cases.
    (B) Consequences to the withholding agent.
    (C) Consequences to the U.S. branch.
    (D) Definition of payment to a U.S. branch.
    (E) Payments to other U.S. branches.
    (v) Payments to a foreign intermediary.
    (A) Payments treated as made to persons for whom the intermediary 
collects the payment.
    (B) Payments treated as made to foreign intermediary.
    (vi) Other payees.
    (vii) Rules for reliably associating a payment with a withholding 
certificate or other appropriate documentation.
    (A) Generally.
    (B) Special rules applicable to a withholding certificate from a 
nonqualified intermediary or flow-through entity.
    (C) Special rules applicable to a withholding certificate provided 
by a qualified intermediary that does not assume primary withholding 
responsibility.
    (D) Special rules applicable to a withholding certificate provided 
by a qualified intermediary that assumes primary withholding 
responsibility under chapter 3 and chapter 4 of the Internal Revenue 
Code.
    (E) Special rules applicable to a withholding certificate provided 
by a qualified intermediary that assumes primary Form 1099 reporting and 
backup withholding responsibility but not primary withholding under 
chapter 3 and chapter 4.

[[Page 104]]

    (F) Special rules applicable to a withholding certificate provided 
by a qualified intermediary that assumes primary withholding 
responsibility under chapter 3 and chapter 4 and primary Form 1099 
reporting and backup withholding responsibility and a withholding 
certificate provided by a withholding foreign partnership or a 
withholding foreign trust.
    (3) Presumptions regarding payee's status in the absence of 
documentation.
    (i) General rules.
    (ii) Presumptions of classification as individual, corporation, 
partnership, etc.
    (A) In general.
    (B) No documentation provided.
    (C) Documentary evidence furnished for offshore obligation.
    (iii) Presumption of U.S. or foreign status.
    (A) Payments to exempt recipients.
    (1) In general.
    (2) Special rule for withholdable payments made to exempt 
recipients.
    (B) Scholarships and grants.
    (C) Pensions, annuities, etc.
    (D) Payments with respect to offshore obligations.
    (E) Certain payments for services.
    (iv) Grace period.
    (v) Special rules applicable to payments to foreign intermediaries.
    (A) Reliance on claim of status as foreign intermediary.
    (B) Beneficial owner documentation or allocation information is 
lacking or unreliable.
    (vi) U.S. branches and territory financial institutions not treated 
as U.S. persons.
    (vii) Joint payees.
    (A) In general.
    (B) Special rule for offshore obligations.
    (viii) Rebuttal of presumptions.
    (ix) Effect of reliance on presumptions and of actual knowledge or 
reason to know otherwise.
    (A) General rule.
    (B) Actual knowledge or reason to know that amount of withholding is 
greater than is required under the presumptions or that reporting of the 
payment is required.
    (x) Examples.
    (4) List of exemptions from, or reduced rates of, withholding under 
chapter 3 of the Code.
    (5) Establishing foreign status under applicable provisions of 
chapter 61 of the Code.
    (6) Rules of withholding for payments by a foreign intermediary or 
certain U.S. branches.
    (i) In general.
    (ii) Examples.
    (7) Liability for failure to obtain documentation timely or to act 
in accordance with applicable presumptions.
    (i) General rule.
    (ii) Proof that tax liability has been satisfied.
    (A) In general.
    (B) Special rule for establishing that income is effectively 
connected with the conduct of a U.S. trade or business.
    (iii) Liability for interest and penalties.
    (iv) Special rule for determining validity of withholding 
certificate containing inconsequential errors.
    (v) Special effective date.
    (8) Adjustments, refunds, or credits of overwithheld amounts.
    (9) Payments to joint owners.
    (c) Definitions.
    (1) Withholding.
    (2) Foreign and U.S. person.
    (i) In general.
    (ii) Dual residents.
    (3) Individual.
    (i) Alien individual.
    (ii) Nonresident alien individual.
    (4) Certain foreign corporations.
    (5) Financial institution and foreign financial institution (or 
FFI).
    (6) Beneficial owner.
    (i) General rule.
    (ii) Special rules.
    (A) General rule.
    (B) Foreign partnerships.
    (C) Foreign simple trusts and foreign grantor trusts.
    (D) Other foreign trusts and foreign estates.
    (7) Withholding agent.
    (8) Person.
    (9) Source of income.
    (10) Chapter 3 of the Code (or chapter 3).
    (11) Reduced rate.
    (12) Payee.
    (13) Intermediary.
    (14) Nonqualified intermediary.
    (15) Qualified intermediary.
    (16) Withholding certificate.
    (17) Documentary evidence; other appropriate documentation.
    (18) Documentation.
    (19) Payor.
    (20) Exempt recipient.
    (21) Non-exempt recipient.
    (22) Reportable amounts.
    (23) Flow-through entity.
    (24) Foreign simple trust.
    (25) Foreign complex trust.
    (26) Foreign grantor trust.
    (27) Partnership.
    (28) Nonwithholding foreign partnership (or NWP).
    (29) Withholding foreign partnership (or WP).
    (30) Possession of the United States or U.S. territory.
    (31) Amount subject to chapter 3 withholding.
    (32) EIN.
    (33) Flow-through withholding certificate.
    (34) Foreign payee.
    (35) Intermediary withholding certificate.

[[Page 105]]

    (36) Nonwithholding foreign trust (or NWT).
    (37) Payment with respect to an offshore obligation.
    (38) Permanent residence address.
    (i) In general.
    (ii) Hold mail instruction.
    (39) Standing instructions to pay amounts.
    (40) Territory financial institution.
    (41) TIN.
    (42) Withholding foreign trust (or WT).
    (43) Certified deemed-compliant FFI.
    (44) Chapter 3 withholding rate pool.
    (45) Chapter 3 status.
    (46) Chapter 4 of the Code (or chapter 4).
    (47) Chapter 4 status.
    (48) Chapter 4 withholding rate pool.
    (49) Deemed-compliant FFI.
    (50) GIIN (or Global Intermediary Identification Number).
    (51) NFFE.
    (52) Nonparticipating FFI.
    (53) Participating FFI.
    (54) Preexisting obligation.
    (55) Registered deemed-compliant FFI.
    (56) Withholdable payment.
    (d) Beneficial owner's or payee's claim of U.S. status.
    (1) In general.
    (2) Payments for which a Form W-9 is otherwise required.
    (3) Payments for which a Form W-9 is not otherwise required.
    (4) When a payment to an intermediary or flow-through entity may be 
treated as made to a U.S. payee.
    (e) Beneficial owner's claim of foreign status.
    (1) Withholding agent's reliance.
    (i) In general.
    (ii) Payments that a withholding agent may treat as made to a 
foreign person that is a beneficial owner.
    (A) General rule.
    (B) Additional requirements.
    (2) Beneficial owner withholding certificate.
    (i) In general.
    (ii) Requirements for validity of certificate.
    (A) In general.
    (B) Requirement to collect foreign TIN and date of birth.
    (1) In general.
    (2) Definitions.
    (3) Requirements for reasonable explanation of the absence of a 
foreign TIN.
    (4) Exceptions to the requirement to obtain a foreign TIN (or 
reasonable explanation for its absence).
    (i) Jurisdictions with which the United States does not have an 
agreement relating to the exchange of tax information.
    (ii) Jurisdictions that do not issue foreign TINs.
    (iii) Account holder that is a government, international 
organization, foreign central bank of issue, or resident of a U.S. 
territory.
    (5) Transition rules for the foreign TIN requirement for a 
beneficial owner withholding certificate signed before January 1, 2018.
    (i) Payments made before January 1, 2020.
    (ii) Payments made after December 31, 2019.
    (iii) Limitation on standard of knowledge.
    (6) Transition rule for the date of birth requirement for a 
beneficial owner withholding certificate signed before January 1, 2018.
    (3) Intermediary, flow-through, or U.S. branch withholding 
certificate.
    (i) In general.
    (ii) Intermediary withholding certificate from a qualified 
intermediary.
    (iii) Intermediary withholding certificate from a nonqualified 
intermediary.
    (iv) Withholding statement provided by nonqualified intermediary.
    (A) In general.
    (B) General requirements.
    (C) Content of withholding statement.
    (1) In general.
    (2) Nonqualified intermediary withholding statement for withholdable 
payments.
    (3) Alternative withholding statement.
    (4) Example.
    (D) Alternative procedures.
    (1) In general.
    (2) Withholding rate pools.
    (i) In general.
    (ii) Withholding rate pools for .chapter 4 purposes.
    (3) Allocation information.
    (4) Failure to provide allocation information.
    (5) Cure provision.
    (6) Form 1042-S reporting in case of allocation failure.
    (7) Liability for tax, interest, and penalties.
    (8) Applicability to flow-through entities and certain U.S. 
branches.
    (E) Notice procedures.
    (v) Withholding certificate from certain U.S. branches (including 
territory financial institutions).
    (vi) Reportable amounts.
    (4) Applicable rules.
    (i) Who may sign the certificate.
    (A) In general.
    (B) Electronic signatures.
    (ii) Period of validity.
    (A) General rule.
    (1) Withholding certificates and documentary evidence.
    (2) Documentary evidence for treaty claims and treaty statements.
    (B) Indefinite validity period.
    (C) Withholding certificate for effectively connected income.
    (D) Change in circumstances.
    (1) Defined.
    (2) Obligation to notify a withholding agent of a change in 
circumstances.

[[Page 106]]

    (3) Withholding agent's obligation with respect to a change in 
circumstances.
    (iii) Retention of documentation.
    (iv) Electronic transmission of information.
    (A) In general.
    (B) Requirements.
    (1) In general.
    (2) Same information as paper Form W-8.
    (3) Perjury statement and signature requirements.
    (i) Perjury statement.
    (ii) Electronic signature.
    (4) Requests for electronic Form W-8 data.
    (C) Form 8233.
    (D) Forms and documentary evidence received by facsimile or email.
    (E) Third party repositories.
    (F) Examples.
    (1) Example 1.
    (2) Example 2.
    (3) Example 3.
    (v) Additional procedures for certificates provided electronically.
    (vi) Acceptable substitute form.
    (vii) Requirement of taxpayer identifying number.
    (viii) Reliance rules.
    (A) Classification.
    (B) Status of payee as an intermediary or as a person acting for its 
own account.
    (C) Reliance on a prior version of a withholding certificate.
    (ix) Certificates to be furnished to withholding agent for each 
obligation unless exception applies.
    (A) Exception for certain branch or account systems or system 
maintained by agent.
    (B) Reliance on certification provided by introducing brokers.
    (1) In general.
    (2) Example.
    (C) Reliance on documentation and certifications provided between 
principals and agents.
    (1) Withholding agent as agent.
    (2) Withholding agent as principal.
    (D) Reliance upon documentation for accounts acquired in merger or 
bulk acquisition for value.
    (5) Qualified intermediaries.
    (i) In general.
    (ii) Definition of qualified intermediary.
    (iii) Withholding agreement.
    (A) In general.
    (B) Terms of the withholding agreement.
    (iv) Assignment of primary withholding responsibility.
    (v) Withholding statement.
    (A) In general.
    (B) Content of withholding statement.
    (C) Withholding rate pools.
    (1) In general.
    (2) Withholding rate pool requirements for a withholdable payment.
    (3) Alternative procedure for U.S. non-exempt recipients.
    (D) Example.
    (6) Qualified derivatives dealers.
    (f) Effective/applicability date.
    (1) In general.
    (2) Lack of documentation for past years.
    (3) Special rules related to section 871(m).

             Sec.  1.1441-2 Amounts subject to withholding.

    (a) In general.
    (b) Fixed or determinable annual or periodical income.
    (1) In general.
    (i) Definition.
    (ii) Manner of payment.
    (iii) Determinability of amount.
    (2) Exceptions.
    (3) Original issue discount.
    (i) Amount subject to tax.
    (ii) Amounts subject to withholding.
    (iii) Exceptions to withholding.
    (4) Securities lending transactions and equivalent transactions.
    (5) REMIC residual interests.
    (6) Dividend equivalents.
    (c) Other income subject to withholding.
    (d) Exceptions to withholding where no money or property is paid or 
lack of knowledge.
    (1) General rule.
    (2) Cancellation of debt.
    (3) Satisfaction of liability following underwithholding by 
withholding agent.
    (4) Withholding exemption inapplicable.
    (e) Payment.
    (1) General rule.
    (2) Income allocated under section 482.
    (3) Blocked income.
    (4) Special rules for dividends.
    (5) Certain interest accrued by a foreign corporation.
    (6) Payments other than in U.S. dollars.
    (7) Payments of dividend equivalents.
    (i) In general.
    (ii) Payment.
    (iii) Premiums and other upfront payments.
    (f) Effective/applicability date.

         Sec.  1.1441-3 Determination of amounts to be withheld.

    (a) General rule.
    (1) Withholding on gross amount.
    (2) Coordination with chapter 4.
    (b) Withholding on payments on certain obligations.
    (1) Withholding at time of payment of interest.
    (2) No withholding between interest payment dates.
    (i) In general.
    (ii) Anti-abuse rule.
    (c) Corporate distributions.
    (1) General rule.
    (2) Exception to withholding on distributions.

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    (i) In general.
    (ii) Reasonable estimate of accumulated and current earnings and 
profits on the date of payment.
    (A) General rule.
    (B) Procedures in case of underwithholding.
    (C) Reliance by intermediary on reasonable estimate.
    (D) Example.
    (3) Special rules in the case of distributions from a regulated 
investment company.
    (i) General rule
    (ii) Reliance by intermediary on reasonable estimate.
    (4) Coordination with withholding under section 1445.
    (i) In general.
    (A) Withholding under section 1441.
    (B) Withholding under both sections 1441 and 1445.
    (C) Coordination with REIT/QIE withholding.
    (ii) Intermediary reliance rule.
    (d) Withholding on payments that include an undetermined amount of 
income.
    (1) In general.
    (2) Withholding on certain gains.
    (e) Payments other than in U.S. dollars.
    (1) In general.
    (2) Payments in foreign currency.
    (f) Tax liability of beneficial owner satisfied by withholding 
agent.
    (1) General rule.
    (2) Example.
    (g) Conduit financing arrangements
    (1) Duty to withhold.
    (2) Effective date.
    (h) Dividend equivalents.
    (1) Withholding on gross amount.
    (2) Reliance by withholding agent on reasonable determinations.
    (3) Effective/applicability date.
    (i) Effective/applicability date.

   Sec.  1.1441-4 Exemptions from withholding for certain effectively 
                   connected income and other amounts.

    (a) Certain income connected with a U.S. trade or business.
    (1) In general.
    (2) Withholding agent's reliance on a claim of effectively connected 
income.
    (i) In general.
    (ii) Special rules for U.S. branches of foreign persons.
    (A) U.S. branches of certain foreign banks or foreign insurance 
companies.
    (B) Other U.S. branches.
    (3) Income on notional principal contracts.
    (i) General rule.
    (ii) Exception for certain payments.
    (iii) Exception for specified notional principal contracts.
    (b) Compensation for personal services of an individual.
    (1) Exemption from withholding.
    (2) Manner of obtaining withholding exemption under tax treaty.
    (i) In general.
    (ii) Withholding certificate claiming withholding exemption.
    (iii) Review by withholding agent.
    (iv) Acceptance by withholding agent.
    (v) Copies of Form 8233.
    (3) Withholding agreements.
    (4) Final payment exemption.
    (5) Requirement of return.
    (6) Personal exemption.
    (i) In general.
    (ii) Multiple exemptions.
    (iii) Special rule where both certain scholarship and compensation 
income are received.
    (c) Special rules for scholarship and fellowship income.
    (1) In general.
    (2) Alternate withholding election.
    (d) Annuities received under qualified plans.
    (e) Per diem of certain alien trainees.
    (f) Failure to receive withholding certificates timely or to act in 
accordance with applicable presumptions.
    (g) Effective/applicability date.

  Sec.  1.1441-5 Withholding on payments to partnerships, trusts, and 
                                estates.

    (a) In general.
    (b) Rules applicable to U.S. partnerships, trusts, and estates.
    (1) Payments to U.S. partnerships, trusts, and estates.
    (2) Withholding by U.S. payees.
    (i) U.S. partnerships.
    (A) In general.
    (B) Effectively connected income of partners.
    (ii) U.S. simple trusts.
    (iii) U.S. complex trusts and U.S. estates.
    (iv) U.S. grantor trusts.
    (v) Subsequent distribution.
    (vi) Coordination with chapter 4 requirements for U.S. partnerships, 
trusts, and estates.
    (c) Foreign partnerships.
    (1) Determination of payee.
    (i) Payments treated as made to partners.
    (ii) Payments treated as made to the partnership.
    (iii) Rules for reliably associating a payment with documentation.
    (iv) Coordination with chapter 4 for payments made to foreign 
partnerships.
    (v) Examples.
    (2) Withholding foreign partnerships.
    (i) Reliance on claim of withholding foreign partnership status.
    (ii) Withholding agreement.
    (iii) Withholding responsibility.
    (iv) Withholding certificate from a withholding foreign partnership.
    (3) Nonwithholding foreign partnerships.

[[Page 108]]

    (i) Reliance on claim of foreign partnership status.
    (ii) Reliance on claim of reduced withholding by a partnership for 
its partners.
    (iii) Withholding certificate from a nonwithholding foreign 
partnership.
    (iv) Withholding statement provided by nonwithholding foreign 
partnership and coordination with chapter 4.
    (v) Withholding and reporting by a foreign partnership.
    (d) Presumption rules.
    (1) In general.
    (2) Determination of partnership status as U.S. or foreign in the 
absence of documentation.
    (3) Determination of partners' status in the absence of certain 
documentation.
    (4) Determination by a withholding foreign partnership of the status 
of its partners.
    (e) Foreign trusts and estates.
    (1) In general.
    (2) Payments to foreign complex trusts and foreign estates.
    (3) Payees of payments to foreign simple trusts and foreign grantor 
trusts.
    (i) Payments for which beneficiaries and owners are payees.
    (ii) Payments for which trust is payee.
    (iii) Coordination with chapter 4 for payments made to foreign 
simple trusts and foreign grantor trusts.
    (4) Reliance on claim of foreign complex trust or foreign estate 
status.
    (5) Foreign simple trust and foreign grantor trust.
    (i) Reliance on claim of foreign simple trust or foreign grantor 
trust status.
    (ii) Reliance on claim of reduced withholding by a foreign simple 
trust or foreign grantor trust for its beneficiaries or owners.
    (iii) Withholding certificate from foreign simple trust or foreign 
grantor trust.
    (iv) Withholding statement provided by foreign simple trust or 
foreign grantor trust and coordination with chapter 4.
    (v) Withholding foreign trusts.
    (6) Presumption rules.
    (i) In general.
    (ii) Determination of status as U.S. or foreign trust or estate in 
the absence of documentation.
    (iii) Determination of beneficiary or owner's status in the absence 
of certain documentation.
    (f) Failure to receive withholding certificate timely or to act in 
accordance with applicable presumptions.
    (g) Effective/applicability date.

 Sec.  1.1441-6 Claim of reduced withholding under an income tax treaty.

    (a) In general.
    (b) Reliance on claim of reduced withholding under an income tax 
treaty.
    (1) In general.
    (i) Identification of limitation on benefits provisions.
    (ii) Reason to know based on existence of treaty.
    (2) Payment to fiscally transparent entity.
    (i) In general.
    (ii) Certification by qualified intermediary.
    (iii) Dual treatment.
    (iv) Examples.
    (3) Certified TIN.
    (4) Claim of benefits under an income tax treaty by a U.S. person.
    (c) Exemption from requirement to furnish a taxpayer identifying 
number and special documentary evidence rules for certain income.
    (1) General rule.
    (2) Income to which special rules apply.
    (3) Certificate of residence.
    (4) Documentary evidence establishing residence in the treaty 
country.
    (i) Individuals.
    (ii) Persons other than individuals.
    (5) Statements regarding entitlement to treaty benefits.
    (i) Statement regarding conditions under a limitation on benefits 
provision.
    (ii) Statement regarding whether the taxpayer derives the income.
    (d) Joint owners.
    (e) Competent authority.
    (f) Failure to receive withholding certificate timely.
    (g) Special taxpayer identifying number rule for certain foreign 
individuals claiming treaty benefits.
    (1) General rule.
    (2) Special rule.
    (3) Requirement that an ITIN be requested during the first business 
day following payment.
    (4) Definition of unexpected payment.
    (5) Examples.
    (h) Dividend equivalents.
    (i) Effective/applicability dates.
    (1) General rule.
    (2) Dividend equivalents.

    Sec.  1.1441-7 General provisions relating to withholding agents.

    (a) Withholding agent defined.
    (1) In general.
    (2) Withholding agent with respect to dividend equivalents.
    (3) Examples.
    (4) Effective/applicability date.
    (b) Standards of knowledge.
    (1) In general.
    (2) Reason to know.
    (3) Financial institutions--limits on reason to know.
    (i) In general.
    (ii) Limits on reason to know for preexisting obligations.
    (4) Rules applicable to withholding certificates.
    (i) In general.

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    (ii) Examples.
    (5) Withholding certificate--establishment of foreign status.
    (i) Classification of U.S. status, U.S. address, or U.S. telephone 
number.
    (ii) U.S. place of birth.
    (iii) Standing instructions with respect to offshore obligations.
    (6) Withholding certificate--claim of reduced rate of withholding 
under treaty.
    (i) Permanent residence address.
    (ii) Mailing address.
    (iii) Standing instructions.
    (7) Documentary evidence.
    (8) Documentary evidence--establishment of foreign status.
    (i) Documentary evidence received prior to January 1, 2001.
    (ii) Documentary evidence received after December 31, 2000.
    (A) Treatment of individual's foreign status.
    (B) Presumption of entity's foreign status.
    (iii) U.S. place of birth.
    (iv) Standing instructions with respect of offshore obligations.
    (9) Documentary evidence--claim of reduced rate of withholding under 
treaty.
    (i) Permanent residence address and mailing address.
    (ii) Standing instructions.
    (10) Indirect account holders.
    (11) Limits on reason to know for multiple obligations belonging to 
a single person.
    (12) Reasonable explanation supporting claim of foreign status.
    (13) Additional guidance.
    (c) Agent.
    (1) In general.
    (2) Authorized agent.
    (3) Liability of withholding agent acting through an agent.
    (d) United States obligations.
    (e) Assumed obligations.
    (f) Conduit financing arrangements.
    (1) Liability of withholding agent.
    (2) Exception for withholding agents that do not know of conduit 
financing arrangement.
    (i) In general.
    (ii) Examples.
    (g) Effective/applicability date.

   Sec.  1.1441-8 Exemption from withholding for payments to foreign 
   governments, international organizations, foreign central banks of 
           issue, and the Bank for International Settlements.

    (a) Foreign governments.
    (b) Reliance on claim of exemption by foreign government.
    (c) Income of a foreign central bank of issue or the Bank for 
International
    Settlements.
    (1) Certain interest income.
    (2) Bankers' acceptances.
    (d) Exemption for payments to international organizations.
    (e) Failure to receive withholding certificate timely and other 
applicable procedures.
    (f) Effective date.
    (1) In general.
    (2) Transition rules.

Sec.  1.1441-9 Exemption from withholding on exempt income of a foreign 
     tax-exempt organization, including foreign private foundations.

    (a) Exemption from withholding for exempt income.
    (b) Reliance on foreign organization's claim of exemption from 
withholding.
    (1) General rule.
    (2) Withholding certificate.
    (3) Presumptions in the absence of documentation.
    (4) Reason to know.
    (c) Failure to receive withholding certificate timely and other 
applicable procedures.
    (d) Effective date.
    (1) In general.
    (2) Transition rules.

      Sec.  1.1441-10 Withholding agents with respect to fast-pay 
                              arrangements.

    (a) In general.
    (b) Exception.
    (c) Liability.
    (d) Examples.
    (e) Effective date.

[T.D. 8734, 62 FR 53421, Oct. 14, 1997, as amended by T.D. 8881, 66 FR 
32168, May 22, 2000; T.D. 9023, 67 FR 70312, Nov. 22, 2002; T.D. 9272, 
71 FR 43366, Aug. 1, 2006; T.D. 9415, 73 FR 40172, July 14, 2008; T.D. 
9808, 82 FR 2056, Jan. 6, 2017; T.D. 9808, 82 FR 29720, June 30, 2017; 
T.D. 9890, 85 FR 198, Jan. 2, 2020]



Sec.  1.1441-1  Requirement for the deduction and withholding of 
tax on payments to foreign persons.

    (a) Purpose and scope. This section, Sec. Sec.  1.1441-2 through 
1.1441-9, and 1.1443-1 provide rules for withholding under sections 
1441, 1442, and 1443 when a payment is made to a foreign person. This 
section provides definitions of terms used in chapter 3 of the Internal 
Revenue Code (Code) and regulations thereunder. It prescribes procedures 
to determine whether an amount must be withheld under chapter 3 of the 
Code and documentation that a withholding agent may rely upon to 
determine the status of a payee or a beneficial owner as a U.S. person 
or as a foreign person and other relevant characteristics of the payee 
that may affect a withholding agent's obligation to withhold under 
chapter 3 of the Code and the regulations thereunder. Special procedures 
regarding payments to foreign

[[Page 110]]

persons that act as intermediaries are also provided. Section 1.1441-2 
defines the income subject to withholding under sections 1441, 1442, and 
1443 and the regulations under these sections. Section 1.1441-3 provides 
rules regarding the amount subject to withholding and rules for 
coordinating withholding under this section with withholding under 
section 1445 and under chapter 4 of the Code. Section 1.1441-4 provides 
exemptions from withholding for, among other things, certain income 
effectively connected with the conduct of a trade or business in the 
United States, including certain compensation for the personal services 
of an individual. Section 1.1441-5 provides rules for withholding on 
payments made to flow-through entities and other similar arrangements. 
Section 1.1441-6 provides rules for claiming a reduced rate of 
withholding under an income tax treaty. Section 1.1441-7 defines the 
term withholding agent and provides due diligence rules governing a 
withholding agent's obligation to withhold. Section 1.1441-8 provides 
rules for relying on claims of exemption from withholding for payments 
to a foreign government, an international organization, a foreign 
central bank of issue, or the Bank for International Settlements. 
Sections 1.1441-9 and 1.1443-1 provide rules for relying on claims of 
exemption from withholding for payments to foreign tax exempt 
organizations and foreign private foundations.
    (b) General rules of withholding--(1) Requirement to withhold on 
payments to foreign persons. A withholding agent must withhold 30 
percent of any payment of an amount subject to withholding made to a 
payee that is a foreign person unless it can reliably associate the 
payment with documentation upon which it can rely to treat the payment 
as made to a payee that is a U.S. person or as made to a beneficial 
owner that is a foreign person entitled to a reduced rate of 
withholding. However, a withholding agent making a payment to a foreign 
person need not withhold where the foreign person assumes responsibility 
for withholding on the payment under chapter 3 of the Code and the 
regulations thereunder as a qualified intermediary (see paragraphs 
(e)(5) and (e)(6) of this section), as a U.S. branch of a foreign person 
(see paragraph (b)(2)(iv) of this section), as a withholding foreign 
partnership (see Sec.  1.1441-5(c)(2)(i)), or as a withholding foreign 
trust (see Sec.  1.1441-5(e)(5)(v)). When withholding under chapter 4 
was applied to a payment, the withholding obligation under this section 
is satisfied. See Sec.  1.1441-3(a)(2). This section (dealing with 
general rules of withholding and claims of foreign or U.S. status by a 
payee or a beneficial owner) and Sec. Sec.  1.1441-4, 1.1441-5, 1.1441-
6, 1.1441-8, 1.1441-9, and 1.1443-1 provide rules for determining 
whether documentation is required as a condition for reducing the rate 
of withholding on a payment to a foreign beneficial owner or to a U.S. 
payee and if so, the nature of the documentation upon which a 
withholding agent may rely in order to reduce such rate. Paragraph 
(b)(2) of this section prescribes the rules for the determination of who 
the payee is, the extent to which a payment is treated as made to a 
foreign payee, and reliable association of a payment with documentation. 
Paragraph (b)(3) of this section describes the applicable presumptions 
for determining the payee's status as U.S. or foreign and the payee's 
other characteristics (e.g., as an owner or intermediary, as an 
individual, partnership, corporation, etc.). Paragraph (b)(4) of this 
section lists the types of payments for which the 30-percent withholding 
rate may be reduced. Because the treatment of a payee as a U.S. or a 
foreign person also has consequences for purposes of making an 
information return under the provisions of chapter 61 of the Code and 
for withholding under other provisions of the Code, such as sections 
3402, 3405, or 3406, paragraph (b)(5) of this section lists applicable 
provisions outside chapter 3 of the Code that require certain payees to 
establish their foreign status (e.g., in order to be exempt from 
information reporting). Paragraph (b)(6) of this section describes the 
withholding obligations of a foreign person making a payment that it has 
received in its capacity as an intermediary. Paragraph (b)(7) of this 
section describes the liability of a withholding agent that

[[Page 111]]

fails to withhold at the required 30-percent rate in the absence of 
documentation. Paragraph (b)(8) of this section deals with adjustments 
and refunds in the case of overwithholding. Paragraph (b)(9) of this 
section deals with determining the status of the payee when the payment 
is jointly owned. See paragraph (c)(6) of this section for a definition 
of beneficial owner. See Sec.  1.1441-7(a) for a definition of 
withholding agent. See Sec.  1.1441-2(a) for the determination of an 
amount subject to withholding. See Sec.  1.1441-2(e) for the definition 
of a payment and when it is considered made. Except as otherwise 
provided, the provisions of this section apply only for purposes of 
determining a withholding agent's obligation to withhold under chapter 3 
of the Code and the regulations thereunder.
    (2) Determination of payee and payee's status--(i) In general. 
Except as otherwise provided in this paragraph (b)(2) and Sec.  1.1441-
5(c)(1) and (e)(3), a payee is the person to whom a payment is made, 
regardless of whether such person is the beneficial owner of the amount 
(as defined in paragraph (c)(6) of this section). A foreign payee is a 
payee who is a foreign person. A U.S. payee is a payee who is a U.S. 
person. Generally, the determination by a withholding agent of the U.S. 
or foreign status of a payee and of its other relevant characteristics 
(e.g., as a beneficial owner or intermediary, or as an individual, 
corporation, or flow-through entity) is made on the basis of a 
withholding certificate that is a Form W-8 or a Form 8233 (indicating 
foreign status of the payee or beneficial owner) or a Form W-9 
(indicating U.S. status of the payee). The provisions of this paragraph 
(b)(2), paragraph (b)(3) of this section, and Sec.  1.1441-5(c), (d), 
and (e) dealing with determinations of payee and applicable presumptions 
in the absence of documentation apply only to payments of amounts 
subject to withholding under chapter 3 of the Code (within the meaning 
of Sec.  1.1441-2(a)). However, for a payment that is both an amount 
subject to withholding under chapter 3 and a withholdable payment under 
chapter 4, first apply the rules of Sec.  1.1471-3 for determining the 
payee of a withholdable payment under chapter 4 and the applicable 
presumptions in the absence of documentation applicable to such 
payments. See also Sec.  1.6049-5(d) for payments of amounts that are 
not subject to withholding under chapter 3 of the Code (or the 
regulations thereunder) but that may be reportable under provisions of 
chapter 61 of the Code (and the regulations thereunder). See paragraph 
(d) of this section for documentation upon which the withholding agent 
may rely in order to treat the payee or beneficial owner as a U.S. 
person. See paragraph (e) of this section for documentation upon which 
the withholding agent may rely in order to treat the payee or beneficial 
owner as a foreign person. For applicable presumptions of status in the 
absence of documentation, see paragraph (b)(3) of this section and Sec.  
1.1441-5(d). For definitions of a foreign person and U.S. person, see 
paragraph (c)(2) of this section.
    (ii) Payments to a U.S. agent of a foreign person. A withholding 
agent making a payment to a U.S. person (other than to a U.S. branch 
that is treated as a U.S. person pursuant to paragraph (b)(2)(iv) of 
this section) and who has actual knowledge that the U.S. person receives 
the payment as an agent of a foreign person must treat the payment as 
made to the foreign person. However, the withholding agent may treat the 
payment as made to the U.S. person if the U.S. person is a financial 
institution and the withholding agent has no reason to believe that the 
financial institution will not comply with its obligation to withhold. 
See paragraph (c)(5) of this section for the definition of a financial 
institution.
    (iii) Payments to wholly-owned entities--(A) Foreign-owned domestic 
entity. A payment to a wholly-owned domestic entity that is disregarded 
for federal tax purposes under Sec.  301.7701-2(c)(2) of this chapter as 
an entity separate from its owner and whose single owner is a foreign 
person shall be treated as a payment to the owner of the entity, subject 
to the provisions of paragraph (b)(2)(iv) of this section. For purposes 
of this paragraph (b)(2)(iii)(A), a domestic entity means a person that 
would be treated as a U.S. person if it had an election in effect under 
Sec.  301.7701-3(c)(1)(i) of this chapter to be treated as a 
corporation. For example,

[[Page 112]]

a limited liability company, A, organized under the laws of the State of 
Delaware, opens an account at a U.S. bank. Upon opening of the account, 
the bank requests A to furnish a Form W-9 as required under section 
6049(a) and the regulations under that section. A does not have an 
election in effect under Sec.  301.7701-3(c)(1)(i) of this chapter and, 
therefore, is not treated as an organization taxable as a corporation, 
including for purposes of the exempt recipient provisions in Sec.  
1.6049-4(c)(1). If A has a single owner and the owner is a foreign 
person (as defined in paragraph (c)(2) of this section), then A may not 
furnish a Form W-9 because it may not represent that it is a U.S. person 
for purposes of the provisions of chapters 3, 4, and 61 of the Code, and 
section 3406. Therefore, A must furnish a Form W-8 with the name, 
address, and taxpayer identifying number (TIN) (if required) of the 
foreign person who is the single owner in the same manner as if the 
account were opened directly by the foreign single owner. See Sec. Sec.  
1.894-1(d) and 1.1441-6(b)(2) for special rules where the entity's owner 
is claiming a reduced rate of withholding under an income tax treaty.
    (B) Foreign entity. A payment to a wholly-owned foreign entity that 
is disregarded under Sec.  301.7701-2(c)(2) of this chapter as an entity 
separate from its owner shall be treated as a payment to the single 
owner of the entity, subject to the provisions of paragraph (b)(2)(iv) 
of this section if the foreign entity has a U.S. branch in the United 
States. For purposes of this paragraph (b)(2)(iii)(B), a foreign entity 
means a person that would be treated as a foreign person if it had an 
election in effect under Sec.  301.7701-3(c)(1)(i) of this chapter to be 
treated as a corporation. See Sec. Sec.  1.894-1T(d) and 1.1441-6(b)(2) 
for special rules where the foreign entity or its owner is claiming a 
reduced rate of withholding under an income tax treaty. Thus, for 
example, if the foreign entity's single owner is a U.S. person, the 
payment shall be treated as a payment to a U.S. person. Therefore, based 
on the saving clause in U.S. income tax treaties, such an entity may not 
claim benefits under an income tax treaty even if the entity is 
organized in a country with which the United States has an income tax 
treaty in effect and treats the entity as a non-fiscally transparent 
entity. See Sec.  1.894-1T(d)(6), Example 10. Unless it has actual 
knowledge or reason to know that the foreign entity to whom the payment 
is made is disregarded under Sec.  301.7701-2(c)(2) of this chapter, a 
withholding agent may treat a foreign entity as an entity separate from 
its owner unless it can reliably associate the payment with a 
withholding certificate from the entity's owner.
    (iv) Payments to a U.S. branch of certain foreign banks or foreign 
insurance companies--(A) U.S. branch treated as a U.S. person in certain 
cases. A payment to a U.S. branch of a foreign person is a payment to a 
foreign person. However, a U.S. branch of a foreign person that is 
described in this paragraph (b)(2)(iv)(A) may agree to be treated as a 
U.S. person for purposes of withholding on specified payments to the 
U.S. branch. If a U.S. branch agrees to be treated as a U.S. person with 
a withholding agent, it is required to act as a U.S. person with respect 
to all other withholding agents, including when acting as an 
intermediary with respect to withholdable payments for purposes of 
chapter 4. See Sec.  1.1471-3(a)(3)(vi). In such cases, the U.S. branch 
is treated as a payee that is a U.S. person. See paragraph (C) of this 
section for additional requirements for the U.S. branch when treated as 
a payor that is a U.S. person. Notwithstanding the preceding sentence, a 
withholding agent making a payment to a U.S. branch treated as a U.S. 
person under this paragraph (b)(2)(iv)(A) shall not treat the branch as 
a U.S. person for purposes of reporting the payment made to the branch. 
Therefore, a payment to such U.S. branch shall be reported on Form 1042-
S under Sec.  1.1461-1(c) and Sec.  1.1474-1(d)(1)(i) for a payment of 
U.S. source FDAP income that is a chapter 4 reportable amount as defined 
in Sec.  1.1471-1(b)(18). Further, a U.S. branch that is treated as a 
U.S. person under this paragraph (b)(2)(iv)(A) shall not be treated as a 
U.S. person for purposes of the withholding certificate it provides to a 
withholding agent. Therefore, the U.S. branch must furnish a U.S. branch 
withholding certificate on a Form W-8IMY as provided in paragraph 
(e)(3)(v)

[[Page 113]]

of this section and not a Form W-9. An agreement to treat a U.S. branch 
as a U.S. person must be evidenced by a U.S. branch withholding 
certificate described in paragraph (e)(3)(v) of this section furnished 
by the U.S. branch to the withholding agent. A U.S. branch described in 
this paragraph (b)(2)(iv)(A) and eligible to be treated as a U.S. person 
is any U.S. branch of a foreign bank subject to regulatory supervision 
by the Federal Reserve Board or a U.S. branch of a foreign insurance 
company required to file an annual statement on a form approved by the 
National Association of Insurance Commissioners with the Insurance 
Department of a State, a Territory, or the District of Columbia. In 
addition, a territory financial institution (including a territory 
financial institution that is a flow-through entity) will be treated as 
a U.S. branch for purposes of this paragraph (b)(2)(iv)(A) and therefore 
is eligible to be treated as a U.S. person. The Internal Revenue Service 
(IRS) may approve a list of U.S. branches that may be eligible for 
treatment as U.S. persons under this paragraph (b)(2)(iv)(A) (see Sec.  
601.601(d)(2) of this chapter). See Sec.  1.6049-5(c)(5)(vi) for the 
treatment of U.S. branches as U.S. payors if they make a payment that is 
subject to reporting under chapter 61 of the Code. Also see Sec.  
1.6049-5(d)(1)(ii) for the treatment of U.S. branches as foreign payees 
under chapter 61 of the Code.
    (B) Consequences to the withholding agent. Any person that is 
otherwise a withholding agent regarding a payment to a U.S. branch 
described in paragraph (b)(2)(iv)(A) of this section shall treat the 
payment in one of the following ways--
    (1) As a payment to a U.S. person, in which case the withholding 
agent is not responsible for withholding on such payment to the extent 
it can reliably associate the payment with a withholding certificate 
described in paragraph (e)(3)(v) of this section that has been furnished 
by the U.S. branch under its agreement with the withholding agent to be 
treated as a U.S. person;
    (2) As a payment directly to the persons whose names are on 
withholding certificates or other appropriate documentation forwarded by 
the U.S. branch to the withholding agent when no agreement is in effect 
to treat the U.S. branch as a U.S. person for such payment, to the 
extent the withholding agent can reliably associate the payment with 
such certificates or documentation;
    (3) As a payment to a foreign person of income that is effectively 
connected with the conduct of a trade or business in the United States 
if the withholding agent has obtained an EIN for the branch and cannot 
reliably associate the payment with a withholding certificate from a 
U.S. branch (or any other certificate or other appropriate documentation 
from another person). See Sec.  1.1441-4(a)(2)(ii); or
    (4) As a payment to a foreign person of income that is not 
effectively connected with the conduct of a trade or business in the 
United States if the withholding agent has not obtained an EIN for the 
branch and cannot reliably associate the payment with a withholding 
certificate from the U.S. branch.
    (C) Consequences to the U.S. branch. A U.S. branch that is treated 
as a U.S. person under paragraph (b)(2)(iv)(A) of this section shall be 
treated as a separate person for purposes of section 1441(a) and all 
other provisions of chapters 3 and 4 of the Code and the regulations 
thereunder (other than for purposes of reporting the payment to the U.S. 
branch under Sec.  1.1461-1(c) and Sec.  1.1474-1(d)(1)(i) for a chapter 
4 reportable amount by a withholding agent) or for purposes of the 
documentation such a branch must furnish under paragraph (e)(3)(v) of 
this section) for any payment that it receives as such. Thus, the U.S. 
branch shall be responsible for withholding on a payment as a U.S. 
person in accordance with the provisions under chapters 3 and 4 of the 
Code and the regulations thereunder and other applicable withholding 
provisions of the Code. For this purpose, it shall obtain and retain 
documentation from payees or beneficial owners of the payments that it 
receives as an intermediary as a U.S. person in the same manner as if it 
were a separate entity. For example, if a U.S. branch receives a payment 
as an intermediary on behalf of customers of its home office and

[[Page 114]]

the home office is a qualified intermediary, the U.S. branch must obtain 
a qualified intermediary withholding certificate described in paragraph 
(e)(3)(ii) of this section from its home office. Similarly, if a U.S. 
branch of an FFI treated as a U.S. person receives a payment on behalf 
of another branch of the FFI that is treated as a nonparticipating FFI, 
the U.S. branch must withhold on the payment made to the other branch as 
if it were a separate person to the extent required under chapter 4. In 
addition, a U.S. branch that has not provided documentation to the 
withholding agent for a payment that is, in fact, not effectively 
connected income is a withholding agent with respect to that payment. 
See paragraph (b)(6) of this section and Sec.  1.1441-4(a)(2)(ii).
    (D) Definition of payment to a U.S. branch. A payment is treated as 
a payment to a U.S. branch of a foreign bank or foreign insurance 
company if the payment is credited to an account maintained in the 
United States in the name of a U.S. branch of the foreign person, or the 
payment is made to an address in the United States where the U.S. branch 
is located and the name of the U.S. branch appears on documents (in 
written or electronic form) associated with the payment (e.g., the check 
mailed or a letter addressed to the branch).
    (E) Payments to other U.S. branches. Similar withholding procedures 
may apply to payments to U.S. branches that are not described in 
paragraph (b)(2)(iv)(A) of this section to the extent permitted by the 
IRS. Any such branch must establish that its situation is analogous to 
that of a U.S. branch described in paragraph (b)(2)(iv)(A) of this 
section. In the alternative, the branch must establish that the 
withholding and reporting requirements under chapter 3 of the Code and 
the regulations thereunder impose an undue administrative burden and 
that the collection of the tax imposed by section 871(a) or 881(a) on 
the foreign person (or its members in the case of a foreign partnership) 
will not be jeopardized by the exemption from withholding. Generally, an 
undue administrative burden will be found to exist in a case where the 
person entitled to the income, such as a foreign insurance company, 
receives from the withholding agent income on securities issued by a 
single corporation, some of which is, and some of which is not, 
effectively connected with conduct of a trade or business within the 
United States and the criteria for determining the effective connection 
are unduly difficult to apply because of the circumstances under which 
such securities are held. No exemption from withholding shall be granted 
under this paragraph (b)(2)(iv)(E) unless the person entitled to the 
income complies with such other requirements as may be imposed by the 
IRS and unless the IRS is satisfied that the collection of the tax on 
the income involved will not be jeopardized by the exemption from 
withholding. The IRS may prescribe such procedures as are necessary to 
make these determinations (see Sec.  601.601(d)(2) of this chapter).
    (v) Payments to a foreign intermediary--(A) Payments treated as made 
to persons for whom the intermediary collects the payment. Except as 
otherwise provided in paragraph (b)(2)(v)(B) of this section, the payee 
of a payment to a person that the withholding agent may treat as a 
foreign intermediary in accordance with the provisions of paragraph 
(b)(3)(ii)(C) or (b)(3)(v)(A) of this section is the person or persons 
for whom the intermediary collects the payment. Thus, for example, the 
payee of a payment that the withholding agent can reliably associate 
with a withholding certificate from a qualified intermediary (defined in 
paragraph (e)(5)(ii) of this section) that does not assume primary 
withholding responsibility or a payment to a nonqualified intermediary 
are the persons for whom the qualified intermediary or nonqualified 
intermediary acts and not to the intermediary itself. See paragraph 
(b)(3)(v) of this section for presumptions that apply if the payment 
cannot be reliably associated with valid documentation. For similar 
rules for payments to flow-through entities, see Sec.  1.1441-5(c)(1) 
and (e)(3).
    (B) Payments treated as made to foreign intermediary. The payee of a 
payment to a person that the withholding agent may treat as a qualified 
intermediary is the qualified intermediary to the extent that the 
qualified intermediary

[[Page 115]]

assumes primary withholding responsibility under paragraph (e)(5)(iv) of 
this section for the payment. For example if a qualified intermediary 
assumes primary withholding responsibility under chapter 3 of the 
Internal Revenue Code but does not assume primary reporting or 
withholding responsibility under chapter 61 or section 3406 of the 
Internal Revenue Code and therefore provides Forms W-9 for U.S. non-
exempt recipients, the qualified intermediary is the payee except to the 
extent the payment is reliably associated with a Form W-9 from a U.S. 
non-exempt recipient.
    (vi) Other payees. A payment to a person described in Sec.  1.6049-
4(c)(1)(ii) that the withholding agent would treat as a payment to a 
foreign person without obtaining documentation for purposes of 
information reporting under section 6049 (if the payment were interest) 
is treated as a payment to a foreign payee for purposes of chapter 3 of 
the Code and the regulations thereunder (or to a foreign beneficial 
owner to the extent provided in paragraph (e)(1)(ii)(A)(6) or (7) of 
this section). Further, a payment that the withholding agent can 
reliably associate with documentary evidence described in Sec.  1.6049-
5(c)(1) relating to the payee is treated as a payment to a foreign 
payee. See Sec.  1.1441-5(b)(1) and (c)(1) for payee determinations for 
payments to partnerships. See Sec.  1.1441-5(e) for payee determinations 
for payments to foreign trusts or foreign estates.
    (vii) Rules for reliably associating a payment with a withholding 
certificate or other appropriate documentation--(A) Generally. The 
presumption rules of paragraph (b)(3) of this section and Sec. Sec.  
1.1441-5(d) and (e)(6) and 1.6049-5(d) apply to any payment, or portion 
of a payment, that a withholding agent cannot reliably associate with 
valid documentation. Generally, a withholding agent can reliably 
associate a payment with valid documentation if, prior to the payment, 
it holds valid documentation (either directly or through an agent), it 
can reliably determine how much of the payment relates to the valid 
documentation, and it has no actual knowledge or reason to know that any 
of the information, certifications, or statements in, or associated 
with, the documentation are incorrect. Special rules apply for payments 
made to intermediaries, flow-through entities, and certain U.S. 
branches. See paragraph (b)(2)(vii)(B) through (F) of this section. The 
documentation referred to in this paragraph (b)(2)(vii) is documentation 
described in paragraphs (c)(16) and (17) of this section upon which a 
withholding agent may rely to treat the payment as a payment made to a 
payee or beneficial owner, and to ascertain the characteristics of the 
payee or beneficial owner that are relevant to withholding or reporting 
under chapter 3 of the Internal Revenue Code and the regulations 
thereunder. A withholding agent that is not required to obtain 
documentation with respect to a payment is considered to lack 
documentation for purposes of this paragraph (b)(2)(vii). For example, a 
withholding agent paying U.S. source interest to a person that is an 
exempt recipient, as defined in Sec.  1.6049-4(c)(1)(ii), is not 
required to obtain documentation from that person in order to determine 
whether an amount paid to that person is reportable under an applicable 
information reporting provision under chapter 61 of the Internal Revenue 
Code. The withholding agent must, however, treat the payment as made to 
an undocumented person for purposes of chapter 3 of the Internal Revenue 
Code. Therefore, the presumption rules of paragraph (b)(3)(iii) of this 
section apply to determine whether the person is presumed to be a U.S. 
person (in which case, no withholding is required under this section), 
or whether the person is presumed to be a foreign person (in which case 
30-percent withholding is required under this section). See paragraph 
(b)(3)(v) of this section for special reliance rules in the case of a 
payment to a foreign intermediary and Sec.  1.1441-5(d) and (e)(6) for 
special reliance rules in the case of a payment to a flow-through 
entity.
    (B) Special rules applicable to a withholding certificate from a 
nonqualified intermediary or flow-through entity. (1) In the case of a 
payment made to a nonqualified intermediary, a flow-through entity (as 
defined in paragraph (c)(23) of this section), or a U.S. branch 
described in paragraph (b)(2)(iv) of this

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section (other than a U.S. branch that is treated as a U.S. person), a 
withholding agent can reliably associate the payment with valid 
documentation only to the extent that, prior to the payment, the 
withholding agent can allocate the payment to a valid nonqualified 
intermediary, flow-through entity, or U.S. branch withholding 
certificate (and a withholding certificate provided by a 
nonparticipating FFI with respect to a portion of a payment that is a 
withholdable payment allocated to an exempt beneficial owner as 
described in Sec.  1.1471-3(c)(3)(iii)(B)(4)); the withholding agent can 
reliably determine how much of the payment relates to valid 
documentation provided by a payee as determined under paragraph (c)(12) 
of this section (i.e., a person that is not itself an intermediary, 
flow-through entity, or U.S. branch); and the withholding agent has 
sufficient information to report the payment on Form 1042-S or Form 
1099, if reporting is required. See, however, paragraph (e)(3)(iv) of 
this section for when a nonqualified intermediary may report payees to 
the withholding agent in a chapter 4 withholding rate pool, in which 
case a withholding agent need not associate the portion of the payment 
attributable to such payees with documentation from each such payee. See 
also paragraph (e)(3)(iii) of this section for the requirements of a 
nonqualified intermediary withholding certificate, paragraph (e)(3)(v) 
of this section for the requirements of a U.S. branch withholding 
certificate, and Sec. Sec.  1.1441-5(c)(3)(iii) and (e)(5)(iii) for the 
requirements of a flow-through withholding certificate (including the 
requirements for a withholding certificate associated with a 
withholdable payment). Thus, a payment cannot be reliably associated 
with valid documentation provided by a payee to the extent such 
documentation is lacking or unreliable, or to the extent that 
information required to allocate and report all or a portion of the 
payment to each payee is lacking or unreliable. If a withholding 
certificate attached to an intermediary, U.S. branch, or flow-through 
withholding certificate is another intermediary, U.S. branch, or flow-
through withholding certificate, the rules of this paragraph 
(b)(2)(vii)(B) apply by treating the share of the payment allocable to 
the other intermediary, U.S. branch, or flow-through entity as if the 
payment were made directly to such other entity. See paragraph 
(e)(3)(iv)(D) of this section for rules permitting information 
allocating a payment to documentation to be received after the payment 
is made.
    (2) The rules of paragraph (b)(2)(vii)(B)(1) of this section are 
illustrated by the following examples. Each example illustrates a 
payment that is not a withholdable payment and, as a result of which, 
neither the chapter 4 status of the NQI nor payee specific documentation 
with respect to the chapter 4 status is required to be provided to the 
withholding agent (and no withholding applies under chapter 4 on each 
payment). See paragraph (e)(3)(iv)(C) of this section for the 
requirements of a withholding statement provided by a nonqualified 
intermediary that receives a withholdable payment and for an example 
illustrating the requirements of an NQI providing a withholding 
statement to a withholding agent for a withholdable payment.

    Example 1. WA, a withholding agent, makes a payment of U.S. source 
interest with respect to a grandfathered obligation as described in 
Sec.  1.1471-2(b) (and thus the payment is not a withholdable payment) 
to NQI, an intermediary that is a nonqualified intermediary. NQI 
provides a valid intermediary withholding certificate under paragraph 
(e)(3)(iii) of this section. NQI does not, however, provide valid 
documentation from the persons on whose behalf it receives the interest 
payment, and, therefore, the interest payment cannot be reliably 
associated with valid documentation provided by a payee. WA must apply 
the presumption rules of paragraph (b)(3)(v) of this section to the 
payment.
    Example 2. The facts are the same as in Example 1, except that NQI 
does attach valid beneficial owner withholding certificates (as defined 
in paragraph (e)(2)(i) of this section) from A, B, C, and D establishing 
their statuses as foreign persons. NQI does not, however, provide WA 
with any information allocating the payment among A, B, C, and D and, 
therefore, WA cannot determine the portion of the payment that relates 
to each beneficial owner withholding certificate. The interest payment 
cannot be reliably associated with valid documentation from a payee, and 
WA must apply the presumption rules of

[[Page 117]]

paragraph (b)(3)(v) of this section to the payment. See, however, 
paragraph (e)(3)(iv)(D) of this section providing for alternative 
procedures that allow a nonqualified intermediary to provide allocation 
information after a payment is made.
    Example 3. The facts are the same as in Example 2, except that NQI 
provides allocation information associated with its intermediary 
withholding certificate indicating that 25% of the interest payment is 
allocable to A and 25% to B. NQI does not provide any allocation 
information regarding the remaining 50% of the payment. WA may treat 25% 
of the payment as made to A and 25% as made to B. The remaining 50% of 
the payment cannot be reliably associated with valid documentation from 
a payee, however, since NQI did not provide information allocating the 
payment. Thus, the remaining 50% of the payment is subject to the 
presumption rules of paragraph (b)(3)(v) of this section.
    Example 4. WA makes a payment of U.S. source interest to NQI1, an 
intermediary that is not a qualified intermediary. NQI1 provides WA with 
a valid nonqualified intermediary withholding certificate as well valid 
beneficial owner withholding certificates from A and B and a valid 
nonqualified intermediary withholding certificate from NQI2. NQI2 has 
provided valid beneficial owner documentation from C sufficient to 
establish C's status as a foreign person. Based on information provided 
by NQI1, WA can allocate 20% of the interest payment to A, and 20% to B. 
Based on information that NQI2 provided NQI1 and that NQI1 provides to 
WA, WA can allocate 60% of the payment to NQI2, but can only allocate 
one half of that payment (30%) to C. Therefore, WA cannot reliably 
associate the remainder of the payment made to NQI2 (30% of the total 
payment) with valid documentation and must apply the presumption rules 
of paragraph (b)(3)(v) of this section to that portion of the payment.

    (C) Special rules applicable to a withholding certificate provided 
by a qualified intermediary that does not assume primary withholding 
responsibility--(1) If a payment is made to a qualified intermediary 
that does not assume primary withholding responsibility under chapters 3 
and 4 of the Code or primary Form 1099 reporting and backup withholding 
responsibility under chapter 61 and section 3406 of the Code for the 
payment, a withholding agent can reliably associate the payment with 
valid documentation only to the extent that, prior to the payment, the 
withholding agent has received a valid qualified intermediary 
withholding certificate described in paragraph (e)(3)(ii) of this 
section and the withholding agent can reliably determine the portion of 
the payment that relates to a chapter 3 withholding rate pool, as 
defined in paragraph (c)(44) of this section; a chapter 4 withholding 
rate pool (including for a withholdable payment as described in 
paragraph (e)(5)(v)(C)(2) of this section), as defined in paragraph 
(c)(48) of this section; or a pool attributable to U.S. exempt 
recipients. In the case of a withholding rate pool attributable to a 
U.S. non-exempt recipient, a payment cannot be reliably associated with 
valid documentation unless, prior to the payment, the qualified 
intermediary has provided the U.S. person's Form W-9 (or, in the absence 
of the form, the name, address, and TIN, if available, of the U.S. 
person) and sufficient information for the withholding agent to report 
the payment on Form 1099. See, however, paragraph (e)(5)(v)(C)(3) of 
this section for alternative procedures for allocating payments among 
U.S. non-exempt recipients and paragraphs (e)(5)(v)(C)(1) and (2) of 
this section for when a chapter 4 withholding rate pool of U.S. payees 
may be provided by a qualified intermediary instead of documentation 
with respect to each U.S. non-exempt recipient.
    (2) The rules of this paragraph (b)(2)(vii)(C) are illustrated by 
the following examples:

    Example 1. WA, a withholding agent, makes a payment of U.S. source 
dividends that is a withholdable payment to QI. QI provides WA with a 
valid qualified intermediary withholding certificate on which it 
indicates that it does not assume primary withholding responsibility 
under chapters 3 and 4 or primary Form 1099 reporting and backup 
withholding responsibility under chapter 61 and section 3406. QI does 
not provide any information allocating the dividend to withholding rate 
pools. WA cannot reliably associate the payment with valid payee 
documentation and therefore must apply the presumption rules applicable 
to a withholdable payment under Sec.  1.1471-3(f)(5) to determine the 
status of the payee for purposes of chapter 4. See Example 2 for an 
application of the presumption rules under Sec.  1.1471-3(f).
    Example 2. WA makes a payment of U.S. source dividends that is a 
withholdable payment to QI, which is an NFFE. QI has 5 customers: A, B, 
C, D, and E, all of whom are individuals except for C. QI has obtained 
valid documentation from A and B establishing their entitlement to a 15% 
rate of tax on U.S. source dividends under an income tax

[[Page 118]]

treaty. C is a U.S. person that is an exempt recipient as defined in 
paragraph (c)(20) of this section. D and E are U.S. non-exempt 
recipients who have provided Forms W-9 to QI. A, B, C, D, and E are each 
entitled to 20% of the dividend payment. QI provides WA with a valid 
qualified intermediary withholding certificate as described in paragraph 
(e)(3)(ii) of this section with which it associates the Forms W-9 from D 
and E. QI associates the following allocation information with its 
qualified intermediary withholding certificate: 40% of the payment is 
allocable to the 15% chapter 3 withholding rate pool, and 20% is 
allocable to each of D and E. QI does not provide any allocation 
information regarding the remaining 20% of the payment. WA cannot 
reliably associate 20% of the payment with valid documentation and, 
therefore, must apply the presumption rules applicable to a withholdable 
payment. Because QI is receiving a withholdable payment as an 
intermediary, under paragraph (b)(3)(iii) of this section WA must apply 
the presumption rule of Sec.  1.1471-3(f)(5) to treat the portion of the 
payment that cannot reliably be associated with valid documentation as 
made to a nonparticipating FFI account holder of QI. As a result, WA is 
required to withhold at a 30% rate of tax under chapter 4. See Sec.  
1.1441-3(a)(2) permitting WA to credit the amount withheld under chapter 
4 against the liability for tax due on the payment under section 1441 or 
1442. The 40% of the payment allocable to the 15% withholding rate pool 
and the portion of the payments allocable to D and E are payments that 
can be reliably associated with documentation.

    (D) Special rules applicable to a withholding certificate provided 
by a qualified intermediary that assumes primary withholding 
responsibility under chapter 3 and chapter 4 of the Internal Revenue 
Code. (1) In the case of a payment made to a qualified intermediary that 
assumes primary withholding responsibility under chapters 3 and 4 of the 
Code with respect to that payment (but does not assume primary Form 1099 
reporting and backup withholding responsibility under chapter 61 of the 
Code and section 3406), a withholding agent can reliably associate the 
payment with valid documentation only to the extent that, prior to the 
payment, the withholding agent has received a valid qualified 
intermediary withholding certificate and the withholding agent can 
reliably determine the portion of the payment that relates to the 
withholding rate pool for which the qualified intermediary assumes 
primary withholding responsibility and the portion of the payment 
attributable to withholding rate pools for each U.S. non-exempt 
recipient for whom the qualified intermediary has provided a Form W-9 
(or, in absence of the form, the name, address, and TIN, if available, 
of the U.S. non-exempt recipient). See paragraph (e)(5)(iv) of this 
section (requiring a qualified intermediary assuming primary withholding 
responsibility under chapter 3 to assume primary withholding 
responsibility under chapter 4). See also paragraph (e)(5)(v)(C)(3) of 
this section for alternative allocation procedures for payments made to 
U.S. persons that are not exempt recipients and paragraphs 
(e)(5)(v)(C)(1) and (2) of this section for when a qualified 
intermediary may provide a chapter 4 withholding rate pool of U.S. 
payees to a withholding agent instead of documentation with respect to 
each U.S. non-exempt recipient.
    (2) Examples. The following examples illustrate the rules of 
paragraph (b)(2)(vii)(D)(1) of this section. See also the example in 
paragraph (e)(5)(v)(D) for rules for reporting of U.S. non-exempt 
recipients when a qualified intermediary that is an FFI reports a U.S. 
account under chapter 4.

    Example 1. WA makes a payment of U.S. source interest that is a 
withholdable payment to QI, a qualified intermediary that is an NFFE. QI 
provides WA with a withholding certificate that indicates that QI will 
assume primary withholding responsibility under chapters 3 and 4 of the 
Code with respect to the payment. In addition, QI attaches a Form W-9 
from A, a U.S. non-exempt recipient, as defined in paragraph (c)(21) of 
this section, and provides the name, address, and TIN of B, a U.S. 
person that is also a non-exempt recipient but who has not provided a 
Form W-9. QI associates a withholding statement with its qualified 
intermediary withholding certificate indicating that 10% of the payment 
is attributable to A and 10% to B, and that QI will assume primary 
withholding responsibility under chapters 3 and 4 with respect to the 
remaining 80% of the payment. WA can reliably associate the entire 
payment with valid documentation. Although under the presumption rule of 
paragraph (b)(3)(v) of this section, an undocumented person receiving 
U.S. source interest is generally presumed to be a foreign person, WA 
has actual knowledge that B is a U.S. non-exempt recipient and therefore 
must report

[[Page 119]]

the payment on Form 1099 and backup withhold on the interest payment 
under section 3406.
    Example 2. The facts are the same as in Example 1, except that no 
information has been provided for the 20% of the payment that is 
allocable to A and B. Thus, QI has accepted withholding responsibility 
for 80% of the payment but has provided no information for the remaining 
20%. In this case, 20% of the payment cannot be reliably associated with 
valid documentation, and, under paragraph (b)(3)(iii) of this section, 
WA must apply the presumption rule of Sec.  1.1471-3(f)(5) to treat the 
payment as made to a nonparticipating FFI and withhold 30% of the gross 
amount of the payment (because the payment is a withholdable payment and 
is treated as made to a foreign payee under paragraph (b)(3)(v) of this 
section). See Example 2 in paragraph (b)(2)(vii)(C)(2) and Sec.  1.1471-
3(f)(1).

    (E) Special rules applicable to a withholding certificate provided 
by a qualified intermediary that assumes primary Form 1099 reporting and 
backup withholding responsibility but not primary withholding under 
chapter 3 and chapter 4. (1) If a payment is made to a qualified 
intermediary that assumes primary Form 1099 reporting and backup 
withholding responsibility for the payment (but does not assume primary 
withholding responsibility under chapters 3 and 4 of the Code), a 
withholding agent can reliably associate the payment with valid 
documentation only to the extent that, prior to the payment, the 
withholding agent has received a valid qualified intermediary 
withholding certificate and the withholding agent can reliably determine 
the portion of the payment that relates to a withholding rate pool or 
pools provided as part of the qualified intermediary's withholding 
statement and the portion of the payment for which the qualified 
intermediary assumes primary Form 1099 reporting and backup withholding 
responsibility. See paragraph (e)(5)(v)(C)(2) of this section for when a 
qualified intermediary may include a chapter 4 withholding rate pool on 
a withholding statement provided to a withholding agent with respect to 
a withholdable payment.
    (2) The following example illustrates the rules of paragraph 
(b)(2)(vii)(D)(1) of this section:

    Example. WA, a withholding agent, makes a payment of U.S. source 
dividends that is a withholdable payment to QI, a qualified intermediary 
that is a participating FFI. QI has provided WA with a valid qualified 
intermediary withholding certificate. QI states on its withholding 
statement accompanying the certificate that it assumes primary Form 1099 
reporting and backup withholding responsibility but does not assume 
primary withholding responsibility under chapters 3 and 4 of the Code. 
QI represents that 15% of the dividend is subject to a 30% rate of 
withholding, 75% of the dividend is subject to a 15% rate of 
withholding. QI represents that it assumes primary Form 1099 reporting 
and backup withholding for the remaining 10% of the payment and will not 
need to provide a chapter 4 withholding rate pool with respect to this 
portion of the payment or documentation with respect to U.S. non-exempt 
recipients. WA can reliably associate the entire payment with valid 
documentation.

    (F) Special rules applicable to a withholding certificate provided 
by a qualified intermediary that assumes primary withholding 
responsibility under chapter 3 and chapter 4 and primary Form 1099 
reporting and backup withholding responsibility and a withholding 
certificate provided by a withholding foreign partnership or a 
withholding foreign trust. If a payment is made to a qualified 
intermediary that assumes both primary withholding responsibility under 
chapters 3 and 4 of the Code and primary Form 1099 reporting and backup 
withholding responsibility under chapter 61 and section 3406 of the Code 
for the payment, a withholding agent can reliably associate a payment 
with valid documentation provided that it receives a valid qualified 
intermediary withholding certificate as described in paragraph 
(e)(3)(ii) of this section. In the case of a payment made to a 
withholding foreign partnership or a withholding foreign trust, the 
withholding agent can reliably associate the payment with valid 
documentation to the extent it can associate the payment with a valid 
withholding certificate described in Sec.  1.1441-5(c)(2)(iv) or in 
Sec.  1.1441-5(e)(5)(v) (respectively). See paragraph (e)(5)(iv) of this 
section, providing that a qualified intermediary assuming primary 
withholding responsibility under chapter 3 must also assume primary 
withholding responsibility under chapter 4 with respect to a 
withholdable payment.
    (3) Presumptions regarding payee's status in the absence of 
documentation--(i) General rules. A withholding agent that cannot, prior 
to the payment, reliably

[[Page 120]]

associate (within the meaning of paragraph (b)(2)(vii) of this section) 
a payment of an amount subject to withholding (as described in Sec.  
1.1441-2(a)) with valid documentation may rely on the presumptions of 
this paragraph (b)(3) to determine the status of the person receiving 
the payment as a U.S. or a foreign person and the person's other 
relevant characteristics (e.g., as an owner or intermediary, as an 
individual, trust, partnership, or corporation). The determination of 
withholding and reporting requirements applicable to payments to a 
person presumed to be a foreign person is governed only by the 
provisions of chapters 3 and 4 of the Code and the regulations 
thereunder. For the determination of withholding and reporting 
requirements applicable to payments to a person presumed to be a U.S. 
person, see chapter 61 of the Code, section 3402, 3405, or 3406, and, 
with respect to the reporting requirements of a participating FFI or 
registered deemed-compliant FFI, see chapter 4 of the Code and the 
related regulations. A presumption that a payee is a foreign payee is 
not a presumption that the payee is a foreign beneficial owner. 
Therefore, the provisions of this paragraph (b)(3) have no effect for 
purposes of reducing the withholding rate if associating the payment 
with documentation of foreign beneficial ownership is required as a 
condition for such rate reduction. See paragraph (b)(3)(ix) of this 
section for consequences to a withholding agent that fails to withhold 
in accordance with the presumptions set forth in this paragraph (b)(3) 
or if the withholding agent has actual knowledge or reason to know of 
facts that are contrary to the presumptions set forth in this paragraph 
(b)(3). See paragraph (b)(2)(vii) of this section for rules regarding 
the extent to which a withholding agent can reliably associate a payment 
with documentation.
    (ii) Presumptions of classification as individual, corporation, 
partnership, etc.--(A) In general. A withholding agent that cannot 
reliably associate a payment with a valid withholding certificate or 
that has received valid documentary evidence under Sec. Sec.  1.1441-
1(e)(1)(ii)(A)(2) and 1.6049-5(c)(1) or (4) but cannot determine a 
payee's classification from the documentary evidence must apply the 
rules of this paragraph (b)(3)(ii) to determine the payee's 
classification as an individual, trust, estate, corporation, or 
partnership. The fact that a payee is presumed to have a certain status 
under the provisions of this paragraph (b)(3)(ii) does not mean that it 
is excused from furnishing documentation if documentation is otherwise 
required to obtain a reduced rate of withholding under this section. For 
example, if, for purposes of this paragraph (b)(3)(ii), a payee is 
presumed to be a tax-exempt organization based on Sec.  1.6049-
4(c)(1)(ii)(B), the withholding agent cannot rely on this presumption to 
reduce the rate of withholding on payments to such person (if such 
person is also presumed to be a foreign person under paragraph 
(b)(3)(iii)(A) of this section) because a reduction in the rate of 
withholding for payments to a foreign tax-exempt organization generally 
requires that a valid Form W-8 described in Sec.  1.1441-9(b)(2) be 
furnished to the withholding agent.
    (B) No documentation provided. If the withholding agent cannot 
reliably associate a payment with a valid withholding certificate or 
valid documentary evidence, it must presume that the payee is an 
individual, a trust, or an estate, if the payee appears to be such 
person (e.g., based on the payee's name or information in the customer 
file). In the absence of reliable indications that the payee is an 
individual, a trust, or an estate, the withholding agent must presume 
that the payee is a corporation or one of the persons enumerated under 
Sec.  1.6049-4(c)(1)(ii)(B) through (Q) if it can be so treated under 
Sec.  1.6049-4(c)(1)(ii)(A)(1) or any one of the paragraphs under Sec.  
1.6049-4(c)(1)(ii)(B) through (Q) without the need to furnish 
documentation. If the withholding agent cannot treat a payee as a person 
described in Sec.  1.6049-4(c)(1)(ii)(A)(1) through (Q), then the payee 
shall be presumed to be a partnership. If such a partnership is presumed 
to be foreign, it is not the beneficial owner of the income paid to it. 
See paragraph (c)(6) of this section. If such a partnership is presumed 
to be domestic, it is a U.S. non-exempt recipient for purposes of 
chapter 61 of the Code.

[[Page 121]]

    (C) Documentary evidence furnished for offshore obligation. If the 
withholding agent receives valid documentary evidence, as described in 
Sec.  1.6049-5(c)(1) or (c)(4), with respect to an offshore obligation 
from an entity but the documentary evidence does not establish the 
entity's classification as a corporation, trust, estate, or partnership, 
the withholding agent may presume (in the absence of actual knowledge 
otherwise) that the entity is the type of person enumerated under Sec.  
1.6049-4 (c)(1)(ii)(B) through (Q) if it can be so treated under any one 
of those paragraphs without the need to furnish documentation. If the 
withholding agent cannot treat a payee as a person described in Sec.  
1.6049-4(c)(1)(ii)(B) through (Q), then the payee shall be presumed to 
be a corporation unless the withholding agent knows, or has reason to 
know, that the entity is not classified as a corporation for U.S. tax 
purposes. If a payee is, or is presumed to be, a corporation under this 
paragraph (b)(3)(ii)(C) and a foreign person under paragraph (b)(3)(iii) 
of this section, a withholding agent shall not treat the payee as the 
beneficial owner of income if the withholding agent knows, or has reason 
to know, that the payee is not the beneficial owner of the income. For 
this purpose, a withholding agent will have reason to know that the 
payee is not a beneficial owner if the documentary evidence indicates 
that the payee is a bank, broker, intermediary, custodian, or other 
agent, or is treated under Sec.  1.6049-4(c)(1)(ii)(B) through (Q) as 
such a person. A withholding agent may, however, treat such a person as 
a beneficial owner if the foreign person provides a statement, in 
writing and signed by a person with authority to sign the statement, 
that is attached to the documentary evidence and that states that the 
foreign person is the beneficial owner of the income.
    (iii) Presumption of U.S. or foreign status. A payment that the 
withholding agent cannot reliably associate with documentation is 
presumed to be made to a U.S. person, except as otherwise provided in 
this paragraph (b)(3)(iii), in paragraphs (b)(3)(iv) and (v) of this 
section, or in Sec.  1.1441-5(d) or (e). A withholding agent must treat 
a payee that is presumed or known to be a trust but for which the 
withholding agent cannot determine the type of trust in accordance with 
the presumptions specified in Sec.  1.1441-5(e)(6)(ii). In the case of a 
payment that is a withholdable payment, a withholding agent must apply 
the presumption rule under Sec.  1.1471-3(f) for purposes of chapter 4.
    (A) Payments to exempt recipients--(1) In general. If a withholding 
agent cannot reliably associate a payment with documentation from the 
payee and the payee is an exempt recipient (as determined under the 
provisions of Sec.  1.6049-4(c)(1)(ii) in the case of interest, or under 
similar provisions under chapter 61 of the Code applicable to the type 
of payment involved, but not including a payee that the withholding 
agent may treat as a foreign intermediary in accordance with paragraph 
(b)(3)(v) of this section), the payee is presumed to be a foreign person 
and not a U.S. person--
    (i) If the withholding agent has actual knowledge of the payee's 
employer identification number and that number begins with the two 
digits ``98'';
    (ii) If the withholding agent's communications with the payee are 
mailed to an address in a foreign country;
    (iii) If the name of the payee indicates that the entity is the type 
of entity that is on the per se list of foreign corporations contained 
in Sec.  301.7701-2(b)(8)(i) of this chapter (and, in the case of a name 
which contains the designation ``corporation'' or ``company,'' the 
withholding agent has a document that reasonably demonstrates the payee 
was incorporated in the relevant jurisdiction);
    (iv) If the payment is made with respect to an offshore obligation 
(as defined in paragraph (c)(37) of this section); or
    (v) With respect to an account opened after July 1, 2014, if the 
withholding agent has a telephone number for the person outside of the 
United States.
    (B) Scholarships and grants. A payment representing taxable 
scholarship or fellowship grant income that does not represent 
compensation for services (but is not excluded from tax under section 
117) and that a withholding agent cannot reliably associate with 
documentation is presumed to be

[[Page 122]]

made to a foreign person if the withholding agent has a record that the 
payee has a U.S. visa that is not an immigrant visa. See section 871(c) 
and Sec.  1.1441-4(c) for applicable tax rate and withholding rules.
    (C) Pensions, annuities, etc. A payment from a trust described in 
section 401(a), an annuity plan described in section 403(a), a payment 
with respect to any annuity, custodial account, or retirement income 
account described in section 403(b), or a payment from an individual 
retirement account or individual retirement annuity described in section 
408 that a withholding agent cannot reliably associate with 
documentation is presumed to be made to a U.S. person only if the 
withholding agent has a record of a Social Security number for the payee 
and relies on a mailing address described in the following sentence. A 
mailing address is an address used for purposes of information reporting 
or otherwise communicating with the payee that is an address in the 
United States or in a foreign country with which the United States has 
an income tax treaty in effect and the treaty provides that the payee, 
if an individual resident in that country, would be entitled to an 
exemption from U.S. tax on amounts described in this paragraph 
(b)(3)(iii)(C). Any payment described in this paragraph (b)(3)(iii)(C) 
that is not presumed to be made to a U.S. person is presumed to be made 
to a foreign person. A withholding agent making a payment to a person 
presumed to be a foreign person may not reduce the 30-percent amount of 
withholding required on such payment unless it receives a withholding 
certificate described in paragraph (e)(2)(i) of this section furnished 
by the beneficial owner. For reduction in the 30-percent rate, see 
Sec. Sec.  1.1441-4(e) or 1.1441-6(b).
    (D) Payments with respect to offshore obligations. A payment is 
presumed made to a foreign payee if the payment is made outside the 
United States (as defined in Sec.  1.6049-5(e)) with respect to an 
offshore obligation (as defined in paragraph (c)(37) of this section) 
and the withholding agent does not have actual knowledge that the payee 
is a U.S. person. See Sec.  1.6049-5(d)(2) and (3) for exceptions to 
this rule.
    (E) Certain payments for services. A payment for services is 
presumed to be made to a foreign person if--
    (1) The payee is an individual;
    (2) The withholding agent does not know, or have reason to know, 
that the payee is a U.S. citizen or resident;
    (3) The withholding agent does not know, or have reason to know, 
that the income is (or may be) effectively connected with the conduct of 
a trade or business within the United States; and
    (4) All of the services for which the payment is made were performed 
by the payee outside of the United States.
    (iv) Grace period. A withholding agent may choose to apply the 
provisions of Sec.  1.6049-5(d)(2)(ii) regarding a 90-day grace period 
for purposes of this paragraph (b)(3) (by applying the term withholding 
agent instead of the term payor) to amounts described in Sec.  1.1441-
6(c)(2) and to amounts covered by a Form 8233 described in Sec.  1.1441-
4(b)(2)(ii). Thus, for these amounts, a withholding agent may choose to 
treat the payee as a foreign person and withhold under chapter 3 of the 
Code (and the regulations thereunder) while awaiting documentation. For 
purposes of determining the rate of withholding under this section, the 
withholding agent must withhold at the unreduced 30-percent rate at the 
time that the amounts are credited to an account. For reporting of 
amounts credited both before and after the grace period, see Sec.  
1.1461-1(c)(4)(i)(A). The following adjustments shall be made at the 
expiration of the grace period:
    (A) If, at the end of the grace period, the documentation is not 
furnished in the manner required under this section and the account 
holder is presumed to be a U.S. non-exempt recipient, then backup 
withholding only applies to amounts credited to the account after the 
expiration of the grace period. Amounts credited to the account during 
the grace period shall be treated as owned by a foreign payee and 
adjustments must be made to correct any underwithholding on such amounts 
in the manner described in Sec.  1.1461-2.
    (B) If, at the end of the grace period, the documentation is not 
furnished in the manner required under this section, or if documentation 
is furnished that does not support the claimed rate

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reduction, and the account holder is presumed to be a foreign person 
then adjustments must be made to correct any underwithholding on amounts 
credited to the account during the grace period, based on the adjustment 
procedures described in Sec.  1.1461-2.
    (v) Special rules applicable to payments to foreign intermediaries--
(A) Reliance on claim of status as foreign intermediary. The presumption 
rules of paragraph (b)(3)(v)(B) of this section apply to a payment made 
to an intermediary (whether the intermediary is a qualified or 
nonqualified intermediary) that has provided a valid withholding 
certificate under paragraph (e)(3)(ii) or (iii) of this section (or has 
provided documentary evidence described in paragraph (b)(3)(ii)(C) of 
this section that indicates it is a bank, broker, custodian, 
intermediary, or other agent) to the extent the withholding agent cannot 
treat the payment as being reliably associated with valid documentation 
under the rules of paragraph (b)(2)(vii) of this section. For this 
purpose, a U.S. person's foreign branch that is a qualified intermediary 
defined in paragraph (e)(5)(ii) of this section shall be treated as a 
foreign intermediary. A payee that the withholding agent may not 
reliably treat as a foreign intermediary under this paragraph 
(b)(3)(v)(A) is presumed to be a payee other than an intermediary whose 
classification as an individual, corporation, partnership, etc., must be 
determined in accordance with paragraph (b)(3)(ii) of this section to 
the extent relevant. In addition, such payee is presumed to be a U.S. or 
a foreign payee based upon the presumptions described in paragraph 
(b)(3)(iii) of this section. The provisions of paragraph (b)(3)(v)(B) of 
this section are not relevant to a withholding agent that can reliably 
associate a payment with a withholding certificate from a person 
representing to be a qualified intermediary to the extent the qualified 
intermediary has assumed primary withholding responsibility in 
accordance with paragraph (e)(5)(iv) of this section.
    (B) Beneficial owner documentation or allocation information is 
lacking or unreliable. Except as otherwise provided in this paragraph 
(b)(3)(v)(B), any portion of a payment that the withholding agent may 
treat as made to a foreign intermediary (whether a nonqualified or a 
qualified intermediary) but that the withholding agent cannot treat as 
reliably associated with valid documentation under the rules of 
paragraph (b)(2)(vii) of this section is presumed made to an unknown, 
undocumented foreign payee. As a result, a withholding agent must deduct 
and withhold 30 percent from any payment of an amount subject to 
withholding. If a withholding certificate attached to an intermediary 
certificate is another intermediary withholding certificate or a flow-
through withholding certificate, the rules of this paragraph 
(b)(3)(v)(B) (or Sec.  1.1441-5(d)(3) or (e)(6)(iii)) apply by treating 
the portion of the payment allocable to the other intermediary or flow-
through entity as if it were made directly to the other intermediary or 
flow-through entity. Any payment of an amount subject to withholding 
that is presumed made to an undocumented foreign person must be reported 
on Form 1042-S. See Sec.  1.1461-1(c). See Sec.  1.6049-5(d) for 
payments that are not subject to withholding under chapter 3. However, 
in the case of a payment that is a withholdable payment made to a 
foreign intermediary, the presumption rules under Sec.  1.1471-3(f)(5) 
shall apply.
    (vi) U.S. branches and territory financial institutions not treated 
as U.S. persons. The rules of paragraph (b)(3)(v)(B) of this section 
shall apply to payments to a U.S. branch or a territory financial 
institution described in paragraph (b)(2)(iv)(A) of this section that 
has provided a withholding certificate as described in paragraph 
(e)(3)(v) of this section on which it has not agreed to be treated as a 
U.S. person.
    (vii) Joint payees--(A) In general. Except as provided in paragraph 
(b)(3)(vii)(B) of this section and this paragraph (b)(3)(vii)(A), if a 
withholding agent makes a payment to joint payees and cannot reliably 
associate the payment with valid documentation from all payees, the 
payment is presumed made to an unidentified U.S. person. If, however, a 
withholding agent makes a payment that is a withholdable payment and any 
joint payee does not appear, by its name and

[[Page 124]]

other information contained in the account file, to be an individual, 
then the entire amount of the payment will be treated as made to an 
undocumented foreign person. See paragraph (b)(3)(iii) of this section 
for presumption rules that apply in the case of a payment that is a 
withholdable payment. However, if one of the joint payees provides a 
Form W-9 furnished in accordance with the procedures described in 
Sec. Sec.  31.3406(d)-1 through 31.3406(d)-5 of this chapter, the 
payment shall be treated as made to that payee. See Sec.  31.3406(h)-2 
of this chapter for rules to determine the relevant payee if more than 
one Form W-9 is provided. For purposes of applying this paragraph 
(b)(3), the grace period rules in paragraph (b)(3)(iv) of this section 
shall apply only if each payee meets the conditions described in 
paragraph (b)(3)(iv) of this section.
    (B) Special rule for offshore obligations. If a withholding agent 
makes a payment to joint payees and cannot reliably associate a payment 
with valid documentation from all payees, the payment is presumed made 
to an unknown foreign payee if the payment is made outside the United 
States (as defined in Sec.  1.6049-5(e)) with respect to an offshore 
obligation (as defined in Sec.  1.6049-5(c)(1)).
    (viii) Rebuttal of presumptions. A payee or beneficial owner may 
rebut the presumptions described in this paragraph (b)(3) by providing 
reliable documentation to the withholding agent or, if applicable, to 
the IRS.
    (ix) Effect of reliance on presumptions and of actual knowledge or 
reason to know otherwise--(A) General rule. Except as otherwise provided 
in paragraph (b)(3)(ix)(B) of this section, a withholding agent that 
withholds on a payment under section 3402, 3405, or 3406 in accordance 
with the presumptions set forth in this paragraph (b)(3) shall not be 
liable for withholding under this section even if it is later 
established that the beneficial owner of the payment is, in fact, a 
foreign person. Similarly, a withholding agent that withholds on a 
payment under this section in accordance with the presumptions set forth 
in this paragraph (b)(3) shall not be liable for withholding under 
section 3402 or 3405 or for backup withholding under section 3406 even 
if it is later established that the payee or beneficial owner is, in 
fact, a U.S. person. A withholding agent that, instead of relying on the 
presumptions described in this paragraph (b)(3), relies on its own 
actual knowledge to withhold a lesser amount, not withhold, or not 
report a payment, even though reporting of the payment or withholding a 
greater amount would be required if the withholding agent relied on the 
presumptions described in this paragraph (b)(3), shall be liable for 
tax, interest, and penalties to the extent provided under section 1461 
and the regulations under that section. See paragraph (b)(7) of this 
section for provisions regarding such liability if the withholding agent 
fails to withhold in accordance with the presumptions described in this 
paragraph (b)(3).
    (B) Actual knowledge or reason to know that amount of withholding is 
greater than is required under the presumptions or that reporting of the 
payment is required. Notwithstanding the provisions of paragraph 
(b)(3)(ix)(A) of this section, a withholding agent may not rely on the 
presumptions described in this paragraph (b)(3) to the extent it has 
actual knowledge or reason to know that the status or characteristics of 
the payee or of the beneficial owner are other than what is presumed 
under this paragraph (b)(3) and, if based on such knowledge or reason to 
know, it should withhold (under this section or another withholding 
provision of the Code) an amount greater than would be the case if it 
relied on the presumptions described in this paragraph (b)(3) or it 
should report (under this section or under another provision of the 
Code) an amount that would not otherwise be reportable if it relied on 
the presumptions described in this paragraph (b)(3). In such a case, the 
withholding agent must rely on its actual knowledge or reason to know 
rather than on the presumptions set forth in this paragraph (b)(3). 
Failure to do so and, as a result, failure to withhold the higher amount 
or to report the payment, shall result in liability for tax, interest, 
and penalties to the extent provided under sections 1461 and 1463 and 
the regulations under those sections.

[[Page 125]]

    (x) Examples. The provisions of this paragraph (b)(3) are 
illustrated by the following examples:

    Example 1. A withholding agent, W, makes a payment of U.S. source 
interest with respect to a grandfathered obligation as described in 
Sec.  1.1471-2(b) (and thus the payment is not a withholdable payment) 
to X, Inc. with respect to an account W maintains for X, Inc. outside 
the United States. W cannot reliably associate the payment to X, Inc. 
with documentation. Under Sec.  1.6049-4(c)(1)(ii)(A)(1), W may treat X, 
Inc. as a corporation that is an exempt recipient under chapter 61. 
Thus, under the presumptions described in paragraph (b)(3)(iii) of this 
section as applicable to a payment to an exempt recipient that is not a 
withholdable payment, W must presume that X, Inc. is a foreign person 
(because the payment is made with respect to an offshore obligation). 
However, W knows that X, Inc. is a U.S. person who is an exempt 
recipient. W may not rely on its actual knowledge to not withhold under 
this section. If W's knowledge is, in fact, incorrect, W would be liable 
for tax, interest, and, if applicable, penalties, under section 1461. W 
would be permitted to reduce or eliminate its liability for the tax by 
establishing, in accordance with paragraph (b)(7) of this section, that 
the tax is not due or has been satisfied. If W's actual knowledge is, in 
fact, correct, W may nevertheless be liable for tax, interest, or 
penalties under section 1461 for the amount that W should have withheld 
based upon the presumptions. W would be permitted to reduce or eliminate 
its liability for the tax by establishing, in accordance with paragraph 
(b)(7) of this section, that its actual knowledge was, in fact, correct 
and that no tax or a lesser amount of tax was due.
    Example 2. A withholding agent, W, makes a payment of U.S. source 
interest with respect to a grandfathered obligation as described in 
Sec.  1.1471-2(b) (and thus the payment is not a withholdable payment) 
to Y who does not qualify as an exempt recipient under Sec.  1.6049-
4(c)(1)(ii). W cannot reliably associate the payment to Y with 
documentation. Under the presumptions described in paragraph (b)(3)(iii) 
of this section, W must presume that Y is a U.S. person who is not an 
exempt recipient for purposes of section 6049. However, W knows that Y 
is a foreign person. W may not rely on its actual knowledge to withhold 
under this section rather than backup withhold under section 3406. If 
W's knowledge is, in fact, incorrect, W would be liable for tax, 
interest, and, if applicable, penalties, under section 3403. If W's 
actual knowledge is, in fact, correct, W may nevertheless be liable for 
tax, interest, or penalties under section 3403 for the amount that W 
should have withheld based upon the presumptions. Paragraph (b)(7) of 
this section does not apply to provide relief from liability under 
section 3403.
    Example 3. A withholding agent, W, makes a payment of U.S. source 
dividends to X, Inc. with respect to an account that X, Inc. opened with 
W after June 30, 2014. W cannot reliably associate the payment to X, 
Inc. with documentation but may treat X, Inc. as an exempt recipient for 
purposes of this section applying the rules of Sec.  1.6042-
3(b)(1)(vii). However, because the dividend payment is a withholdable 
payment and W did not determine the chapter 3 status of X, Inc. before 
July 1, 2014, W may treat X, Inc. as a U.S. person that is an exempt 
recipient only if W obtains documentary evidence supporting X, Inc.'s 
status as a U.S. person. See paragraph (b)(3)(iii)(A)(2) of this 
section.
    Example 4. A withholding agent, W, is a plan administrator who makes 
pension payments to person X with a mailing address in a foreign country 
with which the United States has an income tax treaty in effect. Under 
that treaty, the type of pension income paid to X is taxable solely in 
the country of residence. The plan administrator has a record of X's 
U.S. social security number. W has no actual knowledge or reason to know 
that X is a foreign person. W may rely on the presumption of paragraph 
(b)(3)(iii)(C) of this section in order to treat X as a U.S. person. 
Therefore, any withholding and reporting requirements for the payment 
are governed by the provisions of section 3405 and the regulations under 
that section.

    (4) List of exemptions from, or reduced rates of, withholding under 
chapter 3 of the Code. A withholding agent that has determined that the 
payee is a foreign person for purposes of paragraph (b)(1) of this 
section must determine whether the payee is entitled to a reduced rate 
of withholding under section 1441, 1442, or 1443. This paragraph (b)(4) 
identifies items for which a reduction in the rate of withholding may 
apply and whether the rate reduction is conditioned upon documentation 
being furnished to the withholding agent. Documentation required under 
this paragraph (b)(4) is documentation that a withholding agent must be 
able to associate with a payment upon which it can rely to treat the 
payment as made to a foreign person that is the beneficial owner of the 
payment in accordance with paragraph (e)(1)(ii) of this section. This 
paragraph (b)(4) also cross-references other sections of the Code and 
applicable regulations in which some of these exceptions, exemptions, or 
reductions are further explained. See, for example, paragraph 
(b)(4)(viii) of this section,

[[Page 126]]

dealing with effectively connected income, that cross-references Sec.  
1.1441-4(a); see paragraph (b)(4)(xv) of this section, dealing with 
exemptions from, or reductions of, withholding under an income tax 
treaty, that cross-references Sec.  1.1441-6. This paragraph (b)(4) is 
not an exclusive list of items to which a reduction of the rate of 
withholding may apply and, thus, does not preclude an exemption from, or 
reduction in, the rate of withholding that may otherwise be allowed 
under the regulations under the provisions of chapter 3 of the Code for 
a particular item of income identified in this paragraph (b)(4). The 
exclusions and limitations specified in this paragraph (b)(4) apply for 
purposes of chapter 3. Additional withholding and documentation 
requirements may apply to withholding agents under chapter 4 with 
respect to payments that are withholdable payments. See, for example, 
Sec.  1.1471-2(a) requiring withholding on withholdable payments made to 
certain FFIs and Sec.  1.1471-2(a)(4) for payments exempted from 
withholding under section 1471(a).
    (i) Portfolio interest described in section 871(h) or 881(c) and 
substitute interest payments described in Sec.  1.871-7(b)(2) or Sec.  
1.881-2(b)(2) are exempt from withholding under section 1441(a). See 
Sec.  1.871-14 for regulations regarding portfolio interest and section 
1441(c)(9) for the exemption from withholding for portfolio interest. 
Documentation establishing foreign status is required for interest on an 
obligation in registered form to qualify as portfolio interest. See 
section 871(h)(2)(B)(ii) and Sec.  1.871-14(c)(1)(ii)(C). For special 
documentation rules regarding foreign-targeted registered obligations 
described in Sec.  1.871-14(e)(2) (and issued before January 1, 2016), 
see Sec.  1.871-14(e)(3) and (4) and, in particular, Sec.  1.871-
14(e)(4)(i)(A) and (ii)(A) regarding when the withholding agent must 
receive the documentation. The documentation furnished for purposes of 
qualifying interest as portfolio interest serves as the basis for the 
withholding exemption for purposes of this section and establishing 
foreign status for purposes of section 6049. See Sec.  1.6049-5(b)(8). 
Documentation establishing foreign status is not required for qualifying 
interest on an obligation in bearer form described in Sec.  1.871-
14(b)(1) (and issued before March 19, 2012) as portfolio interest. 
However, in certain cases, documentation for portfolio interest on a 
bearer obligation may have to be furnished in order to establish foreign 
status for purposes of the information reporting provisions of section 
6049 and backup withholding under section 3406. See Sec.  1.6049-
5(b)(7).
    (ii) Bank deposit interest and similar types of deposit interest 
(including original issue discount) described in section 871(i)(2)(A) or 
881(d) that are from sources within the United States are exempt from 
withholding under section 1441(a). See section 1441(c)(10). 
Documentation establishing foreign status is not required for purposes 
of this withholding exemption but may have to be furnished for purposes 
of the information reporting provisions of section 6049 and backup 
withholding under section 3406. See Sec.  1.6049-5(d)(3)(iii) for 
exceptions to the foreign payee and exempt recipient rules regarding 
this type of income. See also Sec.  1.6049-5(b)(11) for applicable 
documentation exemptions for certain bank deposit interest paid on 
obligations in bearer form.
    (iii) Bank deposit interest (including original issue discount) 
described in section 861(a)(1)(B) is exempt from withholding under 
sections 1441(a) as income that is not from U.S. sources. Documentation 
establishing foreign status is not required for purposes of this 
withholding exemption but may have to be furnished for purposes of the 
information reporting provisions of section 6049 and backup withholding 
under section 3406. Reporting requirements for payments of such interest 
are governed by section 6049 and the regulations under that section. See 
Sec.  1.6049-5(b)(12) and alternative documentation rules under Sec.  
1.6049-5(c)(1).
    (iv) Interest or original issue discount from sources within the 
United States on certain short-term obligations described in section 
871(g)(1)(B) or 881(a)(3) is exempt from withholding under sections 
1441(a). Documentation establishing foreign status is not required for 
purposes of this withholding exemption but may have to be furnished for 
purposes of the information reporting provisions of section 6049 and

[[Page 127]]

backup withholding under section 3406. See Sec.  1.6049-5(b)(12) for 
applicable documentation for establishing foreign status and Sec.  
1.6049-5(d)(3)(iii) for exceptions to the foreign payee and exempt 
recipient rules regarding this type of income. See also Sec.  1.6049-
5(b)(10) for applicable documentation exemptions for certain obligations 
in bearer form.
    (v) Income from sources without the United States is exempt from 
withholding under sections 1441(a). Documentation establishing foreign 
status is not required for purposes of this withholding exemption but 
may have to be furnished for purposes of the information reporting 
provisions of section 6049 or other applicable provisions of chapter 61 
of the Code and backup withholding under section 3406. See, for example, 
Sec.  1.6049-5(b) (6) and (12) and alternative documentation rules under 
Sec.  1.6049-5(c). See also paragraph (b)(5) of this section for cross 
references to other applicable provisions of the regulations under 
chapter 61 of the Code.
    (vi) Distributions from certain domestic corporations described in 
section 871(i)(2)(B) or 881(d) are exempt from withholding under section 
1441(a). See section 1441(c)(10). Documentation establishing foreign 
status is not required for purposes of this withholding exemption but 
may have to be furnished for purposes of the information reporting 
provisions of section 6042 and backup withholding under section 3406. 
See Sec.  1.6042-3(b)(1) (iii) through (vi).
    (vii) Dividends paid by certain foreign corporations that are 
treated as income from sources within the United States by reason of 
section 861(a)(2)(B) are exempt from withholding under section 884(e)(3) 
to the extent that the distributions are paid out of earnings and 
profits in any taxable year that the corporation was subject to branch 
profits tax for that year. Documentation establishing foreign status is 
not required for purposes of this withholding exemption but may have to 
be furnished for purposes of the information reporting provisions of 
section 6042 and backup withholding under section 3406. See Sec.  
1.6042-3(b)(1) (iii) through (vii).
    (viii) Certain income that is effectively connected with the conduct 
of a U.S. trade or business is exempt from withholding under section 
1441(a). See section 1441(c)(1). Documentation establishing foreign 
status and status of the income as effectively connected must be 
furnished for purposes of this withholding exemption to the extent 
required under the provisions of Sec.  1.1441-4(a). Documentation 
furnished for this purpose also serves as documentation establishing 
foreign status for purposes of applicable information reporting 
provisions under chapter 61 of the Code and for backup withholding under 
section 3406. See, for example, Sec.  1.6041-4(a)(1).
    (ix) Certain income with respect to compensation for personal 
services of an individual that are performed in the United States is 
exempt from withholding under section 1441(a). See section 1441(c)(4) 
and Sec.  1.1441-4(b). However, such income may be subject to 
withholding as wages under section 3402. Documentation establishing 
foreign status must be furnished for purposes of any withholding 
exemption or reduction to the extent required under Sec.  1.1441-4(b) or 
31.3401(a)(6)-1 (e) and (f) of this chapter. Documentation furnished for 
this purpose also serves as documentation establishing foreign status 
for purposes of information reporting under section 6041. See Sec.  
1.6041-4(a)(1).
    (x) Amounts described in section 871(f) that are received as 
annuities from certain qualified plans are exempt from withholding under 
section 1441(a). See section 1441(c)(7). Documentation establishing 
foreign status must be furnished for purposes of the withholding 
exemption as required under Sec.  1.1441-4(d). Documentation furnished 
for this purpose also serves as documentation establishing foreign 
status for purposes of information reporting under section 6041. See 
Sec.  1.6041-4(a)(1).
    (xi) Payments to a foreign government (including a foreign central 
bank of issue) that are excludable from gross income under section 
892(a) are exempt from withholding under section 1442. See Sec.  1.1441-
8(b). Documentation establishing status as a foreign government is 
required for purposes of this withholding exemption. Payments to a 
foreign government are exempt from information reporting under chapter 
61 of the Code (see Sec.  1.6049-4(c)(1)(ii)(F)).

[[Page 128]]

    (xii) Payments of certain interest income to a foreign central bank 
of issue or the Bank for International Settlements that are exempt from 
tax under section 895 are exempt from withholding under section 1442. 
Documentation establishing eligibility for such exemption is required to 
the extent provided in Sec.  1.1441-8(c)(1). Payments to a foreign 
central bank of issue or to the Bank for International Settlements are 
exempt from information reporting under chapter 61 of the Code (see 
Sec.  1.6049-4(c)(1)(ii) (H) and (M)).
    (xiii) Amounts derived by a foreign central bank of issue from 
bankers' acceptances described in section 871(i)(2)(C) or 881(d) are 
exempt from tax and, therefore, from withholding. See section 
1441(c)(10). Documentation establishing foreign status is not required 
for purposes of this withholding exemption if the name of the payee and 
other facts surrounding the payment reasonably indicate that the 
beneficial owner of the payment is a foreign central bank of issue as 
defined in Sec.  1.861-2(b)(4). See Sec.  1.1441-8(c)(2) for withholding 
procedures. See also Sec. Sec.  1.6049-4(c)(1)(ii)(H) and 1.6041-3(q)(8) 
for a similar exemption from information reporting.
    (xiv) Payments to an international organization from investments in 
the United States of stocks, bonds, or other domestic securities or from 
interest on deposits in banks in the United States of funds belonging to 
such international organization are exempt from tax under section 892(b) 
and, thus, from withholding. Documentation establishing status as an 
international organization is not required if the name of the payee and 
other facts surrounding the payment reasonably indicate that the 
beneficial owner of the payment is an international organization within 
the meaning of section 7701(a)(18). See Sec.  1.1441-8(d). Payments to 
an international organization are exempt from information reporting 
under chapter 61 of the Code (see Sec.  1.6049-4(c)(1)(ii)(G)).
    (xv) Amounts may be exempt from, or subject to a reduced rate of, 
withholding under an income tax treaty. Documentation establishing 
eligibility for benefits under an income tax treaty is required for this 
purpose as provided under Sec. Sec.  1.1441-6. Documentation furnished 
for this purpose also serves as documentation establishing foreign 
status for purposes of applicable information reporting provisions under 
chapter 61 of the Code and for backup withholding under section 3406. 
See, for example, Sec.  1.6041-4(a)(1).
    (xvi) Amounts of scholarships and grants paid to certain exchange or 
training program participants that do not represent compensation for 
services but are not excluded from tax under section 117 are subject to 
a reduced rate of withholding of 14-percent under section 1441(b). 
Documentation establishing foreign status is required for purposes of 
this reduction in rate as provided under Sec.  1.1441-4(c). This income 
is not subject to information reporting under chapter 61 of the Code nor 
to backup withholding under section 3406. The compensatory portion of a 
scholarship or grant is reportable as wage income. See Sec.  1.6041-
3(o).
    (xvii) Amounts paid to a foreign organization described in section 
501(c) are exempt from withholding under section 1441 to the extent that 
the amounts are not income includible under section 512 in computing the 
organization's unrelated business taxable income and are not subject to 
the tax imposed by section 4948(a). Documentation establishing status as 
a tax-exempt organization is required for purposes of this exemption to 
the extent provided in Sec.  1.1441-9. Amounts includible under section 
512 in computing the organization's unrelated business taxable income 
are subject to withholding to the extent provided in section 1443(a) and 
Sec.  1.1443-1(a). Gross investment income (as defined in section 
4940(c)(2)) of a private foundation is subject to withholding at a 4-
percent rate to the extent provided in section 1443(b) and Sec.  1.1443-
1(b). Payments to a tax-exempt organization are exempt from information 
reporting under chapter 61 of the Code and the regulations thereunder 
(see Sec.  1.6049-4(c)(1)(ii)(B)(1)).
    (xviii) Per diem amounts for subsistence paid by the U.S. government 
to a nonresident alien individual who is engaged in any program of 
training in the

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United States under the Mutual Security Act of 1954 are exempt from 
withholding under section 1441(a). See section 1441(c)(6). Documentation 
of foreign status is not required under Sec.  1.1441-4(e) for purposes 
of establishing eligibility for this exemption. See Sec.  1.6041-3(p).
    (xix) Interest with respect to tax-free covenant bonds issued prior 
to 1934 is subject to special withholding procedures set forth in Sec.  
1.1461-1 in effect prior to January 1, 2001 (see Sec.  1.1461-1 as 
contained in 26 CFR part 1, revised April 1, 1999).
    (xx) Income from certain gambling winnings of a nonresident alien 
individual is exempt from tax under section 871(j) and from withholding 
under section 1441(a). See section 1441(c)(11). Documentation 
establishing foreign status is not required for purposes of this 
exemption but may have to be furnished for purposes of the information 
reporting provisions of section 6041 and backup withholding under 
section 3406. See Sec. Sec.  1.6041-1 and 1.6041-4(a)(1).
    (xxi) Amounts paid with respect to a notional principal contract 
described in Sec.  1.871-15(a)(7), an equity-linked instrument described 
in Sec.  1.871-15(a)(4), or a securities lending or sale-repurchase 
transaction described in Sec.  1.871-15(a)(13) are exempt from 
withholding under section 1441(a) as dividend equivalents under section 
871(m) if the transaction is not a section 871(m) transaction within the 
meaning of Sec.  1.871-15(a)(12), if the transaction is subject to the 
exception described in Sec.  1.871-15(k), or if the payment is not a 
dividend equivalent pursuant to Sec.  1.871-15(c)(2). However, the 
amounts may be subject to withholding under section 1441(a) if they are 
subject to tax under any section other than section 871(m). For purposes 
of this withholding exemption, it is not necessary for the payee to 
provide documentation establishing that a notional principal contract or 
equity-linked instrument has a delta (as described in Sec.  1.871-15(g)) 
that is less than 0.80 or does not have substantial equivalence (as 
defined in Sec.  1.871-15(h)) with the underlying security. For purposes 
of the withholding exemption regarding corporate acquisitions described 
in Sec.  1.871-15(k), the exemption only applies if the long party 
furnishes, under penalties of perjury, a written statement to the 
withholding agent certifying that it satisfies the requirements of Sec.  
1.871-15(k).
    (xxii) Certain payments to qualified derivatives dealers (as 
described in paragraph (e)(6) of this section). For purposes of this 
withholding exemption, the qualified derivatives dealer must furnish to 
the withholding agent the documentation described in paragraph 
(e)(3)(ii) of this section. A withholding agent that makes a payment to 
a qualified intermediary that is acting as a qualified derivatives 
dealer is not required to withhold on the following payments if the 
withholding agent can reliably associate the payment with a valid 
qualified intermediary withholding certificate as described in paragraph 
(e)(3)(ii) of this section, including the certification described in 
paragraph (e)(3)(ii)(E):
    (A) A payment with respect to a potential section 871(m) transaction 
that is not an underlying security;
    (B) A payment of a dividend equivalent; or
    (C) A payment of a dividend in 2017.
    (xxiii) Amounts paid with respect to a potential section 871(m) 
transaction that is only a section 871(m) transaction as a result of 
applying Sec.  1.871-15(n) to treat certain transactions as combined 
transactions, if the withholding agent is able to rely on one or more of 
the presumptions provided in Sec.  1.871-15(n)(3)(i) or (ii) (applying 
those paragraphs whether or not the withholding agent is a short party 
by substituting ``withholding agent'' for ``short party''), and the 
withholding agent does not otherwise have actual knowledge that the long 
party (or a related person within the meaning of section 267(b) or 
section 707(b)) entered into the potential section 871(m) transaction in 
connection with any other potential section 871(m) transactions. The 
ability of one or more withholding agents to rely on the presumptions 
provided in section 1.871-15(n)(3) does not affect the withholding tax 
obligations or liability of any party to the transaction that cannot 
rely on the presumptions. Notwithstanding the withholding exemption 
provided to the withholding agent in this paragraph (b)(4)(xxii), the 
long party may still be

[[Page 130]]

liable for tax on dividend equivalent amounts with respect to such 
combined transactions under section 871(m).
    (xxiv) Any payments not otherwise mentioned in this paragraph (b)(4) 
shall be subject to withholding at the rate of 30-percent if it is an 
amount subject to withholding (as defined in Sec.  1.1441-2(a)) unless 
and to the extent the IRS may otherwise prescribe in published guidance 
(see Sec.  601.601(d)(2) of this chapter) or unless otherwise provided 
in regulations under chapter 3 of the Code.
    (5) Establishing foreign status under applicable provisions of 
chapter 61 of the Code. This paragraph (b)(5) identifies relevant 
provisions of the regulations under chapter 61 of the Code that exempt 
payments from information reporting, and therefore, from backup 
withholding under section 3406, based on the payee's status as a foreign 
person. Many of these exemptions require that the payee's foreign status 
be established in order for the exemption to apply. The regulations 
under applicable provisions of chapter 61 of the Code generally provide 
that the documentation described in this section may be relied upon for 
purposes of determining foreign status.
    (i) Payments to a foreign person that are governed by section 6041 
(dealing with certain trade or business income) are exempt from 
information reporting under Sec.  1.6041-4(a).
    (ii) Payments to a foreign person that are governed by section 6041A 
(dealing with remuneration for services and certain sales) are exempt 
from information reporting under Sec.  1.6041A-1(d)(3).
    (iii) Payments to a foreign person that are governed by section 6042 
(dealing with dividends) are exempt from information reporting under 
Sec.  1.6042-3(b)(1) (iii) through (vi).
    (iv) Payments to a foreign person that are governed by section 6044 
(dealing with patronage dividends) are exempt from information reporting 
under Sec.  1.6044-3(c)(1).
    (v) Payments to a foreign person that are governed by section 6045 
(dealing with broker proceeds) are exempt from information reporting 
under Sec.  1.6045-1(g).
    (vi) Payments to a foreign person that are governed by section 6049 
(dealing with interest) to a foreign person are exempt from information 
reporting under Sec.  1.6049-5(b) (6) through (15).
    (vii) Payments to a foreign person that are governed by section 
6050N (dealing with royalties) are exempt from information reporting 
under Sec.  1.6050N-1(c).
    (viii) Payments to a foreign person that are governed by section 
6050P (dealing with income from cancellation of debt) are exempt from 
information reporting under section 6050P or the regulations under that 
section except to the extent provided in Notice 96-61 (1996-2 C.B. 227); 
see also Sec.  601.601(b)(2) of this chapter.
    (ix) Payments to a foreign person that are governed by section 6050W 
(dealing with payment card and third party network transactions) are 
exempt from information reporting under Sec.  1.6050W-1(a)(5)(ii).
    (6) Rules of withholding for payments by a foreign intermediary or 
certain U.S. branches--(i) In general. A foreign intermediary described 
in paragraph (e)(3)(i) of this section or a U.S. branch or territory 
financial institution described in paragraph (b)(2)(iv) of this section 
that receives an amount subject to withholding (as defined in Sec.  
1.1441-2(a)) shall be required to withhold (if another withholding agent 
has not withheld the full amount required) and report such payment under 
chapter 3 of the Code and the regulations thereunder except as otherwise 
provided in this paragraph (b)(6). A nonqualified intermediary, U.S. 
branch, or territory financial institution described in paragraph 
(b)(2)(iv) of this section (other than a U.S. branch or territory 
financial institution that is treated as a U.S. person) shall not be 
required to withhold or report if it has provided a valid nonqualified 
intermediary withholding certificate or a U.S. branch withholding 
certificate, it has provided all of the information required by 
paragraph (e)(3)(iv) of this section (withholding statement), and it 
does not know, and has no reason to know, that another withholding agent 
failed to withhold the correct amount or failed to report the payment 
correctly under Sec.  1.1461-1(c). The withholding requirement of a 
nonqualified intermediary

[[Page 131]]

under the previous sentence also excludes a case in which withholding 
under chapter 4 was applied by a withholding agent on the payment. See 
Sec.  1.1441-3(a)(2) (coordinating withholding under chapter 3 with 
withholding applied under chapter 4 of the Code). A qualified 
intermediary's obligations to withhold and report shall be determined in 
accordance with its qualified intermediary withholding agreement.
    (ii) Examples. The following examples illustrate the rules of 
paragraph (b)(6)(i) of this section and coordinate rules for withholding 
that apply under chapter 4 with those that apply under chapter 3. See 
also paragraph (e)(3)(iv)(C) of this section for the requirements of 
withholding statements provided by nonqualified intermediaries.

    Example 1. FB, a foreign bank, acts as intermediary for five 
different individuals, A, B, C, D, and E, each of whom owns U.S. 
securities that generate U.S. source dividends (that are withholdable 
payments). The dividends are paid by USWA, a U.S. withholding agent. FB 
furnished USWA with a nonqualified intermediary withholding certificate, 
described in paragraph (e)(3)(iii) of this section, on which FB 
certifies its status as a participating FFI (such that withholding under 
chapter 4 does not apply), to which it attached valid withholding 
certificates for A, B, C, D, and E. The withholding certificates from A 
and B claim a 15% reduced rate of withholding under an income tax 
treaty. C, D, and E claim no reduced rate of withholding. FB provides a 
withholding statement that meets all of the requirements of paragraph 
(e)(3)(iv) of this section, including information allocating 20% of each 
dividend payment to each of A, B, C, D, and E. FB does not have actual 
knowledge or reason to know that USWA did not withhold the correct 
amounts or report the dividends on Forms 1042-S to each of A, B, C, D, 
and E. FB is not required to withhold or to report the dividends to A, 
B, C, D, and E.
    Example 2. The facts are the same as in Example 1, except that FB 
did not provide any information for USWA to determine how much of the 
dividend payments were made to A, B, C, D, and E. Because USWA could not 
reliably associate the dividend payments with documentation under 
paragraph (b)(2)(vii) of this section with respect to a payment that is 
a withholdable payment, USWA applied the presumption rule of Sec.  
1.1471-3(f)(5) and withheld 30% from all dividend payments under chapter 
4 and filed a Form 1042-S reporting the payment to an account holder of 
FB that is a non-participating FFI. FB is deemed to know that USWA did 
not report the payment to A, B, C, D, and E because it did not provide 
all of the information required on a withholding statement under 
paragraph (e)(3)(iv) of this section (i.e., allocation information). 
Although FB is not required to withhold on the payment under this 
section because the full 30% withholding was imposed by USWA, it is 
required to report the payments on Forms 1042-S to A, B, C, D, and E. 
FB's intentional failure to do so will subject it to intentional 
disregard penalties under sections 6721 and 6722.

    (7) Liability for failure to obtain documentation timely or to act 
in accordance with applicable presumptions--(i) General rule. A 
withholding agent that cannot reliably associate a payment with valid 
documentation on the date of payment and that does not withhold under 
this section, or withholds at less than the 30-percent rate prescribed 
under section 1441(a) and paragraph (b)(1) of this section, is liable 
under section 1461 for the tax required to be withheld under chapter 3 
of the Code and the regulations thereunder, without the benefit of a 
reduced rate unless--
    (A) The withholding agent has appropriately relied on the 
presumptions described in paragraph (b)(3) of this section (including 
the grace period described in paragraph (b)(3)(iv) of this section) in 
order to treat the payee as a U.S. person or, if applicable, on the 
presumptions described in Sec.  1.1441-4(a)(2)(ii) or (a)(3)(i) to treat 
the payment as effectively connected income;
    (B) The withholding agent can demonstrate to the satisfaction of the 
district director or the Assistant Commissioner (International) that the 
proper amount of tax, if any, was in fact paid to the IRS;
    (C) No documentation is required under section 1441 or this section 
in order for a reduced rate of withholding to apply; or
    (D) The withholding agent has complied with the provisions of Sec.  
1.1441-6(c) or (g).
    (ii) Proof that tax liability has been satisfied--(A) In general. 
Proof of payment of tax may be established for purposes of paragraph 
(b)(7)(i)(B) of this section on the basis of a Form 4669 (or such other 
form as the IRS may prescribe in published guidance (see Sec.  
601.601(d)(2) of

[[Page 132]]

this chapter)) establishing the amount of tax, if any, actually paid by 
or for the beneficial owner on the income. Proof that a reduced rate of 
withholding was, in fact, appropriate under the provisions of chapter 3 
of the Code and the regulations thereunder may also be established after 
the date of payment by the withholding agent on the basis of a valid 
withholding certificate or other appropriate documentation received 
after that date that was effective as of the date of payment. A 
withholding certificate furnished after the date of payment will be 
considered effective as of the date of the payment if the certificate 
contains a signed affidavit (either at the bottom of the form or on an 
attached page) that states that the information and representations 
contained on the certificate were accurate as of the time of the 
payment. A withholding certificate received within 30 days after the 
date of the payment will not be considered to be unreliable solely 
because it does not contain the affidavit described in the preceding 
sentence. However, in the case of a withholding certificate of an 
individual received more than a year after the date of payment, the 
withholding agent will be required to obtain, in addition to the 
withholding certificate and affidavit, documentary evidence, as 
described in Sec.  1.1471-3(c)(5)(i), that supports the individual's 
claim of foreign status or documentary evidence described in Sec.  
1.1441-6(c)(4)(i) to support any treaty claim made on the certificate. 
In the case of a withholding certificate of an entity received more than 
a year after the date of payment, the withholding agent will be required 
to obtain, in addition to the withholding certificate and affidavit, 
documentary evidence described in Sec.  1.1471-3(c)(5)(i) that supports 
the entity's claim of foreign status or documentary evidence described 
in Sec.  1.1441-6(c)(4)(ii) to support any treaty claim made on the 
certificate. If documentation other than a withholding certificate is 
submitted from a payee more than a year after the date of payment, the 
withholding agent will be required to obtain from the payee a 
withholding certificate and affidavit supporting the claim of chapter 3 
status as of the time of the payment. See, however, paragraph 
(b)(7)(ii)(B) of this section for special rules that apply when a 
withholding certificate is received after the date of the payment to 
claim that income is effectively connected with the conduct of a U.S. 
trade or business. See Sec.  1.1471-3(c)(7)(ii) for additional 
requirements that may apply under chapter 4 for documentation obtained 
after the date of payment of a withholdable payment.
    (B) Special rules for establishing that income is effectively 
connected with the conduct of a U.S. trade or business. A withholding 
certificate received after the date of payment to claim under Sec.  
1.1441-4(a)(1) that income is effectively connected with the conduct of 
a U.S. trade or business will be considered effective as of the date of 
the payment if the certificate contains a signed affidavit (either at 
the bottom of the form or on an attached page) that states that the 
information and representations contained on the certificate were 
accurate as of the time of the payment. The signed affidavit must also 
state that the beneficial owner has included the income on its U.S. 
income tax return for the taxable year in which it is required to report 
the income or, alternatively, that the beneficial owner intends to 
include the income on a U.S. income tax return for the taxable year in 
which it is required to report the income and the due date for filing 
such return (including any applicable extensions) is after the date on 
which the affidavit is signed. A certificate received within 30 days 
after the date of the payment will not be considered to be unreliable 
solely because it does not contain the affidavit described in the 
preceding sentences.
    (iii) Liability for interest and penalties. For payments made after 
December 31, 2000, if a withholding agent fails to deduct and withhold 
any tax imposed under sections 1441 or 1442, and the tax against which 
such tax may be credited under section 1462 is paid, then the amount of 
tax required to be deducted and withheld shall not be collected from the 
withholding agent. However, the withholding agent is not relieved from 
liability for interest or any penalties or additions to the tax 
otherwise applicable in respect of the failure to deduct and withhold. 
See section 1463.

[[Page 133]]

Further, in the event that a tax liability is assessed against the 
beneficial owner under section 871, 881, or 882 and interest under 
section 6601(a) is assessed against, and collected from, the beneficial 
owner, the interest charge imposed on the withholding agent shall be 
abated to that extent so as to avoid the imposition of a double interest 
charge.
    (iv) Special rule for determining validity of withholding 
certificate containing inconsequential errors. A withholding agent may 
treat a withholding certificate as valid when the certificate includes 
an error described as an inconsequential error in Sec.  1.1471-
3(c)(7)(i) for which the withholding agent obtains documentation 
sufficient for supporting a payee's claim of status as a foreign person 
or, for a payee that is an entity, its classification to the extent 
permitted under Sec.  1.1471-3(c)(7)(i). For example, if the country of 
residence is abbreviated in an ambiguous way on a beneficial owner 
withholding certificate provided to establish the beneficial owner's 
foreign status, a withholding agent may treat the withholding 
certificate as valid if it has obtained documentary evidence supporting 
that the beneficial owner's residence is in a country other than the 
United States.
    (v) Special effective date. See paragraph (f)(2)(ii) of this section 
for the special effective date applicable to this paragraph (b)(7).
    (8) Adjustments, refunds, or credits of overwithheld amounts. If the 
amount withheld under section 1441, 1442, or 1443 is greater than the 
tax due by the withholding agent or the taxpayer, adjustments may be 
made in accordance with the procedures described in Sec.  1.1461-2(a). 
Alternatively, refunds or credits may be claimed in accordance with the 
procedures described in Sec.  1.1464-1, relating to refunds or credits 
claimed by the beneficial owner, or Sec.  1.6414-1, relating to refunds 
or credits claimed by the withholding agent. If an amount was withheld 
under section 3406 or is subsequently determined to have been paid to a 
foreign person, see paragraph (b)(3)(vii) of this section and Sec.  
31.6413(a)-3(a)(1) of this chapter.
    (9) Payments to joint owners. A payment to joint owners that 
requires documentation in order to reduce the rate of withholding under 
chapter 3 of the Code and the regulations thereunder does not qualify 
for such reduced rate unless the withholding agent can reliably 
associate the payment with documentation from each owner. 
Notwithstanding the preceding sentence, a payment to joint owners 
qualifies as a payment exempt from withholding under this section if any 
one of the owners provides a certificate of U.S. status on a Form W-9 in 
accordance with paragraph (d) (2) or (3) of this section or the 
withholding agent can associate the payment with an intermediary or 
flow-through withholding certificate upon which it can rely to treat the 
payment as made to a U.S. payee under paragraph (d)(4) of this section. 
See Sec.  31.3406(h)-2(a)(3)(i)(B) of this chapter.
    (c) Definitions. The following definitions apply for purposes of 
sections 1441 through 1443, 1461, and regulations under those sections. 
For definitions of terms used in these regulations that are defined 
under sections 1471 through 1474, see subparagraphs (43) through (56) of 
this paragraph.
    (1) Withholding. The term withholding means the deduction and 
withholding of tax at the applicable rate from the payment.
    (2) Foreign and U.S. person--(i) In general. The term foreign person 
means any person that is not a U.S. person, including a QI branch of a 
U.S. financial institution (as defined in Sec.  1.1471-1(b)(109). Such a 
branch continues to be a U.S. payor for purposes of chapter 61 of the 
Code. See Sec.  1.6049-5(c)(4). A U.S. person is a person described in 
section 7701(a)(30), the U.S. government (including an agency or 
instrumentality thereof), a State (including an agency or 
instrumentality thereof), or the District of Columbia (including an 
agency or instrumentality thereof).
    (ii) Dual residents. Individuals will not be treated as U.S. persons 
for purposes of this section for a taxable year or any portion of a 
taxable year for which they are 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(a)(1) of this 
chapter for purposes of computing their U.S. tax liability.

[[Page 134]]

    (3) Individual--(i) Alien individual. The term alien individual 
means an individual who is not a citizen or a national of the United 
States. See Sec.  1.1-1(c).
    (ii) Nonresident alien individual. The term nonresident alien 
individual means persons described in section 7701(b)(1)(B), alien 
individuals who are treated as nonresident aliens pursuant to Sec.  
301.7701(b)-7 of this chapter for purposes of computing their U.S. tax 
liability, or 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. An alien individual who has made an election under section 
6013(g) or (h) to be treated as a resident of the United States is 
nevertheless treated as a nonresident alien individual for purposes of 
withholding under chapter 3 of the Code and the regulations thereunder.
    (4) Certain foreign corporations. For purposes of this section, a 
corporation created or organized in Guam, the Commonwealth of Northern 
Mariana Islands, the U.S. Virgin Islands, and American Samoa, is not 
treated as a foreign corporation if the requirements of sections 
881(b)(1) (A), (B), and (C) are met for such corporation. Further, a 
payment made to a foreign government or an international organization 
shall be treated as a payment made to a foreign corporation for purposes 
of withholding under chapter 3 of the Code and the regulations 
thereunder.
    (5) Financial institution and foreign financial institution (or 
FFI). The term financial institution means a person described in Sec.  
1.1471-1(b)(50). The term foreign financial institution or FFI has the 
meaning set forth in Sec.  1.1471-1(b)(47).
    (6) Beneficial owner--(i) General rule. This paragraph (c)(6) 
defines the term beneficial owner for payments of income other than a 
payment for which a reduced rate of withholding is claimed under an 
income tax treaty. The term beneficial owner means the person who is the 
owner of the income for tax purposes and who beneficially owns that 
income. A person shall be treated as the owner of the income to the 
extent that it is required under U.S. tax principles to include the 
amount paid in gross income under section 61 (determined without regard 
to an exclusion or exemption from gross income under the Internal 
Revenue Code). Beneficial ownership of income is determined under the 
provisions of section 7701(l) and the regulations under that section and 
any other applicable general U.S. tax principles, including principles 
governing the determination of whether a transaction is a conduit 
transaction. Thus, a person receiving income in a capacity as a nominee, 
agent, or custodian for another person is not the beneficial owner of 
the income. In the case of a scholarship, the student receiving the 
scholarship is the beneficial owner of that scholarship. In the case of 
a payment of an amount that is not income, the beneficial owner 
determination shall be made under this paragraph (c)(6) as if the amount 
were income.
    (ii) Special rules--(A) General rule. The beneficial owners of 
income paid to an entity described in this paragraph (c)(6)(ii) are 
those persons described in paragraphs (c)(6)(ii)(B) through (D) of this 
section.
    (B) Foreign partnerships. The beneficial owners of income paid to a 
foreign partnership (whether a nonwithholding or a withholding foreign 
partnership) are the partners in the partnership, unless they themselves 
are not the beneficial owners of the income under this paragraph (c)(6). 
For example, a partnership (first tier) that is a partner in another 
partnership (second tier) is not the beneficial owner of income paid to 
the second tier partnership since the first tier partnership is not the 
owner of the income under U.S. tax principles. Rather, the partners of 
the first tier partnership are the beneficial owners (to the extent they 
are not themselves persons that are not beneficial owners under this 
paragraph (c)(6)). See Sec.  1.1441-5(b) for applicable withholding 
procedures for payments to a domestic partnership. See also Sec.  
1.1441-5(c)(3)(ii) for applicable withholding procedures for payments to 
a foreign partnership where one of the partners (at any level in the 
chain of tiers) is a domestic partnership.
    (C) Foreign simple trusts and foreign grantor trusts. The beneficial 
owners of

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income paid to a foreign simple trust, as described in paragraph (c)(23) 
of this section, are the beneficiaries of the trust, unless they 
themselves are not the beneficial owners of the income under this 
paragraph (c)(6). The beneficial owners of income paid to a foreign 
grantor trust, as described in paragraph (c)(26) of this section, are 
the persons treated as the owners of the trust, unless they themselves 
are not the beneficial owners of the income under this paragraph (c)(6).
    (D) Other foreign trusts and foreign estates. The beneficial owner 
of income paid to a foreign complex trust as defined in paragraph 
(c)(25) of this section or to a foreign estate is the foreign complex 
trust or estate itself.
    (7) Withholding agent. For a definition of the term withholding 
agent and applicable rules, see Sec.  1.1441-7.
    (8) Person. For purposes of the regulations under chapter 3 of the 
Code, the term person shall mean a person described in section 
7701(a)(1) and the regulations under that section and a U.S. branch to 
the extent treated as a U.S. person under paragraph (b)(2)(iv) of this 
section. For purposes of the regulations under chapter 3 of the Code, 
the term person does not include a wholly-owned entity that is 
disregarded for federal tax purposes under Sec.  301.7701-2(c)(2) of 
this chapter as an entity separate from its owner. See paragraph 
(b)(2)(iii) of this section for procedures applicable to payments to 
such entities.
    (9) Source of income. The source of income is determined under the 
provisions of part I (section 861 and following) , subchapter N, chapter 
1 of the Code and the regulations under those provisions.
    (10) Chapter 3 of the Code (or chapter 3). For purposes of the 
regulations under sections 1441, 1442, and 1443, any reference to 
chapter 3 of the Code (or chapter 3) shall not include references to 
sections 1445 and 1446, unless the context indicates otherwise.
    (11) Reduced rate. For purposes of regulations under chapter 3 of 
the Code, and other withholding provisions of the Code, the term reduced 
rate, when used in regulations under chapter 3 of the Code, shall 
include an exemption from tax.
    (12) Payee. For purposes of chapter 3 of the Code, the term payee of 
a payment is determined under paragraph (b)(2) of this section, Sec.  
1.1441-5(c)(1) (relating to partnerships), and Sec.  1.1441-5(e)(2) and 
(3) (relating to trusts and estates) and includes foreign persons, U.S. 
exempt recipients, and U.S. non-exempt recipients. A nonqualified 
intermediary and a qualified intermediary (to the extent it does not 
assume primary withholding responsibility) are not payees if they are 
acting as intermediaries and not the beneficial owner of income. In 
addition, a flow-through entity (other than a withholding foreign 
partnership, withholding foreign trust, or qualified intermediary that 
assumes primary withholding responsibility) is not a payee unless the 
income is (or is deemed to be) effectively connected with the conduct of 
a trade or business in the United States. See Sec.  1.6049-5(d)(1) for 
rules to determine the payee for purposes of chapter 61 of the Code. See 
Sec. Sec.  1.1441-1(b)(3), 1.1441-5(d), and (e)(6) and Sec.  1.6049-
5(d)(3) for presumption rules that apply if a payee's identity cannot be 
determined on the basis of valid documentation. For purposes of chapter 
4, the term payee has the meaning set forth in Sec.  1.1471-3(a) with 
respect to a withholdable payment.
    (13) Intermediary. An intermediary means, with respect to a payment 
that it receives, a person that, for that payment, acts as a custodian, 
broker, nominee, or otherwise as an agent for another person, regardless 
of whether such other person is the beneficial owner of the amount paid, 
a flow-through entity, or another intermediary.
    (14) Nonqualified intermediary. A nonqualified intermediary means 
any intermediary that is not a U.S. person and not a qualified 
intermediary, as defined in paragraph (e)(5)(ii) of this section, or a 
qualified intermediary that is not acting in its capacity as a qualified 
intermediary with respect to a payment. For example, to the extent an 
entity that is a qualified intermediary provides another withholding 
agent with a foreign beneficial owner withholding certificate as defined 
in paragraph (e)(2)(i) of this section, the entity is not acting in its 
capacity as a

[[Page 136]]

qualified intermediary. Notwithstanding the preceding sentence, a 
qualified intermediary is acting as a qualified intermediary to the 
extent it provides another withholding agent with Forms W-9, or other 
information regarding U.S. non-exempt recipients pursuant to its 
qualified intermediary agreement with the IRS.
    (15) Qualified intermediary. The term qualified intermediary is 
defined in paragraph (e)(5)(ii) of this section.
    (16) Withholding certificate. The term withholding certificate means 
a Form W-8 described in paragraph (e)(2)(i) of this section (relating to 
foreign beneficial owners), paragraphs (e)(3)(i) or (e)(5)(i) of this 
section (relating to foreign intermediaries or qualified 
intermediaries), Sec.  1.1441-5(c)(2)(iv), (c)(3)(iii), and (e)(5)(iii) 
(relating to flow-through entities), a Form 8233 described in Sec.  
1.1441-4(b)(2), a Form W-9 as described in paragraph (d) of this 
section, a statement described in Sec.  1.871-14(c)(2)(v) (relating to 
portfolio interest), or any other certificates that under the Code or 
regulations certifies or establishes the status of a payee or beneficial 
owner as a U.S. or a foreign person.
    (17) Documentary evidence; other appropriate documentation. The 
terms documentary evidence or other appropriate documentation refer to 
documentary evidence that may be provided for payments made outside the 
United States with respect to offshore obligations in accordance with 
Sec.  1.6049-5(c)(1) or any other evidence that under the Code or 
regulations certifies or establishes the status of a payee or beneficial 
owner as a U.S. or foreign person. See Sec. Sec.  1.1441-6(b)(2), (c)(3) 
and (4) (relating to treaty benefits), and 1.6049-5(c)(1) and (4) 
(relating to chapter 61 reporting). Also see Sec.  1.1441-4(a)(3)(ii) 
regarding documentary evidence for notional principal contracts.
    (18) Documentation. The term documentation refers to both 
withholding certificates, as defined in paragraph (c)(16) of this 
section, and documentary evidence or other appropriate documentation, as 
defined in paragraph (c)(17) of this section.
    (19) Payor. The term payor is defined in Sec.  31.3406(a)-2 of this 
chapter and Sec.  1.6049-4(a)(2) and generally includes a withholding 
agent, as defined in Sec.  1.1441-7(a). The term also includes any 
person that makes a payment to an intermediary, flow-through entity, or 
U.S. branch that is not treated as a U.S. person to the extent the 
intermediary, flow-through, or U.S. branch provides a Form W-9 or other 
appropriate information relating to a payee so that the payment can be 
reported under chapter 61 of the Internal Revenue Code and, if required, 
subject to backup withholding under section 3406. This latter rule does 
not preclude the intermediary, flow-through entity, or U.S. branch from 
also being a payor.
    (20) Exempt recipient. The term exempt recipient means a person that 
is exempt from reporting under chapter 61 of the Internal Revenue Code 
and backup withholding under section 3406 and that is described in 
Sec. Sec.  1.6041-3(q), 1.6045-2(b)(2)(i), and 1.6049-4(c)(1)(ii), and 
Sec.  5f.6045-1(c)(3)(i)(B) of this chapter. Exempt recipients are not 
exempt from withholding under chapter 3 of the Internal Revenue Code 
unless they are U.S. persons or foreign persons entitled to an exemption 
from withholding under chapter 3.
    (21) Non-exempt recipient. A non-exempt recipient is any person that 
is not an exempt recipient under paragraph (c)(20) of this section.
    (22) Reportable amounts. Reportable amounts are defined in paragraph 
(e)(3)(vi) of this section.
    (23) Flow-through entity. A flow-through entity means any entity 
that is described in this paragraph (c)(23) and that may provide 
documentation on behalf of its partners, beneficiaries, or owners to a 
withholding agent. The entities described in this paragraph are a 
foreign partnership (other than a withholding foreign partnership), a 
foreign simple trust (other than a withholding foreign trust) that is 
described in paragraph (c)(24) of this section, a foreign grantor trust 
(other than a withholding foreign trust) that is described in paragraph 
(c)(26) of this section, or, for any payments for which a reduced rate 
of withholding under an income tax treaty is claimed, any entity to the 
extent the entity is considered to be fiscally transparent under section 
894 with respect to the payment by an interest holder's jurisdiction.

[[Page 137]]

    (24) Foreign simple trust. A foreign simple trust is a foreign trust 
that is described in section 651(a).
    (25) Foreign complex trust. A foreign complex trust is a foreign 
trust other than a foreign simple trust or foreign grantor trust.
    (26) Foreign grantor trust. A foreign grantor trust is a foreign 
trust but only to the extent all or a portion of the income of the trust 
is treated as owned by the grantor or another person under sections 671 
through 679.
    (27) Partnership. The term partnership means any entity treated as a 
partnership under Sec.  301.7701-2 or -3 of this chapter.
    (28) Nonwithholding foreign partnership (or NWP). A nonwithholding 
foreign partnership is a foreign partnership that is not a withholding 
foreign partnership, as defined in Sec.  1.1441-5(c)(2)(i).
    (29) Withholding foreign partnership (or WP). A withholding foreign 
partnership is defined in Sec.  1.1441-5(c)(2)(i).
    (30) Possessions of the United States or U.S. territory. For 
purposes of the regulations under chapters 3 and 61 of the Code, the 
term possessions of the United States or U.S. territory means Guam, 
American Samoa, the Northern Mariana Islands, Puerto Rico, or the Virgin 
Islands.
    (31) Amount subject to chapter 3 withholding. An amount subject to 
withholding under chapter 3 is an amount described in Sec.  1.1441-2(a).
    (32) EIN. The term EIN means an employer identification number (also 
known as a federal tax identification number) described in Sec.  
301.6109-1(a)(1)(i).
    (33) Flow-through withholding certificate. The term flow-through 
withholding certificate means a Form W-8IMY submitted by a foreign 
partnership, foreign simple trust, or foreign grantor trust.
    (34) Foreign payee. The term foreign payee means any payee other 
than a U.S. payee.
    (35) Intermediary withholding certificate. The term intermediary 
withholding certificate means a Form W-8IMY submitted by an intermediary 
or qualified intermediary.
    (36) Nonwithholding foreign trust (or NWT). The term nonwithholding 
foreign trust or NWT means a foreign trust as defined in section 
7701(a)(31)(B) that is a simple trust or grantor trust and is not a 
withholding foreign trust.
    (37) Payment with respect to an offshore obligation. The term 
payment with respect to an offshore obligation means a payment made 
outside of the United States, within the meaning of Sec.  1.6049-5(e), 
with respect to an offshore obligation (as defined in Sec.  1.6049-
5(c)(1), Sec.  1.6041-1(d), or Sec.  1.6042-3(b) (depending on the type 
of payment)).
    (38) Permanent residence address--(i) In general. The term permanent 
residence address is the address in the country of which the person 
claims to be a resident for purposes of that country's income tax. In 
the case of a withholding certificate furnished in order to claim a 
reduced rate of withholding under an income tax treaty, whether a person 
is a resident of a treaty country must be determined in the manner 
prescribed under the applicable treaty. See Sec.  1.1441-6(b). The 
address of a financial institution with which the person maintains an 
account, a post office box, or an address used solely for mailing 
purposes is not a permanent residence address unless such address is the 
only address used by the person and appears as the person's registered 
address in the person's organizational documents. Further, an address 
that is provided subject to a hold mail instruction (as defined in 
paragraph (c)(38)(ii) of this section) is not a permanent residence 
address unless the person provides the documentary evidence described in 
paragraph (c)(38)(ii) of this section. If the person is an individual 
who does not have a tax residence in any country, the permanent 
residence address is the place at which the person normally resides. If 
the person is an entity and does not have a tax residence in any 
country, then the permanent residence address of the entity is the place 
at which the person maintains its principal office.
    (ii) Hold mail instruction. The term hold mail instruction means a 
current instruction by a person to keep the person's mail until such 
instruction is amended. An instruction to send all correspondence 
electronically is not a hold mail instruction. An address that is 
subject to a hold mail instruction may be used as a permanent residence

[[Page 138]]

address if the person has also provided the withholding agent with 
documentary evidence described in Sec.  1.1471-3(c)(5)(i) (without 
regard to the requirement in Sec.  1.1471-3(c)(5)(i) that the 
documentary evidence contain a permanent residence address). The 
documentary evidence described in Sec.  1.1471-3(c)(5)(i) must support 
the person's claim of foreign status or, in the case of a person that is 
claiming treaty benefits, must support residence in the country where 
the person is claiming a reduced rate of withholding under an income tax 
treaty. If, after a withholding certificate is provided, a person's 
permanent residence address is subsequently subject to a hold mail 
instruction, the addition of the hold mail instruction is a change in 
circumstances requiring the person to provide the documentary evidence 
described in this paragraph (c)(38)(ii) in order for a withholding agent 
to use the address as a permanent residence address.
    (39) Standing instructions to pay amounts. The term standing 
instructions to pay amounts has the meaning set forth in Sec.  1.1471-
1(b)(126).
    (40) Territory financial institution. The term territory financial 
institution has the meaning set forth in Sec.  1.1471-1(b)(130).
    (41) TIN. The term TIN means the tax identifying number assigned to 
a person under section 6109.
    (42) Withholding foreign trust (or WT). The term withholding foreign 
trust (or WT) means a foreign grantor trust or foreign simple trust that 
has executed the agreement described in Sec.  1.1441-5(e)(5)(v).
    (43) Certified deemed-compliant FFI. The term certified deemed-
compliant FFI means an FFI described in Sec.  1.1471-5(f)(2).
    (44) Chapter 3 withholding rate pool. The term chapter 3 withholding 
rate pool has the meaning described in paragraph (e)(5)(v)(C)(1) of this 
section.
    (45) Chapter 3 status. The term chapter 3 status refers to the 
attributes of a payee relevant for determining the rate of withholding 
with respect to a payment made to the payee for purposes of chapter 3.
    (46) Chapter 4 of the Code (or chapter 4). The term chapter 4 of the 
Code (or chapter 4) means sections 1471 through 1474 and the regulations 
thereunder.
    (47) Chapter 4 status. The term chapter 4 status means a person's 
status as a U.S. person, a specified U.S. person, an individual that is 
a foreign person, a participating FFI, a deemed-compliant FFI, a 
restricted distributor, an exempt beneficial owner, a nonparticipating 
FFI, a territory financial institution, an excepted NFFE, or a passive 
NFFE.
    (48) Chapter 4 withholding rate pool. The term chapter 4 withholding 
rate pool has the meaning set forth Sec.  1.1471-1(b)(20). For when a 
withholding statement may include a chapter 4 withholding rate pool of 
U.S. payees for purposes of this section and Sec.  1.1441-5, however, 
see paragraph (e)(3)(iv)(A) of this section (for a withholding statement 
provided by a nonqualified intermediary) or paragraph (e)(5)(v)(C)(2) of 
this section (for a withholding statement provided by a qualified 
intermediary).
    (49) Deemed-compliant FFI. The term deemed-compliant FFI means an 
FFI that is treated, pursuant to section 1471(b)(2) and Sec.  1.1471-
5(f), as meeting the requirements of section 1471(b). The term deemed-
compliant FFI also includes a QI branch of a U.S. financial institution 
that is a reporting Model 1 FFI.
    (50) GIIN (or Global Intermediary Identification Number). The term 
GIIN or Global Intermediary Identification Number means the 
identification number that is assigned to a participating FFI or 
registered deemed-compliant FFI. The term GIIN or Global Intermediary 
Identification Number also includes the identification number assigned 
to a reporting Model 1 FFI (as defined in Sec.  1.1471-1(b)(114)) for 
purposes of identifying such entity to withholding agents. All GIINs 
will appear on the IRS FFI list.
    (51) NFFE. The term NFFE or non-financial foreign entity has the 
meaning set forth in Sec.  1.1471-1(b)(80).
    (52) Nonparticipating FFI. The term nonparticipating FFI means an 
FFI other than a participating FFI, a deemed-compliant FFI, or an exempt 
beneficial owner.

[[Page 139]]

    (53) Participating FFI. The term participating FFI has the meaning 
set forth in Sec.  1.1471-1(b)(91).
    (54) Preexisting obligation. The term preexisting obligation has the 
meaning set forth in Sec.  1.1471-1(b)(104).
    (55) Registered deemed-compliant FFI. The term registered deemed- 
compliant FFI has the meaning set forth in Sec.  1.1471-5(f)(1).
    (56) Withholdable payment. The term withholdable payment has the 
meaning set forth in Sec.  1.1473-1(a).
    (d) Beneficial owner's or payee's claim of U.S. status--(1) In 
general. Under paragraph (b)(1) of this section, a withholding agent is 
not required to withhold under chapter 3 of the Code on payments to a 
U.S. payee, to a person presumed to be a U.S. payee in accordance with 
the provisions of paragraph (b)(3) of this section, or to a person that 
the withholding agent may treat as a U.S. beneficial owner of the 
payment. Absent actual knowledge or reason to know otherwise, a 
withholding agent may rely on the provisions of this paragraph (d) in 
order to determine whether to treat a payee or beneficial owner as a 
U.S. person.
    (2) Payments for which a Form W-9 is otherwise required. A 
withholding agent may treat as a U.S. payee any person who is required 
to furnish a Form W-9 and who furnishes it in accordance with the 
procedures described in Sec. Sec.  31.3406(d)-1 through 31.3406(d)-5 of 
this chapter (including the requirement that the payee furnish its 
taxpayer identifying number (TIN)) if the withholding agent meets all 
the requirements described in Sec.  31.3406(h)-3(e) of this chapter 
regarding reliance by a payor on a Form W-9. Providing a Form W-9 or 
valid substitute form shall serve as a statement that the person whose 
name is on the form is a U.S. person. Therefore, a foreign person, 
including a U.S. branch treated as a U.S. person under paragraph 
(b)(2)(iv) of this section, shall not provide a Form W-9. A U.S. branch 
of a foreign person may establish its status as a foreign person exempt 
from reporting under chapter 61 and backup withholding under section 
3406 by providing a withholding certificate on Form W-8.
    (3) Payments for which a Form W-9 is not otherwise required. In the 
case of a payee who is not required to furnish a Form W-9 under section 
3406 (e.g., a person exempt from reporting under chapter 61 of the 
Internal Revenue Code), the withholding agent may treat the payee as a 
U.S. payee if the payee provides the withholding agent with a Form W-9 
or a substitute form described in Sec.  31.3406(h)-3(c)(2) of this 
chapter (relating to forms for exempt recipients) that contains the 
payee's name, address, and TIN. The form must be signed under penalties 
of perjury by the payee if so required by the form or by Sec.  
31.3406(h)-3 of this chapter. Providing a Form W-9 or valid substitute 
form shall serve as a statement that the person whose name is on the 
certificate is a U.S. person. A Form W-9 or valid substitute form shall 
not be provided by a foreign person, including any U.S. branch of a 
foreign person whether or not the branch is treated as a U.S. person 
under paragraph (b)(2)(iv) of this section. See paragraph (e)(3)(v) of 
this section for withholding certificates provided by U.S. branches 
described in paragraph (b)(2)(iv) of this section. The procedures 
described in Sec.  31.3406(h)-2(a) of this chapter shall apply to 
payments to joint payees. A withholding agent that receives a Form W-9 
to satisfy this paragraph (d)(3) must retain the form in accordance with 
the provisions of Sec.  31.3406(h)-3(g) of this chapter, if applicable, 
or of paragraph (e)(4)(iii) of this section (relating to the retention 
of withholding certificates) if Sec.  31.3406(h)-3(g) of this chapter 
does not apply. The rules of this paragraph (d)(3) are only intended to 
provide a method by which a withholding agent may determine that a payee 
is a U.S. person and do not otherwise impose a requirement that 
documentation be furnished by a person who is otherwise treated as an 
exempt recipient for purposes of the applicable information reporting 
provisions under chapter 61 of the Internal Revenue Code (e.g., Sec.  
1.6049-4(c)(1)(ii) for payments of interest).
    (4) When a payment to an intermediary or flow-through entity may be 
treated as made to a U.S. payee. A withholding agent that makes a 
payment to an intermediary (whether a qualified intermediary or 
nonqualified intermediary), a flow-through entity, or a

[[Page 140]]

U.S. branch or territory financial institution described in paragraph 
(b)(2)(iv) of this section may treat the payment as made to a U.S. payee 
to the extent that, prior to the payment, the withholding agent can 
reliably associate the payment with a Form W-9 described in paragraph 
(d)(2) or (3) of this section attached to a valid intermediary, flow-
through, or U.S. branch withholding certificate described in paragraph 
(e)(3)(i) of this section or to the extent the withholding agent can 
reliably associate the payment with a Form W-8 described in paragraph 
(e)(3)(v) of this section that evidences an agreement to treat a U.S. 
branch or territory financial institution described in paragraph 
(b)(2)(iv) of this section as a U.S. person. In addition, a withholding 
agent may treat the payment as made to a U.S. payee only if it complies 
with the electronic confirmation procedures described in paragraph 
(e)(4)(v) of this section, if required, and it has not been notified by 
the IRS that any of the information on the withholding certificate or 
other documentation is incorrect or unreliable. In the case of a Form W-
9 that is required to be furnished for a reportable payment that may be 
subject to backup withholding, the withholding agent may be notified in 
accordance with section 3406(a)(1)(B) and the regulations under that 
section. See applicable procedures under section 3406(a)(1)(B) and the 
regulations under that section for payors who have been notified with 
regard to such a Form W-9. Withholding agents who have been notified in 
relation to other Forms W-9, including under section 6724(b) pursuant to 
section 6721, may rely on the withholding certificate or other 
documentation only to the extent provided under procedures as prescribed 
by the IRS (see Sec.  601.601(d)(2) of this chapter).
    (e) Beneficial owner's claim of foreign status--(1) Withholding 
agent's reliance--(i) In general. Absent actual knowledge or reason to 
know otherwise, a withholding agent may treat a payment as made to a 
foreign beneficial owner in accordance with the provisions of paragraph 
(e)(1)(ii) of this section. See paragraph (e)(4)(viii) of this section 
for applicable reliance rules. See paragraph (b)(4) of this section for 
a description of payments for which a claim of foreign status is 
relevant for purposes of claiming a reduced rate of withholding for 
purposes of section 1441, 1442, or 1443. See paragraph (b)(5) of this 
section for a list of payments for which a claim of foreign status is 
relevant for other purposes, such as claiming an exemption from 
information reporting under chapter 61 of the Code.
    (ii) Payments that a withholding agent may treat as made to a 
foreign person that is a beneficial owner--(A) General rule. The 
withholding agent may treat a payment as made to a foreign person that 
is a beneficial owner if it complies with the requirements described in 
paragraph (e)(1)(ii)(B) of this section and, then, only to the extent--
    (1) That the withholding agent can reliably associate the payment 
with a beneficial owner withholding certificate described in paragraph 
(e)(2) of this section furnished by the person whose name is on the 
certificate or attached to a valid foreign intermediary, flow-through, 
or U.S. branch withholding certificate;
    (2) That the payment is made outside the United States (within the 
meaning of Sec.  1.6049-5(e)) with respect to an offshore obligation 
(within the meaning of paragraph (c)(37) of this section) and the 
withholding agent can reliably associate the payment with documentary 
evidence described in Sec. Sec.  1.1441-6(c)(3) or (4), or 1.6049-
5(c)(1) relating to the beneficial owner;
    (3) That the withholding agent can reliably associate the payment 
with a valid qualified intermediary withholding certificate, as 
described in paragraph (e)(3)(ii) of this section, and the qualified 
intermediary has provided sufficient information for the withholding 
agent to allocate the payment to a chapter 3 withholding rate pool;
    (4) That the withholding agent can reliably associate the payment 
with a withholding certificate described in Sec.  1.1441-5(c)(3)(iii) or 
(e)(5)(iii) from a flow-through entity claiming the income is 
effectively connected income;
    (5) That the withholding agent identifies the payee as a U.S. branch 
described in paragraph (b)(2)(iv) of this section, the payment to which 
it treats

[[Page 141]]

as effectively connected income in accordance with Sec.  1.1441-4(a) 
(2)(ii) or (3);
    (6) That the withholding agent identifies the payee as an 
international organization (or any wholly-owned agency or 
instrumentality thereof) as defined in section 7701(a)(18) that has been 
designated as such by executive order (pursuant to 22 U.S.C. 288 through 
288(f)); or
    (7) That the withholding agent pays interest from bankers' 
acceptances and identifies the payee as a foreign central bank of issue 
(as defined in Sec.  1.861-2(b)(4)).
    (B) Additional requirements. In order for a payment described in 
paragraph (e)(1)(ii)(A) of this section to be treated as made to a 
foreign beneficial owner, the withholding agent must hold the 
documentation (if required) prior to the payment, comply with the 
electronic confirmation procedures described in paragraph (e)(4)(v) of 
this section (if required), and must not have been notified by the IRS 
that any of the information on the withholding certificate or other 
documentation is incorrect or unreliable. If the withholding agent has 
been so notified, it may rely on the withholding certificate or other 
documentation only to the extent provided under procedures prescribed by 
the IRS (see Sec.  601.601(d)(2) of this chapter). See paragraph 
(b)(2)(vii) of this section for rules regarding reliable association of 
a payment with a withholding certificate or other appropriate 
documentation.
    (2) Beneficial owner withholding certificate--(i) In general. A 
beneficial owner withholding certificate is a statement by which the 
beneficial owner of the payment represents that it is a foreign person 
and, if applicable, claims a reduced rate of withholding under section 
1441. A separate withholding certificate must be submitted to each 
withholding agent. If the beneficial owner receives more than one type 
of payment from a single withholding agent, the beneficial owner may 
have to submit more than one withholding certificate to the single 
withholding agent for the different types of payments as may be required 
by the applicable forms and instructions, or as the withholding agent 
may require (such as to facilitate the withholding agent's compliance 
with its obligations to determine withholding under this section or the 
reporting of the amounts under Sec.  1.1461-1 (b) and (c)). For example, 
if a beneficial owner claims that some but not all of the income it 
receives is effectively connected with the conduct of a trade or 
business in the United States, it may be required to submit two separate 
withholding certificates, one for income that is not effectively 
connected and one for income that is so connected. See Sec.  1.1441-
6(b)(2) for special rules for determining who must furnish a beneficial 
owner withholding certificate when a benefit is claimed under an income 
tax treaty. See paragraph (e)(4)(ix) of this section for reliance rules 
in the case of certificates held by another person or at a different 
branch location of the same person. For purposes of a qualified 
intermediary acting as a qualified derivatives dealer, a qualified 
intermediary withholding certificate, as described in paragraph 
(e)(3)(ii) of this section is a beneficial owner withholding certificate 
for purposes of treaty claims for dividends.
    (ii) Requirements for validity of certificate--(A) In general. A 
beneficial owner withholding certificate is valid for purposes of a 
payment of an amount subject to chapter 3 withholding only if it is 
provided on a Form W-8 or a Form 8233 in the case of personal services 
income described in Sec.  1.1441-4(b) or certain scholarship or grant 
amounts described in Sec.  1.1441-4(c) (or a substitute form described 
in paragraph (e)(4)(vi) of this section or such other form as the IRS 
may prescribe). A Form W-8 is valid only if its validity period has not 
expired, it is signed under penalties of perjury by the beneficial 
owner, and it contains all of the information required on the form. The 
required information is the beneficial owner's name, permanent residence 
address (as defined in Sec.  1.1441-1(c)(38)), TIN (if required), a 
certification that the person is not a U.S. citizen (if the person is an 
individual) or a certification of the country under the laws of which 
the beneficial owner is created, incorporated, or governed (if a person 
other than an individual), the classification

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of the entity, and such other information as may be required by the 
regulations under section 1441 or by the form or accompanying 
instructions in addition to, or in lieu of, the information described in 
this paragraph (e)(2)(ii) (including when a foreign TIN and an 
individual's date of birth are required). A beneficial owner withholding 
certificate must also include the chapter 4 status of a beneficial owner 
when required for chapter 4 purposes in order to be valid. See paragraph 
(e)(4)(vii) of this section for circumstances in which a TIN is required 
on a beneficial owner withholding certificate.
    (B) Requirement to collect foreign TIN and date of birth--(1) In 
general. In addition to the general requirements of paragraph 
(e)(2)(ii)(A) of this section, except as provided in paragraphs 
(e)(2)(ii)(B)(4), through (6) of this section, a beneficial owner 
withholding certificate provided by an account holder to document an 
account that is maintained at a U.S. branch or office of a withholding 
agent that is a financial institution is valid for purposes of a payment 
of U.S. source income reportable on Form 1042-S (before the application 
of this paragraph (e)(2)(ii)(B)) made on or after January 1, 2018, only 
if it contains the account holder's taxpayer identification number 
issued by the account holder's jurisdiction of tax residence (foreign 
TIN) or a reasonable explanation for the absence of a foreign TIN (as 
described in paragraph (e)(2)(ii)(B)(3) of this section) and, in the 
case of an individual account holder, the account holder's date of 
birth, unless the withholding agent has the account holder's date of 
birth in its files. A withholding agent is permitted to obtain a foreign 
TIN on a written statement signed by an account holder that includes an 
acknowledgment that such statement is part of the withholding 
certificate if the withholding agent associates such statement with the 
account holder's withholding certificate. A withholding agent will be 
treated as having the account holder's date of birth in its files if it 
obtains the date of birth on a written statement (including a written 
statement transmitted by email) from the account holder. A withholding 
agent may rely on the foreign TIN and date of birth contained in the 
withholding certificate unless it knows or has reason to know that the 
foreign TIN or date of birth is incorrect. Therefore, a withholding 
agent will not be required to validate the format or other 
specifications of the foreign TIN against the applicable jurisdiction's 
TIN system. For purposes of this paragraph (e)(2)(ii)(B), a change of 
address to another jurisdiction other than the United States is a change 
in circumstances for purposes of a withholding agent's reliance on a 
foreign TIN of the account holder (or reasonable explanation for its 
absence).
    (2) Definitions. For purposes of this paragraph (e)(2)(ii)(B), the 
term ``account'' means a financial account as defined in Sec.  1.1471-
5(b) (substituting ``U.S. office or branch of a financial institution'' 
for ``FFI''); the term ``account holder'' has the meaning described in 
Sec.  1.1471-5(a)(3); and the term ``financial institution'' means an 
entity that is a depository institution, custodial institution, 
investment entity, or a specified insurance company, each as defined in 
Sec.  1.1471-5(e).
    (3) Requirements for reasonable explanation of the absence of a 
foreign TIN. A withholding agent may rely on a reasonable explanation 
for the absence of a foreign TIN on a beneficial owner withholding 
certificate only if the explanation addresses why the account holder was 
not issued a foreign TIN. An explanation provided in the instructions 
for, as applicable, Forms W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, or Form W-
8IMY is a reasonable explanation. If an account holder provides an 
explanation other than as described in the preceding sentence, the 
withholding agent must determine whether the explanation is reasonable. 
A reasonable explanation may be provided on the withholding certificate 
or on a separate attached statement associated with the form. A 
withholding agent may rely on a reasonable explanation described in this 
paragraph (e)(2)(ii)(B)(3) unless it has actual knowledge that the 
account holder has a foreign TIN.
    (4) Exceptions to the requirement to obtain a foreign TIN (or 
reasonable explanation for its absence)--(i) Jurisdictions with which 
the United States does not

[[Page 143]]

have an agreement relating to the exchange of tax information. A 
beneficial owner withholding certificate is not required to include a 
foreign TIN (or reasonable explanation for its absence) for an account 
holder resident of a jurisdiction that is not identified, in an 
applicable revenue procedure (see Sec.  601.601(d)(2) of this chapter), 
as a jurisdiction that has in effect with the United States 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 United States agrees to provide, as well as receive, tax 
information. A withholding agent that applies the exception described in 
the preceding sentence is, however, required to obtain the foreign TIN 
(or reasonable explanation for its absence) of each account holder 
resident in a jurisdiction that is added to the list on the applicable 
revenue procedure, before the time for filing Form 1042-S (with any 
applicable extension) for payments made during the calendar year 
following the calendar year in which the revenue procedure was published 
that added the jurisdiction to the list.
    (ii) Jurisdictions that do not issue foreign TINs. A beneficial 
owner withholding certificate is not required to include a foreign TIN 
(or reasonable explanation for its absence) for an account holder 
resident of a jurisdiction that has been identified by the IRS on a list 
of jurisdictions that either do not issue foreign TINs to their 
residents or have requested that their residents not be required to 
provide foreign TINs to withholding agents for purposes of this 
paragraph (e)(2)(ii)(B). A withholding agent that applies the exception 
described in the preceding sentence is, however, required to obtain the 
foreign TIN (or reasonable explanation for its absence) of each account 
holder resident in a jurisdiction that is removed from the list of 
jurisdictions referenced in the preceding sentence before the time for 
filing Form 1042-S (with any applicable extension) for payments made 
during the calendar year following the calendar year in which the 
jurisdiction is removed from the list. A list of jurisdictions that 
either do not issue taxpayer identification numbers to their residents 
or that have requested to be included on the list is available at 
https://www.irs.gov/businesses/corporations/list-of-jurisdictions-that-
do-not-issue-foreign-tins (or any replacement page on the IRS website or 
as provided in published guidance).
    (iii) Account holder that is a government, international 
organization, foreign central bank of issue, or resident of a U.S. 
territory. A beneficial owner withholding certificate is not required to 
include a foreign TIN (or reasonable explanation for its absence) if the 
withholding agent has obtained a valid withholding certificate under 
paragraph (e)(2)(ii)(A) of this section or other documentation on which 
it may rely for purposes of the section 1441 regulations to treat the 
account holder as a government, an international organization, a foreign 
central bank of issue, or a resident of a U.S. territory. Thus, for 
example, a withholding agent may apply the exception provided in this 
paragraph (e)(2)(ii)(B)(4)(iii) with respect to an account holder 
claiming exemption under section 892 or otherwise identifying itself as 
a foreign government on a beneficial owner withholding certificate when 
the withholding agent may rely upon the claim of exemption under Sec.  
1.1441-8(b) or the claim of status as a foreign government under Sec.  
1.1441-7(b)(1) and (2).
    (5) Transition rules for the foreign TIN requirement for a 
beneficial owner withholding certificate signed before January 1, 2018--
(i) Payments made before January 1, 2020. For payments made before 
January 1, 2020, an otherwise valid beneficial owner withholding 
certificate signed before January 1, 2018, is not treated as invalid if 
it does not include a foreign TIN (or a reasonable explanation for its 
absence) as required under paragraph (e)(2)(ii)(B) of this section until 
the earlier of--
    (A) the expiration date of the validity period of the withholding 
certificate (if applicable); or
    (B) the date when a change in circumstances (including for chapter 4 
purposes) requires a revised withholding certificate.
    (ii) Payments made after December 31, 2019. For payments made after 
December 31, 2019, an otherwise valid beneficial owner withholding 
certificate

[[Page 144]]

signed before January 1, 2018, is not treated as invalid if it does not 
include a foreign TIN (or a reasonable explanation for its absence) as 
required under paragraph (e)(2)(ii)(B) of this section until the earlier 
of the date described in paragraph (e)(2)(ii)(B)(5)(i)(A) or (B) of this 
section, provided the withholding agent either--
    (A) obtains from the account holder its foreign TIN (or reasonable 
explanation for its absence) on a written statement (including a written 
statement transmitted by email) which the withholding agent associates 
with the account holder's withholding certificate, or
    (B) already has the account holder's foreign TIN in the withholding 
agent's files, which the withholding agent associates with the account 
holder's withholding certificate.
    (iii) Limitation on standard of knowledge. If a withholding agent 
maintains an account on December 31, 2017, that is documented with a 
valid beneficial owner withholding certificate as of that date, the 
withholding agent's reason to know that the foreign TIN is incorrect, or 
actual knowledge that an account holder has a foreign TIN despite 
providing a reasonable explanation as described in paragraph 
(e)(2)(ii)(B)(3) of this section, is limited to electronically 
searchable information (as defined in Sec.  1.1471-1(b)(38)) that is in 
the withholding agent's files.
    (6) Transition rule for the date of birth requirement for a 
beneficial owner withholding certificate signed before January 1, 2018. 
For an otherwise valid beneficial owner withholding certificate signed 
before January 1, 2018, a withholding agent is not required to treat the 
withholding certificate as invalid for payments made before January 1, 
2019, to an account holder solely because the withholding certificate 
does not include the account holder's date of birth and the date of 
birth is not in the withholding agent's files.
    (3) Intermediary, flow-through, or U.S. branch withholding 
certificate--(i) In general. An intermediary withholding certificate is 
a Form W-8 by which a payee represents that it is a foreign person and 
that it is an intermediary (whether a qualified or nonqualified 
intermediary) with respect to a payment and not the beneficial owner. 
See paragraphs (e)(3)(ii) and (iii) of this section. A flow-through 
withholding certificate is a Form W-8 used by a flow-through entity as 
defined in paragraph (c)(23) of this section. See Sec.  1.1441-
5(c)(3)(iii) (a nonwithholding foreign partnership), Sec.  1.1441-
5(e)(5)(iii) (a foreign simple trust or foreign grantor trust) or Sec.  
1.1441-6(b)(2) (foreign entity presenting claims on behalf of its 
interest holders for a reduced rate of withholding under an income tax 
treaty). A U.S. branch certificate is a Form W-8 furnished under 
paragraph (e)(3)(v) of this section by a U.S. branch described in 
paragraph (b)(2)(iv) of this section. See paragraph (e)(4)(viii) of this 
section for applicable reliance rules.
    (ii) Intermediary withholding certificate from a qualified 
intermediary. A qualified intermediary shall provide a qualified 
intermediary withholding certificate for withholdable payments or 
reportable amounts received by the qualified intermediary. See paragraph 
(e)(3)(vi) of this section for the definition of reportable amount. A 
qualified intermediary withholding certificate is valid only if it is 
furnished on a Form W-8, an acceptable substitute form, or such other 
form as the IRS may prescribe, it is signed under penalties of perjury 
by a person with authority to sign for the qualified intermediary, its 
validity has not expired, and it contains the following information, 
statement, and certifications--
    (A) The name, permanent residence address, qualified intermediary 
employer identification number (QI-EIN), and the country under the laws 
of which the qualified intermediary is created, incorporated, or 
governed. If required for purposes of chapter 4 or if the qualified 
intermediary is a participating FFI or registered deemed-compliant FFI 
and certifies that it is providing (or will provide) a chapter 4 
withholding rate pool of U.S. payees under Sec.  1.6049-4(c)(4) with 
respect to accounts that the qualified intermediary maintains, the 
withholding certificate must also include the chapter 4 status of the 
qualified intermediary and its GIIN (if applicable). See paragraph

[[Page 145]]

(e)(5)(ii) for the chapter 4 status required of a qualified 
intermediary, including when a qualified intermediary withholding 
certificate may include a chapter 4 status of limited FFI (as defined in 
Sec.  1.1471-1(b)(77)). A qualified intermediary that does not act in 
its capacity as a qualified intermediary must not use its QI-EIN. 
Rather, it should provide a nonqualified intermediary withholding 
certificate, if it is acting as an intermediary, and should use the 
taxpayer identification number (if any) that it uses for all other 
purposes and GIIN (if applicable);
    (B) A certification that, with respect to accounts it identifies on 
its withholding statement (as described in paragraph (e)(5)(v) of this 
section), the qualified intermediary is not acting for its own account 
but is acting as a qualified intermediary;
    (C) A certification that the qualified intermediary has provided, or 
will provide, a withholding statement as required by paragraph (e)(5)(v) 
of this section;
    (D) A certification that the qualified intermediary meets the 
requirements of Sec.  1.6049-4(c)(4) when the qualified intermediary 
provides (or will provide) a withholding statement associated with its 
Form W-8 that allocates a payment to a chapter 4 withholding rate pool 
of U.S. payees that hold accounts with the qualified intermediary. 
Additionally, when the qualified intermediary provides a chapter 4 
withholding rate pool of U.S. payees that do not hold accounts 
maintained by the qualified intermediary, the qualified intermediary 
provides a certification on the Form W-8 that the qualified intermediary 
has obtained (or will obtain) documentation from the intermediary or 
flow through entity allocating the payment to the pool to establish that 
the entity's status is as a participating FFI, registered deemed-
compliant FFI, or qualified intermediary under Sec.  1.1471-3(d)(4) (or, 
as applicable, Sec.  1.1471-3(e)(4)(vi)(B) or Sec.  1.1441-
1(b)(2)(vii)); and
    (E) In the case of any payment with respect to a potential section 
871(m) transaction (including any dividend equivalent payment within the 
meaning of Sec.  1.871-15(i)) or underlying security (as defined in 
Sec.  1.871-15(a)(15)) received by a qualified intermediary acting as a 
qualified derivatives dealer, a certification that the home office or 
branch receiving the payment, as applicable, meets the requirements to 
act as a qualified derivatives dealer as further described in paragraph 
(e)(6) of this section and that the qualified derivatives dealer assumes 
primary withholding and reporting responsibilities under chapters 3, 4, 
and 61, and section 3406 with respect to any payments it makes with 
respect to potential section 871(m) transactions;
    (F) Any other information, certifications, or statements as may be 
required by the form or accompanying instructions in addition to, or in 
lieu of, the information and certifications described in this paragraph 
(e)(3)(ii) or paragraph (e)(3)(v) of this section. See paragraph 
(e)(5)(v) of this section for the requirements of a withholding 
statement associated with the qualified intermediary withholding 
certificate.
    (iii) Intermediary withholding certificate from a nonqualified 
intermediary. A nonqualified intermediary shall provide a nonqualified 
intermediary withholding certificate for reportable amounts received by 
the nonqualified intermediary. See paragraph (e)(3)(vi) of this section 
for the definition of reportable amount. A nonqualified intermediary 
withholding certificate is valid only to the extent it is furnished on a 
Form W-8, an acceptable substitute form, or such other form as the IRS 
may prescribe, it is signed under penalties of perjury by a person 
authorized to sign for the nonqualified intermediary, it contains the 
information, statements, and certifications described in this paragraphs 
(e)(3)(iii) and (iv) of this section, its validity has not expired, and 
the withholding certificates and other appropriate documentation for all 
persons to whom the certificate relates are associated with the 
certificate. Withholding certificates and other appropriate 
documentation consist of beneficial owner withholding certificates 
described in paragraph (e)(2)(i) of this section,

[[Page 146]]

intermediary and flow-through withholding certificates described in 
paragraph (e)(3)(i) of this section, withholding foreign partnership and 
withholding foreign trust certificates described in Sec.  1.1441-
5(c)(2)(iv) and (e)(5)(iii), documentary evidence described in 
Sec. Sec.  1.1441-6(c)(3) or (4) and 1.6049-5(c)(1), and any other 
documentation or certificates applicable under other provisions of the 
Code or regulations that certify or establish the status of the payee or 
beneficial owner as a U.S. or a foreign person. If a nonqualified 
intermediary is acting on behalf of another nonqualified intermediary or 
a flow-through entity, then the nonqualified intermediary must associate 
with its own withholding certificate the other nonqualified intermediary 
withholding certificate or the flow-through withholding certificate and 
separately identify all of the withholding certificates and other 
appropriate documentation that are associated with the withholding 
certificate of the other nonqualified intermediary or flow-through 
entity. Nothing in this paragraph (e)(3)(iii) shall require an 
intermediary to furnish original documentation. Copies of certificates 
or documentary evidence may be transmitted to the U.S. withholding 
agent, in which case the nonqualified intermediary must retain the 
original documentation for the same time period that the copy is 
required to be retained by the withholding agent under paragraph 
(e)(4)(iii) of this section and must provide it to the withholding agent 
upon request. For purposes of this paragraph (e)(3)(iii), a valid 
intermediary withholding certificate also includes a statement described 
in Sec.  1.871-14(c)(2)(v) furnished for interest to qualify as 
portfolio interest for purposes of sections 871(h) and 881(c). The 
information and certifications required on a Form W-8 described in this 
paragraph (e)(3)(iii) are as follows--
    (A) The name and permanent resident address of the nonqualified 
intermediary, chapter 4 status (if required for chapter 4 purposes or if 
the nonqualified intermediary provides the certification described in 
paragraph (e)(3)(iii)(D) of this section), GIIN (if applicable), and the 
country under the laws of which the nonqualified intermediary is 
created, incorporated, or governed;
    (B) A certification that the nonqualified intermediary is not acting 
for its own account;
    (C) If the nonqualified intermediary withholding certificate is used 
to transmit withholding certificates or other appropriate documentation 
for more than one person on whose behalf the nonqualified intermediary 
is acting, a withholding statement associated with the Form W-8 that 
provides all the information required by paragraph (e)(3)(iv) of this 
section;
    (D) If the nonqualified intermediary provides a withholding 
statement associated with the Form W-8 allocating a payment to a chapter 
4 withholding rate pool of U.S. payees, a certification that the 
nonqualified intermediary meets the requirements of Sec.  1.6049-4(c)(4) 
with respect to any payees included in such pool that hold accounts 
maintained (as defined in Sec.  1.1471-5(b)(5)) by the nonqualified 
intermediary; and
    (E) Any other information, certifications, or statements as may be 
required by the form or accompanying instructions in addition to, or in 
lieu of, the information, certifications, and statements described in 
this paragraph (e)(3)(iii) or paragraph (e)(5)(iv) of this section.
    (iv) Withholding statement provided by nonqualified intermediary--
(A) In general. A nonqualified intermediary shall provide a withholding 
statement required by this paragraph (e)(3)(iv) to the extent the 
nonqualified intermediary is required to furnish, or does furnish, 
documentation for payees on whose behalf it receives reportable amounts 
(as defined in paragraph (e)(3)(vi) of this section) or to the extent it 
otherwise provides the documentation of such payees to a withholding 
agent. A nonqualified intermediary, however, that is subject to 
withholding under chapter 4 due to its chapter 4 status as a 
nonparticipating FFI need not provide a withholding statement unless it 
is providing documentation to allocate a portion of the payment as made 
to an exempt beneficial owner as described in Sec.  1.1471-
3(c)(3)(iii)(B)(4). A nonqualified intermediary that is subject to 
withholding

[[Page 147]]

under chapter 4 due to its chapter 4 status is not required to disclose 
to the withholding agent information regarding persons for whom it 
collects reportable amounts unless it has actual knowledge that any such 
person is a U.S. non-exempt recipient as defined in paragraph (c)(21) of 
this section. Information regarding U.S. non-exempt recipients required 
under this paragraph (e)(3)(iv) must be provided irrespective of any 
requirement under foreign law that prohibits the disclosure of the 
identity of an account holder of a nonqualified intermediary or 
financial information relating to such account holder. A nonqualified 
intermediary is not required to provide information on a withholding 
statement regarding U.S. non-exempt recipients, provided that the 
nonqualified intermediary is a participating FFI (including a reporting 
Model 2 FFI) or registered deemed-compliant FFI (including a reporting 
Model 1 FFI) that identifies on the withholding statement the portion of 
a payment allocable to a chapter 4 withholding rate pool of U.S. payees 
to the extent that the nonqualified intermediary is permitted to include 
such U.S. payees in a pool under Sec.  1.6049-4(c)(4)(iii). See Sec.  
1.1471-3(d)(4) for the requirements of an entity to identify itself as a 
participating FFI or registered deemed-compliant FFI to a withholding 
agent for purposes of chapter 4. Although a nonqualified intermediary is 
not required to provide documentation and other information required by 
this paragraph (e)(3)(iv) for persons other than U.S. non-exempt 
recipients not included in a chapter 4 withholding rate pool of U.S. 
payees, a withholding agent that does not receive documentation and such 
information must apply the presumption rules of paragraph (b) of this 
section, Sec. Sec.  1.1441-5(d) and (e)(6), 1.6049-5(d), and 1.1471-
3(f)(5) (for a withholdable payment) or the withholding agent shall be 
liable for tax, interest, and penalties. A withholding agent must apply 
the presumption rules even if it is not required under chapter 61 of the 
Code to obtain documentation to treat a payee as an exempt recipient and 
even though it has actual knowledge that the payee is a U.S. person. For 
example, if a nonqualified intermediary receives a payment that is not a 
withholdable payment and fails to provide a withholding agent with a 
Form W-9 for an account holder that is a U.S. exempt recipient that is 
not included in a chapter 4 withholding rate pool of U.S. payees to the 
extent permitted in this paragraph (e)(3)(iv)(A), the withholding agent 
must presume (even if it has actual knowledge that the account holder is 
a U.S. exempt recipient) that the account holder is an undocumented 
foreign person with respect to amounts subject to chapter 3 withholding. 
See paragraph (b)(3)(v) of this section for applicable presumptions. 
Therefore, the withholding agent must withhold 30 percent from the 
payment even though if a Form W-9 had been provided, no withholding or 
reporting on the payment attributable to a U.S. exempt recipient would 
apply. Further, a nonqualified intermediary that fails to provide the 
documentation and the information under this paragraph (e)(3)(iv) for 
another withholding agent to report the payments on Forms 1042-S 
(including under the requirements of Sec.  1.1474-1(d)(2) for a payment 
of a chapter 4 reportable amount) and Forms 1099 is not relieved of its 
responsibility to file information returns. See paragraph (b)(6) of this 
section. Therefore, unless the nonqualified intermediary itself files 
such returns and provides copies to the payees, it shall be liable for 
penalties under sections 6721 (failure to file information returns), and 
6722 (failure to furnish payee statements), including the penalties 
under those sections for intentional failure to file information 
returns. In addition, failure to provide either the documentation or the 
information required by this paragraph (e)(3)(iv) results in a payment 
not being reliably associated with valid documentation. Therefore, the 
beneficial owners of the payment are not entitled to reduced rates of 
withholding and if the full amount required to be held under the 
presumption rules is not withheld by the withholding agent, the 
nonqualified intermediary must withhold the difference between the 
amount withheld by the withholding agent and the amount required to be 
withheld. Failure to withhold

[[Page 148]]

shall result in the nonqualified intermediary being liable for tax under 
section 1461, interest, and penalties, including penalties under section 
6656 (failure to deposit) and section 6672 (failure to collect and pay 
over tax).
    (B) General requirements. A withholding statement must be provided 
prior to the payment of a reportable amount and must contain the 
information specified in paragraph (e)(3)(iv)(C) of this section. The 
statement must be updated as often as required to keep the information 
in the withholding statement correct prior to each subsequent payment. 
The withholding statement forms an integral part of the withholding 
certificate provided under paragraph (e)(3)(iii) of this section, and 
the penalties of perjury statement provided on the withholding 
certificate shall apply to the withholding statement. The withholding 
statement may be provided in any manner the nonqualified intermediary 
and the withholding agent mutually agree, including electronically. If 
the withholding statement is provided electronically as part of a system 
established by the withholding agent or nonqualified intermediary to 
provide the statement, however, there must be sufficient safeguards to 
ensure that the information received by the withholding agent is the 
information sent by the nonqualified intermediary and all occasions of 
user access that result in the submission or modification of the 
withholding statement information must be recorded. In addition, the 
electronic system must be capable of providing a hard copy of all 
withholding statements provided by the nonqualified intermediary. A 
withholding statement may otherwise be transmitted by a nonqualified 
intermediary via email or facsimile to a withholding agent under the 
requirements specified in paragraph (e)(4)(iv)(D) of this section 
(substituting the term withholding statement for the term Form W-8 or 
the term document, as applicable). A withholding agent will be liable 
for tax, interest, and penalties in accordance with paragraph (b)(7) of 
this section to the extent it does not follow the presumption rules of 
paragraph (b)(3) of this section or Sec. Sec.  1.1441-5(d) and (e)(6), 
and 1.6049-5(d) for any payment of a reportable amount, or portion 
thereof, for which it does not have a valid withholding statement prior 
to making a payment. A withholding agent may not treat as valid an 
allocation of a payment to a chapter 4 withholding rate pool of U.S. 
payees described in paragraph (e)(3)(iv)(A) of this section or an 
allocation of a payment to a chapter 4 withholding rate pool of 
recalcitrant account holders described in paragraph (e)(3)(iv)(C)(2) of 
this section unless the withholding agent identifies the nonqualified 
intermediary maintaining the account (as described in Sec.  1.1471-
5(b)(5)) 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 of Sec.  1.1471-3(d)(4). Additionally, in the case of 
a withholdable payment that is an amount subject to withholding made on 
or after April 1, 2017, a withholding agent may not treat as valid an 
allocation of the payment to a chapter 4 withholding rate pool of U.S. 
payees unless the nonqualified intermediary identifies the pool of U.S. 
payees as one described in Sec.  1.1471-3(c)(3)(iii)(B)(2)(iii) (or by 
describing such payees consistent with the description provided in Sec.  
1.1471-3(c)(3)(iii)(B)(2)(iii)).
    (C) Content of withholding statement. The withholding statement 
provided by a nonqualified intermediary must contain the information 
required by this paragraph (e)(3)(iv)(C).
    (1) In general. Except as otherwise provided by paragraph 
(e)(3)(iv)(C)(2) and (3) of this section), the withholding statement 
provided by a nonqualified intermediary must contain the information 
required by this paragraph (e)(3)(iv)(C)(1).
    (i) Except as otherwise provided in (e)(3)(iv)(A) of this section 
(which excludes reporting of information with respect to certain U.S. 
persons on the withholding statement), the withholding statement must 
contain the name, address, TIN (if any), and the type of documentation 
(documentary evidence, Form W-9, or type of Form W-8) for every person 
from whom documentation has been received by the nonqualified 
intermediary and provided to the withholding agent and whether that 
person is a U.S. exempt

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recipient, a U.S. non-exempt recipient, or a foreign person. See 
paragraphs (c)(2), (20), and (21) of this section for the definitions of 
foreign person, U.S. exempt recipient, and U.S. non-exempt recipient. In 
the case of a foreign person, the statement must indicate whether the 
foreign person is a beneficial owner or an intermediary, flow-through 
entity, U.S. branch, or territory financial institution described in 
paragraph (b)(2)(iv) of this section and include the type of recipient, 
based on recipient codes applicable for chapter 3 purposes used for 
filing Forms 1042-S, if the foreign person is a recipient as defined in 
Sec.  1.1461-1(c)(1)(ii).
    (ii) The withholding statement must allocate each payment, by income 
type, to every payee required to be reported on the withholding 
statement for whom documentation has been provided (including U.S. 
exempt recipients except as provided in paragraph (e)(3)(iv)(A) of this 
section). Any payment that cannot be reliably associated with valid 
documentation from a payee shall be treated as made to an unknown payee 
in accordance with the presumption rules of paragraph (b) of this 
section and Sec. Sec.  1.1441-5(d) and (e)(6) and 1.6049-5(d). For this 
purpose, a type of income is determined by the types of income required 
to be reported on Forms 1042-S or 1099, as appropriate. Notwithstanding 
the preceding sentence, deposit interest (including original issue 
discount) described in section 871(i)(2)(A) or 881(d) and interest or 
original issue discount on short-term obligations as described in 
section 871(g)(1)(B) or 881(e) is only required to be allocated to the 
extent it is required to be reported on Form 1099 or Form 1042-S. See 
Sec.  1.6049-8 (regarding reporting of bank deposit interest to certain 
foreign persons). If a payee receives income through another 
nonqualified intermediary, flow-through entity, or U.S. branch or 
territory financial institution described in paragraph (e)(2)(iv) of 
this section (other than a U.S. branch or territory financial 
institution treated as a U.S. person), the withholding statement must 
also state, with respect to the payee, the name, address, and TIN, if 
known, of the other nonqualified intermediary or U.S. branch from which 
the payee directly receives the payment or the flow-through entity in 
which the payee has a direct ownership interest. If another nonqualified 
intermediary, flow-through entity, or U.S. branch fails to allocate a 
payment, the name of the nonqualified intermediary, flow-through entity, 
or U.S. branch that failed to allocate the payment shall be provided 
with respect to such payment.
    (iii) If a payee is identified as a foreign person, the nonqualified 
intermediary must specify the rate of withholding to which the payee is 
subject, the payee's country of residence and, if a reduced rate of 
withholding is claimed, the basis for that reduced rate (e.g., treaty 
benefit, portfolio interest, exempt under section 501(c)(3), 892, or 
895). The allocation statement must also include the TINs of those 
foreign persons for whom such a number is required under paragraph 
(e)(4)(vii) of this section or Sec.  1.1441-6(b)(1) (regarding claims 
for treaty benefits for which a TIN is provided unless a foreign tax 
identifying number described in Sec.  1.1441-6(b)(1) is provided). In 
the case of a claim of treaty benefits, the nonqualified intermediary's 
withholding statement must also state whether the limitation on benefits 
and section 894 statements required by Sec.  1.1441-6(c)(5) have been 
provided, if required, in the beneficial owner's Form W-8 or associated 
with such owner's documentary evidence.
    (iv) The withholding statement must also contain any other 
information the withholding agent reasonably requests in order to 
fulfill its obligations under chapter 3 and chapter 61 of the Code, and 
section 3406.
    (2) Nonqualified intermediary withholding statement for withholdable 
payments. This paragraph (e)(3)(iv)(C)(2) modifies the requirements of a 
withholding statement described in paragraph (e)(3)(iv)(C)(1) of this 
section that is provided by a nonqualified intermediary with respect to 
a reportable amount that is a withholdable payment. For such a payment, 
the requirements applicable to a withholding statement described in 
paragraph (e)(3)(iv)(A) through (e)(3)(iv)(C)(1) of this section shall 
apply, except that--
    (i) The withholding statement must include the chapter 4 status 
(using the

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applicable status code used for filing Form 1042-S) and GIIN (when 
required for chapter 4 purposes under Sec.  1.1471-3(d)) of each other 
intermediary or flow-through entity that is a foreign person and that 
receives the payment, excluding an intermediary or flow- through entity 
that is an account holder of or interest holder in a withholding foreign 
partnership, withholding foreign trust, or intermediary acting as a 
qualified intermediary for the payment;
    (ii) If the nonqualified intermediary that is a participating FFI or 
registered deemed-compliant FFI provides a withholding statement 
described in Sec.  1.1471-3(c)(3)(iii)(B)(2) (describing an FFI 
withholding statement), the withholding statement may include chapter 4 
withholding rate pools with respect to the portions of the payment 
allocated to nonparticipating FFIs and recalcitrant account holders (to 
the extent permitted on an FFI withholding statement described in that 
paragraph) in lieu of providing specific payee information with respect 
to such persons on the statement (including persons subject to chapter 4 
withholding) as described in paragraph (e)(3)(iv)(C)(1) of this section;
    (iii) If the nonqualified intermediary provides a withholding 
statement described in Sec.  1.1471-3(c)(3)(iii)(B)(3) (describing a 
chapter 4 withholding statement), the withholding statement may include 
chapter 4 withholding rate pools with respect to the portions of the 
payment allocated to nonparticipating FFIs; and
    (iv) For a payment allocated to a payee that is a foreign person 
(other than a person included in a chapter 4 withholding rate pool 
described in paragraphs (e)(3)(iv)(C)(2)(ii) and (iii) of this section) 
that is reported on a withholding statement described in Sec.  1.1471-
3(c)(3)(iii)(B)(2) or (3), the withholding statement must include the 
chapter 4 status of the payee (unless an exception applies for purposes 
of providing such status under chapter 4) and, for a payee other than an 
individual, the recipient code for chapter 4 purposes used for filing 
Form 1042-S; and
    (v) To the extent that a withholdable payment is not reportable on a 
Form 1042-S, Form 1099 under the rules of chapter 61, or Form 8966 
``FATCA Report,'' no allocation of the payment is required on the 
withholding statement.
    (3) Alternative withholding statement--(i) In lieu of a withholding 
statement containing all of the information described in paragraph 
(e)(3)(iv)(C)(1) and (2) of this section, a withholding agent may accept 
from a nonqualified intermediary a withholding statement that meets all 
of the requirements of this paragraph (e)(3)(iv)(C)(3)(i) with respect 
to a payment. The withholding statement described in this paragraph 
(e)(3)(iv)(C)(3)(i) may be provided only by a nonqualified intermediary 
that provides the withholding agent with the withholding certificates 
from the beneficial owners (that is, not documentary evidence) before 
the payment is made.
    (A) The withholding statement is not required to contain all of the 
information specified in paragraphs (e)(3)(iv)(C)(1) and (2) of this 
section that is also included on a withholding certificate (for example, 
name, address, TIN (if any), chapter 4 status, GIIN (if any)). The 
withholding statement is also not required to specify the rate of 
withholding to which each foreign payee is subject, provided that all of 
the information necessary to make such determination is provided on the 
withholding certificate. A withholding agent that uses the withholding 
statement may not apply a different rate from that which the withholding 
agent may reasonably conclude from the information on the withholding 
certificate.
    (B) The withholding statement must allocate the payment to every 
payee required to be reported as described in paragraph 
(e)(3)(iv)(C)(1)(ii) of this section.
    (C) The withholding statement must also contain any other 
information the withholding agent reasonably requests in order to 
fulfill its obligations under chapters 3, 4, and 61, and section 3406.
    (D) The withholding statement must contain a representation from the 
nonqualified intermediary that the information on the withholding 
certificates is not inconsistent with any other account information the 
nonqualified intermediary has for the beneficial owners for determining 
the rate of

[[Page 151]]

withholding with respect to each payee (applying the standards of 
knowledge applicable to a withholding agent's reliance on a withholding 
certificate in the regulations under section 1441 and, for a 
withholdable payment, the regulations under section 1471).
    (ii) In lieu of a withholding statement that includes a recipient 
code for chapter 4 purposes used for filing Form 1042-S, a withholding 
agent may accept a nonqualified intermediary withholding statement that 
contains all of the information described in paragraph (e)(3)(iv)(C)(1) 
and (2) of this section (or an alternative withholding statement 
permitted under paragraph (e)(3)(iv)(C)(3)(i) of this section) but that 
does not provide a recipient code for chapter 4 purposes used for filing 
Form 1042-S for a payee as required in paragraph (e)(3)(iv)(C)(2)(iv) of 
this section if the withholding agent is able to determine such payee's 
recipient code based on other information included on or with the 
withholding statement or in the withholding agent's records with respect 
to the payee.
    (4) Example. This example illustrates the principles of paragraph 
(e)(3)(iv)(C) of this section. WA makes a withholdable payment of U.S. 
source dividends to NQI, a nonqualified intermediary. NQI provides WA 
with a valid intermediary withholding certificate under paragraph 
(e)(3)(iii) of this section that includes NQI's certification of its 
status for chapter 4 purposes as a participating FFI. NQI provides a 
withholding statement on which NQI allocates 20% of the payment to a 
chapter 4 withholding rate pool of recalcitrant account holders of NQI 
for purposes of chapter 4 and allocates 80% of the payment equally to A 
and B, individuals that are account holders of NQI. NQI also provides WA 
with valid beneficial owner withholding certificates from A and B 
establishing their status as foreign persons entitled to a 15% rate of 
withholding under an applicable income tax treaty. Because NQI has 
certified its status as a participating FFI, withholding under chapter 4 
is not required with respect to NQI. See Sec.  1.1471-2(a)(4). Based on 
the documentation NQI provided to WA with respect to A and B, WA can 
reliably associate the payment with valid documentation on the portion 
of the payment allocated to them and, because the payment is a 
withholdable payment, may rely on the allocation of the payment for 
NQI's recalcitrant account holders in a chapter 4 withholding rate pool 
in lieu of payee information with respect to such account holders. See 
paragraph (e)(3)(iv)(C)(2) of this section for the special rules for a 
withholding statement provided by a nonqualified intermediary for a 
withholdable payment. Also see Sec.  1.1471-2(a) for WA's withholding 
requirements under chapter 4 with respect to the portion of the payment 
allocated to NQI's recalcitrant account holders and Sec.  1.1441-3(a)(2) 
for coordinating withholding under chapter 3 for payments to which 
withholding is applied under chapter 4.
    (D) Alternative procedures--(1) In general. Under the alternative 
procedures of this paragraph (e)(3)(iv)(D), a nonqualified intermediary 
may provide information allocating a payment of a reportable amount to 
each payee (including U.S. exempt recipients) otherwise required under 
paragraph (e)(3)(iv)(B)(2) of this section after a payment is made. To 
use the alternative procedure of this paragraph (e)(3)(iv)(D), the 
nonqualified intermediary must inform the withholding agent on a 
statement associated with its nonqualified intermediary withholding 
certificate that it is using the procedure under this paragraph 
(e)(3)(iv)(D) and the withholding agent must agree to the procedure. If 
the requirements of the alternative procedure are met, a withholding 
agent, including the nonqualified intermediary using the procedures, can 
treat the payment as reliably associated with documentation and, 
therefore, the presumption rules of paragraph (b)(3) of this section and 
Sec. Sec.  1.1441-5(d) and (e)(6) and 1.6049-5(d) do not apply even 
though information allocating the payment to each payee has not been 
received prior to the payment. See paragraph (e)(3)(iv)(D)(7) of this 
section, however, for a nonqualified intermediary's liability for tax 
and penalties if the requirements of this paragraph (e)(3)(iv)(D) are 
not met. These alternative procedures shall not be used for payments 
that are allocable to U.S. non-exempt recipients except as

[[Page 152]]

provided in paragraph (e)(3)(iv)(D)(2)(ii) of this section. Therefore, a 
nonqualified intermediary is required to provide a withholding agent 
with information allocating payments of reportable amounts to U.S. non-
exempt recipients prior to the payment being made by the withholding 
agent.
    (2) Withholding rate pools--(i) In general. In place of the 
information required in paragraph (e)(3)(iv)(C)(2) of this section 
allocating payments to each payee, the nonqualified intermediary must 
provide a withholding agent with withholding rate pool information prior 
to the payment of a reportable amount. The withholding statement must 
contain all other information required by paragraph (e)(3)(iv)(C) of 
this section. Further, each payee listed in the withholding statement 
must be assigned to an identified withholding rate pool. To the extent a 
nonqualified intermediary is required to provide, or does provide, 
documentation, the alternative procedures do not relieve the 
nonqualified intermediary from the requirement to provide documentation 
prior to the payment being made. Therefore, withholding certificates or 
other appropriate documentation and all information required by 
paragraph (e)(3)(iv)(C) of this section (other than allocation 
information) must be provided to a withholding agent before any new 
payee receives a reportable amount. In addition, the withholding 
statement must be updated by assigning a new payee to a withholding rate 
pool prior to the payment of a reportable amount. A withholding rate 
pool is a payment of a single type of income, determined in accordance 
with the categories of income used to file Form 1042-S, that is subject 
to a single rate of withholding. A withholding rate pool may be 
established by any reasonable method to which the nonqualified 
intermediary and a withholding agent agree (e.g., by establishing a 
separate account for a single withholding rate pool, or by dividing a 
payment made to a single account into portions allocable to each 
withholding rate pool). The nonqualified intermediary shall determine 
withholding rate pools based on valid documentation or, to the extent a 
payment cannot be reliably associated with valid documentation, the 
presumption rules of paragraph (b)(3) of this section and Sec. Sec.  
1.1441-5(d) and (e)(6) and 1.6049-5(d).
    (ii) Withholding rate pools for chapter 4 purposes. This paragraph 
(e)(3)(iv)(D)(2)(ii) modifies the provisions of paragraph 
(e)(3)(iv)(D)(2)(i) of this section with respect to the withholding rate 
pools permitted for the alternative procedures described in paragraph 
(e)(3)(iv)(D)(1) of this section in the case of a payment that is 
allocable on a withholding statement to a chapter 4 withholding rate 
pool as described in this paragraph. In the case of a withholdable 
payment, a nonqualified intermediary may include reportable amounts 
allocable to a chapter 4 withholding rate pool (other than a chapter 4 
withholding rate pool of U.S. payees) in a 30-percent rate pool together 
with a withholding rate pool for amounts subject to chapter 3 
withholding at the 30-percent rate. For a payment of a reportable amount 
that is allocable to a chapter 4 withholding rate pool of U.S. payees on 
a withholding statement, a nonqualified intermediary may include such 
amount in a single withholding rate pool with the amount of the payment 
that is exempt from withholding under chapter 3 instead of providing 
documentation regarding U.S. non-exempt recipients included in the pool 
or separately allocating the amount to the chapter 4 withholding rate 
pool. To the extent that a nonqualified intermediary allocates an amount 
to any chapter 4 withholding rate pool, the nonqualified intermediary is 
required to notify the withholding agent of the allocation before 
receiving the payment and is not required to provide documentation with 
respect to the payees included in such pool. The nonqualified 
intermediary shall determine the chapter 4 withholding rate pools 
permitted to be used under this paragraph (e)(3)(iv)(D)(2)(ii) in 
accordance with the nonqualified intermediary's applicable chapter 4 
status and under Sec.  1.1471-3(c)(3)(iii)(B)(2) (for an FFI withholding 
statement) or (c)(3)(iii)(B)(3) (for a chapter 4 withholding statement) 
or under Sec.  1.6049-4(c)(4) for a chapter 4 withholding rate pool of 
U.S. payees (or similar applicable coordination rule in chapter 61 for

[[Page 153]]

payments other than interest). Additionally, the nonqualified 
intermediary shall identify those payees to which withholding under 
chapter 4 applies that are not included in a chapter 4 reporting pool 
(including payees that could be included in a chapter 4 withholding rate 
pool for whom the nonqualified intermediary chooses to provide payee 
specific information).
    (3) Allocation information. The nonqualified intermediary must 
provide the withholding agent with sufficient information to allocate 
the income in each withholding rate pool to each payee (including U.S. 
exempt recipients or any chapter 4 withholding rate pool identified by 
the withholding agent under paragraph (e)(3)(iv)(D)(2)(ii) of this 
section) within the pool no later than January 31 of the year following 
the year of payment. Any payments that are not allocated to payees for 
whom documentation has been provided or a chapter 4 withholding rate 
pool referred to in the previous sentence shall be allocated to an 
undocumented payee in accordance with the presumption rules of paragraph 
(b)(3) of this section and Sec. Sec.  1.1441-5(d) and (e)(6), 1.6049-
5(d), and 1.1471-3(f)(5) (for a withholdable payment for chapter 4 
purposes). Notwithstanding the preceding sentence, deposit interest 
(including original issue discount) described in section 871(i)(2)(A) or 
881(d) and interest or original issue discount on short-term obligations 
as described in section 871(g)(1)(B) or 881(e) is not required to be 
allocated to a U.S. exempt recipient or a foreign payee, except as 
required under Sec.  1.6049-8 (regarding reporting of deposit interest 
paid to certain foreign persons).
    (4) Failure to provide allocation information. Except as provided in 
paragraph (e)(3)(iv)(D)(5) of this section, if a nonqualified 
intermediary fails to provide allocation information, if required, by 
January 31 for any withholding rate pool to the extent required in 
paragraph (e)(3)(iv)(D)(3) of this section, a withholding agent shall 
not apply the alternative procedures of this paragraph (e)(3)(iv)(D) to 
any payments of reportable amounts paid after January 31 in the taxable 
year following the calendar year for which allocation information was 
not given and any subsequent taxable year. Further, the alternative 
procedures shall be unavailable for any other withholding rate pool 
(other than a chapter 4 withholding rate pool as otherwise permitted) 
even though allocation information was given for that other pool. 
Therefore, the withholding agent must withhold on a payment of a 
reportable amount in accordance with the presumption rules of paragraph 
(b)(3) of this section, and Sec. Sec.  1.1441-5(d) and (e)(6), 1.6049-
5(d), and 1.1471-3(f)(5) (for a withholdable payment for chapter 4 
purposes), unless the nonqualified intermediary provides all of the 
information, including information sufficient to allocate the payment to 
each specific payee or chapter 4 withholding rate pool (as permitted), 
required by paragraph (e)(3)(iv)(A) through (C) of this section prior to 
the payment. A nonqualified intermediary must allocate at least 90 
percent of the income required to be allocated for each withholding rate 
pool as required under this paragraph (e)(3)(iv)(D)(4) or the 
nonqualified intermediary will be treated as having failed to provide 
allocation information for purposes of this paragraph (e)(3)(iv)(D). For 
purposes of the allocation, a nonqualified intermediary is required to 
identify by January 31 the portion of the payment that is allocated to 
each chapter 4 withholding rate pool (rather than the payees included in 
each such pool). See paragraph (e)(3)(iv)(D)(7) of this section for 
liability for tax and penalties if a nonqualified intermediary fails to 
provide allocation information in whole or in part.
    (5) Cure provision. A nonqualified intermediary may cure any failure 
to provide allocation information by providing the required allocation 
information to the withholding agent no later than February 14 following 
the calendar year of payment. If the withholding agent receives the 
allocation information by that date, it may apply the adjustment 
procedures of Sec.  1.1461-2 (or of Sec.  1.1474-2 for an amount 
withheld under chapter 4) to any excess withholding for payments made on 
or after February 1 and on or before February 14. Any nonqualified 
intermediary that fails to cure by February 14 may request the ability 
to use the alternative

[[Page 154]]

procedures of this paragraph (e)(3)(iv)(D) by submitting a request, in 
writing, to the IRS. The request must state the reason that the 
nonqualified intermediary did not comply with the alternative procedures 
of this paragraph (e)(3)(iv)(D) and steps that the nonqualified 
intermediary has taken, or will take, to ensure that no failures occur 
in the future. If the IRS determines that the alternative procedures of 
this paragraph (e)(3)(iv)(D) may apply, a determination to that effect 
will be issued by the IRS to the nonqualified intermediary.
    (6) Form 1042-S reporting in case of allocation failure. If a 
nonqualified intermediary fails to provide allocation information by 
February 14 following the year of payment for a withholding rate pool, 
the withholding agent must file Forms 1042-S for payments made to each 
payee in that pool (other than U.S. exempt recipients) in the prior 
calendar year by pro rating the payment to each payee (including U.S. 
exempt recipients) listed in the withholding statement for that 
withholding rate pool, treating as a payee for this purpose each chapter 
4 withholding rate pool identified by the nonqualified intermediary 
under paragraph (e)(3)(iv)(D)(2)(ii) of this section. If the 
nonqualified intermediary fails to allocate 10 percent or less of an 
amount required to be allocated for a withholding rate pool, a 
withholding agent shall report the unallocated amount as paid to a 
single unknown payee in accordance with the presumption rules of 
paragraph (b) of this section and Sec. Sec.  1.1441-5(d) and (e)(6), 
1.6049-5(d), and Sec.  1.1471-3(f)(5) (for a withholdable payment for 
chapter 4 purposes). The portion of the payment that can be allocated to 
specific recipients, as defined in Sec.  1.1461-1(c)(1)(ii), shall be 
reported to each recipient in accordance with the rules of Sec.  1.1461-
1(c) and Sec.  1.1474-1(d)(2) (for a withholdable payment).
    (7) Liability for tax, interest, and penalties. If a nonqualified 
intermediary fails to provide allocation information by February 14 
following the year of payment for all or a portion of the payments made 
to any withholding rate pool, the withholding agent from whom the 
nonqualified intermediary received payments of reportable amounts shall 
not be liable for any tax, interest, or penalties, due solely to the 
errors or omissions of the nonqualified intermediary. See Sec.  1.1441-
7(b)(2) through (10) for the due diligence requirements of a withholding 
agent. Because failure by the nonqualified intermediary to provide 
allocation information results in a payment not being reliably 
associated with valid documentation, the beneficial owners for whom the 
nonqualified intermediary acts are not entitled to a reduced rate of 
withholding. Therefore, the nonqualified intermediary, as a withholding 
agent, shall be liable for any tax not withheld by the withholding agent 
in accordance with the presumption rules, interest on the under withheld 
tax if the nonqualified intermediary fails to pay the tax timely, and 
any applicable penalties, including the penalties under sections 6656 
(failure to deposit), 6721 (failure to file information returns) and 
6722 (failure to file payee statements). Failure to provide allocation 
information for more than 10 percent of the payments made to a 
particular withholding rate pool will be presumed to be an intentional 
failure within the meaning of sections 6721(e) and 6722(c). The 
nonqualified intermediary may rebut the presumption.
    (8) Applicability to flow-through entities and certain U.S. 
branches. See paragraph (e)(3)(v) of this section and Sec.  1.1441-
5(c)(3)(iv) and (e)(5)(iv) for the applicability of this paragraph 
(e)(3)(iv) to U.S. branches described in paragraph (b)(2)(iv) of this 
section (other than U.S. branches treated as U.S. persons) and flow-
through entities.
    (E) Notice procedures. The IRS may notify a withholding agent that 
the alternative procedures of paragraph (e)(3)(iv)(D) of this section 
are not applicable to a specified nonqualified intermediary, a U.S. 
branch described in paragraph (b)(2)(iv) of this section, or a flow-
through entity. If a withholding agent receives such a notice, it must 
commence withholding under this section or chapter 4 (if applicable) in 
accordance with the presumption rules of paragraph (b)(3) of this 
section and Sec. Sec.  1.1441-5(d) and (e)(6), 1.6049-5(d), and1.1471-
3(f)(5) (for a withholdable payment for chapter 4 purposes) unless the 
nonqualified intermediary, U.S.

[[Page 155]]

branch, or flow-through entity complies with the procedures in 
paragraphs (e)(3)(iv)(A) through (C) of this section. In addition, the 
IRS may notify a withholding agent, in appropriate circumstances, that 
it must apply the presumption rules of paragraph (b)(3) of this section 
and Sec. Sec.  1.1441-5(d) and (e)(6), 1.6049-5(d), and Sec.  1.1471-
3(f)(5) (for a withholdable payment for chapter 4 purposes) to payments 
made to a nonqualified intermediary, a U.S. branch, or a flow-through 
entity even if the nonqualified intermediary, U.S. branch, or flow-
through entity provides allocation information prior to the payment. A 
withholding agent that receives a notice under this paragraph 
(e)(3)(iv)(E) must commence withholding in accordance with the 
presumption rules within 30 days of the date of the notice. The IRS may 
withdraw its prohibition against using the alternative procedures of 
paragraph (e)(3)(iv)(D) of this section, or its requirement to follow 
the presumption rules, if the nonqualified intermediary, U.S. branch, or 
flow-through entity can demonstrate to the satisfaction of the IRS that 
it is capable of complying with the rules under chapter 3 of the Code 
and any other conditions required by the IRS.
    (v) Withholding certificate from certain U.S. branches (including 
territory financial institutions). A U.S. branch certificate is a 
withholding certificate provided by a U.S. branch (including a territory 
financial institution) described in paragraph (b)(2)(iv) of this section 
that is not the beneficial owner of the income. The withholding 
certificate is provided with respect to reportable amounts and must 
state that such amounts are not effectively connected with the conduct 
of a trade or business in the United States. The withholding certificate 
must either transmit the appropriate documentation for the persons for 
whom the branch receives the payment (i.e., as an intermediary) or be 
provided as evidence of its agreement with the withholding agent to be 
treated as a U.S. person with respect to any payment associated with the 
certificate. A U.S. branch withholding certificate is valid only if it 
is furnished on a Form W-8, an acceptable substitute form, or such other 
form as the IRS may prescribe, it is signed under penalties of perjury 
by a person authorized to sign for the branch, its validity has not 
expired, and it contains the information, statements, and certifications 
described in this paragraph (e)(3)(v). If the certificate is furnished 
to transmit withholding certificates and other documentation, it must 
contain the information, certifications, and statements described in 
paragraphs (e)(3)(v)(A) through (C) of this section and in paragraphs 
(e)(3)(iii) and (iv) (alternative procedures) of this section, applying 
the term U.S. branch instead of the term nonqualified intermediary. If 
the certificate is furnished pursuant to an agreement to treat the U.S. 
branch or territory financial institution as a U.S. person (which 
agreement must be for purposes of chapter 4 in addition to this section 
in the case of a payment that is a withholdable payment), the 
information and certifications required on the withholding certificate 
are limited to the following--
    (A) The name of the territory financial institution or person of 
which the U.S. branch is a part, the address of the territory financial 
institution or U.S. branch;
    (B) A certification that the payments associated with the 
certificate are not effectively connected with the conduct of its trade 
or business in the United States;
    (C) The EIN of the U.S. branch or territory financial institution;
    (D) When required for chapter 4 purposes, the chapter 4 status and 
GIIN (if applicable) of the entity of which the U.S. branch is a part; 
and
    (E) Any other information, certifications, or statements as may be 
required by the form or accompanying instructions in addition to, or in 
lieu of, the information and certification described in this paragraph 
(e)(3)(v).
    (vi) Reportable amounts. For purposes of chapter 3 of the Internal 
Revenue Code, a nonqualified intermediary, qualified intermediary, flow-
through entity, and U.S. branch described in paragraph (b)(2)(iv) of 
this section (other than a U.S. branch that agrees to be treated as a 
U.S. person) must provide a withholding certificate and associated 
documentation and other information with respect to reportable

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amounts. For purposes of the regulations under chapter 3 of the Internal 
Revenue Code, the term reportable amount means an amount subject to 
withholding within the meaning of Sec.  1.1441-2(a), bank deposit 
interest (including original issue discount) and similar types of 
deposit interest described in section 871(i)(2)(A) or 881(d) that are 
from sources within the United States, and any amount of interest or 
original issue discount from sources within the United States on the 
redemption of certain short-term obligations described in section 
871(g)(1)(B) or 881(e). Reportable amounts shall not include amounts 
received on the sale or exchange (other than a redemption) of an 
obligation described in section 871(g)(1)(B) or 881(e) that is effected 
at an office outside the United States. See Sec.  1.6045-1(g)(3) to 
determine whether a sale is effected at an office outside the United 
States. Reportable amounts also do not include payments with respect 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 Sec.  1.6049-5(b)(7), (10) or (11) (relating to certain obligations 
issued in bearer form). While short-term OID and bank deposit interest 
are not subject to withholding under chapter 3 of the Internal Revenue 
Code, such amounts may be subject to information reporting under section 
6049 if paid to a U.S. person who is not an exempt recipient described 
in Sec.  1.6049-4(c)(1)(ii) and to backup withholding under section 3406 
in the absence of documentation. See Sec.  1.6049-5(d)(3)(iii) for 
applicable procedures when such amounts are paid to a foreign 
intermediary.
    (4) Applicable rules. The provisions in this paragraph (e)(4) 
describe procedures applicable to withholding certificates on Form W-8 
or Form 8233 (or a substitute form) or documentary evidence furnished to 
establish foreign status. These provisions do not apply to Forms W-9 (or 
their substitutes). For corresponding provisions regarding Form W-9 (or 
a substitute form), see section 3406 and the regulations under that 
section.
    (i) Who may sign the certificate--(A) In general. A withholding 
certificate (including an acceptable substitute) may be signed by any 
person authorized to sign a declaration under penalties of perjury on 
behalf of the person whose name is on the certificate as provided in 
section 6061 and the regulations under that section (relating to who may 
sign generally for an individual, estate, or trust, which includes 
certain agents who may sign returns and other documents), section 6062 
and the regulations under that section (relating to who may sign 
corporate returns), and section 6063 and the regulations under that 
section (relating to who may sign partnership returns). A person 
authorized to sign a withholding certificate includes an officer or 
director of a corporation, a partner of a partnership, a trustee of a 
trust, an executor of an estate, any foreign equivalent of the former 
titles, and any other person that has been provided written 
authorization by the individual or entity named on the certificate to 
sign documentation on such person's behalf.
    (B) Electronic signatures. A withholding agent, regardless of 
whether the withholding agent has established an electronic system 
pursuant to paragraph (e)(4)(iv)(A) or (e)(4)(iv)(C) of this section, 
may accept a withholding certificate with an electronic signature, 
provided the electronic signature meets the requirements of paragraph 
(e)(4)(iv)(B)(3)(ii) of this section. In addition, the withholding 
certificate must reasonably demonstrate to the withholding agent that 
the form has been electronically signed by the recipient identified on 
the form (or a person authorized to sign for the recipient). For 
example, a withholding agent may treat as signed for purposes of the 
requirements for a valid withholding certificate, a withholding 
certificate that has in the signature block the name of the person 
authorized to sign, a time and date stamp, and a statement that the 
certificate has been electronically signed. However, a withholding agent 
may not treat a withholding certificate with a typed name in the 
signature line and no other information as signed for purposes of the

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requirements for a valid withholding certificate. A withholding agent 
may also rely upon, in addition to the contents of a withholding 
certificate, other documentation or information it has collected to 
support that a withholding certificate was electronically signed by the 
recipient identified on the form (or other person authorized to sign for 
the recipient), provided that the withholding agent does not have actual 
knowledge that the documentation or information is incorrect.
    (ii) Period of validity--(A) General rule--(1) Withholding 
certificates and documentary evidence. Except as provided otherwise in 
paragraphs (e)(4)(ii)(B) and (C) of this section and this paragraph 
(e)(4)(ii)(A), a withholding certificate described in paragraph 
(e)(2)(i) of this section, or a certificate described in Sec.  1.871-
14(c)(2)(v) (furnished to qualify interest as portfolio interest for 
purposes of sections 871(h) and 881(c)), will remain valid until the 
earlier of the last day of the third calendar year following the year in 
which the withholding certificate is signed or the day that a change in 
circumstances occurs that makes any information on the certificate 
incorrect. For example, a withholding certificate signed on September 
30, 2015, remains valid through December 31, 2018, unless circumstances 
change that make the information on the form no longer correct. 
Documentary evidence described in Sec.  1.6049-5(c)(1) provided to 
establish a payee's foreign status shall remain valid until the last day 
of the third calendar year following the year in which the documentary 
evidence is provided to the withholding agent except as provided in 
paragraph (e)(4)(ii)(B) of this section; however, if such documentary 
evidence contains an expiration date, it may be treated as valid until 
that expiration date if doing so would provide a longer period of 
validity than the three-year period. Additionally, a withholding 
certificate or documentary evidence with a period of validity that is 
valid on December 31, 2013, will not be treated as invalid based solely 
on the period described in this paragraph (e)(4)(ii) before January 1, 
2015. Notwithstanding the validity periods prescribed by this paragraph 
(e)(4)(ii)(A) and paragraphs (e)(4)(ii)(B) and (C) of this section, a 
withholding certificate and documentary evidence will cease to be valid 
if a change in circumstances makes the information on the documentation 
incorrect.
    (2) Documentary evidence for treaty claims and treaty statements. 
Documentary evidence described in Sec.  1.1441-6(c)(3) or (4) shall 
remain valid until the last day of the third calendar year following the 
year in which the documentary evidence is provided to the withholding 
agent, except as provided in paragraph (e)(4)(ii)(B) of this section. A 
statement regarding entitlement to treaty benefits described in Sec.  
1.1441-6(c)(5) (treaty statement) shall remain valid until the last day 
of the third calendar year following the year in which the treaty 
statement is provided to the withholding agent except as provided in 
this paragraph (e)(4)(ii)(A)(2). A treaty statement provided by an 
entity that identifies a limitation on benefits provision for a publicly 
traded corporation shall not expire at the time provided in the 
preceding sentence if a withholding agent determines, based on publicly 
available information at each time for which the treaty statement would 
otherwise be renewed, that the entity is publicly traded. 
Notwithstanding the second sentence of this paragraph (e)(4)(ii)(A)(2), 
a treaty statement provided by an entity that identifies a limitation on 
benefits provision for a government or tax-exempt organization (other 
than a tax-exempt pension trust or pension fund) shall remain valid 
indefinitely. Notwithstanding the validity periods (or exceptions 
thereto) prescribed in this paragraph (e)(4)(ii)(A)(2), a treaty 
statement will cease to be valid if a change in circumstances makes the 
information on the statement unreliable or incorrect. For accounts 
opened and treaty statements obtained prior to January 6, 2017 
(including those from publicly traded corporations, governments, and 
tax-exempt organizations), the treaty statement will expire January 1, 
2020.
    (B) Indefinite validity period. Notwithstanding paragraph 
(e)(4)(ii)(A) of this section, the certificates (or parts of 
certificates) and documentary evidence described in paragraphs 
(e)(4)(ii)(B)(1)

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through (11) of this section shall remain valid until a change in 
circumstances makes the information on the documentation incorrect under 
paragraph (e)(4)(ii)(D)(3). See, however, Sec.  1.1471-3(c)(6)(ii) for 
when a withholding certificate or documentary evidence remains valid (or 
is subject to renewal) when also provided with respect to a withholdable 
payment made to an entity (including an intermediary) for purposes of 
whether a withholding agent may continue to rely on the entity's claim 
of chapter 4 status. Additionally, the provisions of paragraphs 
(e)(4)(ii)(B)(1), (2), and (11) of this section do not apply to 
documentary evidence or a withholding certificate furnished prior to 
July 1, 2014. (For documentary evidence or a withholding certificate 
furnished 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.)
    (1) A beneficial owner withholding certificate (other than the 
portion of the certificate making a claim for treaty benefits) and 
documentary evidence supporting a claim of foreign status when both are 
provided together by an individual claiming foreign status, if the 
withholding agent does not have a current U.S. residence address or U.S. 
mailing address for the payee, does not have one or more current U.S. 
telephone numbers that are the only telephone numbers the withholding 
agent has for the payee, and, for a payment described in Sec.  1.6049-
5(c)(1), the withholding agent has not been provided standing 
instructions to make a payment to an account in the United States for 
the obligation. For purposes of the preceding sentence, a beneficial 
owner withholding certificate and documentary evidence supporting the 
individual's claim of foreign status will be treated as provided 
together if they are provided within 30 days of each other, regardless 
of which the withholding agent receives first.
    (2) A beneficial owner withholding certificate (other than the 
portion of the certificate making a claim for treaty benefits) and 
documentary evidence provided by an entity supporting the entity's claim 
of foreign status, if both are received by the withholding agent before 
the validity period of either the withholding certificate or the 
documentary evidence would otherwise expire under paragraph 
(e)(4)(ii)(A) of this section. See, however, Sec.  1.1471-3(c)(6)(ii) 
for rules regarding indefinite validity for chapter 4 purposes.
    (3) A beneficial owner withholding certificate provided by an entity 
claiming status as a tax-exempt entity under section 501(c) that is not 
a foreign private foundation under section 509, provided that the 
withholding agent reports at least one payment annually to the entity 
under Sec.  1.1461-1(c).
    (4) A certificate described in paragraph (e)(3)(ii) of this section 
(a qualified intermediary withholding certificate) but not including the 
withholding certificates, documentary evidence, statements, or other 
information associated with the certificate.
    (5) A certificate described in paragraph (e)(3)(iii) of this section 
(a nonqualified intermediary certificate), but not including the 
withholding certificates, documentary evidence, statements, or other 
information associated with the certificate.
    (6) A certificate described in paragraph (e)(3)(v) of this section 
(a U.S. branch (including a territory financial institution) withholding 
certificate that is not provided by the beneficial owner), but not 
including the withholding certificates, documentary evidence, 
statements, or other information associated with the certificate.
    (7) A certificate furnished by a person representing to be an 
integral part of a foreign government (within the meaning of Sec.  
1.892-2T(a)(2)) in accordance with Sec.  1.1441-8(b), or by a person 
representing to be a foreign central bank of issue (within the meaning 
of Sec.  1.861-2(b)(4)) or the Bank for International Settlements in 
accordance with Sec.  1.1441-8(c)(1).
    (8) A withholding certificate provided by a withholding foreign 
trust described in Sec.  1.1441-5(e)(5)(v).
    (9) A certificate described in Sec.  1.1441-5(c)(2)(iv) (dealing 
with a certificate from a person representing to be a withholding 
foreign partnership).
    (10) A certificate described in Sec.  1.1441-5(c)(3)(iii) (a 
withholding certificate from a nonwithholding foreign partnership) or in 
Sec.  1.1441-5(e)(5)(iii) (a withholding certificate of a foreign simple

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or foreign grantor trust) but not including the withholding 
certificates, documentary evidence, statements, or other information 
required to be associated with the certificate; and
    (11) Documentary evidence that is not generally renewed or amended 
(such as a certificate of incorporation).
    (C) Withholding certificate for effectively connected income. 
Notwithstanding paragraph (e)(4)(ii)(B) of this section, the period of 
validity of a withholding certificate furnished to a withholding agent 
to claim a reduced rate of withholding for income that is effectively 
connected with the conduct of a trade or business within the United 
States shall be limited to the three-year period described in paragraph 
(e)(4)(ii)(A) of this section.
    (D) Change in circumstances--(1) Defined. A certificate or 
documentation becomes invalid from the date of a change in circumstances 
affecting the correctness of the certificate or documentation to the 
extent provided in this paragraph (e)(4)(ii)(D). For purposes of this 
section, a person is considered to have a change in circumstances only 
if such change affects the person's claim of chapter 3 status. Thus, for 
example, a change of address is not a change in circumstances with 
respect to a claim of only foreign status under this paragraph 
(e)(4)(ii)(D) if the change is to another address outside the United 
States, but is a change in circumstances if the change is to an address 
in the United States. However, see paragraph (e)(2)(ii)(B)(1) of this 
section for a special rule for a change of address for purposes of 
reliance on a foreign TIN (or a reasonable explanation for the absence 
of a foreign TIN) included on a beneficial owner withholding 
certificate.
    (2) Obligation to notify a withholding agent of a change in 
circumstances. If a change in circumstances makes any information on a 
certificate or other documentary evidence incorrect, then the person 
whose name is on the certificate or other documentation must inform the 
withholding agent within 30 days of the change and furnish a new 
certificate or new documentary evidence. If an intermediary (including a 
U.S. branch or territory financial institution described in paragraph 
(b)(2)(iv)(A) of this section) or a flow-through entity becomes aware 
that a certificate or other appropriate documentation it has furnished 
to the person from whom it collects a payment is no longer valid because 
of a change in the circumstances of the person who issued the 
certificate or furnished the other appropriate documentation, then the 
intermediary or flow-through entity must notify the person from whom it 
collects the payment of the change of circumstances within 30 days of 
the date that it knows or has reason to know of the change in 
circumstances. It must also obtain a new withholding certificate or new 
appropriate documentation to replace the existing certificate or 
documentation the validity of which has expired due to the change in 
circumstances to continue to treat the person who provided the 
certificate or documentary evidence under its claimed chapter 3 status.
    (3) Withholding agent's obligation with respect to a change in 
circumstances. A withholding agent may rely on a certificate without 
having to inquire into possible changes of circumstances that may affect 
the validity of the statement, unless it knows or has reason to know 
that circumstances have changed, as permitted under paragraph 
(e)(4)(viii) of this section. A withholding agent is required to notify 
any person providing documentary evidence (in lieu of a withholding 
certificate) of the person's obligation to notify the withholding agent 
of a change in circumstances. However, a withholding agent may choose to 
apply the provisions of paragraph (b)(3)(iv) of this section regarding 
the 90-day grace period as of that date while awaiting a new certificate 
or documentation or while seeking information regarding changes, or 
suspected changes, in the person's circumstances. A withholding agent 
may also require a new certificate at any time prior to a payment, even 
though the withholding agent has no actual knowledge or reason to know 
that any information stated on the certificate has changed.
    (iii) Retention of documentation. A withholding agent must retain 
each withholding certificate and other documentation for purposes of 
this section for as long as it may be relevant to the

[[Page 160]]

determination of the withholding agent's tax liability under section 
1461 and Sec.  1.1461-1. A withholding agent may retain a withholding 
certificate or documentary evidence that is an original, certified copy, 
or a scanned document (as described in paragraph (e)(4)(iv)(D) of this 
section). A withholding agent may also retain a withholding certificate 
by other means (such as microfiche) that allows a reproduction of the 
document provided that the withholding agent has recorded its receipt of 
a form described in the preceding sentence and is able to produce a hard 
copy of the form. See Sec.  1.6049-5(c)(1) for the requirements for 
maintaining documentary evidence that also apply for purposes of 
determining a payee's U.S. or foreign status for purposes of chapter 3.
    (iv) Electronic transmission of information--(A) In general. A 
withholding agent may establish a system for a beneficial owner or payee 
to electronically furnish a Form W-8, an acceptable substitute Form W-8, 
or such other form as the IRS may prescribe. The system must meet the 
requirements described in paragraph (e)(4)(iv)(B) of this section. See 
paragraph (e)(4)(iv)(D) of this section for other cases in which a Form 
W-8 (or other documentation) may be furnished electronically.
    (B) Requirements--(1) In general. The electronic system must ensure 
that the information received is the information sent, and must document 
all occasions of user access that result in the submission renewal, or 
modification of a Form W-8. In addition, the design and operation of the 
electronic system, including access procedures, must make it reasonably 
certain that the person accessing the system and furnishing Form W-8 is 
the person named in the Form.
    (2) Same information as paper Form W-8. The electronic transmission 
must provide the withholding agent or payor with exactly the same 
information as the paper Form W-8.
    (3) Perjury statement and signature requirements. The electronic 
transmission must contain an electronic signature by the person whose 
name is on the Form W-8 and the signature must be under penalties of 
perjury in the manner described in this paragraph (e)(4)(iv)(B)(3).
    (i) Perjury statement. The perjury statement must contain the 
language that appears on the paper Form W-8. The electronic system must 
inform the person whose name is on the Form W-8 that the person must 
make the declaration contained in the perjury statement and that the 
declaration is made by signing the Form W-8. The instructions and the 
language of the perjury statement must immediately follow the person's 
certifying statements and immediately precede the person's electronic 
signature.
    (ii) Electronic signature. The act of the electronic signature must 
be effected by the person whose name is on the electronic Form W-8. The 
signature must also authenticate and verify the submission. For this 
purpose, the terms authenticate and verify have the same meanings as 
they do when applied to a written signature on a paper Form W-8. An 
electronic signature can be in any form that satisfies the foregoing 
requirements. The electronic signature must be the final entry in the 
person's Form W-8 submission.
    (4) Requests for electronic Form W-8 data. Upon request by the 
Internal Revenue Service during an examination, the withholding agent 
must supply a hard copy of the electronic Form W-8 and a statement that, 
to the best of the withholding agent's knowledge, the electronic Form W-
8 was filed by the person whose name is on the form. The hard copy of 
the electronic Form W-8 must provide exactly the same information as, 
but need not be identical to, the paper Form W-8.
    (C) Form 8233. A withholding agent may establish a system for a 
beneficial owner or payee to provide Form 8233 electronically, provided 
the system meets the requirements of paragraph (e)(4)(iv)(B)(1) through 
(4) of this section (replacing ``Form W-8'' with ``Form 8233'' each 
place it appears).
    (D) Forms and documentary evidence received by facsimile or email. A 
withholding agent may rely upon an otherwise valid Form W-8 (or 
documentary evidence) received by facsimile or a form or document 
scanned and received electronically, such as, for example, an image 
embedded in an email or as a

[[Page 161]]

Portable Document Format (.pdf) attached to an email. A withholding 
agent may not rely on a form or document received by such means, 
however, if the withholding agent knows that the form or document was 
transmitted to the withholding agent by a person not authorized to do so 
by the person required to execute the form. A withholding agent may 
establish other procedures to authenticate and verify a form or document 
sent by such means and may reject any form or document that fails to 
satisfy the requirements of such procedures. A taxpayer may apply this 
paragraph (e)(4)(iv)(D) to all of its open tax years, including tax 
years that are currently under examination by the IRS.
    (E) Third party repositories. A withholding certificate will be 
considered furnished for purposes of this section (including paragraph 
(e)(1)(ii)(A)(1) of this section) by the person providing the 
certificate, and a withholding agent may rely on an otherwise valid 
withholding certificate received electronically from a third party 
repository, if the withholding certificate was uploaded or provided to a 
third party repository and there are processes in place to ensure that 
the withholding certificate can be reliably associated with a specific 
request from the withholding agent and a specific authorization from the 
person providing the certificate (or an agent of the person providing 
the certificate) for the withholding agent making the request to receive 
the withholding certificate. For purposes of the preceding sentence, a 
withholding agent must be able to reliably associate each payment with a 
specific request and authorization except when the withholding agent is 
permitted to rely on the withholding certificate on an obligation-by- 
obligation basis or as otherwise permitted under paragraph (e)(4)(ix) of 
this section (treating the withholding certificate as obtained by the 
withholding agent and furnished by a customer for purposes of this 
paragraph (e)(4)(iv)(E)). A third party repository may also be used for 
withholding statements, and a withholding agent may also rely on an 
otherwise valid withholding statement, if the intermediary providing the 
withholding certificates and withholding statement through the 
repository provides an updated withholding statement in the event of any 
change in the information previously provided (for example, a change in 
the composition of a partnership or a change in the allocation of 
payments to the partners) and ensures there are processes in place to 
update withholding agents when there is a new withholding statement (and 
withholding certificates, as necessary) in the event of any change that 
would affect the validity of the prior withholding certificates or 
withholding statement. A third party repository, for purposes of this 
paragraph, is an entity that maintains withholding certificates 
(including certificates accompanied by withholding statements) but is 
not an agent of the applicable withholding agent or the person providing 
the certificate.
    (F) Examples. This paragraph contains examples to illustrate the 
rules of paragraph (e)(4)(iv)(E) of this section.
    (1) Example 1. A, a foreign corporation, completes a Form W-8BEN-E 
and a Form W-8ECI and uploads the forms to X, a third party repository 
(X is an entity that maintains withholding certificates on an electronic 
data aggregation site). WA, a withholding agent, enters into a contract 
with A under which it will make payments to A of U.S. source FDAP that 
are not effectively connected with A's conduct of a trade or business in 
the United States. X is not an agent of WA or A. Before receiving a 
payment, A sends WA an email with a link that authorizes WA to access 
A's Form W-8BEN-E on X's system. The link does not authorize WA to 
access A's Form W-8ECI. X's system meets the requirements of a third 
party repository, and WA can treat the Form W-8BEN-E as furnished by A.
    (2) Example 2. The facts are the same as Example 1 of this paragraph 
(e)(4)(iv)(F), and WA and A enter into a second contract under which WA 
will make payments to A that are effectively connected with A's conduct 
of a trade or business in the United States. A sends WA an email with a 
link that gives WA access to A's Form W-8ECI on X's system. The link in 
this second email does not give WA access to A's

[[Page 162]]

Form W-8BEN-E. A's email also clearly indicates that the link is 
associated with payments received under the second contract. X's system 
meets the requirements of a third party repository, and WA can treat the 
Form W-8ECI as furnished by A.
    (3) Example 3. FP is a foreign partnership that is acting on behalf 
of its partners, A and B, who are both foreign individuals. FP completes 
a Form W-8IMY and uploads it to X, a third party repository. FP also 
uploads Forms W-8BEN from both A and B and a valid withholding statement 
allocating 50% of the payment to A and 50% to B. WA is a withholding 
agent that makes payments to FP as an intermediary for A and B. FP sends 
WA an email with a link to its Form W-8IMY on X's system. The link also 
provides WA access to FP's withholding statement and A's and B's Forms 
W-8BEN. FP also has processes in place that ensure it will provide a new 
withholding statement or withholding certificate to X's repository in 
the event of a change in the information previously provided that 
affects the validity of the withholding statement and that ensure it 
will update WA if there is a new withholding statement. X's system meets 
the requirements of a third party repository, and WA can treat the Form 
W-8IMY (and withholding statement) as furnished by FP. In addition, 
because FP is acting as an agent of A and B, the beneficial owners, WA 
can treat the Forms W-8BEN for A and B as furnished by A and B.
    (v) Additional procedures for certificates provided electronically. 
The IRS may prescribe procedures in a revenue procedure (see Sec.  
601.601(d)(2) of this chapter) or may issue other appropriate guidance 
(including a written directive for revenue agents) to further prescribe 
the conditions by which the IRS will determine that a system developed 
by a withholding agent to permit beneficial owners and payees to provide 
Forms W-8 electronically satisfies the requirements of paragraph 
(e)(4)(iv)(B) of this section.
    (vi) Acceptable substitute form. A withholding agent may substitute 
its own form instead of an official Form W-8 or 8233 (or such other 
official form as the IRS may prescribe). Such a substitute for an 
official form will be acceptable if it contains provisions that are 
substantially similar to those of the official form, it contains the 
same certifications relevant to the transactions as are contained on the 
official form and these certifications are clearly set forth, and the 
substitute form includes a signature-under-penalties-of-perjury 
statement identical to the one stated on the official form. The 
substitute form is acceptable even if it does not contain all of the 
provisions contained on the official form, so long as it contains those 
provisions that are relevant to the transaction for which it is 
furnished (including those required for purposes of chapter 4). For 
example, a withholding agent that pays no income for which treaty 
benefits are claimed may develop a substitute form that is identical to 
the official form, except that it does not include information regarding 
claims of benefits under an income tax treaty. Similarly, a withholding 
agent that is not required to determine the chapter 4 status of a payee 
providing a form may develop a substitute form that does not contain 
chapter 4 statuses. A withholding agent who uses a substitute form must 
furnish instructions relevant to the substitute form only to the extent 
and in the manner specified in the instructions to the official form. A 
withholding agent may use a substitute form that is written in a 
language other than English and may accept a form that is filled out in 
a language other than English, but the withholding agent must make 
available an English translation of the form and its contents to the IRS 
upon request. A withholding agent may refuse to accept a certificate 
from a payee or beneficial owner (including the official Form W-8 or 
8233) if the certificate provided is not an acceptable substitute form 
provided by the withholding agent, but only if the withholding agent 
furnishes the payee or beneficial owner with an acceptable substitute 
form within 5 business days of receipt of an unacceptable form from the 
payee or beneficial owner. In that case, the substitute form is 
acceptable only if it contains a notice that the withholding agent has 
refused to accept the form submitted by the payee or beneficial owner 
and

[[Page 163]]

that the payee or beneficial owner must submit the acceptable form 
provided by the withholding agent in order for the payee or beneficial 
owner to be treated as having furnished the required withholding 
certificate.
    (vii) Requirement of taxpayer identifying number. A TIN must be 
stated on a withholding certificate when required by this paragraph 
(e)(4)(vii) for the withholding certificate to be valid for purposes of 
this section. A TIN is required to be stated on--
    (A) A withholding certificate on which a beneficial owner is 
claiming the benefit of a reduced rate under an income tax treaty (other 
than for amounts described in Sec.  1.1441-6(c)(2) or amounts for which 
a foreign tax identifying number has been provided, as described in 
Sec.  1.1441-6(c)(2));
    (B) A withholding certificate on which a beneficial owner is 
claiming exemption from withholding because income is effectively 
connected with a U.S. trade or business;
    (C) A withholding certificate on which a beneficial owner is 
claiming exemption from withholding under section 871(f) for certain 
annuities received under qualified plans;
    (D) A withholding certificate on which a beneficial owner is 
claiming an exemption based solely on a foreign organization's claim of 
tax exempt status under section 501(c) or private foundation status 
(however, a TIN is not required from a foreign private foundation that 
is subject to the 4-percent tax under section 4948(a) on income if that 
income would be exempt from withholding but for section 4948(a) (e.g., 
portfolio interest));
    (E) A withholding certificate from a person representing to be a 
qualified intermediary described in paragraph (e)(5)(ii) of this 
section;
    (F) A withholding certificate from a person representing to be a 
withholding foreign partnership or a withholding foreign trust;
    (G) A withholding certificate provided by a foreign organization 
that is described in section 501(c);
    (H) A withholding certificate from a person representing to be a 
U.S. branch or territory financial institution described in paragraph 
(b)(2)(iv) of this section; and
    (I) A withholding certificate provided by an entity acting as a 
qualified securities lender, as defined for purposes of chapter 3, with 
respect to a substitute dividend paid in a securities lending or similar 
transaction.
    (viii) Reliance rules. A withholding agent may rely on the 
information and certifications stated on withholding certificates or 
other documentation without having to inquire into the veracity of this 
information or certification, unless it has actual knowledge or reason 
to know that the information or certification is incorrect. In the case 
of amounts described in Sec.  1.1441-6(c)(2), a withholding agent 
described in Sec.  1.1441-7(b)(3) has reason to know that the 
information or certifications on a certificate are incorrect only to the 
extent provided in Sec.  1.1441-7(b)(4) through (6). See Sec.  1.1441-
6(b)(1) for reliance on representations regarding eligibility for a 
reduced rate under an income tax treaty. Paragraphs (e)(4)(viii)(A) and 
(B) of this section provide examples of such reliance.
    (A) Classification. A withholding agent may rely on the claim of 
entity classification indicated on the withholding certificate that it 
receives from or for the beneficial owner, unless it has actual 
knowledge or reason to know that the classification claimed is 
incorrect. A withholding agent may not rely on a person's claim of 
classification other than as a corporation if the name of the 
corporation indicates that the person is a per se corporation described 
in Sec.  301.7701-2(b)(8)(i) of this chapter unless the certificate 
contains a statement that the person is a grandfathered per se 
corporation described in Sec.  301.7701-2(b)(8) of this chapter and that 
its grandfathered status has not been terminated. In the absence of 
reliable representation or information regarding the classification of 
the payee or beneficial owner, see Sec.  1.1441-1(b)(3)(ii) for 
applicable presumptions.
    (B) Status of payee as an intermediary or as a person acting for its 
own account. A withholding agent may rely on the type of certificate 
furnished as indicative of the payee's status as an intermediary or as 
an owner, unless the withholding agent has actual knowledge or reason to 
know otherwise. For

[[Page 164]]

example, a withholding agent that receives a beneficial owner 
withholding certificate from a foreign financial institution may treat 
the institution as the beneficial owner, unless it has information in 
its records that would indicate otherwise or the certificate contains 
information that is not consistent with beneficial owner status (e.g., 
sub-account numbers that do not correspond to accounts maintained by the 
withholding agent for such person or names of one or more persons other 
than the person submitting the withholding certificate). If the 
financial institution also acts as an intermediary, the withholding 
agent may request that the institution furnish two certificates, i.e., a 
beneficial owner certificate described in paragraph (e)(2)(i) of this 
section for the amounts that it receives as a beneficial owner, and an 
intermediary withholding certificate described in paragraph (e)(3)(i) of 
this section for the amounts that it receives as an intermediary. In the 
absence of reliable representation or information regarding the status 
of the payee as an owner or as an intermediary, see paragraph 
(b)(3)(v)(A) for applicable presumptions.
    (C) Reliance on a prior version of a withholding certificate. Upon 
the issuance by the IRS of an updated version of a withholding 
certificate, a withholding agent may continue to accept the prior 
version of the withholding certificate until the later of six full 
months after the revision date shown on the updated withholding 
certificate or the end of the calendar year the updated withholding 
certificate is issued, unless the IRS has issued guidance that indicates 
that the period for accepting a prior version is shortened or extended 
(including in the instructions to the form), such as when there is a new 
payee status required to be established using the form. A withholding 
agent may continue to rely upon a previously signed prior version of the 
withholding certificate until its period of validity expires.
    (ix) Certificates to be furnished to withholding agent for each 
obligation unless exception applies. Unless otherwise provided in 
paragraphs (e)(4)(ix)(A) through (D) of this section, a withholding 
agent that is a financial institution with which a customer may open an 
account shall obtain a withholding certificate or documentary evidence 
on an obligation-by-obligation basis and may not rely upon such 
documentation collected by another person or another branch of the 
withholding agent.
    (A) Exception for certain branch or account systems or system 
maintained by agent. A withholding agent may rely on a withholding 
certificate or documentary evidence furnished by a customer as part of a 
single branch system, universal account system, or shared account system 
described in Sec.  1.1471-3(c)(8) (substituting the term chapter 3 
status for chapter 4 status each place it appears in that paragraph). 
Furthermore, a withholding agent may rely on a shared documentation 
system maintained by an agent as described in Sec.  1.1471-3(c)(9)(i) 
(also substituting the term chapter 3 status for chapter 4 status each 
place it appears in that paragraph).
    (B) Reliance on certification provided by introducing brokers--(1) 
In general. A withholding agent may rely on the certification of a 
broker indicating the broker's determination of a payee's chapter 3 
status and that the broker holds a valid beneficial owner withholding 
certificate described in paragraph (e)(2)(i) of this section or other 
appropriate documentation for that beneficial owner with respect to any 
readily tradable instrument, as defined in Sec.  31.3406(h)-1(d) of this 
chapter, if the broker is a United States person (including a U.S. 
branch treated as a U.S. person under paragraph (b)(2)(iv) of this 
section) that is acting as the agent of a beneficial owner. A 
withholding agent may also rely on a certification described in the 
preceding sentence that is provided by a qualified intermediary that 
makes payments to beneficial owners that it receives from the 
withholding agent. The certification must be in writing or in electronic 
form and contain all of the information required of a nonqualified 
intermediary under paragraphs (e)(3)(iv)(B) and (C) of this section. If 
a broker chooses to use this paragraph (e)(4)(ix)(B), that broker will 
be solely responsible for applying

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the rules of Sec.  1.1441-7(b) to the withholding certificates or other 
appropriate documentation and shall be liable for any underwithholding 
as a result of the broker's failure to apply such rules. See Sec.  
1.1471-3(c)(9)(iii) for a similar allowance that applies to a broker's 
determination of a payee's chapter 4 status for purposes of chapter 4. 
For purposes of this paragraph (e)(4)(ix)(B), the term broker means a 
person treated as a broker under Sec.  1.6045-1(a).
    (2) Example. The following example illustrates the rules of this 
paragraph (e)(4)(x)(B) with respect to a U.S. broker:

    Example. SCO is a U.S. securities clearing organization that 
provides clearing services for correspondent broker, CB, a U.S. 
corporation. Pursuant to a fully disclosed clearing agreement, CB fully 
discloses the identity of each of its customers to SCO. Part of SCO's 
clearing duties include the crediting of income and gross proceeds of 
readily tradable instruments (as defined in Sec.  31.3406(h)-1(d)) to 
each customer's account. For each disclosed customer that is a foreign 
beneficial owner, CB provides SCO with information required under 
paragraphs (e)(3)(iv)(B) and (C) of this section that is necessary to 
apply the correct rate of withholding and to file Forms 1042-S. SCO may 
use the representations and beneficial owner information provided by CB 
to determine the proper amount of withholding and to file Forms 1042-S. 
CB is responsible for determining the validity of the withholding 
certificates or other appropriate documentation under Sec.  1.1441-1(b).

    (C) Reliance on documentation and certifications provided between 
principals and agents--(1) Withholding agent as agent. A withholding 
agent that acts on behalf of a principal may rely upon documentation (or 
copies of documentation) obtained from the principal, and, with respect 
to a principal that is a U.S. withholding agent, a qualified 
intermediary (when acting as such for determining a payee's status), or 
a withholding foreign partnership or withholding foreign trust with 
respect to a partner, owner, or beneficiary in the partnership or trust, 
the withholding agent may rely upon certification provided by the 
principal for purposes of determining a payee's chapter 3 status. Thus 
an agent (such as a paying agent or transfer agent) may not rely upon a 
certification provided by a principal that is a participating FFI but is 
not also a qualified intermediary, withholding foreign partnership, or 
withholding foreign trust for purposes of this section, even though it 
may rely on the certification when provided solely for purposes of 
chapter 4 under Sec.  1.1471-3(c)(9)(iv).
    (2) Withholding agent as principal. A withholding agent may also 
rely on documentation collected by an agent of the withholding agent in 
order to fulfill its chapter 3 obligations because such agent's actions 
are imputed to the principal (the withholding agent). For example, a 
withholding agent may contract an agent to collect Forms W-8 from 
account holders on its behalf, but the withholding agent remains liable 
for any tax liability resulting from a failure of the agent to comply 
with the requirements of chapter 3.
    (D) Reliance upon documentation for accounts acquired in merger or 
bulk acquisition for value. A withholding agent that acquires an account 
from a predecessor or transferor in a merger or bulk acquisition of 
accounts for value is permitted to rely upon valid documentation (or 
copies of valid documentation) collected by the predecessor or 
transferor for determining the chapter 3 status of an account holder of 
such an account. In addition, a withholding agent that acquires an 
account in a merger or bulk acquisition of accounts for value, other 
than a related party transaction, from a U.S. withholding agent (or a 
qualified intermediary when the withholding agent is also a qualified 
intermediary) may also rely upon the predecessor's or transferor's 
determination of the account holder's chapter 3 status for a transition 
period of the lesser of six months from the date of the merger or until 
the acquirer knows that the claim of entity classification and status is 
inaccurate or a change in circumstances occurs with respect to the 
account. At the end of the transition period, the acquirer will be 
permitted to rely upon the predecessor's determination as to the chapter 
3 status of the account holder only if the documentation that the 
acquirer has for the account holder, including documentation obtained 
from the predecessor or transferor, supports the status claimed. An 
acquirer that discovers at the end of the transition period that

[[Page 166]]

the chapter 3 status assigned by the predecessor or transferor to the 
account holder was incorrect and has not withheld as it would have been 
required to but for its reliance upon the predecessor's determination, 
will be required to withhold on future payments, if any, made to the 
account holder the amount of tax that should have been withheld during 
the transition period but for the erroneous classification as to the 
account holder's status. For purposes of this paragraph (e)(4)(ix)(D), a 
related party transaction is a merger or sale of accounts in which the 
acquirer is in the same expanded affiliated group, within the meaning of 
Sec.  1.1471-5(i)(2), as the predecessor or transferor either prior to 
or after the merger or acquisition or the predecessor or transferor (or 
shareholders of the predecessor or transferor) obtain a controlling 
interest in the acquirer or in a newly formed entity created for 
purposes of the merger or acquisition. See Sec.  1.1471-3(c)(9)(v) for a 
similar reliance rule that applies for purposes of chapter 4.
    (5) Qualified intermediaries--(i) In general. A qualified 
intermediary, as defined in paragraph (e)(5)(ii) of this section, may 
furnish a qualified intermediary withholding certificate to a 
withholding agent. The withholding certificate provides certifications 
on behalf of other persons for the purpose of claiming and verifying 
reduced rates of withholding under section 1441 or 1442 and for the 
purpose of reporting and withholding under other provisions of the Code, 
such as the provisions under chapter 61 and section 3406 (and the 
regulations under those provisions), or for the qualified derivative 
dealer (if applicable). Furnishing such a certificate is in lieu of 
transmitting to a withholding agent withholding certificates or other 
appropriate documentation for the persons for whom the qualified 
intermediary receives the payment, including interest holders in a 
qualified intermediary that is fiscally transparent under the 
regulations under section 894. Although the qualified intermediary is 
required to obtain withholding certificates or other appropriate 
documentation from beneficial owners, payees, or interest holders 
pursuant to its agreement with the IRS, it is generally not required to 
attach such documentation to the intermediary withholding certificate. 
Notwithstanding the preceding sentence, a qualified intermediary must 
provide a withholding agent with the Forms W-9, or disclose the names, 
addresses, and taxpayer identifying numbers, if known, of those U.S. 
non-exempt recipients for whom the qualified intermediary receives 
reportable amounts (within the meaning of paragraph (e)(3)(vi) of this 
section) to the extent required in the qualified intermediary's 
agreement with the IRS. When a qualified intermediary is acting as a 
qualified derivatives dealer, the withholding certificate entitles a 
withholding agent to make payments with respect to potential section 
871(m) transactions that are not underlying securities and dividend 
equivalent payments on underlying securities to the qualified 
derivatives dealer free of withholding. A withholding agent is required 
to withhold on all other U.S. source FDAP payments made to a qualified 
derivatives dealer as required by applicable law. Paragraph (e)(6) of 
this section contains detailed rules prescribing the circumstances in 
which a qualified intermediary can act as a qualified derivatives 
dealer. A person may claim qualified intermediary status before an 
agreement is executed with the IRS if it has applied for such status and 
the IRS authorizes such status on an interim basis under such procedures 
as the IRS may prescribe.
    (ii) Definition of qualified intermediary. With respect to a payment 
to a foreign person, the term qualified intermediary means a person that 
is a party to a withholding agreement with the IRS where such person 
is--
    (A) A foreign financial institution that is a participating FFI 
(including a reporting Model 2 FFI), a registered deemed-compliant FFI 
(including a reporting Model 1 FFI), an FFI treated as a deemed-
compliant FFI under an applicable IGA that is subject to due diligence 
and reporting requirements with respect to its U.S. accounts similar to 
those applicable to a registered deemed-compliant FFI under Sec.  
1.1471-5(f)(1), excluding a U.S. branch of any of the foregoing 
entities, or any other

[[Page 167]]

category of FFI identified in a qualified intermediary withholding 
agreement as eligible to act as a qualified intermediary;
    (B) A foreign branch or office of a U.S. financial institution or a 
foreign branch or office of a U.S. clearing organization that is either 
a reporting Model 1 FFI or agrees to the reporting requirements 
applicable to a participating FFI with respect to its U.S. accounts;
    (C) A foreign person that is a home office or has a branch that is 
an eligible entity as described in paragraph (e)(6)(ii) of this section, 
without regard to the requirement that the person be a qualified 
intermediary; or
    (D) Any other person acceptable to the IRS.
    (iii) Withholding agreement--(A) In general. The IRS may, upon 
request, enter into a withholding agreement with a foreign person 
described in paragraph (e)(5)(ii) of this section pursuant to such 
procedures as the IRS may prescribe in published guidance (see Sec.  
601.601(d)(2) of this chapter). Under the withholding agreement, a 
qualified intermediary shall generally be subject to the applicable 
withholding and reporting provisions applicable to withholding agents 
and payors under chapters 3, 4, and 61 of the Code, section 3406, the 
regulations under those provisions, and other withholding provisions of 
the Code, except to the extent provided under the agreement.
    (B) Terms of the withholding agreement. The withholding agreement 
shall specify the obligations of the qualified intermediary under 
chapters 3 and 4 including, for a qualified intermediary that is an FFI, 
the documentation, withholding, and reporting obligations required of a 
participating FFI or registered deemed-compliant FFI (including a 
reporting Model 1 FFI as defined in Sec.  1.1471-1(b)(114)) with respect 
to each branch of the qualified intermediary other than a U.S. branch 
that is treated as a U.S. person under paragraph (b)(2)(iv)(A) of this 
section. The withholding agreement will specify the type of 
certifications and documentation upon which the qualified intermediary 
may rely to ascertain the classification (e.g., corporation or 
partnership), status (i.e., U.S. or foreign and chapter 4 status) of 
beneficial owners and payees who receive reportable amounts, reportable 
payments, and withholdable payments collected by the qualified 
intermediary for purposes of chapters 3, 4, and 61, section 3406, and, 
if necessary, entitlement to the benefits of a reduced rate under an 
income tax treaty. The withholding agreement shall specify if, and to 
what extent, the qualified intermediary may assume primary withholding 
responsibility in accordance with paragraph (e)(5)(iv) of this section. 
It shall also specify the extent to which applicable return filing and 
information reporting requirements are modified so that, in appropriate 
cases, the qualified intermediary may report payments to the IRS on an 
aggregated basis, without having to disclose the identity of beneficial 
owners and payees. However, the qualified intermediary may be required 
to provide to the IRS the name and address of those foreign customers 
who benefit from a reduced rate under an income tax treaty pursuant to 
the withholding agreement for purposes of verifying entitlement to such 
benefits, particularly under an applicable limitation on benefits 
provision. Under the withholding agreement, a qualified intermediary may 
agree to act as an acceptance agent to perform the duties described in 
Sec.  301.6109-1(d)(3)(iv)(A) of this chapter. The withholding agreement 
may specify the manner in which applicable procedures for adjustments 
for underwithholding and overwithholding, including refund procedures, 
apply to qualified intermediaries and the extent to which applicable 
procedures may be modified. In particular, a withholding agreement may 
allow a qualified intermediary to claim refunds of overwithheld amounts. 
In addition, the withholding agreement shall specify the manner in which 
the IRS will verify compliance with the agreement, including the time 
and manner for which a qualified intermediary will be required to 
certify to the IRS regarding its compliance with the withholding 
agreement (including its performance of a periodic review) and the types 
of information required to be disclosed as part of the certification. In 
appropriate cases, the IRS may require review procedures be performed by 
an

[[Page 168]]

approved reviewer (in addition to those performed as part of the 
periodic review) and may conduct a review of the reviewer's findings. 
The withholding agreement may include provisions for the assessment and 
collection of tax in the event that failure to comply with the terms of 
the withholding agreement results in the failure by the withholding 
agent or the qualified intermediary to withhold and deposit the required 
amount of tax. Further, the withholding agreement may specify the 
procedures by which amounts withheld are to be deposited, if different 
from the deposit procedures under the Code and applicable regulations. 
To determine whether to enter a withholding agreement and the terms of 
any particular withholding agreement, the IRS will consider the type of 
local know-your-customer laws and practices to which the entity is 
subject (if the entity is an FFI), as well as the extent and nature of 
supervisory and regulatory control exercised under the laws of the 
foreign country over the foreign entity.
    (iv) Assignment of primary withholding responsibility. Any person 
(whether a U.S. person or a foreign person) who meets the definition of 
a withholding agent under Sec.  1.1441-7(a) (for payments subject to 
chapter 3 withholding) and Sec.  1.1473-1(d) (for withholdable payments) 
is required to withhold and deposit any amount withheld under Sec. Sec.  
1.1461-1(a) and 1.1474-1(b) and to make the returns prescribed by 
Sec. Sec.  1.1461-1(b) and (c), and by 1.1474-1(c), and (d). Under its 
qualified intermediary withholding agreement, a qualified intermediary 
may, however, inform a withholding agent from which it receives a 
payment that it will assume the primary obligation to withhold, deposit, 
and report amounts under chapters 3 and 4 of the Code and/or under 
chapter 61 and section 3406 of the Code. For assuming withholding 
obligations as described in the previous sentence, a qualified 
intermediary that assumes primary withholding responsibility for 
payments made to an account under chapter 3 is also required to assume 
primary withholding responsibility under chapter 4 for payments made to 
the account that are withholdable payments. Additionally, a qualified 
intermediary may represent that it assumes chapter 61 reporting and 
section 3406 obligations for a payment when the qualified intermediary 
meets the requirements of Sec.  1.6049-4(c)(4)(i) or (ii) for the 
payment. If a withholding agent makes a payment of an amount subject to 
withholding under chapter 3, a reportable payment (as defined in section 
3406(b)), or a withholdable payment to a qualified intermediary that 
represents to the withholding agent that it has assumed primary 
withholding responsibility for the payment, the withholding agent is not 
required to withhold on the payment. The withholding agent is not 
required to determine that the qualified intermediary actually performs 
its primary withholding responsibilities. A qualified intermediary that 
assumes primary withholding responsibility under chapters 3 and 4 or 
primary reporting and backup withholding responsibility under chapter 61 
and section 3406 is not required to assume primary withholding 
responsibility for all accounts it has with a withholding agent but must 
assume primary withholding responsibility for all payments made to any 
one account that it has with the withholding agent.
    (v) Withholding statement--(A) In general. A qualified intermediary 
must provide each withholding agent from which it receives reportable 
amounts as a qualified intermediary with a written statement (the 
withholding statement) containing the information specified in paragraph 
(e)(5)(v)(B) of this section. A withholding statement is not required, 
however, if all of the information a withholding agent needs to fulfill 
its withholding and reporting requirements is contained in the 
withholding certificate. The qualified intermediary withholding 
agreement will require the qualified intermediary to include information 
in its withholding statement relating to withholdable payments for 
purposes of withholding under chapter 4 as described in paragraph 
(e)(5)(v)(C)(2) of this section. The withholding statement forms an 
integral part of the qualified intermediary's qualified intermediary 
withholding certificate, and the penalties of perjury statement provided 
on the withholding certificate shall apply to the withholding statement 
as well.

[[Page 169]]

The withholding statement may be provided in any manner, and in any 
form, to which qualified intermediary and the withholding agent mutually 
agree, including electronically. If the withholding statement is 
provided electronically, the statement must satisfy the requirements 
described in paragraph (e)(3)(iv) of this section (applicable to a 
withholding statement provided by a nonqualified intermediary). The 
withholding statement shall be updated as often as necessary for the 
withholding agent to meet its reporting and withholding obligations 
under chapters 3, 4, and 61 and section 3406. For purposes of this 
section, a withholding agent will be liable for tax, interest, and 
penalties in accordance with paragraph (b)(7) of this section to the 
extent it does not follow the presumption rules of paragraph (b)(3) of 
this section, Sec. Sec.  1.1441-5(d) and (e)(6), and 1.6049-5(d) for a 
payment, or portion thereof, for which it does not have a valid 
withholding statement prior to making a payment.
    (B) Content of withholding statement. The withholding statement must 
contain sufficient information for a withholding agent to apply the 
correct rate of withholding on payments from the accounts identified on 
the statement and to properly report such payments on Forms 1042-S and 
Forms 1099, as applicable. The withholding statement must--
    (1) Designate those accounts for which the qualified intermediary 
acts as a qualified intermediary;
    (2) Designate those accounts for which qualified intermediary 
assumes primary withholding responsibility under chapter 3 and chapter 4 
of the Code and/or primary reporting and backup withholding 
responsibility under chapter 61 and section 3406;
    (3) If applicable, designate those accounts for which the qualified 
intermediary is acting as a qualified securities lender with respect to 
a substitute dividend paid in a securities lending or similar 
transaction;
    (4) If a qualified intermediary is acting as a qualified derivatives 
dealer, designate the accounts:
    (i) For which the qualified derivatives dealer is receiving payments 
with respect to potential section 871(m) transactions or underlying 
securities as a qualified derivatives dealer;
    (ii) For which the qualified derivatives dealer is receiving 
payments with respect to potential section 871(m) transactions (and that 
are not underlying securities) for which withholding is not required;
    (iii) For which qualified derivatives dealer is receiving payments 
with respect to underlying securities for which withholding is required; 
and
    (iv) If applicable, identifying the home office or branch that is 
treated as the owner for U.S. federal income tax purposes; and
    (5) Provide information regarding withholding rate pools, as 
described in paragraph (e)(5)(v)(C) of this section.
    (C) Withholding rate pools--(1) In general. Except to the extent it 
has assumed both primary withholding responsibility under chapters 3 and 
4 of the Code and primary Form 1099 reporting and backup withholding 
responsibility under chapter 61 and section 3406 with respect to a 
payment, a qualified intermediary shall provide as part of its 
withholding statement the chapter 3 withholding rate pool information 
that is required for the withholding agent to meet its withholding and 
reporting obligations under chapters 3 and 61 of the Code and section 
3406. See, however, paragraph (e)(5)(v)(C)(2) of this section for when a 
qualified intermediary may provide a chapter 4 withholding rate pool (as 
described in paragraph (c)(48) of this section) with respect to a 
payment that is a withholdable payment. A chapter 3 withholding rate 
pool is a payment of a single type of income, determined in accordance 
with the categories of income reported on Form 1042-S, that is subject 
to a single rate of withholding paid to a payee that is a foreign person 
and for which withholding under chapter 4 does not apply. A chapter 3 
withholding rate pool may be established by any reasonable method on 
which the qualified intermediary and a withholding agent agree (e.g., by 
establishing a separate account for a single chapter 3 withholding rate 
pool, or by dividing a payment made to a single account into portions 
allocable to each chapter 3 withholding rate pool). A qualified 
intermediary may include a

[[Page 170]]

separate pool for account holders that are U.S. exempt recipients or may 
include such accounts in a chapter 3 withholding rate pool to which 
withholding does not apply. The withholding statement must identify the 
chapter 4 exemption code (as provided in the instructions to Form 1042-
S) applicable to the chapter 3 withholding rate pools contained on the 
withholding statement. To the extent a qualified intermediary does not 
assume primary Form 1099 reporting and backup withholding responsibility 
under chapter 61 and section 3406, a qualified intermediary's 
withholding statement must establish a separate withholding rate pool 
for each U.S. non-exempt recipient account holder that the qualified 
intermediary has disclosed to the withholding agent unless the qualified 
intermediary uses the alternative procedures in paragraph 
(e)(5)(v)(C)(3) of this section or the account holder is a payee that 
the qualified intermediary is permitted to include in a chapter 4 
withholding rate pool of U.S. payees. A qualified intermediary that is a 
participating FFI or registered deemed- compliant FFI may include a 
chapter 4 withholding rate pool of U.S. payees on a withholding 
statement by applying the rules under paragraph (e)(3)(iv)(A) of this 
section (by substituting ``qualified intermediary'' for ``nonqualified 
intermediary'') with respect to an account that it maintains (as 
described in Sec.  1.1471-5(b)(5)) for the payee of the payment. A 
qualified intermediary shall determine withholding rate pools based on 
valid documentation that it obtains under its withholding agreement with 
the IRS, or if a payment cannot be reliably associated with valid 
documentation, under the applicable presumption rules. If a qualified 
intermediary has an account holder that is another intermediary (whether 
a qualified intermediary or a nonqualified intermediary) or a flow- 
through entity, the qualified intermediary may combine the account 
holder information provided by the other intermediary or flow-through 
entity with the qualified intermediary's direct account holder 
information to determine the qualified intermediary's chapter 3 
withholding rate pools and each of the qualified intermediary's chapter 
4 withholding rate pools to the extent provided in its withholding 
agreement with the IRS.
    (2) Withholding rate pool requirements for a withholdable payment. 
This paragraph (e)(5)(v)(C)(2) modifies the requirements of a 
withholding statement described in paragraph (e)(5)(v)(C)(1) of this 
section provided by a qualified intermediary with respect to a 
withholdable payment (including a reportable amount that is a 
withholdable payment). For such a payment, the regulations applicable to 
a withholding statement described in paragraph (e)(5)(v)(C)(1) of this 
section shall apply, except that--
    (i) If the qualified intermediary provides a withholding statement 
described in Sec.  1.1471-3(c)(3)(iii)(B)(2) (describing an FFI 
withholding statement), the withholding statement may include a chapter 
4 withholding rate pool with respect to the portion of the payment 
allocated to a single pool of recalcitrant account holders (without the 
need to subdivide into the pools described in Sec.  1.1471-4(d)(6)), 
including both account holders of the qualified intermediary and of any 
participating FFI, registered deemed-compliant FFI, or other qualified 
intermediary for whom the first-mentioned qualified intermediary 
receives the payment, and nonparticipating FFIs (to the extent 
permitted) in lieu of reporting chapter 3 withholding rate pools with 
respect to such persons as described in paragraph (e)(5)(v)(C)(1) of 
this section); or
    (ii) If the qualified intermediary provides a withholding statement 
described in Sec.  1.1471-3(c)(3)(iii)(B)(3) (describing a chapter 4 
withholding statement), the withholding statement may include a chapter 
4 withholding rate pool with respect to the portion of the payment 
allocated to nonparticipating FFIs.
    (3) Alternative procedure for U.S. non-exempt recipients. If 
permitted under its withholding agreement with the IRS, a qualified 
intermediary may, by mutual agreement with a withholding agent, 
establish a single zero withholding rate pool that includes U.S. non-
exempt recipient account holders for whom the qualified intermediary has 
provided Forms W-9 prior to the withholding

[[Page 171]]

agent paying any reportable payments, as defined in the qualified 
intermediary withholding agreement, and foreign persons for which no 
withholding is required under chapters 3 and 4, and may include payments 
allocated to a chapter 4 withholding rate pool of U.S. payees. In such a 
case, the qualified intermediary may also establish a separate 
withholding rate pool (subject to 28-percent withholding, or other 
applicable statutory back-up withholding tax rate) that includes only 
U.S. non-exempt recipient account holders for whom a qualified 
intermediary has not provided Forms W-9 prior to the withholding agent 
paying any reportable payments. If a qualified intermediary chooses the 
alternative procedure of this paragraph (e)(5)(v)(C)(3), the qualified 
intermediary must provide the information required by its withholding 
agreement to the withholding agent no later than January 15 of the year 
following the year in which the payments are paid. Failure to provide 
such information will result in the application of penalties to the 
qualified intermediary under sections 6721 and 6722, as well as any 
other applicable penalties, and may result in the termination of the 
qualified intermediary's withholding agreement with the IRS. A 
withholding agent shall not be liable for tax, interest, or penalties 
for failure to backup withhold or report information under chapter 61 of 
the Code due solely to the errors or omissions of the qualified 
intermediary. If a qualified intermediary fails to provide the 
allocation information required by this paragraph (e)(5)(v)(C)(3), with 
respect to U.S. non-exempt recipients, the withholding agent shall 
report the unallocated amount paid from the withholding rate pool to an 
unknown recipient, or otherwise in accordance with the appropriate Form 
1099 and the instructions accompanying the form.
    (D) Example. The following example illustrates the application of 
paragraph (e)(5)(v)(C) of this section for a qualified intermediary 
providing chapter 4 withholding rate pools on an FFI withholding 
statement provided to a withholding agent. WA makes a payment of U.S. 
source interest that is a withholdable payment to QI, a qualified 
intermediary that is an FFI and a non-U.S. payor (as defined in Sec.  
1.6049-5(c)(5)), and A and B are account holders of QI (as defined under 
Sec.  1.1471-5(a)) and are both U.S. non-exempt recipients (as defined 
in paragraph (c)(21) of this section). Ten percent of the payment is 
attributable to both A and B. A has provided WA with a Form W-9, but B 
has not provided WA with a Form W-9. QI assumes primary withholding 
responsibility under chapters 3 and 4 with respect to the payment, 80 
percent of which is allocable to foreign payees who are account holders 
other than A and B. As a participating FFI, QI is required to report 
with respect to its U.S. accounts under Sec.  1.1471-4(d) (as 
incorporated into its qualified intermediary agreement). Provided that 
QI reports A's account as a U.S. account under the requirements 
referenced in the preceding sentence, QI is not required to provide WA 
with a Form W-9 from A and may instead include A in a chapter 4 
withholding rate pool of U.S. payees, allocating 10% of the payment to 
this pool. See Sec.  1.6049-4(c)(4)(iii) concerning when reporting under 
section 6049 for a payment of interest is not required when an FFI that 
is a non-U.S. payor reports an account holder receiving the payment 
under its chapter 4 requirements. With respect to B, the interest 
payment is subject to backup withholding under section 3406. Because B 
is a recalcitrant account holder of QI for withholdable payments and 
because QI assumes primary chapter 4 withholding responsibility, 
however, QI may include the portion of the payment allocated to B with 
the remaining 80% of the payment for which QI assumes primary 
withholding responsibility. WA can reliably associate the full amount of 
the payment based on the withholding statement and does so regardless of 
whether WA knows B is a U.S. non-exempt recipient that is receiving a 
portion of the payment. See Sec.  31.3406(g)-1(e) (providing exemption 
to backup withholding when withholding was applied under chapter 4).
    (6) Qualified derivatives dealers--(i) In general. To act as a 
qualified derivatives dealer under a qualified intermediary withholding 
agreement, the home office or branch that is a qualified intermediary 
must be an eligible

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entity as described in paragraph (e)(6)(ii) of this section and, in 
accordance with the qualified intermediary agreement, must--
    (A) Furnish to a withholding agent a qualified intermediary 
withholding certificate (described in paragraph (e)(3)(ii) of this 
section) that indicates that the home office or branch receiving the 
payment is a qualified derivatives dealer with respect to the payments 
associated with the withholding certificate;
    (B) Agree to assume the primary withholding and reporting 
responsibilities, including the documentation provisions under chapters 
3, 4, and 61, and section 3406, the regulations under those provisions, 
and other provisions of the Internal Revenue Code, for payments made as 
a qualified derivatives dealer with respect to potential section 871(m) 
transactions. For this purpose, a qualified derivatives dealer is 
required to obtain a withholding certificate or other appropriate 
documentation from each counterparty to whom the qualified derivatives 
dealer makes a reportable payment (including a dividend equivalent 
payment within the meaning of Sec.  1.871-15(i)). The qualified 
derivatives dealer is also required to determine whether any payment it 
makes with respect to a potential section 871(m) transaction is, in 
whole or in part, a dividend equivalent;
    (C) Agree to remain liable for tax under section 881, if any, on any 
payment with respect to a potential section 871(m) transaction 
(including a dividend equivalent payment within the meaning of Sec.  
1.871-15(i)) and underlying securities as defined in Sec.  1.871-
15(a)(15) (including dividends) it receives as a qualified derivatives 
dealer, or in the case of dividend equivalents received in its equity 
derivatives dealer capacity, the taxes required pursuant to Sec.  1.871-
15(q);
    (D) Comply with the compliance review procedures applicable to a 
qualified intermediary that acts as a qualified derivatives dealer under 
the qualified intermediary withholding agreement, which will specify the 
time and manner in which a qualified derivatives dealer must:
    (1) Certify to the IRS that it has complied with the obligations to 
act as a qualified derivatives dealer (including its performance of a 
periodic review applicable to a qualified derivatives dealer);
    (2) Report to the IRS any amounts subject to reporting on Forms 
1042-S (including dividend equivalent payments that it made);
    (3) Report to the IRS on the appropriate U.S. federal tax return, 
its tax liabilities, including its tax liability pursuant to Sec.  
1.871-15(q)(1) and any other taxes on payments with respect to potential 
section 871(m) transactions or underlying securities as defined in Sec.  
1.871-15(a)(15) it receives; and
    (4) Respond to inquiries from the IRS about obligations it has 
assumed as a qualified derivatives dealer in a timely manner;
    (E) Agree to act as a qualified derivatives dealer for all payments 
made as a principal with respect to potential section 871(m) 
transactions and all payments received as a principal with respect to 
potential section 871(m) transactions and underlying securities as 
defined in Sec.  1.871-15(a)(15) (including dividend equivalent payments 
within the meaning of Sec.  1.871-15(i)), excluding any payments made or 
received by the qualified derivatives dealer to the extent the payment 
is treated as effectively connected with the conduct of a trade or 
business within the United States within the meaning of section 864, and 
not act as a qualified derivatives dealer for any other payments. For 
purposes of this paragraph (E), any securities lending or sale-
repurchase transaction that the qualified intermediary enters into that 
is a section 871(m) transaction is treated as entered into as a 
principal unless the qualified intermediary determines that it is acting 
as an intermediary with respect to that transaction; and
    (F) Each home office or branch must qualify and be approved for 
qualified derivatives dealer status and must represent itself as a 
qualified derivatives dealer on its Form W-8IMY and separately identify 
the home office or branch as the recipient on a withholding statement 
(if necessary). The home office means a foreign person, excluding any 
branches of the foreign

[[Page 173]]

person, that applies for qualified derivatives dealer status. Each home 
office or branch that obtains qualified derivatives dealer status must 
be treated as a separate qualified derivatives dealer.
    (ii) Definition of eligible entity. An eligible entity is a home 
office or branch that is a qualified intermediary and that, treating the 
home office or branch as a separate entity, is--
    (A) An equity derivatives dealer subject to regulatory supervision 
as a dealer by a governmental authority in the jurisdiction in which it 
was organized or operates;
    (B) A bank or bank holding company subject to regulatory supervision 
as a bank or bank holding company (as applicable) by a governmental 
authority in the jurisdiction in which it was organized or operates or 
an entity that is wholly-owned (directly or indirectly) by a bank or 
bank holding company subject to regulatory supervision as a bank or bank 
holding company (as applicable) by a governmental authority in the 
jurisdiction in which the bank or bank holding company (as applicable) 
was organized or operates and that in its equity derivatives dealer 
capacity--
    (1) Issues potential section 871(m) transactions to customers; and
    (2) Receives dividends with respect to stock or dividend equivalent 
payments with respect to potential section 871(m) transactions that 
hedge potential section 871(m) transactions that it issued;
    (C) A foreign branch of a U.S. financial institution, if the foreign 
branch would meet the requirements of paragraph (A) or (B) of this 
section if it were a separate entity; or
    (D) Any person otherwise acceptable to the IRS.
    (f) Effective/applicability date--(1) In general. Except as 
otherwise provided in paragraphs (e)(2)(ii)(B), (e)(4)(iv)(D), (f)(2), 
and (f)(3) of this section, this section applies to payments made on or 
after January 6, 2017. (For payments made after June 30, 2014 (except 
for payments to which paragraph (e)(4)(iv)(D) applies, in which case, 
substitute March 5, 2014, for 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.)
    (2) Lack of documentation for past years. A taxpayer may elect to 
apply the provisions of paragraphs (b)(7)(i)(B), (ii), and (iii) of this 
section, dealing with liability for failure to obtain documentation 
timely, to all of its open tax years, including tax years that are 
currently under examination by the IRS. The election is made by simply 
taking action under those provisions in the same manner as the taxpayer 
would take action for payments made after December 31, 2000.
    (3) Special rules related to section 871(m). Paragraphs (b)(4)(xxi), 
(b)(4)(xxiii), (e)(3)(ii)(E), and (e)(6) of this section apply to 
payments made on or after September 18, 2015. Paragraphs (e)(5)(ii)(C) 
and (e)(5)(v)(B)(4) of this section apply to payments made on or after 
on January 19, 2017.

[T.D. 8734, 62 FR 53424, Oct. 14, 1997]

    Editorial Note: For Federal Register citations affecting Sec.  
1.1441-1, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec.  1.1441-2  Amounts subject to withholding.

    (a) In general. For purposes of the regulations under chapter 3 of 
the Internal Revenue Code, the term amounts subject to withholding means 
amounts from sources within the United States that constitute either 
fixed or determinable annual or periodical income described in paragraph 
(b) of this section or other amounts subject to withholding described in 
paragraph (c) of this section. For purposes of this paragraph (a), an 
amount shall be treated as being from sources within the United States 
if the source of the amount cannot be determined at the time of payment. 
See Sec.  1.1441-3(d)(1) for determining the amount to be withheld from 
a payment in the absence of information at the time of payment regarding 
the source of the amount. Amounts subject to withholding include amounts 
that are not fixed or determinable annual or periodical income and upon 
which withholding is specifically required under a provision of this

[[Page 174]]

section or another section of the regulations under chapter 3 of the 
Internal Revenue Code (such as corporate distributions upon which 
withholding is required under Sec.  1.1441-3(c)(1) that do not 
constitute dividend income). Amounts subject to withholding do not 
include--
    (1) Amounts described in Sec.  1.1441-1(b)(4)(i) to the extent they 
involve interest on obligations in bearer form or on foreign-targeted 
registered obligations (but, in the case of a foreign-targeted 
registered obligation, only to the extent of those amounts paid to a 
registered owner that is a financial institution within the meaning of 
section 871(h)(5)(B) or a member of a clearing organization which member 
is the beneficial owner of the obligation);
    (2) Amounts described in Sec.  1.1441-1(b)(4)(ii) (dealing with bank 
deposit interest and similar types of interest (including original issue 
discount) described in section 871(i)(2)(A) or 881(d));
    (3) Amounts described in Sec.  1.1441-1(b)(4)(iv) (dealing with 
interest or original issue discount on certain short-term obligations 
described in section 871(g)(1)(B) or 881(e));
    (4) Amounts described in Sec.  1.1441-1(b)(4)(xx) (dealing with 
income from certain gambling winnings exempt from tax under section 
871(j));
    (5) Amounts paid as part of the purchase price of an obligation sold 
or exchanged between interest payment dates, unless the sale or exchange 
is part of a plan the principal purpose of which is to avoid tax and the 
withholding agent has actual knowledge or reason to know of such plan;
    (6) Original issue discount paid as part of the purchase price of an 
obligation sold or exchanged in a transaction other than a redemption of 
such obligation, unless the purchase is part of a plan the principal 
purpose of which is to avoid tax and the withholding agent has actual 
knowledge or reason to know of such plan; and
    (7) Insurance premiums paid with respect to a contract that is 
subject to the section 4371 excise tax.
    (8) Amounts of United States source gross transportation income, as 
defined in section 887(b)(1), that is taxable under section 887(a).
    (b) Fixed or determinable annual or periodical income--(1) In 
general--(i) Definition. For purposes of chapter 3 of the Internal 
Revenue Code and the regulations thereunder, fixed or determinable 
annual or periodical income includes all income included in gross income 
under section 61 (including original issue discount) except for the 
items specified in paragraph (b)(2) of this section. Items of income 
that are excluded from gross income under a provision of law without 
regard to the U.S. or foreign status of the owner of the income, such as 
interest excluded from gross income under section 103(a) or qualified 
scholarship income under section 117, shall not be treated as fixed or 
determinable annual or periodical income under chapter 3 of the Internal 
Revenue Code. Income excluded from gross income under section 892 
(income of foreign governments) or section 115 (income of a U.S. 
possession) is fixed or determinable annual or periodical income since 
the exclusion from gross income under those sections is dependent on the 
foreign status of the owner of the income. See Sec.  1.306-3(h) for 
treating income from the disposition of section 306 stock as fixed or 
determinable annual or periodical income.
    (ii) Manner of payment. The term fixed or determinable annual or 
periodical is merely descriptive of the character of a class of income. 
If an item of income falls within the class of income contemplated in 
the statute and described in paragraph (a) of this section, it is 
immaterial whether payment of that item is made in a series of payments 
or in a single lump sum. Further, the income need not be paid annually 
if it is paid periodically; that is to say, from time to time, whether 
or not at regular intervals. The fact that a payment is not made 
annually or periodically does not, however, prevent it from being fixed 
or determinable annual or periodical income (e.g., a lump sum payment). 
In addition, the fact that the length of time during which the payments 
are to be made may be increased or diminished in accordance with 
someone's will or with the happening of an event does not disqualify the 
payment as determinable or periodical. For this purpose, the share of 
the fixed or determinable annual or periodical

[[Page 175]]

income of an estate or trust from sources within the United States which 
is required to be distributed currently, or which has been paid or 
credited during the taxable year, to a nonresident alien beneficiary of 
such estate or trust constitutes fixed or determinable annual or 
periodical income.
    (iii) Determinability of amount. An item of income is fixed when it 
is to be paid in amounts definitely pre-determined. An item of income is 
determinable if the amount to be paid is not known but there is a basis 
of calculation by which the amount may be ascertained at a later time. 
For example, interest is determinable even if it is contingent in that 
its amount cannot be determined at the time of payment of an amount with 
respect to a loan because the calculation of the interest portion of the 
payment is contingent upon factors that are not fixed at the time of the 
payment. For purposes of this section, an amount of income does not have 
to be determined at the time that the payment is made in order to be 
determinable. An amount of income described in paragraph (a) of this 
section which the withholding agent knows is part of a payment it makes 
but which it cannot calculate exactly at the time of payment, is 
nevertheless determinable if the determination of the exact amount 
depends upon events expected to occur at a future date. In contrast, a 
payment which may be income in the future based upon events that are not 
anticipated at the time the payment is made is not determinable. For 
example, loan proceeds may become income to the borrower when and to the 
extent the loan is canceled without repayment. While the cancellation of 
the debt is income to the borrower when it occurs, it is not 
determinable at the time the loan proceeds are disbursed to the borrower 
if the lack of repayment leading to the cancellation of part or all of 
the debt was not anticipated at the time of disbursement. The fact that 
the source of an item of income cannot be determined at the time that 
the payment is made does not render a payment not determinable. See 
Sec.  1.1441-3(d)(1) for determining the amount to be withheld from a 
payment in the absence of information at the time of payment regarding 
the source of the amount.
    (2) Exceptions. For purposes of chapter 3 of the Code and the 
regulations thereunder, the items of income described in this paragraph 
(b)(2) are not fixed or determinable annual or periodical income--
    (i) Gains derived from the sale of property (including market 
discount and option premiums), except for gains described in paragraph 
(b)(3) or (c) of this section; and
    (ii) Any other income that the Internal Revenue Service (IRS) may 
determine, in published guidance (see Sec.  601.601(d)(2) of this 
chapter), is not fixed or determinable annual or periodical income.
    (3) Original issue discount--(i) Amount subject to tax. An amount 
representing original issue discount is fixed or determinable annual or 
periodical income that is subject to tax under sections 871(a)(1)(C) and 
881(a)(3) to the extent provided in those sections and this paragraph 
(b)(3) if not otherwise excluded under paragraph (a) of this section. An 
amount of original issue discount is subject to tax with respect to a 
foreign beneficial owner of an obligation carrying original issue 
discount upon a sale or exchange of the obligation or when a payment is 
made on such obligation. The amount taxable is the amount of original 
issue discount that accrued while the foreign person held the obligation 
up to the time that the obligation is sold or exchanged or that a 
payment is made on the obligation, reduced by any amount of original 
issue discount that was taken into account prior to that time (due to a 
payment made on the obligation). In the case of a payment made on the 
obligation, the tax due on the amount of original issue discount may not 
exceed the amount of the payment reduced by the tax imposed on any 
portion of the payment that is qualified stated interest.
    (ii) Amounts subject to withholding. A withholding agent must 
withhold on the taxable amount of original issue discount paid on the 
redemption of an original issue discount obligation unless an exception 
to withholding applies (e.g., portfolio interest or treaty exception). 
In addition, withholding is

[[Page 176]]

required on the taxable amount of original issue discount upon the sale 
or exchange of an original issue discount obligation, other than in a 
redemption, to the extent the withholding agent has actual knowledge or 
reason to know that the sale or exchange is part of a plan the principal 
purpose of which is to avoid tax. If a withholding agent cannot 
determine the taxable amount of original issue discount on the 
redemption of an original issue discount obligation (or on the sale or 
exchange of such an obligation if the principal purpose of the sale is 
to avoid tax), then it must withhold on the entire amount of original 
issue discount accrued from the date of issue until the date of 
redemption (or the date the obligation is sold or exchanged) determined 
on the basis of the most recently published ``List of Original Issue 
Discount Instruments'' (IRS Publication 1212, available from the IRS 
Forms Distribution Center) or similar list published by the IRS as if 
the beneficial owner of the obligation had held the obligation since its 
original issue.
    (iii) Exceptions to withholding. To the extent that this paragraph 
(b)(3) applies to require withholding by a person other than an issuer 
of an original issue discount obligation, or the issuer's agent, it 
shall apply only to obligations issued after December 31, 2000.
    (4) Securities lending transactions and equivalent transactions. See 
Sec. Sec.  1.871-7(b)(2) and 1.881-2(b)(2) regarding the character of 
substitute payments as fixed and determinable annual or periodical 
income. Such amounts constitute income subject to withholding to the 
extent they are from sources within the United States, as determined 
under section Sec. Sec.  1.861-2(a)(7) and 1.861-3(a)(6). See Sec. Sec.  
1.6042-3(a)(2) and 1.6049-5(a)(5) for reporting requirements applicable 
to substitute dividend and interest payments, respectively.
    (5) REMIC residual interests. Amounts subject to withholding include 
an excess inclusion described in Sec.  1.860G-3(b)(2) and the portion of 
an amount described in Sec.  1.860G-3(b)(1) that is an excess inclusion.
    (6) Dividend equivalents. Amounts subject to withholding include a 
dividend equivalent described in section 871(m) and the regulations 
thereunder. For this purpose, the amount of a dividend equivalent 
includes any gross amount that is used in computing any net amount that 
is transferred to or from the taxpayer under the terms of the 
transaction or any other payment described in section 871(m) and the 
regulations thereunder.
    (c) Other income subject to withholding. Withholding is also 
required on the following items of income--
    (1) Gains described in sections 631 (b) or (c), relating to 
treatment of gain on disposal of timber, coal, or domestic iron ore with 
a retained economic interest; and
    (2) Gains subject to the 30-percent tax under section 871(a)(1)(D) 
or 881(a)(4), relating to contingent payments received from the sale or 
exchange of patents, copyrights, and similar intangible property.
    (d) Exceptions to withholding where no money or property is paid or 
lack of knowledge--(1) General rule. A withholding agent who is not 
related to the recipient or beneficial owner has an obligation to 
withhold under section 1441 only to the extent that, at any time between 
the date that the obligation to withhold would arise (but for the 
provisions of this paragraph (d)) and the due date for the filing of 
return on Form 1042 (including extensions) for the year in which the 
payment occurs, it has control over, or custody of money or property 
owned by the recipient or beneficial owner from which to withhold an 
amount and has knowledge of the facts that give rise to the payment. The 
exemption from the obligation to withhold under this paragraph (d) shall 
not apply, however, to distributions with respect to stock or if the 
lack of control or custody of money or property from which to withhold 
is part of a pre-arranged plan known to the withholding agent to avoid 
withholding under section 1441, 1442, or 1443. For purposes of this 
paragraph (d), a withholding agent is related to the recipient or 
beneficial owner if it is related within the meaning of section 482. Any 
exemption from withholding pursuant to this paragraph (d) applies 
without a requirement that documentation be furnished to the withholding 
agent. However, documentation may have to

[[Page 177]]

be furnished for purposes of the information reporting provisions under 
chapter 61 of the Code and backup withholding under section 3406. The 
exemption from withholding under this paragraph (d) is not a 
determination that the amounts are not fixed or determinable annual or 
periodical income, nor does it constitute an exemption from reporting 
the amount under Sec.  1.1461-1 (b) and (c).
    (2) Cancellation of debt. A lender of funds who forgives any portion 
of the loan is deemed to have made a payment of income to the borrower 
under Sec.  1.61-12 at the time the event of forgiveness occurs. 
However, based on the rules of paragraph (d)(1) of this section, the 
lender shall have no obligation to withhold on such amount to the extent 
that it does not have custody or control over money or property of the 
borrower at any time between the time that the loan is forgiven and the 
due date (including extensions) of the Form 1042 for the year in which 
the payment is deemed to occur. A payment received by the lender from 
the borrower in partial settlement of the debt obligation does not, for 
this purpose, constitute an amount of money or property belonging to the 
borrower from which the withholding tax liability can be satisfied.
    (3) Satisfaction of liability following underwithholding by 
withholding agent. A withholding agent who, after failing to withhold 
the proper amount from a payment, satisfies the underwithheld amount out 
of its own funds may cause the beneficial owner to realize income to the 
extent of such satisfaction or may be considered to have advanced funds 
to the beneficial owner. Such determination depends upon the contractual 
arrangements governing the satisfaction of such tax liability (e.g., 
arrangements in which the withholding agent agrees to pay the amount due 
under section 1441 for the beneficial owner) or applicable laws 
governing the transaction. If the satisfaction of the tax liability is 
considered to constitute an advance of funds by the withholding agent to 
the beneficial owner and the withholding agent fails to collect the 
amount from the beneficial owner, a cancellation of indebtedness may 
result, giving rise to income to the beneficial owner under Sec.  1.61-
12. While such income is annual or periodical fixed or determinable, the 
withholding agent shall have no liability to withhold on such income to 
the extent the conditions set forth in paragraphs (d) (1) and (2) of 
this section are satisfied with respect to this income. Contrast the 
rules of this paragraph (d)(3) with the rules in Sec.  1.1441-3(f)(1) 
dealing with a situation in which the satisfaction of the beneficial 
owner's tax liability itself constitutes additional income to the 
beneficial owner. See, also, Sec.  1.1441-3(c)(2)(ii)(B) for a special 
rule regarding underwithholding on corporate distributions due to 
underestimating an amount of earnings and profits.
    (4) Withholding exemption inapplicable. The exemption in Sec.  
1.1441-2(d) from the obligation to withhold shall not apply to amounts 
described in Sec.  1.860G-3(b)(1) (regarding certain partnership 
allocations of REMIC net income with respect to a REMIC residual 
interest).
    (e) Payment--(1) General rule. A payment is considered made to a 
person if that person realizes income whether or not such income results 
from an actual transfer of cash or other property. For example, 
realization of income from cancellation of debt results in a deemed 
payment. A payment is considered made when the amount would be 
includible in the income of the beneficial owner under the U.S. tax 
principles governing the cash basis method of accounting. A payment is 
considered made whether it is made directly to the beneficial owner or 
to another person for the benefit of the beneficial owner (e.g., to the 
agent of the beneficial owner). Thus, a payment of income is considered 
made to a beneficial owner if it is paid in complete or partial 
satisfaction of the beneficial owner's debt to a creditor. In the event 
of a conflict between the rules of this paragraph (e)(1) governing 
whether a payment has occurred and its timing and the rules of Sec.  
31.3406(a)-4 of this chapter, the rules in Sec.  31.3406(a)-4 of this 
chapter shall apply to the extent that the application of section 3406 
is relevant to the transaction at issue.
    (2) Income allocated under section 482. A payment is considered made 
to the extent income subject to withholding

[[Page 178]]

is allocated under section 482. Further, income arising as a result of a 
secondary adjustment made in conjunction with a reallocation of income 
under section 482 from a foreign person to a related U.S. person is 
considered paid to a foreign person unless the taxpayer to whom the 
income is reallocated has entered into a repatriation agreement with the 
IRS and the agreement eliminates the liability for withholding under 
this section. For purposes of determining the liability for withholding, 
the payment of income is deemed to have occurred on the last day of the 
taxable year in which the transactions that give rise to the allocation 
of income and the secondary adjustments, if any, took place.
    (3) Blocked income. Income is not considered paid if it is blocked 
under executive authority, such as the President's exercise of emergency 
power under the Trading with the Enemy Act (50 U.S.C. App. 5), or the 
International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.). 
However, on the date that the blocking restrictions are removed, the 
income that was blocked is considered constructively received by the 
beneficial owner (and therefore paid for purposes of this section) and 
subject to withholding under Sec.  1.1441-1. Any exemption from 
withholding pursuant to this paragraph (e)(3) applies without a 
requirement that documentation be furnished to the withholding agent. 
However, documentation may have to be furnished for purposes of the 
information reporting provisions under chapter 61 of the Code and backup 
withholding under section 3406. The exemption from withholding granted 
by this paragraph (e)(3) is not a determination that the amounts are not 
fixed or determinable annual or periodical income.
    (4) Special rules for dividends. For purposes of sections 1441 and 
6042, in the case of stock for which the record date is earlier than the 
payment date, dividends are considered paid on the payment date. In the 
case of a corporate reorganization, if a beneficial owner is required to 
exchange stock held in a former corporation for stock in a new 
corporation before dividends that are to be paid with respect to the 
stock in the new corporation will be paid on such stock, the dividend is 
considered paid on the date that the payee or beneficial owner actually 
exchanges the stock and receives the dividend. See Sec.  31.3406(a)-
4(a)(2) of this chapter.
    (5) Certain interest accrued by a foreign corporation. For purposes 
of sections 1441 and 6049, a foreign corporation shall be treated as 
having made a payment of interest as of the last day of the taxable year 
if it has made an election under Sec.  1.884-4(c)(1) to treat accrued 
interest as if it were paid in that taxable year.
    (6) Payments other than in U.S. dollars. For purposes of section 
1441, a payment includes amounts paid in a medium other than U.S. 
dollars. See Sec.  1.1441-3(e) for rules regarding the amount subject to 
withholding in the case of such payments.
    (7) Payments of dividend equivalents--(i) In general. Subject to 
paragraphs (e)(7)(iv), (vi), and (vii) of this section, a payment of a 
dividend equivalent is not considered to be made until the later of 
when--
    (A) The amount of a dividend equivalent is determined as provided in 
Sec.  1.871-15(j)(2), and
    (B) A payment occurs with respect to the section 871(m) transaction 
after the amount of a dividend equivalent is determined as provided in 
Sec.  1.871-15(j)(2).
    (ii) Payment. For purposes of paragraph (e)(7) of this section, a 
payment occurs with respect to a section 871(m) transaction when--
    (A) Money or other property is paid to or by the long party, unless 
the section 871(m) transaction is described in Sec.  1.871-15(i)(3)(i), 
in which case a payment is treated as being made at the end of the 
applicable calendar quarter;
    (B) The long party sells, exchanges, transfers, or otherwise 
disposes of the section 871(m) transaction (including by settlement, 
offset, termination, expiration, lapse, or maturity); or
    (C) The section 871(m) transaction is transferred to an account that 
is not maintained by the withholding agent or the long party terminates 
the account relationship with the withholding agent.
    (iii) Premiums and other upfront payments. When a long party pays a 
premium or other upfront payment to the short party at the time a 
section

[[Page 179]]

871(m) transaction is issued, the premium or other upfront payment is 
not treated as a payment for purposes of paragraph (e)(7)(ii)(A) of this 
section.
    (iv) Option to withhold on dividend payment date. A withholding 
agent may withhold on the payment date described in paragraph (e)(4) of 
this section for the applicable dividend on the underlying security (the 
dividend payment date) if it withholds on that date for all section 
871(m) transactions of the same type (for example, securities lending or 
sale-repurchase transaction, NPC, or ELI) and satisfies the requirements 
to paragraph (e)(7)(v) of this section.
    (v) Changes to time of withholding. This paragraph describes how a 
withholding agent changes the time that it withholds on a dividend 
equivalent payment to a time described in paragraph (e)(7)(i) or (iv) of 
this section and these requirements must be satisfied for a withholding 
agent to change the time it withholds. A withholding agent must apply 
the change consistently to all transactions of the same type entered 
into on or after the change. For transactions of the same type entered 
into before the change, a withholding agent must withhold under the 
original approach throughout the term of the transaction. When a 
withholding agent changes the time that it will withhold, the 
withholding agent must notify each payee in writing that it will 
withhold using the approach described in paragraph (e)(7)(i) or (iv) of 
this section, as applicable, before the time for determining the payee's 
first dividend equivalent payment (as determined under Sec.  1.871-
15(j)(2)). With respect to transactions held by an intermediary or 
foreign flow-through entity, a withholding agent is treated as providing 
notice to each payee holding that transaction through the entity when it 
notifies the intermediary or foreign flow-through entity of the time it 
will withhold, as described in the preceding sentence, provided that the 
intermediary or foreign flow-through entity agrees to provide the same 
notice to each payee. The withholding agent must attach a statement to 
its relevant income tax return (filed by the due date, including 
extensions) for the year of the change notifying the IRS of the change 
and when it applies, identifying the type of section 871(m) transaction 
to which the change applies, and certifying that it has notified its 
payees. For purposes of this paragraph, a withholding agent will be 
considered to have entered into a transaction on the first date the 
withholding agent becomes responsible for withholding on the transaction 
(based on the rule in paragraph (e)(7)(ix) of this section).
    (vi) Withholding by qualified derivatives dealers. A withholding 
agent that is acting as a qualified derivatives dealer must withhold 
with respect to a dividend equivalent payment on the payment date 
described in paragraph (e)(4) of this section for the applicable 
dividend on the underlying security and must notify each payee in 
writing that it will withhold on the dividend payment date before the 
time for determining the payee's first dividend equivalent payment (as 
determined under Sec.  1.871-15(j)(2)).
    (vii) Withholding with respect to derivatives that reference 
partnerships. To the extent that a withholding agent is required to 
withhold with respect to a partnership interest described in Sec.  
1.871-15(m), the liability for withholding arises on March 15 of the 
year following the year in which the payment of a dividend equivalent 
(determined under Sec.  1.871-15(i)) occurs.
    (viii) Notification to holders of withholding timing. If a 
withholding agent is required to notify a payee of when it will withhold 
under paragraph (e)(7)(v) of this section, it may use the reporting 
methods prescribed in Sec.  1.871-15(p)(3)(i).
    (ix) Withholding agent responsibility. A withholding agent is only 
responsible for dividend equivalent amounts determined (as provided in 
Sec.  1.871-15(j)(2)) during the period the withholding agent is a 
withholding agent for the section 871(m) transaction.
    (f) Effective/applicability date. This section applies to payments 
made after December 31, 2000. Paragraph (a)(8) of this section applies 
to payments made on or after January 6, 2017; however, taxpayers may 
apply paragraph (a)(8) to any open tax year. Paragraphs (b)(5) and 
(d)(4) of this section apply to payments made after August 1, 2006. 
Paragraph (b)(6) of this section applies to

[[Page 180]]

payments made on or after January 23, 2012. Paragraph (e)(7) of this 
section applies to payments made on or after January 19, 2017.

[T.D. 8734, 62 FR 53444, Oct. 14, 1997]

    Editorial Note: For Federal Register citations affecting Sec.  
1.1441-2, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec.  1.1441-3  Determination of amounts to be withheld.

    (a) General rule--(1) Withholding on gross amount. Except as 
otherwise provided in regulations under section 1441, the amount subject 
to withholding under Sec.  1.1441-1 is the gross amount of income 
subject to withholding that is paid to a foreign person. The gross 
amount of income subject to withholding may not be reduced by any 
deductions, except to the extent that one or more personal exemptions 
are allowed as provided under Sec.  1.1441-4(b)(6).
    (2) Coordination with chapter 4. A withholding agent making a 
payment that is both a withholdable payment and an amount subject to 
withholding under Sec.  1.1441-2(a) and that has withheld tax as 
required under chapter 4 from such payment is not required to withhold 
under this section notwithstanding paragraph (a)(1) of this section. See 
Sec.  1.1474-6(b)(1) for the allowance for a withholding agent to credit 
withholding applied under chapter 4 against its liability for tax due 
under sections 1441, 1442, or 1443, and see Sec.  1.1474-6(b)(1) for the 
rule allowing a withholding agent to credit withholding applied under 
chapter 4 against its liability for tax due under sections 1441, 1442, 
or 1443, and Sec.  1.1474-6(b)(2) for when such withholding is 
considered applied by a withholding agent. If the withholdable payment 
is not required to be withheld upon under chapter 4, then the 
withholding agent must apply the provisions of Sec.  1.1441-1 to 
determine whether withholding is required under sections 1441, 1442, or 
1443.
    (b) Withholding on payments on certain obligations--(1) Withholding 
at time of payment of interest. When making a payment on an interest-
bearing obligation, a withholding agent must withhold under Sec.  
1.1441-1 upon the gross amount of stated interest payable on the 
interest payment date, regardless of whether the payment constitutes a 
return of capital or the payment of income within the meaning of section 
61. To the extent an amount was withheld on an amount of capital rather 
than interest, see the rules for adjustments, refunds, or credits under 
Sec.  1.1441-1(b)(8).
    (2) No withholding between interest payment dates--(i) In general. A 
withholding agent is not required to withhold under Sec.  1.1441-1 upon 
interest accrued on the date of a sale or exchange of a debt obligation 
when that sale occurs between two interest payment dates (even though 
the amount is treated as interest under Sec.  1.61-7(c) or (d) and is 
subject to tax under section 871 or 881). See Sec.  1.6045-1(c) for 
reporting requirements by brokers with respect to sale proceeds. See 
Sec.  1.61-7(c) regarding the character of payments received by the 
acquirer of an obligation subsequent to such acquisition (that is, as a 
return of capital or interest accrued after the acquisition). Any 
exemption from withholding pursuant to this paragraph (b)(2)(i) applies 
without a requirement that documentation be furnished to the withholding 
agent. However, documentation may have to be furnished for purposes of 
the information reporting provisions under section 6045 or 6049 and 
backup withholding under section 3406. The exemption from withholding 
granted by this paragraph (b)(2) is not a determination that the accrued 
interest is not fixed or determinable annual or periodical income under 
section 871(a) or 881(a).
    (ii) Anti-abuse rule. The exemption in paragraph (b)(2)(i) of this 
section does not apply if the sale of securities is part of a plan the 
principal purpose of which is to avoid tax by selling and repurchasing 
securities and the withholding agent has actual knowledge or reason to 
know of such plan.
    (c) Corporate distributions--(1) General rule. A corporation making 
a distribution with respect to its stock or any intermediary (described 
in Sec.  1.1441-1(c)(13)) making a payment of such a distribution is 
required to withhold under section 1441, 1442, or 1443 on the entire 
amount of the distribution, unless it elects to reduce the amount of 
withholding under the provisions of this paragraph (c). Any exceptions

[[Page 181]]

from withholding provided by this paragraph (c) apply without any 
requirement to furnish documentation to the withholding agent. However, 
documentation may have to be furnished for purposes of the information 
reporting provisions under section 6042 or 6045 and backup withholding 
under section 3406. See Sec.  1.1461-1(c) to determine whether amounts 
excepted from withholding under this section are considered amounts that 
are subject to reporting.
    (2) Exception to withholding on distributions--(i) In general. An 
election described in paragraph (c)(1) of this section is made by 
actually reducing the amount of withholding at the time that the payment 
is made. An intermediary that makes a payment of a distribution is not 
required to reduce the withholding based on the distributing 
corporation's estimates under this paragraph (c)(2) even if the 
distributing corporation itself elects to reduce the withholding on 
payments of distributions that it itself makes to foreign persons. 
Conversely, an intermediary may elect to reduce the amount of 
withholding with respect to the payment of a distribution even if the 
distributing corporation does not so elect for the payments of 
distributions that it itself makes of distributions to foreign persons. 
The amounts with respect to which a distributing corporation or 
intermediary may elect to reduce the withholding are as follows:
    (A) A distributing corporation or intermediary may elect to not 
withhold on a distribution to the extent it represents a nontaxable 
distribution payable in stock or stock rights.
    (B) A distributing corporation or intermediary may elect to not 
withhold on a distribution to the extent it represents a distribution in 
part or full payment in exchange for stock.
    (C) A distributing corporation or intermediary may elect to not 
withhold on a distribution (actual or deemed) to the extent it is not 
paid out of accumulated earnings and profits or current earnings and 
profits, based on a reasonable estimate determined under paragraph 
(c)(2)(ii) of this section.
    (D) A regulated investment company or intermediary may elect to not 
withhold on a distribution representing a capital gain dividend (as 
defined in section 852(b)(3)(C)) or an exempt interest dividend (as 
defined in section 852(b)(5)(A)) based on the applicable procedures 
described under paragraph (c)(3) of this section.
    (E) A U.S. Real Property Holding Corporation (defined in section 
897(c)(2)) or a real estate investment trust (defined in section 856) or 
intermediary may elect to not withhold on a distribution to the extent 
it is subject to withholding under section 1445 and the regulations 
under that section. See paragraph (c)(4) of this section for applicable 
procedures.
    (ii) Reasonable estimate of accumulated and current earnings and 
profits on the date of payment--(A) General rule. A reasonable estimate 
for purposes of paragraph (c)(2)(i)(C) of this section is a 
determination made by the distributing corporation at a time reasonably 
close to the date of payment of the extent to which the distribution 
will constitute a dividend, as defined in section 316. The determination 
is based upon the anticipated amount of accumulated earnings and profits 
and current earnings and profits for the taxable year in which the 
distribution is made, the distributions made prior to the distribution 
for which the estimate is made and all other relevant facts and 
circumstances. A reasonable estimate may be made based on the procedures 
described in Sec.  31.3406(b)(2)-4(c)(2) of this chapter.
    (B) Procedures in case of underwithholding. A distributing 
corporation or intermediary that is a withholding agent with respect to 
a distribution and that determines at the end of the taxable year in 
which the distribution is made that it underwithheld under section 1441 
on the distribution shall be liable for the amount underwithheld as a 
withholding agent under section 1461. However, for purposes of this 
section and Sec.  1.1461-1, any amount underwithheld paid by a 
distributing corporation, its paying agent, or an intermediary shall not 
be treated as income subject to additional withholding even if that 
amount is treated as additional income

[[Page 182]]

to the shareholders unless the additional amount is income to the 
shareholder as a result of a contractual arrangement between the parties 
regarding the satisfaction of the shareholder's tax liabilities. In 
addition, no penalties shall be imposed for failure to withhold and 
deposit the tax if--
    (1) The distributing corporation made a reasonable estimate as 
provided in paragraph (c)(2)(ii)(A) of this section; and
    (2) Either--
    (i) The corporation or intermediary pays over the underwithheld 
amount on or before the due date for filing a Form 1042 for the calendar 
year in which the distribution is made, pursuant to Sec.  1.1461-2(b); 
or
    (ii) The corporation or intermediary is not a calendar year taxpayer 
and it files an amended return on Form 1042X (or such other form as the 
Commissioner may prescribe) for the calendar year in which the 
distribution is made and pays the underwithheld amount and interest 
within 60 days after the close of the taxable year in which the 
distribution is made.
    (C) Reliance by intermediary on reasonable estimate. For purposes of 
determining whether the payment of a corporate distribution is a 
dividend, a withholding agent that is not the distributing corporation 
may, absent actual knowledge or reason to know otherwise, rely on 
representations made by the distributing corporation regarding the 
reasonable estimate of the anticipated accumulated and current earnings 
and profits made in accordance with paragraph (c)(2)(ii)(A) of this 
section. Failure by the withholding agent to withhold the required 
amount due to a failure by the distributing corporation to reasonably 
estimate the portion of the distribution treated as a dividend or to 
properly communicate the information to the withholding agent shall be 
imputed to the distributing corporation. In such a case, the Internal 
Revenue Service (IRS) may collect from the distributing corporation any 
underwithheld amount and subject the distributing corporation to 
applicable interest and penalties as a withholding agent.
    (D) Example. The rules of this paragraph (c)(2) are illustrated by 
the following example:

    Example. (i) Facts. Corporation X, a publicly traded corporation 
with both U.S. and foreign shareholders and a calendar year taxpayer, 
has an accumulated deficit in earnings and profits at the close of 2000. 
In 2001, Corporation X generates $1 million of current earnings and 
profits each month and makes an $18 million distribution, resulting in a 
$12 million dividend. Corporation X plans to make an additional $18 
million distribution on October 1, 2002. Approximately one month before 
that date, Corporation X's management receives an internal report from 
its legal and accounting department concerning Corporation X's estimated 
current earnings and profits. The report states that Corporation X 
should generate only $5.1 million of current earnings and profits by the 
close of the third quarter due to costs relating to substantial 
organizational and product changes, but these changes will enable 
Corporation X to generate $1.3 million of earnings and profits monthly 
for the last quarter of the 2002 fiscal year. Thus, the total amount of 
current and earnings and profits for 2002 is estimated to be $9 million.
    (ii) Analysis. Based on the facts in paragraph (i) of this Example, 
including the fact that earnings and profits estimate was made within a 
reasonable time before the distribution, Corporation X can rely on the 
estimate under paragraph (c)(2)(ii)(A) of this section. Therefore, 
Corporation X may treat $9 million of the $18 million of the October 1, 
2002, distribution to foreign shareholders as a non-dividend 
distribution.

    (3) Special rules in the case of distributions from a regulated 
investment company--(i) General rule. If the amount of any distributions 
designated as being subject to section 852(b)(3)(C) or 5(A), or 
871(k)(1)(C) or (2)(C), exceeds the amount that may be designated under 
those sections for the taxable year, then no penalties will be asserted 
for any resulting underwithholding if the designations were based on a 
reasonable estimate (made pursuant to the same procedures as described 
in paragraph (c)(2)(ii)(A) of this section) and the adjustments to the 
amount withheld are made within the time period described in paragraph 
(c)(2)(ii)(B) of this section. Any adjustment to the amount of tax due 
and paid to the IRS by the withholding agent as a result of 
underwithholding shall not be treated as a distribution for purposes of 
section 562(c) and the regulations thereunder.

[[Page 183]]

Any amount of U.S. tax that a foreign shareholder is treated as having 
paid on the undistributed capital gain of a regulated investment company 
under section 852(b)(3)(D) may be claimed by the foreign shareholder as 
a credit or refund under Sec.  1.1464-1.
    (ii) Reliance by intermediary on reasonable estimate. For purposes 
of determining whether a payment is a distribution designated as subject 
to section 852(b)(3)(C) or (5)(A), or 871(k)(1)(C) or (2)(C), a 
withholding agent that is not the distributing regulated investment 
company may, absent actual knowledge or reason to know otherwise, rely 
on the designations that the distributing company represents have been 
made in accordance with paragraph (c)(3)(i) of this section. Failure by 
the withholding agent to withhold the required amount due to a failure 
by the regulated investment company to reasonably estimate the required 
amounts or to properly communicate the relevant information to the 
withholding agent shall be imputed to the distributing company. In such 
a case, the IRS may collect from the distributing company any 
underwithheld amount and subject the company to applicable interest and 
penalties as a withholding agent.
    (4) Coordination with withholding under section 1445--(i) In 
general. A distribution from a U.S. Real Property Holding Corporation 
(USRPHC) (or from a corporation that was a USRPHC at any time during the 
five-year period ending on the date of distribution) with respect to 
stock that is a U.S. real property interest under section 897(c) or from 
a Real Estate Investment Trust (REIT) or other entity that is a 
qualified investment entity (QIE) under section 897(h)(4) with respect 
to its stock is subject to the withholding provisions under section 1441 
(or section 1442 or 1443) and section 1445. A USRPHC (other than a REIT 
or other entity that is a QIE) making a distribution shall be treated as 
satisfying its withholding obligations under both sections if it 
withholds in accordance with one of the procedures described in either 
paragraph (c)(4)(i)(A) or (B) of this section. A USRPHC must apply the 
same withholding procedure to all the distributions made during the 
taxable year. However, the USRPHC may change the applicable withholding 
procedure from year to year. For rules regarding distributions by REITs 
and other entities that are QIEs, see paragraph (c)(4)(i)(C) of this 
section. To the extent withholding under sections 1441, 1442, or 1443 
applies under this paragraph (c)(4)(i) to any portion of a distribution 
that is a withholdable payment, see paragraph (a)(2) of this section for 
rules coordinating withholding under chapter 4.
    (A) Withholding under section 1441. The USRPHC may choose to 
withhold on a distribution only under section 1441 (or 1442 or 1443) and 
not under section 1445. In such a case, the USRPHC must withhold under 
section 1441 (or 1442 or 1443) on the full amount of the distribution, 
whether or not any portion of the distribution represents a return of 
basis or capital gain. If a reduced tax rate under an income tax treaty 
applies to the distribution by the USRPHC, then the applicable rate of 
withholding on the distribution shall be no less than 15 percent for 
distributions after February 16, 2016, and no less than 10 percent for 
distributions on or before February 16, 2016, unless the applicable 
treaty specifies an applicable lower rate for distributions from a 
USRPHC, in which case the lower rate may apply.
    (B) Withholding under both sections 1441 and 1445. As an alternative 
to the procedure described in paragraph (c)(4)(i)(A) of this section, a 
USRPHC may choose to withhold under both sections 1441 (or 1442 or 1443) 
and 1445 under the procedures set forth in this paragraph (c)(4)(i)(B). 
The USRPHC must make a reasonable estimate of the portion of the 
distribution that is a dividend under paragraph (c)(2)(ii)(A) of this 
section, and must--
    (1) Withhold under section 1441 (or 1442 or 1443) on the portion of 
the distribution that is estimated to be a dividend under paragraph 
(c)(2)(ii)(A) of this section; and
    (2) Withhold under section 1445(e)(3) and Sec.  1.1445-5(e) on the 
remainder of the distribution (except for any portion paid to a 
withholding qualified holder (as defined in Sec.  1.1445-1(g)(11)) or on

[[Page 184]]

such smaller portion based on a withholding certificate obtained in 
accordance with Sec.  1.1445-5(e)(3)(iv).
    (C) Coordination with REIT/QIE withholding. In the case of a 
distribution from a REIT or other entity that is a QIE, withholding is 
required as described in paragraph (c)(4)(i)(C)(1) and (2) of this 
section.
    (1) Withholding is required under section 1441 (or 1442 or 1443) 
on--
    (i) The portion of the distribution that is not designated (for 
REITs) or reported (for regulated investment companies that are QIEs) as 
a capital gain dividend, a return of basis, or a distribution in excess 
of a shareholder's adjusted basis in the stock of the REIT or QIE that 
is treated as a capital gain under section 301(c)(3); and
    (ii) Any portion of a capital gain dividend from a REIT or other 
entity that is a QIE that is not treated as gain attributable to the 
sale or exchange of a U.S. real property interest pursuant to the second 
sentence of section 897(h)(1)).
    (2) Withholding is required under section 1445 with respect to--
    (i) A distribution in excess of a shareholder's adjusted basis in 
the stock of the REIT or QIE is, unless the interest in the REIT or QIE 
is not a U.S. real property interest (for example, an interest in a 
domestically controlled REIT or QIE under section 897(h)(2)) or the 
distribution is paid to a withholding qualified holder (as defined in 
Sec.  1.1445-1(g)(11)); and
    (ii) Any portion of a capital gain dividend that is attributable to 
the sale or exchange of a U.S. real property interest under section 
897(h)(1), unless it is paid to a withholding qualified holder (as 
defined in Sec.  1.1445-1(g)(11)). See Sec.  1.1445-8.
    (ii) Intermediary reliance rule. A withholding agent that is not the 
distributing USRPHC must withhold under paragraph (c)(4)(i) of this 
section, but may, absent actual knowledge or reason to know otherwise, 
rely on representations made by the USRPHC regarding the determinations 
required under paragraph (c)(4)(i) of this section. Failure by the 
withholding agent to withhold the required amount due to a failure by 
the distributing USRPHC to make these determinations in a reasonable 
manner or to properly communicate the determinations to the withholding 
agent shall be imputed to the distributing USRPHC. In such a case, the 
IRS may collect from the distributing USRPHC any underwithheld amount 
and subject the distributing USRPHC to applicable interest and penalties 
as a withholding agent.
    (iii) Applicability date. Paragraphs (c)(4)(i), (c)(4)(i)(B)(2), and 
(c)(4)(i)(C) of this section apply to distributions made by a USRPHC or 
a QIE occurring on or after December 29, 2022. For distributions made by 
a USRPHC or a QIE occurring before December 29, 2022, see Sec.  1.1441-
3(c)(4)(i), (c)(4)(i)(B)(2), and (c)(4)(i)(C), as contained in 26 CFR 
part 1, revised as of April 1, 2021.
    (d) Withholding on payments that include an undetermined amount of 
income--(1) In general. Where the withholding agent makes a payment and 
does not know at the time of payment the amount that is subject to 
withholding because the determination of the source of the income or the 
calculation of the amount of income subject to tax depends upon facts 
that are not known at the time of payment, then the withholding agent 
must withhold an amount under Sec.  1.1441-1 based on the entire amount 
paid that is necessary to ensure that the tax withheld is not less than 
30 percent (or other applicable percentage) of the amount that could be 
from sources within the United States or income subject to tax. See 
Sec.  1.1471-2(a)(5) for similar rules under chapter 4 that apply to 
payments made to payees that are entities. The amount so withheld shall 
not exceed 30 percent of the amount paid. With respect to a payment 
described in paragraph (d)(1) or (2) of this section, the withholding 
agent may elect to retain 30 percent of the payment to hold in escrow 
until the earlier of the date that the amount of income from sources 
within the United States or the taxable amount can be determined or one 
year from the date the amount is placed in escrow, at which time the 
withholding becomes due under Sec.  1.1441-1, or, to the extent that 
withholding is not required, the escrowed amount must be paid to the 
payee.
    (2) Withholding on certain gains. Absent actual knowledge or reason 
to

[[Page 185]]

know otherwise, a withholding agent may rely on a claim regarding the 
amount of gain described in Sec.  1.1441-2(c) if the beneficial owner 
withholding certificate, or other appropriate withholding certificate, 
states the beneficial owner's basis in the property giving rise to the 
gain. In the absence of a reliable representation on a withholding 
certificate, the withholding agent must withhold an amount under Sec.  
1.1441-1 that is necessary to assure that the tax withheld is not less 
than 30 percent (or other applicable percentage) of the recognized gain. 
For this purpose, the recognized gain is determined without regard to 
any deduction allowed by the Code from the gains. The amount so withheld 
shall not exceed 30 percent of the amount payable by reason of the 
transaction giving rise to the recognized gain. See Sec.  1.1441-1(b)(8) 
regarding adjustments in the case of overwithholding.
    (e) Payments other than in U.S. dollars--(1) In general. The amount 
of a payment made in a medium other than U.S. dollars is measured by the 
fair market value of the property or services provided in lieu of U.S. 
dollars. The withholding agent may liquidate the property prior to 
payment in order to withhold the required amount of tax under section 
1441 or obtain payment of the tax from an alternative source. However, 
the obligation to withhold under section 1441 is not deferred even if no 
alternative source can be located. Thus, for purposes of withholding 
under chapter 3 of the Code, the provisions of Sec.  31.3406(h)-
2(b)(2)(ii) of this chapter (relating to backup withholding from another 
source) shall not apply. If the withholding agent satisfies the tax 
liability related to such payments, the rules of paragraph (f) of this 
section apply.
    (2) Payments in foreign currency. If the amount subject to 
withholding tax is paid in a currency other than the U.S. dollar, the 
amount of withholding under section 1441 shall be determined by applying 
the applicable rate of withholding to the foreign currency amount and 
converting the amount withheld into U.S. dollars on the date of payment 
at the spot rate (as defined in Sec.  1.988-1(d)(1)) in effect on that 
date. A withholding agent making regular or frequent payments in foreign 
currency may use a month-end spot rate or a monthly average spot rate. 
In addition, such a withholding agent may use the spot rate on the date 
the amount of tax is deposited (within the meaning of Sec.  1.6302-
2(a)), provided that such deposit is made within seven days of the date 
of the payment giving rise to the obligation to withhold. A spot rate 
convention must be used consistently for all non-dollar amounts withheld 
and from year to year. Such convention cannot be changed without the 
consent of the Commissioner. The U.S. dollar amount so determined shall 
be treated by the beneficial owner as the amount of tax paid on the 
income for purposes of determining the final U.S. tax liability and, if 
applicable, claiming a refund or credit of tax.
    (f) Tax liability of beneficial owner satisfied by withholding 
agent--(1) General rule. In the event that the satisfaction of a tax 
liability of a beneficial owner by a withholding agent constitutes 
income to the beneficial owner and such income is of a type that is 
subject to withholding, the amount of the payment deemed made by the 
withholding agent for purposes of this paragraph (f) shall be determined 
under the gross-up formula provided in this paragraph (f)(1). Whether 
the payment of the tax by the withholding agent constitutes a 
satisfaction of the beneficial owner's tax liability and whether, as 
such, it constitutes additional income to the beneficial owner, must be 
determined under all the facts and circumstances surrounding the 
transaction, including any agreements between the parties and applicable 
law. The formula described in this paragraph (f)(1) is as follows:
[GRAPHIC] [TIFF OMITTED] TR14OC97.000

    (2) Example. The following example illustrates the provisions of 
this paragraph (f):

    Example. College X awards a qualified scholarship within the meaning 
of section 117(b) to foreign student, FS, who is in the United States on 
an F visa. FS is a resident of a country that does not have an income 
tax treaty with the United States. The scholarship is $20,000 to be 
applied to tuition, mandatory fees and books, plus benefits in

[[Page 186]]

kind consisting of room and board and roundtrip air transportation. 
College X agrees to pay any U.S. income tax owed by FS with respect to 
the scholarship. The fair market value of the room and board measured by 
the amount College X charges non-scholarship students is $6,000. The 
cost of the roundtrip air transportation is $2,600. Therefore, the total 
fair market value of the scholarship received by FS is $28,600. However, 
the amount taxable is limited to the fair market value of the benefits 
in kind ($8,600) because the portion of the scholarship amount for 
tuition, fees, and books is not included in gross income under section 
117. The applicable rate of withholding is 14 percent under section 
1441(b). Therefore, under the gross-up formula, College X is deemed to 
make a payment of $10,000 ($8,600 divided by (1-.14). The U.S. tax that 
must be deducted and withheld from the payment under section 1441(b) is 
$1,400 (.14 x $10,000). College X reports scholarship income of $30,000 
and $1,400 of U.S. tax withheld on Forms 1042 and 1042-S.

    (g) Conduit financing arrangements--(1) Duty to withhold. A financed 
entity or other person required to withhold tax under section 1441 with 
respect to a financing arrangement that is a conduit financing 
arrangement within the meaning of Sec.  1.881-3(a)(2)(iv) shall be 
required to withhold under section 1441 as if the district director had 
determined, pursuant to Sec.  1.881-3(a)(3), that all conduit entities 
that are parties to the conduit financing arrangement should be 
disregarded. The amount of tax required to be withheld shall be 
determined under Sec.  1.881-3(d). The withholding agent may withhold 
tax at a reduced rate if the financing entity establishes that it is 
entitled to the benefit of a treaty that provides a reduced rate of tax 
on a payment of the type deemed to have been paid to the financing 
entity. Section 1.881-3(a)(3)(ii)(E) shall not apply for purposes of 
determining whether any person is required to deduct and withhold tax 
pursuant to this paragraph (g), or whether any party to a financing 
arrangement is liable for failure to withhold or entitled to a refund of 
tax under sections 1441 or 1461 to 1464 (except to the extent the amount 
withheld exceeds the tax liability determined under Sec.  1.881-3(d)). 
See Sec.  1.1441-7(f) relating to withholding tax liability of the 
withholding agent in conduit financing arrangements subject to Sec.  
1.881-3.
    (2) Effective date. This paragraph (g) is effective for payments 
made by financed entities on or after September 11, 1995. This paragraph 
shall not apply to interest payments covered by section 127(g)(3) of the 
Tax Reform Act of 1984, and to interest payments with respect to other 
debt obligations issued prior to October 15, 1984 (whether or not such 
debt was issued by a Netherlands Antilles corporation).
    (h) Dividend equivalents--(1) Withholding on gross amount. The gross 
amount of a dividend equivalent described in section 871(m) and the 
regulations thereunder is subject to withholding in an amount equal to 
the gross amount of the dividend equivalent used in computing any net 
amount that is transferred to or from the taxpayer. Withholding is 
required on the amount of the dividend equivalent calculated under Sec.  
1.871-15(j).
    (2) Reliance by withholding agent on reasonable determinations. For 
purposes of determining whether a payment is a dividend equivalent and 
the timing and amount of a dividend equivalent under section 871(m), a 
withholding agent may rely on the information received from the party to 
the transaction that is required (as provided in Sec.  1.871-15(p)) to 
make those determinations, unless the withholding agent knows or has 
reason to know that the information is incorrect. When a withholding 
agent fails to withhold the required amount because the party described 
in Sec.  1.871-15(p) fails to reasonably determine or timely provide 
information regarding whether a transaction is a section 871(m) 
transaction, the timing and amount of any dividend equivalent, or any 
other information required to be provided pursuant to Sec.  1.871-15(p), 
and the withholding agent relied, absent actual knowledge to the 
contrary, on that party's determination or did not timely receive 
required information, then the failure to withhold is imputed to the 
party required to make the determinations described in Sec.  1.871-
15(p). In that case, the IRS may collect any underwithheld amount from 
the party to the transaction that was required to make the 
determinations described in Sec.  1.871-15(p) or timely provide the 
information and subject that party to applicable interest and penalties 
as if the

[[Page 187]]

party were a withholding agent with respect to the payment of the 
dividend equivalent made pursuant to the section 871(m) transaction.
    (3) Effective/applicability date. Except for the first sentence of 
paragraph (h)(1), this paragraph (h) applies to payments made on or 
after September 18, 2015. The first sentence of paragraph (h)(1) of this 
section, applies to payments made on or after January 23, 2012.
    (i) Effective/applicability date. Except as otherwise provided in 
paragraphs (g)(2) and (h)(3) 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, revised April 1, 2016. For payments made 
after December 31, 2000, see this section as in effect and contained in 
26 CFR part 1 as revised April 1, 2013.)

[T.D. 6500, 25 FR 12074, Nov. 26, 1960]

    Editorial Note: For Federal Register citations affecting Sec.  
1.1441-3, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec.  1.1441-4  Exemptions from withholding for certain effectively 
connected income and other amounts.

    (a) Certain income connected with a U.S. trade or business--(1) In 
general. No withholding is required under section 1441 on income 
otherwise subject to withholding if the income is (or is deemed to be) 
effectively connected with the conduct of a trade or business within the 
United States and is includible in the beneficial owner's gross income 
for the taxable year. For purposes of this paragraph (a), an amount is 
not deemed to be includible in gross income if the amount is (or is 
deemed to be) effectively connected with the conduct of a trade or 
business within the United States and the beneficial owner claims an 
exemption from tax under an income tax treaty because the income is not 
attributable to a permanent establishment in the United States. To claim 
a reduced rate of withholding because the income is not attributable to 
a permanent establishment, see Sec.  1.1441-6(b)(1). This paragraph (a) 
does not apply to income of a foreign corporation to which section 
543(a)(7) applies for the taxable year or to compensation for personal 
services performed by an individual. See paragraph (b) of this section 
for compensation for personal services performed by an individual.
    (2) Withholding agent's reliance on a claim of effectively connected 
income--(i) In general. Absent actual knowledge or reason to know 
otherwise, a withholding agent may rely on a claim of exemption based 
upon paragraph (a)(1) of this section if, prior to the payment to the 
foreign person, the withholding agent can reliably associate the payment 
with a Form W-8 upon which it can rely to treat the payment as made to a 
foreign beneficial owner in accordance with Sec.  1.1441-1(e)(1)(ii). 
For purposes of this paragraph (a), a withholding certificate is valid 
only if, in addition to other applicable requirements, it includes the 
taxpayer identifying number of the person whose name is on the Form W-8 
and represents, under penalties of perjury, that the amounts for which 
the certificate is furnished are effectively connected with the conduct 
of a trade or business in the United States and is includable in the 
beneficial owner's gross income for the taxable year. In the absence of 
a reliable claim that the income is effectively connected with the 
conduct of a trade or business in the United States, the income is 
presumed not to be effectively connected, except as otherwise provided 
in paragraph (a) (2)(ii) or (3) of this section. See Sec.  1.1441-
1(e)(4)(ii)(C) for the period of validity applicable to a certificate 
provided under this section and Sec.  1.1441-1(e)(4)(ii)(D) for changes 
in circumstances arising during the taxable year indicating that the 
income to which the certificate relates is not, or is no longer expected 
to be, effectively connected with the conduct of a trade or business 
within the United States. A withholding certificate shall be effective 
only for the item or items of income specified therein. The provisions 
of Sec.  1.1441-1(b)(3)(iv) dealing with a 90-day grace period shall 
apply for purposes of this section.
    (ii) Special rules for U.S. branches of foreign persons--(A) U.S. 
branches of certain foreign banks or foreign insurance

[[Page 188]]

companies. A payment to a U.S. branch described in Sec.  1.1441-
1(b)(2)(iv)(B)(3) is presumed to be effectively connected with the 
conduct of a trade or business in the United States without the need to 
furnish a certificate if the withholding agent obtains an EIN for the 
entity, unless the U.S. branch provides a U.S. branch withholding 
certificate described in Sec.  1.1441-1(e)(3)(v) that represents 
otherwise. If no certificate is furnished but the income is not, in 
fact, effectively connected income, then the branch must withhold 
whether the payment is collected on behalf of other persons or on behalf 
of another branch of the same entity. See Sec.  1.1441-1(b)(2)(iv) and 
(b)(6) for general rules applicable to payments to U.S. branches of 
foreign persons.
    (B) Other U.S. branches. See Sec.  1.1441-1(b)(2)(iv)(E) for similar 
procedures for other U.S. branches to the extent provided in a 
determination letter from the IRS.
    (3) Income on notional principal contracts--(i) General rule. Except 
as otherwise provided in paragraph (a)(3)(iii) of this section, a 
withholding agent that pays amounts attributable to a notional principal 
contract described in Sec.  1.863-7(a) or Sec.  1.988-2(e) shall have no 
obligation to withhold on the amounts paid under the terms of the 
notional principal contract regardless of whether a withholding 
certificate is provided. However, a withholding agent must file returns 
under Sec.  1.1461-1(b) and (c) reporting the income that it must treat 
as effectively connected with the conduct of a trade or business in the 
United States under the provisions of this paragraph (a)(3). Except as 
otherwise provided in paragraph (a)(3)(ii) of this section, a 
withholding agent must treat the income as effectively connected with 
the conduct of a U.S. trade or business if the income is paid to, or to 
the account of, a qualified business unit of a foreign person located in 
the United States or, if the payment is paid to, or to the account of, a 
qualified business unit of a foreign person located outside the United 
States, the withholding agent knows, or has reason to know, the payment 
is effectively connected with the conduct of a trade or business within 
the United States. Income on a notional principal contract does not 
include the amount characterized as interest under the provisions of 
Sec.  1.446-3(g)(4).
    (ii) Exception for certain payments. A payment shall not be treated 
as effectively connected with the conduct of a trade or business within 
the United States for purposes of paragraph (a)(3)(i) of this section 
even if no withholding certificate is furnished 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 Swaps and Derivatives Association (ISDA) Agreement, 
including the Schedule thereto) or in the confirmation on the particular 
notional principal contract transaction that the payee is a U.S. person 
or a non-U.S. branch of a foreign person.
    (iii) Exception for specified notional principal contracts. A 
withholding agent that makes a payment attributable to a specified 
notional principal contract described in section 871(m) and the 
regulations thereunder that is not treated as effectively connected with 
the conduct of a trade or business within the United States is obligated 
to withhold on the amount of the payment that is a dividend equivalent.
    (b) Compensation for personal services of an individual--(1) 
Exemption from withholding. Withholding is not required under Sec.  
1.1441-1 from salaries, wages, remuneration, or any other compensation 
for personal services of a nonresident alien individual if such 
compensation is effectively connected with the conduct of a trade or 
business within the United States and--
    (i) Such compensation is subject to withholding under section 3402 
(relating to withholding on wages) and the regulations under that 
section;
    (ii) Such compensation would be subject to withholding under section 
3402 but for the provisions of section 3401(a) (not including section 
3401(a)(6)) and the regulations under that section. This paragraph 
(b)(1)(ii) does not apply to payments to a nonresident alien individual 
from any trust described in section 401(a), any annuity plan described 
in section 403(a), any annuity, custodial account, or retirement income 
account described in section

[[Page 189]]

403(b), or an individual retirement account or individual retirement 
annuity described in section 408. Instead, these payments are subject to 
withholding under this section to the extent they are exempted from the 
definition of wages under section 3401(a)(12) or to the extent they are 
from an annuity, custodial account, or retirement income account 
described in section 403(b), or an individual retirement account or 
individual retirement annuity described in section 408. Thus, for 
example, payments to a nonresident alien individual from a trust 
described in section 401(a) are subject to withholding under section 
1441 and not under section 3405 or section 3406.
    (iii) Such compensation is for services performed by a nonresident 
alien individual who is a resident of Canada or Mexico and who enters 
and leaves the United States at frequent intervals;
    (iv) Such compensation is, or will be, exempt from the income tax 
imposed by chapter 1 of the Code by reason of a provision of the 
Internal Revenue Code or a tax treaty to which the United States is a 
party;
    (v) Such compensation is paid after January 3, 1979 as a commission 
or rebate paid by a ship supplier to a nonresident alien individual, who 
is employed by a nonresident alien individual, foreign partnership, or 
foreign corporation in the operation of a ship or ships of foreign 
registry, for placing orders for supplies to be used in the operation of 
such ship or ships with the supplier. See section 162(c) and the 
regulations thereunder for denial of deductions for illegal bribes, 
kickbacks, and other payments; or
    (vi) Compensation that is exempt from withholding under section 3402 
by reason of section 3402(e), provided that the employee and his 
employer enter into an agreement under section 3402(p) to provide for 
the withholding of income tax upon payments of amounts described in 
Sec.  31.3401(a)-3(b)(1) of this chapter. An employee who desires to 
enter into such an agreement should furnish his employer with Form W-4 
(withholding exemption certificate) (or such other form as the Internal 
Revenue Service (IRS) may prescribe). See section 3402(f) and the 
regulations thereunder and Sec.  31.3402(p)-1 of this chapter.
    (2) Manner of obtaining withholding exemption under tax treaty--(i) 
In general. In order to obtain the exemption from withholding by reason 
of a tax treaty provided by paragraph (b)(1)(iv) of this section, a 
nonresident alien individual must submit a withholding certificate 
(described in paragraph (b)(2)(ii) of this section) to each withholding 
agent from whom amounts are to be received. A separate withholding 
certificate must be filed for each taxable year of the alien individual. 
If the withholding agent is satisfied that an exemption from withholding 
is warranted (see paragraph (b)(2)(iii) of this section), the 
withholding certificate shall be accepted in the manner set forth in 
paragraph (b)(2)(iv) of this section. The exemption from withholding 
becomes effective for payments made at least ten days after a copy of 
the accepted withholding certificate is forwarded to the IRS. The 
withholding agent may rely on an accepted withholding certificate only 
if the IRS has not objected to the certificate. For purposes of this 
paragraph (b)(2)(i), the IRS will be considered to have not objected to 
the certificate if it has not notified the withholding agent within a 
10-day period beginning from the date that the withholding certificate 
is forwarded to the IRS pursuant to paragraph (b)(2)(v) of this section. 
After expiration of the 10-day period, the withholding agent may rely on 
the withholding certificate retroactive to the date of the first payment 
covered by the certificate. The fact that the IRS does not object to the 
withholding certificate within the 10-day period provided in this 
paragraph (b)(2)(i) shall not preclude the IRS from examining the 
withholding agent at a later date with respect to facts that the 
withholding agent knew or had reason to know regarding the payment and 
eligibility for a reduced rate and that were not disclosed to the IRS as 
part of the 10-day review process.
    (ii) Withholding certificate claiming withholding exemption. The 
statement claiming an exemption from withholding shall be made on Form 
8233 (or an acceptable substitute or such other form as the IRS may 
prescribe). Form

[[Page 190]]

8233 shall be dated, signed by the beneficial owner under penalties of 
perjury, and contain the following information--
    (A) The individual's name, permanent residence address, taxpayer 
identifying number (or a copy of a completed Form W-7 or SS-5 showing 
that a number has been applied for), and the U.S. visa number, if any;
    (B) The individual's current immigration status and visa type;
    (C) The individual's original date of entry into the United States;
    (D) The country that issued the individual's passport and the number 
of such passport, or the individual's permanent address if a citizen of 
Canada or Mexico;
    (E) The taxable year for which the statement is to apply, the 
compensation to which it relates, and the amount (or estimated amount if 
exact amount not known) of such compensation;
    (F) A statement that the individual is not a citizen or resident of 
the United States;
    (G) The number of personal exemptions claimed by the individual;
    (H) A statement as to whether the compensation to be paid to him or 
her during the taxable year is or will be exempt from income tax and the 
reason why the compensation is exempt;
    (I) If the compensation is exempt from withholding by reason of an 
income tax treaty to which the United States is a party, the tax treaty 
and provision under which the exemption from withholding is claimed and 
the country of which the individual is a resident;
    (J) Sufficient facts to justify the claim in exemption from 
withholding; and
    (K) Any other information as may be required by the form or 
accompanying instructions in addition to, or in lieu of, the information 
described in this paragraph (b)(2)(ii).
    (iii) Review by withholding agent. The exemption from withholding 
provided by paragraph (b)(1)(iv) of this section shall not apply unless 
the withholding agent accepts (in the manner provided in paragraph 
(b)(2)(iv) of this section) the statement on Form 8233, ``Exemption From 
Withholding on Compensation for Independent (and Certain Dependent) 
Personal Services of a Nonresident Alien Individual,'' (or successor 
form) supplied by the nonresident alien individual. Before accepting the 
statement, the withholding agent must examine the statement. If the 
withholding agent knows or has reason to know that any of the facts or 
assertions on Form 8233 may be false or that the eligibility of the 
individual's compensation for the exemption cannot be readily 
determined, the withholding agent may not accept the statement on Form 
8233 and is required to withhold under this section. If the withholding 
agent accepts the statement and subsequently finds that any of the facts 
or assertions contained on Form 8233 may be false or that the 
eligibility of the individual's compensation for the exemption can no 
longer be readily determined, then the withholding agent shall promptly 
so notify the IRS by letter, and the withholding agent is not relieved 
of liability to withhold on any amounts still to be paid. If the 
withholding agent is notified by the IRS that the eligibility of the 
individual's compensation for the exemption is in doubt or that such 
compensation is not eligible for the exemption, the withholding agent is 
required to withhold under this section. The rules of this paragraph 
(b)(2) are illustrated by the following examples.

    Example 1. C, a nonresident alien individual, submits Form 8233 to 
W, a withholding agent. The statement on Form 8233 does not include all 
the information required by paragraph (b)(2)(ii) of this section. 
Therefore, W has reason to know that he or she cannot readily determine 
whether C's compensation for personal services is eligible for an 
exemption from withholding and, therefore, W must withhold.
    Example 2. D, a nonresident alien individual, is performing services 
for W, a withholding agent. W has accepted a statement on Form 8233 
submitted by D, according to the provisions of this section. W receives 
notice from the IRS that the eligibility of D's compensation for a 
withholding exemption is in doubt. Therefore, W has reason to know that 
the eligibility of the compensation for a withholding exemption cannot 
be readily determined, as of the date W receives the notification, and W 
must withhold tax under section 1441 on amounts paid after receipt of 
the notification.

[[Page 191]]

    Example 3. E, a nonresident alien individual, submits Form 8233 to 
W, a withholding agent for whom E is to perform personal services. The 
statement contains all the information requested on Form 8233. E claims 
an exemption from withholding based on a personal exemption amount 
computed on the number of days E will perform personal services for W in 
the United States. If W does not know or have reason to know that any 
statement on the Form 8233 is false or that the eligibility of E's 
compensation for the withholding exemption cannot be readily determined, 
W can accept the statement on Form 8233 and exempt from withholding the 
appropriate amount of E's income.
    (iv) Acceptance by withholding agent. If after the review described 
in paragraph (b)(2)(iii) of this section the withholding agent is 
satisfied that an exemption from withholding is warranted, the 
withholding agent may accept the statement by making a certification, 
verified by a declaration

that it is made under the penalties of perjury, on Form 8233. The 
certification shall be--
    (A) That the withholding agent has examined the statement,
    (B) That the withholding agent is satisfied that an exemption from 
withholding is warranted, and
    (C) That the withholding agent does not know or have reason to know 
that the individual's compensation is not entitled to the exemption or 
that the eligibility of the individual's compensation for the exemption 
cannot be readily determined.
    (v) Copies of Form 8233. The withholding agent shall forward one 
copy of each Form 8233 that is accepted under paragraph (b)(2)(iv) of 
this section to the IRS within five days of such acceptance. The 
withholding agent shall retain a copy of Form 8233.
    (3) Withholding agreements. Compensation for personal services of a 
nonresident alien individual who is engaged during the taxable year in 
the conduct of a trade or business within the United States may be 
wholly or partially exempted from the withholding required by Sec.  
1.1441-1 if an agreement is reached between the IRS and the alien 
individual with respect to the amount of withholding required. Such 
agreement shall be available in the circumstances and in the manner set 
forth by the Internal Revenue Service, and shall be effective for 
payments covered by the agreement that are made after the agreement is 
executed by all parties. The alien individual must agree to timely file 
an income tax return for the current taxable year.
    (4) Final payment exemption--(i) General rule. Compensation for 
independent personal services of a nonresident alien individual who is 
engaged during the taxable year in the conduct of a trade or business 
within the United States may be wholly or partially exempted from the 
withholding required by Sec.  1.1441-1 from the final payment of 
compensation for independent personal services. This exemption does not 
apply to wages. This exemption from withholding is available only once 
during an alien individual's taxable year and is obtained by the alien 
individual presenting to the withholding agent a letter in duplicate 
from a district director stating the amount of compensation subject to 
the exemption and the amount that would otherwise be withheld from such 
final payment under section 1441 that shall be paid to the alien 
individual due to the exemption. The alien individual shall attach a 
copy of the letter to his or her income tax return for the taxable year 
for which the exemption is effective.
    (ii) Final payment of compensation for personal services. For 
purposes of this paragraph, final payment of compensation for personal 
services means the last payment of compensation, other than wages, for 
personal services rendered within the United States that the individual 
expects to receive from any withholding agent during the taxable year.
    (iii) Manner of applying for final payment exemption. In order to 
obtain the final payment exemption provided by paragraph (b)(4)(i) of 
this section, the nonresident alien individual (or his or her agent) 
must file the forms and provide the information required by the district 
director. Ordinary and necessary business expenses may be taken into 
account if substantiated to the satisfaction of the district director. 
The alien individual must submit a statement, signed by him or her and 
verified by a declaration that it is made under the penalties of 
perjury, that all the information provided is

[[Page 192]]

true and that to his or her knowledge no relevant information has been 
omitted. The information required to be submitted includes, but is not 
limited to--
    (A) A statement by each withholding agent from whom amounts of gross 
income effectively connected with the conduct of a trade or business 
within the United States have been received by the alien individual 
during the taxable year, of the amount of such income paid and the 
amount of tax withheld, signed and verified by a declaration that it is 
made under penalties of perjury;
    (B) A statement by the withholding agent from whom the final payment 
of compensation for personal services will be received, of the amount of 
such final payment and the amount which would be withheld under Sec.  
1.1441-1 if a final payment exemption under paragraph (b)(4)(i) of this 
section is not granted, signed and verified by a declaration that it is 
made under penalties of perjury;
    (C) A statement by the individual that he or she does not intend to 
receive any other amounts of gross income effectively connected with the 
conduct of a trade or business within the United States during the 
current taxable year;
    (D) The amount of tax which has been withheld (or paid) under any 
other provision of the Code or regulations with respect to any income 
effectively connected with the conduct of a trade or business within the 
United States during the current taxable year;
    (E) The amount of any outstanding tax liabilities (and interest and 
penalties relating thereto) from the current taxable year or prior 
taxable periods; and
    (F) The provision of any income tax treaty under which a partial or 
complete exemption from withholding may be claimed, the country of the 
individual's residence, and a statement of sufficient facts to justify 
an exemption pursuant to such treaty.
    (iv) Letter to withholding agent. If the district director is 
satisfied that the information provided under paragraph (b)(4)(iii) of 
this section is sufficient, the district director will, after 
coordination with the Director of the Foreign Operations District, 
ascertain the amount of the alien individual's tentative income tax for 
the taxable year with respect to gross income that is effectively 
connected with the conduct of a trade or business within the United 
States. After the tentative tax has been ascertained, the district 
director will provide the alien individual with a letter to the 
withholding agent stating the amount of the final payment of 
compensation for personal services that is exempt from withholding, and 
the amount that would otherwise be withheld under section 1441 that 
shall be paid to the alien individual due to the exemption. The amount 
of compensation for personal services exempt from withholding under this 
paragraph (b)(4) shall not exceed $5,000.

    Example 1. On July 15, 1983, B, a non-resident alien individual, 
appears before a district director with the information required by 
paragraph (b)(4)(iii) of this section. B has received personal service 
income in 1983 from which $3,000 has been withheld under section 1441. 
On August 1, 1983, B will receive $5,000 in personal service income from 
W. B does not intend to receive any other income subject to U.S. tax 
during 1983. Taking into account B's substantiated deductible business 
expenses, the district director computes the tentative tax liability on 
B's income effectively connected with the conduct of a trade or business 
in the United States during 1983 (including the $5,000 payment to be 
made on August 1, 1983) to be $3,300. B does not owe U.S. tax for any 
other taxable periods. The amount of B's final payment exemption is 
determined as follows:
    (1) The amount of total withholding is $4,500 ($3,000 previously 
withheld plus $1,500, 30% of the $5,000 final payment);
    (2) The amount of tentative excess withholding is $1,200 (total 
withholding of $4,500 minus B's tentative tax liability of $3,300); and
    (3) To allow B to receive $1,200 of the amount which would otherwise 
have been withheld from the final payment, the district director allows 
a withholding exemption for $4,000 of B's final payment. W must withhold 
$300 from the final payment.
    Example 2. The facts are the same as in Example 1 except B will 
receive a final payment of compensation on August 1, 1983, in the amount 
of $10,000 and B's tentative tax liability is $3,900. The amount of B's 
final payment exemption is determined as follows:
    (1) The amount of total withholding is $6,000 ($3,000 previously 
withheld plus $3,000, 30% of the $10,000 final payment);
    (2) The amount of tentative excess withholding is $2,100 (total 
withholding of $6,000

[[Page 193]]

minus B's tentative tax liability of $3,900); and
    (3) To allow B to receive $2,100 of the amount which would otherwise 
be withheld from the final payment, $7,000 of the final payment would 
have to be exempt from withholding; however, as no more than $5,000 of 
the final payment can be exempt from withholding under this paragraph 
(b)(4), the district director allows a withholding exemption for $5,000 
of B's final payment. B must file a claim for refund at the end of the 
taxable year to obtain a refund of $600. W must withhold $1,500 from the 
final payment.

    (5) Requirement of return. The tentative tax determined by the 
district director under paragraph (b)(4)(iv) of this section or by the 
Director of the Foreign Operations District under the withholding 
agreement procedure of paragraph (b)(3) of this section shall not 
constitute a final determination of the income tax liability of the 
nonresident alien individual, nor shall such determination constitute a 
tax return of the nonresident alien individual for any taxable period. 
An alien individual who applies for or obtains an exemption from 
withholding under the procedures of paragraphs (b) (2), (3), or (4) of 
this section is not relieved of the obligation to file a return of 
income under section 6012.
    (6) Personal exemption--(i) In general. To determine the tax to be 
withheld at source under Sec.  1.1441-1 from remuneration paid for 
personal services performed within the United States by a nonresident 
alien individual and from scholarship and fellowship income described in 
paragraph (c) of this section, a withholding agent may take into account 
one personal exemption pursuant to sections 873(b)(3) and 151 regardless 
of whether the income is effectively connected. For purposes of 
withholding under section 1441 on remuneration for personal services, 
the exemption must be prorated upon a daily basis for the period during 
which the personal services are performed within the United States by 
the nonresident alien individual by dividing by 365 the number of days 
in the period during which the individual is present in the United 
States for the purpose of performing the services and multiplying the 
result by the amount of the personal exemption in effect for the taxable 
year. See Sec.  31.3402(f)(6)-1 of this chapter.
    (ii) Multiple exemptions. More than one personal exemption may be 
claimed in the case of a resident of a contiguous country or a national 
of the United States under section 873(b)(3). In addition, residents of 
a country with which the United States has an income tax treaty in 
effect may be eligible to claim more than one personal exemption if the 
treaty so provides. Claims for more than one personal exemption shall be 
made on the withholding certificate furnished to the withholding agent. 
The exemption must be prorated on a daily basis in the same manner as 
described in paragraph (b)(6)(i) of this section.
    (iii) Special rule where both certain scholarship and compensation 
income are received. The fact that both non-compensatory scholarship 
income and compensation income (including compensatory scholarship 
income) are received during the taxable year does not entitle the 
taxpayer to claim more than one personal exemption amount (or more than 
the additional amounts permitted under paragraph (b)(6)(ii) of this 
section). Thus, if a nonresident alien student receives non-compensatory 
taxable scholarship income from one withholding agent and compensation 
income from another withholding agent, no more than the total personal 
exemption amount permitted under the Internal Revenue Code or under an 
income tax treaty may be taken into account by both withholding agents. 
For this purpose, the withholding agent may rely on a representation 
from the beneficial owner that the exemption amount claimed does not 
exceed the amount permissible under this section.
    (c) Special rules for scholarship and fellowship income--(1) In 
general. Under section 871(c), certain amounts paid as a scholarship or 
fellowship for study, training, or research in the United States to a 
nonresident alien individual temporarily present in the United States as 
a nonimmigrant under section 101(a)(15) (F), (J), (M), or (Q) of the 
Immigration and Nationality Act are treated as income effectively 
connected with the conduct of a trade or business within the United 
States. The amounts described in the preceding sentence are those 
amounts that do not represent compensation for

[[Page 194]]

services. Such amounts (as described in the second sentence of section 
1441(b)) are subject to withholding under section 1441, but at the lower 
rate of 14 percent. That rate may be reduced under the provisions of an 
income tax treaty. Claims of a reduced rate under an income tax treaty 
shall be made under the procedures described in Sec.  1.1441-6(b)(1). 
Therefore, claims for reduction in withholding under an income tax 
treaty on amounts described in this paragraph (c)(1) may not be made on 
a Form 8233. However, if the payee is receiving both compensation for 
personal services (including compensatory scholarship income) and non-
compensatory scholarship income described in this paragraph (c)(1) from 
the same withholding agent, claims for reduction of withholding on both 
types of income may be made on Form 8233.
    (2) Alternate withholding election. A withholding agent may elect to 
withhold on the amounts described in paragraph (c)(1) of this section at 
the rates applicable under section 3402, as if the income were wages. 
Such election shall be made by obtaining a Form W-4 (or an acceptable 
substitute or such other form as the IRS may prescribe) from the 
beneficial owner. The fact that the withholding agent asks the 
beneficial owner to furnish a Form W-4 for such fellowship or 
scholarship income or to take such income into account in preparing such 
Form W-4 shall serve as notice to the beneficial owner that the income 
is being treated as wages for purposes of withholding tax under section 
1441.
    (d) Annuities received under qualified plans. Withholding is not 
required under section Sec.  1.1441-1 in the case of any amount received 
as an annuity if the amount is exempt from tax under section 871(f) and 
the regulations under that section. The withholding agent may exempt the 
payment from withholding if, prior to payment, it can reliably associate 
the payment with documentation upon which it can rely to treat the 
payment as made to a beneficial owner in accordance with Sec.  1.1441-
1(e)(1)(ii). A beneficial owner withholding certificate furnished for 
purposes of claiming the benefits of the exemption under this paragraph 
(d) is valid only if, in addition to other applicable requirements, it 
contains a taxpayer identifying number.
    (e) Per diem of certain alien trainees. Withholding is not required 
under section 1441(a) and Sec.  1.1441-1 on per diem amounts paid for 
subsistence by the United States Government (directly or by contract) to 
any nonresident alien individual who is engaged in any program of 
training in the United States under the Mutual Security Act of 1954, as 
amended (22 U.S.C. chapter 24). This rule shall apply even though such 
amounts are subject to tax under section 871. Any exemption from 
withholding pursuant to this paragraph (e) applies without a requirement 
that documentation be furnished to the withholding agent. However, 
documentation may have to be furnished for purposes of the information 
reporting provisions under section 6041 and backup withholding under 
section 3406. The exemption from withholding granted by this paragraph 
(e) is not a determination that the amounts are not fixed or 
determinable annual or periodical income.
    (f) Failure to receive withholding certificates timely or to act in 
accordance with applicable presumptions. See applicable procedures 
described in Sec.  1.1441-1(b)(7) in the event the withholding agent 
does not hold an appropriate withholding certificate or other 
appropriate documentation at the time of payment or does not act in 
accordance with applicable presumptions described in paragraph (a) 
(2)(i), (2)(ii), or (3) of this section.
    (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, revised April 1, 2016. For payments made 
after December 31, 2000, see this section as in effect and contained in 
26 CFR part 1 revised April 1, 2013.)

[T.D. 6500, 25 FR 12075, Nov. 26, 1960]

    Editorial Note: For Federal Register citations affecting Sec.  
1.1441-4, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.

[[Page 195]]



Sec.  1.1441-5  Withholding on payments to partnerships, trusts, and estates.

    (a) In general. This section describes the rules that apply to 
payments made to partnerships, trusts, and estates. Paragraph (b) of 
this section prescribes the rules that apply to a withholding agent 
making a payment to a U.S. partnership, trust, or estate. It also 
prescribes the obligations of a U.S. partnership, trust, or estate that 
makes a payment to a foreign partner, beneficiary, or owner. Paragraph 
(c) of this section prescribes rules that apply to a withholding agent 
that makes a payment to a foreign partnership. Paragraph (d) of this 
section provides presumption rules that apply to payments made to 
foreign partnerships. Paragraph (e) of this section prescribes rules, 
including presumption rules, that apply to a withholding agent that 
makes a payment to a foreign trust or foreign estate.
    (b) Rules applicable to U.S. partnerships, trusts, and estates--(1) 
Payments to U.S. partnerships, trusts, and estates. No withholding is 
required under section 1.1441-1(b)(1) on a payment of an amount subject 
to withholding (as defined in Sec.  1.1441-2(a)) that a withholding 
agent may treat as made to a U.S. payee. Therefore, if a withholding 
agent can reliably associate (within the meaning of Sec.  1.1441-
2(b)(vii)) a Form W-9 provided in accordance with Sec.  1.1441-1(d)(2) 
or (4) by a U.S. partnership, U.S. trust, or a U.S. estate the 
withholding agent may treat the payment as made to a U.S. payee and the 
payment is not subject to withholding under section 1441 even though the 
partnership, trust, or estate may have foreign partners, beneficiaries, 
or owners. A withholding agent is also not required to withhold under 
section 1441 on a payment it makes to an entity presumed to be a U.S. 
payee under paragraphs (d)(2) and (e)(6)(ii) of this section.
    (2) Withholding by U.S. payees--(i) U.S. partnerships--(A) In 
general. A U.S. partnership is required to withhold under Sec.  1.1441-1 
as a withholding agent on an amount subject to withholding (as defined 
in Sec.  1.1441-2(a)) that is includible in the gross income of a 
partner that is a foreign person. Subject to paragraph (b)(2)(v) of this 
section, a U.S. partnership shall withhold when any distributions that 
include amounts subject to withholding (including guaranteed payments 
made by a U.S. partnership) are made. To the extent a foreign partner's 
distributive share of income subject to withholding has not actually 
been distributed to the foreign partner, the U.S. partnership must 
withhold on the foreign partner's distributive share of the income on 
the earlier of the date that the statement required under section 
6031(b) is mailed or otherwise provided to the partner or the due date 
for furnishing the statement.
    (B) Effectively connected income of partners. Withholding on items 
of income that are effectively connected income in the hands of the 
partners who are foreign persons is governed by section 1446 and not by 
this section. In such a case, partners in a domestic partnership are not 
required to furnish a withholding certificate in order to claim an 
exemption from withholding under section 1441(c)(1) and Sec.  1.1441-4.
    (ii) U.S. simple trusts. A U.S. trust that is described in section 
651(a) (a U.S. simple trust) is required to withhold under chapter 3 of 
the Internal Revenue Code as a withholding agent on the distributable 
net income includible in the gross income of a foreign beneficiary to 
the extent the distributable net income is an amount subject to 
withholding (as defined in Sec.  1.1441-2(a)). A U.S. simple trust shall 
withhold when a distribution is made to a foreign beneficiary. The U.S. 
trust may make a reasonable estimate of the portion of the distribution 
that constitutes distributable net income consisting of an amount 
subject to withholding and apply the appropriate rate of withholding to 
the estimated amount. If, at the end of the taxable year in which the 
distribution is made, the U.S. simple trust determines that it 
underwithheld under section 1441 or 1442, the trust shall be liable as a 
withholding agent for the amount under withheld under section 1461. No 
penalties shall be imposed for failure to withhold and deposit the tax 
if the U.S. simple trust's estimate was reasonable and the trust pays 
the underwithheld amount on or before the due date of

[[Page 196]]

Form 1042 under section 1461. Any payment of underwithheld amounts by 
the U.S. simple trust shall not be treated as income subject to 
additional withholding even if that amount is treated as additional 
income to the foreign beneficiary, unless the additional amount is 
income to the foreign beneficiary as a result of a contractual 
arrangement between the parties regarding the satisfaction of the 
foreign beneficiary's tax liability. To the extent a U.S. simple trust 
is required to, but does not, distribute such income to a foreign 
beneficiary, the U.S. trust must withhold on the foreign beneficiary's 
allocable share at the time the income is required (without extension) 
to be reported on Form 1042-S under Sec.  1.1461-1(c).
    (iii) U.S. complex trusts and U.S. estates. A U.S. trust that is not 
a trust described in section 651(a) (see paragraph (b)(2)(ii) of this 
section) or sections 671 through 679 (see paragraph (b)(2)(iv) of this 
section) (a U.S. complex trust) is required to withhold under chapter 3 
of the Internal Revenue Code (Code) as a withholding agent on the 
distributable net income includible in the gross income of a foreign 
beneficiary to the extent the distributable net income consists of an 
amount subject to withholding (as defined in Sec.  1.1441-2(a)) that is, 
or is required to be, distributed currently. The U.S. complex trust 
shall withhold when a distribution is made to a foreign beneficiary. The 
trust may use the same procedures regarding an estimate of the amount 
subject to withholding as a U.S. simple trust under paragraph (b)(2)(ii) 
of this section. To the extent an amount subject to withholding is 
required to be, but is not actually, distributed, the U.S. complex trust 
must withhold on the foreign beneficiary's allocable share at the time 
the income is required to be reported on Form 1042-S under Sec.  1.1461-
1(c), without extension. A U.S. estate is required to withhold under 
chapter 3 of the Code on the distributable net income includible in the 
gross income of a foreign beneficiary to the extent the distributable 
net income consists of an amount subject to withholding (as defined in 
Sec.  1.1441-2(a)) that is actually distributed. A U.S. estate may also 
use the reasonable estimate procedures of paragraph (b)(2)(ii) of this 
section. However, those procedures apply to an estate that has a taxable 
year other than a calendar year only if the estate files an amended 
return on Form 1042 for the calendar year in which the distribution was 
made and pays the underwithheld tax and interest within 60 days after 
the close of the taxable year in which the distribution was made.
    (iv) U.S. grantor trusts. A U.S. trust that is described in section 
671 through 679 (a U.S. grantor trust) must withhold on any income 
includible in the gross income of a foreign person that is treated as an 
owner of the grantor trust to the extent the amount includible consists 
of an amount that is subject to withholding (as described in Sec.  
1.1441-2(a)). The withholding must occur at the time the income is 
received by, or credited to, the trust.
    (v) Subsequent distribution. If a U.S. partnership or U.S. trust 
withholds on a foreign partner, beneficiary, or owner's share of an 
amount subject to withholding before the amount is actually distributed 
to the partner, beneficiary, or owner, withholding is not required when 
the amount is subsequently distributed.
    (vi) Coordination with chapter 4 requirements for U.S. partnerships, 
trusts, and estates. To the extent that a U.S. partnership is required 
to withhold on an amount under chapter 4 with respect to a partner, 
beneficiary, or owner, the partnership, trust, or estate must apply the 
rules described in Sec.  1.1473-1(a)(5) to determine when it must 
withhold on the amount under chapter 4. In a case in which withholding 
applies under chapter 4 to such an amount, see Sec.  1.1441-3(a)(2) to 
coordinate with withholding that otherwise applies to such an amount 
under this paragraph (b).
    (c) Foreign partnerships--(1) Determination of payee--(i) Payments 
treated as made to partners. Except as otherwise provided in paragraph 
(c)(1)(ii) or (iv) of this section, the payees of a payment to a person 
that the withholding agent may treat as a nonwithholding foreign 
partnership under paragraph (c)(3)(i) or (d)(2) of this section are the 
partners (looking through partners

[[Page 197]]

that are foreign intermediaries or flow-through entities) as follows--
    (A) If the withholding agent can reliably associate a partner's 
distributive share of the payment with a valid Form W-9 provided under 
Sec.  1.1441-1(d), the partner is a U.S. payee;
    (B) If the withholding agent can reliably associate a partner's 
distributive share of the payment with a valid Form W-8, or other 
appropriate documentation, provided under Sec.  1.1441-1(e)(1)(ii), the 
partner is a payee that is a foreign beneficial owner;
    (C) If the withholding agent can reliably associate a partner's 
distributive share of the payment with a qualified intermediary 
withholding certificate under Sec.  1.1441-1(e)(3)(ii), a nonqualified 
intermediary withholding certificate under Sec.  1.1441-1(e)(3)(iii), or 
a U.S. branch certificate under Sec.  1.1441-1(e)(3)(v) (including one 
provided by a territory financial institution), then the rules of Sec.  
1.1441-1(b)(2)(v) shall apply to determine who the payee is in the same 
manner as if the partner's distributive share of the payment had been 
paid directly to such intermediary or U.S. branch or territory financial 
institution;
    (D) If the withholding agent can reliably associate the partner's 
distributive share with a withholding foreign partnership certificate 
under paragraph (c)(2)(iv) of this section or a nonwithholding foreign 
partnership certificate under paragraph (c)(3)(iii) of this section, 
then the rules of this paragraph (c)(1)(i) or paragraph (c)(1)(ii) of 
this section shall apply to determine whether the payment is treated as 
made to the partners of the higher-tier partnership under this paragraph 
(c)(1)(i) or to the higher-tier partnership itself (under the rules of 
paragraph (c)(1)(ii) of this section) in the same manner as if the 
partner's distributive share of the payment had been paid directly to 
the higher-tier foreign partnership;
    (E) If the withholding agent can reliably associate the partner's 
distributive share with a withholding certificate described in paragraph 
(e) of this section regarding a foreign trust or estate, then the rules 
of paragraph (e) of this section shall apply to determine who the payees 
are; and
    (F) If the withholding agent cannot reliably associate the partner's 
distributive share with a withholding certificate or other appropriate 
documentation, the partners are considered to be the payees and the 
presumptions described in paragraph (d)(3) of this section shall apply 
to determine their classification and status.
    (ii) Payments treated as made to the partnership. A payment to a 
person that the withholding agent may treat as a foreign partnership is 
treated as a payment to the foreign partnership and not to its partners 
only if--
    (A) The withholding agent can reliably associate the payment with a 
withholding certificate described in paragraph (c)(2)(iv) of this 
section (withholding certificate of a withholding foreign partnership);
    (B) The withholding agent can reliably associate the payment with a 
withholding certificate described in paragraph (c)(3)(iii) of this 
section (nonwithholding foreign partnership) certifying that the payment 
is income that is effectively connected with the conduct of a trade or 
business in the United States; or
    (C) The withholding agent can treat the income as effectively 
connected income under the presumption rules of Sec.  1.1441-4(a)(2)(ii) 
or (3)(i).
    (iii) Rules for reliably associating a payment with documentation. 
For rules regarding the reliable association of a payment with 
documentation, see Sec.  1.1441-1(b)(2)(vii). In the absence of 
documentation, see Sec. Sec.  1.1441-1(b)(3) and 1.6049-5(d) and 
paragraphs (d) and (e)(6) of this section for applicable presumptions.
    (iv) Coordination with chapter 4 for payments made to foreign 
partnerships. A withholding agent that makes a payment of U.S. source 
FDAP income to a foreign partnership that is a withholdable payment to 
which withholding under chapter 4 applies must apply the rules described 
in Sec.  1.1473-1(a)(5)(vi) to determine when the payment is treated as 
made to a partner in the partnership for purposes of chapter 4. In a 
case in which withholding applies under chapter 4 to a withholdable 
payment made to a foreign partnership, see Sec.  1.1441-3(a)(2) to 
coordinate with withholding otherwise required

[[Page 198]]

under this paragraph (c) with respect to the amount of the payment 
included in the gross income of a partner. For when a withholding agent 
may reliably associate a withholdable payment with a chapter 4 
withholding rate pool in lieu of obtaining documentation for each payee 
include in the pool, see Sec.  1.1441-1(e)(3)(iv)(C)(2) (substituting 
the term nonwithholding foreign partnership for the term nonqualified 
intermediary).
    (v) Examples. The rules of paragraphs (c)(1)(i) and (ii) of this 
section are illustrated by the following examples. Each example assumes 
that all payments are not withholdable payments and thus no withholding 
applies under chapter 4.

    Example 1. FP is a nonwithholding foreign partnership organized in 
Country X. FP has two partners, FC, a foreign corporation, and USP, a 
U.S. partnership. USWH, a U.S. withholding agent, makes a payment of 
U.S. source interest to FP that is not a withholdable payment. FP has 
provided USWH with a valid nonwithholding foreign partnership 
certificate, as described in paragraph (c)(3)(iii) of this section, with 
which it associates a beneficial owner withholding certificate from FC 
and a Form W-9, ``Request for Taxpayer Identification Number and 
Certification,'' from USP together with the withholding statement 
required by paragraph (c)(3)(iv) of this section. USWH can reliably 
associate the payment of interest with the withholding certificates from 
FC and USP. Under paragraph (c)(1)(i) of this section, the payees of the 
interest payment are FC and USP.
    Example 2. The facts are the same as in Example 1, except that FP1, 
a nonwithholding foreign partnership, is a partner in FP rather than 
USP. FP1 has two partners, A and B, both foreign persons. FP provides 
USWH with a valid nonwithholding foreign partnership certificate, as 
described in paragraph (c)(3)(iii) of this section, with which it 
associates a beneficial owner withholding certificate from FC and a 
nonwithholding foreign partnership certificate from FP1. In addition, 
foreign beneficial owner withholding certificates from A and B are 
associated with the nonwithholding foreign partnership withholding 
certificate from FP1. FP also provides the withholding statement 
required by paragraph (c)(3)(iv) of this section. USWH can reliably 
associate the interest payment with the withholding certificates 
provided by FC, A, and B. Therefore, under paragraph (c)(1)(i) of this 
section, the payees of the interest payment are FC, A, and B.
    Example 3. USWH makes a payment of U.S. source dividends to WFP, a 
withholding foreign partnership, that is not a withholdable payment. WFP 
has two partners, FC1 and FC2, both foreign corporations. USWH can 
reliably associate the payment with a valid withholding foreign 
partnership withholding certificate from WFP. Therefore, under paragraph 
(c)(1)(ii)(A) of this section, WFP is the payee of the interest.
    Example 4. USWH makes a payment of U.S. source royalties that is not 
a withholdable payment to FP, a foreign partnership. USWH can reliably 
associate the royalties with a valid withholding certificate from FP on 
which FP certifies that the income is effectively connected with the 
conduct of a trade or business in the United States. Therefore, under 
paragraph (c)(1)(ii)(B) of this section, FP is the payee of the 
royalties.

    (2) Withholding foreign partnerships--(i) Reliance on claim of 
withholding foreign partnership status. A withholding foreign 
partnership is a foreign partnership that has entered into an agreement 
with the IRS, as described in paragraph (c)(2)(ii) of this section, with 
respect to distributions and guaranteed payments it makes to its 
partners. A withholding agent that can reliably associate a payment with 
a certificate described in paragraph (c)(2)(iv) of this section may 
treat the person to whom it makes the payment as a withholding foreign 
partnership for purposes of withholding under chapters 3 and 4 of the 
Code, information reporting under chapter 61 of the Code, backup 
withholding under section 3406, and withholding under other provisions 
of the Code. Furnishing such a certificate is in lieu of transmitting to 
a withholding agent withholding certificates or other appropriate 
documentation for its partners. Although the withholding foreign 
partnership generally will be required to obtain withholding 
certificates or other appropriate documentation from its partners 
pursuant to its agreement with the IRS, it generally will not be 
required to attach such documentation to its withholding foreign 
partnership withholding certificate to the extent it is permitted to act 
as a withholding foreign partnership with respect to the payment under 
its agreement. In addition, the IRS may permit a foreign partnership to 
act as a qualified intermediary under Sec.  1.1441-1(e)(5)(ii)(D) with 
respect to its partners in appropriate circumstances.

[[Page 199]]

    (ii) Withholding agreement. The IRS may, upon request, enter into a 
withholding agreement with a foreign partnership pursuant to such 
procedures as the IRS may prescribe in published guidance (see Sec.  
601.601(d)(2) of this chapter). Under the withholding agreement, a 
foreign partnership shall generally be subject to the applicable 
withholding and reporting provisions applicable to withholding agents 
and payors as defined in Sec.  1.6049-4(a) under chapters 3, 4, and 61 
of the Code, section 3406, the regulations under those provisions, and 
other withholding provisions of the Code, except to the extent provided 
under the withholding agreement. Under the withholding agreement, a 
foreign partnership may agree to act as an acceptance agent to perform 
the duties described in Sec.  301.6109-1(d)(3)(iv)(A) of this chapter. 
For a foreign partnership that is an FFI, the withholding agreement will 
require the partnership to assume the requirements of a participating 
FFI, a registered deemed-compliant FFI, or an FFI treated as a deemed-
compliant FFI under an applicable IGA that is subject to due diligence 
and reporting requirements with respect to its U.S. accounts similar to 
those applicable to a registered deemed-compliant FFI under Sec.  
1.1471-5(f)(1). The withholding agreement may specify the manner in 
which applicable procedures for adjustments for underwithholding and 
overwithholding, including refund procedures, apply to the withholding 
foreign partnership and its partners and the extent to which applicable 
procedures may be modified. In particular, the withholding agreement may 
allow a withholding foreign partnership to claim refunds of overwithheld 
amounts on behalf of its customers. In addition, the withholding 
agreement must specify the manner in which the IRS will verify the 
partnership's compliance with its agreement, including the requirements 
for a periodic review of the partnership's compliance with the 
withholding agreement and the procedures for the partnership to certify 
to its compliance with the withholding agreement. A withholding foreign 
partnership must file a return on Form 1042, ``Annual Withholding Tax 
Return for U.S. Source Income of Foreign Persons,'' and information 
returns on Form 1042-S, ``Foreign Person's U.S. Source Income Subject to 
Withholding.'' The withholding agreement may also require a withholding 
foreign partnership to file a partnership return under section 6031(a) 
and partner statements under 6031(b), including for each U.S. partner to 
the extent required in the agreement. Additionally, a partnership that 
is an FFI will be required to file Form 8966, ``FATCA Report'' to the 
extent provided in the withholding agreement.
    (iii) Withholding responsibility. A withholding foreign partnership 
must assume primary withholding responsibility under both chapters 3 and 
4 of the Code to the extent required in the withholding agreement. It is 
not required to provide information to the withholding agent regarding 
each partner's distributive share of the payment (including a 
withholdable payment). The withholding foreign partnership will be 
responsible for reporting the payments under Sec. Sec.  1.1461-1(c), 
1.1474-1(d), and chapter 61 of the Code and filing Form 1042 (to the 
extent required in the withholding agreement). A withholding agent 
making a payment to a withholding foreign partnership is not required to 
withhold any amount under chapters 3 and 4 of the Code on the payment 
unless it has actual knowledge or reason to know that the foreign 
partnership is not acting as a withholding foreign partnership with 
respect to the payment or has not withheld to the extent required. The 
withholding foreign partnership shall withhold the payments under the 
same procedures and at the same time as prescribed for withholding by a 
U.S. partnership under paragraph (b)(2) of this section, except that, 
for purposes of determining the partner's status, the provisions of 
paragraph (d)(4) of this section shall apply.
    (iv) Withholding certificate from a withholding foreign partnership. 
The rules of Sec.  1.1441-1(e)(4) shall apply to withholding 
certificates described in this paragraph (c)(2)(iv). A withholding 
certificate furnished by a withholding foreign partnership is valid with 
regard to any partner on whose behalf the certificate is furnished only 
if it is furnished on a Form W-8, an acceptable

[[Page 200]]

substitute form, or such other form as the IRS may prescribe, it is 
signed under penalties of perjury by a partner with authority to sign 
for the partnership, its validity has not expired, and it contains the 
information, statement, and certifications described in this paragraph 
(c)(2)(iv) as follows--
    (A) The name, permanent residence address (as described in Sec.  
1.1441-1(e)(2)(ii)), the employer identification number of the 
partnership, the country under the laws of which the partnership is 
created or governed, the chapter 4 status of the partnership if required 
for purposes of chapter 4 or if the partnership provides (or will 
provide) a withholding statement associated with the Form W-8 allocating 
a payment to a chapter 4 withholding rate pool of U.S. payees under 
Sec.  1.6049-4(c)(4) with respect to its partners, and the GIIN of the 
partnership (if applicable). If the partnership provides (or will 
provide) a chapter 4 withholding rate pool of U.S. payees as described 
in the preceding sentence, the partnership must certify to its chapter 4 
status as a participating FFI (including a reporting Model 2 FFI) or 
registered deemed-compliant FFI (including a reporting Model 1 FFI);
    (B) A certification that the partnership is a withholding foreign 
partnership within the meaning of paragraph (c)(2)(i) of this section, 
and, for a partnership that is an FFI receiving a withholdable payment, 
a certification that the partnership is acting as a participating FFI, a 
registered deemed-compliant FFI, or a nonreporting IGA FFI (as defined 
in Sec.  1.1471-1(b)(83)); and
    (C) Any other information, certifications or statements as may be 
required by the withholding foreign partnership agreement with the IRS 
or the form or accompanying instructions in addition to, or in lieu of, 
the information, statements, and certifications described in this 
paragraph (c)(2)(iv).
    (3) Nonwithholding foreign partnerships--(i) Reliance on claim of 
foreign partnership status. A withholding agent may treat a person as a 
nonwithholding foreign partnership if it receives from that person a 
nonwithholding foreign partnership withholding certificate as described 
in paragraph (c)(3)(iii) of this section. A withholding agent that does 
not receive a nonwithholding foreign partnership withholding certificate 
or does not receive a valid withholding certificate from an entity it 
knows, or has reason to know, is a foreign partnership must apply the 
presumption rules of Sec. Sec.  1.1441-1(b)(3) and 1.6049-5(d) and 
paragraphs (d) and (e)(6) of this section. In addition, to the extent a 
withholding agent cannot, prior to a payment, reliably associate the 
payment with valid documentation from a payee that is associated with 
the nonwithholding foreign partnership withholding certificate or has 
insufficient information to report the payment on Form 1042-S or Form 
1099, to the extent reporting is required, the withholding agent must 
apply the presumption rules. See Sec.  1.1441-1(b)(2)(vii)(A) and (B) 
for rules regarding reliable association. See, however, Sec.  1.1441-
1(e)(3)(iv)(C)(2) for when a withholding agent may reliably associate a 
withholdable payment with a chapter 4 withholding rate pool in lieu of 
obtaining documentation for each payee included in the pool 
(substituting the term nonwithholding foreign partnership for the term 
nonqualified intermediary). See also Sec.  1.1441-1(e)(3)(iv)(A) for 
when a withholding agent may reliably associate a payment with a chapter 
4 withholding rate pool of U.S. payees. See paragraph (c)(3)(iv) of this 
section and Sec.  1.1441-1(e)(3)(iv) for alternative procedures 
permitting allocation information to be received after a payment is 
made.
    (ii) Reliance on claim of reduced withholding by a partnership for 
its partners. This paragraph (c)(3)(ii) describes the manner in which a 
withholding agent may rely on a claim of reduced withholding when making 
a payment to a nonwithholding foreign partnership. To the extent that a 
withholding agent treats a payment to a nonwithholding foreign 
partnership as a payment to the nonwithholding foreign partnership's 
partners (whether direct or indirect) in accordance with paragraph 
(c)(1)(i) of this section, it may rely on a claim for reduced 
withholding by the partner if, prior to the payment, the withholding 
agent can reliably associate the payment (within the meaning

[[Page 201]]

of Sec.  1.1441-1(b)(2)(vii)) with a valid withholding certificate or 
other appropriate documentation from the partner that establishes 
entitlement to a reduced rate of withholding. A withholding certificate 
or other appropriate documentation that establishes entitlement to a 
reduced rate of withholding is a beneficial owner withholding 
certificate described in Sec.  1.1441-1(e)(2)(i), documentary evidence 
described in Sec.  1.1441-6(c)(3) or (4) or Sec.  1.6049-5(c)(1) (for a 
partner claiming to be a foreign person and a beneficial owner, 
determined under the provisions of Sec.  1.1441-1(c)(6)), a Form W-9 
described in Sec.  1.1441-1(d) (for a partner claiming to be a U.S. 
payee), a withholding foreign partnership withholding certificate 
described in paragraph (c)(2)(iv) of this section, or a withholding 
statement allocating the payment to a chapter 4 withholding rate pool of 
U.S. payees. For when the withholding agent can reliably associate the 
payment with a chapter 4 withholding rate pool, see paragraph (c)(3)(i) 
of this section. See also Sec.  1.1441-3(a)(2) (coordinating withholding 
under chapter 3 when withholding under chapter 4 is applied to a 
payment). Unless a nonwithholding foreign partnership withholding 
certificate is provided for income claimed to be effectively connected 
with the conduct of a trade or business in the United States, a claim 
must be presented for each portion of the payment that represents an 
item of income includible in the distributive share of a partner as 
required under paragraph (c)(3)(iii)(C) of this section. When making a 
claim for several partners, the partnership may present a single 
nonwithholding foreign partnership withholding certificate to which the 
partners' certificates or other appropriate documentation are 
associated. Where the nonwithholding foreign partnership withholding 
certificate is provided for income claimed to be effectively connected 
with the conduct of a trade or business in the United States under 
paragraph (c)(3)(iii)(D) of this section, the claim may be presented 
without having to identify any partner's distributive share of the 
payment.
    (iii) Withholding certificate from a nonwithholding foreign 
partnership. A nonwithholding foreign partnership shall provide a 
nonwithholding foreign partnership withholding certificate with respect 
to reportable amounts received by the nonwithholding foreign 
partnership. A nonwithholding foreign partnership withholding 
certificate is valid only to the extent it is furnished on a Form W-8 
(or an acceptable substitute form or such other form as the IRS may 
prescribe), it is signed under penalties of perjury by a partner with 
authority to sign for the partnership, its validity has not expired, and 
it contains the information, statements, and certifications described in 
this paragraph (c)(3)(iii) and paragraph (c)(3)(iv) of this section, and 
the withholding certificates and other appropriate documentation for all 
the persons to whom the certificate relates are associated with the 
certificate. The rules of Sec.  1.1441-1(e)(4) shall apply to 
withholding certificates described in this paragraph (c)(3)(iii). No 
withholding certificates or other appropriate documentation from persons 
who derive income through a partnership (whether or not U.S. exempt 
recipients) are required to be associated with the nonwithholding 
foreign partnership withholding certificate if the certificate is 
furnished solely for income claimed to be effectively connected with the 
conduct of a trade or business in the United States. Withholding 
certificates and other appropriate documentation that may be associated 
with the nonwithholding foreign partnership withholding certificate 
consist of beneficial owner withholding certificates under Sec.  1.1441-
1(e)(2)(i), intermediary withholding certificates under Sec.  1.1441-
1(e)(3)(i), withholding foreign partnership withholding certificates 
under paragraph (c)(2)(iv) of this section, nonwithholding foreign 
partnership withholding certificates under this paragraph (c)(3)(iii), 
withholding certificates from foreign trusts or estates under paragraph 
(e) of this section, documentary evidence described in Sec.  1.1441-
6(c)(3) or (4) or documentary evidence described in Sec.  1.6049-
5(c)(1), and any other documentation or certificates applicable under 
other provisions of the Internal Revenue Code or regulations that 
certify or establish the status of the payee or beneficial owner as a 
U.S. or a foreign person.

[[Page 202]]

Nothing in this paragraph (c)(3)(iii) shall require a nonwithholding 
foreign partnership to furnish original documentation. Copies of 
certificates or documentary evidence may be transmitted to the U.S. 
withholding agent, in which case the nonwithholding foreign partnership 
must retain the original documentation for the same time period that the 
copy is required to be retained by the withholding agent under Sec.  
1.1441-1(e)(4)(iii) and must provide it to the withholding agent upon 
request. The information, statement, and certifications required on the 
withholding certificate are as follows--
    (A) The name, permanent residence address (as described in Sec.  
1.1441-1(e)(2)(ii)), the employer identification number of the 
partnership, if any, the country under the laws of which the partnership 
is created or governed, and the chapter 4 status of the partnership (for 
a nonwithholding foreign partnership receiving a withholdable payment or 
providing a withholding statement associated with the Form W-8 
allocating a payment to a chapter 4 withholding rate pool of U.S. 
payees), and the GIIN of the partnership (if applicable);
    (B) A certification that the person whose name is on the certificate 
is a foreign partnership;
    (C) A withholding statement associated with the nonwithholding 
foreign partnership withholding certificate that provides all of the 
information required by paragraph (c)(3)(iv) of this section and Sec.  
1.1441-1(e)(3)(iv). No withholding statement is required, however, for a 
nonwithholding foreign partnership withholding certificate furnished for 
income claimed to be effectively connected with the conduct of a trade 
or business in the United States;
    (D) A certification that the income is effectively connected with 
the conduct of a trade or business in the United States, if applicable; 
and
    (E) Any other information, certifications, or statements required by 
the form or accompanying instructions in addition to, or in lieu of, the 
information and certifications described in this paragraph (c)(3)(iii).
    (iv) Withholding statement provided by nonwithholding foreign 
partnership and coordination with chapter 4. The provisions of Sec.  
1.1441-1(e)(3)(iv) (regarding a withholding statement) shall apply to a 
nonwithholding foreign partnership by substituting the term 
nonwithholding foreign partnership for the term nonqualified 
intermediary, including when a nonwithholding foreign partnership may 
provide to a withholding agent a withholding statement that includes a 
chapter 4 withholding rate pool in lieu of information with respect to 
each partner that is a payee of a payment.
    (v) Withholding and reporting by a foreign partnership. A 
nonwithholding foreign partnership described in this paragraph (c)(3) 
that receives an amount subject to withholding (as defined in Sec.  
1.1441-2(a)) shall be required to withhold and report such payment under 
chapter 3 of the Code and the regulations thereunder except as otherwise 
provided in this paragraph (c)(3)(v). A nonwithholding foreign 
partnership shall not be required to withhold and report if it has 
provided a valid nonwithholding foreign partnership withholding 
certificate, it has provided all of the information required by 
paragraph (c)(3)(iv) of this section (withholding statement), and it 
does not know, and has no reason to know, that another withholding agent 
failed to withhold the correct amount or failed to report the payment 
correctly under Sec.  1.1461-1(c). A nonwithholding foreign partnership 
is also not required to withhold and report under this paragraph (c)(3) 
to the extent that withholding under chapter 4 was applied to a payment 
that is includible in the gross income of a partner in the partnership. 
See also Sec.  1.1441-3(a)(2) for coordination rules when withholding 
under chapter 4 has been applied to a withholdable payment. A 
withholding foreign partnership's obligations to withhold and report 
shall be determined in accordance with its withholding foreign 
partnership agreement.
    (d) Presumption rules--(1) In general. This paragraph (d) contains 
the applicable presumptions for a withholding agent (including a 
partnership) to determine the classification and status of a partnership 
and its partners in the absence of documentation. The provisions of 
Sec.  1.1441-1(b)(3)(iv) (regarding

[[Page 203]]

the 90-day grace period) and Sec.  1.1441-1(b)(3)(vii) through (ix) 
shall apply for purposes of this paragraph (d).
    (2) Determination of partnership status as U.S. or foreign in the 
absence of documentation. In the absence of a valid representation of 
U.S. partnership status in accordance with paragraph (b)(1) of this 
section or of foreign partnership status in accordance with paragraph 
(c)(2)(i) or (c)(3)(i) of this section, the withholding agent shall 
determine the classification of the payee under the presumptions set 
forth in Sec.  1.1441-1(b)(3)(ii). If the withholding agent treats the 
payee as a partnership under Sec.  1.1441-1(b)(3)(ii), the withholding 
agent shall apply the presumptions set forth in Sec.  1.1441-
1(b)(3)(iii)(A)(1) (applied by substituting the term partnership for the 
term exempt recipient) to determine whether to treat the partnership as 
a U.S. person or foreign person. For rules regarding reliable 
association with a withholding certificate from a domestic or a foreign 
partnership, see Sec.  1.1441-1(b)(2)(vii).
    (3) Determination of partners' status in the absence of certain 
documentation. If a nonwithholding foreign partnership has provided a 
nonwithholding foreign partnership withholding certificate under 
paragraph (c)(3)(iii) of this section that would be valid except that 
the withholding agent cannot reliably associate all or a portion of the 
payment with valid documentation from a partner of the partnership, then 
the withholding agent may apply the presumption rule of this paragraph 
(d)(3) with respect to all or a portion of the payment for which 
documentation has not been received. See Sec.  1.1441-1(b)(2)(vii)(A) 
and (B) for rules regarding reliable association. The presumption rule 
of this paragraph (d)(3) also applies to a person that is presumed to be 
a foreign partnership under the rule of paragraph (d)(2) of this 
section. Any portion of a payment that the withholding agent cannot 
treat as reliably associated with valid documentation from a partner may 
be presumed made to a foreign payee. As a result, any payment of an 
amount subject to withholding is subject to withholding at a rate of 30 
percent. Any payment that is presumed to be made to an undocumented 
foreign payee must be reported on Form 1042-S. See Sec.  1.1461-1(c). 
For a payment described in this paragraph (d)(3) that is a withholdable 
payment, see Sec.  1.1471-3(f)(5) for the presumption rule for 
determining the payee's chapter 4 status to determine whether 
withholding under chapter 4 applies to the payment.
    (4) Determination by a withholding foreign partnership of the status 
of its partners. Except as otherwise provided in the agreement described 
in paragraph (c)(2) of this section, a withholding foreign partnership 
shall determine whether the partners or some other persons are the 
payees of the partners' distributive shares of any payment made by a 
withholding foreign partnership by applying the rules of Sec.  1.1441-
1(b)(2), paragraph (c)(1) of this section (in the case of a partner that 
is a foreign partnership), and paragraph (e)(3) of this section (in the 
case of a partner that is a foreign estate or a foreign trust). Further, 
the provisions of paragraph (d)(3) of this section shall apply to 
determine the status of partners and the applicable withholding rates to 
the extent that, at the time the foreign partnership is required to 
withhold on a payment, it cannot reliably associate the amount with 
documentation for any one or more of its partners.
    (e) Foreign trusts and estates--(1) In general. This paragraph (e) 
provides rules applicable to payments of amounts subject to withholding 
(as defined in Sec.  1.1441-2(a)) that a withholding agent may treat as 
made to any foreign trust or a foreign estate. For rules relating to 
payments to a U.S. trust or a U.S. estate, see paragraph (b) of this 
section. For the definitions of foreign simple trust, foreign complex 
trust, and foreign grantor trust, see Sec.  1.1441-1(c)(24), (25), and 
(26).
    (2) Payments to foreign complex trusts and foreign estates. Under 
Sec.  1.1441-1(c)(6)(ii)(D), a foreign complex trust or foreign estate 
is generally considered to be the beneficial owner of income paid to the 
foreign complex trust or foreign estate. See paragraph (e)(4) of this 
section for rules describing when a withholding agent may treat a 
payment as made to a foreign complex trust or a foreign estate.

[[Page 204]]

    (3) Payees of payments to foreign simple trusts and foreign grantor 
trusts--(i) Payments for which beneficiaries and owners are payees. For 
purposes of the regulations under chapters 3 and 61 of the Internal 
Revenue Code and section 3406, a foreign simple trust is not a 
beneficial owner or a payee of a payment. Also, a foreign grantor trust 
(or a portion of a trust that is a foreign grantor trust) is not 
considered a beneficial owner or a payee of a payment. Except as 
otherwise provided in paragraph (e)(3)(ii) of this section, the payees 
of a payment made to a person that the withholding agent may treat as a 
foreign simple trust or a foreign grantor trust (or a portion of a trust 
that is a foreign grantor trust) are determined under the rules of this 
paragraph (e)(3)(i). The payees shall be treated as the beneficial 
owners if they may be so treated under Sec.  1.1441-1(c)(6)(ii)(C) and 
they provide documentation supporting their status as the beneficial 
owners. The payees of a payment to a foreign simple trust or foreign 
grantor trust are determined as follows--
    (A) If the withholding agent can reliably associate a payment with a 
valid Form W-9 provided under Sec.  1.1441-1(d) from a beneficiary or 
owner of the foreign trust, then the beneficiary or owner is a U.S. 
payee;
    (B) If the withholding agent can reliably associate a payment with a 
valid Form W-8, or other appropriate documentation, provided under Sec.  
1.1441-1(e)(1)(ii) from a beneficiary or owner of the foreign trust, 
then the beneficiary or owner is a payee that is a foreign beneficial 
owner;
    (C) If the withholding agent can reliably associate a payment with a 
qualified intermediary withholding certificate under Sec.  1.1441-
1(e)(3)(ii), a nonqualified intermediary withholding certificate under 
Sec.  1.1441-1(e)(3)(ii), or a U.S. branch withholding certificate under 
Sec.  1.1441-1(e)(3)(v), then the rules of Sec.  1.1441-1(b)(2)(v) shall 
apply to determine the payee in the same manner as if the payment had 
been paid directly to such intermediary or U.S. branch;
    (D) If the withholding agent can reliably associate a payment with a 
withholding foreign partnership withholding certificate under paragraph 
(c)(2)(iv) of this section or a nonwithholding foreign partnership 
withholding certificate under paragraph (c)(3)(iii) of this section, 
then the rules of paragraph (c)(1)(i) or (ii) of this section shall 
apply to determine the payee;
    (E) If the withholding agent can reliably associate the payment with 
a foreign simple trust withholding certificate or a foreign grantor 
trust withholding certificate (both described in paragraph (e)(5)(iii) 
of this section) from a second or higher-tier foreign simple trust or 
foreign grantor trust, then the rules of this paragraph (e)(3)(i) or 
paragraph (e)(3)(ii) of this section shall apply to determine whether 
the payment is treated as made to a beneficiary or owner of the higher-
tier trust or to the trust itself in the same manner as if the payment 
had been made directly to the higher-tier trust; and
    (F) If the withholding agent cannot reliably associate a payment 
with a withholding certificate or other appropriate documentation, the 
payees shall be determined by applying the presumptions described in 
paragraph (e)(6) of this section.
    (ii) Payments for which trust is payee. A payment to a person that 
the withholding agent may treat as made to a foreign trust under 
paragraph (e)(5)(iii) of this section is treated as a payment to the 
trust, and not to a beneficiary of the trust, only if--
    (A) The withholding agent can reliably associate the payment with a 
foreign complex trust withholding certificate under paragraph (e)(4) of 
this section;
    (B) The withholding agent can reliably associate the payment with a 
foreign simple trust withholding certificate under paragraph (e)(5)(iii) 
of this section certifying that the payment is income that is treated as 
effectively connected with the conduct of a trade or business in the 
United States; or
    (C) The withholding agent can treat the income as effectively 
connected income under the presumption rules of Sec.  1.1441-4(a)(3)(i).
    (iii) Coordination with chapter 4 for payments made to foreign 
simple trusts and foreign grantor trusts. A withholding agent that makes 
a payment of U.S. source FDAP income to a foreign simple trust or 
foreign grantor trust

[[Page 205]]

that is a withholdable payment to which withholding under chapter 4 
applies must apply the rules described in Sec.  1.1473-1(a)(5)(vi) to 
determine when the payment is treated as made to a beneficiary or owner 
of the trust for purposes of chapter 4. In a case in which withholding 
applies under chapter 4 to a withholdable payment made to a foreign 
simple trust or foreign grantor trust, see Sec.  1.1441-3(a)(2) to 
coordinate withholding otherwise required under this paragraph (e) with 
respect to the amount of the payment included in the gross income of the 
payee of the payment. For when a withholding agent may reliably 
associate a withholdable payment with a chapter 4 withholding rate pool 
in lieu of obtaining documentation for each payee included in the pool, 
see Sec.  1.1441-1(e)(3)(iv)(C)(2) (substituting the term nonwithholding 
foreign trust for the term nonqualified intermediary).
    (4) Reliance on claim of foreign complex trust or foreign estate 
status. A withholding agent may treat a payment as made to a foreign 
complex trust or a foreign estate if the withholding agent can reliably 
associate the payment with a beneficial owner withholding certificate 
described in Sec.  1.1441-1(e)(2)(i) or other documentary evidence under 
Sec.  1.1441-6(c)(3) or (4) (regarding a claim for treaty benefits) or 
Sec.  1.6049-5(c)(1) (regarding documentary evidence to establish 
foreign status for purposes of chapter 61 of the Internal Revenue Code) 
that establishes the foreign complex trust or foreign estate's status as 
a beneficial owner. See paragraph (e)(6) of this section for presumption 
rules if documentation is lacking.
    (5) Foreign simple trust and foreign grantor trust--(i) Reliance on 
claim of foreign simple trust or foreign grantor trust status. A 
withholding agent may treat a person as a foreign simple trust or 
foreign grantor trust if it receives from that person a foreign simple 
trust or foreign grantor trust withholding certificate as described in 
paragraph (e)(5)(iii) of this section. A withholding agent must apply 
the presumption rules of Sec. Sec.  1.1441-1(b)(3) and 1.6049-5(d) and 
paragraphs (d) and (e)(6) of this section to the extent it cannot, prior 
to the payment, reliably associate a payment (within the meaning of 
Sec.  1.1441-1(b)(2)(vii)) with a valid foreign simple trust or foreign 
grantor trust withholding certificate, it cannot reliably determine how 
much of the payment relates to valid documentation provided by a payee 
(e.g., a person that is not itself a nonqualified intermediary, flow-
through entity, or U.S. branch) associated with the foreign simple trust 
or foreign grantor trust withholding certificate, or it does not have 
sufficient information to report the payment on Form 1042-S or Form 
1099, if reporting is required. See Sec.  1.1441-1(b)(2)(vii)(A) and 
(B). See, however, Sec.  1.1441-1(e)(3)(iv)(C)(2) for when a withholding 
agent may reliably associate a withholdable payment with a chapter 4 
withholding rate pool in lieu of obtaining documentation for each payee 
included in a pool (substituting the term nonwithholding foreign trust 
for the term nonqualified intermediary). See also Sec.  1.1441-
1(e)(3)(iv)(A) for when a withholding agent may reliably associate a 
payment with a chapter 4 withholding rate pool of U.S. payees.
    (ii) Reliance on claim of reduced withholding by a foreign simple 
trust or foreign grantor trust for its beneficiaries or owners. This 
paragraph (e)(5)(ii) describes the manner in which a withholding agent 
may rely on a claim of reduced withholding when making a payment to a 
foreign simple trust or foreign grantor trust. To the extent that a 
withholding agent treats a payment to a foreign simple trust or foreign 
grantor trust as a payment to payees other than the trust in accordance 
with paragraph (e)(3)(i) of this section, it may rely on a claim for 
reduced withholding by a beneficiary or owner if, prior to the payment, 
the withholding agent can reliably associate the payment (within the 
meaning of Sec.  1.1441-1(b)(2)(vii)) with a valid withholding 
certificate or other appropriate documentation from a payee or 
beneficial owner that establishes entitlement to a reduced rate of 
withholding. A withholding certificate or other appropriate 
documentation that establishes entitlement to a reduced rate of 
withholding is a beneficial owner withholding certificate described in 
Sec.  1.1441-1(e)(2)(i) or documentary evidence described in Sec.  
1.1441-6(c)(3) or (4) or in Sec.  1.6049-5(c)(1) (for a beneficiary or

[[Page 206]]

owner claiming to be a foreign person and a beneficial owner, determined 
under the provisions of Sec.  1.1441-1(c)(6)), a Form W-9 described in 
Sec.  1.1441-1(d) (for a beneficiary or owner claiming to be a U.S. 
payee), a withholding foreign partnership withholding certificate 
described in paragraph (c)(2)(iv) of this section, or a withholding 
statement allocating the payment to a chapter 4 withholding rate pool of 
U.S. payees. For when the withholding agent can reliably associate the 
payment with a chapter 4 withholding rate pool, see paragraph (c)(3)(i) 
of this section. See also Sec.  1.1441-3(a)(2) (coordinating withholding 
under chapter 3 when withholding under chapter 4 is applied to a 
withholdable payment). Unless a foreign simple trust or foreign grantor 
trust withholding certificate is provided for income treated as income 
effectively connected with the conduct of a trade or business in the 
United States, a claim must be presented for each payee's portion of the 
payment. When making a claim for several payees, the trust may present a 
single foreign simple trust or foreign grantor trust withholding 
certificate with which the payees' certificates or other appropriate 
documentation are associated. Where the foreign simple trust or foreign 
grantor trust withholding certificate is provided for income that is 
treated as effectively connected with the conduct of a trade or business 
in the United States under paragraph (e)(5)(iii)(D) of this section, the 
claim may be presented without having to identify any beneficiary's or 
grantor's distributive share of the payment.
    (iii) Withholding certificate from foreign simple trust or foreign 
grantor trust. A withholding certificate furnished by a foreign simple 
trust or a foreign grantor trust that is not a withholding foreign trust 
(within the meaning of paragraph (e)(5)(v) of this section) is valid 
only if it is furnished on a Form W-8, an acceptable substitute form, or 
such other form as the IRS may prescribe, it is signed under penalties 
of perjury by a trustee, its validity has not expired, it contains the 
information, statements, and certifications required by this paragraph 
(e)(5)(iii) and Sec.  1.1441-1(e)(3)(iv), and the withholding 
certificates or other appropriate documentation for all of the payees 
(as determined under paragraph (e)(3)(i) of this section) to whom the 
certificate relates are associated with the foreign simple trust or 
foreign grantor trust withholding certificate. The rules of Sec.  
1.1441-1(e)(4) shall apply to withholding certificates described in this 
paragraph (e)(5)(iii). No withholding certificates or other appropriate 
documentation from persons who derive income through a foreign simple 
trust or a foreign grantor trust (whether or not U.S. exempt recipients) 
are required to be associated with the foreign simple trust or foreign 
grantor trust withholding certificate if the certificate is furnished 
solely for income that is treated as effectively connected with the 
conduct of a trade or business in the United States. Withholding 
certificates and other appropriate documentation (as determined under 
paragraph (e)(3)(i) of this section) that may be associated with a 
foreign simple trust or foreign grantor trust withholding certificate 
consist of beneficial owner withholding certificates under Sec.  1.1441-
1(e)(2)(i), intermediary withholding certificates under Sec.  1.1441-
1(e)(3)(i), withholding foreign partnership withholding certificates 
under paragraph (c)(2)(iv) of this section, nonwithholding foreign 
partnership withholding certificates under paragraph (c)(3)(iii) of this 
section, withholding certificates from foreign trusts or estates under 
paragraph (e)(4) or (5)(iii) of this section, documentary evidence 
described in Sec. Sec.  1.1441-6(c)(3) or (4), or 1.6049-5(c)(1), and 
any other documentation or certificates applicable under other 
provisions of the Internal Revenue Code or regulations that certify or 
establish the status of the payee or beneficial owner as a U.S. or a 
foreign person. Nothing in this paragraph (e)(5)(iii) shall require a 
foreign simple trust or foreign grantor trust to provide original 
documentation. Copies of certificates or documentary evidence may be 
passed up to the U.S. withholding agent, in which case the foreign 
simple trust or foreign grantor trust must retain the original 
documentation for the same time period that the copy is required to be 
retained by the withholding agent under Sec.  1.1441-1(e)(4)(iii) and 
must provide it to the

[[Page 207]]

withholding agent upon request. The information, statement, and 
certifications required on a foreign simple trust or foreign grantor 
trust withholding certificate are as follows--
    (A) The name, permanent residence address (as described in Sec.  
1.1441-1(e)(2)(ii)), the employer identification number, if required, of 
the trust, the country under the laws of which the trust is created, the 
chapter 4 status of the trust if required for purposes of chapter 4 or 
if the trust provides (or will provide) a withholding statement 
associated with the Form W-8 allocating a payment to a chapter 4 
withholding rate pool of U.S. payees under Sec.  1.6049-4(c)(4) with 
respect to the nonwithholding foreign trust's owners and beneficiaries, 
and the GIIN of the trust (if applicable). If a nonwithholding foreign 
trust provides (or will provide) a chapter 4 withholding rate pool of 
U.S. payees as described in the preceding sentence, the trust must 
certify to its chapter 4 status as a participating FFI (including a 
reporting Model 2 FFI) or registered deemed-compliant FFI (including a 
reporting Model 1 FFI);
    (B) A certification that the person whose name is on the certificate 
is a foreign simple trust or a foreign grantor trust;
    (C) A withholding statement associated with the foreign simple trust 
or foreign grantor trust withholding certificate that provides all of 
the information required by paragraph (e)(5)(iv) of this section. No 
withholding statement is required, however, for a foreign simple trust 
withholding certificate furnished for income that is treated as 
effectively connected with the conduct of a trade or business in the 
United States;
    (D) A certification on a foreign simple trust withholding 
certificate that the income is treated as effectively connected with the 
conduct of a trade or business in the United States, if applicable; and
    (E) Any other information, certifications, or statements required by 
the form or accompanying instructions in addition to, or in lieu of, the 
information, certifications, and statements described in this paragraph 
(e)(5)(iii);
    (iv) Withholding statement provided by a foreign simple trust or 
foreign grantor trust and coordination with chapter 4. The provisions of 
Sec.  1.1441-1(e)(3)(iv) (regarding a withholding statement) shall apply 
to a foreign simple trust or foreign grantor trust by substituting the 
term foreign simple trust or foreign grantor trust for the term 
nonqualified intermediary, including when a withholding statement 
provided by a foreign simple trust or foreign grantor trust may include 
a chapter 4 withholding rate pool in lieu of information with respect to 
each owner or beneficiary that is a payee of a payment.
    (v) Withholding foreign trusts. The IRS may enter into a withholding 
agreement with a foreign trust to treat the trust or estate as a 
withholding foreign trust. Such a withholding agreement shall generally 
follow the same principles as a withholding agreement with a withholding 
foreign partnership under paragraph (c)(2)(ii) of this section. A 
withholding agent may treat a payment to a withholding foreign trust in 
the same manner the withholding agent would treat a payment (including a 
withholdable payment) to a withholding foreign partnership. See Sec.  
1.1441-1(e)(5)(ii)(D). For a withholding foreign trust that is an FFI, 
the withholding agreement will require the withholding foreign trust to 
assume the requirements of either a participating FFI, registered 
deemed-compliant FFI, or an FFI treated as a deemed-compliant FFI under 
an applicable IGA that is subject to due diligence and reporting 
requirements with respect to its U.S. accounts similar to those 
applicable to a registered deemed-compliant FFI under Sec.  1.1471-
5(f)(1).
    (6) Presumption rules--(i) In general. This paragraph (e)(6) 
contains the applicable presumptions for a withholding agent (including 
a trust or estate) to determine the classification and status of a trust 
or estate and its beneficiaries or owners in the absence of valid 
documentation. The provisions of Sec.  1.1441-1(b)(3)(iv) (regarding the 
90-day grace period) and Sec.  1.1441-1(b)(3)(vii) through (ix) shall 
apply for purposes of this paragraph (e)(6).
    (ii) Determination of status as U.S. or foreign trust or estate in 
the absence of documentation. In the absence of valid documentation that 
establishes the

[[Page 208]]

U.S. status of a trust or estate under paragraph (b)(1) of this section 
and of documentation that establishes the foreign status of a trust or 
estate under paragraph (e)(4) or (e)(5)(iii) of this section, the 
withholding agent shall determine the classification of the payee based 
upon the presumptions set forth in Sec.  1.1441-1(b)(3)(ii). If, based 
upon those presumptions, the withholding agent classifies the payee as a 
trust or estate, the withholding agent shall apply the presumptions set 
forth in Sec.  1.1441-1(b)(3)(iii)(A)(1) (applied by substituting the 
term trust for the term exempt recipient) to determine whether the trust 
or estate is a U.S. person or foreign person. An undocumented payee 
presumed to be a foreign trust shall be presumed to be a foreign complex 
trust. If a withholding agent has documentary evidence that establishes 
that an entity is a foreign trust, but the withholding agent cannot 
determine whether the foreign trust is a complex trust, a simple trust, 
or foreign grantor trust, the withholding agent shall presume that the 
trust is a foreign complex trust. Notwithstanding the preceding 
sentence, in the case of a foreign trust with a settlor that is a U.S. 
person for which a withholding agent has both a U.S. address and TIN, 
the withholding agent shall presume that the trust is a grantor trust 
when it cannot determine the status of the trust as a simple trust, 
complex trust, or grantor trust. See Sec.  1.1471-3(f)(4) and (5) to 
determine the status of the payee for purposes of chapter 4.
    (iii) Determination of beneficiary or owner's status in the absence 
of certain documentation. If a foreign simple trust or foreign grantor 
trust has provided a foreign simple trust or foreign grantor trust 
withholding certificate under paragraph (e)(5)(iii) of this section but 
the payment to such trust cannot be reliably associated with valid 
documentation from a specific beneficiary or owner of the trust, then 
any portion of a payment that a withholding agent cannot treat as 
reliably associated with valid documentation from a beneficiary or owner 
may be presumed made to a foreign payee. As a result, any payment of an 
amount subject to withholding is subject to withholding at a rate of 30 
percent. Any such payment that is presumed to be made to an undocumented 
foreign person must be reported on Form 1042-S. See Sec.  1.1461-1(c).
    (f) Failure to receive withholding certificate timely or to act in 
accordance with applicable presumptions. See applicable procedures 
described in Sec.  1.1441-1(b)(7) in the event the withholding agent 
does not hold an appropriate withholding certificate or other 
appropriate documentation at the time of payment or fails to rely on the 
presumptions set forth in Sec.  1.1441-1(b)(3) or in paragraph (d) or 
(e) of this section. For a payment that is a withholdable payment, see 
Sec.  1.1471-3(f) for the presumption rule for determining the payee's 
chapter 4 status.
    (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. 8734, 62 FR 53452, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72185, 72188, Dec. 31, 1998; 64 FR 73410, Dec. 30, 1999; T.D. 8881, 65 
FR 32188, May 22, 2000; 66 FR 18188, Apr. 6, 2001; T.D. 9658, 79 FR 
12773, Mar. 6, 2014; T.D. 9808, 82 FR 2088, Jan. 6, 2017]



Sec.  1.1441-6  Claim of reduced withholding under an income tax treaty.

    (a) In general. The rate of withholding on a payment of income 
subject to withholding may be reduced to the extent provided under an 
income tax treaty in effect between the United States and a foreign 
country. Most benefits under income tax treaties are to foreign persons 
who reside in the treaty country. In some cases, benefits are available 
under an income tax treaty to U.S. citizens or U.S. residents or to 
residents of a third country. See paragraph (b)(5) of this section for 
claims of benefits by U.S. persons. If the requirements of this section 
are met, the amount withheld from the payment may be reduced at source 
to account for the treaty benefit. See, however, Sec.  1.1471-2(a) and 
Sec.  1.1472-1(b)

[[Page 209]]

for when withholding at source on a withholdable payment may not be 
reduced to account for a treaty benefit such that the beneficial owner 
of the payment may need to file a claim for refund to obtain a refund 
for the overwithheld amount of tax. See also Sec.  1.1441-4(b)(2) for 
rules regarding claims of a reduced rate of withholding under an income 
tax treaty in the case of compensation from personal services and Sec.  
1.1441-4(c)(1) for rules regarding claims of a reduced rate of 
withholding under an income tax treaty in the case of scholarship and 
fellowship income.
    (b) Reliance on claim of reduced withholding under an income tax 
treaty--(1) In general. The withholding imposed under section 1441, 
1442, or 1443 on any payment to a foreign person is eligible for 
reduction under the terms of an income tax treaty only to the extent 
that such payment is treated as derived by a resident of an applicable 
treaty jurisdiction, such resident is a beneficial owner, and all other 
requirements for benefits under the treaty are satisfied. See section 
894 and the regulations under section 894 to determine whether a 
resident of a treaty country derives the income. Absent actual knowledge 
or reason to know otherwise, a withholding agent may rely on a claim 
that a beneficial owner is entitled to a reduced rate of withholding 
based upon an income tax treaty if, prior to the payment, the 
withholding agent can reliably associate the payment with a beneficial 
owner withholding certificate, as described in Sec.  1.1441-1(e)(2), 
that contains the information necessary to support the claim, or, in the 
case of a payment of income described in paragraph (c)(2) of this 
section made outside the United States with respect to an offshore 
obligation, documentary evidence described in paragraphs (c)(3), (c)(4), 
and (c)(5) of this section. See Sec.  1.6049-5(e) for the definition of 
payments made outside the United States and Sec.  1.6049-5(c)(1) for the 
definition of an offshore obligation. For purposes of this paragraph 
(b)(1), a beneficial owner withholding certificate described in Sec.  
1.1441-1(e)(2)(i) contains information necessary to support the claim 
for a treaty benefit only if it includes the beneficial owner's taxpayer 
identifying number (except as otherwise provided in paragraph (c)(1) and 
(g) of this section, or the beneficial owner provides its foreign tax 
identifying number issued by its country of residence and such country 
has with the United States an income tax treaty or information exchange 
agreement in effect), includes the representations that the beneficial 
owner derives the income under section 894 and the regulations under 
section 894, if required, and with regard to a beneficial owner that is 
an entity, includes a statement that the entity meets the limitation on 
benefits provisions of the treaty, if any. For claims for treaty 
benefits for scholarship and fellowship income, the beneficial owner 
withholding certificate must contain the beneficial owner's U.S. 
taxpayer identifying number (not a foreign taxpayer identifying number). 
The withholding certificate must also contain any other representations 
required by this section and any other information, certifications, or 
statements as may be required by the form or accompanying instructions 
in addition to, or in place of, the information and certifications 
described in this section. Absent actual knowledge or reason to know 
that the claims are unreliable or incorrect (applying the standards of 
knowledge in Sec.  1.1441-7(b)), a withholding agent may rely on the 
claims made on a withholding certificate or on documentary evidence. A 
withholding agent may also rely on the information contained in a 
withholding statement provided under Sec. Sec.  1.1441-1(e)(3)(iv) and 
1.1441-5(c)(3)(iv) and (e)(5)(iv) to determine whether the appropriate 
statements regarding section 894 and limitation on benefits have been 
provided in connection with documentary evidence. The Internal Revenue 
Service (IRS) may apply the provisions of Sec.  1.1441-1(e)(1)(ii)(B) to 
notify the withholding agent that the certificate cannot be relied upon 
to grant benefits under an income tax treaty. See Sec.  1.1441-
1(e)(4)(viii) regarding reliance on a withholding certificate by a 
withholding agent. The provisions of Sec.  1.1441-1(b)(3)(iv) dealing 
with a 90-day grace period shall apply for purposes of this section.
    (i) Identification of limitation on benefits provisions. In 
conjunction with the representation that the beneficial

[[Page 210]]

owner meets the limitation on benefits provision of the applicable 
treaty, if any, required by paragraph (b)(1) of this section, a 
beneficial owner withholding certificate must also identify the specific 
limitation on benefits provision of the article (if any, or a similar 
provision) of the treaty upon which the beneficial owner relies to claim 
the treaty benefit. A withholding agent may rely on the beneficial 
owner's claim regarding its reliance on a specific limitation on 
benefits provision absent actual knowledge that such claim is unreliable 
or incorrect.
    (ii) Reason to know based on existence of treaty. For purposes of 
this paragraph (b)(1), a withholding agent's reason to know that a 
beneficial owner's claim to a reduced rate of withholding under an 
income tax treaty is unreliable or incorrect includes a circumstance 
where the beneficial owner is claiming benefits under an income tax 
treaty that does not exist or is not in force. A withholding agent may 
determine whether a tax treaty is in existence and is in force by 
checking the list maintained on the IRS website at https://www.irs.gov/
businesses/international-businesses/united-states-income-tax-treaties-a-
to-z (or any replacement page on the IRS website) or in the State 
Department's annual Treaties in Force publication.
    (2) Payment to fiscally transparent entity--(i) In general. If the 
person claiming a reduced rate of withholding under an income tax treaty 
is an interest holder of an entity that is considered to be fiscally 
transparent (as defined in the regulations under section 894) by the 
interest holder's jurisdiction with respect to an item of income, then, 
with respect to such income derived by that person through the entity, 
the entity shall be treated as a flow-through entity and may provide a 
flow-through withholding certificate with which the withholding 
certificate or other documentary evidence of the interest holder that 
supports the claim for treaty benefits is associated. In the case of a 
payment that is a withholdable payment, see, however, Sec.  1.1471-3(c) 
for determining the payee of the payment and Sec. Sec.  1.1471-2(a) and 
1472-1(b) for when withholding at source may apply to the payment based 
on the status of the payee notwithstanding a claim for treaty benefits 
made under this paragraph (b)(2) by an interest holder in the payee. In 
such a case, the interest holder may file a claim for refund of the 
overwithheld amount of tax. For purposes of this paragraph (b)(2)(i), 
interest holders do not include any direct or indirect interest holders 
that are themselves treated as fiscally transparent entities with 
respect to that income by the interest holder's jurisdiction. See Sec.  
1.1441-1(c)(23) and (e)(3)(i) for the definition of flow-through entity 
and flow-through withholding certificate. The entity may provide a 
beneficial owner withholding certificate, or beneficial owner 
documentation, with respect to any remaining portion of the income to 
the extent the entity is receiving income and is not treated as fiscally 
transparent by its own jurisdiction. Further, the entity may claim a 
reduced rate of withholding with respect to the portion of a payment for 
which it is not treated as fiscally transparent if it meets all the 
requirements to make such a claim and, in the case of treaty benefits, 
it provides the documentation required by paragraph (b)(1) of this 
section. If dual claims, as described in paragraph (b)(2)(iii) of this 
section, are made, multiple withholding certificates may have to be 
furnished. Multiple withholding certificates may also have to be 
furnished if the entity receives income for which a reduction of 
withholding is claimed under a provision of the Internal Revenue Code 
(e.g., portfolio interest) and income for which a reduction of 
withholding is claimed under an income tax treaty.
    (ii) Certification by qualified intermediary. Notwithstanding 
paragraph (b)(2)(i) of this section, a foreign entity that is fiscally 
transparent, as defined in the regulations under section 894, that is 
also a qualified intermediary for purposes of claiming a reduced rate of 
withholding under an income tax treaty for its interest holders (who are 
deriving the income paid to the entity as residents of an applicable 
treaty jurisdiction) may furnish a single qualified intermediary 
withholding certificate, as described in Sec.  1.1441-1(e)(3)(ii),

[[Page 211]]

for amounts for which it claims a reduced rate of withholding under an 
income tax treaty on behalf of its interest holders.
    (iii) Dual treatment. Under paragraph (b)(2)(i) of this section, a 
withholding agent may make a payment to a foreign entity that is 
simultaneously claiming to be the beneficial owner of a portion of the 
income (whether or not it is also claiming a reduced rate of tax on its 
own behalf) and a reduced rate on behalf of persons in their capacity as 
interest holders in the entity with respect to the same, or a different, 
portion of the income. If the same portion of a payment may be reliably 
associated with both the entity's claim and an interest holder's claim, 
the withholding agent may choose to reject both claims and request new 
documentation and information allocating the payment among the 
beneficial owners of the payment or the withholding agent may choose 
which claim to apply. If the entity and the interest holder's claims are 
reliably associated with separate portions of the payment, the 
withholding agent may, at its option, accept such dual claims based on 
withholding certificates or other appropriate documentation furnished by 
the entity and its interest holders with respect to their respective 
shares of the payment even though this will result in the withholding 
agent treating the entity differently with respect to different portions 
of the same payment. Alternatively, the withholding agent may choose to 
apply only the claim made by the entity, provided the entity may be 
treated as a beneficial owner of the income. If the withholding agent 
does not accept claims for a reduced rate of withholding presented by 
any one or more of the interest holders, or by the entity, any interest 
holder or the entity may subsequently claim a refund or credit of any 
amount so withheld to the extent the interest holder's or entity's share 
of such withholding exceeds the amount of tax due.
    (iv) Examples. The following examples illustrate the rules of 
paragraph (b)(2) of this section. Each of the following examples 
describes a payment of U.S. source royalties, which are not withholdable 
payments under chapter 4. See Sec.  1.1473-1(a)(4)(iii) (describing 
nonfinancial payments that are not treated as withholdable payments). 
Thus, withholding under chapter 4 shall not apply with respect to the 
U.S. source royalties in any of the following examples:
    (A) Example 1--(i) Facts. Entity E is a business organization formed 
under the laws of country Y. Country Y has an income tax treaty with the 
United States. The treaty contains a limitation on benefits provision. E 
receives U.S. source royalties from withholding agent W and claims a 
reduced rate of withholding under the U.S.-Y tax treaty on its own 
behalf (rather than on behalf of its interest holders). E furnishes a 
beneficial owner withholding certificate described in paragraph (b)(1) 
of this section that represents that E is a resident of country Y 
(within the meaning of the U.S.-Y tax treaty), is the beneficial owner 
of the income, derives the income under section 894 and the regulations 
under section 894, and is not precluded from claiming benefits by the 
treaty's limitation on benefits provision.
    (ii) Analysis. Absent actual knowledge or reason to know otherwise, 
as described in paragraph (b)(1) of this section, W may rely on the 
representations made by E to apply a reduced rate of withholding.
    (B) Example 2--(i) Facts. The facts are the same as under Example 1, 
except that one of E's interest holders, H, is an entity organized in 
country Z. The U.S.-Z tax treaty reduces the rate on royalties to zero 
whereas the rate on royalties under the U.S.-Y tax treaty applicable to 
E is 5%. H is not fiscally transparent under country Z's tax law with 
respect to such income. H furnishes a beneficial owner withholding 
certificate to E that represents that H derives, within the meaning of 
section 894 and the regulations under section 894, its share of the 
royalty income paid to E as a resident of country Z, is the beneficial 
owner of the royalty income, and is not precluded from claiming treaty 
benefits by virtue of the limitation on benefits provision in the U.S.-Z 
treaty. E furnishes to W a flow-through withholding certificate 
described in Sec.  1.1441-1(e)(3)(i) to which it attaches H's beneficial 
owner withholding certificate and a withholding

[[Page 212]]

statement for the portion of the payment that H claims as its 
distributive share of the royalty income. E also furnishes to W a 
beneficial owner withholding certificate for itself for the portion of 
the payment that H does not claim as its distributive share.
    (ii) Analysis. Absent actual knowledge or reason to know otherwise, 
as described in paragraph (b)(1) of this section, W may rely on the 
documentation furnished by E to treat the royalty payment to a single 
foreign entity (E) as derived by different residents of tax treaty 
countries as a result of the claims presented under different treaties. 
W may, at its option, grant dual treatment, that is, a reduced rate of 
zero percent under the U.S.-Z treaty on the portion of the royalty 
payment that H claims to derive as a resident of country Z and a reduced 
rate of 5% under the U.S.-Y treaty for the balance. However, under 
paragraph (b)(2)(iii) of this section, W may, at its option, treat E as 
the only relevant person deriving the royalty and grant benefits under 
the U.S.-Y treaty only.
    (C) Example 3--(i) Facts. E is a business organization formed under 
the laws of country X. Country X has an income tax treaty with the 
United States. E has two interest holders, H1, organized in country Y, 
and H2, organized in country Z. E receives from W, a U.S. withholding 
agent, a payment of U.S. source royalties and interest, with respect to 
an obligation issued before July 1, 2014, that is eligible for the 
portfolio interest exception under sections 871(h) and 881(c), provided 
W receives the appropriate beneficial owner statement required under 
section 871(h)(5). E is classified as a corporation under U.S. tax law 
principles. Country X, E's country of organization, treats E as an 
entity that is not fiscally transparent with respect to items of income 
under the regulations under section 894. Under the U.S.-X income tax 
treaty, royalties are subject to a 5% rate of withholding. Country Y, 
H1's country of organization, treats E as fiscally transparent with 
respect to items of income under section 894 and H1 as not fiscally 
transparent with respect to items of income. Under the country Y-U.S. 
income tax treaty, royalties are exempt from U.S. tax. Country Z, H2's 
country of organization, treats E as not fiscally transparent under 
section 894 with respect to items of income. E provides W with a flow-
through beneficial owner withholding certificate with which it 
associates a beneficial owner withholding certificate from H1. H1's 
withholding certificate states that H1 is a resident of country Y, 
derives the royalty income under section 894, meets the applicable 
limitation on benefits provisions of the U.S.-Y treaty, and is the 
beneficial owner of the income. The withholding statement attached to 
E's flow-through withholding certificate allocates one-half of the 
royalty payment to H1. E also provides W with a beneficial owner 
withholding certificate for the interest income and the remaining one-
half of the royalty income. The withholding certificate states that E is 
a resident of country X, derives the royalty income under section 894, 
meets the limitation on benefits provisions of the U.S.-X treaty, and is 
the beneficial owner of the income.
    (ii) Analysis. Absent actual knowledge or reason to know that the 
claims are incorrect, as described in paragraph (b)(1), W may treat one-
half of the royalty derived by E as subject to a 5% withholding rate and 
one-half of the royalty as derived by H1 and subject to no withholding. 
Further, it may treat all of the interest as being paid to E and as 
qualifying for the portfolio interest exception. W can, at its option, 
treat the entire royalty as paid to E and subject it to withholding at a 
5% rate of withholding. In that case, H1 would be entitled to claim a 
refund with respect to its one-half of the royalty.
    (D) Example 4--(1) Facts. Entity E is a business organization formed 
under the laws of Country Y. Country Y has an income tax treaty with the 
United States that contains a limitation on benefits provision. E 
receives U.S. source royalties from withholding agent W. E furnishes a 
beneficial owner withholding certificate to W claiming a reduced rate of 
withholding under the U.S.-Country Y tax treaty. However, E's beneficial 
owner withholding certificate does not specifically identify the 
limitation on benefits provision that E satisfies.

[[Page 213]]

    (2) Analysis. Because E's withholding certificate does not 
specifically identify the limitation on benefits provision under the 
U.S.-Country Y tax treaty that E satisfies as required by paragraph 
(b)(1)(i) of this section, W cannot rely on E's withholding certificate 
to apply the reduced rate of withholding claimed by E.
    (3) Certified TIN. The IRS may issue guidance requiring a foreign 
person claiming treaty benefits and for whom a TIN is required to 
establish with the IRS, at the time the TIN is requested or after the 
TIN is issued, that the person is a resident in a treaty country and 
meets other conditions (such as limitation on benefits provisions) of 
the treaty. See Sec.  601.601(d)(2) of this chapter.
    (4) Claim of benefits under an income tax treaty by a U.S. person. 
In certain cases, a U.S. person may claim the benefit of an income tax 
treaty. For example, under certain treaties, a U.S. citizen residing in 
the treaty country may claim a reduced rate of U.S. tax on certain 
amounts representing a pension or an annuity from U.S. sources. Claims 
of treaty benefits by a U.S. person may be made by furnishing a Form W-9 
to the withholding agent or such other form as the IRS may prescribe in 
published guidance (see Sec.  601.601(d)(2) of this chapter).
    (c) Exemption from requirement to furnish a taxpayer identifying 
number and special documentary evidence rules for certain income--(1) 
General rule. In the case of income described in paragraph (c)(2) of 
this section, a withholding agent may rely on a beneficial owner 
withholding certificate described in paragraph (b)(1) of this section 
without regard to the requirement that the withholding certificate 
include the beneficial owner's taxpayer identifying number. In the case 
of a payment of income not described in paragraph (c)(2) of this 
section, a withholding agent may rely on a withholding certificate that 
includes the beneficial owner's foreign taxpayer identifying number 
described in paragraph (b)(1) of this section instead of the beneficial 
owner's taxpayer identifying number. In the case of payments of income 
described in paragraph (c)(2) of this section made outside the United 
States (as defined in Sec.  1.6049-5(e)) with respect to an offshore 
obligation (as defined in Sec.  1.6049-5(c)(1)), a withholding agent 
may, as an alternative to a withholding certificate described in 
paragraph (b)(1) of this section, rely on a certificate of residence 
described in paragraph (c)(3) of this section or documentary evidence 
described in paragraph (c)(4) of this section, relating to the 
beneficial owner, that the withholding agent has reviewed and maintains 
in its records in accordance with Sec.  1.1441-1(e)(4)(iii). In the case 
of a payment to a person other than an individual, the certificate of 
residence or documentary evidence must be accompanied by the statements 
described in paragraphs (c)(5)(i) and (ii) of this section regarding 
limitation on benefits and whether the amount paid is derived by such 
person or by one of its interest holders. The withholding agent 
maintains the reviewed documents by retaining the original, certified 
copy, or photocopy (microfiche, electronic scan, or similar means of 
electronic storage) of such documents. With respect to documentary 
evidence, the withholding agent must also note in its records the date 
on which the documents were received and reviewed. This paragraph (c)(1) 
shall not apply to amounts that are exempt from withholding based on a 
claim that the income is effectively connected with the conduct of a 
trade or business in the United States.
    (2) Income to which special rules apply. The income to which 
paragraph (c)(1) of this section applies is dividends and interest from 
stocks and debt obligations that are actively traded, dividends from any 
redeemable security issued by an investment company registered under the 
Investment Company Act of 1940 (15 U.S.C. 80a-1), dividends, interest, 
or royalties from units of beneficial interest in a unit investment 
trust that are (or were upon issuance) publicly offered and are 
registered with the Securities and Exchange Commission under the 
Securities Act of 1933 (15 U.S.C. 77a), and amounts paid with respect to 
loans of securities described in this paragraph (c)(2). With respect to 
a dividend equivalent described in section 871(m) and the regulations 
thereunder, this paragraph (c)(2) applies to the extent that the 
underlying security

[[Page 214]]

described in section 871(m) and the regulations thereunder satisfies the 
requirements of this paragraph (c)(2). For purposes of this paragraph 
(c)(2), a stock or debt obligation is actively traded if it is actively 
traded within the meaning of section 1092(d) and Sec.  1.1092(d)-1 when 
documentation is provided.
    (3) Certificate of residence. A certificate of residence referred to 
in paragraph (c)(1) of this section is a certification issued by an 
appropriate tax official of the treaty country of which the taxpayer 
claims to be a resident that the taxpayer has filed its most recent 
income tax return as a resident of that country (within the meaning of 
the applicable tax treaty). The certificate of residence must have been 
issued by such official within three years prior to its being presented 
to the withholding agent, or such other period as the IRS may prescribe 
in published guidance (see Sec.  601.601(d)(2) of this chapter). See 
Sec.  1.1441-1(e)(4)(ii)(A) for the period during which a withholding 
agent may rely on a certificate of residence. The competent authorities 
may agree to a different procedure for certifying residence, in which 
case such procedure shall govern for payments made to a person claiming 
to be a resident of the country with which such an agreement is in 
effect.
    (4) Documentary evidence establishing residence in the treaty 
country--(i) Individuals. For an individual, the documentary evidence 
referred to in paragraph (c)(1) of this section is any documentation 
that includes the individuals name, address, and photograph, is an 
official document issued by an authorized governmental body (i.e., a 
government or agency thereof, or a municipality), and has been issued no 
more than three years prior to presentation to the withholding agent. A 
document older than three years may be relied upon as proof of residence 
only if it is accompanied by additional evidence of the person's 
residence in the treaty country (e.g., a bank statement, utility bills, 
or medical bills). Documentary evidence must be in the form of original 
documents or certified copies thereof.
    (ii) Persons other than individuals. For a person other than an 
individual, the documentary evidence referred to in paragraph (c)(1) of 
this section is any documentation that includes the name of the entity 
and the address of its principal office in the treaty country, and is an 
official document issued by an authorized governmental body (e.g., a 
government or agency thereof, or a municipality).
    (5) Statements regarding entitlement to treaty benefits--(i) 
Statement regarding conditions under a limitation on benefits provision. 
In addition to the documentary evidence described in paragraph 
(c)(4)(ii) of this section, a taxpayer that is not an individual must 
provide a statement that it meets one or more of the conditions set 
forth in the limitation on benefits article (if any, or in a similar 
provision) contained in the applicable tax treaty and must identify the 
specific limitation on benefits provision of the article (if any, or a 
similar provision) of the treaty upon which the taxpayer relies to claim 
the treaty benefit. A withholding agent may rely on the taxpayer's claim 
on a treaty statement regarding its reliance on a specific limitation on 
benefits provision absent actual knowledge that such claim is unreliable 
or incorrect.
    (ii) Statement regarding whether the taxpayer derives the income. A 
taxpayer that is not an individual must also provide, in addition to the 
documentary evidence and the statement described in paragraph (c)(5)(i) 
of this section, a statement that any income for which it intends to 
claim benefits under an applicable income tax treaty is income that will 
properly be treated as derived by itself as a resident of the applicable 
treaty jurisdiction within the meaning of section 894 and the 
regulations thereunder. This requirement does not apply if the taxpayer 
furnishes a certificate of residence that certifies that fact.
    (d) Joint owners. In the case of a payment to joint owners, each 
owner must furnish a withholding certificate or, if applicable, 
documentary evidence or a certificate of residence. The applicable rate 
of withholding on a payment of income to joint owners shall be the 
highest applicable rate.
    (e) Competent authority. The procedures described in this section 
may be

[[Page 215]]

modified to the extent the U.S. competent authority may agree with the 
competent authority of a country with which the United States has an 
income tax treaty in effect.
    (f) Failure to receive withholding certificate timely. See 
applicable procedures described in Sec.  1.1441-1(b)(7) in the event the 
withholding agent does not hold an appropriate withholding certificate 
or other appropriate documentation at the time of payment.
    (g) Special taxpayer identifying number rule for certain foreign 
individuals claiming treaty benefits--(1) General rule. Except as 
provided in paragraph (c) or (g)(2) of this section, for purposes of 
paragraph (b)(1) of this section, a withholding agent may not rely on a 
beneficial owner withholding certificate, described in paragraph (b)(1) 
of this section, that does not include the beneficial owner's taxpayer 
identifying number (TIN).
    (2) Special rule. For purposes of satisfying the TIN requirement of 
paragraph (b)(1) of this section, a withholding agent may rely on a 
beneficial owner withholding certificate, described in such paragraph, 
without regard to the requirement that the withholding certificate 
include the beneficial owner's TIN, if--
    (i) A withholding agent, who is also an acceptance agent, as defined 
in Sec.  301.6109-1(d)(3)(iv) of this chapter (the payor), has entered 
into an acceptance agreement that permits the acceptance agent to 
request an individual taxpayer identification number (ITIN) on an 
expedited basis because of the circumstances of payment or unexpected 
nature of payments required to be made by the payor;
    (ii) The payor was required to make an unexpected payment to the 
beneficial owner who is a foreign individual;
    (iii) An ITIN for the beneficial owner cannot be received by the 
payor from the Internal Revenue Service (IRS) because the IRS is not 
issuing ITINs at the time of payment or any time prior to the time of 
payment when the payor has knowledge of the unexpected payment;
    (iv) The unexpected payment to the beneficial owner could not be 
reasonably delayed to permit the payor to obtain an ITIN for the 
beneficial owner on an expedited basis; and
    (v) The payor satisfies the provisions of paragraph (g)(3) of this 
section.
    (3) Requirement that an ITIN be requested during the first business 
day following payment. The payor must submit a beneficial owner payee 
application for an ITIN (Form W-7 ``Application for IRS Individual 
Taxpayer Identification Number'') that complies with the requirements of 
Sec.  301.6109-1(d)(3)(ii) of this chapter, and also the certification 
described in Sec.  301.6109-1(d)(3)(iv)(A)(4) of this chapter, to the 
IRS during the first business day after payment is made.
    (4) Definition of unexpected payment. For purposes of this section, 
an unexpected payment is a payment that, because of the nature of the 
payment or the circumstances in which it is made, could not reasonably 
have been anticipated by the payor or beneficial owner during a time 
when the payor or beneficial owner could obtain an ITIN from the IRS. 
For purposes of this paragraph (g)(4), a payor or beneficial owner will 
not lack the requisite knowledge of the forthcoming payment solely 
because the amount of the payment is not fixed.
    (5) Examples. The rules of this paragraph (g) are illustrated by the 
following examples:

    Example 1. G, a citizen and resident of Country Y, a country with 
which the United States has an income tax treaty that exempts U.S. 
source gambling winnings from U.S. tax, is visiting the United States 
for the first time. During his visit, G visits Casino B, a casino that 
has entered into a special acceptance agent agreement with the IRS that 
permits Casino B to request an ITIN on an expedited basis. During that 
visit, on a Sunday, G wins $5000 in slot machine play at Casino B and 
requests immediate payment from Casino B. ITINs are not available from 
the IRS on Sunday and would not again be available until Monday. G, who 
does not have an individual taxpayer identification number, furnishes a 
beneficial owner withholding certificate, described in Sec.  1.1441-
1(e)(2), to the Casino upon winning at the slot machine. The beneficial 
owner withholding certificate represents that G is a resident of Country 
Y (within the meaning of the U.S.-Y tax treaty) and meets all applicable 
requirements for claiming benefits under the U.S.-Y tax treaty. The 
beneficial owner withholding certificate does not, however,

[[Page 216]]

contain an ITIN for G. On the following Monday, Casino B faxes a 
completed Form W-7, including the required certification, for G, to the 
IRS for an expedited ITIN. Pursuant to paragraph (b) and (g)(2) of this 
section, absent actual knowledge or reason to know otherwise, Casino B, 
may rely on the documentation furnished by G at the time of payment and 
pay the $5000 to G without withholding U.S. tax based on the treaty 
exemption.
    Example 2. The facts are the same as Example 1, except G visits 
Casino B on Monday. G requests payment Monday afternoon. In order to pay 
the winnings to G without withholding the 30 percent tax, Casino B must 
apply for and obtain an ITIN for G because an expedited ITIN is 
available from the IRS at the time of the $5000 payment to G.
    Example 3. The facts are the same as Example 1, except G requests 
payment fifteen minutes before the time when the IRS begins issuing 
ITINs. Under these facts, it would be reasonable for Casino B to delay 
payment to G. Therefore, Casino B must apply for and obtain an ITIN for 
G if G wishes to claim an exemption from U.S. withholding tax under the 
U.S.-Y tax treaty at the time of payment.
    Example 4. P, a citizen and resident of Country Z, is a lawyer and a 
well-known expert on real estate transactions. P is scheduled to attend 
a three-day seminar on complex real estate transactions, as a 
participant, at University U, a U.S. university, beginning on a Saturday 
and ending on the following Monday, which is a holiday. University U has 
entered into a special acceptance agent agreement with the IRS that 
permits University U to request an ITIN on an expedited basis. Country Z 
is a country with which the United States has an income tax treaty that 
exempts certain income earned from the performance of independent 
personal services from U.S. tax. It is P's first visit to the United 
States. On Saturday, prior to the start of the seminar, Professor Q, one 
of the lecturers at the seminar, cancels his lecture. That same day the 
Dean of University U offers P $5000, to replace Professor Q at the 
seminar, payable at the conclusion of the seminar on Monday. P agrees. P 
gives her lecture Sunday afternoon. ITINs are not available from the IRS 
on that Saturday, Sunday, or Monday. After the seminar ends on Monday, 
P, who does not have an ITIN, requests payment for her teaching. P 
furnishes a beneficial owner withholding certificate, described in Sec.  
1.1441-1(e)(2), to University U that represents that P is a resident of 
Country Z (within the meaning of the U.S.-Z tax treaty) and meets all 
applicable requirements for claiming benefits under the U.S.-Z tax 
treaty. The beneficial owner withholding certificate does not, however, 
contain an ITIN for P. On Tuesday, University U faxes a completed Form 
W-7, including the required certification, for P, to the IRS for an 
expedited ITIN. Pursuant to paragraph (b) and (g)(2) of this section, 
absent actual knowledge or reason to know otherwise, University U may 
rely on the documentation furnished by P and pay $5000 to P without 
withholding U.S. tax based on the treaty exemption.

    (h) Dividend equivalents. The rate of withholding on a dividend 
equivalent may be reduced to the extent provided under an income tax 
treaty in effect between the United States and a foreign country. For 
this purpose, a dividend equivalent as described in section 871(m) and 
the regulations thereunder is treated as a dividend from sources within 
the United States. To receive a reduced rate of withholding with respect 
to a dividend equivalent, a foreign person must satisfy the other 
requirements described in this section.
    (i) Effective/applicability dates--(1) General rule. Except as 
otherwise provided in paragraphs (i)(2) and (3) of this section, this 
section applies to payments made on or after January 6, 2017. (For 
payments made after June 30, 2014 (except for payments to which 
paragraph (c)(1) applies, in which case substitute March 5, 2014, for 
June 30, 2014), and before January 6, 2017, see this section as in 
effect and contained in 26 CFR part 1, revised April 1, 2016. For 
payments made after December 31, 2001, and before July 1, 2014, see this 
section as in effect and contained in 26 CFR part 1 revised April 1, 
2013.)
    (2) Dividend equivalents. Paragraph (h) of this section applies to 
payments made on or after December 5, 2013.
    (3) Effective/applicability date. Paragraphs (b)(1)(i) and (ii), 
(b)(2)(iv)(D), and (c)(5)(i) of this section apply to withholding 
certificates and treaty statements provided on or after January 6, 2017.

[T.D. 8734, 62 FR 53458, Oct. 14, 1997]

    Editorial Note: For Federal Register citations affecting Sec.  
1.1441-6, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec.  1.1441-7  General provisions relating to withholding agents.

    (a) Withholding agent defined--(1) In general. For purposes of 
chapter 3 of

[[Page 217]]

the Internal Revenue Code and the regulations under such chapter, the 
term withholding agent means any person, U.S. or foreign, that has the 
control, receipt, custody, disposal, or payment of an item of income of 
a foreign person subject to withholding, including (but not limited to) 
a foreign intermediary described in Sec.  1.1441-1(e)(3)(i), a foreign 
partnership, or a U.S. branch described in Sec.  1.1441-1(b)(2)(iv)(A) 
or (E). See Sec. Sec.  1.1441-1(b)(2) and (3) and 1.1441-5(c), (d), and 
(e), for rules to determine whether a payment is considered made to a 
foreign person. Any person who meets the definition of a withholding 
agent is required to deposit any tax withheld under Sec.  1.1461-1(a) 
and to make the returns prescribed by Sec.  1.1461-1(b) and (c), except 
as otherwise may be required by a qualified intermediary withholding 
agreement, a withholding foreign partnership agreement, or a withholding 
foreign trust agreement. When several persons qualify as withholding 
agents with respect to a single payment, only one tax is required to be 
withheld and deposited. See Sec.  1.1461-1. A person who, as a nominee 
described in Sec.  1.6031(c)-1T, has furnished to a partnership all of 
the information required to be furnished under Sec.  1.6031(c)-1T(a) 
shall not be treated as a withholding agent if it has notified the 
partnership that it is treating the provision of information to the 
partnership as a discharge of its obligations as a withholding agent.
    (2) Withholding agent with respect to dividend equivalents. Each 
person that is a party to any contract or arrangement that provides for 
the payment of a dividend equivalent, as described in section 871(m) and 
the regulations thereunder, is treated as having control and custody of 
the payment.
    (3) Examples. The following examples illustrate the rules of 
paragraphs (a)(1) and (a)(2) of this section:

    Example 1. USB is a broker organized in the United States. USB pays 
U.S. source dividends and interest, which are amounts subject to 
withholding under Sec.  1.1441-2(a), to FC, a foreign corporation that 
has an investment account with USB. USB is a withholding agent as 
defined in paragraph (a)(1) of this section.
    Example 2. USB is a bank organized in the United States. FB is a 
bank organized in country X. FB has an omnibus account with USB through 
which FB invests in debt and equity instruments that pay amounts subject 
to withholding as defined in Sec.  1.1441-2(a). FB is a nonqualified 
intermediary, as defined in Sec.  1.1441-1(c)(14). Both USB and FB are 
withholding agents as defined in paragraph (a)(1) of this section.
    Example 3. The facts are the same as in Example 2, except that FB is 
a qualified intermediary. Both USB and FB are withholding agents as 
defined in paragraph (a)(1) of this section.
    Example 4. FB is a bank organized in country X. FB has a branch in 
the United States. FB's branch has customers that are foreign persons 
who receive amounts subject to withholding, as defined in Sec.  1.1441-
2(a). FB is a withholding agent under paragraph (a)(1) of this section 
and is required to withhold and report payments of amounts subject to 
withholding in accordance with chapter 3 of the Internal Revenue Code.
    Example 5. X is a foreign corporation. X pays dividends to 
shareholders who are foreign persons. Under section 861(a)(2)(B), a 
portion of the dividends are from sources within the United States and 
constitute amounts subject to withholding within the meaning of Sec.  
1.1441-2(a). The dividends are not subject to tax under section 884(a). 
See section 884(e)(3). X is a withholding agent under paragraph (a)(1) 
of this section.
    Example 6. FC, a foreign corporation, enters into a notional 
principal contract (NPC) with Bank X, a bank organized in the United 
States. The NPC is a specified NPC for purposes of section 871(m) and 
the regulations thereunder. FC is the long party to the contract and 
Bank X is the short party. The NPC references a specified number of 
shares of dividend-paying common stock issued by a domestic corporation. 
As the long party, FC receives payments from Bank X based on any 
appreciation in the value of the common stock and dividends paid with 
respect to the common stock. As the short party, Bank X receives payment 
from FC based on any depreciation in the value of the common stock and a 
payment based on LIBOR. Bank X is a withholding agent because Bank X is 
deemed to have control and custody of a dividend equivalent as a party 
to the NPC. If FC's tax liability under section 881 has not been 
satisfied in full by Bank X as withholding agent, FC is required to file 
a return on Form 1120-F (U.S. Income Tax Return of a Foreign 
Corporation).
    Example 7. CO is a domestic clearing organization. CO serves as a 
central counterparty clearing and settlement service provider for 
derivatives exchanges in the United States. CB is a broker organized in 
Country X, a foreign country, and a clearing member of CO. CB is a 
nonqualified intermediary, as defined in Sec.  1.1441-1(c)(14). FC is a 
foreign corporation that has an account with CB. FC instructs

[[Page 218]]

CB to purchase a call option that is a specified ELI (as described in 
Sec.  1.871-15(e)). CB effects the trade for FC on the exchange. The 
exchange matches FC's order with an order for a written call option with 
the same terms. The exchange then sends the matched trade to CO, which 
clears the trade. CB and the clearing member representing the person who 
sold the call option settle the trade with CO. Upon receiving the 
matched trade, the option contracts are novated and CO becomes the 
counterparty to CB and the counterparty to the clearing member 
representing the person who sold the call option. To the extent that 
there is a dividend equivalent with respect to the call option, both CO 
and CB are withholding agents as described in paragraph (a)(1) of this 
section. As a withholding agent, CO and CB must each determine whether 
it is obligated to withhold under chapter 3 of the Internal Revenue Code 
and the regulations thereunder.
    Example 8. FCO is a foreign clearing organization. FCO serves as a 
central counterparty clearing and settlement service provider for 
derivatives exchanges in Country A, a foreign country. CB is a broker 
organized in Country A, and a clearing member of FCO. CB is a 
nonqualified intermediary, as defined in Sec.  1.1441-1(c)(14). FC is a 
foreign corporation that has an account with CB. FC instructs CB to 
purchase a call option that is a section 871(m) transaction. CB effects 
the trade for FC on the exchange. The exchange matches FC's order with 
an order for a written call option with the same terms. The exchange 
then sends the matched trade to FCO, which clears the trade. CB and the 
clearing member representing the call option seller settle the trade 
with FCO. Upon receiving the matched trade, the option contracts are 
novated and FCO becomes the counterparty to CB and the counterparty to 
the clearing member representing the call option seller. To the extent 
that there is a dividend equivalent with respect to the call option, 
both FCO and CB are withholding agents as described in paragraph (a)(1) 
of this section.
    Example 9. The facts are the same as Example 8, except that CB is a 
qualified intermediary, as defined in Sec.  1.1441-1(c)(15), that has 
assumed the primary obligation to withhold, deposit, and report amounts 
under chapters 3 and 4 of Internal Revenue Code. CB provides a written 
statement to FCO representing that it has assumed primary withholding 
responsibility for any dividend equivalent payment with respect to the 
call option. FCO, therefore, is not required to withhold on a dividend 
equivalent payment to CB.

    (4) Effective/applicability date. Paragraph (a)(2) of this section 
and Example 6 apply on or after January 23, 2012. Example 7, Example 8, 
and Example 9 of paragraph (a)(3) of this section apply beginning 
January 19, 2017.
    (b) Standards of knowledge--(1) In general. A withholding agent must 
withhold at the full 30-percent rate under section 1441, 1442, or 
1443(a) or at the full 4-percent rate under section 1443(b) if it has 
actual knowledge or reason to know that a claim of U.S. status or of a 
reduced rate of withholding under section 1441, 1442, or 1443 is 
unreliable or incorrect. A withholding agent shall be liable for tax, 
interest, and penalties to the extent provided under sections 1461 and 
1463 and the regulations under those sections if it fails to withhold 
the correct amount despite its actual knowledge or reason to know the 
amount required to be withheld. For purposes of the regulations under 
sections 1441, 1442, and 1443, a withholding agent may rely on 
information or certifications contained in, or associated with, a 
withholding certificate or other documentation furnished by or for a 
beneficial owner or payee unless the withholding agent has actual 
knowledge or reason to know that the information or certifications are 
incorrect or unreliable and, if based on such knowledge or reason to 
know, it should withhold (under chapter 3 of the Code or another 
withholding provision of the Code) an amount greater than would be the 
case if it relied on the information or certifications, or it should 
report (under chapter 3 of the Code or under another provision of the 
Code) an amount that would not otherwise be reportable if it relied on 
the information or certifications. See Sec.  1.1441-1(e)(4)(viii) for 
applicable reliance rules. A withholding agent that has received 
notification by the Internal Revenue Service (IRS) that a claim of U.S. 
status or of a reduced rate is incorrect has actual knowledge beginning 
on the date that is 30 calendar days after the date the notice is 
received. A withholding agent that fails to act in accordance with the 
presumptions set forth in Sec. Sec.  1.1441-1(b)(3), 1.1441-4(a), 
1.1441-5 (d) and (e), or 1.1441-9(b)(3) may also be liable for tax, 
interest, and penalties. See Sec.  1.1441-1(b)(3)(ix) and (7). In the 
case of a withholding agent making a withholdable payment to a payee 
that the withholding agent is required to treat as a foreign entity, see

[[Page 219]]

Sec.  1.1471-3(e) for standards of knowledge and Sec. Sec.  1.1471-2 and 
1.1472-1(b) for withholding that may apply under chapter 4. A 
withholding agent is allowed to apply the rules under paragraphs (b)(5) 
and (b)(8) of this section as in effect and contained in 26 CFR part 1 
revised April 1, 2013, to accounts opened, and obligations entered into, 
by an entity on or after July 1, 2014, and before January 1, 2015.
    (2) Reason to know. A withholding agent shall be considered to have 
reason to know if its knowledge of relevant facts or of statements 
contained in the withholding certificates or other documentation is such 
that a reasonably prudent person in the position of the withholding 
agent would question the chapter 3 claims made. For an obligation other 
than a preexisting obligation, a withholding agent will have reason to 
know that a chapter 3 claim made by the holder of the obligation 
(account holder) is unreliable or incorrect if any information contained 
in its account opening files or other files pertaining to the obligation 
(account information), including documentation collected for purposes of 
AML due diligence (as defined under Sec.  1.1471-1(b)(4)), conflicts 
with the account holder's claim. A withholding agent will not, however, 
be considered to have reason to know that a person's chapter 3 claim is 
unreliable or incorrect based on documentation collected for AML due 
diligence until the date that is 30 days after the obligation is 
executed (or the account is opened for an obligation that is an account 
with a financial institution).
    (3) Financial institutions--limits on reason to know--(i) In 
general. For purposes of this paragraph (b)(3) and paragraphs (b)(4) 
through (10) of this section, the terms withholding certificate, 
documentary evidence, and documentation are defined in Sec.  1.1441-
1(c)(16), (17), and (18). Except as otherwise provided in paragraphs 
(b)(4) through (9) of this section, a withholding agent that is a 
financial institution under Sec.  1.1471-5(e), an insurance company 
(without regard to whether such company is a specified insurance 
company), or a broker or dealer in securities that maintains or opens an 
account for a beneficial owner (a direct account holder) has reason to 
know that documentation provided by the direct account holder is 
unreliable or incorrect only if one or more of the circumstances 
described in paragraphs (b)(4) through (9) of this section exist. If a 
direct account holder has provided documentation that is unreliable or 
incorrect under the rules of paragraph (b)(4) through (9) of this 
section, the withholding agent may require new documentation. 
Alternatively, the withholding agent may rely on the documentation 
originally provided if the rules of paragraphs (b)(4) through (9) of 
this section permit such reliance based on additional statements and 
documentation obtained by the withholding agent from the beneficial 
owner. Paragraph (b)(10) of this section provides rules regarding reason 
to know for withholding agents that receive beneficial owner 
documentation from persons (indirect account holders) that have an 
account relationship with, or an ownership interest in, a direct account 
holder of the withholding agent. Paragraph (b)(11) of this section 
provides limitations on a withholding agent's reason to know for 
multiple obligations held by the same person. Paragraph (b)(12) of this 
section defines a reasonable explanation provided by an individual with 
respect to the individual's claim of foreign status. For rules regarding 
reliance on Form W-9, see Sec.  31.3406(h)-3(e)(2) of this chapter. For 
payments that are withholdable payments, see Sec.  1.1471-3(e)(3) and 
(4) for additional rules regarding a withholding agent's reason to know 
with respect to a payee's claim of chapter 4 status and Sec.  1.1471-
3(f) for presumption rules that apply when the claim of chapter 4 status 
is unreliable or incorrect.
    (ii) Limits on reason to know for preexisting obligations. With 
respect to a preexisting obligation, a withholding agent that has 
documented the foreign status of the direct account holder for purposes 
of chapter 3 or chapter 61 before July 1, 2014, may continue to rely on 
such documentation without regard to a U.S. phone number or U.S. place 
of birth. If, however, the withholding agent reviews documentation for 
an individual account holder claiming foreign status that contains a 
U.S. place of birth (as described in paragraph

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(b)(5)(ii) of this section) or if the withholding agent is notified of a 
change in circumstances under the criteria of paragraphs (b)(5) and (8) 
of this section (as effective on July 1, 2014), the obligation will be 
treated as having experienced a change in circumstances under Sec.  
1.1441-1(e)(4)(ii)(D) as of the date that the withholding agent reviews 
the documentation or receives the notification, and the withholding 
agent will then have reason to know that the documentation is unreliable 
or incorrect. With respect to an obligation held by an entity, a 
withholding agent is not required to treat the additional U.S. indicia 
described in this paragraph (b) as a change in circumstances under Sec.  
1.1441-1(e)(4)(ii)(D) before January 1, 2015. See Sec.  1.1441-
1(b)(3)(iv) for the grace period following a change in circumstances. 
For purposes of this rule, a direct account holder will be considered 
documented prior to July 1, 2014, without regard to whether the 
withholding agent obtains renewal documentation for the account holder 
on or after July 1, 2014, pursuant to the requirements of Sec.  1.1441-
1(e)(4)(ii)(A).
    (4) Rules applicable to withholding certificates--(i) In general. A 
withholding agent has reason to know that a beneficial owner withholding 
certificate provided by a direct account holder is unreliable or 
incorrect if the withholding certificate is incomplete with respect to 
any item on the certificate that is relevant to the claims made by the 
direct account holder, the withholding certificate contains any 
information that is inconsistent with the direct account holder's claim, 
the withholding agent has account information that is inconsistent with 
the direct account holder's claim, or the withholding certificate lacks 
information necessary to establish entitlement to a reduced rate of 
withholding. For purposes of establishing a direct account holder's 
status as a foreign person or resident of a treaty country a withholding 
certificate shall be considered unreliable or inconsistent with an 
account holder's claims only if it is not reliable under the rules of 
paragraphs (b)(5) and (6) of this section. See, however, Sec.  1.1441-
1(e)(2)(ii)(B) for additional reliance standards that apply to a 
withholding certificate that is required to include an account holder's 
foreign TIN. A withholding agent that relies on an agent to review and 
maintain a withholding certificate is considered to know or have reason 
to know the facts within the knowledge of the agent.
    (ii) Examples. The rules of paragraph (b)(4) of this section are 
illustrated by the following examples:

    Example 1. F, a foreign person that has a direct account 
relationship with USB, a bank that is a U.S. person, provides USB with a 
beneficial owner withholding certificate for the purpose of claiming a 
reduced rate of withholding on U.S. source dividends (which is a 
withholdable payment). F resides in a treaty country that has a 
limitation on benefits provision in its income tax treaty with the 
United States. The withholding certificate includes a certification of 
F's status for chapter 4 purposes to except the payment from withholding 
under chapter 4, but does not contain a statement regarding limitation 
on benefits or deriving the income under section 894 as required by 
Sec.  1.1441-6(b)(1). USB cannot rely on the withholding certificate to 
grant a reduced rate of withholding for chapter 3 purposes because it is 
incomplete with respect to the claim made by F.
    Example 2. F, a foreign person and entity that has a direct account 
relationship with USB, a broker that is a U.S. person, provides USB with 
a withholding certificate for the purpose of claiming the portfolio 
interest exception under section 881(c) with respect to interest paid on 
an obligation issued before July 1, 2014. The payment of interest is not 
a withholdable payment under Sec.  1.1471-2(b) (referring to payments 
made with respect to grandfathered obligations), and, therefore, 
withholding does not apply to the payment under chapter 4. See Sec.  
1.1441-3(c)(4)(i) for rules coordinating withholding under chapters 3 
and 4. F indicates on its withholding certificate, however, that it is a 
partnership. USB may not treat F as a beneficial owner of the interest 
for purposes of the portfolio interest exception because F has indicated 
on its withholding certificate that it is a foreign partnership, and 
such entity classification is inconsistent with its claim as a 
beneficial owner.

    (5) Withholding certificate--establishment of foreign status. A 
withholding agent has reason to know that a beneficial owner withholding 
certificate (as defined in Sec.  1.1441-1(e)(2), but excluding a Form W-
8ECI) provided by a direct account holder is unreliable or incorrect for 
purposes of establishing the account holder's status as a foreign person 
as set forth in paragraphs (b)(5)(i) through (iii) of this section.

[[Page 221]]

    (i) Classification of U.S. status, U.S. address, or U.S. telephone 
number. A withholding certificate is unreliable or incorrect if the 
withholding agent has classified the person as a U.S. person in its 
account information, the withholding certificate has a current permanent 
residence address (as defined in Sec.  1.1441-1(e)(2)(ii)) in the United 
States, the withholding certificate has a current mailing address in the 
United States, the withholding agent has a current residence or mailing 
address as part of its account information that is an address in the 
United States, or the direct account holder notifies the withholding 
agent of a new residence or mailing address in the United States 
(whether or not provided on a withholding certificate). A withholding 
agent also has reason to know that a withholding certificate provided by 
a person is unreliable or incorrect if the withholding agent has a 
current telephone number for the account holder in the United States and 
has no telephone number for the account holder outside of the United 
States. When any of the foregoing U.S. indicia are present, a 
withholding agent may nevertheless rely on the beneficial owner 
withholding certificate to establish the account holder's foreign status 
if it may do so under the provisions of paragraph (b)(5)(i)(A) or (B) of 
this section.
    (A) A withholding agent may treat a direct account holder as a 
foreign person if the beneficial owner withholding certificate has been 
provided by an individual and--
    (1) The withholding agent has in its possession or obtains 
documentary evidence establishing foreign status (as described in Sec.  
1.1471-3(c)(5)(i)) that does not contain a U.S. address and the 
individual provides the withholding agent with a reasonable explanation, 
in writing, supporting the claim of foreign status (as defined in 
paragraph (b)(12) of this section);
    (2) For a payment made outside the U.S. with respect to an offshore 
obligation (as described in Sec.  1.6049-5(c)(1)), the withholding agent 
has in its possession or obtains documentary evidence establishing 
foreign status (as described in Sec.  1.1471-3(c)(5)(i)), that does not 
contain a U.S. address;
    (3) For a payment made with respect to an offshore obligation (with 
offshore obligation defined as in Sec.  1.6049-5(c)(1)), the withholding 
agent classifies the individual as a resident of the country in which 
the obligation is maintained, the withholding agent is required to 
report a payment made to the individual annually on a tax information 
statement that is filed with the tax authority of the country in which 
the office is located as part of that country's resident reporting 
requirements, and that country has a tax information exchange agreement 
or income tax treaty in effect with the United States; or
    (4) For a case in which the withholding agent classified the account 
holder as a U.S. person in its account information, the withholding 
agent has in its possession or obtains documentary evidence described in 
Sec.  1.1471-3(c)(5)(i)(B) evidencing citizenship in a country other 
than the United States.
    (B) A withholding agent may treat a direct account holder as a 
foreign person if the beneficial owner withholding certificate has been 
provided by an entity that the withholding agent does not know, or does 
not have reason to know, is a flow-through entity and--
    (1) The withholding agent has in its possession or obtains 
documentation establishing foreign status that substantiates that the 
entity is actually organized or created under the laws of a foreign 
country; or
    (2) For a payment made with respect to an offshore obligation (with 
offshore obligation defined as in Sec.  1.6049-5(c)(1)), the withholding 
agent classifies the entity as a resident of the country in which the 
account is maintained, the withholding agent is required to report a 
payment made to the entity annually on a tax information statement that 
is filed with the tax authority of the country in which the office is 
located as part of that country's resident reporting requirements, and 
that country has a tax information exchange agreement or income tax 
treaty in effect with the United States.
    (ii) U.S. place of birth. A withholding agent has reason to know 
that a withholding certificate claiming foreign status provided by a 
direct account holder that is an individual is unreliable or incorrect 
if the withholding

[[Page 222]]

agent has, either on accompanying documentation or as part of its 
account information, an unambiguous indication of a place of birth for 
the individual in the United States. A withholding agent may treat the 
individual as a foreign person, notwithstanding the U.S. place of birth, 
if the withholding agent has in its possession or obtains documentary 
evidence described in Sec.  1.1471-3(c)(5)(i)(B) evidencing citizenship 
in a country other than the United States and either a copy of the 
individual's Certificate of Loss of Nationality of the United States or 
a reasonable written explanation of the account holder's renunciation of 
U.S. citizenship or the reason the account holder did not obtain U.S. 
citizenship at birth.
    (iii) Standing instructions with respect to offshore obligations. A 
beneficial owner withholding certificate is unreliable or incorrect if 
it is provided with respect to an offshore obligation (as defined in 
Sec.  1.6049-5(c)(1)) of a direct account holder that has provided 
standing instructions to pay amounts to an address or an account 
maintained in the United States. The withholding agent may treat the 
account holder as a foreign person, however, if the account holder 
provides either a reasonable explanation in writing that supports its 
foreign status or documentary evidence establishing foreign status 
described in Sec.  1.1471-3(c)(5)(i).
    (6) Withholding certificate--claim of reduced rate of withholding 
under treaty. A withholding agent has reason to know that a withholding 
certificate (other than Form W-9) provided by a direct account holder is 
unreliable or incorrect for purposes of establishing that the account 
holder is a resident of a country with which the United States has an 
income tax treaty if it is described in paragraphs (b)(6)(i) through 
(iii) of this section.
    (i) Permanent residence address. A beneficial owner withholding 
certificate is unreliable or incorrect if the permanent residence 
address on the beneficial owner withholding certificate is not in the 
country whose treaty is invoked, or the direct account holder notifies 
the withholding agent of a new permanent residence address that is not 
in the treaty country. A withholding agent may, however, treat a direct 
account holder as entitled to a reduced rate of withholding under an 
income tax treaty if the account holder provides a reasonable 
explanation for the permanent residence address outside the treaty 
country (e.g., the address is the address of a branch of the beneficial 
owner located outside the treaty country in which the entity is a 
resident) or the withholding agent has in its possession or obtains 
documentary evidence described in Sec.  1.1471-3(c)(5)(i) that 
establishes residency in a treaty country.
    (ii) Mailing address. A beneficial owner withholding certificate is 
unreliable or incorrect if the permanent residence address on the 
withholding certificate is in the applicable treaty country but the 
withholding certificate contains a mailing address outside the treaty 
country or the withholding agent has a current mailing address as part 
of its account information for the direct account holder that is outside 
the treaty country. A mailing address that is a P.O. Box, in-care-of 
address, or address at a financial institution (if the financial 
institution is not a beneficial owner) shall not preclude a withholding 
agent from treating the account holder as a resident of a treaty country 
if such address is in the treaty country. If a withholding agent has a 
mailing address (whether or not contained on the withholding 
certificate) outside the applicable treaty country, the withholding 
agent may nevertheless treat a direct account holder as a resident of an 
applicable treaty country if--
    (A) The withholding agent has in its possession or obtains 
documentary evidence described in Sec.  1.1471-3(c)(5)(i) supporting the 
account holder's claim of residence in the applicable treaty country 
(and the additional documentation does not contain an address outside 
the treaty country);
    (B) The withholding agent has in its possession, or obtains, 
documentation that establishes that the direct account holder is an 
entity organized in a treaty country (or an entity managed and 
controlled in a treaty country, if the applicable treaty so requires);
    (C) The withholding agent knows that the address outside the 
applicable

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treaty country (other than a P.O. box, or in-care-of address) is a 
branch of the account holder that is an entity that is a resident of the 
applicable treaty country; or
    (D) The withholding agent obtains a written statement from the 
direct account holder that reasonably establishes entitlement to treaty 
benefits.
    (iii) Standing instructions. A beneficial owner withholding 
certificate is unreliable or incorrect to establish entitlement to a 
reduced rate of withholding under an income tax treaty if the direct 
account holder has standing instructions to pay amounts directing the 
withholding agent to pay amounts from its account to an address or an 
account outside the treaty country unless the account holder provides a 
reasonable explanation, in writing, or the withholding agent has in its 
possession or obtains documentary evidence described in Sec.  1.1471-
3(c)(5)(i) establishing the account holder's residence in the applicable 
treaty country.
    (7) Documentary evidence. A withholding agent shall not treat 
documentary evidence provided by a direct account holder as valid if the 
documentary evidence does not reasonably establish the identity of the 
person presenting the documentary evidence. For example, documentary 
evidence is not valid if it is provided in person by a direct account 
holder that is a natural person and the photograph or signature on the 
documentary evidence, if any, does not match the appearance or signature 
of the person presenting the document. A withholding agent shall not 
rely on documentary evidence to reduce the rate of withholding that 
would otherwise apply under the presumption rules of Sec. Sec.  1.1441-
1(b)(3), 1.1441-5(d) and (e)(6), and 1.6049-5(d) if the documentary 
evidence contains information that is inconsistent with the direct 
account holder's claim of a reduced rate of withholding, the withholding 
agent has other account information that is inconsistent with the direct 
account holder's claim, or the documentary evidence lacks information 
necessary to establish entitlement to a reduced rate of withholding. For 
example, if a direct account holder provides documentary evidence to 
claim treaty benefits and the documentary evidence establishes the 
direct account holder's status as a foreign person and a resident of a 
treaty country, but the account holder fails to provide the treaty 
statements required by Sec.  1.1441-6(c)(5), the documentary evidence 
does not establish the direct account holder's entitlement to a reduced 
rate of withholding. For purposes of establishing a direct account 
holder's status as a foreign person or resident of a country with which 
the United States has an income tax treaty, documentary evidence shall 
be considered unreliable or incorrect only if it is not reliable under 
the rules of paragraph (b)(8) or (9) of this section.
    (8) Documentary evidence--establishment of foreign status. A 
withholding agent has reason to know that documentary evidence is 
unreliable or incorrect for purposes of establishing the direct account 
holder's status as a foreign person if the documentary evidence is 
described in paragraphs (b)(8)(i), (ii), (iii), or (iv) of this section.
    (i) Documentary evidence received prior to January 1, 2001. A 
withholding agent shall not treat documentary evidence provided by a 
direct account holder before January 1, 2001, as valid for purposes of 
establishing the account holder's status as a foreign person if it has 
actual knowledge that the account holder is a U.S. person or if it has a 
mailing or residence address for the account holder in the United 
States. If a withholding agent has an address for the direct account 
holder in the United States, the withholding agent may nevertheless 
treat the account holder as a foreign person if it can so treat the 
account holder under the rules of paragraph (b)(8)(ii) of this section. 
See, however, paragraph (b)(3)(ii) of this section regarding changes in 
circumstances with respect to preexisting obligations.
    (ii) Documentary evidence received after December 31, 2000. A 
withholding agent shall not treat documentary evidence provided by an 
account holder after December 31, 2000, as valid for purposes of 
establishing the direct account holder's foreign status if the 
withholding agent does not have a permanent residence address for the 
account holder. Documentary evidence is also unreliable or incorrect to 
establish

[[Page 224]]

a direct account holder's status as a foreign person if the withholding 
agent has classified the account holder as a U.S. person in its account 
information, if the withholding agent has a current mailing or permanent 
residence address (whether or not on the documentation) for the direct 
account holder in the United States, the direct account holder notifies 
the withholding agent of a new residence or mailing address in the 
United States, or if the withholding agent has a current telephone 
number for the account holder in the United States and has no telephone 
number for the account holder outside of the United States. 
Notwithstanding the foregoing, a withholding agent may rely on 
documentary evidence as establishing the direct account holder's foreign 
status if it may do so under the provisions of paragraph (b)(8)(ii)(A) 
or (B) of this section.
    (A) Treatment of individual's foreign status. A withholding agent 
may treat a direct account holder that is an individual as a foreign 
person even if it has any of the U.S. indicia described in this 
paragraph for the account holder if--
    (1) The withholding agent has in its possession or obtains 
additional documentary evidence supporting the claim of foreign status 
(described in Sec.  1.1471-3(c)(5)(i)) that does not contain a U.S. 
address and a reasonable explanation in writing supporting the account 
holder's foreign status;
    (2) The withholding agent obtains a valid beneficial owner 
withholding certificate on Form W-8 and the Form W-8 contains a 
permanent residence address outside the United States and a mailing 
address outside the United States (or if a mailing address is inside the 
United States the account holder provides a reasonable explanation in 
writing supporting the account holder's foreign status); or
    (3) For a payment made with respect to an offshore obligation (with 
offshore obligation defined as in Sec.  1.6049-5(c)(1)), the withholding 
agent classifies the individual as a resident of the country in which 
the obligation is maintained, the withholding agent is required to 
report a payment made to the individual annually on a tax information 
statement that is filed with the tax authority of the country in which 
the office is located as part of that country's resident reporting 
requirements, and that country has a tax information exchange agreement 
or income tax treaty in effect with the United States.
    (B) Presumption of entity's foreign status. A withholding agent may 
treat a direct account holder that is an entity (other than a flow-
through entity) as a foreign person even if it has any of the U.S. 
indicia described in this paragraph for the account holder in the United 
States if--
    (1) The withholding agent has in its possession or obtains 
documentary evidence establishing foreign status that substantiates that 
the entity is actually organized or created under the laws of a foreign 
country;
    (2) The withholding agent obtains a valid beneficial owner 
withholding certificate on Form W-8 and the Form W-8 contains a 
permanent residence address outside the United States and a mailing 
address outside the United States (or if a mailing address is inside the 
United States the account holder provides additional documentary 
evidence sufficient to establish the account holder's foreign status); 
or
    (3) For a payment made with respect to an offshore obligation (with 
offshore obligation defined as in Sec.  1.6049-5(c)(1)), the withholding 
agent classifies the entity as a resident of the country in which the 
account is maintained, the withholding agent is required to report a 
payment made to the entity annually on a tax information statement that 
is filed with the tax authority of the country in which the office is 
located as part of that country's resident reporting requirements, and 
that country has a tax information exchange agreement or income tax 
treaty in effect with the United States.
    (iii) U.S. place of birth. A withholding agent has reason to know 
that documentary evidence provided by a direct account holder to support 
an individual's foreign status is unreliable or incorrect if the 
withholding agent has, either on the documentary evidence or as part of 
its account information, an unambiguous indication of a place of birth 
for the individual in the United States. A withholding agent may treat 
the individual as a foreign person, notwithstanding the U.S. birth 
place, if

[[Page 225]]

the withholding agent has in its possession or obtains documentary 
evidence described in Sec.  1.1471-3(c)(5)(i)(B) evidencing citizenship 
in a country other than the United States and a copy of the individual's 
Certificate of Loss of Nationality of the United States. Alternatively, 
a withholding agent may treat the individual as a foreign person if the 
withholding agent obtains a valid beneficial owner withholding 
certificate on Form W-8 from the individual that establishes the account 
holder's foreign status, documentary evidence described in Sec.  1.1471-
3(c)(5)(i)(B) evidencing citizenship in a country other than the United 
States, and a reasonable written explanation of the individual's 
renunciation of U.S. citizenship or the reason the individual did not 
obtain U.S. citizenship at birth.
    (iv) Standing instructions with respect to offshore obligations. 
Documentary evidence is unreliable or incorrect if it is provided with 
respect to an offshore obligation (as defined in Sec.  1.6049-5(c)(1)) 
of a direct account holder that has provided the withholding agent with 
standing instructions to pay amounts to an address or an account 
maintained in the United States. The withholding agent may treat the 
direct account holder as a foreign person, however, if the account 
holder provides either a reasonable explanation in writing that supports 
its foreign status or a valid beneficial owner withholding certificate 
claiming foreign status.
    (9) Documentary evidence--claim of reduced rate of withholding under 
treaty. A withholding agent has reason to know that documentary evidence 
is unreliable or incorrect for purposes of establishing that a direct 
account holder is a resident of a country with which the United States 
has an income tax treaty if it is described in paragraph (b)(9)(i) or 
(ii) of this section.
    (i) Permanent residence address and mailing address. Documentary 
evidence is unreliable or incorrect if the withholding agent has a 
current mailing or current permanent residence address for the direct 
account holder (whether or not on the documentary evidence) that is 
outside the applicable treaty country, or the withholding agent has no 
permanent residence address for the account holder. If a withholding 
agent has a current mailing or current permanent residence address for 
the direct account holder outside the applicable treaty country, the 
withholding agent may nevertheless treat a direct account holder as a 
resident of an applicable treaty country if the withholding agent--
    (A) Has in its possession or obtains additional documentary evidence 
described in Sec.  1.1471-3(c)(5)(i) supporting the direct account 
holder's claim of residence in the applicable treaty country (and the 
documentary evidence does not contain an address outside the applicable 
treaty country, a P.O. box, an in-care-of address, or the address of a 
financial institution);
    (B) Has in its possession or obtains documentary evidence described 
in Sec.  1.1471-3(c)(5)(i) that establishes the direct account holder is 
an entity organized in a treaty country (or an entity managed and 
controlled in a treaty country, if the applicable treaty so requires); 
or
    (C) Obtains a valid beneficial owner withholding certificate on Form 
W-8 that contains a permanent residence address and a mailing address in 
the applicable treaty country.
    (ii) Standing instructions. Documentary evidence is unreliable or 
incorrect if the direct account holder has provided the withholding 
agent with standing instructions to pay amounts to an address or an 
account maintained outside the treaty country unless the direct account 
holder provides a reasonable explanation, in writing, establishing the 
direct account holder's residence in the applicable treaty country, or a 
valid beneficial owner withholding certificate that contains a permanent 
residence address and a mailing address in the applicable treaty 
country.
    (10) Indirect account holders. A withholding agent that receives 
documentation from a payee through a nonqualified intermediary, a flow-
through entity, or a U.S. branch (including a territory financial 
institution) described in Sec.  1.1441-1(b)(2)(iv) (other than a U.S. 
branch or territory financial institution that is treated as a U.S. 
person) has reason to know that the documentation is unreliable or 
incorrect if a reasonably prudent person in the position of a 
withholding agent would

[[Page 226]]

question the claims made. This standard requires, but is not limited to, 
a withholding agent's compliance with the rules of paragraphs (b)(10)(i) 
through (iv).
    (i) The withholding agent must review the withholding statement 
described in Sec.  1.1441-1(e)(3)(iv) and may not rely on information in 
the statement to the extent the information does not support the claims 
made for any payee. For this purpose, a withholding agent may not treat 
a payee as a foreign person if an address in the United States is 
provided for such payee and may not treat a person as a resident of a 
country with which the United States has an income tax treaty if the 
address for that person is outside the applicable treaty country. 
Notwithstanding a U.S. address or an address outside a treaty country, 
the withholding agent may treat a payee as a foreign person or a foreign 
person as a resident of a treaty country if the withholding statement is 
accompanied by a valid withholding certificate and documentary evidence 
(as described in Sec.  1.1471-3(c)(5)(i)) or a reasonable explanation is 
provided, in writing, by the nonqualified intermediary, flow-through 
entity, or U.S. branch supporting the payee's foreign status or the 
foreign person's residency in a treaty country.
    (ii) The withholding agent must review each withholding certificate 
in accordance with the requirements of paragraphs (b)(5) and (6) of this 
section and verify that the information on the withholding certificate 
is consistent with the information on the withholding statement required 
under Sec.  1.1441-1(e)(3)(iv). If there is a discrepancy between the 
withholding certificate and the withholding statement, the withholding 
agent may choose to rely on the withholding certificate, if valid, and 
instruct the nonqualified intermediary, flow-through entity, or U.S. 
branch to correct the withholding statement or apply the presumption 
rules of Sec. Sec.  1.1441-1(b), 1.1441-5(d) and (e)(6), 1.6049-5(d), 
and 1.1471-3(f) (for a withholdable payment for chapter 4 purposes) to 
the payment allocable to the payee who provided the withholding 
certificate. If the withholding agent chooses to rely upon the 
withholding certificate, the withholding agent is required to instruct 
the intermediary or flow-through entity to correct the withholding 
statement and confirm that the intermediary or flow-through entity does 
not know or have reason to know that the withholding certificate is 
unreliable or inaccurate.
    (iii) The withholding agent must review the documentary evidence 
provided by the nonqualified intermediary, flow-through entity, or U.S. 
branch to determine that there is no obvious indication that the payee 
is a U.S. non-exempt recipient or that the documentary evidence does not 
establish the identity of the person who provided the documentation 
(e.g., the documentary evidence does not appear to be an identification 
document).
    (iv) If the beneficial owner is claiming a reduced rate of 
withholding under an income tax treaty, the rules of Sec.  1.1441-
6(b)(1)(ii) also apply to determine whether the withholding agent has 
reason to know that a claim for treaty benefits is unreliable or 
incorrect.
    (11) Limits on reason to know for multiple obligations belonging to 
a single person. A withholding agent that maintains multiple obligations 
for a single person will have reason to know that a claim of foreign 
status for the person is inaccurate based on account information for 
another obligation held by the person only to the extent that--
    (i) The withholding agent's computerized systems link the 
obligations by reference to a data element such as client number, EIN, 
or foreign tax identifying number and consolidates the account 
information and payment information for the obligations; or
    (ii) The withholding agent has treated the obligations as 
consolidated obligations for purposes of sharing documentation pursuant 
to Sec.  1.1441-1(e)(4)(ix).
    (12) Reasonable explanation supporting claim of foreign status. A 
reasonable explanation supporting an individual's claim of foreign 
status for purposes of paragraphs (b)(5) and (8) of this section means a 
written statement prepared by the individual or the individual's 
completion of a checklist provided by the withholding agent, stating 
that the individual meets the requirements of one

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of paragraphs (b)(12)(i) through (iv) of this section.
    (i) The individual certifies that he or she--
    (A) Is a student at a U.S. educational institution and holds the 
appropriate visa;
    (B) Is a teacher, trainee, or intern at a U.S. educational 
institution or a participant in an educational or cultural exchange 
visitor program, and holds the appropriate visa;
    (C) Is a foreign individual assigned to a diplomatic post or a 
position in a consulate, embassy, or international organization in the 
United States; or
    (D) Is a spouse or unmarried child under the age of 21 years of one 
of the persons described in paragraphs (b)(12)(i)(A) through (C) of this 
section;
    (ii) The individual provides information demonstrating that he or 
she has not met the substantial presence test set forth in Sec.  
301.7701(b)-1(c) of this chapter (e.g., a written statement indicating 
the number of days present in the United States during the three-year 
period that includes the current year);
    (iii) The individual certifies that he or she meets the closer 
connection exception described in Sec.  301.7701(b)-2, states the 
country to which the individual has a closer connection, and 
demonstrates how that closer connection has been established; or
    (iv) With respect a payment entitled to a reduced rate of tax under 
a U.S. income tax treaty, the individual certifies that he or she is 
treated as a resident of a country other than the United States and is 
not treated as a U.S. resident or U.S. citizen for purposes of that 
income tax treaty.
    (13) Additional guidance. The IRS may prescribe other circumstances 
for which a withholding certificate or documentary evidence is 
unreliable or incorrect in addition to the circumstances described in 
paragraph (b) of this section to establish an account holder's status as 
a foreign person or a beneficial owner entitled to a reduced rate of 
withholding in published guidance (see Sec.  601.601(d)(2) of this 
chapter).
    (c) Agent--(1) In general. A withholding agent may authorize an 
agent to fulfill its obligations under chapter 3 if the requirements of 
paragraph (c)(2) of this section are satisfied. The acts of an agent of 
a withholding agent (including the receipt of withholding certificates, 
the payment of amounts of income subject to withholding, and the deposit 
of tax withheld) are imputed to the withholding agent on whose behalf it 
is acting.
    (2) Authorized agent. An agent is an authorized agent only if--
    (i) There is a written agreement between the withholding agent and 
the person acting as agent that clearly provides which obligations under 
chapter 3 that the agent is authorized to fulfill;
    (ii) A Form 8655, ``Reporting Agent Authorization,'' is filed with 
the IRS by a withholding agent if its agent (including any sub-agent) 
acts as a reporting agent for filing Form 1042 on behalf of the 
withholding agent and the agent (or sub-agent) identifies itself 
(instead of the withholding agent) as the filer on the Form 1042;
    (iii) Books and records and relevant personnel of the agent 
(including any sub-agent) are available to the withholding agent (on a 
continuous basis, including after termination of the relationship) in 
order to evaluate the withholding agent's compliance with the provisions 
of chapters 3, 4, and 61 of the Code, section 3406, and the regulations 
under those provisions; and
    (iv) The U.S. withholding agent remains fully liable for the acts of 
its agent (or for any sub-agent) and does not assert any of the defenses 
that may otherwise be available, including under common law principles 
of agency in order to avoid tax liability under the Code.
    (3) Liability of withholding agent acting through an agent. An 
authorized agent is subject to the same withholding and reporting 
obligations that apply to any withholding agent under the provisions of 
chapter 3 of the Code and the regulations thereunder. See the 
instructions to Form 1042-S for the manner for filing the form when an 
authorized agent acts on behalf of a withholding agent. Except as 
otherwise provided in the QI, WP, and WT agreements, an authorized agent 
does not benefit from the special procedures or exceptions that may 
apply to a QI, WP, or WT. A withholding agent acting through an 
authorized agent is liable for any failure

[[Page 228]]

of the agent, such as failure to withhold an amount or make payment of 
tax, in the same manner and to the same extent as if the agent's failure 
had been the failure of the withholding agent. For this purpose, the 
agent's actual knowledge or reason to know shall be imputed to the 
withholding agent. The withholding agent's liability shall exist 
irrespective of the fact that the authorized agent is also a withholding 
agent and is itself separately liable for failure to comply with the 
provisions of the regulations under section 1441, 1442, or 1443. 
However, the same tax, interest, or penalties shall not be collected 
more than once.
    (d) United States obligations. If the United States is a withholding 
agent for an item of interest, including original issue discount, on 
obligations of the United States or of any agency or instrumentality 
thereof, the withholding obligation of the United States is assumed and 
discharged by--
    (1) The Commissioner of the Public Debt, for interest paid by checks 
issued through the Bureau of the Public Debt;
    (2) The Treasurer of the United States, for interest paid by him or 
her, whether by check or otherwise;
    (3) Each Federal Reserve Bank, for interest paid by it, whether by 
check or otherwise; or
    (4) Such other person as may be designated by the IRS.
    (e) Assumed obligations. If, in connection with the sale of a 
corporation's property, payment on the bonds or other obligations of the 
corporation is assumed by a person, then that person shall be a 
withholding agent to the extent amounts subject to withholding are paid 
to a foreign person. Thus, the person shall withhold such amounts under 
Sec.  1.1441-1 as would be required to be withheld by the seller or 
corporation had no such sale or assumption been made.
    (f) Conduit financing arrangements--(1) Liability of withholding 
agent. Subject to paragraph (f)(2) of this section, any person that is 
required to deduct and withhold tax under Sec.  1.1441-3(g) is made 
liable for that tax by section 1461. A person that is required to deduct 
and withhold tax but fails to do so is liable for the payment of the tax 
and any applicable penalties and interest.
    (2) Exception for withholding agents that do not know of conduit 
financing arrangement--(i) In general. A withholding agent will not be 
liable under paragraph (f)(1) of this section for failing to deduct and 
withhold with respect to a conduit financing arrangement unless the 
person knows or has reason to know that the financing arrangement is a 
conduit financing arrangement. This standard shall be satisfied if the 
withholding agent knows or has reason to know of facts sufficient to 
establish that the financing arrangement is a conduit financing 
arrangement, including facts sufficient to establish that the 
participation of the intermediate entity in the financing arrangement is 
pursuant to a tax avoidance plan. A withholding agent that knows only of 
the financing transactions that comprise the financing arrangement will 
not be considered to know or have reason to know of facts sufficient to 
establish that the financing arrangement is a conduit financing 
arrangement.
    (ii) Examples. The following examples illustrate the operation of 
paragraph (d)(2) of this section. Each example assumes that withholding 
under chapter 4 does not apply.

    Example 1. (i) DS is a U.S. subsidiary of FP, a corporation 
organized in Country N, a country that does not have an income tax 
treaty with the United States. FS is a special purpose subsidiary of FP 
that is incorporated in Country T, a country that has an income tax 
treaty with the United States that prohibits the imposition of 
withholding tax on payments of interest. FS is capitalized with 
$10,000,000 in debt from BK, a Country N bank, and $1,000,000 in capital 
from FS.
    (ii) On May 1, 1995, C, a U.S. person, purchases an automobile from 
DS in return for an installment note. On July 1, 1995, DS sells a number 
of installment notes, including C's, to FS in exchange for $10,000,000. 
DS continues to service the installment notes for FS, and C is not 
notified of the sale of its obligation and continues to make payments to 
DS. But for the withholding tax on payments of interest by DS to BK, DS 
would have borrowed directly from BK, pledging the installment notes as 
collateral.
    (iii) The C installment note is a financing transaction, whether 
held by DS or by FS, and the FS note held by BK also is a financing 
transaction. After FS purchases the installment note, and during the 
time the installment note is held by FS, the transactions constitute a 
financing arrangement, within the meaning of Sec.  1.881-3(a)(2)(i). BK 
is

[[Page 229]]

the financing entity, FS is the intermediate entity, and C is the 
financed entity. Because the participation of FS in the financing 
arrangement reduces the tax imposed by section 881 and because there was 
a tax avoidance plan, FS is a conduit entity.
    (iv) Because C does not know or have reason to know of the tax 
avoidance plan (and by extension that the financing arrangement is a 
conduit financing arrangement), C is not required to withhold tax under 
section 1441. However, DS, who knows that FS's participation in the 
financing arrangement is pursuant to a tax avoidance plan and is a 
withholding agent for purposes of section 1441, is not relieved of its 
withholding responsibilities.
    Example 2. Assume the same facts as in Example 1 except that C 
receives a new payment booklet on which DS is described as ``agent.'' 
Although C may deduce that its installment note has been sold, without 
more C has no reason to know of the existence of a financing 
arrangement. Accordingly, C is not liable for failure to withhold, 
although DS still is not relieved of its withholding responsibilities.
    Example 3. (i) DC is a U.S. corporation that is in the process of 
negotiating a loan of $10,000,000 from BK1, a bank located in Country N, 
a country that does not have an income tax treaty with the United 
States. Before the loan agreement is signed, DC's tax lawyers point out 
that interest on the loan would not be subject to withholding tax if the 
loan were made by BK2, a subsidiary of BK1 that is incorporated in 
Country T, a country that has an income tax treaty with the United 
States that prohibits the imposition of withholding tax on payments of 
interest. BK1 makes a loan to BK2 to enable BK2 to make the loan to DC. 
Without the loan from BK1 to BK2, BK2 would not have been able to make 
the loan to DC.
    (ii) The loan from BK1 to BK2 and the loan from BK2 to DC are both 
financing transactions and together constitute a financing arrangement 
within the meaning of Sec.  1.881-3(a)(2)(i). BK1 is the financing 
entity, BK2 is the intermediate entity, and DC is the financed entity. 
Because the participation of BK2 in the financing arrangement reduces 
the tax imposed by section 881 and because there is a tax avoidance 
plan, BK2 is a conduit entity.
    (iii) Because DC is a party to the tax avoidance plan (and 
accordingly knows of its existence), DC must withhold tax under section 
1441. If DC does not withhold tax on its payment of interest, BK2, a 
party to the plan and a withholding agent for purposes of section 1441, 
must withhold tax as required by section 1441.
    Example 4. (i) DC is a U.S. corporation that has a long-standing 
banking relationship with BK2, a U.S. subsidiary of BK1, a bank 
incorporated in Country N, a country that does not have an income tax 
treaty with the United States. DC has borrowed amounts of as much as 
$75,000,000 from BK2 in the past. On January 1, 1995, DC asks to borrow 
$50,000,000 from BK2. BK2 does not have the funds available to make a 
loan of that size. BK2 considers asking BK1 to enter into a loan with DC 
but rejects this possibility because of the additional withholding tax 
that would be incurred. Accordingly, BK2 borrows the necessary amount 
from BK1 with the intention of on-lending to DC. BK1 does not make the 
loan directly to DC because of the withholding tax that would apply to 
payments of interest from DC to BK1. DC does not negotiate with BK1 and 
has no reason to know that BK1 was the source of the loan.
    (ii) The loan from BK2 to DC and the loan from BK1 to BK2 are both 
financing transactions and together constitute a financing arrangement 
within the meaning of Sec.  1.881-3(a)(2)(i). BK1 is the financing 
entity, BK2 is the intermediate entity, and DC is the financed entity. 
The participation of BK2 in the financing arrangement reduces the tax 
imposed by section 881. Because the participation of BK2 in the 
financing arrangement reduces the tax imposed by section 881 and because 
there was a tax avoidance plan, BK2 is a conduit entity.
    (iii) Because DC does not know or have reason to know of the tax 
avoidance plan (and by extension that the financing arrangement is a 
conduit financing arrangement), DC is not required to withhold tax under 
section 1441. However, BK2, who is also a withholding agent under 
section 1441 and who knows that the financing arrangement is a conduit 
financing arrangement, is not relieved of its withholding 
responsibilities.

    (g) Effective/applicability date. Except as otherwise provided in 
paragraph (a)(4) 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. 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. 7977, 49 FR 36834, Sept. 20, 1984]

    Editorial Note: For Federal Register citations affecting Sec.  
1.1441-7, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.

[[Page 230]]



Sec.  1.1441-8  Exemption from withholding for payments to foreign 
governments, international organizations, foreign central banks of
issue, and the Bank for International Settlements.

    (a) Foreign governments. Under section 892, certain specific types 
of income received by foreign governments are excluded from gross income 
and are exempt from taxation, unless derived from the conduct of a 
commercial activity or received from or by a controlled commercial 
entity. Accordingly, withholding is not required under Sec.  1.1441.1 
with regard to any item of income which is exempt from taxation under 
section 892.
    (b) Reliance on claim of exemption by foreign government. Absent 
actual knowledge or reason to know otherwise, the withholding agent may 
rely upon a claim of exemption made by the foreign government if, prior 
to the payment, the withholding agent can reliably associate the payment 
with documentation upon which it can rely to treat the payment as made 
to a beneficial owner in accordance with Sec.  1.1441-1(e)(1)(ii). A 
Form W-8 furnished by a foreign government for purposes of claiming an 
exemption under this paragraph (b) is valid only if, in addition to 
other applicable requirements, it certifies that the income is, or will 
be, exempt from taxation under section 892 and the regulations under 
that section and whether the person whose name is on the certificate is 
an integral part of a foreign government (as defined in Sec.  1.892-
2T(a)(2)) or a controlled entity (as defined in Sec.  1.892-2T(a)(3)).
    (c) Income of a foreign central bank of issue or the Bank for 
International Settlements--(1) Certain interest income. Section 895 
provides for the exclusion from gross income of certain income derived 
by a foreign central bank of issue, or by the Bank for International 
Settlements, from obligations of the United States or of any agency or 
instrumentality thereof or from interest on deposits with persons 
carrying on the banking business if the bank is the owner of the 
obligations or deposits and does not hold the obligations or deposits 
for, or use them in connection with, the conduct of a commercial banking 
function or other commercial activity by such bank. See Sec.  1.895-1. 
Absent actual knowledge or reason to know that a foreign central bank of 
issue, or the Bank for International Settlements, is operating outside 
the scope of the exclusion granted by section 895 and the regulations 
under that section, the withholding agent may rely on a claim of 
exemption if, prior to the payment, the withholding agent can reliably 
associate the payment with documentation upon which it can rely to treat 
the foreign central bank of issue or the Bank for International 
Settlements as the beneficial owner of the payment in accordance with 
Sec.  1.1441-1(e)(1)(ii). A Form W-8 furnished by a foreign central bank 
of issue or the Bank for International Settlements for purposes of 
claiming an exemption under this paragraph (c)(1) is valid only if, in 
addition to other applicable requirements, it certifies that the person 
whose name is on the certificate is a foreign central bank of issue, or 
the Bank for International Settlements, and that the bank does not, and 
will not, hold the obligations or the bank deposits covered by the Form 
W-8 for, or use them in connection with, the conduct of a commercial 
banking function or other commercial activity.
    (2) Bankers acceptances. Interest derived by a foreign central bank 
of issue from bankers acceptances is exempt from tax under sections 
871(i)(2)(C) and 881(d) and Sec.  1.861-2(b)(4). With respect to 
bankers' acceptances, a withholding agent may treat a payee as a foreign 
central bank of issue without requiring a withholding certificate if the 
name of the payee and other facts surrounding the payment reasonably 
indicate that the payee or beneficial owner is a foreign central bank of 
issue, as defined in Sec.  1.861-2(b)(4).
    (d) Exemption for payments to international organizations. A payment 
to an international organization (within the meaning of section 
7701(a)(18)) is exempt from withholding on any payment. A withholding 
agent may treat a payee as an international organization without 
requiring a withholding certificate if the name of the payee is one that 
is designated as an international organization by executive order 
(pursuant to 22 U.S.C. 288 through 288(f)) and

[[Page 231]]

other facts surrounding the transaction reasonably indicate that the 
international organization is the beneficial owner of the payment.
    (e) Failure to receive withholding certificate timely and other 
applicable procedures. See applicable procedures described in Sec.  
1.1441-1(b)(7) in the event the withholding agent does not hold a valid 
withholding certificate described in paragraph (b) or (c)(1) of this 
section or other appropriate documentation at the time of payment. 
Further, the provisions of Sec.  1.1441-1(e)(4) shall apply to 
withholding certificates and other documents related thereto furnished 
under the provisions of this section.
    (f) Effective date--(1) In general. This section applies to payments 
made after December 31, 2000.
    (2) Transition rules. For purposes of this section, the validity of 
a Form 8709 that was valid on January 1, 1998, under the regulations in 
effect prior to January 1, 2001 (see 26 CFR part 1, revised April 1, 
1999) and expired, or will expire, at any time during 1998, is extended 
until December 31, 1998. The validity of a Form 8709 that is valid on or 
after January 1, 1999, remains valid until its validity expires under 
the regulations in effect prior to January 1, 2001 (see 26 CFR part 1, 
revised April 1, 1999) but in no event shall such a form remain valid 
after December 31, 2000. The rule in this paragraph (f)(2), however, 
does not apply to extend the validity period of a Form 8709 that expires 
solely by reason of changes in the circumstances of the person whose 
name is on the certificate. Notwithstanding the first three sentences of 
this paragraph (f)(2), a withholding agent may choose to not take 
advantage of the transition rule in this paragraph (f)(2) with respect 
to one or more withholding certificates valid under the regulations in 
effect prior to January 1, 2001 (see 26 CFR part 1, revised April 1, 
1999) and, therefore, to require withholding certificates conforming to 
the requirements described in this section (new withholding 
certificates). For purposes of this section, a new withholding 
certificate is deemed to satisfy the documentation requirement under the 
regulations in effect prior to January 1, 2001 (see 26 CFR part 1, 
revised April 1, 1999). Further, a new withholding certificate remains 
valid for the period specified in Sec.  1.1441-1(e)(4)(ii), regardless 
of when the certificate is obtained.

[T.D. 8211, 53 FR 24066, June 27, 1988, as amended at T.D. 8211, 53 FR 
27595, July 21, 1988; Redesignated and amended by T.D. 8734, 62 FR 
53464, Oct. 14, 1997; T.D. 8804, 63 FR 72185, Dec. 31, 1998; 64 FR 
73410, Dec. 30, 1999]



Sec.  1.1441-9  Exemption from withholding on exempt income of a 
foreign tax-exempt organization, including foreign private 
foundations.

    (a) Exemption from withholding for exempt income. No withholding is 
required under section 1441(a) or 1442, and the regulations under those 
sections, on amounts paid to a foreign organization that is described in 
section 501(c) to the extent that the amounts are not income includable 
under section 512 in computing the organization's unrelated business 
taxable income. See, however, Sec.  1.1443-1 for withholding on payments 
of unrelated business income to foreign tax-exempt organizations and on 
payments subject to tax under section 4948. For a foreign organization 
to claim an exemption from withholding under section 1441(a) or 1442 
based on its status as an organization described in section 501(c), it 
must furnish the withholding agent with a withholding certificate 
described in paragraph (b)(2) of this section. A foreign organization 
described in section 501(c) may choose to claim a reduced rate of 
withholding under the procedures described in other sections of the 
regulations under section 1441 and not under this section. In 
particular, if an organization chooses to claim benefits under an income 
tax treaty, the withholding procedures applicable to claims of such a 
reduced rate are governed solely by the provisions of Sec.  1.1441-6 and 
not of this section.
    (b) Reliance on foreign organization's claim of exemption from 
withholding--(1) General rule. A withholding agent may rely on a claim 
of exemption under this section only if, prior to the payment, the 
withholding agent can reliably associate the payment with a valid 
withholding certificate described in paragraph (b)(2) of this section.

[[Page 232]]

    (2) Withholding certificate. A withholding certificate under this 
paragraph (b)(2) is valid only if it is a Form W-8 and if, in addition 
to other applicable requirements, the Form W-8 includes the taxpayer 
identifying number of the organization whose name is on the certificate, 
and it certifies that the Internal Revenue Service (IRS) has issued a 
favorable determination letter (and the date thereof) that is currently 
in effect, what portion, if any, of the amounts paid constitute income 
includible under section 512 in computing the organization's unrelated 
business taxable income, and, if the organization is described in 
section 501(c)(3), whether it is a private foundation described in 
section 509. Notwithstanding the preceding sentence, if the organization 
cannot certify that it has been issued a favorable determination letter 
that is still in effect, its withholding certificate is nevertheless 
valid under this paragraph (b)(2) if the organization attaches to the 
withholding certificate an opinion that is acceptable to the withholding 
agent from a U.S. counsel (or any other person as the IRS may prescribe 
in published guidance (see Sec.  601.601(d)(2) of this chapter)) 
concluding that the organization is described in section 501(c). If the 
determination letter or opinion of counsel to which the withholding 
certificate refers concludes that the organization is described in 
section 501(c)(3), and the certificate further certifies that the 
organization is not a private foundation described in section 509, an 
affidavit of the organization setting forth sufficient facts concerning 
the operations and support of the organization for the Internal Revenue 
Service (IRS) to determine that such organization would be likely to 
qualify as an organization described in section 509(a)(1), (2), (3), or 
(4) must be attached to the withholding certificate. An organization 
that provides an opinion of U.S. counsel or an affidavit may provide the 
same opinion or affidavit to more than one withholding agent provided 
that the opinion is acceptable to each withholding agent who receives it 
in conjunction with a withholding certificate. Any such opinion of 
counsel or affidavit must be renewed whenever there is a change in facts 
or circumstances that are relevant to determine the organization's 
status under section 501(c) or, if relevant, that the organization is or 
is not a private foundation described in section 509.
    (3) Presumptions in the absence of documentation. Notwithstanding 
paragraph (b)(1) of this section, if the organization's certification 
with respect to whether amounts paid constitute income includable under 
section 512 in computing the organization's unrelated business taxable 
income is not reliable or is lacking but all other certifications are 
reliable, the withholding agent may rely on the certificate but the 
amounts paid are presumed to be income includable under section 512 in 
computing the organization's unrelated business taxable income. If the 
certification regarding private foundation status is not reliable, the 
withholding agent may rely on the certificate but the amounts paid are 
presumed to be paid to a foreign beneficial owner that is a private 
foundation.
    (4) Reason to know. Reliance by a withholding agent on the 
information and certifications stated on a withholding certificate is 
subject to the agent's actual knowledge or reason to know that such 
information or certification is incorrect as provided in Sec.  1.1441-
7(b). For example, a withholding agent must cease to treat a foreign 
organization's claim for exemption from withholding based on the 
organization's tax-exempt status as valid beginning on the earlier of 
the date on which such agent knows that the IRS has given notice to such 
foreign organization that it is not an organization described in section 
501(c) or the date on which the IRS gives notice to the public that such 
foreign organization is not an organization described in section 501(c). 
Similarly, a withholding agent may no longer rely on a certification 
that an amount is not subject to tax under section 4948 beginning on the 
earlier of the date on which such agent knows that the IRS has given 
notice to such foreign organization that it is subject to tax under 
section 4948 or the date on which the IRS gives notice that such foreign 
organization is a private foundation within the meaning of section 
509(a).

[[Page 233]]

    (c) Failure to receive withholding certificate timely and other 
applicable procedures. See applicable procedures described in Sec.  
1.1441-1(b)(7) in the event the withholding agent does not hold a valid 
withholding certificate or other appropriate documentation at the time 
of payment. Further, the provisions of Sec.  1.1441-1(e)(4) shall apply 
to withholding certificates and other documents related thereto 
furnished under the provisions of this section.
    (d) Effective date--(1) In general. This section applies to payments 
made after December 31, 2000.
    (2) Transition rules. For purposes of this section, the validity of 
a Form W-8, 1001, or 4224 or a statement that was valid on January 1, 
1998, under the regulations in effect prior to January 1, 2001 (see 26 
CFR parts 1 and 35a, revised April 1, 1999) and expired, or will expire, 
at any time during 1998, is extended until December 31, 1998. The 
validity of a Form W-8, 1001, or 4224 or a statement that is valid on or 
after January 1, 1999 remains valid until its validity expires under the 
regulations in effect prior to January 1, 2001 (see 26 CFR parts 1 and 
35a, revised April 1, 1999) but in no event shall such form or statement 
remain valid after December 31, 2000. The rule in this paragraph (d)(2), 
however, does not apply to extend the validity period of a Form W-8, 
1001, or 4224 or a statement that expires solely by reason of changes in 
the circumstances of the person whose name is on the certificate. 
Notwithstanding the first three sentences of this paragraph (d)(2), a 
withholding agent may choose to not take advantage of the transition 
rule in this paragraph (d)(2) with respect to one or more withholding 
certificates valid under the regulations in effect prior to January 1, 
2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999) and, therefore, 
to require withholding certificates conforming to the requirements 
described in this section (new withholding certificates). For purposes 
of this section, a new withholding certificate is deemed to satisfy the 
documentation requirement under the regulations in effect prior to 
January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999). 
Further, a new withholding certificate remains valid for the period 
specified in Sec.  1.1441-1(e)(4)(ii), regardless of when the 
certificate is obtained.

[T.D. 8734, 62 FR 53465, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72185, Dec. 31, 1998; T.D. 8856, 64 FR 73410, Dec. 10, 1999; T.D. 8881, 
65 FR 32201, May 22, 2000]



Sec.  1.1441-10  Withholding agents with respect to fast-pay arrangements.

    (a) In general. A corporation that issues fast-pay stock in a fast-
pay arrangement described in Sec.  1.7701(l)-3(b)(1) is a withholding 
agent with respect to payments made on the fast-pay stock and payments 
deemed made under the recharacterization rules of Sec.  1.7701(l)-3. 
Except as provided in this paragraph (a) or in paragraph (b) of this 
section, the withholding tax rules under section 1441 and section 1442 
apply with respect to a fast-pay arrangement described in Sec.  
1.7701(l)-3(c)(1)(i) in accordance with the recharacterization rules 
provided in Sec.  1.7701(l)-3(c). In all cases, notwithstanding 
paragraph (b) of this section, if at any time the withholding agent 
knows or has reason to know that the Commissioner has exercised the 
discretion under either Sec.  1.7701(l)-3(c)(1)(ii) to apply the 
recharacterization rules of Sec.  1.7701(l)-3(c), or Sec.  1.7701(l)-
3(d) to depart from the recharacterization rules of Sec.  1.7701(l)-3(c) 
for a taxpayer, the withholding agent must withhold on payments made (or 
deemed made) to that taxpayer in accordance with the characterization of 
the fast-pay arrangement imposed by the Commissioner under Sec.  
1.7701(l)-3.
    (b) Exception. If at any time the withholding agent knows or has 
reason to know that any taxpayer entered into a fast-pay arrangement 
with a principal purpose of applying the recharacterization rules of 
Sec.  1.7701(l)-3(c) to avoid tax under section 871(a) or section 881, 
then for each payment made or deemed made to such taxpayer under the 
arrangement, the withholding agent must withhold, under section 1441 or 
section 1442, the higher of--
    (1) The amount of withholding that would apply to such payment 
determined under the form of the arrangement; or

[[Page 234]]

    (2) The amount of withholding that would apply to deemed payments 
determined under the recharacterization rules of Sec.  1.7701(l)-3(c).
    (c) Liability. Any person required to deduct and withhold tax under 
this section is made liable for that tax by section 1461, and is also 
liable for applicable penalties and interest for failing to comply with 
section 1461.
    (d) Examples. The following examples illustrate the rules of this 
section:

    Example 1. REIT W issues shares of fast-pay stock to foreign 
individual A, a resident of Country C. United States source dividends 
paid to residents of C are subject to a 30 percent withholding tax. W 
issues all shares of benefited stock to foreign individuals who are 
residents of Country D. D's income tax convention with the United States 
reduces the United States withholding tax on dividends to 15 percent. 
Under Sec.  1.7701(l)-3(c), the dividends paid by W to A are deemed to 
be paid by W to the benefited shareholders. W has reason to know that A 
entered into the fast-pay arrangement with a principal purpose of using 
the recharacterization rules of Sec.  1.7701(l)-3(c) to reduce United 
States withholding tax. W must withhold at the 30 percent rate because 
the amount of withholding that applies to the payments determined under 
the form of the arrangement is higher than the amount of withholding 
that applies to the payments determined under Sec.  1.7701(l)-3(c).
    Example 2. The facts are the same as in Example 1 of this paragraph 
(d) except that W does not know, or have reason to know, that A entered 
into the arrangement with a principal purpose of using the 
recharacterization rules of Sec.  1.7701(l)-3(c) to reduce United States 
withholding tax. Further, the Commissioner has not exercised the 
discretion under Sec.  1.7701(l)-3(d) to depart from the 
recharacterization rules of Sec.  1.7701(l)-3(c). Accordingly, W must 
withhold tax at a 15 percent rate on the dividends deemed paid to the 
benefited shareholders.

    (e) Effective date. This section applies to payments made (or deemed 
made) on or after January 6, 1999.

[T.D. 8853, 65 FR 1312, Jan. 10, 2000]



Sec.  1.1442-1  Withholding of tax on foreign corporations.

    For regulations concerning the withholding of tax at source under 
section 1442 in the case of foreign corporations, foreign governments, 
international organizations, foreign tax-exempt corporations, or foreign 
private foundations, see Sec. Sec.  1.1441-1 through 1.1441-9.

[T.D. 8734, 62 FR 53466, Oct. 14, 1997]



Sec.  1.1442-2  Exemption under a tax treaty.

    For regulations providing for a claim of reduced withholding tax 
under section 1442 by certain foreign corporations pursuant to the 
provisions of an income tax treaty, see Sec.  1.1441-6.

[T.D. 8734, 62 FR 53466, Oct. 14, 1997]



Sec.  1.1442-3  Tax exempt income of a foreign tax-exempt corporation.

    For regulations providing for a claim of exemption for income exempt 
from tax under section 501(a) of a foreign tax-exempt corporation, see 
Sec.  1.1441-9. See Sec.  1.1443-1 for withholding rules applicable to 
foreign private foundations and to the unrelated business income of 
foreign tax-exempt organizations.

[T.D. 8734, 62 FR 53466, Oct. 14, 1997]



Sec.  1.1443-1  Foreign tax-exempt organizations.

    (a) Income includible in computing unrelated business taxable 
income. In the case of a foreign organization that is described in 
section 501(c), amounts paid or effectively connected taxable income 
allocable to the organization that are includible under section 512 and 
section 513 in computing the organization's unrelated business taxable 
income are subject to withholding under Sec. Sec.  1.1441-1, 1.1441-4, 
1.1441-6, and 1.1446-1 through 1.1446-6, in the same manner as payments 
or allocations of effectively connected taxable income of the same 
amounts made to any foreign person that is not a tax-exempt 
organization. Therefore, a foreign organization receiving amounts 
includible under section 512 and section 513 in computing the 
organization's unrelated business taxable income may claim an exemption 
from withholding or a reduced rate of withholding with respect to that 
income in the same manner as a foreign person that is not a tax-exempt 
organization. See Sec.  1.1441-9(b)(3) for a presumption that amounts 
are includible under section 512 and section 513 in computing the 
organization's unrelated business taxable income in the absence of 
reliable certification. See

[[Page 235]]

also Sec.  1.1446-3(c)(3), applying this presumption in the context of 
section 1446.
    (b) Income subject to tax under section 4948--(1) In general. The 
gross investment income (as defined in section 4940(c)(2)) of a foreign 
private foundation is subject to withholding under section 1443(b) at 
the rate of 4 percent to the extent that the income is from sources 
within the United States and is subject to the tax imposed by section 
4948(a) and the regulations under that section. Withholding under this 
paragraph (b) is required irrespective of the fact that the income may 
be effectively connected with the conduct of a trade or business in the 
United States by the foreign organization. See Sec.  1.1441-9(b)(3) for 
applicable presumptions that amounts are subject to tax under section 
4948. The withholding imposed under this paragraph (b)(1) does not 
obviate a private foundation's obligation to file any return required by 
law with respect to such organization, such as the form that the 
foundation is required to file under section 6033 for the taxable year.
    (2) Reliance on a foreign organization's claim of foreign private 
foundation status. For reliance by a withholding agent on a foreign 
organization's claim of foreign private foundation status, see Sec.  
1.1441-9 (b) and (c).
    (3) Applicable procedures. A withholding agent withholding the 4-
percent amount pursuant to paragraph (b)(1) of this section shall treat 
such withholding as withholding under section 1441(a) or 1442(a) for all 
purposes, including reporting of the payment on a Form 1042 and a Form 
1042-S pursuant to Sec.  1.1461-1 (b) and (c). Similarly, the foreign 
private foundation shall treat the 4-percent withholding as withholding 
under section 1441(a) or 1442(a), including for purposes of claims for 
refunds and credits.
    (4) Claim of benefits under an income tax treaty. The withholding 
procedures applicable to claims of a reduced rate under an income tax 
treaty are governed solely by the provisions of Sec.  1.1441-6 and not 
by this section.
    (c) Effective date--(1) In general. This section applies to payments 
made after December 31, 2000, except that the references in paragraph 
(a) of this section to effectively connected taxable income and 
withholding under section 1446 shall apply to partnership taxable years 
beginning after May 18, 2005, or such earlier time as the regulations 
under Sec. Sec.  1.1446-1 through 1.1446-5 apply by reason of an 
election under Sec.  1.1446-7.
    (2) Transition rules. For purposes of this section, the validity of 
an affidavit or opinion of counsel described in Sec.  1.1443-1(b)(4)(i) 
in effect prior to January 1, 2001 (see Sec.  1.1443-1(b)(4)(i) as 
contained in 26 CFR part 1, revised April 1, 1999) is extended until 
December 31, 2000. However, a withholding agent may choose to not take 
advantage of the transition rule in this paragraph (c)(2) with respect 
to one or more withholding certificates valid under the regulations in 
effect prior to January 1, 2001 (see 26 CFR part 1, revised April 1, 
1999) and, therefore, to require withholding certificates conforming to 
the requirements described in this section (new withholding 
certificates). For purposes of this section, a new withholding 
certificate is deemed to satisfy the documentation requirement under the 
regulations in effect prior to January 1, 2001 (see 26 CFR part 1, 
revised April 1, 1999). Further, a new withholding certificate remains 
valid for the period specified in Sec.  1.1441-1(e)(4)(ii), regardless 
of when the certificate is obtained.

[T.D. 8734, 62 FR 53466, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72186, Dec. 31, 1998; T.D. 8856, 64 FR 73411, Dec. 30, 1999; T.D. 9200, 
70 FR 28717, May 18, 2005; T.D. 9394, 73 FR 23074, Apr. 29, 2008]



Sec.  1.1445-1  Withholding on dispositions of U.S. real property 
interests by foreign persons: In general.

    (a) Purpose and scope of regulations. These regulations set forth 
rules relating to the withholding requirements of section 1445. In 
general, section 1445(a) provides that any person who acquires a U.S. 
real property interest from a foreign person must withhold a tax of 15 
percent (10 percent in the case of dispositions described in paragraph 
(b)(2) of this section) from the amount realized by the transferor 
foreign person (or a lesser amount established by agreement with the 
Internal Revenue

[[Page 236]]

Service). Section 1445(e) provides special rules requiring withholding 
on distributions and certain other transactions by corporations, 
partnerships, trusts, and estates. This Sec.  1.1445-1 provides general 
rules concerning the withholding requirement of sections 1445(a), as 
well as definitions applicable under both section 1445(a) and 1445(e). 
Section 1.1445-2 provides for various situations in which withholding is 
not required under section 1445(a). Section 1.1445-3 provides for 
adjustments to the amount required to be withheld by transferees under 
section 1445(a). Section 1.1445-4 prescribes the duties of agents in 
transactions subject to withholding under either section 1445(a) or 
1445(e). Section 1.1445-5 provides rules concerning the withholding 
required under section 1445(e), while Sec.  1.1445-6 provides for 
adjustments to the amount required to be withheld under section 1445(e). 
Finally, Sec.  1.1445-7 provides rules concerning the treatment of a 
foreign corporation that has made an election under section 897(i) to be 
treated as a domestic corporation.
    (b) Duty to withhold--(1) In general. Except as provided in 
paragraph (b)(2) and Sec. Sec.  1.1445-2 and 1.1445-3, transferees of 
U.S. real property interests are required to deduct and withhold a tax 
equal to 15 percent of the amount realized by the transferor if the 
transferor is a foreign person. Neither the transferee's duty to 
withhold nor the amount required to be withheld is affected by the 
amount of cash to be paid by the transferee. Amounts withheld must be 
reported and paid over in accordance with the requirements of paragraph 
(c) of this section. Failures to withhold and pay over are subject to 
the liabilities set forth in paragraph (e) of this section. If two or 
more persons are joint transferees of a U.S. real property interest, 
each such person is subject to the obligation to withhold. That 
obligation is fulfilled with respect to each such person if any one of 
them withholds and pays over the required amount in accordance with the 
rules of this section. If the amount realized (as defined in paragraph 
(g)(5) of this section) by the transferor is zero, then no withholding 
is required. For example, if a real property interest is transferred as 
a gift (i.e., the recipient does not assume any liabilities or furnish 
any other consideration to the transferor) then no withholding is 
required.
    (2) Reduced rate for certain residences. Transferees of U.S. real 
property interests are required to deduct and withhold a tax equal to 10 
percent of the amount realized by the transferor if the transferor is a 
foreign person and the following requirements are satisfied:
    (i) The property is acquired by the transferee for use by the 
transferee as a residence;
    (ii) the amount realized for the property does not exceed 
$1,000,000; and
    (iii) section 1445(b)(5) does not apply to the disposition. See 
Sec.  1.1445-2(d)(1).
    (3) U.S. real property interest owned jointly by foreign and non-
foreign transferors. The amount subject to withholding under paragraph 
(b)(1) of this section with respect to the transfer of a U.S. real 
property interest owned by one or more foreign persons (as defined in 
Sec.  1.897-1(k)) and one or more non-foreign persons shall be 
determined by allocating the amount realized from the transfer between 
(or among) such transferors based upon the capital contribution of each 
transferor with respect to the property and by aggregating the amounts 
allocated to any foreign person (or persons). For this purpose, a 
husband and wife will each be deemed to have contributed 50 percent of 
the aggregate capital contributed by such husband and wife. See Sec.  
1.1445-1(f)(3)(iv) with respect to the crediting of the amount withheld 
between or among joint foreign transferors.
    (4) Options to acquire a U.S. real property interest--(i) No 
withholding on grant of option. No withholding is required under section 
1445 with respect to any amount realized by the grantor on the grant of 
an option to acquire a U.S. real property interest.
    (ii) No withholding upon lapse of option. No withholding is required 
under section 1445 with respect to any amount realized by the grantor 
upon the lapse of an option to acquire a U.S. real property interest.
    (iii) Withholding required upon the sale or exchange of option. A 
transferee of an option to acquire a U.S. real property interest must 
deduct and withhold a

[[Page 237]]

tax equal to 15 percent of the amount realized by the transferor upon 
the disposition. This paragraph(b)(4)(iii) does not apply to require 
withholding upon the initial grant of an option.
    (iv) Withholding required on exercise of option. If the holder 
exercises an option to purchase a U.S. real property interest, the 
amount paid for the option shall be considered an amount realized by the 
grantor/transferor upon the transfer of the property with respect to 
which the option was granted, and shall thus be subject to withholding 
on the day that such underlying property is transferred. The preceding 
sentence applies regardless of whether or not the terms of the option 
specifically provide that the option price is applied to the purchase 
price.
    (5) Exceptions and modifications. The duty to withhold under section 
1445(a) is subject to the exceptions and modifications contained in 
Sec. Sec.  1.1445-2 and 1.1445-3. Generally, Sec.  1.1445-2 provides 
rules for determining that withholding is not required because either 
the transferor is not a foreign person or the interest transferred is 
not a U.S. real property interest. In addition, Sec.  1.1445-2 provides 
exceptions to the withholding requirement, including a rule that exempts 
from withholding any person who acquires a U.S. real property interest 
for use as a residence for a contract price of $300,000 or less. If 
withholding is required under section 1445(a), Sec.  1.1445-3 allows the 
amount withheld to be modified pursuant to a withholding certificate 
issued by the Internal Revenue Service. If a transferee cannot withhold 
the full amount required because the first payment of consideration for 
the transfer does not involve sufficient cash (or other liquid assets 
convertible into cash, such as foreign currency), then a withholding 
certificate must be obtained pursuant to Sec.  1.1445-3.
    (c) Reporting and paying over of withheld amounts--(1) In general. A 
transferee must report and pay over any tax withheld by the 20th day 
after the date of the transfer. Forms 8288 and 8288-A are used for this 
purpose, and must be filed at the location as provided in the 
instructions to Forms 8288 and 8288-A. Pursuant to section 7502 and 
regulations thereunder, the timely mailing of Forms 8288 and 8228-A will 
be treated as their timely filing. Form 8288-A will be stamped by the 
IRS to show receipt, and a stamped copy will be mailed by the IRS to the 
transferor (at the address reported on the form) for the transferor's 
use. See Sec. Sec.  1.1445-1(f) and 1.1445-3(f). Forms 8288 and 8288-A 
are required to include the identifying numbers of both the transferor 
and the transferee, as provided in paragraph (d) of this section. If any 
identifying number as required by such forms is not provided, the 
transferee must still report and pay over any tax withheld on Form 8288, 
although the transferor cannot obtain a credit or refund of tax on the 
basis of a Form 8288-A that does not include the transferor's 
identifying number (see paragraph (f)(2) of this section).
    (2) Pending application for withholding certificate--(i) In general. 
(A) Delayed reporting and payment with respect to application submitted 
by transferee. If an application for a withholding certificate with 
respect to a transfer of a U.S. real property interest is submitted to 
the Internal Revenue Service by the transferee on the day of or at any 
time prior to the transfer, the transferee must withhold 15 percent (10 
percent in the case of dispositions described in paragraph (b)(2) of 
this section) of the amount realized as required by paragraph (b) of 
this section. However, the amount withheld, or a lesser amount as 
determined by the Service, need not be reported and paid over to the 
Service until the 20th day following the Service's final determination 
with respect to the application for a withholding certificate. For this 
purpose, the Service's final determination occurs on the day when the 
withholding certificate is mailed to the transferee by the Service or 
when a notification denying the request for a withholding certificate is 
mailed to the transferee by the Service. An application is submitted to 
the Service on the day it is actually received by the Service at the 
address provided in Sec.  1.1445-1(g)(10) or, under the rules of section 
7502, on the day it is mailed to the Service at the address provided in 
Sec.  1.1445-1(g)(10).
    (B) Delayed reporting and payment with respect to application 
submitted by

[[Page 238]]

transferor. If an application for a withholding certificate with respect 
to a transfer of a U.S. real property interest is submitted to the 
Internal Revenue Service by the Transferor on the day of or any time 
prior to the transfer, such transferor must provide notice to the 
transferee prior to the transfer. No particular form is required but the 
notice must set forth the name, address, and taxpayer identification 
number of the transferor, a brief description of the property which is 
the subject of the application, and the date the application was 
submitted to the Service. The transferee must withhold 15 percent (10 
percent in the case of dispositions described in paragraph (b)(2) of 
this section) of the amount realized as required in paragraph (b) of 
this section but need not report or pay over to the Service such amount 
(or a lesser amount as determined by the Service) until the 20th day 
following the Service's final determination with respect to the 
application. The Service will send a copy of the withholding certificate 
or copy of the notification denying the request for a withholding 
certificate to the transferee. For this purpose, the Service's final 
determination will be deemed to occur on the day when the copy of the 
withholding certificate or the copy of the notification denying the 
request for a withholding certificate is mailed by the Service to the 
transferee (or transferees). An application is submitted to the Service 
on the day it is actually received by the Service at the address 
provided in Sec.  1.1445-1(g)(10) or, under the rules of Sec.  7502, on 
the day it is mailed to the Service at the address provided in Sec.  
1.1445-1(g)(10).
    (ii) Anti-abuse rule--(A) In general. A transferee that in reliance 
upon the rules of this paragraph (c)(2) fails to report and pay over 
amounts withheld by the 20th day following the date of the transfer, 
shall be subject to the payment of interest and penalties if the 
relevant application for a withholding certificate (or an amendment to 
the application for a withholding certificate) was submitted for a 
principal purpose of delaying the transferee's payment to the IRS of the 
amount withheld. Interest and penalties shall be assessed on the amount 
that is ultimately paid over (or collected pursuant to the agreement) 
with respect to the period between the 20th day after the date of the 
transfer and the date on which payment is made (or collected).
    (B) Presumption. A principal purpose of delaying payment of the 
amount withheld shall be presumed if--
    (1) The transferee applies for a withholding certificate pursuant to 
Sec.  1.1445-3(c) based on a determination of the transferor's maximum 
tax liability, and
    (2) Such liability is ultimately determined to be equal to 90 
percent or more of the amount that was otherwise required to be withheld 
and paid over. However, the presumption created by the previous sentence 
may be rebutted by evidence establishing that delaying payment of the 
amount withheld was not a principal purpose of the transaction.
    (d) Contents of Forms 8288 and 8288-A--(1) Transactions subject to 
section 1445(a). Any person that is required to file Forms 8288 and 
8288-A pursuant to section 1445(a) and the rules of this section must 
set forth thereon the following information:
    (i) The name, identifying number, and home address (in the case of 
an individual) or office address (in the case of any entity) of the 
transferee(s) filing the return;
    (ii) The name, identifying number, and home address (in the case of 
an individual) or office address (in the case of any entity) of the 
transferor(s);
    (iii) A brief description of the U.S. real property interest 
transferred, including its location and the nature of any substantial 
improvements in the case of real property, and the class or type and 
amount of interests transferred in the case of interests in a 
corporation that constitute U.S. real property interests;
    (iv) The date of the transfer;
    (v) The amount realized by the transferor, as defined in paragraph 
(g)(5) of this section;
    (vi) The amount withheld by the transferee and whether withholding 
is at the statutory or reduced rate; and
    (vii) Such other information as the Commissioner may require.

[[Page 239]]

    For purposes of paragraph (d)(1) (i) and (ii), mailing addresses may 
be provided in addition to, but not in lieu of, home addresses or office 
addresses.
    (2) Transactions subject to section 1445(e). Any person that is 
required to file Forms 8288 and 8288-A pursuant to the rules of Sec.  
1.1445-5 must set forth thereon the following information:
    (i) The name, identifying number, and office address of the entity 
or fiduciary filing the return;
    (ii) The amount withheld by the entity or fiduciary;
    (iii) The date of the transfer;
    (iv) In the case of a transaction subject to withholding pursuant to 
section 1445(e)(1) and Sec.  1.1445-5(c):
    (A) A brief description of the U.S. real property interest 
transferred, as described in paragraph (d)(1)(iii) of this section;
    (B) The name, identifying number, and home address (in the case of 
an individual) or office address (in the case of an entity) of each 
holder of an interest in the entity that is a foreign person; and
    (C) Each such interest-holder's pro rata share of the amount 
withheld;
    (v) In the case of a distribution subject to withholding pursuant to 
section 1445(e)(2) and Sec.  1.1445-5(d):
    (A) A brief description of the U.S. real property interest 
transferred, as described in paragraph (d)(1)(iii) of this section; and
    (B) The amount of gain recognized upon the distribution by the 
corporation.
    (vi) In the case of a distribution subject to withholding pursuant 
to section 1445(e)(3) and Sec.  1.1445-5(e):
    (A) A brief description of the property distributed by the 
corporation;
    (B) The name, identifying number, and home address (in case of an 
individual) or office address (in the case of an entity) of each holder 
of an interest in the entity that is a foreign person;
    (C) The amount realized upon the distribution by each such foreign 
interest holder; and
    (D) Each foreign interest-holder's pro rata share of the amount 
withheld; and
    (vii) Such other information as the Commissioner may require.
    (e) Liability of transferee upon failure to withhold--(1) In 
general. Every person required to deduct and withhold tax under section 
1445 is made liable for that tax by section 1461. Therefore, a person 
that is required to deduct and withhold tax but fails to do so may be 
held liable for the payment of the tax and any applicable penalties and 
interest.
    (2) Transferor's liability not otherwise satisfied--(i) Tax and 
penalties. Except as provided in paragraph (e)(3) of this section, if a 
transferee is required to deduct and withhold tax under section 1445 but 
fails to do so, then the tax shall be assessed against and collected 
from that transferee. Such person may also be subject to any of the 
civil and criminal penalties that apply. Corporate officers or other 
responsible persons may be subject to a civil penalty under section 6672 
equal to the amount that should have been withheld and paid over.
    (ii) Interest. If a transferee is required to deduct and withhold 
tax under section 1445 but fails to do so, then such transferee shall be 
liable for the payment of interest pursuant to section 6601 and the 
regulations thereunder. Interest shall be payable with respect to the 
period between--
    (A) The last date on which the tax imposed under section 1445 was 
required to be paid over by the transferee, and
    (B) The date on which such tax is actually paid. Interest shall be 
payable with respect to the entire amount that is required to be 
deducted and withheld. However, if the Service issues a withholding 
certificate providing for withholding of a reduced amount, then, for the 
period after the issuance of the certificate, interest shall be payable 
with respect to that reduced amount.
    (3) Transferor's liability otherwise satisfied--(i) Tax and 
penalties. If a transferee is required to deduct and withhold tax under 
section 1445 but fails to do so, and the transferor's tax liability with 
respect to the transfer was satisfied (or was established to be zero) 
by--
    (A) The transferor's filing of an income tax return (and payment of 
any tax due) with respect to the transfer, or
    (B) The issuance of a withholding certificate by the Internal 
Revenue

[[Page 240]]

Service establishing that the transferor's maximum tax liability is 
zero,

then the tax required to be withheld under section 1445 shall not be 
collected from the transferee. Such transferee's liability for tax, and 
the requirement that such person file Forms 8288 and 8288-A, shall be 
deemed to have been satisfied as of the date on which the transferor's 
income tax return was filed or the withholding certificate was issued. 
No penalty shall be imposed on or collected from such person for failure 
to return or pay the tax, unless such failure was fraudulent and for the 
purpose of evading payment. A transferee that seeks to avoid liability 
for tax and penalties pursuant to the rule of paragraph (e)(3)(i) must 
provide sufficient information for the Service to determine whether the 
transferor's tax liability was satisfied (or was established to be 
zero).
    (ii) Interest. If a transferee is required to deduct and withhold 
tax under section 1445 but fails to do so, then such person shall be 
liable for the payment of interest under section 6601 and regulations 
thereunder. Such transferee's liability for the payment of interest 
shall not be excused by reason of the deemed satisfaction, pursuant to 
subdivision (i) of this paragraph (e)(3), of the transferee's liability 
under section 1445, because the deemed satisfaction of that liability is 
the equivalent of the late payment of a liability, on which interest 
must be paid. Interest shall be payable with respect to the period 
between--
    (A) The last date on which the tax imposed under section 1445 was 
required to be paid over, and
    (B) The date (established from information supplied to the Service 
by the transferee) on which any tax due is paid with respect to the 
transferor's relevant income tax return, or the date the withholding 
certificate is issued establishing that the transferor's maximum tax 
liability is zero.

Interest shall be payable with respect to the entire amount that is 
required to be deducted and withheld. However, if the Service issues a 
withholding certificate providing for withholding of a reduced amount, 
then for the period after the issuance of the certificate interest shall 
be payable with respect to that reduced amount.
    (4) Coordination with entity with holding rules. For purposes of 
section 1445(e) and Sec. Sec.  1.1445-5, 1.1445-6, 1.1445-7, and 1.1445-
8T, the rules of this paragraph (e) shall be applied by--
    (i) Substituting the words ``person required to withhold'' for the 
word ``transferee'' each place it appears in this paragraph (e), and
    (ii) Substituting the words ``person subject to withholding'' for 
the word ``transferor'' each place it appears in this paragraph (e).
    (f) Effect of withholding on transferor--(1) In general. The 
withholding of tax under section 1445(a) does not excuse a foreign 
person that disposes of a U.S. real property interest from filing a U.S. 
tax return with respect to the income arising from the disposition. Form 
1040NR, 1041, or 1120F, as appropriate, must be filed, and any tax due 
must be paid, by the filing deadline generally applicable to such 
person. (The return may be filed by such later date as is provided in an 
extension granted by the Internal Revenue Service.) Any tax withheld 
under section 1445(a) shall be credited against the amount of income tax 
as computed in such return.
    (2) Manner of obtaining credit or refund. A stamped copy of Form 
8288-A will be provided to the transferor by the Service (under 
paragraph (c) of this section) if the Form 8288-A is complete, including 
the transferor's identifying number. Except as provided in paragraph 
(f)(3) of this section, a stamped copy of Form 8288-A must be attached 
to the transferor's return to establish the amount withheld that is 
available as a credit. If the amount withheld under section 1445(a) 
constitutes less than the full amount of the transferor's U.S. tax 
liability for that taxable year, then a payment of estimated tax may be 
required to be made pursuant to section 6154 or 6654 prior to the filing 
of the income tax return for that year. Alternatively, if the amount 
withheld under section 1445(a) exceeds the transferor's maximum tax 
liability with respect to the disposition (as determined by the IRS), 
then the transferor may seek an early refund of the excess pursuant to 
Sec.  1.1445-3(g), or a

[[Page 241]]

normal refund upon the filing of a tax return.
    (3) Special rules--(i) Failure to receive Form 8288-A. If a stamped 
copy of Form 8288-A has not been provided to the transferor by the 
Service, the transferor may establish the amount of tax withheld by the 
transferee by attaching to its return substantial evidence (e.g., 
closing documents) of such amount. Such a transferor must attach to its 
return a statement which supplies all of the information required by 
Sec.  1.1445-1(d), including the transferor's identifying number.
    (ii) U.S. persons subjected to withholding. If a transferee 
withholds tax under section 1445(a) with respect to a person who is not 
a foreign person, such person may credit the amount of any tax withheld 
against his income tax liability in accordance with the provisions of 
this Sec.  1.1145-1(f) or apply for an early refund under Sec.  1.1445-
3(g).
    (iii) Refund in case of installment sale. A transferor that takes 
gain into account in accordance with the provisions of section 453 shall 
not be entitled to a refund of the amount withheld, unless a withholding 
certificate providing for such a refund is obtained from the Internal 
Revenue Service pursuant to the provisions of Sec.  1.1445-3.
    (iv) Joint foreign transferors. If two or more foreign persons 
jointly transfer a U.S. real property interest, each transferor shall be 
credited with such portion of the amount withheld as such transferors 
mutually agree. Such transferors must request that the transferee 
reflect the agreed-upon crediting of the amount withheld on the Forms 
8288-A filed by the transferee. If the foreign transferors fail to 
request that the transferee reflect the agreed-upon crediting of the 
amount withheld by the 10th day after the date of transfer, the 
transferee must credit the amount withheld equally between (or among) 
the foreign transferors. In such case, the transferee is indemnified 
pursuant to section 1461 against any claim by a transferor objecting to 
the resulting division of credits. For rules regarding the amount 
realized allocated to joint foreign and non-foreign transferors, see 
Sec.  1.1445-1(b)(2).
    (g) Definitions--(1) In general. Unless otherwise specified, the 
definitions of terms provided in Sec.  1.897-1 shall apply for purposes 
of this section and Sec. Sec.  1.1445-2 through 1.1445-7. For purposes 
of section 1445 and the regulations thereunder, definitions of other 
relevant terms are provided in this paragraph (g). In addition, the term 
``residence'' is defined in 1.1445-2(d)(1), the terms ``transferor's 
agent'' and ``transferee's agent'' are defined in 1.1445-4(f), and the 
term ``relevant taxpayer'' is defined in 1.1445-6(a)(2).
    (2) Transfer. The term ``transfer'' means any transaction that would 
constitute a disposition for any purpose, of the Internal Revenue Code 
and regulations thereunder. For purposes of Sec. Sec.  1.1445-5 and 
1.1445-6, the term includes distribution to shareholders of a 
corporation, partners of a partnership and beneficiaries of a trust or 
estate.
    (3) Transferor. The term ``transferor'' means any person, foreign or 
domestic, that disposes of a U.S. real property interest by sale, 
exchange, gift, or any other transfer. The term ``U.S. real property 
interest'' is defined in Sec.  1.897-1(c).
    (4) Transferee. The term ``transferee'' means any person, foreign or 
domestic, that acquires a U.S. real property interest by purchase, 
exchange, gift, or any other transfer.
    (5) Amount realized. The amount realized by the transferor for the 
transfer of a U.S. real property interest is the sum of.
    (i) The cash paid, or to be paid.
    (ii) The fair market value of other property transferred, or to be 
transferred, and
    (iii) The outstanding amount of any liability assumed by the 
transferee or to which the U.S. real property interest is subject 
immediately before and after the transfer.

The term ``cash paid or to be paid'' does not include stated or unstated 
interest or original issue discount (as determined under the rules of 
sections 1271 through 1275).
    (6) Contract price. The contract price of a U.S. real property 
interest is the sum that is agreed to by the transferee and transferor 
as the total amount of consideration to be paid for the property. That 
amount will generally be equal to the amount realized by the

[[Page 242]]

transferor, as defined in paragraph (b)(5) of this section.
    (7) Fair market value. The fair market value of property means the 
price at which the property would change hands between an unrelated 
willing buyer and willing seller, neither being under any compulsion to 
buy or to sell and both having reasonable knowledge of all relevant 
facts.
    (8) Date of transfer. The date of transfer of a U.S. real property 
interest is the first date on which consideration is paid (or a 
liability assumed) by the transferee. However, for purposes of section 
1445(e) (2), (3), and (4) and Sec. Sec.  1.1445-5(c)(1)(iii) and 1.1445-
5(c)(3) only, the date of transfer is the date of the distribution that 
gives rise to the obligation to withhold. For purposes of this paragraph 
(g)(8), the payment of consideration does not include the payment, prior 
to the passage of legal or equitable title (other than pursuant to an 
initial contract for purchase), of earnest money, a good-faith deposit, 
or any similar sum that is primarily intended to bind the transferee or 
transferor to the entering or performance of a contract. Such a payment 
will not constitute a payment of consideration solely because it may 
ultimately be applied against the amount owed to the transferor by the 
transferee. Such a payment is presumed to be earnest money, a good faith 
deposit, or a similar sum if it is subject to forfeiture in the event of 
a failure to enter into a contract or a breach of contract. However, a 
payment that is not forfeitable may nevertheless be found to constitute 
earnest money, a good faith deposit, or a similar sum.
    (9) Identifying number. Pursuant to Sec.  1.897-1(p), an 
individual's identifying number is the social security number or the 
identification number assigned by the Internal Revenue Service (see 
Sec.  301.6109-1 of this chapter). The identifying number of any other 
person is its United States employer identification number.
    (10) Address for correspondence. Any written communication to the 
Internal Revenue Service described in this section is to be mailed to 
the address specified in the Instructions for Form 8288 under the 
heading ``Where To File.''
    (11) Withholding qualified holder. A withholding qualified holder 
means a qualified holder (under Sec.  1.897(l)-1(d)), and a foreign 
partnership all of the interests of which are held by qualified holders 
(under Sec.  1.897(l)-1(d)), including through one or more partnerships.
    (h) Applicability dates. The requirement in paragraphs (c)(2)(i)(B), 
(d)(1)(i) and (ii), (d)(2)(i), (d)(2)(iv)(B), and (d)(2)(vi)(B) of this 
section that taxpayer identification numbers be provided (in all cases) 
is applicable for dispositions of U.S. real property interests occurring 
after November 3, 2003. The withholding rates set forth in paragraphs 
(a), (b)(1), (b)(2), (b)(4)(iii), (c)(2)(i)(A), and (c)(2)(i)(B) of this 
section apply to dispositions after February 16, 2016. For dispositions 
on or before February 16, 2016, see paragraphs (a), (b)(1), (b)(3)(iii), 
(c)(2)(i)(A), and (c)(2)(i)(B) of this section as contained in 26 CFR 
part 1 revised as of April 1, 2015.

[T.D. 8113, 51 FR 46629, Dec. 24, 1986; 52 FR 3796, 3916, Feb. 6, 1987, 
as amended by T.D. 8647, 60 FR 66076, Dec. 21, 1995; T.D. 9082, 68 FR 
46084, Aug. 5, 2003; T.D. 9751, 81 FR 8400, Feb. 19, 2016; T.D. 9971, 87 
FR 80065, Dec. 29, 2022]



Sec.  1.1445-2  Situations in which withholding is not required 
under section 1445(a).

    (a) Purpose and scope of section. This section provides rules 
concerning various situations in which withhold is not required under 
section 1445(a). In general, a transferee has a duty to withhold under 
section 1445(a) only if both of the following are true:
    (1) The transferor is a foreign person; and
    (2) The transferee is acquiring a U.S. real property interest.

Thus, paragraphs (b) and (c) of this section provide rules under which a 
transferee of property can ascertain that he has no duty to withhold 
because one or the other of the two key elements is missing. Under 
paragraph (b), a transferee may determine that no withholding is 
required because the transferor is not a foreign person. Under paragraph 
(c), a transferee may determine that no withholding is required because 
the property acquired is not a U.S. real property interest. Finally,

[[Page 243]]

paragraph (d) of this section provides rules concerning exceptions to 
the withholding requirement.
    (b) Transferor not a foreign person--(1) In general. No withholding 
is required under section 1445 if the transferor of a U.S. real property 
interest is not a foreign person. Therefore, paragraph (b)(2) of this 
section provides rules pursuant to which the transferor can provide a 
certification of non-foreign status to inform the transferee that 
withholding is not required. A transferee that obtains such a 
certification must retain that document for five years, as provided in 
paragraph (b)(3) of this section. Except to the extent provided in 
paragraph (b)(4) of this section, the obtaining of this certification 
excuses the transferee from any liability otherwise imposed by section 
1445 and Sec.  1.1445-1(e). However, section 1445 and the rules of this 
section do not impose any obligation upon a transferee to obtain a 
certification from the transferor, thus, a transferee may instead rely 
upon other means to ascertain the non-foreign status of the transferor. 
If, however, the transferee relies upon other means and the transferor 
was, in fact, a foreign person, then the transferee is subject to the 
liability imposed by section 1445 and Sec.  1.1445-1(e).


A transferee is in no event required to rely upon other means to 
ascertain the non-foreign status of the transferor and may demand a 
certification of non-foreign status. If the certification is not 
provided, the transferee may withhold tax under section 1445 and will be 
considered, for purposes of sections 1461 through 1463, to have been 
required to withhold such tax.
    (2) Transferor's certification of non-foreign status--(i) In 
general. The rules in this paragraph (b)(2)(i) apply for purposes of the 
transferor's certification of non-foreign status (including a 
certification of non-foreign status provided by a withholding qualified 
holder (as defined in Sec.  1.1445-1(g)(11)).
    (A) A transferee of a U.S. real property interest is not required to 
withhold under section 1445(a) if, before or at the time of the 
transfer, the transferor furnishes to the transferee a certification 
that is signed under penalties of perjury and--
    (1) States that the transferor is not a foreign person; and
    (2) Sets forth the transferor's name, identifying number and home 
address (in the case of an individual) or office address (in the case of 
an entity).
    (B) For purposes of paragraph (b)(2)(i)(A) of this section, a 
foreign person is a nonresident alien individual, foreign corporation, 
foreign partnership, foreign trust, or foreign estate, except that a 
withholding qualified holder (as defined in Sec.  1.1445-1(g)(11)) is 
not a foreign person. Additionally, a foreign corporation that has made 
a valid election under section 897(i) is generally not treated as a 
foreign person for purposes of section 1445. In this regard, see Sec.  
1.1445-7. Pursuant to Sec.  1.897-1(p), an individual's identifying 
number is the individual's Social Security number and any other person's 
identifying number is its U.S. employer identification number (EIN), or, 
if the transferor is a withholding qualified holder (as defined in Sec.  
1.1445-1(g)(11)) that does not have a U.S. taxpayer identification 
number, a foreign tax identification number issued by its jurisdiction 
of residence. A certification pursuant to this paragraph (b) must be 
verified as true and signed under penalties of perjury by a responsible 
officer in the case of a corporation, by a general partner in the case 
of a partnership, and by a trustee, executor, or equivalent fiduciary in 
the case of a trust or estate. No particular form is needed for a 
certification pursuant to this paragraph (b), nor is any particular 
language required, so long as the document meets the requirements of 
this paragraph (b)(2)(i), except that, with respect to a certification 
submitted by a withholding qualified holder (as defined in Sec.  1.1445-
1(g)(11)), the transferor must state on the certification that it is 
treated as a non-foreign person because it is a withholding qualified 
holder and must further specify whether it qualifies as a withholding 
qualified holder because it is a qualified holder under Sec.  1.897(l)-
1(d) or a foreign partnership that satisfies the requirements of Sec.  
1.1445-1(g)(11). Samples of acceptable certifications are provided in 
paragraph (b)(2)(iv) of this section.

[[Page 244]]

    (ii) Foreign corporation that ``has made election under section 
897(i). A foreign corporation that has made a valid election under 
section 897(i) to be treated as a domestic corporation for purposes of 
section 897 may provide a certification of non-foreign status pursuant 
to this paragraph (b)(2). However, an electing foreign corporation must 
attach to such certification a copy of the acknowledgment of the 
election provided to the corporation by the Internal Revenue Service 
pursuant to Sec.  1.897-3(d)(4).

An acknowledgment is valid for this purpose only if it states that the 
information required by Sec.  1.897-3 has been determined to be 
complete.
    (iii) Disregarded entities. A disregarded entity may not certify 
that it is the transferor of a U.S. real property interest, as the 
disregarded entity is not the transferor for U.S. tax purposes, 
including sections 897 and 1445. Rather, the owner of the disregarded 
entity is treated as the transferor of property and must provide a 
certificate of non-foreign status to avoid withholding under section 
1445. A disregarded entity for these purposes means an entity that is 
disregarded as an entity separate from its owner under Sec.  301.7701-3 
of this chapter, a qualified REIT subsidiary as defined in section 
856(i), or a qualified subchapter S subsidiary under section 
1361(b)(3)(B). Any domestic entity must include in its certification of 
non-foreign status with respect to the transfer a certification that it 
is not a disregarded entity. This paragraph (b)(2)(iii) and the sample 
certification provided in paragraph (b)(2)(iv)(B) of this section (to 
the extent it addresses disregarded entities) is applicable for 
dispositions occurring September 4, 2003.
    (iv) Sample certifications--(A) Individual transferor.

    ``Section 1445 of the Internal Revenue Code provides that a 
transferee (buyer) of a U.S. real property interest must withhold tax if 
the transferor (seller) is a foreign person. To inform the transferee 
(buyer) that withholding of tax is not required upon my disposition of a 
U.S. real property interest, I, [name of transferor], hereby certify the 
following:
    1. I am not a nonresident alien for purposes of U.S. income 
taxation;
    2. My U.S. taxpayer identifying number [Social Security number] is 
____; and
    3. My home address is:
________________________________________________________________________

________________________________________________________________________
    I understand that this certification may be disclosed to the 
Internal Revenue Service by the transferee and that any false statement 
I have made here could be punished by fine, imprisonment, or both.
    Under penalties of perjury I declare that I have examined this 
certification and to the best of my knowledge and belief it is true, 
correct, and complete. [Signature and Date]''

    (B) Entity transferor.

    ``Section 1445 of the Internal Revenue Code provides that a 
transferee of a U.S. real property interest must withhold tax if the 
transferor is a foreign person. For U.S. tax purposes (including section 
1445), the owner of a disregarded entity (which has legal title to a 
U.S. real property interest under local law) will be the transferor of 
the property and not the disregarded entity. To inform the transferee 
that withholding of tax is not required upon the disposition of a U.S. 
real property interest by [name of transferor] , the undersigned hereby 
certifies the following on behalf of [name of the transferor]:
    1. [Name of transferor] is not a foreign corporation, foreign 
partnership, foreign trust, or foreign estate (as those terms are 
defined in the Internal Revenue Code and Income Tax Regulations);
    2. [Name of transferor] is not a disregarded entity as defined in 
Sec.  1.1445-2(b)(2)(iii);
    3. [Name of transferor]'s U.S. employer identification number is 
___; and
    4. [Name of transferor]'s office address is _______.
    [Name of transferor] understands that this certification may be 
disclosed to the Internal Revenue Service by transferee and that any 
false statement contained herein could be punished by fine, 
imprisonment, or both.
    Under penalties of perjury I declare that I have examined this 
certification and to the best of my knowledge and belief it is true, 
correct, and complete, and I further declare that I have authority to 
sign this document on behalf of [name of transferor].

[Signature(s) and date]

[Title(s)]''

    (v) Form W-9. For purposes of paragraph (b)(2)(i) of this section, a 
certification of non-foreign status includes a valid Form W-9, Request 
for Taxpayer Identification Number and Certification, or its successor, 
submitted to the transferee by the transferor.
    (vi) Form W-8EXP. A certification of non-foreign status may be made 
by a

[[Page 245]]

withholding qualified holder (as defined under Sec.  1.1445-1(g)(11)) as 
provided in paragraph (b)(2)(i) of this section to certify its qualified 
holder status. A certification of non-foreign status under paragraph 
(b)(2)(i) of this section also includes a certification made on a Form 
W-8EXP (or its successor) that states that the transferor is treated as 
a non-foreign person because it is a withholding qualified holder and 
must further specify whether it qualifies as a withholding qualified 
holder because it is a qualified holder under Sec.  1.897(l)-1(d) or a 
foreign partnership that satisfies the requirements of Sec.  1.1445-
1(g)(11). The certification must also meet all of the other requirements 
for a valid Form W-8EXP (or its successor) as provided on the form and 
the instructions to the form. A qualified holder may not provide a 
certification of non-foreign status on a Form W-9 (or its successor) as 
permitted in paragraph (b)(2)(v) of this section.
    (3) Transferee must retain certification. If a transferee obtains a 
transferor's certification pursuant to the rules of this paragraph (b), 
then the transferee must retain that certification until the end of the 
fifth taxable year following the taxable year in which the transfer 
takes place. The transferee must retain the certification, and make it 
available to the Internal Revenue Service when requested in accordance 
with the requirements of section 6001 and regulations thereunder.
    (4) Reliance upon certification not permitted--(i) In general. A 
transferee may not rely upon a transferor's certification pursuant to 
this paragraph (b) under the circumstances set forth in either 
subdivision (ii) or (iii) of this paragraph (b)(4). In either of those 
circumstances, a transferee's withholding obligation shall apply as if a 
certification had never been obtained, and the transferee is fully 
liable pursuant to section 1445 and Sec.  1.1445-1(e) for any failure to 
withhold.
    (ii) Failure to attach IRS acknowledgment of election. A transferee 
that knows that the transferor is a foreign corporation may not rely 
upon a certification of non-foreign status provided by the corporation 
on the basis of election under section 897(i), unless there is attached 
to the certification a copy of the acknowledgment by the Internal 
Revenue Service of the corporation's election, as required by paragraph 
(b)(2)(ii) of this section.
    (iii) Knowledge of falsity. A transferee is not entitled to rely 
upon a transferor's certification if prior to or at the time of the 
transfer the transferee either--
    (A) Has actual knowledge that the transferor's certification is 
false; or
    (B) Receives a notice that the certification is false from a 
transferor's or transferee's agent, pursuant to Sec.  1.1445-4.
    (iv) Belated notice of false certification. If after the date of the 
transfer a transferee receives a notice that a certification is false, 
then that transferee is entitled to rely upon the certification only 
with respect to consideration that was paid prior to receipt for the 
notice. Such a transferee is required to withhold a full 15 percent of 
the amount realized from the consideration that remains to be paid to 
the transferor if possible. Thus, if 15 percent or more of the amount 
realized remains to be paid to the transferor then the transferee is 
required to withhold and pay over the full 15 percent. The transferee 
must do so by withholding and paying over the entire amount of each 
successive payment of consideration to the transferor until the full 15 
percent of the amount realized has been withheld and paid over. Amounts 
so withheld must be reported and paid over by the 20th day following the 
date on which each such payment of consideration is made. A transferee 
that is subject to the rules of this paragraph (b)(4)(iv) may not obtain 
a withholding certificate pursuant to Sec.  1.1445-3, but must instead 
withhold and pay over the amounts required by this paragraph. For 
dispositions described in Sec.  1.1445-1(b)(2), this paragraph shall be 
applied by replacing ``15 percent'' with ``10 percent'' each time it 
appears.
    (c) Transferred property not a U.S. real property interest--(1) In 
general. No withholding is required under section 1445 if the transferee 
acquires only property that is not a U.S. real property interest. As 
defined in section 897(c) and Sec.  1.897-1(c), a U.S. real property 
interest includes certain interests in U.S. corporations, as well as 
direct

[[Page 246]]

interests in real property and certain associated personal property. 
This paragraph (c) provides rules pursuant to which a person acquiring 
an interest in a U.S. corporation may determine that withholding is not 
required because that interest is not a U.S. real property interest. To 
determine whether an interest in tangible property constitutes a U.S. 
real property interest the acquisition of which would be subject to 
withholding, see Sec.  1.897-1 (b) and (c).
    (2) Interests in publicly traded entities. No withholding is 
required under section 1445(a) upon the acquisition of an interest in a 
domestic corporation if any class of stock of the corporation is 
regularly traded on an established securities market.

This exemption shall apply if the disposition is incident to an initial 
public offering of stock pursuant to a registration statement filed with 
the Securities and Exchange Commission. Similarly, no withholding is 
required under section 1445(a) upon the acquisition of an interest in a 
publicly traded partnership or trust. However, the rule of this 
paragraph (c)(2) shall not apply to the acquisition, from a single 
transferor in a single (or related transferors (as defined in Sec.  
1.897-1(i)) transaction (or related transactions), of an interest 
described in Sec.  1.897-1(c)(2)(iii)(B) (relating to substantial 
amounts of non-publicly traded interests in publicly traded 
corporations) or to similar interests in publicly traded partnerships or 
trusts. The person making an acquisition described in the preceding 
sentence must otherwise determine whether withholding is required, 
pursuant to section 1445 and the regulations thereunder. Transactions 
shall be deemed to be related if they are undertaken within 90 days of 
one another or if it can otherwise be shown that they were undertaken in 
pursuance of a prearranged plan.
    (3) Transferee receives statement that interest in corporation is 
not a U.S. real property interest--(i) In general. No withholding is 
required under section 1445(a) upon the acquisition of an interest in a 
domestic corporation, if the transferor provides the transferee with a 
copy of a statement, issued by the corporation pursuant to Sec.  1.897-
2(h), certifying that the interest is not a U.S. real property interest. 
In general, a corporation may issue such a statement only if the 
corporation was not a U.S. real property holding corporation at any time 
during the previous five years (or the period in which the interest was 
held by its present holder, if shorter) or if interests in the 
corporation ceased to be United States real property interests under 
section 897(c)(1)(B). (A corporation may not provide such a statement 
based on its determination that the interest in question is an interest 
solely as a creditor). See Sec.  1.897-2 (f) and (h). The corporation 
may provide such a statement directly to the transferee at the 
transferor's request. The transferor must request such a statement prior 
to the transfer, and shall, to the extent possible, specify the 
anticipated date of the transfer. A corporation's statement may be 
relied upon for purposes of this paragraph (c)(3) only if the statement 
is dated not more than 30 days prior to the date of the transfer. A 
transferee may also rely upon a corporation's statement that is 
voluntarily provided by the corporation in response to a request from 
the transferee, if that statement otherwise complies with the 
requirements of this paragraph (c)(3) and Sec.  1.897-2(h).
    (ii) Reliance on statement not permitted. A transferee is not 
entitled to rely upon a statement that a corporation is not a U.S. real 
property holding corporation if, prior to or at the time of the 
transfer, the transferee either--
    (A) Has actual knowledge that the statement is false, or
    (B) Receives a notice that the statement is false from a 
transferor's or transferee's agent, pursuant to Sec.  1.1445-4.

Such a transferee's withholding obligations shall apply as if a 
statement had never been given, and such a transferee may be held fully 
liable pursuant to Sec.  1.1445-1(e) for any failure to withhold.
    (iii) Belated notice of false statement. If after the date of the 
transfer, a transferee receives notice that a statement provided under 
Sec.  1.1445-2(c)(3)(i) (that an interest in a corporation is not a U.S. 
real property interest) is false, then such transferee may rely on the

[[Page 247]]

statement only with respect to consideration that was paid prior to the 
receipt of the notice.

Such a transferee is required to withhold a full 15 percent of the 
amount realized from the consideration that remains to be paid to the 
transferor, if possible. Thus, if 15 percent or more of the amount 
realized remains to be paid to the transferor, then the transferee is 
required to withhold and pay over the full 15 percent. The transferee 
must do so by withholding and paying over the entire amount of each 
successive payment of consideration to the transferor, until the full 15 
percent of the amount realized has been withheld and paid over. Amounts 
so withheld must be reported and paid over by the 20th day following the 
date on which each such payment of consideration is made. A transferee 
that is subject to the rules of this Sec.  1.1445-2(c)(3)(iii) may not 
obtain a withholding certificate pursuant to Sec.  1.1445-3, but must 
instead withhold and pay over the amounts required by this paragraph.
    (d) Exceptions to requirement of withholding--(1) Purchase of 
residence for $300,000 or less. No withholding is required under section 
1445(a) if one or more individual transferees acquire a U.S. real 
property interest for use as a residence and the amount realized on the 
transaction is $300,000 or less. For purposes of this section, a U.S. 
real property interest is acquired for use as a residence if on the date 
of the transfer the transferee (or transferees) has definite plans to 
reside at the property for at least 50 percent of the number of days 
that the property is used by any person during each of the first two 12-
month periods following the date of the transfer. The number of days 
that the property will be vacant is not taken into account in 
determining the number of days such property is used by any person. A 
transferee shall be considered to reside at a property on any day on 
which a member of the transferee's family, as defined in section 
267(c)(4), resides at the property. No form or other document need be 
filed with the Internal Revenue Service to establish a transferee's 
entitlement to rely upon the exception provided by this paragraph 
(d)(1). A transferee who fails to withhold in reliance upon this 
exception, but who does not in fact reside at the property for the 
minimum number of days set forth above, shall be liable for the failure 
to withhold (if the transferor was a foreign person and did not pay the 
full U.S. tax due on any gain recognized upon the transfer). However, if 
the transferee establishes that the failure to reside the minimum number 
of days was caused by a change in circumstances that could not 
reasonably have been anticipated at the time of the transfer, then the 
transferee shall not be liable for the failure to withhold.

The exception provided by paragraph (d)(1) does not apply in any case 
where the transferee is other than an individual even if the property is 
acquired for or on behalf of an individual who will use the property as 
a residence. However, this exception applies regardless of the 
organizational structure of the transferor (i.e., regardless of whether 
the transferor is an individual, partnership, trust, corporation, etc.).
    (2) Coordination with nonrecognition provisions--(i) In general. A 
transferee shall not be required to withhold under section 1445(a) with 
respect to the transfer of a U.S. real property interest if--
    (A) The transferor notifies the transferee, in the manner described 
in paragraph (d)(2)(iii) of this section, that by reason of the 
operation of a nonrecognition provision of the Internal Revenue Code or 
the provisions of any United States treaty the transferor is not 
required to recognize any gain or loss with respect to the transfer, and
    (B) By the 20th day after the date of the transfer the transferee 
mails a copy of the transferor's notice to the Internal Revenue Service, 
at the address provided in Sec.  1.1445-1(g)(10), together with a cover 
letter setting forth the name, identifying number, and home address (in 
the case of an individual) or office address (in the case of an entity) 
of the transferee providing the notice to the Service. The rule of this 
paragraph (d)(2)(i) is subject to the exceptions set forth in paragraph 
(d)(2)(ii). For purposes of this paragraph (d)(2) a nonrecognition 
provision is any provision of the Internal Revenue Code for not 
recognizing gain or loss.

[[Page 248]]

    (ii) Exceptions. A transferee may not rely upon the rule of 
paragraph (d)(2)(i) of this section, and must therefore withhold under 
section 1445(a) with respect to the transfer of a U.S. real property 
interest, if either:
    (A) The transferor qualifies for nonrecognition treatment with 
respect to part, but not all, of the gain realized by the transferor 
upon the transfer, or
    (B) The transferee knows or has reason to know that the transferor 
is not entitled to the nonrecognition treatment claimed by the 
transferor.

In either of the above circumstances the transferee or transferor may 
request a withholding certificate from the Internal Revenue Service 
pursuant to the rules of Sec.  1.1445-3.
    (iii) Contents of the notice. No particular form is required for a 
transferor's notice to a transferee that the transferor is not required 
to recognize gain or loss with respect to a transfer. The notice must be 
verified as true and signed under penalties of perjury by the 
transferor, by a responsible officer in the case of a corporation, by a 
general partner in the case of a partnership, and by a trustee or 
equivalent fiduciary in the case of a trust or estate. The following 
information must be set forth in paragraphs labeled to correspond with 
the designation set forth as follows--
    (A) A statement that the document submitted constitutes a notice of 
a nonrecognition transaction or a treaty provision pursuant to the 
requirements of Sec.  1.1445-2(d)(2);
    (B) The name, identifying number, and home address (in the case of 
an individual) or office address (in the case of an entity) of the 
transferor submitting the notice;
    (C) A statement that the transferor is not required to recognize any 
gain or loss with respect to the transfer;
    (D) A brief description of the transfer; and
    (E) A brief summary of the law and facts supporting the claim that 
recognition of gain or loss is not required with respect to the 
transfer.
    (iv) No notice allowed. The provisions of this paragraph (d)(2) do 
not apply to exclusions from income under section 121, to simultaneous 
like-kind exchanges under section 1031 that do not qualify for 
nonrecognition treatment in their entirety (see paragraph (d)(2)(ii)(A) 
of this section), and to non-simultaneous like-kind exchanges under 
section 1031 where the transferee cannot determine that the exchange has 
been completed and all the conditions for nonrecognition have been 
satisfied at the time it is otherwise required to pay the section 1445 
withholding tax and file the withholding tax return (Form 8288, ``U.S. 
Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real 
Property Interests''). In these cases, the transferee is excused from 
withholding only upon the timely application for and receipt of a 
withholding certificate under Sec.  1.1445-3 (see Sec.  1.1445-3(b)(5) 
and (6) for specific rules applicable to transactions under sections 121 
and 1031). This paragraph (d)(2)(iv) is applicable for dispositions and 
exchanges occurring September 4, 2003.
    (3) Special procedural rules applicable to foreclosures--(i) Amount 
to be withheld--(A) foreclosures. A transferee that acquires a U.S. real 
property interest pursuant to a repossession or foreclosure on such 
property under a mortgage, security agreement, deed of trust or other 
instrument securing a debt must withhold tax under section 1445(a) equal 
to 15 percent (10 percent in the case of dispositions described in Sec.  
1.1445-1(b)(2)) of the amount realized on such sale. Such amount must be 
reported and paid over to the Service under the general rules of Sec.  
1.1445-1. However, if the transferee complies with the notice 
requirements of Sec.  1.1445-2(d)(3) (ii) and (iii), such transferee may 
report and pay over to the Service on or before the 20th day following 
the final determination by a court or trustee with jurisdiction over the 
foreclosure action, the lesser of:
    (1) The amount otherwise required to be withheld under section 
1445(a), or
    (2) The ``alternative amount'' as defined in the succeeding 
sentence. The alternative amount is the entire amount, if any, 
determined by a court or trustee with jurisdiction over the matter, that 
accrues to the debtor/transferor out of the amount realized from the 
foreclosure sale. The amount of any mortgage, lien, or other security 
agreement secured by the property,

[[Page 249]]

that is terminated, assumed by another person, or otherwise extinguished 
(as to the debtor/transferor) shall not be treated as an amount that 
accrues to the debtor/transferor for purposes of this Sec.  1.1445-
2(d)(3)(i)(A). If the alternative amount is zero, no withholding is 
required. Any difference between the amount withheld at the time of the 
foreclosure sale and the amount to be reported and paid over to the 
Service must be transferred to the court or trustee with jurisdiction 
over the foreclosure action. Amounts withheld, if any, are to be 
reported and paid to the Service by using Forms 8288 and 8288-A in 
conformity with Sec.  1.1445-1(d).
    (B) Deeds in lieu of foreclosures. A transferee of a U.S. real 
property interest pursuant to a deed in lieu of foreclosure must 
withhold tax equal to 15 percent (10 percent in the case of dispositions 
described in Sec.  1.1445-1(b)(2)) of the amount realized by the debtor/
transferor on the transfer. However, no withholding is required if:
    (1) The transferee is the only person with a security interest in 
the property,
    (2) No cash or other property (other than incidental fees incurred 
with respect to the transfer) is paid, directly or indirectly, to any 
person with respect to the transfer, and
    (3) The notice requirement of Sec.  1.1445-2(d)(3) are satisfied.

The amount withheld, if any, must be reported and paid over to the 
Service not later than the 20th day following the date of transfer. In a 
case where withholding would otherwise be required, a withholding 
certificate may be requested in accordance with Sec.  1.1445-3.
    (ii) Notice to the court or trustee in a foreclosure action--(A) 
Notice on day of purchase. A transferee in a foreclosure sale that 
chooses to use the special rules applicable to foreclosures must provide 
notice to the court or trustee with jurisdiction over the foreclosure 
action on the day the property is transferred with respect to such 
transferee's withholding obligation. No particular form is necessary but 
the notice must set forth the transferee's name, home address in the 
case of an individual, office address in the case of an entity, a brief 
description of the property, the date of the transfer, the amount 
realized on the sale of the foreclosed property and the amount withheld 
under section 1445(a).
    (B) Notice whether amount withheld or alternative amount is reported 
and paid over to the Service. A purchaser/transferee in a foreclosure 
that chooses to use the special rules applicable to foreclosures must 
provide notice to the court or trustee with jurisdiction over the 
foreclosure action regarding whether the amount withheld or the 
alternative amount will be (or has been) reported and paid over to the 
Service. The notice should set forth all the information required by the 
preceding paragraph (d)(3)(ii)(A), the amount withheld or alternative 
amount that will be (or has been) reported and paid over to the Service, 
and the amount that will be (or has been) paid over to the court or 
trustee.
    (iii) Notice to the Service--(A) General rule. A transferee that in 
reliance upon the rules of this paragraph (d)(3) withholds an 
alternative amount (or does not withhold because the alternative amount 
is zero) must, on or before the 20th day following the final 
determination by a court or trustee in a foreclosure action or on or 
before the 20th day following the date of the transfer with respect to a 
transfer pursuant to a deed in lieu of foreclosure, provide notice 
thereof to the Assistant Commissioner (International) at the address 
provided in Sec.  1.1445-1(g)(10). (The filing of such a notice shall 
not relieve a creditor of any obligation it may have to file a notice 
pursuant to section 6050J and the regulations thereunder.) No particular 
form is required but the following information must be set forth in 
paragraphs labelled to correspond with the numbers set forth below.
    (1) A statement that the notice constitutes a notice of foreclosure 
action or transfer pursuant to a deed in lieu of foreclosure under Sec.  
1.1445-2(d)(3).
    (2) The name, identifying number, and home address (in the case of 
an individual) or office address (in the case of an entity) of the 
purchaser/transferee.

[[Page 250]]

    (3) The name, identifying number, and home address (in the case of 
an individual) or office address (in the case of an entity) of the 
debtor/transferor.
    (4) In a foreclosure action, the date of the final determination by 
a court or trustee regarding the distribution of the amount realized 
from the foreclosure sale. In a transfer pursuant to a deed in lieu of 
foreclosure, the date the property is transferred to the purchaser/
transferee.
    (5) A brief description of the property.
    (6) The amount realized from the foreclosure sale or with respect to 
the transfer pursuant to a deed in lieu of foreclosure.
    (7) The alternative amount.
    (B) Special rule for lenders required to file Form 1099-A where the 
alternative amount is zero. A person required under section 6050J to 
file Form 1099-A does not have to comply with the notice requirement of 
Sec.  1.1445-2(d)(3)(iii)(A) if the alternative amount is zero. In such 
case, the filing of the Form 1099-A will be deemed to satisfy the notice 
requirements of Sec.  1.1445-2(d)(3)(iii)(A).
    (iv) Requirements not applicable. A transferee is not required to 
withhold tax or provide notice pursuant to the rules of this paragraph 
(d)(3) if no substantive withholding liability applies to the transfer 
of the property by the debtor/transferor. For example, if the debtor/
transferor provides the transferee with a certification of non-foreign 
status pursuant to paragraph (b) of this section, then no substantive 
withholding liability would exist with respect to the acquisition of the 
property from the debtor transferor. In such a case, no withholding of 
tax or notice to the Internal Revenue Service is required of the 
transferee with respect to the repossession or foreclosure.
    (v) Anti-abuse rule. If a U.S. real property interest is transferred 
in foreclosure or pursuant to a deed in lieu of foreclosure for a 
principal purpose of avoiding the requirements of section 1445(a), then 
the provisions of this paragraph (d)(3) shall not apply to the transfer 
and the transferee shall be fully liable for any failure to withhold 
with respect to the transfer. A principal purpose to avoid section 
1445(a) will be presumed (subject to rebuttal on the basis of all 
relevant facts and circumstances) if:
    (A) The transferee acquires property in which it, or a related 
party, has a security interest;
    (B) The security interest did not arise in connection with the 
debtor/transferor's or a related party's or predecessor in interest's 
acquisition, improvement, or maintenance of the property; and
    (C) The total amount of all debts secured by the property exceeds 90 
percent of the fair market value of the property.
    (4) Installment payments. A transferee of a U.S. real property 
interest is not required to withhold under section 1445 when making 
installment payments on an obligation arising out of a dispositions that 
took place before January 1, 1985. With respect to disposition that take 
place after December 31, 1984, the transferee shall be required to 
satisfy its entire withholding obligation within the time specified in 
Sec.  1.1445-1(c) regardless of the amount actually paid by the 
transferee. Thereafter, no withholding is required upon further 
installment payments on an obligation arising out of the transfer. A 
transferee that is unable to satisfy its entire withholding obligation 
within the time specified in Sec.  1.1445-1(c) may request a withholding 
certificate pursuant to Sec.  1.1445-3.
    (5) Acquisitions by governmental bodies. No withholding of tax is 
required under section 1445 with respect to any acquisition of property 
by the United States, a state or possession of the United States, a 
political subdivision thereof, or the District of Columbia.
    (6) [Reserved]
    (7) Withholding certificate obtained by transferee or transferor. No 
withholding is required under section 1445(a) if the transferee is 
provided with a withholding certificate that so specifies. Either the 
transferor or the transferee may seek a withholding certificate from the 
Internal Revenue Service, pursuant to the provisions of Sec.  1.1445-3.
    (8) Amount realized by transferor is zero. If the amount realized by 
transferor on a transfer of a U.S. real property interest is zero, no 
withholding is required.

[[Page 251]]

    (e) Applicability dates. The requirement in paragraphs (d)(2)(i)(B), 
(d)(2)(iii)(B), and (d)(3)(iii)(A)(2) and (3) of this section that 
taxpayer identification numbers be provided (in all cases) is applicable 
for dispositions of U.S. real property interests occurring after 
November 3, 2003. The exclusion of entities described in section 897(l) 
from the definition of foreign person in paragraph (b)(2)(i) of this 
section applies to dispositions and distributions after December 18, 
2015, and the withholding rates set forth in paragraphs (b)(4)(iv), 
(c)(3)(iii), and (d)(3)(i) of this section apply to dispositions after 
February 16, 2016. For dispositions on or before February 16, 2016, see 
paragraphs (b)(4)(iv), (c)(3)(iii), and (d)(3)(i) of this section as 
contained in 26 CFR part 1 revised as of April 1, 2015. Paragraph 
(b)(2)(v) of this section applies to certifications provided on or after 
May 7, 2019, except that a taxpayer may choose to apply paragraph 
(b)(2)(v) of this section with respect to certifications provided before 
May 7, 2019. Paragraphs (b)(2)(i) and (b)(2)(vi) of this section, apply 
with respect to dispositions of U.S. real property interests and 
distributions described in section 897(h) occurring on or after December 
29, 2022. For dispositions of U.S. real property interests and 
distributions described in section 897(h) occurring before December 29, 
2022, see Sec.  1.1445-2(b)(2)(i) and (b)(2)(vi), as contained in 26 CFR 
part 1, revised as of April 1, 2021.

[T.D. 8113, 51 FR 46633, Dec. 24, 1986; 52 FR 3917, Feb. 6, 1987, as 
amended by T.D. 8198, 53 FR 16230, May 5, 1988; T.D. 9082, 68 FR 46084, 
Aug. 5, 2003; T.D. 9751, 81 FR 8401, Feb. 19, 2016; T.D. 9926, 85 FR 
76932, Nov. 30, 2020; T.D. 9971, 87 FR 80065, Dec. 29, 2022]



Sec.  1.1445-3  Adjustments to amount required to be withheld pursuant 
to withholding certificate.

    (a) In general. Withholding under section 1445(a) may be reduced or 
eliminated pursuant to a withholding certificate issued by the Internal 
Revenue Service in accordance with the rules of this section. A 
withholding certificate may be issued by the Service in cases where 
reduced withholding is appropriate (see paragraph (c) of this section), 
where the transferor is exempt from U.S. tax (see paragraph (d) of this 
section), or where an agreement for the payment of tax is entered into 
with the Service (see paragraph (e) of this section). A withholding 
certificate that is obtained prior to a transfer notifies the transferee 
that no withholding is required. A withholding certificate that is 
obtained after a transfer has been made may authorize a normal refund or 
an early refund pursuant to paragraph (g) of this section. Either a 
transferee or transferor may apply for a withholding certificate. The 
Internal Revenue Service will act upon an application for a withholding 
certificate not later than the 90th day after it is received. Solely for 
this purpose (i.e., determining the day upon which the 90-day period 
commences), an application is received by the Service on the date that 
all information necessary for the Service to make a determination is 
provided by the applicant. In no event, however, will a withholding 
certificate be issued without the transferor's identifying number. (For 
rules regarding whether an application for a withholding certificate has 
been timely submitted, see Sec.  1.445-1(c)(2).) The Service may deny a 
request for a withholding certificate where, after due notice, an 
applicant fails to provide information necessary for the Service to make 
a determination. The Service will act upon an application for an early 
refund not later than the 90th day after it is received. An application 
for an early refund must either (1) include a copy of a withholding 
certificate issued by the Service with respect to the transaction or, 
(2) be combined with an application for a withholding certificate. Where 
an application for an early refund is combined with an application for a 
withholding certificate, the Service will act upon both applications not 
later than the 90th day after receipt. In the case of an application for 
a certificate based on non-conforming security under paragraph (e)(3)(v) 
of this section, and in unusually complicated cases, the Service may be 
unable to provide a final withholding certificate by the 90th day. In 
such a case the Service will notify the applicant, by the 45th day after 
receipt of the application, that additional processing time will be 
necessary. The

[[Page 252]]

Service's notice may request additional information or explanation 
concerning particular aspects of the application, and will provide a 
target date for final action (contingent upon the application's timely 
submission of any requested information). A withholding certificate 
issued pursuant to the provisions of this section serves to fulfill the 
requirements of section 1445(b)(4) concerning qualifying statements, 
section 1445(c)(1) concerning the transferor's maximum tax liability, or 
section 1445(c)(2) concerning the Secretary's authority to prescribe 
reduced withholding.
    (b) Applications for withholding certificates--(1) In general. An 
application for a withholding certificate must be submitted to the 
address provided in Sec.  1.1445-1(g)(10). An application for a 
withholding certificate must be signed by a responsible officer in the 
case of a corporation, by a general partner in the case of a 
partnership, by a trustee, executor, or equivalent fiduciary in the case 
of a trust or estate, and in the case of an individual by the individual 
himself. A duly authorized agent may sign the application but the 
application must contain a valid power of attorney authorizing the agent 
to sign the application on behalf of the applicant. The person signing 
the application must verify under penalties of perjury that all 
representations made in connection with the application are true, 
correct, and complete to his knowledge and belief. No particular form is 
required for an application, but the application must set forth the 
information described in paragraphs (b), (2), (3), and (4), and to the 
extent applicable, paragraph (b)(5) or (6) of this section.
    (2) Parties to the transaction. The application must set forth the 
name, address, and identifying number of the person submitting the 
application (specifying whether that person is the transferee or 
transferor), and the name, address, and identifying number of other 
parties to the transaction (specifying whether each such party is a 
transferee or transferor). The Service will deny the application if 
complete information, including the identifying numbers of all the 
parties, is not provided. Thus, for example, the applicant should 
determine if an identifying number exists for each party, and, if none 
exists for a particular party, the applicant should notify the 
particular party of the obligation to get an identifying number before 
the application can be submitted to the Service. The address provided in 
the case of an individual must be that individual's home address, and 
the address provided in the case of an entity must be that entity's 
office address. A mailing address may be provided in addition to, but 
not in lieu of, a home address or office address.
    (3) Real property interest to be transferred. The application must 
set forth information concerning the U.S. real property interest with 
respect to which the withholding certificate is sought, including the 
type of interest, the contract price, and, in the case of an interest in 
real property, its location and general description, or in the case of 
an interest in a U.S. real property holding corporation, the class or 
type and amount of the interest.
    (4) Basis for certificate--(i) Reduced withholding. If a withholding 
certificate is sought on the basis of a claim that reduced withholding 
in appropriate, the application must include:
    (A) A calculation of the maximum tax that may be imposed on the 
disposition in accordance with paragraph (c)(2) of this section. Such 
calculation must be accompanied by a copy of the relevant contract and 
depreciation schedules or other evidence that confirms the contract 
price and adjusted basis of the property. If no depreciation schedules 
are provided, the application must state the nature of the use of the 
property and why depreciation was not allowable. Evidence that supports 
any claimed adjustment to the maximum tax on the disposition must also 
be provided;
    (B) A calculation of the transferor's unsatisfied withholding 
liability, or evidence supporting the claim that no such liability 
exists, in accordance with paragraph (c)(3) of this section; and
    (C) In the case of a request for a special reduction of withholding 
pursuant to paragraph (c)(4) of this section, a statement of law and 
facts in support of the request.

[[Page 253]]

    (ii) Exemption. If a withholding certificate is sought on the basis 
of the transferor's exemption from U.S. tax, the application must set 
forth a brief statement of the law and facts that support the claimed 
exemption. In this regard, see paragraph (d) of this section.
    (iii) Agreement. If a withholding certificate is sought on the basis 
of an agreement for the payment of tax, the application must include a 
signed copy of the agreement proposed by the applicant and a copy of the 
security instrument (if any) proposed by the applicant. In this regard, 
see paragraph (e) of this section.
    (5) Special rule for exclusions from income under section 121. A 
withholding certificate may be sought on the basis of a section 121 
exclusion as a reduction in the amount of tax due under paragraph 
(c)(2)(v) of this section. The application must include information 
establishing that the transferor, who is a nonresident alien individual 
at the time of the sale (and is therefore subject to sections 897 and 
1445) is entitled to claim the benefits of section 121. For example, a 
claim for reduced withholding as a result of section 121 must include 
information that the transferor occupied the U.S. real property interest 
as his or her personal residence for the required period of time.
    (6) Special rule for like-kind exchanges under Section 1031. A 
withholding certificate may be requested with respect to a like-kind 
exchange under section 1031 as a transaction subject to a nonrecognition 
provision under paragraph (c)(2)(ii) of this section. The application 
must include information substantiating the requirements of section 
1031. The IRS may require additional information during the course of 
the application process to determine that the requirements of section 
1031 are satisfied. In the case of a deferred like-kind exchange, the 
withholding agent is excused from reporting and paying the withholding 
tax to the IRS within 20 days after the transfer only if an application 
for a withholding certificate is submitted prior to or on the date of 
transfer. See Sec.  1.1445-1(c)(2) for rules concerning delayed 
reporting and payment where an application for a withholding certificate 
has been submitted to the IRS prior to or on the date of transfer.
    (c) Adjustment of amount required to be withheld--(1) In general. 
The Internal Revenue Service may issue a withholding certificate that 
excuses withholding or that permits the transferee to withhold an 
adjusted amount reflecting the transferor's maximum tax liability. The 
transferor's maximum tax liability is the sum of--
    (i) The maximum amount which could be imposed as tax under section 
871 or 882 upon the transferor's disposition of the subject real 
property interest, as determined under paragraph (c)(2) of this section, 
and
    (ii) The transferor's unsatisfied withholding liability with respect 
to the subject real property interest, as determined under paragraph 
(c)(3) of this section.

In addition, the Internal Revenue Service may issue a withholding 
certificate that permits the transferee to withhold a reduced amount if 
the Service determines pursuant to paragraph (c)(4) of this section that 
reduced withholding will not jeopardize the collection of tax.
    (2) Maximum tax imposed on disposition. The first element of the 
transferor's maximum tax liability is the maximum amount which the 
transferor could be required to pay as tax upon the disposition of the 
subject real property interest. In the case of an individual transferor 
that amount will generally be the contract price of the property minus 
its adjusted basis, multiplied by the maximum individual income tax rate 
applicable to long term capital gain. In the case of a corporate 
transferor, that amount will generally be the contract price of the 
property minus its adjusted basis, multiplied by the maximum corporate 
income tax rate applicable to long term capital gain. However, that 
amount must be adjusted to take into account the following:
    (i) Any reduction of tax to which the transferor is entitled under 
the provisions of a U.S. income tax treaty;
    (ii) The effect of any nonrecognition provision that is applicable 
to the transaction;
    (iii) Any losses realized and recognized upon the previous 
disposition of

[[Page 254]]

U.S. real property interests during the taxable year;
    (iv) Any amount that is required to be treated as ordinary income; 
and
    (v) Any other factor that may increase or reduce the tax upon the 
disposition.
    (3) Transferor's unsatisfied withholding liability--(i) In general. 
The second element of the transferor's maximum tax liability is the 
transferor's unsatisfied withholding liability. That liability is the 
amount of any tax that the transferor was required to but did not 
withhold and pay over under section 1445 upon the acquisition of the 
subject U.S. real property interest or a predecessor interest. The 
transferor's unsatisfied withholding liability is included in the 
calculation of maximum tax liability so that such prior withholding 
liability can be satisfied by the transferee's withholding upon the 
current transfer. Alternatively, the transferor's unsatisfied 
withholding liability may be disregarded for purposes of calculating the 
maximum tax liability, if either--
    (A) Such prior withholding liability is fully satisfied by a payment 
that is made with the application submitted pursuant to this section; or
    (B) An agreement is entered into for the payment of that liability 
pursuant to the rules of paragraph (e) of this section.


Because section 1445 only requires withholding after December 31, 1984, 
no transferor's unsatisfied withholding liability can exist unless the 
transferor acquired the subject or predecessor real property interest 
after that date. For purposes of this paragraph (c), a predecessor 
interest is one that was exchanged for the subject U.S. real property 
interest in a transaction in which the transferor was not required to 
recognize the full amount of the gain or loss realized upon the 
transfer.
    (ii) Evidence that no unsatisfied withholding liability exists. For 
purposes of paragraph (b)(4)(i)(B) of this section (concerning 
information that must be submitted with an application for a withholding 
certificate), evidence that the transferor has no unsatisfied 
withholding liability includes any one of the following documents:
    (A) Evidence that the transferor acquired the subject or predecessor 
real property interest prior to January 1, 1985;
    (B) A copy of the Form 8288 that was filed by the transferor, and 
proof of payment of the amount shown due thereon, with respect to the 
transferor's acquisition of the subject or predecessor real property 
interest;
    (C) A copy of a withholding certificate with respect to the 
transferor's acquisition of the subject or predecessor real property 
interest, plus a copy of Form 8288 and proof of payment with respect to 
any withholding required under that certificate;
    (D) A copy of the non-foreign certification furnished by the person 
from whom the subject or predecessor U.S. real property interest was 
acquired, executed at the time of that acquisition;
    (E) Evidence that the transferor purchased the subject or 
predecessor real property for $300,000 or less, and a statement signed 
by the transferor under penalties of perjury, that the transferor 
purchased the property for use as a residence within the meaning of 
Sec.  1.1445-2(d)(1);
    (F) Evidence that the person from whom the transferor acquired the 
subject or predecessor U.S. real property interest fully paid any tax 
imposed on that transaction pursuant to section 897.
    (G) A copy of a notice of nonrecognition treatment provided to the 
transferor pursuant to Sec.  1.1445-2(d)(2) by person from whom the 
transferor acquired the subject or predecessor U.S. real property 
interest; and
    (H) A statement, signed by the transferor under penalties of 
perjury, setting forth the facts and circumstances that supported the 
transferor's conclusion that no withholding was required under section 
1445(a) with respect to the transferor's acquisition of the subject or 
predecessor real property interest.
    (4) Special reduction of amount required to be withheld. The 
Internal Revenue Service may, in its discretion, issue a withholding 
certificate that permits the transferee to withhold a reduced amount 
based upon a determination

[[Page 255]]

that reduced withholding will not jeopardize the collection of tax. A 
transferor that requests a withholding certificate pursuant to this 
paragraph (c)(4) is required pursuant to paragraph (b)(4)(i)(C) of this 
section to submit a statement of law and facts in support of the 
request. That statement must explain why the transferor is unable to 
enter into an agreement for the payment of tax pursuant to paragraph (e) 
of this section.
    (d) Transferor's exemption from U.S. tax--(1) In general. The 
Internal Revenue Service will issue a withholding certificate that 
excuses all withholding by a transferee if it is established that:
    (i) The transferor's gain from the disposition of the subject U.S. 
real property interest will be exempt from U.S. tax, and
    (ii) The transferor has no unsatisfied withholding liability.

For the available exemptions, see paragraph (d)(2) of this section. The 
transferor's unsatisfied withholding liability shall be determined in 
accordance with the provisions of paragraph (c)(3) of this section. A 
transferor that is entitled to a reduction of (rather than an exemption 
from) U.S. tax may obtain a withholding certificate to that effect 
pursuant to the provisions of paragraph (c) of this section.
    (2) Available exemptions. A transferor's gain from the disposition 
of a U.S. real property interest may be exempt from U.S. tax because 
either:
    (i) The transferor is an integral part or controlled entity of a 
foreign government and the disposition of the subject property is not a 
commercial activity, as determined pursuant to section 892 and the 
regulations thereunder; or
    (ii) The transferor is entitled to the benefits of an income tax 
treaty that provides for such an exemption (subject to the limitations 
imposed by section 1125(c) of Pub. L. 96-499, which, in general, 
overrides such benefits as of January 1, 1985).
    (e) Agreement for the payment of tax--(1) In general. The Internal 
Revenue Service will issue a withholding certificate that excuses 
withholding or that permits a transferee to withhold a reduced amount, 
if either the transferee or the transferor enters into an agreement for 
the payment of tax pursuant to the provisions of this paragraph (e). An 
agreement for the payment of tax is a contract between the Service and 
any other person that consists of two necessary elements. Those elements 
are--
    (i) A contract between the Service and the other person, setting 
forth in detail the rights and obligations of each; and
    (ii) A security instrument or other form of security acceptable to 
the Director, Foreign Operations District.
    (2) Contents of agreement--(i) In general. An agreement for the 
payment of tax must cover an amount described in subdivision (ii) or 
(iii) of this paragraph (e)(2). The agreement may either provide 
adequate security for the payment of the chosen amount in accordance 
with paragraph (e)(3) of this section, or provide for the payment of 
that amount through a combination of security and withholding of tax by 
the transferee.
    (ii) Tax that would otherwise be withheld. An agreement for the 
payment of tax may cover the amount of tax that would otherwise be 
required to be withheld pursuant to section 1445(a). In addition to the 
amount computed pursuant to section 1445(a), the applicant must agree to 
pay interest upon that amount, at the rate established under section 
6621, with respect to the period between the date on which the tax 
imposed by section 1445(a) would otherwise be due (i.e., the 20th day 
after the date of transfer) and the date on which the transferor's 
payment of tax with respect to the disposition will be due under the 
agreement. The amount of interest agreed upon must be paid by the 
applicant regardless of whether or not the Service is required to draw 
upon any security provided pursuant to the agreement. The interest may 
be paid either with the return or by the Service drawing upon the 
security.
    (iii) Maximum tax liability. An agreement for the payment of tax may 
cover the transferor's maximum tax liability, determined in accordance 
with paragraph (c) of this section. The agreement must also provide for 
the payment of an additional amount equal to 25 percent of the amount 
determined under paragraph (c) of this section.

[[Page 256]]

This additional amount secures the interest and penalties that would 
accrue between the date of a failure to file a return and pay tax with 
respect to the disposition, and the date on which the Service collects 
upon that liability pursuant to the agreement. Such additional amount 
will only be collected if the Service finds it necessary to draw upon 
any security provided due to the transferor's failure to file a return 
and pay tax with respect to the relevant disposition.
    (3) Major types of security--(i) In general. The following are the 
major types of security acceptable to the Service. Further details with 
respect to the terms and conditions of each type may be specified by 
Revenue Procedure.
    (ii) Bond with surety or guarantor. The Service may accept as 
security with respect to a transferor's tax liability a bond that is 
executed with a satisfactory surety or guarantor. Only the following 
persons may act as surety or guarantor for this purpose
    (A) A surety company holding a certificate of authority from the 
Secretary as an acceptable surety on Federal bonds, as listed in 
Treasury Department Circular No. 570, published annually in the Federal 
Register on the first working day of July;
    (B) A person that is engaged within or without the United States in 
the conduct of a banking, financing, or similar business under the 
principles of Sec.  1.864-4(c)(5), and that is subject to U.S. or 
foreign local or national regulation of such business, if that person is 
otherwise acceptable to the Service; and
    (C) A person that is engaged within or without the United States in 
the conduct of an insurance business that is subject to U.S. or foreign 
local or national regulation, if that person is otherwise acceptable to 
the Service.
    (iii) Bond with collateral. The Service may accept as security with 
respect to a transferor's tax liability a bond that is secured by 
acceptable collateral. All collateral must be deposited with a 
responsible financial institution acting as escrow agent, or, in the 
Service's discretion, with the Service. Only the following types of 
collateral are acceptable:
    (A) Bonds, notes, or other public debt obligations of the United 
States, in accordance with the rules of 31 CFR part 225; and
    (B) A certified cashier's, or treasurer's check, drawn on an entity 
acceptable to the Service that is engaged within or without the United 
States in the conduct of a banking, financing, or similar business under 
the principles of Sec.  1.864-4(c)(5) and that is subject to U.S. or 
foreign local or national regulation of such business.
    (iv) Letter of credit. The Service may accept as security with 
respect to a transferor's tax liability an irrevocable letter of credit. 
The Service may accept a letter of credit issued by an entity acceptable 
to the Service that is engaged within or without the United States in 
the conduct of a banking, financing, or similar business under the 
principles of Sec.  1.864-4(c)(5) and that is subject to U.S. or foreign 
local or national regulation of such business. However, the Director 
will accept a letter of credit from an entity that is not engaged in 
trade or business in the United States only if such letter may be drawn 
on an advising bank within the United States.
    (v) Guarantees and other non-conforming security--(A) Guarantee. The 
Service may in its discretion accept as security with respect to a 
transferor's tax liability the applicant's guarantee that it will pay 
such liability. The Service will in general accept such a guarantee only 
from a corporation, foreign or domestic, any class of stock of which is 
regularly traded on an established securities market on the date of the 
transfer.
    (B) Other forms of security. The Service may in unusual 
circumstances and at its discretion accept any form of security that if 
finds to be adequate. An application for a withholding certificate that 
proposes a form of security that does not conform with any of the 
preferred types set forth in paragraph (e)(3) (ii) through (iv) of this 
section or any relevant Revenue Procedure must include:
    (1) A detailed statement of the facts and circumstances supporting 
the use of the proposed form of security, and

[[Page 257]]

    (2) A memorandum of law concerning the validity and enforceability 
of the proposed form of security.
    (4) Terms of security instrument. Any security instrument that is 
furnished pursuant to this section must provide that--
    (i) The amount of each deposit of estimated tax that will be 
required with respect to the gain realized on the subject disposition 
may be collected by levy upon the security as of the date following the 
date on which each such deposit is due (unless such deposit is timely 
made);
    (ii) The entire amount of the liability may be collected by levy 
upon the security at any time during the nine months following the date 
on which the payment of tax with respect to the subject disposition is 
due, subject to release of the security upon the full payment of the tax 
and any interest and penalties due. If the transferor requests an 
extension of time to file a return with respect to the disposition, then 
the Director may require that the term of the security instrument be 
extended until the date that is nine months after the filing deadline as 
extended.
    (f) Amendments to application for withholding certificate--(1) In 
general. An applicant for a withholding certificate may amend an 
otherwise complete application by submitting an amending statement to 
the address provided in Sec.  1.1445-1(g)(10). The amending statement 
shall provide the information required by Sec.  1.1445-3(f)(3) and must 
be signed and accompanied by a penalties of perjury statement in 
accordance with Sec.  1.1445-3(b)(1).
    (2) Extension of time for the Service to process requests for 
withholding certificates--(i) In general. If an amending statement is 
submitted, the time in which the Internal Revenue Service must act upon 
the amended application shall be extended by 30 days.
    (ii) Substantial amendments. If an amending statement is submitted 
and the Service finds that the statement substantially amends the facts 
of the underlying application or substantially alters the terms of the 
withholding certificate as requested in the initial application, the 
time within which the Service must act upon the amended application 
shall be extended by 60 days. The applicant shall be so notified.
    (iii) Amending statement received after the requested withholding 
certificate has been signed on behalf of the Service. If an amending 
statement is received after the withholding certificate, drafted in 
response to the underlying application, has been signed on behalf of the 
Service and prior to the day such certificate is mailed to the 
applicant, the time in which the Service must act upon the amended 
application shall be extended by 90 days. The applicant will be so 
notified.
    (3) Information required to be submitted. No particular form is 
required for an amending statement but the statement must provide the 
following information:
    (i) Identification of applicant. The amending statement must set 
forth the name, address and identifying number of the person submitting 
the amending statement (specifying whether that person is the transferee 
or transferor).
    (ii) Date of underlying application. The amending statement must set 
forth the date of the underlying application for a withholding 
certificate.
    (iii) Real property interest to be (or that has been) transferred. 
The amending statement must set forth a brief description of the real 
property interest with respect to which the underlying application for a 
withholding certificate was submitted.
    (iv) Amending information. The amending statement must fully set 
forth the basis for the amendment including any modification of the 
facts supporting the application for a withholding certificate and any 
change sought in the terms of the withholding certificate.
    (g) Early refund of overwithheld amounts. If a transferor receives a 
withholding certificate pursuant to this section, and an amount greater 
than that specified in the certificate was withheld by the transferee, 
then pursuant to the rules of this paragraph (g) the transferor may 
apply for a refund (without interest) of the excess amount prior to the 
date on which the transferor's tax return is due (without extensions). 
(Any interest payable on refunds issued after the filing of a tax return 
shall be determined in accordance

[[Page 258]]

with the provisions of section 6611 and regulations thereunder.) An 
application for an early refund must be delivered to the address 
provided in Sec.  1.1445-1(g)(10). No particular form is required for 
the application, but the following information must be set forth in 
separate paragraphs numbered to correspond with the number given below:
    (1) Name, address, and identifying number of the transferor seeking 
the refund;
    (2) Amount required to be withheld pursuant to the withholding 
certificate issued by Internal Revenue Service;
    (3) Amount withheld by the transferee (attach a copy of Form 8288-A 
stamped by IRS pursuant to Sec.  1.1445-1(c));
    (4) Amount to be refunded to the transferor. An application for an 
early refund cannot be processed unless the required copy of Form 8288-A 
(or substantial evidence of the amount withheld in the case of a failure 
to receive Form 8288-A as provided in Sec.  1.1445-1(f)(3)) is attached 
to the application. If an application for a withholding certificate 
based upon the transferor's maximum tax liability is submitted after the 
transfer takes place, then that application may be combined with an 
application for an early refund. The Service will act upon a claim for 
refund within the time limits set forth in paragraph (a) of this 
section.
    (h) Effective date for taxpayer identification numbers. The 
requirement in paragraphs (b)(2), (f)(3)(i), and (g)(1) of this section 
that taxpayer identification numbers be provided (in all cases) is 
applicable for dispositions of U.S. real property interests occurring 
after November 3, 2003.

[T.D. 8113, 51 FR 46637, Dec. 24, 1986; 52 FR 3796, Feb. 6, 1987; T.D. 
9082, 68 FR 46085, Aug. 5, 2003, as amended by T.D. 9751, 81 FR 8401, 
Feb. 19, 2016]



Sec.  1.1445-4  Liability of agents.

    (a) Duty to provide notice of false certification or statement to 
transferee. A transferee's or transferor's agent must provide notice to 
the transferee if either--
    (1) The transferee is furnished with a non-U.S. real property 
interest statement pursuant to Sec.  1.1445-2(c)(3) and the agent knows 
that the statement is false; or
    (2) The transferee is furnished with a non-foreign certification 
pursuant to Sec.  1.1445-2(b)(2) and either (i) the agent knows that the 
certification is false, or (ii) the agent represents a transferor that 
is a foreign corporation. An agent that represents a transferor that is 
a foreign corporation is not required to provide notice to the 
transferee if the foreign corporation provided a non-foreign 
certification to the transferee prior to such agent's employment and the 
agent does not know that the corporation did so.
    (b) Duty to provide notice of false certification or statement to 
entity or fiduciary. A transferee's or transferor's agent must provide 
notice to an entity or fiduciary that plans to carry out a transaction 
described in section 1445(e) (1), (2), (3), or (4) if either--
    (1) The entity or fiduciary is furnished with a non-U.S. real 
property interest statement pursuant to Sec.  1.1445-5(b)(4)(iii) and 
the agent knows that such statement is false; or
    (2) The entity or fiduciary is furnished with a non-foreign 
certification pursuant to Sec.  1.1445-5(b)(3) (ii) and either (i) the 
agent knows that such certification is false, or (ii) the agent 
represents a foreign corporation that made such a certification.
    (c) Procedural requirements--(1) Notice to transferee, entity, or 
fiduciary. An agent who is required by this section to provide notice 
must do so in writing as soon as possible after learning of the false 
certification or statement, but not later than the date of the transfer 
(prior to the transferee's payment of consideration). If an agent first 
learns of a false certification or statement after the date of the 
transfer, notice must be given by the third day following that 
discovery. The notice must state that the certification or statement is 
false and may not be relied upon. The notice must also explain the 
possible consequences to the recipient of a failure to withhold. The 
notice need not disclose the information on which the agent's statement 
is based. The following is an example of an acceptable notice.``This is 
to notify you that you may be required to withhold

[[Page 259]]

tax in connection with (describe transaction). You have been provided 
with a certification of non-foreign status (or a non-U.S. real property 
interest statement) in connection with that transaction. I have learned 
that that document is false. Therefore, you may not rely upon it as a 
basis for failing to withhold under section 1445 of the Internal Revenue 
Code. Section 1445 provides that any person who acquires a U.S. real 
property interest from a foreign person after February 16, 2016, must 
withhold a tax equal to 15 percent (10 percent in the case of 
dispositions described in Sec.  1.1445-1(b)(2)) of the total purchase 
price. (The term `U.S. real property interest' includes real property, 
stock in U.S. corporations whose assets are primarily real property, and 
some personal property associated with realty.) Any person who is 
required to withhold but fails to do so can be held liable for the tax. 
Thus, if you do not withhold the 15 percent tax (10 percent tax in the 
case of dispositions described in Sec.  1.1445-1(b)(2)) from the total 
that you pay on this transaction you could be required to pay the tax 
yourself, if what you are acquiring is a U.S. real property interest and 
the transferor is a foreign person. Tax that is withheld must be 
promptly paid over to the IRS using Form 8288. For further information 
see sections 897 and 1445 of the Internal Revenue Code and the related 
regulations.''
    (2) Notice to be filed with IRS. An agent who is required by 
paragraph (a) or (b) of this section to provide notice to a transferee, 
entity, or fiduciary must furnish a copy of that notice to the Internal 
Revenue Service by the date on which the notice is required to be given 
to the transferee, entity, or fiduciary. The copy of the notice must be 
delivered to the address provided in Sec.  1.1445-1(g)(10) and must be 
accompanied by a cover letter stating that the copy is being filed 
pursuant to the requirements of this Sec.  1.1445-4(c)(2).
    (d) Effect on recipient. A transferee, entity, or fiduciary that 
receives a notice pursuant to this section prior to the date of the 
transfer from any agent of the transferor or transferee may not rely 
upon the subject certification or statement for purposes of excusing 
withholding pursuant to Sec.  1.1445-2 or Sec.  1.1445-5. Therefore, the 
recipient of a notice may be held liable for any failure to deduct and 
withhold tax under section 1445 as if such certification or statement 
had never been given. For special rules concerning the effect of the 
receipt of a notice after the date of the transfer, see Sec. Sec.  
1.1445-2(b)(4)(iv) and 1.1445-5 (c), (d) and (e).
    (e) Failure to provide notice. Any agent who is required to provide 
notice but who fails to do so in the manner required by paragraph (a) or 
(b) of this section shall be held liable for the tax that the recipient 
of the notice would have been required to withhold under section 1445 if 
such notice had been given. However, an agent's liability under this 
paragraph (e) is limited to the amount of compensation that that agent 
derives from the transaction. In addition, an agent who assists in the 
preparation of, or fails to disclose knowledge of, a false certification 
or statement may be liable for civil or criminal penalties.
    (f) Definition of transferor's or transferee's agent--(1) In 
general. For purposes of this section, the terms ``transferor's agent'' 
and ``transferee's agent'' means any person who represents the 
transferor or transferee (respectively)--
    (i) In any negotiation with another person (or another person's 
agent) relating to the transaction; or
    (ii) In settling the transaction.
    (2) Transactions subject to section 1445(e). In the case of 
transactions subject section 1445(e), the following definitions apply.
    (i) The term ``transferor's agent'' means any person that represents 
or advises an entity or fiduciary with respect to the planning, 
arrangement, or consummation by the entity of a transaction described in 
section 1445(e) (1), (2), (3), or (4).
    (ii) The term ``transferee's agent'' means any person that 
represents or advises the holder of an interest in an entity with 
respect to the planning, arrangement or consummation by the entity of a 
transaction described in section 1445(e) (1), (2), (3), or (4).
    (3) Exclusion of settlement officers and clerical personnel. For 
purposes of this section, a person shall not be treated as a 
transferor's agent or transferee's

[[Page 260]]

agent with respect to any transaction solely because such person 
performs one or more of the following activities.
    (i) The receipt and disbursement of any portion of the consideration 
for the transaction;
    (ii) The recording of any document in connection with the 
transaction;
    (iii) Typing, copying, and other clerical tasks;
    (iv) The obtaining of title insurance reports and reports concerning 
the condition of the real property that is the subject of the 
transaction; or
    (v) The transmission or delivery of documents between the parties.
    (4) Exclusion for governing body of a condominium association and 
the board of directors of a cooperative housing corporation. The members 
of a board, committee or other governing body of a condominium 
association and the board of directors and officers of a cooperative 
housing corporation will not be deemed agents of the transferor or 
transferee if such individuals function exclusively in their capacity as 
representatives of such association or corporation with respect to the 
transaction. In addition, the managing agent of a cooperative housing 
corporation or condominium association will not be deemed to be an agent 
of the transferee or transferor if such person functions exclusively in 
its capacity as a managing agent. If a person's activities include 
advising the transferee or transferor with respect to the transfer, this 
exclusion shall not apply.

[T.D. 8113, 51 FR 46641, Dec. 24, 1986; 52 FR 3796, 3917, Feb. 6, 1987; 
T.D. 9082, 68 FR 46086, Aug. 5, 2003, as amended by T.D. 9751, 81 FR 
8402, Feb. 19, 2016]



Sec.  1.1445-5  Special rules concerning distributions and other 
transactions by corporations, partnerships, trusts, and estates.

    (a) Purpose and scope. This section provides special rules 
concerning the withholding that is required under section 1445(e) upon 
distributions and other transactions involving domestic or foreign 
corporations, partnerships, trusts, and estates. Paragraph (b) of this 
section provides rules that apply generally to the various withholding 
requirements set forth in this section. Under section 1445(e)(1) and 
paragraph (c) of this section, a domestic partnership or the fiduciary 
of a domestic trust or estate is required to withhold tax upon the 
entity's disposition of a U.S. real property interest if any foreign 
persons are partners or beneficiaries of the entity. Paragraph (d) 
provides rules concerning the requirement of section 1445(e)(2) that a 
foreign corporation withhold tax upon its distribution of a U.S. real 
property interest to its interest-holders. Finally, under section 
1445(e)(3) and paragraph (e) of this section a domestic U.S. real 
property holding corporation is required to withhold tax upon certain 
distributions to interest-holders that are foreign persons. Paragraphs 
(f) and (g) of this section are reserved to provide rules concerning 
transactions involving interests in partnerships, trusts, and estates 
that will be subject to withholding pursuant to sections 1445(e) (4) and 
(5).
    (b) Rules of general application--(1) Double withholding not 
required. If tax is required to be withheld with respect to a transfer 
of property in accordance with the rules of this section, then no 
additional tax is required to be withheld by the transferee of the 
property with respect to that transfer pursuant to the general rules of 
section 1445(a) and Sec.  1.1445-1. For rules coordinating the 
withholding under section 1441 (or section 1442 or 1443) and under 
section 1445 on distributions from a corporation, see Sec.  1.1441-
3(b)(4). If a transfer of a U.S. real property interest described in 
section 1445(e) is exempt from withholding under the rules of this 
section, then no withholding is required under the general rules of 
section 1445(a) and Sec.  1.1445-1.
    (2) Coordination with nonrecognition provisions--(i) In general. 
Withholding shall not be required under the rules of this section with 
respect to a transfer described in section 1445(e) of a U.S. real 
property interest if--
    (A) By reason of the operation of a nonrecognition provision of the 
Internal Revenue Code or the provisions of any treaty of the United 
States no gain or loss is required to be recognized by the foreign 
person with respect to which withholding would otherwise be required; 
and

[[Page 261]]

    (B) The entity or fiduciary that is otherwise required to withhold 
complies with the notice requirements of paragraph (b)(2)(ii) of this 
section. The entity or fiduciary must determine whether gain or loss is 
required to be recognized pursuant to the rules of section 897 and the 
applicable nonrecognition provisions of the Internal Revenue Code. An 
entity or fiduciary may obtain a withholding certificate from the 
Internal Revenue Service that confirms the applicability of a 
nonrecognition provision, but is not required to do so. For purposes of 
this paragraph (b)(2), a nonrecognition provision is any provision of 
the Internal Revenue Code for not recognizing gain or loss. If 
nonrecognition treatment is available only with respect to part of the 
gain realized on a transfer, the exemption from withholding provided by 
this paragraph (b)(2) shall not apply. In such cases a withholding 
certificate may be sought pursuant to the provisions of Sec.  1.1445-6.
    (ii) Notice of nonrecognition transfer. An entity or fiduciary that 
fails to withhold tax with respect to a transfer in reliance upon the 
rules of this paragraph (b)(2) must by the 20th day after the date of 
the transfer deliver a notice thereof to the address provided in Sec.  
1.1445-1(g)(10). No particular form is required for a notice of 
transfer, but the following information must be set forth in paragraphs 
labelled to correspond with the letter set forth below:
    (A) A statement that the document submitted constitutes a notice of 
a nonrecognition transfer pursuant to the requirements of Sec.  1.1445-
5(b)(2)(ii);
    (B) The name, office address, and identifying number of the entity 
of fiduciary submitting the notice;
    (C) The name, identifying number, and home address (in the case of 
an individual) or office address (in the case of an entity) of each 
foreign person with respect to which withholding would otherwise be 
required;
    (D) A brief description of the transfer; and
    (E) A brief statement of the law and facts supporting the claim that 
recognition of gain or loss is not required with respect to the 
transfer.
    (3) Interest-holder not a foreign person--(i) In general. Pursuant 
to the provisions of paragraphs (c) and (e) of this section, an entity 
or fiduciary is required to withhold with respect to certain transfers 
of property if a holder of an interest in the entity is a foreign 
person. For purposes of determining whether a holder of an interest is a 
foreign person, and entity or fiduciary may rely upon a certification of 
nonforeign status provided by that person in accordance with paragraph 
(b)(3)(ii) of this section. Except to the extent provided in paragraph 
(b)(3)(iii) of this section, such a certification excuses the entity or 
fiduciary from any liability otherwise imposed pursuant to section 
1445(e) and regulations thereunder. However, no obligation is imposed 
upon an entity or fiduciary to obtain certifications from interest-
holders; an entity or fiduciary may instead rely upon other means to 
ascertain the nonforeign status of an interest-holder. If the entity or 
fiduciary does rely upon other means but the interest-holder proves, in 
fact, to be a foreign person, then the entity or fiduciary is subject to 
any liability imposed pursuant to section 1445 and regulations 
thereunder.

An entity or fiduciary is not required to rely upon other means to 
ascertain the non-foreign status of an interest-holder and may demand a 
certification of non-foreign status. If the certification is not 
provided, the entity or fiduciary may withhold tax under section 1445 
and will be considered, for purposes of sections 1461 through 1463, to 
have been required to withhold such tax.
    (ii) Interest-holder's certification of non-foreign status--(A) In 
general. For purposes of this section, an entity or fiduciary may treat 
any holder of an interest in the entity as a U.S. person if that 
interest-holder furnishes to the entity or fiduciary a certification 
stating that the interest-holder is not a foreign person, in accordance 
with the provisions of paragraph (b)(3)(ii)(B) of this section. In 
general, a foreign person is a nonresident alien individual, foreign 
corporation, foreign partnership, foreign trust, or foreign estate, 
except that a withholding qualified holder (as defined in Sec.  1.1445-
1(g)(11)) is not a foreign person for purposes of this section.

[[Page 262]]

    (B) Procedural rules. The rules in this paragraph (b)(3)(ii)(B) 
apply for purposes of the interest-holder's certification of non-foreign 
status (including a certification of non-foreign status provided by a 
withholding qualified holder (as defined in Sec.  1.1445-1(g)(11)).
    (1) An interest-holder's certification of non-foreign status must be 
signed under penalties of perjury and must state--
    (i) That the interest-holder is not a foreign person; and
    (ii) The interest-holder's name, identifying number, home address 
(in the case of an individual), or office address (in the case of an 
entity), and place of incorporation (in the case of a corporation).
    (2) For purposes of paragraph (b)(3)(ii)(B)(1) of this section, an 
individual's identifying number is the individual's Social Security 
number and any other person's identifying number is its U.S. employer 
identification number (see Sec.  1.897-1(p)), or, if the interest-holder 
is a withholding qualified holder (as defined in Sec.  1.1445-1(g)(11)) 
that does not have a U.S. taxpayer identification number, a foreign tax 
identification number issued by its jurisdiction of residence. The 
certification must be signed by a responsible officer in the case of a 
corporation, by a general partner in the case of a partnership, and by a 
trustee, executor, or equivalent fiduciary in the case of a trust or 
estate. No particular form is needed for a certification pursuant to 
this paragraph (b)(3)(ii), nor is any particular language required, so 
long as the document meets the requirements of this paragraph, except 
that, with respect to certification submitted by a withholding qualified 
holder (as defined in Sec.  1.1445-1(g)(11)), the transferor must state 
on the certification that it is treated as a non-foreign person because 
it is a withholding qualified holder and must further specify whether it 
qualifies as a withholding qualified holder because it is a qualified 
holder under Sec.  1.897(l)-1(d) or a foreign partnership that satisfies 
the requirements of Sec.  1.1445-1(g)(11). Samples of acceptable 
certifications are provided in paragraph (b)(3)(ii)(E) of this section.
    (3) An entity may rely upon a certification pursuant to this 
paragraph (b)(3)(ii)(B) for a period of two calendar years following the 
close of the calendar year in which the certification was given. If an 
interest holder becomes a foreign person (or no longer is treated as a 
withholding qualified holder (as defined in Sec.  1.1445-1(g)(11)) and 
therefore is no longer treated as a non-foreign person for purposes of 
withholding under section 1445 within the period described in the 
preceding sentence, the interest-holder must notify the entity before 
any further dispositions or distributions and upon receipt of such 
notice (or any other notification of the foreign status of the interest-
holder) the entity may no longer rely upon the prior certification. An 
entity that obtains and relies upon a certification must retain that 
certification with its books and records for a period of three calendar 
years following the close of the last calendar year in which the entity 
relied upon the certification.
    (C) Foreign corporation that has made an election under section 
897(i). A foreign corporation that has made a valid election under 
section 897(i) to be treated as a domestic corporation for purposes of 
section 897 may provide a certification of non-foreign status pursuant 
to this paragraph (b)(3)(ii). However, an electing foreign corporation 
must attach to such certification a copy of the acknowledgment of the 
election provided to the corporation by the Internal Revenue Service 
pursuant to Sec.  1.897-3(d)(4).

An acknowledgment is valid for this purpose only if it states that the 
information required by Sec.  1.897-3 has been determined to be 
complete.
    (D) Form W-8EXP. A certification of non-foreign status can be made 
by a withholding qualified holder (as defined in Sec.  1.1445-1(g)(11)) 
as provided in this paragraph (b)(3)(ii) to certify its qualified holder 
status. A certification of non-foreign status under this paragraph 
(b)(3)(ii) also includes a certification made on a Form W-8EXP that 
states that the interest-holder is treated as a non-foreign person 
because it is a withholding qualified holder and must further specify 
whether it qualifies as a withholding qualified holder because it is a 
qualified holder under Sec.  1.897(l)-1(d) or a foreign partnership

[[Page 263]]

that satisfies the requirements of Sec.  1.1445-1(g)(11). The 
certification must also meet all of the other requirements for a valid 
Form W-8EXP as provided on the form and the instructions to the form. A 
qualified holder may not provide a certification of non-foreign status 
on a Form W-9, as described in paragraph (b)(3)(iv) of this section.
    (iii) Reliance upon certification not permitted. An entity or 
fiduciary may not rely upon an interest-holder's certification of non-
foreign status if, prior to or at the time of the transfer with respect 
to which withholding would be required, the entity or fiduciary either--
    (A) Has actual knowledge that the certification is false;
    (B) Has received a notice that the certification is false from a 
transferor's or transferee's agent, pursuant to Sec.  1.1445-4; or
    (C) Has received from a corporation that it knows to be a foreign 
corporation a certification that does not have attached to it a copy of 
the IRS acknowledgment of the corporation's election under section 
897(i), as required by paragraph (b)(3)(ii)(C) of this section. Such an 
entity's or fiduciary's withholding obligations shall apply as if a 
statement had never been given, and such an entity or fiduciary may be 
held fully liable pursuant to Sec.  1.1445-1(e) for any failure to 
withhold. For special rules concerning an entity's belated receipt of a 
notice concerning a false certification, see paragraphs (c)(2)(ii) and 
(e)(2)(iii) of this section.
    (iv) Form W-9. For purposes of paragraph (b)(3)(i) of this section, 
a certification of non-foreign status includes a valid Form W-9, Request 
for Taxpayer Identification Number and Certification, or its successor, 
submitted to the transferee by the transferor.
    (4) Property transferred not a U.S. real property interest--(i) In 
general. Pursuant to the provisions of paragraphs (c) and (d) of this 
section, an entity or fiduciary is required to withhold with respect to 
certain transfers of property, if the property transferred is a U.S. 
real property interest. (In addition, taxable distributions of U.S. real 
property interests by domestic or foreign partnerships, trusts, and 
estates will be subject to withholding pursuant to section 1445(e)(4) 
and paragraph (f) of this section after publication of a Treasury 
decision under sections 897 (e)(2) and (g). As defined in section 897(c) 
and Sec.  1.897-1(c), a U.S. real property interest includes certain 
interests in U.S. corporations, as well as direct interests in real 
property and certain associated personal property. This paragraph (b)(4) 
provides rules pursuant to which an entity (or fiduciary thereof) that 
transfers an interest in a U.S. corporation may determine that 
withholding is not required because the interest transferred is not a 
U.S. real property interest. To determine whether an interest in 
tangible property constitutes a U.S. real property interest the transfer 
of which would be subject to withholding, see Sec.  1.897-1 (b) and (c).
    (ii) Interests in publicly traded entities. Withholding is not 
required under paragraph (c) or (d) of this section upon an entity's 
transfer of an interest in a domestic corporation if any class of stock 
of the corporation is regularly traded on an established securities 
market. This exemption shall apply to a disposition incident to an 
initial public offering of stock pursuant to a registration statement 
filed with the Securities and Exchange Commission.

Similarly, no withholding is required under paragraph (c) or (d) of this 
section upon an entity's transfer of an interest in a publicly traded 
partnership or trust. However, the rule of this paragraph (b)(4)(ii) 
shall not apply to the transfer, to a single transferee (or related 
transferees as defined in Sec.  1.897-1(i)) in a single transaction (or 
related transactions), of an interest described in Sec.  1.897-
1(c)(2)(iii)(B) (relating to substantial amounts of non-publicly traded 
interests in publicly traded corporations) or of similar interests in 
publicly traded partnerships or trusts. The entity making a transfer 
described in the preceding sentence must otherwise determine whether 
withholding is required, pursuant to section 1445(e) and the regulations 
thereunder. Transactions shall be deemed to be related if they are 
undertaken within 90 days of one another or if it can otherwise be shown 
that they were undertaken in pursuance of a prearranged plan.
    (iii) Corporation's statement that interest is not a U.S. real 
property interest. (A)

[[Page 264]]

In general. No withholding is required under paragraph (c) or (d) of 
this section upon an entity's transfer of an interest in a domestic 
corporation if, prior to the transfer, the entity or fiduciary obtains a 
statement, issued by the corporation pursuant to Sec.  1.897-2(h), 
certifying that the interest is not a U.S. real property interest. In 
general, a corporation may issue such a statement only if the 
corporation was not a U.S. real property holding corporation at any time 
during the previous five years (or the period in which the interest was 
held by its present holder, if shorter) or if interests in the 
corporation ceased to be United States real property interests under 
section 897(c)(1)(B). (A corporation may not provide such a statement 
based on its determination that the interest in question is an interest 
solely as a creditor.) See Sec.  1.897-2 (f) and (h). A corporation's 
statement may be relied upon for purposes of this paragraph (b)(4)(iii) 
only if the statement is dated not more than 30 days prior to the date 
of the transfer.
    (B) Reliance on statement not permitted. An entity or fiduciary is 
not entitled to rely upon a statement that an interest in a corporation 
is not a U.S. real property interest, if, prior to or at the time of the 
transfer, the entity or fiduciary either--
    (1) Has actual knowledge that the statement is false, or
    (2) Receives a notice that the statement is false from a 
transferor's or transferee's agent, pursuant to Sec.  1.1445-4.

Such an entity's or fiduciary's withholding obligations shall apply as 
if a statement had never been given, and such an entity or fiduciary may 
be held fully liable pursuant to Sec.  1.1445-1(e) for any failure to 
withhold. For special rules concerning an entity's belated receipt of a 
notice concerning a false statement, see paragraphs (c)(2)(iii) and 
(d)(2)(i) of this section.
    (5) Reporting and paying over of withheld amounts--(i) In General. 
An entity or fiduciary must report and pay over to the Internal Revenue 
Service any tax withheld pursuant to section 1445(e) and this section by 
the 20th day after the date of the transfer (as defined in Sec.  1.1445-
1(g)(8). Forms 8288 and 8288-A are used for this purpose and must be 
filed at the location as provided in the instructions to Forms 8288 and 
8288-A. The contents of Forms 8288 and 8288-A are described in Sec.  
1.1445-1(d). Pursuant to section 7502 and regulations thereunder, the 
timely mailing of Forms 8288 and 8288-A by U.S. mail will be treated as 
their timely filing. Form 8288-A will be stamped by the Internal Revenue 
Service to show receipt, and a stamped copy will be mailed by the 
Service to the interest holder if the Form 8288 is complete, including 
the transferor's identifying number, at the address shown on the form, 
for the interest-holder's use. See paragraph (b)(7) of this section. If 
an application for a withholding certificate with respect to a transfer 
of a U.S. real property interest was submitted to the Internal Revenue 
Service on the day of or at any time prior to the transfer, the entity 
or fiduciary must withhold the amount required under section 1445(e) and 
the rules of this section. However, the amount withheld, or a lesser 
amount as determined by the Service, need not be reported and paid over 
to the Service until the 20th day following the Service's final 
determination. For this purpose, the Service's final determination 
occurs on the day when the withholding certificate is mailed to the 
applicant by the Service or when a notification denying the request for 
a withholding certificate is mailed to the applicant by the Service. An 
application is submitted to the Service on the day it is actually 
received by the Service at the address provided in Sec.  1.1445-1(g)(10) 
or, under the rules of section 7502, on the day it is mailed to the 
Service at the address provided in Sec.  1.1445-1(g)(10). For rules 
concerning the issuance of withholding certificates, see Sec.  1.1445-6.
    (ii) Anti-abuse rule. An entity or fiduciary that in reliance upon 
the rules of this paragraph (b)(5)(ii) fails to report and pay over 
amounts withheld by the 20th day following the date of the transfer, 
shall be subject to the payment of interest and penalties if the 
relevant application for a withholding certificate (or an amendment of 
the application for a withholding certificate) was submitted for a 
principle purpose of delaying the payment to the IRS of

[[Page 265]]

the amount withheld. Interest and penalties shall be assessed on the 
amount that is ultimately paid over, with respect to the period between 
the 20th day after the date of the transfer and the date on which 
payment is made.
    (6) Liability upon failure to withhold. For rules regarding 
liability upon failure to withhold under section 1445(e) and this Sec.  
1.1445-5, see Sec.  1.1445-1(e).
    (7) Effect of withholding by entity or fiduciary upon interest 
holder. The withholding of tax under section 1445(e) does not excuse a 
foreign person that is subject to U.S. tax by reason of the operation of 
section 897 from filing a U.S. tax return. Thus, Form 1040NR. 1041. or 
1120F, as appropriate must be filed and any tax due must be paid, by the 
filing date otherwise applicable to such person (or any extension 
thereof). The tax withheld with respect to the foreign person under 
section 1445(e) (as shown on Form 8288-A) shall be credited against the 
amount of income tax as computed in such return, but only if the stamped 
copy of Form 8288-A provided to the entity or fiduciary (under paragraph 
(b)(5) of this section) is attached to the return or substantial 
evidence of the amount of tax withheld is attached to the return in 
accordance with the succeeding sentence. If a stamped copy of Form 8288-
A has not been provided to the interest-holder by the Service, the 
interest-holder may establish the amount of tax withheld by the entity 
or fiduciary by attaching to its return substantial evidence of such 
amount. Such an interest-holder must attach to its return a statement 
which supplies all of the information required by Sec.  1.1445-1(d)(2). 
If the amount withheld under section 1445(e) constitutes less than the 
full amount of the foreign person's U.S. tax liability for that taxable 
year, then a payment of estimated tax may be required to be made 
pursuant to section 6154 or 6654 prior to the filing of the income tax 
return for the year. Alternatively, if the amount withheld under section 
1445(e) exceeds the foreign person's maximum tax liability with respect 
to the transaction (as reflected in a withholding certificate issued by 
the Internal Revenue Service pursuant to Sec.  1.1445-6), then the 
foreign person may seek an early refund of the excess pursuant to Sec.  
1.1445-6(g). A foreign person that takes gain into account in accordance 
with the provisions of section 453 shall not be entitled to a refund to 
the amount withheld, unless a withholding certificate providing for such 
a refund is obtained pursuant to Sec.  1.1445-6. If an entity or 
fiduciary withholds tax under section 1445(e) with respect to a 
beneficial owner of an interest who is not a foreign person, such 
beneficial owner may credit the amount of any tax withheld against his 
income tax liability in accordance with the provisions of this Sec.  
1.1445-5(b)(7) or apply for an early refund under Sec.  1.1445-6(g).
    (8) Effective dates--(i) Partnership, trust, and estate dispositions 
of U.S. real property interests. The provisions of section 1445(e)(1) 
and paragraph (c) of this section, requiring withholding upon certain 
dispositions of U.S. real property interests by domestic partnerships, 
trusts, and estates, shall apply to any disposition on or after January 
1, 1985.
    (ii) Certain distributions by foreign corporations. The provisions 
of section 1445(e)(2) and paragraph (d) of this section, requiring 
withholding upon distributions of U.S. real property interests by 
foreign corporations shall apply to distributions made on or after 
January 1, 1985.
    (iii) Distributions by certain domestic corporations to foreign 
shareholders. The provisions of section 1445(e)(3) and paragraph (e)(1) 
of this section, requiring withholding upon distributions in redemption 
of stock under section 302(a) or liquidating distributions under Part II 
of subchapter C of the Internal Revenue Code by U.S. real property 
holding corporations to foreign shareholders, shall apply to 
distributions made on or after January 1, 1985. The provisions of 
section 1445(e)(3) and paragraph (e)(1) of this section requiring 
withholding on distributions under section 301 by U.S. real property 
holding corporations to foreign shareholders shall apply to 
distributions made after August 20, 1996. The provisions of paragraph 
(e) of this section providing for the coordination of withholding 
between sections 1445 and 1441 (or 1442 or 1443) for distributions under

[[Page 266]]

section 301 by U.S. real property holding corporations to foreign 
shareholders apply to distributions after December 31, 2000 (see Sec.  
1.1441-3(c)(4) and (h)).
    (iv) Taxable distributions by domestic or foreign partnerships, 
trusts, and estates. The provisions of section 1445(e)(4), requiring 
withholding upon certain taxable distributions by domestic or foreign 
partnerships, trusts, and estates, shall apply to distributions made on 
or after the effective date of a Treasury decision under section 897 
(e)(2)(B)(ii) and (g).
    (v) [Reserved]
    (vi) Tiered Partnerships. No withholding is required upon the 
disposition of a U.S. real property interest by a partnership which is 
directly owned, in whole or in part, by another domestic partnership 
(but only to the extent that the amount realized is attributable to the 
partnership interest of that other partnership) until the effective date 
of a Treasury Decision published under section 1445(e) providing rules 
governing this matter.
    (c) Dispositions of U.S. real property interests by domestic 
partnerships, trusts, and estates--(1) Withholding required--(i) In 
general. If a domestic partnership, trust, or estate disposes of a U.S. 
real property interest and any partner, beneficiary, or owner of the 
entity is a foreign person, then the partnership or the trustee, 
executor, or equivalent fiduciary of the trust or estate must withhold 
tax with respect to each such foreign person in accordance with the 
provisions of subdivision (ii), (iii), or (iv), of this paragraph (c)(1) 
(as applicable). The withholding obligation imposed by this paragraph 
(c) applies to the fiduciary of a trust even if the grantor of the trust 
or another person is treated as the owner of the trust or any portion 
thereof for purposes of the Internal Revenue Code. Thus, the withholding 
obligation imposed by this paragraph (c) applies to the trustee of a 
land trust or similar arrangement, even if such a trustee is not 
ordinarily treated under the applicable provisions of local law as a 
true fiduciary.
    (ii) Disposition by partnership. A partnership must withhold a tax 
equal to the rate specified in section 1445(e)(1) multiplied by the 
amount of each foreign partner's distributive share of the gain realized 
by the partnership upon the disposition of each U.S. real property 
interest. Such distributive share of the gain must be determined 
pursuant to the principles of section 704 and the regulations 
thereunder. For the rules applicable to partnerships, interests in which 
are regularly traded on an established securities market, see Sec.  
1.1445-8.
    (iii) Disposition by trust or estate--(A) In general. A trustee, 
fiduciary, executor or equivalent fiduciary (hereafter collectively 
referred to as the fiduciary) of a trust or estate having one or more 
foreign beneficiaries must withhold tax in accordance with the rules of 
this Sec.  1.1445-5(c)(1)(iii). Such a fiduciary must establish a U.S. 
real property interest account and must enter in such account all gains 
and losses realized during the taxable year of the trust or estate from 
dispositions of U.S. real property interests. The fiduciary must 
withhold a tax equal to the rate specified in section 1445(e)(1) 
multiplied by the amount of any distribution to a foreign beneficiary 
that is attributable to the balance in the U.S. real property interest 
account on the day of the distribution. A distribution from a trust or 
estate to a beneficiary (domestic or foreign) shall, solely for purposes 
of section 1445(e)(1), be deemed to be attributable first to any balance 
in the U.S. real property interest account and then to other amounts. 
However, a distribution that occurs prior to the transfer of a U.S. real 
property interest in a taxable year or at any other time when the amount 
contained in the U.S. real property interest account is zero, is not 
subject to withholding under this Sec.  1.1445-5(c)(1)(iii). The U.S. 
real property interest account is reduced by the amount distributed to 
all beneficiaries (domestic and foreign) attributable to such account 
during the taxable year of the trust or estate. Any ending balance of 
the U.S. real property interest account not distributed by the close of 
the taxable year of the trust or estate is cancelled and is not carried 
over (or carried back) to any other year. Thus, the beginning balance of 
such account

[[Page 267]]

in any taxable year of the trust or estate is always zero. For rules 
applicable to grantor trusts see Sec.  1.1445-5(c)(1)(iv). For rules 
applicable to trusts, interests in which are regularly traded on an 
established securities market and real estate investment trusts, see 
Sec.  1.1445-8.
    (B) Example. The following example illustrates the rules of 
paragraph (c)(1)(iii)(A) of this section. In 1994, the relevant rate of 
withholding (that is, the rate specified in section 1445(e)(1)) was 35%.

    On January 1, 1994, A establishes a domestic trust (which has as its 
taxable year, the calendar year) for the benefit of B, a nonresident 
alien, and C, a U.S. citizen. The trust is not a trust subject to 
sections 671 through 679. Under the terms of the trust, the trustee, T, 
is given discretion to distribute income and corpus of the trust to 
provide for the reasonable needs of B and C. During the trust's 1994 tax 
year, T disposes of three parcels of vacant land located in the United 
States. The following chart illustrates the computation of the amount 
subject to withholding under section 1445 with respect to distributions 
made by T to B and C during 1994.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Gains or                                              Section 1445        U.S. real
                Date                        Parcel sold           (loss)      Distributions    Distributions to B    withholding 35%   property interest
                                                                 realized          to C       (before withholding)         rate             account
--------------------------------------------------------------------------------------------------------------------------------------------------------
 1/01/94............................  ......................  ..............  .............  .....................  .................                -0-
 3/01/94............................  Parcel 1..............        140,000   .............  .....................  .................            140,000
 3/05/94............................  ......................  ..............         5,000                  10,000              3,500            125,000
 3/15/94............................  ......................  ..............        10,000                   5,000              1,750            110,000
 5/01/94............................  Parcel 2..............        300,000   .............  .....................  .................            410,000
 5/15/94............................  Parcel 3..............        (50,000)  .............  .....................  .................            360,000
12/01/94............................  ......................  ..............       170,000                 170,000             59,500             20,000
 1/01/95............................  ......................  ..............  .............  .....................  .................                -0-
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (iv) Disposition by grantor trust. The trustee or equivalent 
fiduciary of a trust that is subject to the provisions of subpart E of 
part 1 of subchapter J (sections 671 through 679) must withhold a tax 
equal to the rate specified in section 1445(e)(1) multiplied by the 
amount of the gain realized from each disposition of a U.S. real 
property interest to the extent such gain is allocable to a portion of 
the trust treated as owned by a foreign person under subpart E of part 1 
of subchapter J.
    (2) Withholding not required under paragraph (c)--(i) [Reserved]
    (ii) Interest-holder not a foreign person--(A) In general. A 
domestic partnership, trust, or estate that disposes of a U.S. real 
property interest shall not be required to withhold with respect to any 
partner or beneficiary that it determines, pursuant to the rules of 
paragraph (b)(3) of this section, not to be a foreign person.
    (B) Belated notice of false certification. If after the date of the 
transfer a partnership or fiduciary learns that a partner's or 
beneficiary's certification of non-foreign status is false, then that 
partnership or fiduciary shall be required to withhold, with respect to 
the foreign partner or beneficiary that gave the false certification, 
the lessor of--
    (1) The amount otherwise required to be withheld under the rules of 
this paragraph (c), or
    (2) An amount equal to that partner's or beneficiary's remaining 
interests in the income or assets of the partnership, trust, or estate. 
Amounts so withheld must be reported and paid over by the 60th day 
following the date on which the partnership or fiduciary learns that the 
certification is false. For rules concerning the notifications of false 
certifications that may be required to be given to partnerships and 
fiduciaries, see Sec.  1.1445-4(b).
    (iii) Property disposed of not a U.S. real property interest--(A) In 
general. No withholding is required under this paragraph (c) if a 
domestic partnership, trust, or estate that disposes of property 
determines pursuant to the rules of paragraph (b)(4) of this section 
that the property disposed of is not a U.S. real property interest.
    (B) Belated notice of false statement. If after the date of the 
transfer a partnership or fiduciary learns that a corporation's 
statement (that an interest in the corporation is not a U.S. real 
property interest) is false, then that partnership or fiduciary shall be 
required

[[Page 268]]

to withhold, with respect to each foreign partner or beneficiary, the 
lesser of--
    (1) The amount otherwise required to be withheld under the rules of 
this paragraph (c), or
    (2) An amount equal to that partner's or beneficiary's remaining 
interests in the income or assets of the partnership, trust, or estate.

Amounts so withheld must be reported and paid over by the 60th day 
following the date on which the partnership or fiduciary learns that the 
statement is false. For rules concerning the notifications of false 
statements that may be required to be given to partnerships or 
fiduciaries, see Sec.  1.1445-4(b).
    (iv) Withholding certificate. No withholding is required under this 
paragraph (c) with respect to the transfer of a U.S. real property 
interest if the Internal Revenue Service issues a withholding 
certificate that so provides. For rules concerning the issuance of 
withholding certificates, see Sec.  1.1445-6.
    (v) Nonrecognition transactions. For special rules concerning 
transactions entitled to nonrecognition of gain or loss, see paragraph 
(b)(2) of this section.
    (3) Large partnerships or trusts--(i) In general. If a partnership 
or trust has more than 100 partners or beneficiaries, then the 
partnership or fiduciary of the trust may elect to withhold in 
accordance with the provisions of this Sec.  1.1445-5(c)(3) in lieu of 
withholding in the manner required by Sec.  1.1445-5(c)(1). However, the 
rules of this Sec.  1.1445-5(c)(3) shall not apply to any partnership or 
trust interests in which are regularly traded on an established 
securities market except as described in Sec.  1.1445-8(c)(1). The rules 
of this Sec.  1.1445-5(c)(3) shall not apply to any real estate 
investment trust. See Sec.  1445-8.
    (ii) Amount to be withheld. A partnership or trust electing to 
withhold under this paragraph (c)(3) shall withhold from each 
distribution to a foreign person an amount equal to the rate specified 
in section 1445(e)(1) multiplied by of the amount attributable to 
section 1445(e)(1) transfers.
    (iii) Amounts attributable to section 1445(e)(1) transfers. A 
distribution is attributable to section 1445(e)(1) transfers to the 
extent of the partner's or beneficiary's proportionate share of the 
current balance of the entity's section 1445(e)(1) account. A 
distribution from a partnership or trust that has made an election under 
this Sec.  1.1445-5(c)(3) shall be deemed first to be attributable to a 
section 1445(e)(1) transfer to the extent of the balance in the section 
1445(e)(1) account. An entity's section 1445(e)(1) account shall be 
equal to--
    (A) The total amount of net gain realized by the entity upon all 
transfers of U.S. real property interests carried out by the entity 
after the date of its election under this Sec.  1.1445-5(c)(3); minus
    (B) The total amount of all distributions by the entity to domestic 
and foreign distributees from such account.
    (iv) Special rules for entities that make recurring sales of growing 
crops and timber. An entity that makes an election under Sec.  1.1445-
5(c)(3) and that makes recurring sales of growing crops and timber may 
further elect to determine the amount subject to withholding under the 
rules of this Sec.  1.1445-5(c)(3)(iv). Such an entity must withhold 
from each distribution to a foreign partner or beneficiary an amount 
equal to 15 percent of such partner's or beneficiary's proportionate 
share of the current balance of the entity's gross section 1445(e)(1) 
account. An entity's gross section 1445(e)(1) account equals--
    (A) The total amount realized by the entity upon all transfers of 
U.S. real property interests carried out by the entity after the date of 
its election under this Sec.  1.1445-5(c)(3)(iv); minus
    (B) The total amount of all distributions to domestic and foreign 
distributees from such account.

An entity that elects to compute the amount subject to withholding under 
this Sec.  1.1445-5(c)(3)(iv), shall make such election in accordance 
with Sec.  1.1445-5(c)(3)(vi) and shall be subject to the provisions 
otherwise applicable under Sec.  1.1445-5(c)(3).
    (v) Procedural rules. An election under paragraph (c)(3) may be made 
by filing a notice thereof with at the address provided in Sec.  1.1445-
1(g)(10). The notice must be submitted by a general partner (in the case 
of a partnership) or the trustee or equivalent fiduciary (in the case of 
a trust). The notice must set forth the name, office address, and

[[Page 269]]

identifying number of the partnership or fiduciary making the election, 
and, in the case of a partnership, must include the name, office 
address, and identifying number of the general partner submitting the 
election. An election under this paragraph (c)(3) may be revoked only 
with the consent of the Internal Revenue Service. Consent of the Service 
may be requested by filing an application to revoke the election at the 
address stated above. This application must include all information 
provided to the Service with the election notice and must provide an 
explanation of the reasons for revoking the election. The application to 
revoke an election must also specify the amount remaining to be 
distributed in the section 1445(e)(1) account or the gross section 
1445(e)(1) account.

An entity that ceases to qualify under section 1.1445-5(c)(3) because 
such entity does not have more than 100 partners or beneficiaries may 
revoke its election only with the consent of the Internal Revenue 
Service.
    (d) Distributions of U.S. real property interests by foreign 
corporations--(1) In general. A foreign corporation that distributes a 
U.S. real property interest must deduct and withhold a tax equal to the 
rate specified in section 1445(e)(2) multiplied by of the amount of gain 
recognized by the corporation on the distribution. The amount of gain 
required to be recognized by the corporation must be determined pursuant 
to the rules of section 897 and any other applicable section. For 
special rules concerning the applicability of a nonrecognition provision 
to a distribution, see paragraph (b)(2) of this section. The withholding 
liability imposed by this paragraph (d) applies to the same taxpayer 
that owes the related substantive income tax liability pursuant to the 
operation of section 897. Only one such liability will be assessed and 
collected from a foreign corporation, but separate penalties for 
failures to comply with the two requirements will be asserted.
    (2) Withholding not required--(i) Property distributed not a U.S. 
real property interest--(A) In general. No withholding is required under 
this paragraph (d) if a foreign corporation that distributes property 
determines pursuant to the rules of paragraph (b)(3) of this section 
that the property distributed is not a U.S. real property interest.
    (B) Belated notice of false statement. If after the date of a 
distribution described in paragraph (d)(1) of this section a foreign 
corporation learns that another corporation's statement (that an 
interest in that other corporation is not a U.S. real property interest) 
is false, then the foreign corporation may not rely upon that statement 
for any purpose. Such a foreign corporation's withholding obligations 
under this paragraph (d) shall apply if a statement had never been 
given, and such a corporation may be held fully liable pursuant to Sec.  
1.1445-5(b)(5) for any failure to withhold. Amounts withheld pursuant to 
the rule of this paragraph (d)(2)(i)(B) must be reported and paid over 
by the 60th day following the date on which the foreign corporation 
learns that the statement is false. No penalties or interest will be 
assessed for failures to withhold prior to that date. For rules 
concerning the notifications of false statements that may be required to 
be given to foreign corporations, see Sec.  1.1445-4(b).
    (ii) Withholding certificate. No withholding is required under this 
paragraph (d) with respect to a foreign corporation's distribution of a 
U.S. real property interest if the distributing corporation obtains a 
withholding certificate from the Internal Revenue Service that so 
provides. For rules concerning the issuance of withholding certificates, 
see Sec.  1.1445-6.
    (e) Distributions to foreign persons by U.S. real property holding 
corporations--(1) In general. A domestic corporation that distributes 
any property to a foreign person that holds an interest in the 
corporation must deduct and withhold a tax equal to 15 percent of the 
fair market value of the property distributed to the foreign person, 
if--
    (i) The foreign person's interest in the corporation constitutes a 
U.S. real property interest under the provisions of section 897 and 
regulations thereunder; and
    (ii) There is a distribution of property in redemption of stock 
treated as an exchange under section 302(a), in liquidation of the 
corporation pursuant

[[Page 270]]

to the provisions of Part II of subchapter C of the Internal Revenue 
Code (sections 331 through section 346), or with respect to stock under 
section 301 that is not made out of earnings and profits of the 
corporation.
    (2) Coordination rules for Section 301 distributions. If a domestic 
corporation makes a distribution of property under section 301 to a 
foreign person whose interest in such corporation constitutes a U.S. 
real property interest under the provisions of section 897 and the 
regulations thereunder, then see Sec.  1.1441-3(c)(4) for rules 
coordinating withholding obligations under sections 1445 and 1441 (or 
1442 or 1443)).
    (3) Withholding not required--(i) Foreign person's interest not a 
U.S. real property interest. Withholding is required under this 
paragraph (e) only with respect to distributions to foreign persons 
holding interests in the corporation that constitute U.S. real property 
interests. In general, a foreign person's interest in a domestic 
corporation constitutes a U.S. real property interest if the corporation 
was a U.S real property holding corporation at any time during the 
shorter of (A) the period in which the foreign person held the interest 
or (B) the previous five years (but not earlier than June 19, 1980). See 
section 897(c) and Sec. Sec.  1.897-1(c) and 1.897-2 (b) and (h). 
However, an interest in such a corporation ceases to be a U.S. real 
property interest after all of the U.S. real property interests held by 
the corporation itself are disposed of in transactions on which gain or 
loss is recognized. See section 897(c)(1)(B) and Sec.  1.897-2(f)(2). 
Thus, if a U.S. real property holding corporation in the process of 
liquidation does not elect section 337 nonrecognition treatment upon its 
sale of all U.S. real property interests held by the corporation, and 
recognizes gain or loss upon such sales, interests in that corporation 
cease to be U.S. real property interests. Therefore, no withholding 
would be required with respect to that corporation's subsequent 
liquidating distribution to a foreign shareholder of property other than 
a U.S. real property interest.
    (ii) Nonrecognition transactions. For special rules concerning the 
applicability of a nonrecognition provision to a distribution described 
in paragraph (e)(1) of this section, see paragraph (b)(2) of this 
section.
    (iii) Interest-holder not a foreign person--(A) In general. A 
domestic corporation shall not be required to withhold under this 
paragraph (e) with respect to a distribution of property to any 
distributee that it determines, pursuant to the rules of paragraph 
(b)(3) of this section, not to be a foreign person.
    (B) Belated notice of false certification. If after the date of a 
distribution described in paragraph (e)(1) of this section a domestic 
corporation learns that an interest-holder's certification of non-
foreign status is false, then the corporation may rely upon that 
certification only if the person providing the false certification holds 
(or held) less than 10 percent of the value of the outstanding stock of 
the corporation. With respect to less than 10 percent interest-holders, 
no withholding is required under this paragraph (e) upon receipt of a 
belated notice of false certification. With respect to 10 percent or 
greater interest-holders, the corporation's withholding obligations 
under this paragraph (e) shall apply as if a certification had never 
been given, and such a corporation may be held fully liable pursuant to 
Sec.  1.1445-5(b)(6) for any failure to withhold as of the date 
specified in this Sec.  1.1445-5(e)(3)(iii)(B). Amounts withheld 
pursuant to the rule of this paragraph (e)(3)(iii)(B) must be reported 
and paid over by the 60th day following the date on which the 
corporation learns that the certification is false. No penalties or 
interest for failures to withhold will be assessed prior to that date. 
For rules concerning the notifications of false certifications that may 
be required to be given to U.S. real property holding corporations, see 
Sec.  1.1445-4(b).
    (iv) Withholding certificate. No withholding, or reduced 
withholding, is required under this paragraph (e) with respect to a 
domestic corporation's distribution of property if the distributing 
corporation obtains a withholding certificate from the Internal Revenue 
Service that so provides. For rules concerning the issuance of 
withholding certificates, see Sec.  1.1445-6.
    (f) Taxable distributions by domestic or foreign partnerships, 
trusts, or estates. [Reserved]

[[Page 271]]

    (g) Dispositions of interests in partnerships, trusts, and estates. 
[Reserved]
    (h) Applicability dates. The requirement in paragraphs (b)(2)(ii)(B) 
and (C) of this section that taxpayer identification numbers be provided 
(in all cases) is applicable for dispositions of U.S. real property 
interests occurring after November 3, 2003. The withholding rates set 
forth in paragraphs (c)(3)(iv) and (e)(1) of this section apply to 
distributions after February 16, 2016. For distributions on or before 
February 16, 2016, see paragraphs (c)(3)(iv) and (e)(1) of this section 
as contained in 26 CFR part 1 revised as of April 1, 2015. Paragraph 
(b)(3)(iv) of this section applies to certifications provided on or 
after May 7, 2019, except that a taxpayer may choose to apply paragraph 
(b)(3)(iv) of this section with respect to certifications provided 
before May 7, 2019. Paragraphs (c) and (d) of this section apply to 
distributions on or after November 30, 2020. Paragraph (b)(3)(ii)(A) of 
this section applies with respect to dispositions of U.S. real property 
interests and distributions described in section 897(h) occurring on or 
after December 29, 2022. For dispositions of U.S. real property 
interests and distributions described in section 897(h) occurring before 
December 29, 2022, see Sec.  1.1445-5(b)(3)(ii)(A), as contained in 26 
CFR part 1, revised as of April 1, 2021.

[T.D. 8113, 51 FR 46642, Dec. 24, 1986; 52 FR 3796, 3917, Feb. 6, 1987]

    Editorial Note: For Federal Register citations affecting Sec.  
1.1445-5, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.fdsys.gov.



Sec.  1.1445-6  Adjustments pursuant to withholding certificate 
of amount required to be withheld under section 1445(e).

    (a) Withholding certificate for purposes of section 1445(e)--(1) In 
general. Pursuant to the provisions of Sec.  1.1445-5 (c)(2)(iv), 
(d)(2)(ii), and (e)(2)(iv), withholding under section 1445(e) may be 
reduced or eliminated pursuant to a withholding certificate issued by 
the Internal Revenue Service in accordance with the rules of this Sec.  
1.1445-6. A withholding certificate may be issued in cases where 
adjusted withholding is appropriate (e.g., because of the applicability 
of a nonrecognition provision--see paragraph (c) of this section), where 
the relevant taxpayers are exempt from U.S. tax (see paragraph (d) of 
this section), or where an agreement for the payment of tax is entered 
into with the Service (see paragraph (e) of this section). A withholding 
certificate that is obtained prior to a transfer allows the entity or 
fiduciary to withhold a reduced amount or excuses withholding entirely. 
A withholding certificate that is obtained after a transfer has been 
made may authorize a normal refund or an early refund pursuant to 
paragraph (g) of this section. The Internal Revenue Service will act 
upon an application for a withholding certificate not later than the 
90th day after it is received. (The Service may deny a request for a 
withholding certificate where, after due notice, an applicant fails to 
provide the information necessary to make a determination.) Solely for 
this purpose (i.e., determining the day upon which the 90 day period 
commences), an application is received by the Service on the date when 
all information necessary for the Service to make a determination is 
provided by the applicant. In no event, however, will a withholding 
certificate be issued without the transferor's identifying number. (For 
rules regarding whether an application has been timely submitted, see 
Sec.  1.1445-5(b)(5)). The Internal Revenue Service will act upon an 
application for an early refund not later than the 90th day after it is 
received. An application for an early refund must either (i) include a 
copy of a withholding certificate issued by the Service with respect to 
the transaction, or (ii) be combined with an application for a 
withholding certificate. Where an application for an early refund is 
combined with an application for a withholding certificate, the Service 
will act upon both applications not later than the 90th day after 
receipt. Either an entity, a fiduciary, or a relevant taxpayer (as 
defined in paragraph (a)(2) of this section) may apply for a withholding 
certificate. An entity or fiduciary may apply for a withholding 
certificate with respect to all or less than all relevant taxpayers. For 
special rules concerning the issuance of

[[Page 272]]

a withholding certificate to a foreign corporation that has made an 
election under section 897(i), see Sec.  1.1445-7(d).
    (2) Relevant taxpayer. For purposes of this section, the term 
``relevant taxpayer'' means any foreign person that will bear 
substantive income tax liability by reason of the operation of section 
897 with respect to a transaction upon which withholding is required 
under section 1445(e).
    (b) Applications for withholding certificates--(1) In general. An 
application for a withholding certificate pursuant to this Sec.  1.1445-
6 must be submitted in the manner provided in Sec.  1.1445-3 (b). 
However, in lieu of the information required to be submitted pursuant to 
Sec.  1.1445-3(b)(4), the applicant must provide the information 
required by paragraph (b)(2) of this section. In addition, the 
information required by paragraph (b)(3) of this section must be 
submitted with the application.
    (2) Basis for certificate--(i) Adjusted withholding. If a 
withholding certificate is sought on the basis of a claim that adjusted 
withholding is appropriate, the application must include a calculation, 
in accordance with paragraph (c) of this section, of the maximum tax 
that may be imposed on each relevant taxpayer with respect to which 
adjusted withholding is sought. The application must also include all 
evidence necessary to substantiate the claimed calculation, such as 
records of adjustments to basis or appraisals of fair market value.
    (ii) Exemption. If a withholding certificate is sought on the basis 
of a relevant taxpayer's exemption from U.S. tax, the application must 
set forth a brief statement of the law and facts that support the 
claimed exemption. See paragraph (d) of this section.
    (iii) Agreement. If a withholding certificate is sought on the basis 
of an agreement for the payment of tax, the application must include a 
copy of the agreement proposed by the applicant and a copy of the 
security instrument (if any) proposed by the applicant. In this regard, 
see paragraph (e) of this section.
    (3) Relevant taxpayers. An application for withholding certificate 
pursuant to this section must include all of the following information: 
the name, identifying number, and home address (in the case of an 
individual) or office address (in the case of an entity) of each 
relevant taxpayer with respect to which adjusted withholding is sought.
    (c) Adjustment of amount required to be withheld. The Internal 
Revenue Service may issue a withhold certificate that excuses 
withholding or that permits an entity or fiduciary to withhold an 
adjusted amount reflecting the relevant taxpayers' maximum tax 
liability. A relevant taxpayer's maximum tax liability is the maximum 
amount which that taxpayer could be required to pay as tax by reason of 
the transaction upon which withholding is required. In the case of an 
individual taxpayer that amount will generally be the gain realized by 
the individual, multiplied by the maximum individual income tax rate 
applicable to long term capital gain. In the case of a corporate 
taxpayer, that amount will generally be the gain realized by the 
corporation, multiplied by the maximum corporate income tax rate 
applicable to long term capital gain. However, that amount must be 
adjusted to take into account the following:
    (1) Any reduction of tax to which the relevant taxpayer is entitled 
under the provisions of a U.S. income tax treaty;
    (2) The effect of any nonrecognition provision that is applicable to 
the transaction;
    (3) Any losses previously realized and recognized by the relevant 
taxpayer during the taxable year by reason of the operation of section 
897;
    (4) Any amount realized upon the subject transfer by the relevant 
taxpayer that is required to be treated as ordinary income under any 
provision of the Code; and
    (5) Any other factor that may increase or reduce the tax upon the 
transaction.
    (d) Relevant taxpayer's exemption from U.S. tax--(1) In general. The 
Internal Revenue Service will issue a withholding certificate that 
excuses withholding by an entity or fiduciary if it is established that 
a relevant taxpayer's income from the transaction will be exempt from 
U.S. tax. For the available exemptions, see paragraph (d)(2) of this 
section. If a relevant taxpayer is entitled to a reduction of (rather 
than an

[[Page 273]]

exemption from) U.S. tax, then the entity or fiduciary may obtain a 
withholding certificate to that effect pursuant to the provisions of 
paragraph (c) of this section.
    (2) Available exemptions. A relevant taxpayer's income from a 
transaction with respect to which withholding is required under section 
1445(e) may be exempt from U.S. tax because either:
    (i) The relevant taxpayer is an integral part or controlled entity 
of a foreign government and the subject income is exempt from U.S. tax 
pursuant to section 892 and the regulations thereunder; or
    (ii) The relevant taxpayer is entitled to the benefits of an income 
tax treaty that provides for such an exemption (subject to the 
limitations imposed by section 1125(c) of Pub. L. 96-499, which, in 
general overrides such benefits as of January 1, 1985).
    (e) Agreement for the payment of tax--(1) In general. The Internal 
Revenue Service will issue a withholding certificate that excuses 
withholding or that permits an entity or fiduciary to withhold a reduced 
amount, if the entity, fiduciary, or a relevant taxpayer enters into an 
agreement for the payment of tax pursuant to the provisions of this 
paragraph (e). An agreement for the payment of tax is a contract between 
the Service and the entity, fiduciary, or relevant taxpayer that 
consists of two necessary elements. Those elements are--
    (i) A contract between the Service and the other person, setting 
forth in detail the rights and obligations of each; and
    (ii) A security instrument or other form of security acceptable to 
the Assistant Commissioner (International).
    (2) Contents of agreement--(i) In general. An agreement for the 
payment of tax must cover an amount described in subdivision (ii) or 
(iii) of this paragraph (e)(2). The agreement may either provide 
adequate security for the payment of the chosen amount with respect to 
the relevant taxpayer in accordance with paragraph (e)(3) of this 
section or provide for the payment of that amount through a combination 
of security and withholding of tax by the entity or fiduciary.
    (ii) Tax that would otherwise be withheld. An agreement for the 
payment of tax may cover the amount of tax that would otherwise be 
required to be withheld with respect to the relevant taxpayer pursuant 
to section 1445(e). In addition to the amount computed pursuant to 
section 1445(e), the applicant must agree to pay interest upon that 
amount, at the rate established under section 6621, with respect to the 
period between the date on which withholding tax under section 1445(e) 
would otherwise be due and the date on which the relevant taxpayer's 
payment of tax with respect to the disposition will be due. The amount 
of interest agreed upon must be paid by the applicant regardless of 
whether or not the Service is required to draw upon any security 
provided pursuant to the agreement. The interest may be paid either with 
the return or by the Service drawing upon the security.
    (iii) Maximum tax liability. An agreement for the payment of tax may 
cover the relevant taxpayer's maximum tax liability, determined in 
accordance with paragraph (c) of this section. The agreement must also 
provide for the payment of an additional amount equal to 25 percent of 
the amount determined under paragraph (c) of this section. This 
additional amount secures the interest and penalties that would accrue 
between the date of the relevant taxpayer's failure to file a return and 
pay tax with respect to the disposition, and the date of which the 
Service collects upon that liability pursuant to the agreement.
    (iv) Allocation of payment. An agreement for the payment of tax 
pursuant to this section must set forth an allocation of the payment 
provided for by the agreement among the relevant taxpayers with respect 
to which the withholding certificate is sought. In the case of an 
agreement that covers an amount described in subdivision (ii) of this 
paragraph (e)(2), such allocation must be based upon the amount that 
would otherwise be required to be withheld with respect to each relevant 
taxpayer. In the case of an agreement that covers an amount described in 
subdivision (iii) of this paragraph (e)(2), such

[[Page 274]]

allocation must be based upon each relevant taxpayer's maximum tax 
liability.
    (3) Major types of security. The major types of security that are 
acceptable to the Internal Revenue Service for purposes of this section 
are described in Sec.  1.1445-3(e)(3).
    (4) Terms of security instrument. Any security instrument that is 
furnished pursuant to this section must contain the terms described in 
Sec.  1.1445-3(e)(4).
    (f) Amendments to application for withholding certificates--(1) In 
general. An applicant for a withholding certificate may amend an 
otherwise complete application by submitting an amending statement to 
the address provided in Sec.  1.1445-1(g)(10). The amending statement 
shall provide the information required by Sec.  1.1445-6(f)(3) and must 
be signed and accompanied by a penalties of perjury statement in 
accordance with Sec.  1.1445-6(b).
    (2) Extension of time for the Service to process requests for 
withholding certificates--(i) In general. If an amending statement is 
submitted, the time in which the Internal Revenue Service must act upon 
the amended application shall be extended by 30 days.
    (ii) Substantial amendments. If an amending statement is submitted 
and the Service finds that the statement substantially amends to the 
facts of the underlying application or substantially alters the terms of 
the withholding certificate as requested in the initial application, the 
time within which the Service must act upon the amended application 
shall be extended by 60 days. The applicant shall be so notified.
    (iii) Amending statement received after the requested withholding 
certificate has been signed on behalf of the Service. If an amending 
statement is received after the withholding certificate, drafted in 
response to the underlying application, has been signed on behalf of the 
Service and prior to the day such certificate is mailed to the 
applicant, the time in which the Service must act upon the amended 
application shall be extended by 90 days.
    (3) Information required to be submitted. No particular form is 
required for an amending statement but the statement must provide the 
following information:
    (i) Identification of applicant. The amending statement must set 
forth the name, address, and identifying number of the person submitting 
the amending statement.
    (ii) Date of application. The amending statement must set forth the 
date of the underlying application for a withholding certificate.
    (iii) Real property interest to be (or that has been) transferred. 
The amending statement must set forth a brief description of the real 
property interest with respect to which the underlying application for a 
withholding certificate was submitted.
    (iv) Amending information. The amending statement must fully set 
forth the basis for the amendment including any modification of the 
facts supporting the application for a withholding certificate and any 
change sought in the terms of the withholding certificate.
    (g) Early refund of overwithheld amounts. If the Internal Revenue 
Service issues a withholding certificate pursuant to this section, and 
an amount greater than that specified in the certificate was withheld by 
the entity or fiduciary, then pursuant to the rules of this paragraph 
(g) a relevant taxpayer may apply for an early refund of a proportionate 
share of the excess amount (without interest) prior to the date on which 
the relevant taxpayer's return is due (without extensions). An 
application for an early refund must be delivered to the address 
provided in Sec.  1.1445-1(g)(10). No particular form is required for 
the application, but the following information must be set forth in 
separate paragraphs numbered to correspond with the numbers given below:
    (1) Name, address, and identifying number of the relevant taxpayer 
seeking the refund;
    (2) Amount required to be withheld pursuant to withholding 
certificate;
    (3) Amount withheld by entity or fiduciary (attach a copy of Form 
8288-A stamped by IRS pursuant to Sec.  1.1445-5(b)(4) or provide 
substantial evidence of the amount withheld in the case of a failure to 
receive Form 8288-A, as provided in Sec.  1.1445-5(b)(7)); and

[[Page 275]]

    (4) Amount to be refunded to the relevant taxpayer.

An application for an early refund cannot be processed unless the 
required copy of Form 8288-A or substantial evidence of the amount 
withheld in the case of a failure to receive Form 8288-A (as provided in 
Sec.  1.1445-5(b)(7)) is attached to the application. If an application 
for a withholding certificate is submitted after the transfer takes 
place, then that application may be combined with an application for an 
early refund. The Service will act upon a claim for refund within the 
time limits set forth in Sec.  1.1445-6(a)(1).
    (h) Effective date for taxpayer identification numbers. The 
requirement in paragraphs (b)(3), (f)(3)(i), and (g)(1) of this section 
that taxpayer identification numbers be provided (in all cases) is 
applicable for dispositions of U.S. real property interests occurring 
after November 3, 2003.

[T.D. 8113, 51 FR 46648, Dec. 24, 1986; 52 FR 3796, 3917, Feb. 6, 1987; 
T.D. 9082, 68 FR 46086, Aug. 5, 2003, as amended by T.D. 9751, 81 FR 
8402, Feb. 19, 2016]



Sec.  1.1445-7  Treatment of foreign corporation that has made an 
election under section 897(i) to be treated as a domestic corporation.

    (a) In general. Pursuant to section 897(i) a foreign corporation may 
elect to be treated as a domestic corporation for purposes of sections 
897 and 6039C. A foreign corporation that has made such an election 
shall also be treated as a domestic corporation for purposes of the 
withholding required under section 1445, in accordance with the 
provisions of this section.
    (b) Withholding under section 1445(a)--(1) Dispositions by 
corporation. A foreign corporation that has made an election under 
section 897(i) may provide a transferee with a certification of non-
foreign status in connection with the corporation's disposition of a 
U.S. real property interest. However, in accordance with the provisions 
of Sec. Sec.  1.1445-2(b)(2)(ii) and 1.1445-5(b)(3)(ii)(C), such an 
electing foreign corporation must attach to such certification a copy of 
the acknowledgment of the election provided to the corporation by the 
Internal Revenue Service pursuant to Sec.  1.897-3(d)(4) which states 
that the information required by Sec.  1.897-3 has been determined to be 
complete.
    (2) Dispositions of interests in corporation. Dispositions of 
interests in electing foreign corporations shall be subject to the 
withholding requirements of section 1445(a) and the rules of Sec. Sec.  
1.1445-1 through 1.1445-4. Therefore, if a foreign person disposes of an 
interest in such a corporation, and that interest is a U.S. real 
property interest under the provisions of section 897 and regulations 
thereunder, then the transferee is required to withhold under section 
1445(a).
    (c) Withholding under section 1445(e). Because a foreign corporation 
that has made an election under section 897(i) is treated as a domestic 
corporation for purposes of determining withholding obligations under 
section 1445, such a corporation is not subject to the requirement of 
section 1445(e)(2) that a foreign corporation withhold at the corporate 
capital gain rate from the gain recognized upon the distribution of a 
U.S. real property interest. Such a corporation is subject to the 
provisions of section 1445(e)(3). Thus, if interests in an electing 
corporation constitute U.S. real property interests, then the 
corporation is required to withhold with respect to the non-dividend 
distribution of any property to an interest-holder that is a foreign 
person. See Sec.  1.1445-5(e). Dividend distributions (distributions 
that are described in section 301) shall be treated as provided in 
sections 897(f), 1441 and 1442. In addition, if interests in an electing 
foreign corporation do not constitute U.S. real property interests, then 
distributions by such corporation shall be treated as provided in 
sections 897(f) (if applicable), 1441 and 1442.

(Approved by the Office of Management and Budget under control number 
545-0902)

[T.D. 8113, 51 FR 46650, Dec. 24, 1986; 52 FR 3796, Feb. 6, 1987]



Sec.  1.1445-8  Special rules regarding publicly traded partnerships, 
publicly traded trusts and real estate investment trusts (REITs).

    (a) Entities to which this section applies. The rules of this 
section apply to--
    (1) Any partnership or trust, interests in which are regularly 
traded on

[[Page 276]]

an established securities market (regardless of the number of its 
partners or beneficiaries), and
    (2) Any REIT (regardless of the form of its organization).

For purposes of paragraph (a)(1) of this section, the rules of section 
1445 (e)(1) and this section shall not apply to a publicly traded 
partnership (as defined in section 7704) which is treated as a 
corporation under section 7704(a), or to those entities that are 
classified as ``associations'' and taxed as corporations. See Sec.  
301.7701-2.
    (b) Obligation to withhold--(1) In general. An entity described in 
paragraph (a) of this section is not required to withhold under the 
provisions of Sec.  1.1445-5(c), which states the withholding 
requirements of domestic partnerships, trusts and estates upon the 
disposition of U.S. real property interests. Except as otherwise 
provided in this paragraph (b), an entity described in paragraph (a) of 
this section shall be liable to withhold tax upon the distribution of 
any amount attributable to the disposition of a U.S. real property 
interest, with respect to each holder of an interest in the entity that 
is a foreign person. The amount to be withhold is described in paragraph 
(c) of this section.
    (2) Publicly traded partnerships. Publicly traded partnerships which 
comply with the withholding procedures under section 1446 will be deemed 
to have satisfied their withholding obligations under this paragraph 
(b).
    (3) Special rule for certain distributions to nominees. In the case 
of a person that--
    (i) Is a nominee (as defined in paragraph (d) of this section),
    (ii) Receives a distribution attributable to the disposition of a 
U.S. real property interest directly from an entity described in 
paragraph (a) of this section or indirectly from such entity through a 
nominee,
    (iii) Receives the distribution for payment to any foreign person, 
or the account of any foreign person, and
    (iv) Receives a qualified notice pursuant to paragraph (f) of this 
section,

then the obligation to withhold in accordance with the general rules of 
section 1445(e)(1) and this paragraph (b) shall be imposed solely on 
that person to the extent of the amount specified by the qualified 
notice. A person obligated to withhold by reason of this paragraph 
(b)(3) is referred to as a withholding agent.
    (4) Person designated to act for withholding agent. The rules stated 
in Sec.  1.1441-7(b) (1) and (2) regarding a person designated to act 
for a withholding agent shall apply for purposes of this section.
    (5) Effect of withholding exemption granted under Sec.  1.1441-4(f). 
A letter issued by a district director under the provisions of Sec.  
1.1441-4(f), which exempts a person from withholding under section 1441 
or section 1442, shall also exempt that person from withholding under 
this paragraph (b), if--
    (i) The letter identifies another person as the withholding agent 
for purposes of section 1441 or 1442, and
    (ii) Such other person enters into a written agreement, with the 
district director who issued the letter, to be the withholding agent for 
purposes of this paragraph (b).

The exemption granted, and the corresponding withholding obligation 
imposed, by this paragraph (b)(5) shall apply with respect to the first 
distribution made after execution of the agreement described in the 
preceding sentence and shall continue to apply to all distributions made 
during the period in which the exemption granted under Sec.  1.1441-4(f) 
is in effect.
    (6) Payment other than in money. The rule stated in Sec.  1.1441-
7(c) regarding payment other than in money shall apply for purposes of 
this section.
    (c) Amount to be withheld--(1) Distribution from a publicly traded 
partnership or publicly traded trust. The amount to be withheld under 
this section with respect to a distribution by a publicly traded 
partnership or publicly traded trust shall be computed in the manner 
described in Sec.  1.1445-5(c)(3) (ii) and (iii), subject to the rules 
of this section.
    (2) REITs--(i) In general. The amount to be withheld with respect to 
a distribution by a REIT, under this section shall be equal to the 
highest rate specified in section 1445(e)(1) multiplied by the amount 
described in paragraph (c)(2)(ii) of this section.

[[Page 277]]

    (ii) Amount subject to withholding--(A) In general. Except as 
otherwise provided in paragraph (c)(2)(ii)(C) of this section, the 
amount subject to withholding is the amount of any distribution, 
determined with respect to each share or certificate of beneficial 
interest, designated by a REIT as a capital gain dividend, multiplied by 
the number of shares or certificates of beneficial interest owned by the 
foreign person. Solely for purposes of this paragraph, the largest 
amount of any distribution occurring after March 7, 1991 that could be 
designated as a capital gain dividend under section 857(b)(3)(C) shall 
be deemed to have been designated by a REIT as a capital gain dividend 
regardless of the amount actually designated.
    (B) Distribution attributable to net short-term capital gain from 
the disposition of a U.S. real property interest. [Reserved]
    (C) Designation of prior distribution as capital gain dividend. If a 
REIT makes an actual designation of a prior distribution, in whole or in 
part, as a capital gain dividend, such prior distribution shall not be 
subject to withholding under this section. Rather, a REIT must 
characterize and treat as a capital gain dividend distribution (solely 
for purposes of section 1445(e)(1)) each distribution, determined with 
respect to each share or certificate of beneficial interest, made on the 
day of, or any time subsequent to, such designation as a capital gain 
dividend until such characterized amounts equal the amount of the prior 
distribution designated as a capital gain dividend. The provisions of 
this paragraph shall not be applicable in any taxable year in which the 
REIT adopts a formal or informal resolution or plan of complete 
liquidation.
    (iii) Example. The following example illustrates the rules of 
paragraph (c)(2)(ii)(C) of this section.

    In the first quarter of 1988, XYZ REIT makes a dividend distribution 
of $2X. In the second quarter of 1988, XYZ sells real property, 
recognizing a long term capital gain of $15X, and makes a dividend 
distribution of $5X. In the third quarter of 1988, XYZ makes a 
distribution of $3X. In the fourth quarter of 1988, XYZ sells real 
property recognizing a long term capital loss of $2X. Within 30 days 
after the close of the taxable year, XYZ designates a capital gain 
dividend for the year of $13X. It subsequently makes a fourth quarter 
distribution of $7X. Since XYZ has made an actual designation of prior 
distributions during the taxable year as capital gain dividends, 
withholding on those prior distributions will not be required. However, 
the REIT must characterize, solely for purposes of section 1445(e)(1), a 
total amount of $13X of dividend distributions as capital gain 
dividends. Therefore, the fourth quarter dividend distribution of $7X 
must be characterized as a capital gain dividend subject to withholding 
under this section. In addition, XYZ will be required to characterize an 
additional $6X of subsequent dividend distributions as capital gain 
dividends.

    (d) Definition of nominee. For purposes of this section, the term 
``nominee'' means a domestic person that holds an interest in an entity 
described in paragraph (a) of this section on behalf of another domestic 
or foreign person.
    (e) Determination of non-foreign status by withholding agent. A 
withholding agent may rely on a certification of non-foreign status 
pursuant to Sec.  1.1445-5(b)(3)(ii) to determine whether an interest 
holder is not a foreign person. Reliance on these documents will excuse 
the withholding agent from liability imposed under section 1445(e)(1) in 
the absence of actual knowledge that the interest holder is a foreign 
person. A withholding agent may also employ other means to determine the 
status of an interest holder, but, if the agent relies on such other 
means and the interest holder proves, in fact, to be a foreign person 
(or, is not a withholding qualified holder (as defined in Sec.  1.1445-
1(g)(11)) and therefore is not treated as a non-foreign person for 
purposes of withholding under section 1445), then the withholding agent 
is subject to any liability imposed pursuant to section 1445 and the 
regulations thereunder for failure to withhold. See also Sec.  1.1445-
5(b)(3)(ii)(B)(3) for the period during which a withholding agent may 
rely on a certification of non-foreign status submitted by a withholding 
qualified holder (as defined in Sec.  1.1445-1(g)(11)), which applies 
under this paragraph (e).
    (f) Qualified notice. A qualified notice for purposes of paragraph 
(b)(3)(iv) of this section is a notice provided in the manner described 
in Sec.  1.1446-4(b)(4) by a partnership, trust, or REIT regarding a 
distribution that is attributable to the disposition of a United States 
real

[[Page 278]]

property interest. In the case of a REIT, a qualified notice is only a 
notice of a distribution, all or any portion of which the REIT actually 
designates, or characterizes in accordance with paragraph (c)(2)(ii)(C) 
of this section, as a capital gain dividend in the manner described in 
Sec.  1.1446-4(b)(4), with respect to each share or certificate of 
beneficial interest. A deemed designation under paragraph (c)(2)(ii)(A) 
of this section may not be the subject of a qualified notice under this 
paragraph (f). A person described in paragraph (b)(3) of this section is 
treated as receiving a qualified notice when the notice is provided in 
accordance with Sec.  1.1446-4(b)(4).
    (g) Reporting and paying over withheld amounts. With respect to an 
amount withheld under this section, a withholding agent is not required 
to conform to the requirements of Sec.  1.1445-5(b)(5) but is required 
to report and pay over to the Internal Revenue Service any amount 
required to be withheld pursuant to the rules and procedures of section 
1461, the regulations thereunder and Sec.  1.6302-2. Forms 1042 and 
1042S are to be used for this purpose.
    (h) Early refund procedure not available. The early refund procedure 
set forth in Sec.  1.1445-6(g) shall not apply to amounts withheld under 
the rules of this section. For adjustment of over-withheld amounts, see 
Sec.  1.1461.4.
    (i) Liability upon failure to withhold. For rules regarding 
liability upon failure to withhold under Sec.  1445(e) and this section, 
see Sec.  1.1445-1(e).
    (j) Applicability dates. Paragraph (c)(2)(i) of this section applies 
to distributions on or after November 30, 2020. Paragraph (e) of this 
section applies with respect to distributions made on or after December 
29, 2022. For distributions made before December 29, 2022, see Sec.  
1.1445-8(e) as contained in 26 CFR part 1, as revised April 1, 2021. 
Paragraph (f) of this section applies to distributions made on or after 
January 1, 2022. For distributions made before January 1, 2022, see 
Sec.  1.1445-8(f) as contained in 26 CFR part 1, revised as of April 1, 
2020.

[T.D. 8321, 55 FR 50553, Dec. 7, 1990; 56 FR 4542, Feb. 5, 1991, as 
amended by T.D. 8647, 60 FR 66077, Dec. 21, 1995; T.D. 9926, 85 FR 
76932, Nov. 30, 2020; T.D. 9971, 87 FR 80066, Dec. 29, 2022]



Sec.  1.1445-10T  Special rule for Foreign governments (temporary).

    (a) This section provides a temporary regulation that, if and when 
adopted as a final regulation will add a new paragraph (d)(6) to Sec.  
1.1445-2. Paragraph (b) of this section would then appear as paragraph 
(d)(6) of Sec.  1.1445-2.
    (b) Foreign government--(1) As transferor. A foreign government is 
subject to U.S. taxation under section 897 on the disposition of a U.S. 
real property interest except to the extent specifically otherwise 
provided in the regulations issued under section 892. A foreign 
government that disposes of a U.S. real property interest that is not 
subject to taxation as specifically provided by the regulations under 
section 892 may present a notice of nonrecognition treatment pursuant to 
paragraph (d)(2) of this section that specifically cites the provision 
of such regulation, and thereby avoids withholding by the transferee of 
the property. A foreign government that disposes of a U.S. real property 
interest or the transferee of the property may obtain a withholding 
certificate from the Internal Revenue Service that confirms the 
applicability of section 892, but neither is required to do so. Rules 
concerning the issuance of withholding certificates are provided in 
Sec.  1.1445-3.
    (2) As transferee. A foreign government or international 
organization that acquires a U.S. real property interest is fully 
subject to section 1445 and the regulations thereunder. Therefore, such 
an entity is required to withhold tax upon the acquisition of a U.S. 
real property interest from a foreign person.
    (c) Effective date. The rules of this section shall be effective for 
transfers, exchanges, distributions and other dispositions occurring on 
or after June 6, 1988.

[T.D. 8198, 53 FR 16230, May 5, 1988]

[[Page 279]]



Sec.  1.1445-11T  Special rules requiring withholding 
under Sec.  1.1445-5 (temporary).

    (a) Purpose and scope. This section provides temporary regulations 
that, if and when adopted as a final regulation will add certain new 
paragraphs within Sec.  1.1445-5 (b) and (c). The paragraphs of this 
section would then appear as set forth below. Paragraph (b) of this 
section would then appear as paragraph (b)(8)(v) of Sec.  1.1445-5. 
Paragraph (c) of this section would then appear as paragraph (c)(2)(i) 
of Sec.  1.1445-5. Paragraph (d) of this section would then appear as 
paragraph (g) of Sec.  1.1445-5.
    (b) Dispositions of interests in partnerships, trusts, and estates. 
The provisions of section 1445(e)(5), requiring withholding upon certain 
dispositions of interests in partnerships, trusts, and estates, that own 
directly or indirectly a U.S. real property interest shall apply to 
dispositions on or after the effective date of a later Treasury decision 
under section 897(g) of the Code except in the case of dispositions of 
interests in partnerships in which fifty percent of the value of the 
gross assets consist of U.S. real property interests and ninety percent 
or more of the value of the gross assets consist of U.S. real property 
interests plus any cash or cash equivalents. The provisions of section 
1445(e)(5), shall apply, however, to dispositions after June 6, 1988, of 
interests in partnerships in which fifty percent or more of the value of 
the gross assets consist of U.S. real property interests, and ninety 
percent or more of the value of the gross assets consist of U.S. real 
property interests plus any cash or cash equivalents. See paragraph (d) 
of this section.
    (c) Transactions covered elsewhere. No withholding is required under 
this paragraph (c) with respect to the distribution of a U.S. real 
property interest by a partnership, trust, or estate. Such distributions 
shall be subject to withholding under section 1445(e)(4) and paragraph 
(f) of this Sec.  1.1445-5 on the effective date of a later Treasury 
decision published under section 897(g) of the Code. No withholding is 
required at this time for distributions described in the preceding 
sentence. See paragraph (b)(8)(iv) of this Sec.  1.1445-5. No 
withholding is required under this paragraph with respect to the 
disposition of an interest in a trust, estate, or partnership except in 
the case of a partnership in which fifty percent or more of the value of 
the gross assets consist of U.S. real property interests, and ninety 
percent or more of the value of the gross assets consist of U.S. real 
property interests plus any cash or cash equivalents. See paragraph 
(b)(8)(v) of Sec.  1.1445-5. Withholding shall be required as provided 
in section 1445(e)(5) and paragraph (g) of this section with respect to 
the disposition after June 6, 1988, of an interest in a partnership in 
which fifty percent or more of the value of the gross assets consist of 
U.S. real property interests, and ninety percent or more of the value of 
the gross assets consist of U.S. real property interests plus any cash 
or cash equivalents.
    (d) Dispositions of interests in partnerships, trusts or estates--
(1) Withholding required on disposition of certain partnership 
interests. Withholding is required under section 1445(e)(5) and this 
paragraph with respect to the disposition by a foreign partner of an 
interest in a domestic or foreign partnership in which fifty percent or 
more of the value of the gross assets consist of U.S. real property 
interests, and ninety percent or more of the value of the gross assets 
consist of U.S. real property interests plus any cash or cash 
equivalents. For purposes of this paragraph cash equivalents mean any 
asset readily convertible into cash (whether or not denominated in U.S. 
dollars), including, but not limited to, bank accounts, certificates of 
deposit, money market accounts, commercial paper, U.S. and foreign 
treasury obligations and bonds, corporate obligations and bonds, 
precious metals or commodities, and publicly traded instruments. The 
taxpayer on filing an income tax return for the year of the disposition 
may demonstrate the extent to which the gain on the disposition of the 
interest is not attributable to U.S. real property interests. A taxpayer 
is also permitted by Sec.  1.1445-3 to apply for a withholding 
certificate in instances where reduced withholding is appropriate.
    (2) Withholding not required--(i) Transferee receives statement that 
interest in

[[Page 280]]

partnership is not described in paragraph (d)(1). No withholding is 
required under paragraph (d)(1) of this section upon the disposition of 
a partnership interest otherwise described in that paragraph if the 
transferee is provided a statement, issued by the partnership and signed 
by a general partner under penalties of perjury no earlier than 30 days 
before the transfer, certifying that fifty percent or more of the value 
of the gross assets does not consist of U.S. real property interests, or 
that ninety percent or more of the value of the gross assets of the 
partnership does not consist of U.S. real property interests plus cash 
or cash equivalents.
    (ii) Reliance on statement not permitted. A transferee is not 
entitled to rely upon a statement described in paragraph (d)(2)(i) of 
this section if, prior to or at the time of the transfer, the transferee 
either--
    (A) Has actual knowledge that the statement is false, or
    (B) Receives a notice, pursuant to Sec.  1.1445-4.

Such a transferee's withholding obligations shall apply as if the 
statement had never been given, and such a transferee may be held fully 
liable pursuant to Sec.  1.1445-1(e) for any failure to withhold.
    (iii) Belated notice of false statement. If, after the date of the 
transfer, a transferee receives notice that a statement provided under 
paragraph (d)(2)(i) of this section is false, then such transferee may 
rely on the statement only with respect to consideration that was paid 
prior to the receipt of the notice. Such a transferee is required to 
withhold a full 10 percent of the amount realized from the consideration 
that remains to be paid to the transferor. Thus, if 10 percent or more 
of the amount realized remains to be paid to the transferor, then the 
transferee is required to withhold and pay over the full 10 percent. The 
transferee must do so by withholding and paying over the entire amount 
of each successive payment of consideration to the transferor, until the 
full 10 percent of the amount realized has been withheld and paid over. 
Amounts so withheld must be reported and paid over by the 20th day 
following the date on which each such payment of consideration is made. 
A transferee that is subject to the rules of this Sec.  1.1445-
10T(d)(2)(iii) may not obtain a withholding certificate pursuant to 
Sec.  1.1445-3, but must instead withhold and pay over the amounts 
required by this paragraph. \1\
---------------------------------------------------------------------------

    \1\ Section 324(a) of the Protecting Americans from Tax Hikes Act of 
2015 (Pub. L. 114-113) increased the withholding rate under section 
1445(e)(5) to 15 percent, applicable to dispositions after February 16, 
2016.
---------------------------------------------------------------------------

    (e) Effective date. The rules of this section are effective for 
transactions after June 6, 1988.

[T.D. 8198, 53 FR 16231, May 5, 1988, as amended by T.D. 9751, 81 FR 
8402, Feb. 19, 2016]



Sec.  1.1446-0  Table of contents.

    This section lists the captions contained in Sec. Sec.  1.1446-1 
through 1.1446-7.

Sec.  1.1446-1 Withholding tax on foreign partners' share of effectively 
                        connected taxable income.

    (a) In general.
    (b) Steps in determining 1446 tax obligation.
    (c) Determining whether a partnership has a foreign partner.
    (1) In general.
    (2) Submission of Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, and W-9.
    (i) In general.
    (ii) Withholding certificate applicable to each type of partner.
    (A) U.S. person.
    (B) Nonresident alien.
    (C) Foreign partnership.
    (D) Disregarded entities.
    (E) Domestic and foreign grantor trusts.
    (F) Nominees.
    (G) Foreign governments, foreign tax-exempt organizations and other 
foreign persons.
    (H) Foreign corporations, certain foreign trusts, and foreign 
estates.
    (iii) Effect of Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, W-9, and 
statement.
    (A) Partnership reliance on withholding certificate.
    (B) Reason to know.
    (C) Subsequent knowledge and impact on penalties.
    (iv) Requirements for certificates to be valid.
    (A) When period of validity expires.
    (B) Required information for Forms W-8BEN, W-8IMY, W-8ECI, and W-
8EXP.
    (v) Partner must provide new withholding certificate when there is a 
change in circumstances.
    (vi) Partnership must retain withholding certificates.

[[Page 281]]

    (3) Presumptions in the absence of valid Form W-8BEN, Form W-8IMY, 
Form W-8ECI, Form W-8EXP, Form W-9, or statement.
    (4) Consequences when partnership knows or has reason to know that 
Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, or Form W-9 is 
incorrect or unreliable and does not withhold.
    (5) Acceptable substitute form.

Sec.  1.1446-2 Determining a partnership's effectively connected taxable 
         income allocable to foreign partners under section 704.

    (a) In general.
    (b) Computation.
    (1) In general.
    (2) Income and gain rules.
    (i) Application of the principles of section 864.
    (ii) Income treated as effectively connected.
    (iii) Exempt income.
    (3) Deductions and losses.
    (i) Oil and gas interests.
    (ii) Charitable contributions.
    (iii) Net operating losses and other suspended or carried losses.
    (iv) Interest deductions.
    (v) Limitation on capital losses.
    (vi) Other deductions.
    (vii) Limitations on deductions.
    (4) Other rules.
    (i) Exclusion of items allocated to U.S. partners.
    (ii) Partnership credits.
    (5) Examples.

 Sec.  1.1446-3 Time and manner of calculating and paying over the 1446 
                                  tax.

    (a) In general.
    (1) Calculating 1446 tax.
    (2) Applicable percentage.
    (i) In general.
    (ii) Special types of income or gain.
    (b) Installment payments.
    (1) In general.
    (2) Calculation.
    (i) General application of the principles of section 6655.
    (ii) Annualization methods.
    (iii) Partner's estimated tax payments.
    (iv) Partner whose interest terminates during the partnership's 
taxable year.
    (v) Exceptions and modifications to the application of the 
principles under section 6655.
    (A) Inapplicability of special rules for large corporations.
    (B) Inapplicability of special rules regarding early refunds.
    (C) Period of underpayment.
    (D) Other taxes.
    (E) 1446 tax treated as tax under section 11.
    (F) Application of section 6655(f).
    (G) Application of section 6655(i).
    (H) Current year tax safe harbor.
    (I) Prior year tax safe harbor.
    (3) 1446 tax safe harbor.
    (i) In general.
    (ii) Permission to change to standard annualization method.
    (c) Coordination with other withholding rules.
    (1) Fixed or determinable, annual or periodical income.
    (2) Real property gains.
    (i) Domestic partnerships.
    (ii) Foreign partnerships.
    (3) Coordination with section 1443.
    (4) Coordination with section 1446(f).
    (d) Reporting and crediting the 1446 tax.
    (1) Reporting 1446 tax.
    (i) Reporting of installment tax payments and notification to 
partners of installment tax payments.
    (ii) Payment due dates.
    (iii) Annual return and notification to partners.
    (iv) Information provided to beneficiaries of foreign trusts and 
estates.
    (v) Attachments required of foreign trusts and estates.
    (vi) Attachments required of beneficiaries of foreign trusts and 
estates.
    (vii) Information provided to beneficiaries of foreign trusts and 
estates that are partners in certain publicly traded partnerships.
    (2) Crediting 1446 tax against a partner's U.S. tax liability.
    (i) In general.
    (ii) Substantiation for purposes of claiming the credit under 
section 33.
    (iii) Special rules for apportioning the tax credit under section 
33.
    (A) Foreign trusts and estates.
    (B) Use of domestic trusts to circumvent section 1446.
    (iv) Refunds to withholding agent.
    (v) 1446 tax treated as cash distribution to partners.
    (vi) Examples.
    (e) Liability of partnership for failure to withhold.
    (1) In general.
    (2) Proof that tax liability has been satisfied and deemed payment 
of 1446 tax.
    (3) Liability for interest, penalties, and additions to the tax.
    (i) Partnership.
    (ii) Foreign partner.
    (4) Examples.
    (f) Effect of withholding on partner.

              Sec.  1.1446-4 Publicly traded partnerships.

    (a) In general.
    (b) Definitions.
    (1) Publicly traded partnership.
    (2) Applicable percentage.
    (3) Nominee.
    (4) Qualified notice.
    (c) Paying and reporting 1446 tax.
    (d) Rules for nominees required to withhold tax under section 1446.

[[Page 282]]

    (1) In general.
    (2) Exception to nominee's withholding.
    (e) Determining foreign status of partners.
    (f) Distributions subject to withholding.
    (1) In general.
    (2) In-kind distributions.
    (3) Ordering rule relating to distributions.
    (4) Coordination with section 1445(e)(1).

              Sec.  1.1446-5 Tiered partnership structures.

    (a) In general.
    (b) Reporting requirements.
    (1) In general.
    (2) Publicly traded partnerships.
    (c) Look through rules for foreign upper-tier partnerships.
    (d) Publicly traded partnerships.
    (1) Upper-tier publicly traded partnership.
    (2) Lower-tier publicly traded partnership.
    (e) Election by a domestic upper-tier partnership to apply look 
through rules.
    (1) In general.
    (2) Information required for valid election statement.
    (3) Consent of lower-tier partnership.
    (f) Examples.

  Sec.  1.1446-6 Special rules to reduce a partnership's 1446 tax with 
respect to a foreign partner's allocable share of effectively connected 
                             taxable income.

    (a) In general.
    (1) Purpose and scope.
    (2) Reasonable reliance on a certificate.
    (b) Foreign partners to whom this section applies.
    (1) In general.
    (2) Definitions.
    (i) U.S. income tax return.
    (ii) Timely-filed.
    (iii) Qualifying U.S. income tax return.
    (3) Special rules.
    (c) Reduction of 1446 tax with respect to a foreign partner.
    (1) General rules.
    (i) Certified deductions and losses.
    (A) Deductions and losses from the partnership.
    (B) Deductions and loss from other sources.
    (C) Limit on the consideration of a partner's net operating loss 
deduction.
    (D) Limitation on losses subject to certain partner level 
limitations.
    (E) Certification of deductions and losses to other partnerships.
    (F) Partner level use of deductions and losses certified to a 
partnership.
    (ii) De minimis certificate for nonresident alien individual 
partners.
    (A) In general.
    (B) Requirements for exception.
    (iii) Consideration of certain current year state and local taxes.
    (2) Form and time of certification.
    (i) Form of certification.
    (ii) Time of certification provided to partnership.
    A) First certificate submitted for a partnership's taxable year.
    (B) Updated certificates and status updates.
    (1) Preceding year tax returns not yet filed.
    (2) Other circumstances requiring an updated certificate.
    (3) Form and content of updated certificate.
    (4) Partnership consideration of an updated certificate.
    (3) Notification to partnership when a partner's certificate cannot 
be relied upon.
    (4) Partner to receive copy of notice.
    (5) Notification to partnership when no foreign partner's 
certificate can be relied upon.
    (6) Partnership notification to partner regarding use of deductions 
and losses.
    (7) Partner's certificate valid only for partnership taxable year 
for which submitted.
    (d) Effect of certificate of deductions and losses on partner and 
partnership.
    (1) Effect on partner.
    (i) No effect on liability for income tax of foreign partner.
    (ii) No effect on partner's estimated tax obligations.
    (iii) No effect on partner's obligation to file U.S. income tax 
return.
    (2) Effect on partnership.
    (i) Reasonable reliance to relieve partnership from addition to tax 
under section 6665.
    (ii) Continuing liability for withholding tax under section 1461 and 
for applicable interest and penalties.
    (A) In general.
    (B) Certificate defective because of amount or character of 
deductions and losses.
    (3) Partnership level rules and requirements.
    (i) Filing requirement.
    (ii) Reasonable cause for failure to timely file a valid certificate 
and computation.
    (A) Determining reasonable cause.
    (B) Notification.
    (e) Examples.
    (f) Effective/Applicability date.
    (g) Transition rule.

                   Sec.  1.1446-7 Applicability dates.

[T.D. 9200, 70 FR 28717, May 18, 2005, as amended by T.D. 9394, 73 FR 
23074, Apr. 29, 2008; T.D. 9926, 85 FR 76933, Nov. 30, 2020]



Sec.  1.1446-1  Withholding tax on foreign partners' share of
effectively connected taxable income.

    (a) In general. If a domestic or foreign partnership has effectively 
connected taxable income (ECTI) as computed under Sec.  1.1446-2 for any 
partnership tax year, and any portion of such taxable income is 
allocable under section 704 to a foreign partner, then the partnership

[[Page 283]]

must pay a withholding tax under section 1446 (1446 tax) at the time and 
in the manner prescribed in this section, and Sec. Sec.  1.1446-2 
through 1.1446-6.
    (b) Steps in determining 1446 tax obligation. In general, a 
partnership determines its 1446 tax as follows. The partnership 
determines whether it has any foreign partners in accordance with 
paragraph (c) of this section. If the partnership does not have any 
foreign partners (including any person presumed to be foreign under 
paragraph (c) of this section and any domestic trust treated as foreign 
under Sec.  1.1446-3(d)) during its taxable year, it generally will not 
have a 1446 tax obligation. If the partnership has one or more foreign 
partners, it then determines under Sec.  1.1446-2 whether it has ECTI 
any portion of which is allocable under section 704 to one or more of 
the foreign partners. If the partnership has ECTI allocable under 
section 704 to one or more of its foreign partners, the partnership 
computes its 1446 tax, pays over 1446 tax, and reports the amount paid 
in accordance with the rules in Sec.  1.1446-3. For special rules 
applicable to publicly traded partnerships, see Sec.  1.1446-4. For 
special rules applicable to tiered partnership structures, see Sec.  
1.1446-5. For special rules that may apply in determining the amount of 
1446 tax due with respect to a partner, see Sec.  1.1446-6.
    (c) Determining whether a partnership has a foreign partner--(1) In 
general. Except as otherwise provided in this section, Sec.  1.1446-3, 
and Sec.  1.1446-5, only a partnership that has at least one foreign 
partner during the partnership's taxable year can have a 1446 tax 
liability. Generally, the term foreign partner means any partner of the 
partnership that is not a U.S. person within the meaning of section 
7701(a)(30). Thus, a partner of the partnership is generally a foreign 
partner if the partner is a nonresident alien, foreign partnership (see 
Sec.  1.1446-5 for rules that allow a lower-tier partnership to look 
through an upper-tier foreign partnership to the partners of such 
partnership for purposes of computing its 1446 tax), foreign corporation 
(which includes a foreign government pursuant to section 892(a)(3)), 
foreign estate or trust (see paragraph (c)(2) of this section for rules 
that instruct a partnership to consider the grantor or other owner of a 
trust under subpart E of subchapter J as the partner for purposes of 
computing the partnership's 1446 tax), as those terms are defined under 
section 7701 and the regulations thereunder, or a foreign organization 
described in section 501(c), or other foreign person. A person also is a 
foreign partner if the person is presumed to be a foreign person under 
paragraph (c)(3) of this section. For purposes of this section, a 
partner that is treated as a U.S. person for all income tax purposes (by 
election or otherwise, see e.g., sections 953(d) and 1504(d)) will not 
be a foreign partner, provided the partner has provided the partnership 
a valid Form W-9, ``Request for Taxpayer Identification Number and 
Certification,'' or the partnership uses other means to determine that 
the partner is not a foreign partner (see paragraph (c)(3) of this 
section). A partner that is treated as a U.S. person only for certain 
specified purposes is considered a foreign partner for purposes of 
section 1446, and a partnership must pay 1446 tax on the portion of ECTI 
allocable to that partner. For example, a partnership must generally pay 
1446 tax on ECTI allocable to a foreign corporate partner that has made 
an election under section 897(i).
    (2) Submission of Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, and W-9--(i) 
In general. Except as otherwise provided in this paragraph (c)(2) or 
paragraph (c)(3) of this section, a partnership must generally determine 
whether a partner is a foreign partner, and the partner's tax 
classification (e.g., corporate or non-corporate), by obtaining a 
withholding certificate from the partner that is a Form W-8BEN, 
``Certificate of Foreign Status of Beneficial Owner for United States 
Tax Withholding,'' Form W-8IMY, ``Certificate of Foreign Intermediary, 
Flow-Through Entity, or Certain U.S. Branches for United States Tax 
Withholding,'' Form W-8ECI, ``Certificate of Foreign Person's Claim for 
Exemption from Withholding on Income Effectively Connected With the 
Conduct of a Trade or Business in the United States,'' Form W-8EXP, 
``Certificate of Foreign Government or other Foreign

[[Page 284]]

Organization for United States Tax Withholding,'' or a Form W-9, as 
applicable, or an acceptable substitute form permitted under paragraph 
(c)(5) of this section. Generally, a foreign partner that is a 
nonresident alien, a foreign estate or trust (other than a grantor trust 
described in this paragraph (c)(2)), a foreign corporation, or a foreign 
government should provide a valid Form W-8BEN.
    (ii) Withholding certificate applicable to each type of partner. A 
partner that submits a valid Form W-8 (e.g., Form W-8BEN) for purposes 
of section 1441 or 1442 will generally satisfy the documentation 
requirements of this section provided that the submission of such form 
is not inconsistent with the rules of this paragraph (c)(2) or paragraph 
(c)(3) of this section. The following rules shall apply for purposes of 
this section.
    (A) U.S. person. A partner that is a U.S. person (other than a 
grantor trust described in this paragraph (c)(2)), including a domestic 
partnership and domestic simple or complex trust (including an estate), 
shall provide a valid Form W-9.
    (B) Nonresident alien. A Form W-8 (e.g., Form W-8BEN) submitted by a 
nonresident alien for purposes of withholding under section 1441 will 
generally be accepted for purposes of section 1446. If no such form is 
submitted for purposes of section 1441, such nonresident alien shall 
submit Form W-8BEN for purposes of section 1446.
    (C) Foreign partnership. A partner that is a foreign partnership 
generally shall provide a valid Form W-8IMY for purposes of section 
1446. See Sec.  1.1446-5 (permitting a lower-tier partnership to look 
through an upper-tier foreign partnership in certain circumstances when 
computing 1446 tax).
    (D) Disregarded entities. An entity that is disregarded as an entity 
separate from its owner under Sec.  301.7701-3 of this chapter (whether 
domestic or foreign) shall not submit a Form W-8 (e.g., Form W-8BEN) or 
Form W-9. Instead, the owner of such entity for Federal tax purposes 
shall submit appropriate documentation to comply with this section. See 
Sec. Sec.  301.7701-1 through 301.7701-3 of this chapter for determining 
the U.S. Federal tax classification of a partner.
    (E) Domestic and foreign grantor trusts. To the extent that a 
grantor or other person is treated as the owner of any portion of a 
trust under subpart E of subchapter J of the Internal Revenue Code, such 
trust shall provide documentation under this paragraph (c)(2) to 
identify the trust as a grantor trust and provide documentation on 
behalf of the grantor or other person treated as the owner of all or a 
portion of such trust as required by this paragraph (c)(2). If such 
trust is a foreign trust, the trust shall submit Form W-8IMY to the 
partnership identifying itself as a foreign grantor trust and shall 
provide such documentation (e.g., Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, 
or W-9) and information pertaining to its grantor or other owner to the 
partnership that permits the partnership to reliably associate (within 
the meaning of Sec.  1.1441-1(b)(2)(vii)) such portion of the trust's 
allocable share of partnership ECTI with the grantor or other person 
that is the owner of such portion of the trust. If such trust is a 
domestic trust, the trust shall furnish the partnership a statement 
under penalty of perjury that the trust is, in whole or in part, a 
domestic grantor trust and such statement shall identify that portion of 
the trust that is treated as owned by a grantor or another person under 
subpart E of subchapter J of the Internal Revenue Code. The trust shall 
also provide such documentation and information (e.g., Forms W-8BEN, W-
8IMY, W-8ECI, W-8EXP, or W-9) pertaining to its grantor or other 
owner(s) to the partnership that permits the partnership to reliably 
associate (within the meaning of Sec.  1.1441-1(b)(2)(vii)) such portion 
of the trust's allocable share of partnership ECTI with the grantor or 
other person that is the owner of such portion of the trust.
    (F) Nominees. Where a nominee holds an interest in a partnership on 
behalf of another person, the beneficial owner of the partnership 
interest, not the nominee, shall submit a Form W-8 (e.g., Form W-8BEN) 
or Form W-9 to the partnership or nominee that is the withholding agent.
    (G) Foreign governments, foreign tax-exempt organizations and other 
foreign

[[Page 285]]

persons. A Form W-8 (e.g., Form W-8EXP) submitted by a partner that is a 
foreign government, foreign tax-exempt organization, or other foreign 
person for purposes of withholding under Sec. Sec.  1441 through 1443 
will also operate to establish the foreign status of such partner under 
this section. However, except as set forth in Sec.  1.1446-2(b)(4)(iii) 
(regarding withholding qualified holders (as defined in Sec.  1.1445-
1(g)(11)) and Sec.  1.1446-3(c)(3) (regarding certain tax-exempt 
organizations described in section 501(c)), the submission of Form W-
8EXP (or successor) will have no effect on whether there is a 1446 tax 
due with respect to such partner's allocable share of partnership ECTI. 
For example, a partnership must still pay 1446 tax with respect to a 
foreign government partner's allocable share of ECTI because such 
partner is treated as a foreign corporation under section 892(a)(3). If 
no Form W-8 is submitted for purposes of withholding under sections 1441 
through 1443, then such government, tax-exempt organization, or person 
must generally submit Form W-8BEN.
    (H) Foreign corporations, certain foreign trusts, and foreign 
estates. Consistent with the rules of this paragraph (c)(2) and 
paragraph (c)(3) of this section, a foreign corporation, a foreign trust 
(other than a foreign grantor trust described in paragraph (c)(2)(ii)(E) 
of this section), or a foreign estate may generally submit any 
appropriate Form W-8 (for example, Form W-8BEN-E or Form W-8IMY) to the 
partnership to establish its foreign status for purposes of section 
1446. In addition, a foreign entity may also submit a certification of 
non-foreign status (including a Form W-8EXP) described in Sec.  1.1445-
5(b)(3)(ii) for purposes of documenting itself as a withholding 
qualified holder (as defined in Sec.  1.1445-1(g)(11)).
    (iii) Effect of Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, W-9, and 
statement--(A) Partnership reliance on withholding certificate. In 
general, for purposes of this section, a partnership may rely on a valid 
Form W-8 (e.g., Form W-8BEN) or Form W-9, or statement described in this 
paragraph (c)(2) from a partner, beneficial owner, or grantor trust to 
determine whether that person, beneficial owner, or the owner of a 
grantor trust, is a non-foreign or foreign partner for purposes of 
computing 1446 tax, and if such person is a foreign partner, to 
determine whether or not such person is a corporation for U.S. tax 
purposes. The rules of paragraph (c)(3) of this section shall apply to a 
partnership that receives a Form W-8IMY from a foreign grantor trust or 
a statement described in this paragraph (c)(2) from a domestic grantor 
trust, but does not receive a Form W-8 (e.g., Form W-8BEN) or Form W-9 
identifying such grantor or other person. Further, a partnership may not 
rely on a Form W-8 or Form W-9, or statement described in this paragraph 
(c)(2), and such form or statement is therefore not valid for any 
installment period or Form 8804 filing date during which the partnership 
has actual knowledge or has reason to know that any information on the 
withholding certificate or statement is incorrect or unreliable and, if 
based on such knowledge or reason to know, the partnership should pay 
1446 tax in an amount greater than would be the case if it relied on the 
certificate or statement.
    (B) Reason to know. A partnership has reason to know that 
information on a withholding certificate or statement is incorrect or 
unreliable if its knowledge of relevant facts or statements contained on 
the form or other documentation is such that a reasonably prudent person 
in the position of the withholding agent would question the claims made. 
See Sec. Sec.  1.1441-1(e)(4)(viii) and 1.1441-7(b)(1) and (2).
    (C) Subsequent knowledge and impact on penalties. If the partnership 
does not have actual knowledge or reason to know that a Form W-8BEN, 
Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or statement received 
from a partner, beneficial owner, or grantor trust contains incorrect or 
unreliable information, but it subsequently determines that the 
certificate or statement contains incorrect or unreliable information, 
and, based on such knowledge the partnership should pay 1446 tax in an 
amount greater than would be the case if it relied on the certificate or 
statement, then the partnership will not be subject to penalties for its 
failure to pay the 1446 tax in reliance on

[[Page 286]]

such certificate or statement for any installment payment date prior to 
the date that the determination is made. See Sec. Sec.  1.1446-1(c)(4) 
and 1.1446-3 concerning penalties for failure to pay the withholding tax 
when a partnership knows or has reason to know that a withholding 
certificate or statement is incorrect or unreliable.
    (iv) Requirements for certificates to be valid. Except as otherwise 
provided in this paragraph (c), for purposes of this section, the 
validity of a Form W-9 shall be determined under section 3406 and Sec.  
31.3406(h)-3(e) of this chapter which establish when such form may be 
reasonably relied upon. A Form W-8BEN, Form W-8IMY, Form W-8ECI, or Form 
W-8EXP is only valid for purposes of this section if its validity period 
has not expired, the partner submitting the form has signed it under 
penalties of perjury, and it contains all the required information.
    (A) When period of validity expires. For purposes of this section, a 
Form W-8BEN, Form W-8IMY, Form W-8ECI, or Form W-8EXP submitted by a 
partner shall be valid until the end of the period of validity 
determined for such form under Sec.  1.1441-1(e). With respect to a 
foreign partnership submitting Form W-8IMY, the period of validity of 
such form shall be determined under Sec.  1.1441-1(e) as if such foreign 
partnership submitted the form required of a nonwithholding foreign 
partnership. See Sec.  1.1441-1(e)(4)(ii).
    (B) Required information for Forms W-8BEN, W-8IMY, W-8ECI, and W-
8EXP. Forms W-8BEN, W-8IMY, W-8ECI, and W-8EXP submitted under this 
section must contain the partner's name, permanent address and Taxpayer 
Identification Number (TIN), the country under the laws of which the 
partner is formed, incorporated or governed (if the person is not an 
individual), the classification of the partner for U.S. Federal tax 
purposes (e.g., partnership, corporation), and any other information 
required to be submitted by the forms or instructions for such form, as 
applicable.
    (v) Partner must provide new withholding certificate when there is a 
change in circumstances. The principles of Sec.  1.1441-1(e)(4)(ii)(D) 
shall apply when a change in circumstances has occurred (including 
situations where the status of a U.S. person changes) that requires a 
partner to provide a new withholding certificate.
    (vi) Partnership must retain withholding certificates. A partnership 
or nominee who has responsibility for paying 1446 tax under this section 
or Sec.  1.1446-4 must retain each withholding certificate, statement, 
and other information received from its direct and indirect partners for 
as long as it may be relevant to the determination of the withholding 
agent's 1446 tax liability under section 1461 and the regulations 
thereunder.
    (3) Presumptions in the absence of valid Form W-8BEN, Form W-8IMY, 
Form W-8ECI, Form W-8EXP, Form W-9, or statement. Except as otherwise 
provided in this paragraph (c)(3), a partnership that does not receive a 
valid Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or 
statement required by paragraph (c)(2) of this section from a partner, 
beneficial owner, or grantor trust, or a partnership that receives a 
withholding certificate or statement but has actual knowledge or reason 
to know that the information on the certificate or statement is 
incorrect or unreliable, must presume that the partner is a foreign 
person. Except as provided in Sec.  1.1446-3(a)(2) and Sec.  1.1446-
5(c)(2), a partnership that knows that a partner is an individual shall 
treat the partner as a nonresident alien. Except as provided in Sec.  
1.1446-3(a)(2) and Sec.  1.1446-5(c)(2), a partnership that knows that a 
partner is an entity shall treat the partner as a corporation if the 
entity is a corporation as defined in Sec.  301.7701-2(b)(8) of this 
chapter. See Sec.  1.1446-3(a)(2) which prohibits a partnership in 
certain circumstances from considering preferential tax rates in 
computing its 1446 tax when the presumption and rules of this paragraph 
(c)(3) apply. In all other cases, the partnership shall treat the 
partner as either a nonresident alien or a foreign corporation, 
whichever classification results in a higher 1446 tax being due, and 
shall pay the 1446 tax in accordance with this presumption. Except as 
provided in Sec.  1.1446-5(c)(2), the presumption set forth in this 
paragraph (c)(3) that a partner is a foreign person shall not apply to 
the extent

[[Page 287]]

that the partnership relies on other means to ascertain the non-foreign 
status of a partner and the partnership is correct in its determination 
that such partner is a U.S. person. A partnership is in no event 
required to rely upon other means to determine the non-foreign status of 
a partner and may demand that a partner furnish an acceptable 
certificate under this section. If a certificate is not provided in such 
circumstances, the partnership may presume that the partner is a foreign 
partner, and for purposes of sections 1461 through 1463, will be 
considered to have been required to pay 1446 tax on such partner's 
allocable share of partnership ECTI.
    (4) Consequences when partnership knows or has reason to know that 
Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, or Form W-9 is 
incorrect or unreliable and does not withhold. If a partnership has 
actual knowledge or has reason to know that a Form W-8BEN, Form W-8IMY, 
Form W-8ECI, Form W-8EXP, Form W-9, or statement required by paragraph 
(c)(2) of this section submitted by a partner, beneficial owner, or 
grantor trust contains incorrect or unreliable information (either 
because the certificate or statement when given to the partnership 
contained incorrect information or because there has been a change in 
facts that makes information on the certificate or statement incorrect), 
and the partnership pays less than the full amount of 1446 tax due on 
ECTI allocable to that partner, the partnership shall be fully liable 
under section 1461 and Sec.  1.1461-3 (Sec.  1.1461-1 for publicly 
traded partnerships subject to Sec.  1.1446-4) and Sec.  1.1446-3, and 
for all applicable penalties and interest, for any failure to pay the 
1446 tax for the period during which the partnership has such knowledge 
or reason to know that the certificate contained incorrect or unreliable 
information and for all subsequent installment periods. If a partner, 
beneficial owner, or grantor trust submits a new valid Form W-8BEN, Form 
W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or statement, as applicable, 
the partnership may rely on that documentation when paying 1446 tax (or 
any installment of such tax) for any payment date that has not passed at 
the time such form is received.
    (5) Acceptable substitute form. A partnership or withholding agent 
responsible for paying 1446 tax (or any installment of such tax) may 
substitute its own form for the official version of Form W-8 (e.g., Form 
W-8BEN) that is recognized under this section to ascertain the identity 
of its partners, provided such form is consistent with Sec.  1.1441-
1(e)(4)(vi). All references under this section or Sec. Sec.  1.1446-2 
through 1.1446-6 to a Form W-8 (e.g., Form W-8BEN, Form W-8IMY, Form W-
8ECI, Form W-8EXP) shall include the acceptable substitute form 
recognized under this paragraph (c)(5).

[T.D. 9200, 70 FR 28717, May 18, 2005, as amended by T.D. 9394, 73 FR 
23074, Apr. 29, 2008; T.D. 9971, 87 FR 80066, Dec. 29, 2022]



Sec.  1.1446-2  Determining a partnership's effectively connected 
taxable income allocable to foreign partners under section 704.

    (a) In general. A partnership's effectively connected taxable income 
(ECTI) is generally the partnership's taxable income as computed under 
section 703, with adjustments as provided in section 1446(c) and this 
section, and computed with consideration of only those partnership items 
which are effectively connected (or treated as effectively connected) 
with the conduct of a trade or business in the United States. For 
purposes of determining the section 1446 withholding tax (1446 tax) or 
any installment of such tax under Sec.  1.1446-3, partnership ECTI 
allocable under section 704 to foreign partners is the sum of the 
allocable shares of ECTI of each of the partnership's foreign partners 
as determined under paragraph (b) of this section. See Sec.  1.1446-6 
(special rules permitting the partnership to consider partner-level 
deductions and losses to reduce the partnership's 1446 tax). The 
calculation of partnership ECTI allocable to foreign partners as set 
forth in paragraph (b) of this section and the partnership's withholding 
tax obligation are partnership-level computations solely for purposes of 
determining the 1446 tax. Therefore, any deduction that is not taken 
into account in calculating a partner's allocable share of partnership 
ECTI (e.g.,

[[Page 288]]

percentage depletion), but which is a deduction that under U.S. tax law 
the foreign partner is otherwise entitled to claim, can still be claimed 
by the foreign partner when computing its U.S. tax liability and filing 
its U.S. income tax return, subject to any restriction or limitation 
that otherwise may apply.
    (b) Computation--(1) In general. A foreign partner's allocable share 
of partnership ECTI for the partnership's taxable year that is allocable 
under section 704 to a particular foreign partner is equal to that 
foreign partner's distributive share of partnership gross income and 
gain for the partnership's taxable year that is effectively connected 
and properly allocable to the partner under section 704 and the 
regulations thereunder, reduced by the foreign partner's distributive 
share of partnership deductions for the partnership taxable year that 
are connected with such income under section 873(a) or 882(c) and 
properly allocable to the partner under section 704 and the regulations 
thereunder, in each case, after application of the rules of this 
section. See Sec.  1.1446-6 (special rules permitting the partnership to 
consider partner-level deductions and losses to reduce the partnership's 
1446 tax). For these purposes, a foreign partner's distributive share of 
effectively connected gross income and gain and the deductions connected 
with such income shall be computed by considering allocations that are 
respected under the rules of section 704 and Sec.  1.704-1(b)(1), 
including special allocations in the partnership agreement (as defined 
in Sec.  1.704-1(b)(2)(ii)(h)), and adjustments to the basis of 
partnership property described in section 743 pursuant to an election by 
the partnership under section 754 (see Sec.  1.743-1(j)). The character 
of effectively connected partnership items (capital versus ordinary) 
shall be separately considered only to the extent set forth in paragraph 
(b)(3)(v) of this section and, when applicable, sections 1.1446-
3(a)(2)(consideration of preferential rates when computing 1446 tax) and 
section 1.1446-6 (special rules permitting the partnership to consider 
partner-level deductions and losses to reduce the partnership's 1446 
tax).
    (2) Income and gain rules. For purposes of computing a foreign 
partner's allocable share of partnership ECTI under this paragraph (b), 
the following rules shall apply with respect to partnership income and 
gain.
    (i) Application of the principles of section 864. The determination 
of whether a partnership's items of gross income are effectively 
connected shall be made by applying the principles of section 864 and 
the regulations thereunder.
    (ii) Income treated as effectively connected. A partnership's items 
of gross income that are effectively connected include any income that 
is treated as effectively connected income, including partnership income 
subject to a partner's election under section 871(d) or section 882(d), 
any partnership income treated as effectively connected with the conduct 
of a U.S. trade or business pursuant to section 897, and any other items 
of partnership income treated as effectively connected under another 
provision of the Internal Revenue Code, without regard to whether those 
amounts are taxable to the partner. A partner that makes the election 
under section 871(d) or section 882(d) shall furnish to the partnership 
a statement that indicates that such election has been made. See Sec.  
1.871-10(d)(3). If a partnership receives a valid Form W-8ECI from a 
partner, the partner is deemed, for purposes of section 1446, to have 
effectively connected income subject to withholding under section 1446 
to the extent of the items identified on the form.
    (iii) Exempt income. A foreign partner's allocable share of 
partnership ECTI does not include income or gain exempt from U.S. tax by 
reason of a provision of the Internal Revenue Code. A foreign partner's 
allocable share of partnership ECTI also does not include income or gain 
exempt from U.S. tax by operation of any U.S. income tax treaty or 
reciprocal agreement. In the case of income excluded by reason of a 
treaty provision, such income must be derived by a resident of an 
applicable treaty jurisdiction, the resident must be the beneficial 
owner of the item, and all other requirements for benefits under the 
treaty must be satisfied. The partnership must have received from

[[Page 289]]

the partner a valid withholding certificate, that is, Form W-8BEN (see 
Sec.  1.1446-1(c)(2)(iii) regarding when a Form W-8BEN is valid for 
purposes of this section), containing the information necessary to 
support the claim for treaty benefits required in the forms and 
instructions. In addition, for purposes of this section, the withholding 
certificate must contain the beneficial owner's taxpayer identification 
number.
    (3) Deductions and losses. For purposes of computing a foreign 
partner's allocable share of partnership ECTI under this paragraph (b), 
the following rules shall apply with respect to deductions and losses.
    (i) Oil and gas interests. The deduction for depletion with respect 
to oil and gas wells shall be allowed, but the amount of such deduction 
shall be determined without regard to sections 613 and 613A.
    (ii) Charitable contributions. The deduction for charitable 
contributions provided in section 170 shall not be allowed.
    (iii) Net operating losses and other suspended or carried losses. 
Except as provided in Sec.  1.1446-6, the net operating loss deduction 
of any foreign partner provided in section 172 shall not be taken into 
account. Further, except as provided in Sec.  1.1446-6, the partnership 
shall not take into account any suspended losses (e.g., losses in excess 
of a partner's basis in the partnership, see section 704(d)) or any 
capital loss carrybacks or carryovers available to a foreign partner.
    (iv) Interest deductions. The rules of this paragraph (b)(3)(iv) 
shall apply for purposes of determining the amount of interest expense 
that is allocable to income which is (or is treated as) effectively 
connected with the conduct of a trade or business for purposes of 
calculating a foreign partner's allocable share of partnership ECTI. In 
the case of a non-corporate foreign partner, the rules of Sec.  1.861-
9T(e)(7) shall apply. In the case of a corporate foreign partner, the 
rules of Sec.  1.882-5 shall apply by treating the partnership as a 
foreign corporation and using the partner's pro-rata share of the 
partnership's assets and liabilities for these purposes. For these 
purposes, the rules governing elections under Sec.  1.882-5(a)(7) shall 
be made at the partnership level.
    (v) Limitation on capital losses. Losses from the sale or exchange 
of capital assets allocable under section 704 to a partner shall be 
allowed only to the extent of gains from the sale or exchange of capital 
assets allocable under section 704 to such partner.
    (vi) Other deductions. No deduction shall be allowed for personal 
exemptions provided in section 151 or the additional itemized deductions 
for individuals provided in part VII of subchapter B of the Internal 
Revenue Code (section 211 and following).
    (vii) Limitations on deductions. Except as provided in Sec.  1.1446-
6 and this paragraph (b)(3), any limitations on losses or deductions 
that apply at the partner level when determining ECTI allocable to a 
foreign partner shall not be taken into account.
    (4) Other rules--(i) Exclusion of items allocated to U.S. partners. 
Except as provided in Sec.  1.1446-5(e), in computing partnership ECTI, 
the partnership shall not take into account any item of income, gain, 
loss, or deduction to the extent allocable to any partner that is not a 
foreign partner, as that term is defined in Sec.  1.1446-1(c).
    (ii) Partnership credits. See Sec.  1.1446-3(a) providing that the 
1446 tax is computed without regard to a partner's distributive share of 
the partnership's tax credits.
    (iii) Special rule for qualified holders. With respect to a foreign 
partner that is a withholding qualified holder (as defined in Sec.  
1.1445-1(g)(11)), the foreign partner's allocable share of partnership 
ECTI does not include gain or loss that is not taken into account under 
Sec.  1.897(l)-1(b) and that is not otherwise treated as effectively 
connected with a trade or business in the United States. The partnership 
must have received from the partner a valid certificate of non-foreign 
status (including a Form W-8EXP) described in Sec.  1.1445-2(b)(2)(i) or 
Sec.  1.1445-5(b)(3)(ii). See Sec.  1.1446-1(c)(2)(ii)(G) and (H) 
regarding documentation of withholding qualified holders.
    (5) Examples. The following examples illustrate the application of 
this section. In considering the examples, disregard the potential 
application of

[[Page 290]]

Sec.  1.1446-3(b)(2)(v)(F) (relating to the de minimis exception to 
paying 1446 tax). The examples are as follows:

    Example 1. Limitation on capital losses. PRS partnership has two 
equal partners, A and B. A is a nonresident alien and B is a U.S. 
citizen. A provides PRS with a valid Form W-8BEN, and B provides PRS 
with a valid Form W-9. PRS has the following annualized tax items for 
the relevant installment period, all of which are effectively connected 
with its U.S. trade or business and are allocated equally between A and 
B: $100 of long-term capital gain, $400 of long-term capital loss, $300 
of ordinary income, and $100 of ordinary deductions. Assume that these 
allocations are respected under section 704(b) and the regulations 
thereunder. Accordingly, A's allocable share of PRS's effectively 
connected items includes $50 of long-term capital gain, $200 of long-
term capital loss, $150 of ordinary income, and $50 of ordinary 
deductions. In determining A's allocable share of partnership ECTI, the 
amount of the long-term capital loss that may be taken into account 
pursuant to paragraph (b)(3)(v) of this section is limited to A's 
allocable share of gain from the sale or exchange of capital assets. 
Accordingly, A's share of partnership ECTI allocable under section 704 
pursuant to Sec.  1.1446-2 is $100 ($150 of ordinary income less $50 of 
ordinary deductions, plus $50 of capital gain less $50 of capital loss).
    Example 2. Limitation on capital losses--special allocations. PRS 
partnership has two equal partners, A and B. A and B are both 
nonresident aliens. A and B each provide PRS with a valid Form W-8BEN. 
PRS has the following annualized tax items for the relevant installment 
period, all of which are effectively connected with its U.S. trade or 
business: $200 of long-term capital gain, $200 of long-term capital 
loss, and $400 of ordinary income. A and B have equal shares in the 
ordinary income, however, pursuant to the partnership agreement, capital 
gains and losses are subject to special allocations. The long-term 
capital gain is allocable to A, and the long-term capital loss is 
allocable to B. Assume that these allocations are respected under 
section 704(b) and the regulations thereunder. Pursuant to paragraph 
(b)(3)(v) of this section, A's allocable share of partnership ECTI under 
Sec.  1.1446-2 is $400 (consisting of $200 of ordinary income and $200 
of long-term capital gain), and B's allocable share of partnership ECTI 
is $200 (consisting of $200 of ordinary income).
    Example 3. Withholding tax obligation where partner has net 
operating losses. PRS partnership has two equal partners, FC, a foreign 
corporation, and DC, a domestic corporation. FC and DC provide a valid 
Form W-8BEN and Form W-9, respectively, to PRS. Both FC and PRS are on a 
calendar taxable year. PRS is engaged in the conduct of a trade or 
business in the United States and for its first installment period 
during its taxable year has $100 of annualized ECTI that is allocable to 
FC. As of the beginning of the taxable year, FC had an unused 
effectively connected net operating loss carryover in the amount of 
$300. FC's net operating loss carryover is not taken into account in 
determining FC's allocable share of partnership ECTI under Sec.  1.1446-
2 and, absent the application of Sec.  1.1446-6 (permitting a foreign 
partner to certify deductions and losses reasonably expected to be 
available to reduce the partner's U.S. income tax liability on the 
effectively connected income or gain allocable from the partnership), is 
not considered in computing the 1446 tax installment payment due on 
behalf of FC. Accordingly, PRS must pay 1446 tax with respect to the 
$100 of ECTI allocable to FC.

[T.D. 9200, 70 FR 28717, May 18, 2005, as amended by T.D. 9394, 73 FR 
23074, Apr. 29, 2008; T.D. 9971, 87 FR 80066, Dec. 29, 2022]



Sec.  1.1446-3  Time and manner of calculating and paying over 
the 1446 tax.

    (a) In general--(1) Calculating 1446 tax. This section provides 
rules for calculating, reporting, and paying over the section 1446 
withholding tax (1446 tax). A partnership's 1446 tax equals the amount 
determined under this section and shall be paid in installments during 
the partnership's taxable year (see paragraph (d)(1) of this section for 
installment payment due dates), with any remaining tax due paid with the 
partnership's annual return required to be filed pursuant to paragraph 
(d) of this section. For these purposes, a partnership shall not take 
into account either a partner's liability for any other tax imposed 
under any other provision of the Internal Revenue Code (e.g., section 55 
or 884) or a partner's distributive share of the partnership's tax 
credits when determining the amount of the partnership's 1446 tax.
    (2) Applicable percentage--(i) In general. Except as provided in 
this paragraph (a)(2), in the case of a foreign partner that is a 
corporation for U.S. tax purposes, the applicable percentage is the 
highest rate of tax specified in section 11(b) for such taxable year. 
Except as provided in this paragraph (a)(2) and Sec.  1.1446-5, in the 
case of a foreign partner that is not a corporation for U.S. tax 
purposes (e.g., a partnership, individual, trust or estate), the

[[Page 291]]

applicable percentage is the highest rate of tax specified in section 1.
    (ii) Special types of income or gain. Except as otherwise provided, 
a partnership is permitted to consider as the applicable percentage 
under this paragraph (a)(2) the highest rate of tax applicable to a 
particular type of income or gain allocable to a partner (e.g., long-
term capital gain allocable to a non-corporate partner, unrecaptured 
section 1250 gain, collectibles gain under section 1(h)), to the extent 
of a partner's allocable share of such income or gain. Consideration of 
the highest rate of tax applicable to a particular type of income or 
gain under the previous sentence shall be made without regard to the 
amount of such partner's income. A partnership is not permitted to 
consider the highest rate of tax applicable to a particular type of 
income or gain under this paragraph (a)(2)(ii) if the application of the 
preferential rate depends upon the corporate or non-corporate status of 
the person reporting the income or gain and, either no documentation has 
been provided to the partnership under Sec.  1.1446-1 to establish the 
corporate or non-corporate status of the partner required to pay tax on 
the income or gain, or the partnership is otherwise required to compute 
and pay 1446 tax on such portion of the income or gain using the highest 
applicable percentage under section 1446(b). See e.g., Sec. Sec.  
1.1446-1(c)(3) (presumption of foreign status in the absence of 
documentation) and 1.1446-5(c)(2) (requirement to pay 1446 tax at higher 
of rates in section 1446(b) where a lower-tier partnership cannot 
reliably associate income with a partner of the upper-tier partnership).
    (b) Installment payments--(1) In general. Except as provided in 
Sec.  1.1446-4 for certain publicly traded partnerships, a partnership 
must pay its 1446 tax by making installment payments of the 1446 tax 
based on the amount of partnership effectively connected taxable income 
(ECTI) allocable under section 704 to its foreign partners, without 
regard to whether the partnership makes any distributions to its 
partners during the partnership's taxable year. The amount of the 
installment payments is determined in accordance with this paragraph 
(b), and the tax must be paid at the times set forth in paragraph (d) of 
this section. Subject to paragraphs (b)(2)(v) and (b)(3)(ii) of this 
section, in computing its first installment of 1446 tax for a taxable 
year, a partnership must decide whether it will pay its 1446 tax for the 
entire taxable year by using the safe harbor set forth in paragraph 
(b)(3)(i) of this section, or by using one of several annualization 
methods available under paragraph (b)(2)(ii) of this section for 
computing partnership ECTI allocable to foreign partners. In the case of 
a partnership's underpayment of an installment of 1446 tax, the 
partnership shall be subject to an addition to the tax equal to the 
amount determined under section 6655, as modified by this section, as if 
such partnership were a corporation, as well as any other applicable 
interest and penalties. See Sec.  1.1446-3(f). Section 6425 (permitting 
an adjustment for an overpayment of estimated tax by a corporation) 
shall not apply to a partnership's payment of its 1446 tax.
    (2) Calculation--(i) Application of the principles of section 6655--
(A) In general. Installment payments of 1446 tax required during the 
partnership's taxable year are based upon partnership ECTI for the 
portion of the partnership taxable year to which the payments relate, 
and, except as set forth in this paragraph (b)(2) or paragraph (b)(3) of 
this section, shall be calculated using the principles of section 6655. 
The principles of section 6655, except as otherwise provided in Sec.  
1.6655-2, are applied to annualize the partnership's items of 
effectively connected income, gain, loss, and deduction to determine 
each foreign partner's allocable share of partnership ECTI. Each foreign 
partner's allocable share of partnership ECTI is then multiplied by the 
relevant applicable percentage for the type of income allocable to the 
foreign partner under paragraph (a)(2) of this section. The respective 
1446 tax amounts are then added for each foreign partner to yield an 
annualized 1446 tax with respect to such partner. The installment of 
1446 tax due with respect to a foreign partner equals the excess of the 
section 6655(e)(2)(B)(ii) percentage of the annualized 1446 tax for that 
partner (or, if applicable, the adjusted seasonal amount) for the 
relevant installment

[[Page 292]]

period, over the aggregate amount of 1446 tax installment payments 
previously paid with respect to that partner during the partnership's 
taxable year. The partnership's total 1446 tax installment payment 
equals the sum of the installment payments due for such period on behalf 
of all the partnership's foreign partners.
    (B) Calculation rules when certificates are submitted under Sec.  
1.1446-6. (1) To the extent applicable, in computing the 1446 tax due 
with respect to a foreign partner, a partnership may consider a 
certificate received from such partner under Sec.  1.1446-6(c)(1)(i) or 
(ii) and the amount of state and local taxes permitted to be considered 
under Sec.  1.1446-6(c)(1)(iii). For the purposes of applying this 
paragraph (b)(2)(i)(B), a partnership shall first annualize the 
partner's allocable share of the partnership's items of effectively 
connected income, gain, deduction, and loss before--
    (i) Considering under Sec.  1.1446-6(c)(1)(i) the partner's 
certified deductions and losses;
    (ii) Determining under Sec.  1.1446-6(c)(1)(ii) whether the 1446 tax 
otherwise due with respect to that partner is less than $1,000 
(determined with regard to any certified deductions or losses); or
    (iii) Considering under Sec.  1.1446-6(c)(1)(iii) the amount of 
state and local taxes withheld and remitted on behalf of the partner.
    (2) The amount of the limitation provided in Sec.  1.1446-
6(c)(1)(i)(C) shall be based on the partner's allocable share of these 
annualized amounts. For any installment period in which the partnership 
considers a partner's certificate, the partnership must also consider 
the following events to the extent they occur prior to the due date for 
paying the 1446 tax for such installment period--
    (i) The receipt of an updated certificate or status update from the 
partner under Sec.  1.1446-6(c)(2)(ii)(B) certifying an amount of 
deductions or losses that is less than the amount reflected on the 
superseded certificate (see Sec.  1.1446-6(e)(2) Example 4);
    (ii) The failure to receive an updated certificate or status update 
from the partner that should have been provided under Sec.  1.1446-
6(c)(2)(ii)(B); and
    (iii) The receipt of a notification from the IRS under Sec.  1.1446-
6(c)(3) or (5) (see Sec.  1.1446-6(e)(2) Example 5).
    (ii) Annualization methods. A partnership that decides to annualize 
its income for the taxable year shall use one of the annualization 
methods set forth in section 6655(e) and the regulations thereunder, and 
as described in the forms and instructions for Form 8804, ``Annual 
Return for Partnership Withholding Tax (Section 1446),'' Form 8805, 
``Foreign Partner's Information Statement of Section 1446 Withholding 
Tax,'' and Form 8813, ``Partnership Withholding Tax Payment Voucher.''
    (iii) Partner's estimated tax payments. In computing its installment 
payments of 1446 tax, a partnership may not take into account a 
partner's estimated tax payments.
    (iv) Partner whose interest terminates during the partnership's 
taxable year. If a partner's interest in the partnership terminates 
prior to the end of the partnership's taxable year, the partnership 
shall take into account the income that is allocable to the partner for 
the portion of the partnership taxable year that the person was a 
partner.
    (v) Exceptions and modifications to the application of the 
principles under section 6655. To the extent not otherwise modified in 
Sec. Sec.  1.1446-1 through 1.1446-7 or inconsistent with those rules, 
the principles of section 6655 apply to the calculation of the 
installment payments of 1446 tax made by a partnership as set forth in 
this paragraph (b)(2)(v).
    (A) Inapplicability of special rules for large corporations. The 
principles of section 6655(d)(2), concerning large corporations (as 
defined in section 6655(g)(2)), shall not apply.
    (B) Inapplicability of special rules regarding early refunds. The 
principles of section 6655(h), applicable to amounts excessively 
credited or refunded under section 6425, shall not apply. See paragraph 
(b)(1) of this section providing that section 6425 shall not apply for 
purposes of the 1446 tax. This paragraph (b)(2)(v)(B) shall apply to 
1446 tax paid by a partnership or nominee, as well as to amounts that a 
partner is deemed to have paid for estimated tax purposes by reason of 
the partnership's or nominee's 1446 tax payments under Sec.  1.1446-
3(d)(1)(i).

[[Page 293]]

    (C) Period of underpayment. The period of the underpayment set forth 
in section 6655(b)(2) shall end on the earlier of the date the 
partnership is required to file Form 8804 (as provided in paragraph 
(d)(1)(iii) of this section and without regard to extensions), or with 
respect to any portion of the underpayment, the date on which such 
portion is paid.
    (D) Other taxes. Section 6655 shall be applied without regard to any 
references to alternative minimum taxable income and modified 
alternative minimum taxable income.
    (E) 1446 tax treated as tax under section 11. The principles of 
section 6655(g)(1) shall be applied to treat the 1446 tax as a tax 
imposed by section 11, and any partnership required to pay such tax 
shall be treated as a corporation.
    (F) Application of section 6655(f). A partnership subject to section 
1446 shall apply section 6655(f) after aggregating the 1446 tax due (or 
any installment of such tax) for all its foreign partners. See Sec.  
1.1446-6(c)(1)(ii) for an exception to this rule when a nonresident 
alien partner certifies to the partnership that the partnership 
investment is the nonresident alien partner's only activity giving rise 
to effectively connected items.
    (G) Application of section 6655(i). If a partnership has a taxable 
year of less than 12 months, the partnership is required to pay 1446 tax 
(including installments of such tax) in accordance with this section 
Sec.  1.1446-3, if the partnership has ECTI allocable under section 704 
to foreign partners. In such a case, the partnership shall adjust its 
installment payments of 1446 tax in a reasonable manner (e.g., the 
annualized amounts of ECTI estimated to be allocable to a foreign 
partner, and the section 6655(e)(2)(B)(ii) percentage to be applied to 
each installment) to account for the short-taxable year. However, if the 
partnership's taxable year is a period of less than 4 months, the 
partnership shall not be required to make installment payments of 1446 
tax, but will only be required to file Forms 8804 and 8805 in accordance 
with this section Sec.  1.1446-3, and report and pay the appropriate 
1446 tax for the short-taxable year.
    (H) Current year tax safe harbor. The safe harbor set forth in 
section 6655(d)(1)(B)(i) shall apply to a partnership subject to section 
1446.
    (I) Prior year tax safe harbor. The safe harbor set forth in section 
6655(d)(1)(B)(ii) shall not apply and instead the safe harbor set forth 
in paragraph (b)(3) of this section applies.
    (3) 1446 tax safe harbor--(i) In general. The addition to tax under 
section 6655 shall not apply to a partnership with respect to a current 
installment of 1446 tax if--
    (A) The average of the amount of the current installment and prior 
installments during the taxable year is at least 25 percent of the total 
1446 tax (without regard to Sec.  1.1446-6) for the prior taxable year;
    (B) The prior taxable year consisted of twelve months;
    (C) The partnership timely files (including extensions) an 
information return under section 6031 for the prior year; and
    (D) The amount of ECTI for the prior taxable year is not less than 
50 percent of the ECTI shown on the annual return of section 1446 
withholding tax that is (or will be) timely filed for the current year.
    (ii) Permission to change to standard annualization method. Except 
as otherwise provided in this paragraph (b)(3)(ii), if a partnership 
decides to pay its 1446 tax for the first installment period based upon 
the safe harbor method set forth in paragraph (b)(3)(i), the partnership 
must use the safe harbor method for each installment payment made during 
the partnership's taxable year. Notwithstanding the previous sentence, 
if a partnership paying over 1446 tax during the taxable year pursuant 
to this paragraph (b)(3) determines during an installment period (based 
upon the standard option annualization method set forth in section 
6655(e) and the regulations thereunder, as modified by the forms and 
instructions to Forms 8804, 8805, and 8813) that it will not qualify for 
the safe harbor in this paragraph (b)(3) because the prior year's ECTI 
will not meet the 50-percent threshold in paragraph (b)(3)(i)(D) of this 
section, then the partnership is permitted, without being subject to the 
addition to the tax under section 6655

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(as applied through this section), to pay over its 1446 tax for the 
period in which such determination is made, and all subsequent 
installment periods during the taxable year, using the standard option 
annualization method. A change pursuant to this paragraph shall be 
disclosed in a statement attached to the Form 8804 the partnership files 
for the taxable year and shall include information to allow the IRS to 
determine whether the change was appropriate.
    (c) Coordination with other withholding rules--(1) Fixed or 
determinable, annual or periodical income. Fixed or determinable, annual 
or periodical income subject to tax under section 871(a) or section 881 
is not subject to withholding under section 1446, and such income is 
subject to the withholding requirements of sections 1441 and 1442 and 
the regulations thereunder.
    (2) Real property gains--(i) Domestic partnerships. Except as 
otherwise provided in this paragraph (c)(2), a domestic partnership that 
is otherwise subject to the withholding requirements of sections 1445 
and 1446 will be subject to the payment and reporting requirements of 
section 1446 only and not section 1445(e)(1) and the regulations 
thereunder, with respect to partnership gain from the disposition of a 
U.S. real property interest (as defined in section 897(c)). A 
partnership that has complied with the requirements of section 1446 will 
be deemed to satisfy the withholding requirements of section 1445 and 
the regulations thereunder. However, a domestic partnership that would 
otherwise be exempt from section 1445 withholding by operation of a 
nonrecognition provision must continue to comply with the requirements 
of Sec.  1.1445-5(b)(2). In the event that amounts are withheld under 
section 1445(e) at the time of the disposition of a U.S. real property 
interest, such amounts may be credited against the partnership's 1446 
tax. A partnership that fails to comply fully with the requirements of 
section 1446 pursuant to this paragraph (c)(2) shall be liable for any 
unpaid 1446 tax and subject to any applicable addition to the tax, 
interest, and penalties under section 1446. See Sec.  1.1446-4(f)(4) for 
rules coordinating the withholding liability of publicly traded 
partnerships under sections 1445 and 1446.
    (ii) Foreign partnerships. A foreign partnership that is subject to 
withholding under section 1445(a) during its taxable year may credit the 
amount withheld under section 1445(a) against its section 1446 tax 
liability for that taxable year only to the extent such amount is 
allocable to foreign partners.
    (3) Coordination with section 1443. A partnership that has ECTI 
allocable under section 704 to a foreign organization described in 
section 501(c) shall be required to pay 1446 tax on such ECTI only to 
the extent such ECTI is includible under section 512 and section 513 in 
computing the organization's unrelated business taxable income. The 
certificate procedure available under Sec.  1.1441-9(b)(1) by which a 
partner may set forth the amounts it believes will and will not be 
includible in its computation of unrelated business taxable income under 
section 512 and section 513 shall also apply to a partner in a 
partnership subject to section 1446. Such certificate shall be made by a 
partner in the same manner as under Sec.  1.1441-9(b)(2). A partnership 
that determines that the partner's certificate as to certain partnership 
items is unreliable or lacking must presume, consistent with Sec.  
1.1441-9(b)(3) (regarding amounts includible under section 512 in 
computing the organization's unrelated business taxable income), that 
such partnership items would be includible in computing the partner's 
UBTI.
    (4) Coordination with section 1446(f). A partnership that is 
directly or indirectly subject to withholding under section 1446(f)(1) 
during its taxable year may credit the amount withheld under section 
1446(f)(1) against its section 1446 tax liability for that taxable year 
only to the extent the amount is allocable to foreign partners.
    (d) Reporting and crediting the 1446 tax--(1) Reporting 1446 tax. 
This paragraph (d) sets forth the rules for reporting and crediting the 
1446 tax paid by a partnership. To the extent that 1446 tax is paid on 
ECTI allocable to a domestic trust (including a grantor or other person 
treated as an owner of a portion of such trust) or a grantor or other 
person treated as the owner of a

[[Page 295]]

portion of a foreign trust, the rules of this paragraph (d) applicable 
to a foreign trust or its beneficiaries shall be applied to such 
domestic or foreign trust and its beneficiaries or owners, as 
applicable, so that appropriate credit for the 1446 tax may be claimed 
by the trust, beneficiary, grantor, or other person.
    (i) Reporting of installment tax payments and notification to 
partners of installment tax payments. Each partnership required to make 
an installment payment of 1446 tax must file Form 8813, ``Partnership 
Withholding Tax Payment Voucher (Section 1446),'' in accordance with the 
instructions to that form. Form 8813 is generally used to transmit an 
installment payment of 1446 tax to the IRS with respect to partnership 
ECTI estimated to be allocated to foreign partners. However, see Sec.  
1.1446-6(d)(3) (relating to circumstances where a partnership must file 
Form 8813 when no payment is required under section 1446). Except as 
provided in this section, a partnership must notify each foreign partner 
of the 1446 tax paid on the partner's behalf when the partnership makes 
an installment payment of 1446 tax. The notice required to be given to a 
foreign partner under the previous sentence must be provided within 10 
days of the installment payment due date, or, if paid later, the date 
such installment payment is made. A foreign partner generally may credit 
an installment of 1446 tax paid by the partnership on the partner's 
behalf against the partner's estimated tax that the partner must pay 
during the partner's own taxable year. See Sec.  1.1446-5(b) (relating 
to tiered partnership structures). However, a foreign partner may not 
obtain an early refund of such amounts under the estimated tax rules. 
See Sec.  1.1446-3(b)(2)(v)(B). See paragraph (d)(2) of this section for 
the amount of 1446 tax a partner may credit against its U.S. income tax 
liability. No particular form is required for a partnership's 
notification to a foreign partner, but each notification must include 
the partnership's name, the partnership's Taxpayer Identification Number 
(TIN), the partnership's address, the partner's name, the partner's TIN, 
the partner's address, the annualized ECTI estimated to be allocated to 
the foreign partner (or prior year's safe harbor amount, if applicable), 
and the amount of tax paid on behalf of the partner for both the current 
and any prior installment periods during the partnership's taxable year. 
Notwithstanding any other provision of this paragraph (d), a withholding 
agent is not required to notify a partner of an installment of 1446 tax 
paid on the partner's behalf, unless requested by the partner, if--
    (A) The partnership's agent responsible for providing notice 
pursuant to this paragraph is the same person that acts as an agent of 
the foreign partner for purposes of filing the partner's U.S. Federal 
income tax return for the partner's taxable year that includes the 
installment payment date; or
    (B) The partnership has at least 500 foreign partners and the total 
1446 tax that the partnership determines will be required to be paid for 
the partnership taxable year on behalf of such partner (based on 
paragraph (b)(2)(ii) or (3) of this section) with respect to the 
partner's allocable share of ECTI is less than $1,000.
    (ii) Payment due dates. The 1446 tax is calculated based on 
partnership ECTI allocable under section 704 to foreign partners during 
the partnership's taxable year, as determined under section 706. 
Installment payments of the 1446 tax generally must be made during the 
partnership's taxable year in which such income is derived. A 
partnership must pay to the Internal Revenue Service a portion of its 
estimated annual 1446 tax in installments on or before the 15th day of 
the fourth, sixth, ninth, and twelfth months of the partnership's 
taxable year as provided in section 6655. Any additional amount 
determined to be due is to be paid with the filing of the annual return 
of tax required under paragraph (d)(1)(iii) of this section and clearly 
designated as for the prior taxable year. Form 8813 should not be 
submitted for a payment made under the preceding sentence.
    (iii) Annual return and notification to partners. Every partnership 
(except a publicly traded partnership subject to Sec.  1.1446-4) that 
has effectively connected gross income for the partnership's taxable 
year allocable under section 704 to one or more of its foreign

[[Page 296]]

partners (or is treated as having paid 1446 tax under Sec.  1.1446-
5(b)), must file Form 8804, ``Annual Return for Partnership Withholding 
Tax (Section 1446).'' Additionally, every partnership that is required 
to file Form 8804 also must file Form 8805, ``Foreign Partner's 
Information Statement of Section 1446 Withholding Tax,'' for each of its 
foreign partners on whose behalf it paid 1446 tax, and furnish Form 8804 
and the Forms 8805 to the Internal Revenue Service and the respective 
Form 8805 to each of its partners. Notwithstanding the previous 
sentence, a partnership that considers a foreign partner's certificate 
under Sec.  1.1446-6 when computing its 1446 tax on Form 8804 is 
required to furnish such partner and the Internal Revenue Service a Form 
8805, even if the form submitted to the partner shows no payment of 1446 
tax on behalf of the partner. Forms 8804 and 8805 are separate from Form 
1065, ``U.S. Return of Partnership Income,'' and the attachments 
thereto, and are not to be filed as part of the partnership's Form 1065. 
A partnership must generally file Forms 8804 and 8805 on or before the 
due date for filing the partnership's Form 1065. See Sec.  1.6031(a)-
1(c) for rules concerning the due date of a partnership's Form 1065. 
However, with respect to partnerships described in Sec.  1.6081-5(a)(1), 
Forms 8804 and 8805 are not due until the 15th day of the sixth month 
following the close of the partnership's taxable year.
    (iv) Information provided to beneficiaries of foreign trusts and 
estates. A foreign trust or estate that is a partner in a partnership 
subject to withholding under section 1446 shall be provided Form 8805 by 
the partnership. The foreign trust or estate must provide to each of its 
beneficiaries a copy of the Form 8805 furnished by the partnership. In 
addition, the foreign trust or estate must provide a statement for each 
of its beneficiaries to inform each beneficiary of the amount of the 
credit that may be claimed under section 33 (as determined under this 
section) for the 1446 tax paid by the partnership. Until an official 
Internal Revenue Service form is available, the statement from a foreign 
trust or estate that is described in this paragraph (d)(1)(iv) shall 
contain the following information--
    (A) Name, address, and TIN of the foreign trust or estate;
    (B) Name, address, and TIN of the partnership;
    (C) The amount of the partnership's ECTI allocated to the foreign 
trust or estate for the partnership taxable year (as shown on the Form 
8805 provided to the trust or estate);
    (D) The amount of 1446 tax paid by the partnership on behalf of the 
foreign trust or estate (as shown on Form 8805 to the trust or estate);
    (E) Name, address, and TIN of the beneficiary of the foreign trust 
or estate;
    (F) The amount of the partnership's ECTI allocated to the trust or 
estate for purposes of section 1446 that is to be included in the 
beneficiary's gross income; and
    (G) The amount of 1446 tax paid by the partnership on behalf of the 
foreign trust or estate that the beneficiary is entitled to claim on its 
return as a credit under section 33.
    (v) Attachments required of foreign trusts and estates. The 
statement furnished to each foreign beneficiary under this paragraph 
(d)(1) must also be attached to the foreign trust or estate's U.S. 
Federal income tax return filed for the taxable year that includes the 
installment periods to which the statement relates.
    (vi) Attachments required of beneficiaries of foreign trusts and 
estates. The beneficiary of the foreign trust or estate must attach the 
statement provided by the trust or estate pursuant to paragraph 
(d)(1)(iv) of this section, along with a copy of the Form 8805 furnished 
by the partnership to such trust or estate, to its U.S. income tax 
return for the year in which it claims a credit for the 1446 tax. See 
Sec.  1.1446-3(d)(2)(ii) for additional rules regarding a partner or 
beneficial owner claiming a credit for the 1446 tax.
    (vii) Information provided to beneficiaries of foreign trusts and 
estates that are partners in certain publicly traded partnerships. A 
statement similar to the statement required by paragraph

[[Page 297]]

(d)(1)(iv) of this section shall be provided by trusts or estates that 
hold interests in publicly traded partnerships subject to Sec.  1.1446-
4.
    (2) Crediting 1446 tax against a partner's U.S. tax liability--(i) 
In general. A partnership's payment of 1446 tax on the portion of ECTI 
allocable to a foreign partner generally relates to the partner's U.S. 
income tax liability for the partner's taxable year in which the partner 
is subject to U.S. tax on that income. Subject to paragraphs (d)(2)(ii) 
and (iii) of this section, a partner may claim as a credit under section 
33 the 1446 tax paid by the partnership with respect to ECTI allocable 
to that partner. The partner may not claim an early refund of these 
amounts under the estimated tax rules. See paragraph (d)(1)(i) of this 
section regarding a partner's ability to credit an installment of 1446 
tax paid on the partner's behalf against the partner's estimated tax 
payments due for the taxable year. See also Sec.  1.1446-5(b) (relating 
to tiered partnership structures).
    (ii) Substantiation for purposes of claiming the credit under 
section 33. A partner may credit the amount paid under section 1446 with 
respect to such partner against its U.S. income tax liability only if it 
attaches proof of payment to its U.S. income tax return for the 
partner's taxable year in which the items comprising such partner's 
allocable share of partnership ECTI are included in the partner's 
income. Except as provided in the next sentence, proof of payment 
consists of a copy of the Form 8805 the partnership provides to the 
partner (or in the case of a beneficiary of a foreign trust or estate, 
the statement required under paragraph (d)(1)(iv) or (vii) of this 
section to be provided by such trust or estate and a copy of the related 
Form 8805 furnished to such trust or estate), but only if the name and 
TIN on the Form 8805 (or the statement provided by a foreign trust or 
estate) match the name and TIN on the partner's U.S. tax return, and 
such form (or statement) identifies the partner (or beneficiary) as the 
person entitled to the credit under section 33. In the case of a partner 
of a publicly traded partnership that is subject to withholding on 
distributions under Sec.  1.1446-4, proof of payment consists of a copy 
of the Form 1042-S, ``Foreign Person's U.S. Source Income Subject to 
Withholding,'' provided to the partner by the partnership.
    (iii) Special rules for apportioning the tax credit under section 
33--(A) Foreign trusts and estates. Section 1446 tax paid on the portion 
of ECTI allocable under section 704 to a foreign trust or estate that 
the foreign trust or estate may claim as a credit under section 33 shall 
bear the same ratio to the total 1446 tax paid on behalf of the trust or 
estate as the total ECTI allocable to such trust or estate and not 
distributed (or treated as distributed) to the beneficiaries of such 
trust or estate, and, accordingly not deducted under section 651 or 
section 661 in calculating the trust or estate's taxable income, bears 
to the total ECTI allocable to such trust or estate. The 1446 tax that a 
foreign trust or estate is not entitled to claim as a credit under this 
paragraph (d)(2) may be claimed as a credit by the beneficiary of such 
trust or estate that includes the partnership ECTI allocated to the 
trust or estate in gross income under section 652 or section 662 
(whether distributed or deemed to be distributed and with the same 
character as effectively connected income as in the hands of the trust 
or estate). In the case of a foreign trust or estate with multiple 
beneficiaries, each beneficiary may claim a portion of the 1446 tax that 
may be claimed by all beneficiaries under the previous sentence as a 
credit in the same proportion as the amount of ECTI included in such 
beneficiary's gross income bears to the total amount of ECTI included by 
all beneficiaries. The trust or estate must provide each beneficiary 
with a copy of the Form 8805 provided to it by the partnership and 
prepare the statement required by paragraph (d)(1)(iv) of this section.
    (B) Use of domestic trusts to circumvent section 1446. This 
paragraph (d)(2)(iii)(B) shall apply if a partnership knows or has 
reason to know that a foreign person holds its interest in the 
partnership through a domestic trust, and such domestic trust was formed 
or availed of with a principal purpose of avoiding the 1446 tax. The use 
of a domestic trust may have a principal purpose of avoiding the 1446 
tax even

[[Page 298]]

though the tax avoidance purpose is outweighed by other purposes when 
taken together. In such case, a partnership is required to pay 1446 tax 
under this paragraph as if the domestic trust was a foreign trust for 
purposes of section 1446 and the regulations thereunder. Accordingly, 
all applicable additions to the tax, interest, and penalties shall apply 
to the partnership for its failure to pay 1446 tax under this paragraph 
(d)(2)(iii)(B), commencing with the installment period during which the 
partnership knows or has reason to know that this paragraph 
(d)(2)(iii)(B) applies. A publicly traded partnership within the meaning 
of Sec.  1.1446-4 (or a nominee required to pay 1446 tax under Sec.  
1.1446-4) will not be considered to know or have reason to know a 
domestic trust is being used to avoid the 1446 tax under this paragraph 
(d)(2)(iii)(B), provided the interest held in such entity by the 
domestic trust is publicly traded.
    (iv) Refunds to withholding agent. A withholding agent (i.e., the 
partnership) may obtain a refund of the 1446 tax paid (or deemed paid 
under Sec.  1.1446-5(b)) to the extent of the excess of the amount paid 
to the Internal Revenue Service by the partnership, over the 
partnership's section 1446 tax liability as determined by the sum of the 
total tax creditable to each partner indicated on all Forms 8805 for the 
taxable year. If a partnership issues Form 8805 to a partner, then the 
partnership may not claim a refund for any amount of tax shown on that 
form as paid on behalf of the partner. If a partnership incorrectly 
withholds upon a United States person under section 1446 of the Internal 
Revenue Code and issues a Form 8805 to that person, the partnership may 
not file for a refund of the amount incorrectly withheld. Instead, the 
United States person may file for a refund of that amount on its annual 
return. For rules concerning refunds to withholding agents who pay 1446 
tax on distributions of effectively connected income or gain under Sec.  
1.1446-4 (i.e., publicly traded partnerships or nominees), see Sec.  
1.1464-1.
    (v) 1446 tax treated as cash distribution to partners. Except as 
otherwise provided in this paragraph (d)(2)(v), a partnership's payment 
of 1446 tax on behalf of a foreign partner is treated under section 
1446(d) and this section as a deemed distribution of money to the 
partner on the earliest of the day on which the partnership paid the 
tax, the last day of the partnership's taxable year for which the amount 
was paid, or the last day on which the partner owned an interest in the 
partnership during the taxable year for which the tax was paid. However, 
a deemed distribution of money under section 1446(d) resulting from a 
partnership's installment payment of 1446 tax on behalf of a partner is 
treated as an advance or drawing of money under Sec.  1.731-1(a)(1)(ii) 
to the extent of the partner's distributive share of income for the 
partnership taxable year. The rule treating a deemed distribution as an 
advance or drawing of money under this paragraph (d)(2)(v) applies only 
for purposes of determining the tax results of the deemed distribution 
to the partner under sections 705, 731, and 733, and does not affect the 
date that the partnership is considered to have paid any installment of 
1446 tax for purposes of section 6655 (as applied through this section) 
or the date a foreign partner is deemed to have paid estimated tax by 
reason of such installment payment. See paragraph (d)(1)(i) of this 
section (permitting a partner to credit 1446 tax paid on the partner's 
behalf against the partner's estimated tax obligation). An amount 
treated as an advance or drawing of money is taken into account at the 
end of the partnership taxable year or the last day during the 
partnership's taxable year on which the partner owned an interest in the 
partnership. Any 1446 tax paid after the close of the partnership's 
taxable year, including amounts paid with the filing of Form 8804, that 
are on account of partnership ECTI allocated to partners for the prior 
taxable year shall be treated under section 1446(d) and this section as 
a distribution from the partnership on the earlier of the last day of 
the partnership's prior taxable year for which the tax is paid, or the 
last day in such prior taxable year on which such foreign partner held 
an interest in the partnership.

[[Page 299]]

    (vi) Examples. The following examples illustrate the application of 
this section. In considering the examples, disregard the potential 
application of paragraph (b)(2)(v)(F) of this section (relating to the 
de minimis exception to paying 1446 tax). The examples are as follows:
    (A) Example 1: Simple trust that reports entire amount of ECTI. PRS 
is a partnership that has two partners, FT, a foreign trust, and A, a 
U.S. person. FT is a simple trust under section 651. FT and A each 
provide PRS with a valid Form W-8BEN and Form W-9, respectively. FT has 
one beneficiary, NRA, a nonresident alien. PRS and FT each maintain a 
calendar taxable year. PRS estimated for each installment period during 
the partnership's taxable year that FT would be allocated $100 of ECTI 
for the taxable year, and that all such ECTI would be ordinary in 
character. Assume that the allocation of the $100 would be respected 
under section 704(b) and the regulations thereunder. PRS pays 
installments of 1446 tax based upon its estimates and timely pays a 
total of $37 of 1446 tax over the course of the partnership's taxable 
year ($100 ECTI x .37). Assume that PRS' estimates of ECTI allocable to 
FT during the taxable year equal the actual amount of ECTI allocable to 
FT for the taxable year. Assume also that FT's only income for the 
taxable year is the $100 of income from PRS, and that, pursuant to the 
terms of the trust's governing instrument and local law, the $100 of 
ECTI is not included in FT's fiduciary accounting income and the deemed 
distribution of the $37 withholding tax paid under paragraph (d)(2)(v) 
of this section is not included in FT's fiduciary accounting income. 
Accordingly, the $100 of ECTI is not income required to be distributed 
by FT, and FT may not claim a deduction under section 651 for this 
amount. FT must report the $100 of ECTI in its gross income and may 
claim a credit under section 33 as determined under paragraph 
(d)(2)(iii) of this section of $37 for the 1446 tax paid by PRS. NRA is 
not required to include any of the ECTI in gross income and accordingly 
may not claim a credit for any amount of the $37 of 1446 tax PRS paid.
    (B) Example 2: Simple trust that distributes a portion of ECTI to 
the beneficiary. Assume the same facts as in paragraph (d)(2)(vi)(A) of 
this section (Example 1), except that PRS distributes $60 to FT, which 
FT includes in its fiduciary accounting income under local law. FT will 
report the $100 of ECTI in its gross income and may claim a deduction 
for the $60 required to be distributed under section 651(a) to NRA. 
Pursuant to paragraph (d)(2)(iii) of this section, FT may claim a $14.8 
credit under section 33 for the 1446 tax PRS paid ($40/$100 multiplied 
by $37). NRA is required to include the $60 of the ECTI in gross income 
under section 652 (as ECTI) and may claim a $22.2 credit under section 
33 for the 1446 tax PRS paid ($37 less $14.8 or $60/$100 multiplied by 
$37).
    (C) Example 3: Complex trust that distributes entire ECTI to the 
beneficiary. Assume the same facts as in paragraph (d)(2)(vi)(A) of this 
section (Example 1), except that FT is a complex trust under section 
661. PRS distributes $60 to FT, which FT includes in its fiduciary 
accounting income. FT distributes the $60 of fiduciary accounting income 
to NRA and also properly distributes an additional $40 to NRA from FT's 
principal. FT will report the $100 of ECTI in its gross income and may 
deduct the $60 required to be distributed to NRA under section 661(a)(1) 
and may deduct the $40 distributed to NRA under section 661(a)(2). 
Pursuant to paragraph (d)(2)(iii) of this section, FT may not claim a 
credit under section 33 for any of the $37 of 1446 tax paid by PRS. NRA 
is required to include $100 of the ECTI in gross income under section 
662 (as ECTI) and may claim a $37 credit under section 33 for the 1446 
tax paid by PRS ($37 less $0).
    (e) Liability of partnership for failure to withhold--(1) In 
general. Every partnership required to pay 1446 tax is made liable for 
that tax by section 1461. Therefore, a partnership that is required to 
pay 1446 tax but fails to do so, or pays less than the amount required 
under this section, is liable under section 1461 for the payment of the 
tax required to be withheld under chapter 3 of the Internal Revenue Code 
and the regulations thereunder unless, and to the extent, the 
partnership can demonstrate pursuant to paragraph (e)(2) of

[[Page 300]]

this section, to the satisfaction of the Commissioner or his delegate, 
that a foreign partner has paid the full amount of tax required to be 
paid by such partner to the Internal Revenue Service. See paragraph 
(e)(3) of this section and section 1463 regarding a partnership's 
liability for penalties and interest even though a foreign partner has 
satisfied the underlying tax liability. See also Sec.  1.1461-3 for 
applicable penalties when a partnership fails to pay 1446 tax. See 
paragraph (b) of this section for an addition to the tax under section 
6655 when there is an underpayment of 1446 tax.
    (2) Proof that tax liability has been satisfied and deemed payment 
of 1446 tax. Proof of payment of tax may be established for purposes of 
paragraph (e)(1) of this section consistent with Sec.  1.1445-1(e)(3). 
Under that standard, a partnership must provide sufficient information 
to the IRS to determine that the partner's tax liability was satisfied 
or established to be zero in accordance with the rules of this section. 
Under this section, a partnership's liability for 1446 tax shall be 
deemed to have been satisfied (deemed payment), to the extent of the 
1446 tax due with respect to the ECTI allocable to a foreign partner, on 
the later of the date that such partner is considered to have paid all 
tax that is required to be shown on such partner's U.S. income tax 
return under section 6513(a) and (b)(2) (prescribing the date tax is 
considered paid for purposes of sections 6511(b)(2), (c), and 6512), or 
the last date for payment of the 1446 tax without extensions (the 
unextended due date for Form 8804). The deemed payment rule of this 
paragraph (e)(2) shall apply for purposes sections of 1446, 1461, and 
1463, and any additions to the tax, interest, or penalties potentially 
applicable to such partnership under section 1446, including sections 
6601, 6651, and 6655. Any deemed payment of 1446 tax under this 
paragraph (e)(2) shall not be treated as a deemed distribution under 
section 1446(d) and this section.
    (3) Liability for interest, penalties, and additions to the tax--(i) 
Partnership. Notwithstanding paragraph (e)(2) of this section, a 
partnership that fails to pay 1446 tax is not relieved from liability 
under section 6655 (as applied through this section) or for interest 
under section 6601, when applicable. See Sec.  1.1463-1. Such liability 
may exist even if there is no underlying tax liability due from a 
foreign partner on its allocable share of partnership ECTI. The addition 
to the tax under section 6655 or the interest charge under section 6601 
that is required by those sections shall be imposed as set forth in 
those sections, as modified by this section. The section 6601 interest 
charge shall accrue beginning on the last date prescribed for payment of 
the 1446 tax due under section 1461 (which is the due date, without 
extensions, for filing Form 8804). The section 6601 interest charge 
shall stop accruing on the 1446 tax liability on the date, and to the 
extent, that the unpaid tax liability under section 1446 is satisfied 
(or is deemed satisfied under this paragraph (e)). Further, a 
partnership's liability under section 6655 (as applied through this 
section) for any underpaid installment payment shall accrue beginning on 
the relevant installment payment date, and shall stop accruing on the 
earlier of the date (and to the extent) that the 1446 tax liability is 
actually satisfied or the date prescribed in paragraph (b)(2)(v)(C) of 
this section. See paragraph (e)(4) of this section for examples 
illustrating that a partner's payment of estimated tax has no effect on 
the partnership's calculation of its addition to the tax under section 
6655 and this section. See Sec.  1.1461-3 for a list of the additions to 
tax, interest, and penalties that may apply to a partnership that fails 
to comply with section 1446. See Sec.  1.1446-6(d)(2)(i) for exceptions 
to the application of the addition to the tax under section 6655 (as 
applied through this section) when a partnership reasonably relies on a 
foreign partner's certificate to reduce 1446 tax.
    (ii) Foreign partner. A foreign partner is permitted to reduce any 
addition to the tax under section 6654 or section 6655 by the amount of 
any section 6655 addition to the tax paid by the partnership with 
respect to the partnership's failure to pay adequate installment 
payments of the 1446 tax on ECTI allocable to the foreign partner.

[[Page 301]]

    (4) Examples. The following examples illustrate the application of 
this section. In considering the examples, disregard the potential 
application of paragraph (b)(2)(v)(F) of this section (relating to the 
de minimis exception to paying 1446 tax). Further, in each of the 
examples where a partnership is deemed to have paid 1446 tax with 
respect to ECTI allocable to a partner, it is assumed that the 
partnership has presented to the IRS the appropriate information under 
paragraph (e)(2) of this section for the IRS to conclude that the deemed 
payment is appropriate. The examples are as follows:
    (i) Example 1: Foreign partnership fails to pay 1446 tax and sole 
foreign partner fails to pay all tax required to be shown on partner's 
U.S. income tax return. (A) PRS is a foreign partnership engaged in a 
trade or business in the United States and has two equal partners, A, a 
U.S. person, and B, a nonresident alien. PRS is described in Sec.  
1.6081-5(a) (PRS keeps its books and records outside the United States 
and Puerto Rico) and, therefore, is required to file Form 8804 by the 
15th day of the 6th month following the close of its taxable year. Both 
partners and PRS are calendar year taxpayers. PRS has received a valid 
Form W-9 and W-8BEN from A and B, respectively, but has not received any 
other documents or certificates. B is engaged in multiple trades or 
businesses (including the PRS partnership) that give rise to effectively 
connected income. PRS will use an acceptable annualization method under 
this section for computing its 1446 tax.
    (B) In PRS's first year of operations (Year 1), PRS estimates for 
each installment period described in Sec.  1.1446-3 that B will be 
allocated $100 of ordinary ECTI for the taxable year. Therefore, for 
each installment period PRS is required to pay one fourth of the tax on 
the annualized ECTI allocable to B, or $9.25 (.25 x ($100 x .37)). PRS 
fails to make any installment payments. PRS's operations actually result 
in $100 of ECTI allocated to B. Therefore, PRS was required to have paid 
1446 tax of $37 on or before the due date, without extensions, for 
filing its Form 8804 which is June 15, Year 2 (the last date prescribed 
for payment of the 1446 tax). PRS does not file Forms 8804 or 8805.
    (C) B pays estimated taxes and makes the following payments on the 
following dates: June 15, Year 1--$20, September 15, Year 1--$15, and 
January 15, Year 2--$10. B's total estimated tax payments equal $45. B 
files its U.S. Federal income tax return timely on June 15, Year 2, and 
reports all effectively connected income required to be shown on its 
return. Assume that B's total correct tax liability as shown on the 
return is $50. B does not make a payment with its return and so B still 
owes $5 to the Internal Revenue Service (excluding any interest, 
penalties, and additions to the tax that may apply). Assume that B is 
not subject to an addition to the tax under section 6654.
    (D) Under the rules of paragraph (e)(2) of this section, for 
purposes of sections 1446, 1461, and 1463, PRS is not considered to have 
paid any 1446 tax because B has not paid all of B's U.S. income tax 
liability.
    (E) Further, under the principles of section 6655 and the rules of 
Sec.  1.1446-3(e), a partner's estimated tax payments will not affect 
the calculation of a partnership's addition to the tax. Accordingly, PRS 
will be liable under the principles of section 6655 and Sec.  1.1446-3 
for failing to withhold for each installment payment. The addition to 
the tax will accrue beginning with the due date of each installment 
payment on the $9.25 underpayment for each respective installment period 
and will continue to accrue until June 15, Year 2 (the date prescribed 
in paragraph (b)(2)(v)(C) of this section).
    (F) Further, beginning on June 15, Year 2 (the last date prescribed 
for payment of 1446 tax without extensions), PRS will be liable for 
interest under section 6601 with respect to the unpaid 1446 tax, $37. 
This interest will stop accruing on the earlier of the date that the 
1446 tax is paid by PRS or is deemed paid under paragraph (e)(2) of this 
section by reason of B's payment of its full tax liability.
    (G) Further, beginning on June 15, Year 2 (the due date for filing 
Form 8804), PRS will be liable for the addition to the tax under section 
6651(a)(1) for failing to file Form 8804. This addition to the tax 
accrues on the amount

[[Page 302]]

required to be shown as the 1446 tax liability on Form 8804, $37. This 
addition to the tax will accrue at the rate of 5 percent per month until 
the date that PRS files Form 8804 for Year 1, or the maximum accrual of 
the penalty (25 percent of the tax required to be shown on the return) 
under that section has been reached.
    (H) PRS may be liable for other penalties and additions to the tax 
for its failure to withhold or to furnish statements to its foreign 
partner B. See Sec.  1.1461-3 for a list of the penalties that may 
apply.
    (ii) Example 2: Foreign partnership fails to pay 1446 tax but sole 
foreign partner pays all tax required to be shown on the partner's U.S. 
income tax return. The facts are the same as paragraph (e)(4)(i)(A) of 
this section (Example 1), except that B pays $5 with the filing of B's 
return and has therefore paid all tax required to be shown on B's return 
within the meaning of paragraph (e)(2) of this section.
    (A) For purposes of sections 1446, 1461, and 1463, PRS is deemed to 
have paid its 1446 tax liability under paragraph (e)(2) of this section 
as of the later of the date that B is considered to have paid its tax 
under section 6513(a) and (b)(2) (June 15, Year 2) and the last date for 
PRS to pay its 1446 tax without extensions (also June 15, Year 2). 
Therefore, PRS is deemed to have paid all of its 1446 tax liability as 
of June 15, Year 2. PRS has no continuing liability for 1446 tax under 
section 1461, however, additions to the tax, interest, and penalties may 
apply.
    (B) For purposes of section 6655 and Sec.  1.1446-3, under paragraph 
(e)(2) PRS is deemed to have paid its 1446 tax on June 15, Year 2. Even 
if B had fully paid its tax liability as of March 15, Year 2, the rule 
in paragraph (e)(2) of this section would not deem PRS to have paid its 
1446 tax until June 15, Year 2. As a result, B's estimated tax payments 
will have no effect on PRS's calculation of its addition to the tax. The 
addition to the tax under 6655 and Sec.  1.1446-3 shall begin to accrue 
on each installment date with respect to the underpaid installment 
($8.75), and will stop accruing on June 15, Year 2, the date prescribed 
in paragraph (b)(2)(v)(C) of this section.
    (C) Because PRS is deemed to have paid its full 1446 tax liability 
as of June 15, Year 2 (the last date prescribed for payment of 1446 tax 
without extensions), PRS is not subject to an interest charge under 
section 6601, or a failure to file penalty under section 6651 (see 
section 6651(b)(1)).
    (D) PRS may be liable for other penalties and additions to the tax 
for its failure to withhold or to furnish statements to its foreign 
partner B. See Sec.  1.1461-3 for a list of the penalties that may 
apply.
    (E) If PRS had several foreign partners, PRS would conduct the same 
analysis as set forth above with respect to each partner. That is, under 
paragraph (e) of this section, PRS may be deemed to have paid 1446 tax 
with respect to the ECTI allocable to some but not all of its foreign 
partners.
    (iii) Example 3: Domestic partnership fails to pay 1446 tax but sole 
foreign partner fully pays all tax required to be shown on partner's 
U.S. income tax return. The facts are the same as paragraph (e)(4)(ii) 
introductory text of this section (Example 2), except that PRS is a 
domestic partnership whose last date prescribed for paying 1446 tax 
without extensions (i.e., generally the unextended due date for Form 
8804) is March 15, Year 2.
    (A) For purposes of sections 1446, 1461, and 1463, PRS is deemed to 
have paid its 1446 tax liability on the later of the date that B is 
considered to have paid tax under section 6513(a) and (b)(2) (June 15, 
Year 2) and the last date for paying 1446 tax without extensions (i.e., 
the unextended due date for Form 8804, March 15, Year 2). Accordingly, 
PRS is not considered to have fully paid its 1446 tax liability until 
June 15, Year 2. PRS has no continuing liability for 1446 tax under 
section 1461, however, additions to the tax, interest, and penalties may 
apply.
    (B) For purposes of section 6655 and Sec.  1.1446-3, PRS is subject 
to an underpayment addition to the tax that accrues on the same amount 
as in paragraphs (e)(4)(i) and (ii) of this section (Examples 1 and 2), 
respectively because PRS is not deemed to have paid 1446 tax under 
paragraph (e)(2) of this section until June 15, Year 2. The addition to 
the tax will stop accruing on the

[[Page 303]]

date prescribed in paragraph (b)(2)(v)(C) of this section (i.e., March 
15, Year 2, the due date, without extensions, for filing Form 8804).
    (C) For purposes of section 6601, as of the last date prescribed for 
paying 1446 tax without extensions (March 15, Year 2), PRS has not paid 
or been deemed to have paid any 1446 tax. Accordingly, the interest 
charge under section 6601 shall begin to accrue on March 15, Year 2, and 
shall accrue until the 1446 liability is paid or deemed to have been 
paid. In this case, the interest charge will accrue until June 15, Year 
2, the date that PRS is deemed to have paid its 1446 tax under paragraph 
(e)(2) of this section.
    (D) For purposes of section 6651(a)(1), as of March 15, Year 2, 
PRS's amount required to be shown as tax on its Form 8804 is $37. This 
amount cannot be reduced under section 6651(b)(1) because PRS is not 
deemed to have paid 1446 tax under paragraph (e)(2) of this section 
until June 15, Year 2, a date falling after the last date for PRS to pay 
its 1446 tax, March 15, Year 2. Accordingly, the failure to file penalty 
will begin to accrue on March 15, Year 2 (filing due date for Form 
8804), and shall stop accruing on the earlier of the date that PRS files 
Form 8804 or the maximum accrual of the penalty (25 percent of the 
amount required to be shown as tax on the return) is reached.
    (E) PRS may be liable for other penalties and additions to the tax 
for its failure to withhold or to furnish statements to its foreign 
partner B. See Sec.  1.1461-3 for a list of the penalties that may 
apply.
    (f) Effect of withholding on partner. The payment of the 1446 tax by 
a partnership does not excuse a foreign partner to which a portion of 
ECTI is allocable from filing a U.S. tax or informational return, as 
appropriate, with respect to that income. Information concerning 
installment payments of 1446 tax paid during the partnership's taxable 
year on behalf of a foreign partner shall be provided to such foreign 
partner in accordance with paragraph (d) of this section and such 
information may be taken into account by the foreign partner when 
computing the partner's estimated tax liability during the taxable year. 
Form 1040NR, ``U.S. Nonresident Alien Income Tax Return,'' Form 1065, 
``U.S. Return of Partnership Income,'' Form 1120F, ``U.S. Income Tax 
Return of a Foreign Corporation,'' or such other return as appropriate, 
must be filed by the partner, and any tax due must be paid, by the 
filing deadline (including extensions) generally applicable to such 
person. Pursuant to paragraph (d) of this section, a partner may 
generally claim a credit under section 33 for its share of any 1446 tax 
paid by the partnership against the amount of income tax (or 1446 tax in 
the case of tiers of partnerships) as computed in such partner's return. 
See Sec.  1.1446-3(e)(3)(ii) for rules permitting a partner to reduce 
its addition to tax under section 6654 or section 6655.

[T.D. 9200, 70 FR 28717, May 18, 2005, as amended by T.D. 9394, 73 FR 
23074, Apr. 29, 2008; T.D. 9821, 82 FR 33444, July 20, 2017; T.D. 9892, 
85 FR 5324, Jan. 30, 2020; T.D. 9394, 85 FR 35558, June 11, 2020; T.D. 
9926, 85 FR 76933, Nov. 30, 2020]



Sec.  1.1446-4  Publicly traded partnerships.

    (a) In general. This section sets forth rules for applying the 
section 1446 withholding tax (1446 tax) to publicly traded partnerships. 
A publicly traded partnership (as defined in paragraph (b) of this 
section) that has effectively connected gross income, gain or loss must 
pay 1446 tax by withholding from distributions to a foreign partner. 
Publicly traded partnerships that withhold on distributions must pay 
over and report any 1446 tax as provided in paragraph (c) of this 
section, and generally are not to pay over and report the 1446 tax under 
the rules in Sec.  1.1446-3. The amount of the withholding tax on 
distributions, other than distributions excluded under paragraph (f) of 
this section, that are made during any partnership taxable year, equals 
the applicable percentage (defined in paragraph (b)(2) of this section) 
of such distributions. For penalties and additions to the tax for 
failure to comply with this section, see Sec. Sec.  1.1461-1 and 1.1461-
3.
    (b) Definitions--(1) Publicly traded partnership. For purposes of 
this section, the term publicly traded partnership has the same meaning 
as in section 7704 (including the regulations

[[Page 304]]

thereunder), but does not include a publicly traded partnership treated 
as a corporation under that section.
    (2) Applicable percentage. For purposes of this section, applicable 
percentage shall have the meaning as set forth in Sec.  1.1446-3(a)(2), 
except that the partnership or nominee required to pay 1446 tax may not 
consider a preferential rate in computing the 1446 tax due with respect 
to a partner.
    (3) Nominee. For purposes of this section, the term nominee means a 
person that holds an interest in a publicly traded partnership on behalf 
of a foreign person and that is either a U.S. person, a qualified 
intermediary (as defined in Sec.  1.1441-1(e)(5)(ii)) that assumes 
primary withholding responsibility for the distribution, or a U.S. 
branch of a foreign person that agrees to be treated as a U.S. person 
(as described in Sec.  1.1441-1(b)(2)(iv)) with respect to the 
distribution. For purposes of this paragraph (b)(3), a U.S. branch or a 
qualified intermediary is a nominee only if it assumes primary 
withholding responsibility for the distribution for all purposes of 
chapters 3 and 4 of subtitle A of the Code.
    (4) Qualified notice. For purposes of this section, a qualified 
notice is a notice from a publicly traded partnership that states the 
amount of a distribution that is attributable to each type of income 
described in paragraphs (f)(3)(i) through (v) of this section. A 
qualified notice may also include the information described in Sec.  
1.1446(f)-4(b)(3) (relating to the 10-percent exception to withholding 
under section 1446(f)(1)) and the information described in Sec.  
1.1446(f)-4(c)(2)(iii) (relating to an adjustment to the amount realized 
for withholding under section 1446(f)(1)). The notice must be posted in 
a readily accessible format in an area of the primary public website of 
the publicly traded partnership that is dedicated to this purpose, and a 
copy of the notice must be delivered to any registered holder that is a 
nominee. A qualified notice must be posted and delivered to the 
registered holder by the date required for providing notice with respect 
to distributions described in 17 CFR 240.10b-17(b)(1) or (3) issued 
pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a) and 
contain the information described therein as it would relate to the 
distribution. The publicly traded partnership must keep the notice 
accessible to the public for ten years on its primary public website or 
the primary public website of any successor organization. No specific 
format is required unless otherwise prescribed by the Commissioner in 
forms or instructions or in publications or guidance published in the 
Internal Revenue Bulletin (see Sec. Sec.  601.601(d)(2) and 601.602 of 
this chapter). See paragraph (d) of this section regarding when a 
nominee is considered to have received a qualified notice.
    (c) Paying and reporting 1446 tax. The withholding tax required 
under this section is to be paid pursuant to the rules and procedures of 
section 1461, Sec. Sec.  1.1461-1, 1.1461-2, and 1.6302-2, as 
supplemented by the rules of this section. A withholding agent under 
this section must use Form 1042, ``Annual Withholding Tax Return for 
U.S. Source Income of Foreign Persons,'' and Form 1042-S, ``Foreign 
Person's U.S. Source Income Subject to Withholding,'' to report 
withholding from distributions under this section. See Sec.  1.1461-
1(b). Further, a withholding agent under this section may obtain a 
refund for 1446 tax paid in accordance with section 1464 and the 
regulations thereunder. See Sec.  1.1446-3(d)(1)(iv) and (vii) (relating 
to a foreign trust or estate that holds an interest in a publicly traded 
partnership) and Sec.  1.1446-5(d) (relating to a publicly traded 
partnership that is part of a tiered partnership structure) for 
additional guidance.
    (d) Rules for nominees required to withhold tax under section 1446--
(1) In general. A nominee that receives a distribution from a publicly 
traded partnership (or another nominee) that is to be paid to (or for 
the account of) any foreign person is treated as a withholding agent 
under this section. A nominee that fails to withhold pursuant to this 
section is subject to liability under section 1461, as well as 
applicable penalties and interest, as if the nominee were the 
partnership responsible for withholding. A nominee that receives a 
qualified notice that meets the requirements in paragraph (b)(4) of this 
section must withhold based on the amounts specified on the qualified

[[Page 305]]

notice. A nominee is treated as receiving a qualified notice on the date 
that the notice is posted to the publicly traded partnership's website 
or is received by the nominee in accordance with paragraph (b)(4) of 
this section. If a nominee properly withholds based on the amounts 
specified on a qualified notice, the nominee is not liable for any 
underwithholding on amounts that are effectively connected income, gain, 
or loss. Rather, the publicly traded partnership that issued the 
qualified notice is liable under section 1461 for underwithholding on 
such amounts. If a nominee does not receive a qualified notice that 
meets the requirements in paragraph (b)(4) of this section, or to the 
extent the qualified notice does not specify an amount, the nominee must 
withhold on the full amount of the distribution with respect to--
    (i) A foreign partner that is a corporation, at the greater of the 
highest rate of tax specified in section 11(b) or 881 (without regard to 
any reduction in the rate of tax permitted under an applicable income 
tax treaty);
    (ii) A foreign partner that is not a corporation, at the greater of 
the highest rate of tax specified in section 1 or 871 (without regard to 
any reduction in the rate of tax permitted under an applicable income 
tax treaty); or
    (iii) A foreign partner whose classification cannot be determined, 
at the higher of the rate determined under paragraph (d)(1)(i) or (ii) 
of this section.
    (2) Exception to nominee's withholding. A nominee is not required to 
withhold under paragraph (d)(1) of this section to the extent that it 
makes a payment of a distribution to a qualified intermediary or U.S. 
branch that is also a nominee for the distribution under paragraph 
(b)(3) of this section. For purposes of the preceding sentence, a 
nominee may treat a qualified intermediary or U.S. branch as a nominee 
for a distribution based on, respectively, a valid qualified 
intermediary withholding certificate described in Sec.  1.1441-
1(e)(3)(ii) or a valid U.S. branch withholding certificate described in 
Sec.  1.1446(f)-4(a)(2)(ii)(B) on which the qualified intermediary or 
U.S. branch represents that it assumes primary withholding 
responsibility with respect to the distribution.
    (e) Determining foreign status of partners. Except as provided in 
this paragraph (e), the rules of Sec.  1.1446-1 shall apply in 
determining whether a partner of a publicly traded partnership is a 
foreign partner for purposes of the 1446 tax. A partnership or nominee 
obligated to withhold under this section shall be entitled to rely on 
any of the forms acceptable under Sec.  1.1446-1 that it receives from 
persons on whose behalf it holds interests in the partnership to the 
same extent a partnership is entitled to rely on such forms under those 
rules. If a partnership or nominee pays a distribution to an entity that 
provides a valid qualified intermediary withholding certificate 
described in Sec.  1.1441-1(e)(3)(ii) indicating that the entity does 
not assume primary withholding responsibility for the distribution, for 
withholding under this section the partnership or nominee may instead 
rely on a withholding statement that allocates the distribution to--
    (1) A chapter 3 withholding rate pool (as described in Sec.  1.1441-
1(e)(5)(v)(C)) consisting of account holders that are foreign persons 
subject to withholding at the highest rate of tax specified in section 
1;
    (2) A chapter 3 withholding rate pool (as described in Sec.  1.1441-
1(e)(5)(v)(C)) consisting of account holders that are foreign persons 
subject to withholding at the highest rate of tax specified in section 
11(b);
    (3) A chapter 3 withholding rate pool (as described in Sec.  1.1441-
1(e)(5)(v)(C)) consisting of account holders that are foreign persons 
not subject to withholding; or
    (4) Each account holder for which a form acceptable under Sec.  
1.1446-1 is provided.
    (f) Distributions subject to withholding--(1) In general. Except as 
provided in this paragraph (f)(1), a publicly traded partnership must 
withhold at the applicable percentage with respect to any actual 
distribution made to a foreign partner. The amount of a distribution 
subject to 1446 tax includes the amount of any 1446 tax required to be 
withheld on the distribution. In the case of a partnership (upper-tier 
partnership) that receives a

[[Page 306]]

partnership distribution from another partnership in which it is a 
partner (lower-tier partnership) (i.e., a tiered structure described in 
Sec.  1.1446-5), any 1446 tax that was paid by the lower-tier 
partnership may be credited by the upper-tier partnership and shall be 
treated as a distribution under section 1446. For example, a foreign 
publicly traded partnership, UTP, owns an interest in domestic publicly 
traded partnership, LTP. LTP makes a distribution subject to section 
1446 of $100 to UTP during its taxable year beginning January 1, 2020, 
and withholds 37 percent (the highest rate in section 1) ($37) of that 
distribution under section 1446. UTP receives a net distribution of $63 
which it immediately redistributes to its partners. UTP has a liability 
to pay 37 percent of the total actual and deemed distribution it makes 
to its foreign partners as a section 1446 withholding tax. UTP may 
credit the $37 withheld by LTP against this liability as if it were paid 
by UTP. See Sec. Sec.  1.1462-1(b) and 1.1446-5(b)(1). When UTP 
distributes the $63 it actually receives from LTP to its partners, UTP 
is treated for purposes of section 1446 as if it made a distribution of 
$100 to its partners ($63 actual distribution and $37 deemed 
distribution). UTP's partners (U.S. and foreign) may claim a credit 
against their U.S. income tax liability for their allocable share of the 
$37 of 1446 tax paid on their behalf.
    (2) In-kind distributions. If a publicly traded partnership 
distributes property other than money, the partnership shall not release 
the property until it has funds sufficient to enable the partnership to 
pay over in money the required 1446 tax.
    (3) Ordering rule relating to distributions. Distributions from 
publicly traded partnerships are deemed to be paid out of the following 
types of income in the order indicated--
    (i) Amounts attributable to income described in section 1441 or 1442 
that are not effectively connected with the conduct of a trade or 
business in the United States and are subject to withholding under Sec.  
1.1441-2(a);
    (ii) Amounts attributable to income described in section 1441 or 
1442 that are not effectively connected with the conduct of a trade or 
business in the United States and are not subject to withholding under 
Sec.  1.1441-2(a);
    (iii) Amounts attributable to income effectively connected with the 
conduct of a trade or business in the United States that are not subject 
to withholding under Sec. Sec.  1.1446-1 through 1.1446-6;
    (iv) Amounts subject to withholding under Sec. Sec.  1.1446-1 
through 1.1446-6; and
    (v) Amounts not listed in paragraphs (f)(3)(i) through (iv) of this 
section.
    (4) Coordination with section 1445(e)(1). Except as otherwise 
provided in this section, a publicly traded partnership that complies 
with the requirements of withholding under section 1446 and this section 
will be deemed to have satisfied the requirements of section 1445(e)(1) 
and the regulations thereunder. Notwithstanding the excluded amounts set 
forth in paragraph (f)(3) of this section, distributions subject to 
withholding at the applicable percentage shall include the following--
    (i) Amounts subject to withholding under section 1445(e)(1) upon 
distribution pursuant to an election under Sec.  1.1445-5(c)(3) of the 
regulations; and
    (ii) Amounts not subject to withholding under section 1445 because 
the distributee is a partnership or is a foreign corporation that has 
made an election under section 897(i).

[T.D. 9200, 70 FR 28717, May 18, 2005, as amended by T.D. 9926, 85 FR 
76934, Nov. 30, 2020; 86 FR 13191, Mar. 8, 2021]



Sec.  1.1446-5  Tiered partnership structures.

    (a) In general. The rules of this section shall apply in cases where 
a partnership (lower-tier partnership) that has effectively connected 
taxable income (ECTI), has a partner that is a partnership (upper-tier 
partnership). Except as provided in paragraph (e) of this section, if an 
upper-tier domestic partnership directly owns an interest in a lower-
tier partnership, the lower-tier partnership is not required to pay the 
section 1446 withholding tax (1446 tax) with respect to the upper-tier 
partnership's allocable share of net income, regardless of whether the 
upper-tier domestic partnership's partners are foreign. Paragraph (b) of 
this section prescribes the reporting requirements for upper-tier and 
lower-tier

[[Page 307]]

partnerships subject to section 1446. Paragraph (c) of this section 
prescribes rules requiring a lower-tier partnership to look through an 
upper-tier foreign partnership to a partner of such upper-tier 
partnership to the extent it has sufficient documentation to determine 
the status of such partner and determine such partner's indirect share 
of the lower-tier partnership's effectively connected taxable income 
(ECTI). Paragraph (d) of this section prescribes rules applicable to a 
publicly traded partnership in a tiered partnership structure. Paragraph 
(e) of this section prescribes rules permitting a domestic upper-tier 
partnership to elect to apply the look through rules of paragraph (c) of 
this section. Paragraph (f) of this section sets forth examples 
illustrating the rules of this section.
    (b) Reporting requirements--(1) In general. Notwithstanding 
paragraph (c) of this section, to the extent that an upper-tier 
partnership that is a foreign partnership is a partner in a lower-tier 
partnership, and the lower-tier partnership has paid 1446 tax (including 
installment payments of such tax) with respect to ECTI allocable to the 
upper-tier partnership, the lower-tier partnership shall comply with 
Sec. Sec.  1.1446-1 through 1.1446-3 and provide the upper-tier 
partnership notice of such payments and a copy of the statements and 
forms filed with respect to the upper-tier partnership's interest in the 
lower-tier partnership (e.g., Form 8805, ``Foreign Partner's Information 
Statement of Section 1446 Withholding Tax''). The upper-tier partnership 
may treat the 1446 tax (or any installment of such tax) paid by the 
lower-tier partnership on its behalf as a credit against its liability 
to pay 1446 tax (or any installment of such tax), as if the upper-tier 
partnership actually paid over the amounts at the time that the amounts 
were paid by the lower-tier partnership. See Sec.  1.1462-1(b) and Sec.  
1.1446-3(d). To the extent required in Sec.  1.1446-3(d)(1)(iii), the 
upper-tier partnership will file Form 8804, ``Annual Return for 
Partnership Withholding Tax (Section 1446),'' and Form 8805, ``Foreign 
Partner's Information Statement of Section 1446 Withholding Tax,'' for 
each of its foreign partners with respect to its 1446 tax obligation. To 
the extent the upper-tier partnership does not claim a refund of the 
1446 tax it paid (or is considered to have paid), the upper-tier 
partnership will pass the credit for the 1446 tax paid to its partners 
on the Forms 8805 it issues. See Sec.  1.1446-3(d). The rules of this 
paragraph (b) shall apply to an upper-tier and lower-tier partnership to 
the extent that an election has been made and consented to under 
paragraph (e) of this section.
    (2) Publicly traded partnerships. In the case of an upper-tier 
foreign partnership that is a publicly traded partnership, the rules of 
Sec.  1.1446-4(c) shall apply. See also paragraph (d) of this section.
    (c) Look through rules for foreign upper-tier partnerships. For 
purposes of computing the 1446 tax obligation of a lower-tier 
partnership, if an upper-tier foreign partnership owns an interest in 
the lower-tier partnership, the upper-tier partnership's allocable share 
of ECTI from the lower-tier partnership shall be treated as allocable to 
a partner of the upper-tier partnership, to the extent of such partner's 
indirect share of such ECTI (as if such partner were a direct partner in 
the lower-tier partnership), if--
    (1) The upper-tier foreign partnership furnishes the lower-tier 
partnership a valid Form W-8IMY, ``Certificate of Foreign Intermediary, 
Flow Through Entity, or Certain U.S. Branches for United States Tax 
Withholding,'' indicating that it is a look-through foreign partnership 
for purposes of section 1446; and
    (2) The lower-tier partnership can reliably associate (within the 
meaning of Sec.  1.1441-1(b)(2)(vii)) effectively connected partnership 
items allocable to the upper-tier partnership (and indirectly to such 
partner) with a Form W-8 (e.g., Form W-8BEN), Form W-9, ``Request for 
Taxpayer Identification Number and Certification,'' or other form 
acceptable under Sec.  1.1446-1, establishing the status of such partner 
provided by the upper-tier partnership. The lower-tier partnership 
required to pay 1446 tax must be able to provide the information 
necessary for the IRS to determine the chain of ownership, allocation of 
effectively connected items at each partnership level, as well as to the 
ultimate beneficial owner of

[[Page 308]]

the effectively connected items, and whether the amount of 1446 tax paid 
was appropriate. This information should permit each partnership in the 
tiered structure and the IRS to reliably associate any effectively 
connected items allocable to such upper-tier partnership, as well as to 
the ultimate beneficial owner of the effectively connected items. The 
principles of Sec.  1.1441-1(b)(2)(vii) shall apply to determine whether 
a lower-tier partnership can reliably associate effectively connected 
partnership items allocable to the upper-tier partnership with a partner 
of the upper-tier partnership. To the extent the lower-tier partnership 
receives a valid Form W-8IMY from the upper-tier partnership but cannot 
reliably associate a portion of the upper-tier partnership's allocable 
share of effectively connected partnership items with a partner of such 
upper-tier partnership, then the lower-tier partnership shall pay 1446 
tax on such portion at the higher of the applicable percentages in 
section 1446(b). See Sec.  1.1446-3(a)(2) for the treatment of any 
income or gain potentially subject to a preferential rate. If a lower-
tier partnership has not received a valid Form W-8IMY from the upper-
tier partnership, the lower-tier partnership shall withhold on the 
upper-tier partnership's entire allocable share of ECTI at the higher of 
the applicable percentages in section 1446(b). The look through regime 
set forth in this paragraph (c) is for purposes of computing the lower-
tier partnership's 1446 tax obligation only and does not alter the 
persons considered to be partners in the lower-tier partnership for 
partnership reporting purposes (e.g., issuing Form 8805, Schedule K-1).
    (d) Publicly traded partnerships--(1) Upper-tier publicly traded 
partnership. The rules set forth in paragraph (c) shall not apply to 
look through an upper-tier partnership whose interests are publicly 
traded (as defined in Sec.  1.1446-4(b)(1)).
    (2) Lower-tier publicly traded partnership. The look through rules 
of paragraph (c) of this section shall apply, if the requirements of 
that paragraph are met, to a lower-tier partnership that is a publicly 
traded partnership within the meaning of Sec.  1.1446-4(b)(1) only if 
the upper-tier partnership is not described in paragraph (d)(1) of this 
section. For example, a lower-tier publicly traded partnership (or 
nominee) shall look through an upper-tier foreign partnership (or 
domestic partnership to the extent an election is made and consented to 
under paragraph (e) of this section) when computing its 1446 tax 
liability, provided the upper-tier partnership is not a publicly traded 
partnership and the appropriate documentation needed to satisfy the 
standards set forth in Sec.  1.1441-1(b)(2)(vii) and paragraph (c) of 
this section have been furnished.
    (e) Election by a domestic upper-tier partnership to apply look 
through rules--(1) In general. Subject to the rules of this paragraph 
(e), a domestic partnership that is a partner in a lower-tier 
partnership may elect to apply the rules of this section 1.1446-5 and 
have the lower-tier partnership look through such upper-tier partnership 
to the partners of such domestic partnership for purposes of computing 
the lower-tier partnership's 1446 tax liability. A domestic partnership 
shall make this election by attaching to the Form W-9 submitted to the 
lower-tier partnership, a written statement and information (described 
in paragraph (e)(2) of this section) that identifies the upper-tier 
partnership as a domestic partnership and that states that such 
partnership is making the election under this paragraph (e). This 
paragraph (e)(1) shall not apply to a publicly traded partnership 
described in Sec.  1.1446-4(b)(1). See paragraph (d)(1) of this section.
    (2) Information required for valid election statement. In addition 
to the requirements of paragraphs (e)(1) and (3) of this section, the 
election statement submitted under this paragraph (e)(2) is not valid 
and cannot be accepted by the lower-tier partnership pursuant to 
paragraph (e)(3) of this section unless the upper-tier partnership 
attaches valid documentation pursuant to Sec.  1.1446-1 (e.g., Form W-
8BEN) with respect to one or more of its foreign partners. The 
information and documentation submitted with the election must comply 
with the rules of this section to permit the lower-tier partnership to 
reliably associate (within the meaning of Sec.  1.1441-1(b)(2)(vii)) at 
least a portion of

[[Page 309]]

the upper-tier partnership's allocable share of ECTI with one or more 
foreign partners of the upper-tier partnership. The election statement 
must identify the upper-tier partnership by name, address, and TIN, and 
specify the percentage interest the domestic partnership holds in the 
lower-tier partnership. The statement may also include such information 
the upper-tier partnership deems necessary to enable the lower-tier 
partnership to apply the provisions of this section. If at any time the 
upper-tier partnership determines that the information or documentation 
previously provided to the lower-tier partnership is no longer correct, 
the upper-tier partnership shall update such information and 
documentation. Except as provided in paragraph (e)(3) of this section, 
an election that is effective under this paragraph (e) shall apply for 
subsequent taxable years until such upper-tier partnership revokes the 
election in writing. A revocation under this section shall be effective 
for any installment due date arising more than 15 days subsequent to the 
date that the lower-tier partnership receives such revocation.
    (3) Consent of lower-tier partnership. An election made under this 
paragraph (e) is not effective until the lower-tier partnership consents 
in writing to the upper-tier partnership that it agrees to apply the 
provisions of this section. A lower-tier partnership may not consent to 
an election submitted under this paragraph (e) for any installment date 
or Form 8804 filing date arising within 15 days of the lower-tier 
partnership's receipt of such election. The lower-tier partnership's 
written consent must specify the extent to which it will look through 
the upper-tier partnership in computing its 1446 tax (or any installment 
of such tax). To the extent that the lower-tier partnership does not 
consent to an election to apply the look through provisions of paragraph 
(c) of this section, the lower-tier partnership shall consider such 
portion of the upper-tier partnership's allocable share of ECTI as 
allocable to a domestic person for purposes of computing its 1446 tax 
obligation. A lower-tier partnership that has consented to an election 
under this paragraph (e) may revoke or modify its consent, in writing, 
at any time.
    (f) Examples. The following examples illustrate the provisions of 
this section. In considering the examples, disregard the potential 
application of Sec.  1.l446-3(b)(2)(v)(F) (relating to the de minimis 
exception to paying 1446 tax). The examples are as follows:

    Example 1. Sufficient documentation--tiered partnership structure. 
(i) Nonresident alien (NRA) and foreign corporation (FC) are partners in 
PRS, a foreign partnership, and share profits and losses in PRS 70 and 
30 percent, respectively. All of PRS's partnership items are allocated 
based upon each partner's respective ownership interest and it is 
assumed that these allocations are respected under section 704(b) and 
the regulations thereunder. NRA and FC each furnish PRS with a valid 
Form W-8BEN establishing themselves as a foreign individual and foreign 
corporation, respectively. PRS holds a 40 percent interest in the 
profits, losses and capital of LTP, a lower-tier partnership. NRA holds 
the remaining 60 percent interest in profits, losses and capital of LTP. 
All of LTP's partnership items are allocated based upon each partner's 
respective ownership interest and it is assumed that these allocations 
are respected under section 704(b) and the regulations thereunder. LTP 
has $100 of annualized ECTI for the relevant installment period. All of 
this income is ordinary income and there is no potential application of 
a preferential rate applicable percentage under Sec.  1.1446-3(a)(2). 
Further, Sec.  1.1446-6 does not apply. PRS has no income other than the 
income allocated from LTP. PRS provides LTP with a valid Form W-8IMY 
indicating that it is a foreign partnership and attaches the valid Form 
W-8BENs executed by NRA and FC, as well as a statement describing the 
allocation of PRS's effectively connected items among its partners. The 
information that PRS submits to LTP is sufficient to permit LTP to 
reliably associate (within the meaning of Sec.  1.1441-1(b)(2)(vii)) 
PRS's allocable share of effectively connected items with NRA and FC 
pursuant to this section. Further, NRA provides a valid Form W-8BEN to 
LTP.
    (ii) LTP must pay 1446 tax on the $60 allocable to its direct 
partner NRA using the applicable percentage for non-corporate partners 
(the highest rate in section 1).
    (iii) With respect to the effectively connected partnership items 
that LTP can reliably associate with NRA through PRS (70 percent of 
PRS's 40 percent allocable share ($40), or $28), LTP will pay 1446 tax 
on NRA's allocable share of LTP's ECTI (as determined by looking through 
PRS) using the applicable percentage for non-corporate partners (the 
highest rate in section 1).

[[Page 310]]

    (iv) With respect to the effectively connected partnership items 
that LTP can reliably associate with FC through PRS (30 percent of PRS's 
40 percent allocable share ($40), or $12), LTP will pay 1446 tax on FC's 
allocable share of LTP's ECTI (as determined by looking through PRS) 
using the applicable percentage for corporate partners (the highest rate 
in section 11).
    (v) LTP's payment of the 1446 tax is treated as a distribution to 
NRA and PRS, its direct partners, that those partners may credit against 
their respective tax obligations. PRS will report its 1446 tax 
obligation with respect to its direct foreign partners, NRA and FC, on 
the Form 8804 and Forms 8805 that it files with the Internal Revenue 
Service pursuant to paragraph (b) of this section and will credit the 
amount withheld by LTP on its Form 8804. This credit will satisfy PRS's 
1446 tax liability as reported on the Form 8804 it files because PRS's 
only income is from LTP, and LTP paid 1446 tax with respect to all of 
PRS's allocable share in LTP by looking through to PRS's partners NRA 
and FC. Further, PRS will pass along the credit for the 1446 tax 
withheld by LTP to its partners, NRA and FC on the Form 8805 issued to 
each partner. The credit passed to each partner on Form 8805 will be 
treated as a distribution to the respective partners under section 
1446(d).
    Example 2. Insufficient documentation--tiered partnership structure. 
(i) LTP is a domestic partnership that has two equal partners A and PRS. 
A is a nonresident alien and PRS is a foreign partnership that has two 
equal foreign partners, C and D. Neither A nor PRS provides LTP with a 
valid Form W-8 or Form W-9. Neither C nor D provides PRS with a valid 
Form W-8 or Form W-9. Pursuant to Sec.  1.1446-1(c)(3), LTP must presume 
that PRS is a foreign person subject to withholding under section 1446 
at the higher of the highest rate under section 1 or section 11(b)(1). 
LTP has also not received any documentation with respect to A. LTP must 
presume that A is a foreign person, and, if LTP knows that A is an 
individual, compute and pay 1446 tax, subject to Sec.  1.1446-3(a)(2), 
based on that knowledge.
    (ii) Assume a change of facts where C provides a form W-8 (e.g., 
Form W-8BEN) to PRS, and PRS in turn, furnishes that form to LTP along 
with its Form W-8IMY, and information regarding how effectively 
connected items are allocated to C and D. Based upon the additional 
facts, LTP can reliably associate one-half of PRS's allocable share of 
ECTI with documentation related with C. Therefore, under paragraph 
(c)(2) of this section, LTP will look through PRS to C when computing 
its 1446 tax to the extent of C's indirect share and will not look 
through with respect to the remainder of PRS's allocable share (D's 
indirect share).

[T.D. 9200, 70 FR 28717, May 18, 2005, as amended by T.D. 9394, 73 FR 
23074, Apr. 29, 2008]



Sec.  1.1446-6  Special rules to reduce a partnership's 1446 tax with
respect to a foreign partner's allocable share of effectively 
connected taxable income.

    (a) In general--(1) Purpose and scope. This section provides rules 
regarding when a partnership required to pay withholding tax under 
section 1446 (1446 tax), or an installment of 1446 tax, may consider 
certain partner-level deductions and losses in computing its 1446 tax 
obligation under Sec.  1.1446-3, or otherwise not pay a de minimis 
amount of 1446 tax due with respect to a nonresident alien individual 
partner. A partnership determines the applicability of the rules of this 
section on a partner-by-partner basis for each installment period and 
when completing its Form 8804, ``Annual Return for Partnership 
Withholding Tax (Section 1446),'' and paying 1446 tax for the 
partnership taxable year. Except with respect to certain state and local 
taxes paid by the partnership on behalf of the partner, to apply the 
rules of this section with respect to a foreign partner, the partnership 
must receive a certificate from such partner for each partnership 
taxable year. Paragraph (b) of this section identifies the foreign 
partners to which this section applies. Paragraph (c) of this section 
identifies the deductions and losses that a foreign partner may certify 
to the partnership as well as the state and local taxes paid by the 
partnership on behalf of the foreign partner that can be taken into 
account without a certification, and establishes an exception that 
permits a partnership to not pay a de minimis amount of 1446 tax with 
respect to a nonresident alien partner. Paragraph (c) of this section 
also sets forth the requirements for a valid certificate. Paragraphs 
(a)(2) and (d) of this section establish when a partnership may rely on 
and consider a foreign partner's certificate in computing its 1446 tax, 
and the effects of relying on

[[Page 311]]

such a certificate. Paragraph (d) of this section also describes the 
effects of a partnership relying on a certificate (including an updated 
certificate) and the reporting requirements of a partnership with 
respect to a certificate. Paragraph (e) of this section sets forth 
examples that illustrate the rules of this section. Paragraph (f) of 
this section provides the Effective/Applicability date. Paragraph (g) of 
this section provides a transition rule.
    (2) Reasonable reliance on a certificate. Subject to Sec.  1.1446-2 
and the rules of this section, a partnership receiving a certificate 
(including an updated certificate or status update under paragraph 
(c)(2)(ii)(B) of this section) of deductions and losses from a partner 
provided in accordance with the provisions of this section may 
reasonably rely on such certificate (to the extent of the certified 
deductions and losses or other representations set forth in the 
certificate) until such time that it has actual knowledge or reason to 
know that the certificate is defective or that the time for receiving an 
updated certificate or status update from the partner under paragraph 
(c)(2)(ii)(B) of this section has expired. For this purpose, a 
partnership shall be considered to have actual knowledge or reason to 
know that a certificate is defective upon receipt of written 
notification from the IRS under paragraph (c)(3) or (c)(5) of this 
section.
    (b) Foreign partner to whom this section applies--(1) In general. 
Except as otherwise provided in paragraph (b)(3) of this section, a 
foreign partner to whom this section applies is a foreign partner that 
meets the requirements of this paragraph (b)(1).
    (i) The partner has provided valid documentation to the partnership 
to which a certificate is submitted under this section in accordance 
with Sec.  1.1446-1.
    (ii) If the partner's current taxable year is the first taxable year 
in which the partner submits a certificate to any partnership, the 
partner has filed (or will file) a qualifying U.S. income tax return for 
each of its three taxable years ending before the end of the 
partnership's taxable year for which the partner is submitting a 
certificate (regardless of whether it was a partner in that partnership 
during each of these years). A qualifying U.S. income tax return for a 
taxable year that is prior to the first taxable year the partner submits 
a certificate to any partnership is a U.S. income tax return filed 
within the time specified in paragraph (b)(2)(iii) of this section.
    (iii) If the current taxable year of the partner is not the first 
taxable year in which the partner submits a certificate to any 
partnership, the partner met the requirements in paragraph (b)(1)(ii) of 
this section for the first taxable year in which it submitted a 
certificate to any partnership and has filed (or will file) a qualifying 
U.S. income tax return for its first taxable year in which it submitted 
a certificate to any partnership and each subsequent taxable year ending 
before the beginning of the current taxable year (regardless of whether 
it was a partner in any partnership during each of those years). A 
qualifying U.S. income tax return for a taxable year that is prior to 
the taxable year the partner submits a certificate to any partnership is 
a U.S. income tax return filed within the time specified in paragraph 
(b)(2)(iii) of this section.
    (iv) The partner files a qualifying U.S. income tax return (within 
the meaning of paragraph (b)(2)(iii) of this section) for its taxable 
year in which a certificate is provided to any partnership.
    (2) Definitions--(i) U.S. income tax return. A U.S. income tax 
return means a Form 1040NR, ``U.S. Nonresident Alien Income Tax 
Return,'' in the case of a nonresident alien individual and a Form 
1120F, ``U.S. Income Tax Return of a Foreign Corporation,'' in the case 
of a foreign corporation.
    (ii) Timely-filed. Only for purposes of this section, a U.S. income 
tax return shall be considered timely-filed if the return is filed on or 
before the due date set forth in section 6072(c), plus any extension of 
time to file such return granted under section 6081.
    (iii) Qualifying U.S. income tax return. A U.S. income tax return 
shall constitute a qualifying U.S. income tax return if the return 
reports income or gain that is effectively connected with a U.S. trade 
or business or deductions

[[Page 312]]

or losses properly allocated and apportioned to such activities and if 
the return is described in paragraph (b)(2)(iii)(A), (B), or (C) of this 
section. A protective return described in Sec.  1.874-1(b)(6) or Sec.  
1.882-4(a)(3)(vi) is not a qualifying U.S. income tax return for 
purposes of this section.
    (A) A U.S. income tax return for a partner's preceding taxable year 
in which it did not submit a certificate to any partnership (but not 
including a taxable year following the first taxable year in which the 
partner submitted a certificate to any partnership), with a due date as 
set forth in section 6072(c), not including any extensions of time to 
file, which falls before the beginning of the current partnership 
taxable year for which the certificate is provided is described in this 
paragraph (b)(2)(iii)(A) if the return is filed and all amounts due with 
respect to such return (including interest, penalties, and additions to 
tax, if any) are paid on or before the earlier of--
    (1) The date that is one year after the due date set forth in 
section 6072(c) for such return, not including any extensions of time to 
file; or
    (2) The date on which the certificate for the current partnership 
taxable year is submitted to the partnership.
    (B) A U.S. income tax return for a partner's preceding taxable year 
in which it did not submit a certificate to any partnership (but not 
including a taxable year following the first taxable year in which the 
partner submitted a certificate to any partnership), with a due date as 
set forth in section 6072(c), not including any extensions of time to 
file, which falls within the current partnership taxable year for which 
the certificate is provided is described in this paragraph 
(b)(2)(iii)(B) if the return is timely-filed and all amounts due with 
respect to such return are timely paid.
    (C) A U.S. income tax return for a taxable year in which the partner 
submits a certificate to any partnership and for a taxable year 
following the first taxable year in which the partner submits a 
certificate to any partnership is described in this paragraph 
(b)(2)(iii)(C) if the return is timely-filed and all amounts due with 
such return are timely paid with respect to such return.
    (3) Special rules--(i) In the case of a partnership (upper-tier 
partnership) that is a partner in another partnership (lower-tier 
partnership)--
    (A) The rules of this section may apply to reduce or eliminate the 
1446 tax (or any installment of such tax) of the lower-tier partnership 
with respect to a foreign partner of the upper-tier partnership only to 
the extent the provisions of Sec.  1.1446-5 apply to look through the 
upper-tier partnership to the foreign partner of such upper-tier 
partnership and the certificate described in paragraph (c) of this 
section is provided by such foreign partner to the upper-tier 
partnership and, in turn, provided to the lower-tier partnership with 
other appropriate documentation (see Sec.  1.1446-5(c) and (e));
    (B) An upper-tier partnership that submits a certificate of 
deductions and losses or a de minimis certificate to a lower-tier 
partnership may not submit that certificate to another lower-tier 
partnership;
    (C) An upper-tier partnership that relies on a certificate submitted 
to it by a foreign partner under this section for computing its 1446 tax 
due on effectively connected taxable income (ECTI) allocable to that 
partner (other than ECTI allocable to it from a lower-tier partnership) 
may not submit that certificate to any lower-tier partnership; and
    (D) In addition to any other information required by this section, a 
lower-tier partnership must submit with a Form 8813, ``Partnership 
Withholding Tax Payment Voucher (Section 1446),'' and Form 8805, 
``Foreign Partner's Information Statement of Section 1446 Withholding 
Tax,'' for which it relies on a certificate from an upper-tier 
partnership to reduce the 1446 tax due with respect to a foreign partner 
of the upper-tier partnership, sufficient information so that the IRS 
may reliably associate the ECTI and the certificate of deductions and 
losses with the partner in the upper-tier partnership submitting the 
certificate, including the name, taxpayer identification number (TIN) 
and allocation of effectively connected items at each partnership tier,

[[Page 313]]

as well as to the ultimate upper-tier partner submitting the 
certificate.
    (ii) This section shall not apply to a partner that is a foreign 
estate or its beneficiaries.
    (iii) This section shall not apply to a partner that is a trust or 
to its beneficiaries, except to the extent that such trust is owned by a 
grantor or other person under subpart E of subchapter J of the Internal 
Revenue Code, the documentation requirements of Sec.  1.1446-1 have been 
met by the grantor or other owner of such trust, and the certificate 
described in paragraph (c) of this section is provided by the grantor or 
other owner of such trust to the partnership.
    (iv) This section shall not apply to a partner in a publicly-traded 
partnership subject to Sec.  1.1446-4.
    (c) Reduction of 1446 tax with respect to a foreign partner--(1) 
General rules. Under paragraph (c)(1)(i) of this section a foreign 
partner to whom this section applies may certify to a partnership for a 
partnership taxable year that it has certain deductions (other than 
charitable deductions) and losses properly allocated and apportioned to 
gross income that is effectively connected (or treated as effectively 
connected) with the conduct of the partner's trade or business in the 
United States, and that the partner reasonably expects those deductions 
and losses to be available and claimed on the partner's U.S. income tax 
return to be filed for that taxable year. Under paragraph (c)(1)(ii) of 
this section, a nonresident alien individual partner to whom this 
section applies may also certify to a partnership for a partnership 
taxable year that its only investment or activity giving rise to 
effectively connected items for the partnership's taxable year that ends 
with or within the partner's taxable year is (and will be) the partner's 
investment in the partnership. A certificate submitted by a foreign 
partner to a partnership under this section must be in accordance with 
the form and requirements set forth in paragraph (c)(2)(ii) of this 
section. Under paragraph (c)(1)(iii) of this section, a partnership may 
take into account certain state and local taxes withheld by the 
partnership on behalf of the partner.
    (i) Certified deductions and losses--(A) Deductions and losses from 
the partnership. Under this paragraph (c)(1)(i)(A), a partner may 
certify to a partnership for a partnership taxable year deductions 
(other than charitable deductions) and losses properly allocated and 
apportioned to gross income which is effectively connected (or treated 
as effectively connected) with the conduct of the partner's trade or 
business in the United States, that are reported on a Form 1065 
(Schedule K-1), ``Partner's Share of Income, Credits, Deductions, 
etc.,'' issued (or to be issued) to the partner by the partnership for a 
prior partnership taxable year, that are (or will be) reported on a 
qualifying U.S. income tax return for a partner's taxable year that ends 
before the installment due date or the close of the partnership taxable 
year for which the partner is certifying such deductions and losses, and 
that the partner reasonably expects to be available and claimed on a 
qualifying U.S. income tax return for the partner's taxable year ending 
with or after the close of the partnership taxable year. A partner that 
has a loss reported on a Form 1065 (Schedule K-1) issued (or to be 
issued) to the partner by the partnership for a prior partnership 
taxable year, but that is not (and will not be) reported on a qualifying 
U.S. income tax return for a prior taxable year of the partner because 
the loss is suspended under section 704(d) may also certify such 
suspended loss to the partnership under this paragraph (c)(1)(i)(A).
    (B) Deductions and losses from other sources. Under this paragraph 
(c)(1)(i)(B), a foreign partner may certify to a partnership for a 
partnership taxable year deductions (other than charitable deductions) 
and losses properly allocated and apportioned to gross income that is 
effectively connected (or treated as effectively connected) with the 
conduct of the partner's trade or business in the United States and that 
are from sources other than the partnership to whom the certificate is 
submitted if the deductions and losses are (or will be) reported on a 
qualifying U.S. income tax return of the partner for a taxable year that 
ends before the installment due date or the close of the partnership 
taxable year for which the

[[Page 314]]

partner is certifying the deductions and losses and the partner 
reasonably expects the deductions and losses to be available and claimed 
on the qualifying U.S. income tax return filed for its taxable year 
ending with or after the close of the partnership taxable year. Any 
deductions and losses certified under this paragraph (c)(1)(i)(B) that 
are allocated to the partner from another partnership must be reported 
on a Form 1065 (Schedule K-1) issued (or to be issued) to the partner by 
such other partnership. However, the partner may not certify any 
deduction or loss allocated to it from another partnership that is 
suspended under section 704(d).
    (C) Limit on the consideration of a partner's net operating loss 
deduction. A partnership may not consider a net operating loss deduction 
(as determined under section 172) certified by the partner under this 
paragraph (c)(1)(i) in an amount greater than the percentage limitation, 
if any, provided in section 56(a)(4) and (d) multiplied by the partner's 
allocable share of ECTI from the partnership reduced by all other 
certified deductions and losses whether or not taken into account by the 
partnership, as well as deductions considered under paragraph 
(c)(1)(iii) of this section.
    (D) Limitation on losses subject to certain partner level 
limitations. Pursuant to paragraph (c)(2)(i) of this section, a partner 
must identify any certified losses or deductions that are subject to 
special limitations at the partner level (for example, sections 465 and 
469) and provide information to the partnership that will allow the 
partnership to take the special limitations into account. For example, 
where a partner certifies a loss to the partnership that is a passive 
activity loss under section 469, the partner shall identify the 
activities the partnership conducts that the partner expects will be 
passive activities. The partnership shall then ensure that these 
limitations are taken into account when determining the 1446 tax due 
with respect to the partner.
    (E) Certification of deductions and losses to other partnerships. 
Deductions and losses certified to a partnership for a taxable year of 
the partnership may not be certified for the taxable year of another 
partnership that begins or ends with or within the taxable year of the 
partnership to which the deductions and losses were certified.
    (F) Partner level use of deductions and losses certified to a 
partnership. Any deductions and losses certified to a partnership for a 
taxable year of the partner and considered by the partnership in 
computing its section 1446 tax due may not be considered by that partner 
for the same taxable year in computing the amount of its required 
installments under section 6654(d) or 6655(d) on income unrelated to the 
partnership to which the partner has submitted the certificate.
    (ii) De minimis certificate for nonresident alien individual 
partners--(A) In general. Under this paragraph (c)(1)(ii), a nonresident 
alien individual partner to whom this section applies and that satisfies 
the requirements of paragraph (c)(1)(ii)(B) of this section may certify 
to a partnership that its only activity giving rise to effectively 
connected income, gain, deduction, or loss for the partnership's taxable 
year that ends with or within the partner's taxable year is (and will 
be) the partner's investment in the partnership. A partnership that 
receives a certificate from a nonresident alien partner under this 
paragraph (c)(1)(ii) and that may reasonably rely on such certificate is 
not required to pay 1446 tax (or any installment of such tax) with 
respect to such partner if the partnership estimates that the annualized 
(or, in the case of a partnership completing its Form 8804, the actual) 
1446 tax otherwise due with respect to such partner is less than $1,000, 
without taking into account any deductions or losses certified by the 
partner to the partnership under paragraph (c)(1)(i) of this section or 
any amounts under paragraph (c)(1)(iii) of this section.
    (B) Requirements for exception. The requirements of this paragraph 
(c)(1)(ii)(B) are met if the nonresident individual alien partner's only 
activity giving rise to effectively connected income, gain, deduction, 
or loss for the partnership taxable year that ends with or within the 
partner's taxable year is (and will be) the partner's investment in the 
partnership. For this purpose, if the partner has (or has reason to 
expect to have) income or gain

[[Page 315]]

described in section 864(c)(6), such income or gain shall be considered 
derived from a separate investment activity. A certificate submitted by 
a nonresident alien individual partner under this paragraph (c)(1)(ii) 
is valid even if such certificate does not certify deductions and losses 
to partnership under this section. A nonresident alien individual 
partner that submits a certificate to a partnership under this paragraph 
(c)(1)(ii) must notify the partnership in writing and revoke such 
certificate within 10 days of the date that the partner invests or 
otherwise engages in another activity that may give rise to effectively 
connected income, gain, deduction, or loss for the partner's taxable 
year. For example, while an investment in a U.S. real property interest 
(as defined in section 897(c)) would not give rise to an activity 
requiring a notification (unless an election is in effect under section 
871(d)), the disposition of the U.S. real property interest would give 
rise to an activity requiring a notification.
    (iii) Consideration of certain current year state and local taxes. 
In addition to any deductions and losses certified by a foreign partner 
to a partnership under paragraph (c)(1)(i) of this section, the 
partnership may consider as a deduction of such partner 90-percent of 
any state and local income taxes withheld and remitted by the 
partnership on behalf of such partner with respect to the partner's 
allocable share of partnership ECTI. The partnership may consider the 
amount of state and local taxes of the foreign partner determined under 
this paragraph (c)(1)(iii) regardless of whether the foreign partner 
submits a certificate to the partnership under paragraph (c)(1)(i) or 
(ii) of this section.
    (2) Form and time of certification--(i) Form of certification. A 
partner's certification to a partnership under paragraph (c)(1)(i) or 
(iii) of this section shall be made using Form 8804-C, ``Certificate Of 
Partner-Level Items to Reduce Section 1446 Withholding'' in accordance 
with the instructions of the form and the rules of this section.
    (ii) Time for certification provided to partnership--(A) First 
certificate submitted for a partnership's taxable year. Provided the 
other requirements of this section are met, a partnership may only rely 
on the first certificate received from a foreign partner for any 1446 
tax installment due or Form 8804 filing due (without regard to 
extensions) on or after the date on which the certificate is received. 
See Sec.  1.1446-3 for 1446 tax installment due dates. See also 
paragraph (e) of this section for examples illustrating the rules of 
this paragraph (c)(2).
    (B) Updated certificates and status updates--(1) Preceding year tax 
returns not yet filed. If a foreign partner's U.S. income tax return for 
a preceding taxable year has not been filed as of the time the partner 
submits to the partnership its first certificate under this paragraph 
(c), the certificate shall specify this fact and set forth the filing 
due date for such return set forth in section 6072(c), plus any 
extension of time to file such return granted under section 6081 and the 
regulations under section 6081. The partner shall also submit an updated 
certificate to the partnership in accordance with this paragraph (c) 
within 10 days of the date the partner files its U.S. income tax return 
for any such taxable year. In addition, prior to the partnership's final 
1446 tax installment due date the partner shall provide to the 
partnership, under penalties of perjury, a status update regarding any 
U.S. income tax return for the prior taxable year that has not (or will 
not) be filed as of the final installment due date. The status update 
must identify the due date, set forth in section 6072(c), plus any 
extension of time to file such return granted under section 6081 and the 
regulations under section 6081, for any un-filed return identified in 
the first certificate and state whether the first certificate submitted 
may continue to be considered by the partnership. If the partnership 
does not receive an updated certificate or a status update from the 
partner prior to the partnership's final installment due date, the 
partnership shall disregard the partner's certificate when computing the 
1446 tax due with respect to that partner for the final installment 
period and when completing its Form 8804 for the taxable year. In 
addition, the foreign partner shall not be permitted to submit an 
additional or substitute certificate for the disregarded

[[Page 316]]

certificate. See Sec.  1.1446-3(b)(2)(i) for computation requirements 
for installment payments of 1446 tax when a partnership receives, or 
fails to receive, an updated certificate or status update. See also 
paragraph (e)(2) Examples 4 and 8 of this section. Notwithstanding this 
paragraph (c)(2)(ii)(B)(1), a partner that can meet the requirements of 
this section for a subsequent partnership taxable year may submit a 
certificate to the partnership under this section for such taxable year.
    (2) Other circumstances requiring an updated certificate. If at any 
time during the partnership taxable year the partner determines that its 
most recent certificate furnished to the partnership for such taxable 
year is incorrect, then the partner shall submit to the partnership an 
updated certificate in accordance with this paragraph (c) within 10 days 
of such determination. For example, if the partner determines that the 
amount or character of the certified deductions or losses is incorrect, 
the partner shall submit an updated certificate to the partnership. See 
Sec.  1.1446-3(b)(2)(i) for computation requirements for installment 
payments of 1446 tax when a partnership receives an updated certificate.
    (3) Form and content of updated certificate. The updated certificate 
required by this paragraph (c)(2)(ii) must be provided using the form 
and instructions identified in paragraph (c)(2)(i) of this section. The 
updated certificate must indicate that it is an updated certificate 
filed in accordance with this paragraph (c)(2)(ii). The partner is not 
required to attach to the updated certificate a copy of the certificate 
that is being updated (superseded certificate).
    (4) Partnership consideration of an updated certificate. A 
partnership may consider an updated certificate, that meets the 
requirements of this paragraph (c), that is received prior to an 
installment due date in the same partnership taxable year for which the 
superseded certificate was provided, or prior to the due date of its 
Form 8804 (without regard to extensions) to be filed for the year the 
superseded certificate was provided. A partnership must consider an 
updated certificate that meets all the requirements of this paragraph 
(c) if it would increase the amount of 1446 tax the partnership would 
pay by the next installment due date, if any, or the due date of its 
Form 8804. An updated certificate considered by the partnership under 
this paragraph (c)(2)(ii)(B)(4) supersedes all prior certificates 
submitted by the foreign partner for the same partnership taxable year, 
beginning with the installment period or Form 8804 filing date for which 
the partnership considers the updated certificate. See paragraph (e)(2) 
Example 4 of this section.
    (3) Notification to partnership when a partner's certificate cannot 
be relied upon. If the IRS determines, in its discretion based on all 
the facts and circumstances, that a foreign partner's certificate is 
defective (or that it lacks information sufficient to make this 
determination after providing written request for such information to 
the partnership), the IRS shall notify the partnership of such 
determination in writing. Upon receipt of such written notification, the 
partnership shall not rely on any certificate submitted by that foreign 
partner for the partnership taxable year to which the defective 
certificate relates (or any subsequent partnership taxable year), until 
the IRS provides written notification to the partnership revoking or 
modifying the original written notification. For purposes of this 
section, a foreign partner's certificate of deductions and losses shall 
be defective if--
    (i) The partner is not described in paragraph (b) of this section;
    (ii) Any deductions or losses set forth in such certificate are not 
described in paragraph (c)(1)(i) of this section;
    (iii) The timing requirements under paragraph (c)(2) of this section 
for submitting an original certificate, an updated certificate or a 
status update to the partnership are not met;
    (iv) The certificate does not include all of the information 
required by paragraph (c)(2)(i) of this section;
    (v) Any representation made on the certificate is incorrect;
    (vi) The actual amount of deductions and losses available to the 
partner is less than the amount of deductions and losses certified to 
the partnership for

[[Page 317]]

the partnership taxable year and considered by the partnership in 
determining its 1446 tax due; or
    (vii) There is a failure to comply with any other provision of this 
section.
    (4) Partner to receive copy of notice. If the IRS notifies a 
partnership under paragraph (c)(3) of this section that a certificate of 
a foreign partner is defective, the IRS shall send a copy of such notice 
to the partner's address as shown on the certificate. The partnership 
shall also promptly furnish a copy of the IRS notice to such partner.
    (5) Notification to partnership when no foreign partner's 
certificate can be relied upon. If the IRS determines, in its discretion 
based on all the facts and circumstances, that there would be a 
substantial reduction in section 1446 tax as a result of the submission 
of one or more defective certificates or that a substantial portion of 
all certificates being submitted by partners to the partnership and by 
the partnership to the IRS are defective (or lack information sufficient 
to make this determination), then the IRS shall notify the partnership 
of such determination in writing. Upon receipt of such written 
notification, the partnership shall not rely on any certificate 
submitted by any partner for the partnership taxable year to which the 
notice relates or any subsequent partnership taxable year, until the IRS 
provides written notification to the partnership revoking or modifying 
the original notice.
    (6) Partnership notification to partner regarding use of deductions 
and losses. Unless Sec.  1.1446-3(d)(1)(i)(A) or (B) applies (relating 
to waiver of notice of tax paid during the partnership taxable year), a 
partnership must notify each foreign partner of the amount of such 
partner's certified deductions and losses and state and local taxes, if 
any, taken into account under this paragraph (c) in determining the 1446 
tax due with respect to such partner for each installment period or Form 
8804 filing date, as applicable.
    (7) Partner's certificate valid only for partnership taxable year 
for which submitted. A partnership that receives a certificate from a 
partnership under this paragraph (c) shall consider such certificate 
only for the partnership taxable year for which the certificate is 
submitted, as set forth on the certificate.
    (d) Effect of certificate of deductions and losses on partners and 
partnership--(1) Effect on partner--(i) No effect on liability for 
income tax of foreign partner. A foreign partner that certifies 
deductions and losses to a partnership under this section is not 
relieved of liability for income tax on its allocable share of ECTI from 
the partnership. Further, the submission of a certificate under this 
section does not constitute an acceptance by the IRS of the amount or 
character of the deductions or losses certified therein.
    (ii) No effect on partner's estimated tax obligations. A foreign 
partner that certifies deductions and losses to a partnership under this 
section is not relieved of any estimated tax obligation otherwise 
applicable to such partner with respect to income or gain allocated to 
such partner from the partnership.
    (iii) No effect on partner's obligation to file U.S. income tax 
return. The submission of a certificate under paragraph (c) of this 
section does not relieve the foreign partner from its obligation to file 
a U.S. income tax return even if as a result of the partnership 
considering the certificate the partner would have no additional tax due 
with such return. See also Sec.  1.1446-3(f).
    (2) Effect on partnership--(i) Reasonable reliance to relieve 
partnership from addition to tax under section 6655. A partnership that 
has reasonably relied on a certificate received from a foreign partner 
and complied with the filing requirements of paragraph (d)(3)(i) of this 
section, shall not be liable for any addition to tax under section 6655 
(as applied through Sec.  1.1446-3) for any period during which the 
partnership reasonably relied on such certificate, even if such 
certificate is later determined to be defective or the partner submits 
an updated certificate under paragraph (c)(2) of this section that 
increases the 1446 tax due with respect to such partner.
    (ii) Continuing liability for withholding tax under section 1461 and 
for applicable interest and penalties--(A) In general. Except as 
otherwise provided in this section, a partnership that has reasonably 
relied on a certificate received

[[Page 318]]

from a foreign partner and complied with the filing requirements of 
paragraph (d)(3)(i) of this section, is not relieved from liability for 
the 1446 tax (or any installment of such tax) under section 1461, any 
additions to the tax, interest or penalties. However, the partnership 
may be relieved of additions to the tax or penalties in certain 
circumstances. See Sec. Sec.  301.6651-1(c) and 301.6724-1 of this 
chapter. Further, see Sec.  1.1446-3(e) which deems a partnership to 
have paid 1446 tax with respect to ECTI allocable to a partner in 
certain circumstances. See also paragraph (e)(2) Example 5 of this 
section.
    (B) Certificate defective because of amount or character of 
deductions and losses. If a certificate is determined to be defective 
because the actual amount of deductions and losses available to the 
partner is less than the amount reflected on the certificate (other than 
when it is determined that the partner certified the same deduction or 
loss to more than one partnership), or because the character of the 
certified deductions and losses is erroneous, the partnership shall be 
liable for 1446 tax under section 1461 (or any installment of such tax) 
with respect to such partner to the extent the partnership considered an 
amount of certified deductions and losses greater than the amount 
actually available to the partner and permitted to be used under 
Sec. Sec.  1.1446-1 through 1.1446-5 and this section, or to the extent 
that the proper character of the certified deductions and losses results 
in a greater amount of 1446 tax due with respect to such partner. See 
paragraph (e)(2) Example 6 of this section.
    (3) Partnership level rules and requirements--(i) Filing 
requirement. A partnership that relies in whole or in part on a 
certificate received from a partner under this section in computing its 
1446 tax due with respect to such partner must still file Form 8813 or 
Form 8804 and 8805, whichever is applicable, for the period for which 
the certificate is considered, even if as a result of relying on the 
certificate no 1446 tax (or an installment of such tax) is due with 
respect to such foreign partner. See generally Sec.  1.1446-3(d)(1). 
Except as otherwise provided in this paragraph (d)(3)(i), the 
partnership must attach a copy of the foreign partner's certificate, and 
the computation of the 1446 tax due with respect to such partner, to 
both the Form 8813 and Form 8805 filed with the IRS for any installment 
period or year for which such certificate is considered in computing the 
partnership's 1446 tax. See Sec.  1.1446-3(d)(1)(iii) requiring the 
partnership to furnish Form 8805 to the IRS and such foreign partner 
even if no 1446 tax is paid on behalf of the partner. The partnership 
must include in that computation the amount of state and local taxes 
described in paragraph (c)(1)(iii) of this section taken into account in 
computing the 1446 tax due with respect to that partner. The partnership 
must also attach a computation of the 1446 tax due with respect to a 
partner for whom only state and local taxes described in paragraph 
(c)(1)(iii) are taken into account. For an installment period other than 
the first installment period for which the partnership considers a 
foreign partner's certificate or updated certificate, the partnership 
may, instead of attaching any partner's certificate, attach to Form 8813 
a list containing the name, TIN, the amount of certified deductions and 
losses, and the amount of state and local taxes the partnership may 
consider under paragraph (c)(1)(iii) of this section for each foreign 
partner whose certificate was relied upon. For purposes of the preceding 
sentence, if the partnership is relying on a certificate received under 
paragraph (c)(1)(ii) of this section, instead of providing the amounts 
described in the prior sentence, it should attach a statement to Form 
8813 which provides that, relying on that certificate, no 1446 tax is 
due with respect to that partner.
    (ii) Reasonable cause for failure to timely file a valid certificate 
and computation. This paragraph (d)(3)(ii) provides the sole source of 
relief for a partnership that fails to timely file a valid certificate 
or attach a computation of 1446 tax as required under paragraph 
(d)(3)(i) of this section. To permit the partnership to reasonably rely 
on such certificate, the partnership shall be considered to have 
satisfied the requirements of paragraph (d)(3)(i) of this section if the 
partnership demonstrates that such failure was due to reasonable

[[Page 319]]

cause and not willful neglect and if once the partnership becomes aware 
of the failure, the partnership attaches the certificate and 
computation, as well as a written statement setting forth the reasons 
for the failure to comply with the requirements of paragraph (d)(3)(i) 
of this section, to an amended Form 8813 or amended Forms 8804 and 8805 
for the relevant period. All such submissions should be sent to the 
address provided in the instructions to Form 8804-C.
    (A) Determining reasonable cause. In determining whether the 
partnership has reasonable cause, the Director shall consider whether 
the partnership acted reasonably and in good faith considering all the 
facts and circumstances.
    (B) Notification. If the IRS has notified, as provided in paragraph 
(c)(3) of this section, the partnership that the certificate is 
defective or that no foreign partner's certificate may be relied upon, 
as provided in paragraph (c)(5) of this section, the partnership will be 
deemed not to have acted reasonably and in good faith. Otherwise, the 
Director shall notify the partnership in writing within 120 days of the 
amended filing if it is determined that the failure to comply was not 
due to reasonable cause, or if additional time will be needed to make 
such determination. If the Director fails to notify the partnership 
within 120 days of the amended filing, the partnership shall be 
considered to have demonstrated to the Director that such failure was 
due to reasonable cause and not willful neglect.
    (e) Examples. (1) The rules of this section are illustrated by the 
examples in paragraph (e)(2) of this section. In 2008, the relevant rate 
of withholding for foreign partners that were not corporations (that is, 
the highest rate in section 1 as specified in Sec.  1.1446-3(a)(2)(i)) 
was 35%, and the due date for filing Form 8804 for domestic calendar 
year partnerships (that is, the date specified in Sec.  1.1446-
3(d)(1)(iii)) was April 15. Except as otherwise provided, in each 
example assume:
    (i) Section 1.1446-3(b)(2)(v)(F) (relating to the de minimis 
exception to paying 1446 tax) does not apply;
    (ii) Paragraph (c)(1)(ii) of this section (relating to a nonresident 
alien individual partner whose sole investment generating effectively 
connected income or gain is the partnership) does not apply;
    (iii) All income and losses are ordinary;
    (iv) For purposes of applying paragraph (c)(1)(i)(C) of this 
section, the percentage limitation under section 56(a)(4) and (d) is 90 
percent;
    (v) Any loss is not a passive activity loss within the meaning of 
section 469;
    (vi) The partnership uses an acceptable annualization method under 
Sec.  1.1446-3;
    (vii) NRA is a nonresident alien individual who maintains a calendar 
taxable year for U.S. tax purpose;
    (viii) B and C are U.S. individuals who maintain a calendar taxable 
year; and
    (ix) Any partnership maintains a calendar taxable year.
    (2) The examples are as follows:

    Example 1. Qualifying U.S. income tax return. (i) NRA and B form a 
partnership (PRS) in year 4 to conduct a trade or business in the United 
States. NRA and B provide PRS appropriate documentation under Sec.  
1.1446-1 to establish their status for purposes of section 1446. NRA 
submits a certificate to PRS (using Form 8804-C) on March 20, year 4, to 
be considered by PRS in determining its 1446 tax due with respect to NRA 
for the first installment period in the year 4. The Form 8804-C states 
that NRA reasonably expects to have an effectively connected net 
operating loss of $5,000 available to offset its allocable share of ECTI 
from PRS in year 4. Prior to year 4, NRA had not submitted a certificate 
to a partnership under this section. NRA filed (or will file) its year 1 
U.S. income tax return on March 11, year 3; its year 2 U.S. income tax 
return on February 12, year 4; its year 3 U.S. income tax return on 
April 13, year 4; and its year 4 U.S. income tax return on May 14, year 
5. NRA paid or (will pay) all amounts due with respect to the returns 
(including interest, penalties, and additions to tax, if any) by the 
date they are filed. NRA's years 1 though 3 U.S. income tax returns 
report income or gain effectively connected with a U.S. trade or 
business or deductions or losses properly allocated and apportioned to 
such activities.
    (ii) To be eligible to submit a certificate of deductions and losses 
to PRS under this section, NRA must satisfy the requirements of 
paragraph (b)(1) of this section. In accordance with Sec.  1.1446-1, NRA 
provided valid documentation to PRS to establish its status for purposes 
of section 1446. NRA's year 1 U.S. income tax return is a qualifying 
U.S.

[[Page 320]]

income tax return because it reported income or gain effectively 
connected with a U.S. trade or business or deductions or losses properly 
allocated and apportioned to such activities and is described under 
paragraph (b)(2)(iii)(A) of this section. Although NRA filed its year 1 
return after the due date of the return (determined under section 
6072(c) without regard to any extension of time to file) the return was 
filed on March 11, year 3, which was on or before the earlier of June 
15, year 3, the date one year after its section 6072(c) due date without 
regard to any extension of time to file, and March 20, year 4, the date 
on which NRA submitted the certificate to PRS. NRA's year 2 U.S. income 
tax return is a qualifying U.S. income tax return because it reported 
income or gain effectively connected with a U.S. trade or business or 
deductions or losses properly allocated and apportioned to such 
activities and is described under paragraph (b)(2)(iii)(A) of this 
section. Although NRA filed its year 2 return after the due date of the 
return (determined under section 6072(c) without regard to any extension 
of time to file) the return was filed on February 12, year 4, which was 
on or before the earlier of June 15, year 4, the date one year after its 
section 6072(c) due date without regard to any extension of time to 
file, and March 20, year 4, the date on which NRA submitted the 
certificate to PRS. NRA's year 3 U.S. income tax return is a qualifying 
U.S. income tax return because it reported income or gain effectively 
connected with a U.S. trade or business or deductions or losses properly 
allocated and apportioned to such activities and is described under 
paragraph (b)(2)(iii)(B) of this section. Because NRA filed its year 3 
U.S. income tax return on April 13, year 4, the return will be 
considered timely-filed under paragraph (b)(2)(ii) of this section, as 
the due date under section 6072(c) was June 15, year 4. NRA's year 4 
U.S. income tax return is a qualifying U.S. income tax return because it 
reported income or gain effectively connected with a U.S. trade or 
business or deductions or losses properly allocated and apportioned to 
such activities and is described under paragraph (b)(2)(iii)(C) of this 
section. Because NRA filed its year 4 U.S. income tax return on May 14, 
year 5, the return will be considered timely-filed under paragraph 
(b)(2)(ii) of this section. Accordingly, NRA meets the conditions of 
paragraph (b)(1) of this section and is eligible to provide a 
certificate of deductions and losses to PRS for year 4.
    Example 2. Subsequent year qualifying U.S. income tax return. (i) 
Assume the same facts as in Example 1. Further, NRA and C form a second 
partnership (XYZ) in year 7 to conduct a trade or business in the United 
States. NRA and C provide XYZ appropriate documentation under Sec.  
1.1446-1 to establish their status for purposes of section 1446. NRA did 
not submit a certificate under this section to any partnership for years 
5 and 6. NRA submits a certificate to XYZ (using Form 8804-C) on April 
10, year 7, to be considered by XYZ in determining its 1446 tax due with 
respect to NRA for its first installment period in year 7. The 
certificate states that NRA reasonably expects to have an effectively 
connected net operating loss of $8,000 available to offset its allocable 
share of ECTI from XYZ in year 7. Further, the certificate contains all 
of the necessary representations required under this section. NRA will 
file its U.S. income tax return for year 5 on March 25, year 7, (after 
its section 6072(c) due date and any extension of time to file that 
could have been granted under section 6081), its U.S. income tax return 
for year 6 on April 26, year 7; and its U.S. income tax return for year 
7 on May 27, year 8. NRA will pay all amounts due with the returns 
(including interest, penalties, and additions to tax, if any) by the 
dates they are filed. NRA's years 5, 6, and 7 U.S. income tax returns 
will report income or gain that is effectively connected with a U.S. 
trade or business or deductions or losses properly allocated and 
apportioned to such activities.
    (ii) To be eligible to submit a certificate of deductions and losses 
to XYZ under this section, NRA must satisfy the requirements of 
paragraph (b)(1) of this section. NRA provided valid documentation to 
XYZ in accordance with Sec.  1.1446-1. As described in Example 1, NRA's 
year 4 U.S. income tax return is a qualifying U.S. income tax return 
because it will report income or gain effectively connected with a U.S. 
trade or business and is described under paragraph (b)(2)(iii)(C) of 
this section. Although NRA's year 5 U.S. income tax return reports 
income or gain effectively connected with a U.S. trade or business or 
deductions or losses properly allocated and apportioned to such 
activities it is not a qualifying U.S. income tax return under paragraph 
(b)(2)(iii) of this section. Because NRA submitted a certificate to PRS 
in year 4, to constitute a qualifying U.S. income tax return the year 5 
U.S. income tax return must be timely-filed and all amounts due with 
such return must be timely paid. See paragraph (b)(2)(iii)(C) of this 
section. However, NRA will not file its U.S. income tax return for year 
5 until March 25, year 7, (after its section 6072(c) due date and any 
extension of time to file that could have been granted under section 
6081). Because the year 5 tax return is not a qualifying U.S. income tax 
return under paragraph (b)(2)(iii) of this section, NRA does not satisfy 
the requirements of paragraph (b)(1)(ii) of this section and, therefore, 
may not submit a certificate of deductions and losses to XYZ under this 
section in year 7.
    Example 3. General application of the rules of this section. NRA and 
B form a partnership (PRS) to conduct a trade or business in the

[[Page 321]]

United States. NRA and B are equal partners under the partnership 
agreement. NRA and B provide PRS appropriate documentation under Sec.  
1.1446-1 to establish their status for purposes of section 1446. Prior 
to the formation of PRS, NRA had not invested in or engaged in the 
conduct of a U.S. trade or business. PRS incurs a $1,500 effectively 
connected net operating loss in years 1 and 2. The loss incurred in each 
is allocated equally between NRA and B. NRA has filed a qualifying U.S. 
income tax return (within the meaning of paragraph (b)(2)(iii) of this 
section) for years 1 and 2 that report its allocable share of effective 
connected net operating loss allocated to it from PRS, as reported on 
the Form 1065 (Schedule K-1) issued to NRA for each year.
    (i) In year 3, NRA may not submit a certificate to PRS under 
paragraph (c) because it will not have filed qualifying U.S. income tax 
returns for the preceding three years. In year 3, PRS has ECTI of $1,000 
that is allocated equally between NRA and B. PRS satisfies its 1446 tax 
obligation with respect to NRA for year 3.
    (ii) In year 4, PRS estimates that it will have ECTI of $4,000, 
which will be allocated equally between NRA and B. On or before April 
15th of year 4 (the first installment due date), NRA submits a 
certificate to PRS under this section (using Form 8804-C) certifying 
that it reasonably expects to have an effectively connected net 
operating loss of $1,000 ($750 loss in both years 1 and 2, less $500 of 
income in year 3) available to offset its allocable share of ECTI from 
PRS in year 4. As of the date the certificate is submitted, NRA has 
received the Form 1065 (Schedule K-1) from PRS for year 3 but has not 
yet filed its U.S. income tax return for year 3.
    (iii) With respect to year 4, and based upon paragraph (b)(1) of 
this section, NRA can include year 3 (NRA's preceding taxable year) as 
one of the preceding three years that it has filed or will file 
qualifying U.S. income tax returns (within the meaning of paragraph 
(b)(2)(iii) of this section). Therefore, provided PRS has, in accordance 
with paragraph (a)(2) of this section, no actual knowledge or reason to 
know the certificate is defective, PRS may reasonably rely on NRA's 
certificate. Accordingly, PRS may consider NRA's certificate to reduce 
the 1446 tax that would otherwise be required to be paid on NRA's 
behalf. Specifically, subject to paragraph (c)(1)(i)(C) of this section, 
the $1,000 of net losses that have been reported on Forms 1065 (Schedule 
K-1) issued to NRA that are available to reduce NRA's U.S. income tax on 
NRA's allocable share of effectively connected income or gain allocable 
from PRS may be used to reduce the $2,000 of ECTI estimated to be 
allocable to NRA. As a result, PRS must pay 1446 tax on only $1,100 of 
NRA's allocable share of partnership ECTI for the first installment 
period in year 5 ($2,000-($1,000 x .90)). PRS must pay 1446 tax of 
$96.25 for its first installment period with respect to the ECTI 
allocable to NRA ($1,100 (net ECTI after considering certified losses) x 
.35 (withholding tax rate) x .25 (section 6655(e)(2)(B) percentage for 
the first installment period)). See Sec.  1.1446-3(b)(2). Pursuant to 
paragraph (d)(3) of this section, PRS must attach NRA's certificate and 
PRS's computation of its 1446 tax obligation with respect to NRA to its 
Form 8813, ``Partnership Withholding Tax Payment Voucher (Section 
1446),'' filed for the first installment period. Under paragraph 
(c)(2)(ii)(B) of this section, NRA is required to provide an updated 
certificate on or before the 10th day after NRA files its U.S. income 
tax return for year 3, even if the updated certificate results in no 
change to the amount of deductions and losses reported on the superseded 
certificate.
    (iv) The results are the same if NRA had not yet received a Form 
1065 (Schedule K-1) from PRS for year 3. See paragraph (c)(1)(i)(A) of 
this section.
    Example 4. Updated certificate submitted for losses. On January 1, 
year 8, NRA and B form a partnership (PRS) to conduct a trade or 
business in the United States. NRA and B are equal partners in PRS. NRA 
and B provide PRS appropriate documentation under Sec.  1.1446-1 to 
establish their status for purposes of section 1446. During years 1 
through 7 NRA held an interest in another partnership (XYZ) that 
conducted a trade or business in the United States. NRA timely-filed 
(within the meaning of paragraph (b)(2) of this section) U.S. income tax 
returns for years 1 through 6 reporting its allocable share of ECTI (or 
loss) from XYZ (and timely paid all tax shown on such returns). NRA 
files its U.S. income tax return for year 7 on June 9, year 8 (and 
timely pays all tax due with such return). Therefore, NRA has filed 
qualifying U.S. income tax returns (within the meaning of paragraph 
(b)(2)(iii) of this section) for years 1 through 7. During years 1 
through 7, NRA's only investment generating effectively connected items 
was its interest in XYZ. The XYZ partnership liquidated and ceased doing 
business on December 31, year 7.
    (i) On or before April 15, year 8, PRS receives from NRA a valid 
certificate under this section using Form 8804-C in which NRA certifies 
that it reasonably expects to have available effectively connected net 
operating losses in the amount of $5,000. Among other statements made in 
accordance with paragraph (c) of this section, NRA represents that it 
has not yet filed its year 7 U.S. income tax return, but will timely 
file such return (and timely pay all tax due with such return). For its 
first installment period in year 8, PRS estimates that it will earn 
taxable income of $10,000 for the year which will be allocated equally 
to NRA and B (NRA's allocable share of PRS's ECTI is $5,000).

[[Page 322]]

    (ii) Provided PRS has, in accordance with paragraph (a)(2) of this 
section, no actual knowledge or reason to know the certificate is 
defective, PRS may reasonably rely on NRA's certificate when computing 
its 1446 tax obligation for the first installment period. PRS is limited 
under paragraph (c)(1)(i)(C) of this section and PRS may only consider 
$4,500 ($5,000 x .90) of the certified net operating loss. After 
consideration of the certified loss, PRS owes 1446 tax in the amount of 
$43.75 for the first installment period ($5,000 estimated allocable ECTI 
less $4,500 (certified loss as limited under paragraph (c)(1)(i)(C)) x 
.35 (1446 tax applicable percentage) x .25 (section 6655(e)(2)(B) 
percentage for the first installment period)). See Sec.  1.1446-3(b)(2). 
Pursuant to paragraph (d)(3) of this section, PRS must attach a copy of 
NRA's certificate and the computation of 1446 tax due with respect to 
NRA to the Form 8813 filed with respect to NRA.
    (iii) PRS's estimate of ECTI allocable to NRA for the second 
installment period remains unchanged from the first installment period. 
On June 10, year 8, NRA provides PRS an updated certificate reporting 
that NRA now reasonably expects to have an effectively connected net 
operating loss of $4,000 available to offset its allocable share of ECTI 
from PRS in year 4. NRA provided the updated certificate within 10 days 
of filing its U.S. income tax return for the year 7 taxable year, as 
required by paragraph (c)(2)(ii)(B) of this section. Provided the 
updated certificate is otherwise valid, PRS may rely on the updated 
certificate for the second installment period (due date June 15, year 
8). Even if the updated certificate were not valid, PRS could no longer 
rely on the original certificate.
    (iv) Under paragraph (d) of this section, PRS is not relieved from 
liability for the 1446 tax due with respect to NRA under section 1461 if 
it relies on a certificate determined to be defective, or if it receives 
an updated certificate reporting an amount of deductions and losses less 
than the amount reported on the superseded certificate. Under the 
principles of section 6655 (as applied through Sec.  1.1446-3), PRS is 
required to have paid 50-percent of the annualized 1446 tax due with 
respect to NRA on or before the due date of the second installment 
period (section 6655(e)(2)(B) percentage for the second installment 
period). Under paragraph (c)(2)(ii)(B) of this section, because NRA's 
updated certificate is valid for the second installment period, if PRS 
considers a certificate for that period it must consider the updated 
certificate. Under paragraph (c)(1)(i)(C) of this section, PRS can only 
consider $3,600 ($4,000 x .90) of NRA's updated effectively connected 
net operating loss. Assuming PRS considers NRA's updated certificate for 
the second installment period, PRS must have paid a total of $245 of 
1446 tax with respect to the ECTI estimated to be allocable to NRA as of 
the second installment due date ($1,400 ($5,000 ECTI less $3,600 net 
operating loss deduction) x .35 (withholding tax rate) x .50 (section 
6655(e)(2)(B) percentage for the second installment period)). After 
considering PRS's payment of 1446 tax for the first installment period, 
PRS is required to pay $201.25 for the second installment period ($245 
less previous payment of $43.75). See Sec.  1.1446-3(b)(2). Further, if 
PRS considers NRA's updated certificate for the second installment 
period, when PRS files Form 8813 it must attach the updated certificate 
along with PRS's computation of 1446 tax due with respect to NRA.
    (v) Under paragraph (d) of this section, PRS is not liable for the 
addition to the tax under section 6655 (as applied through Sec.  1.1446-
3) for the first installment period because PRS reasonably relied on 
NRA's certificate of losses for that period.
    (vi) Assume that PRS's estimate of its ECTI allocable to NRA for the 
third and fourth installment periods is the same as for the first and 
second installment periods. Assume PRS may reasonably rely on NRA's 
updated certificate in calculating its payment of 1446 tax for the third 
and fourth installment periods. The third installment of 1446 tax would 
be $122.50 (($5,000 - $3,600) x .35 x .75 = $367.50 - $245 (total 
previous payments)). The fourth installment of 1446 tax would be $122.50 
(($5,000 - $3,600) x .35 x 1.00 = $490 - $367.50 (total previous 
payments)). See Sec.  1.1446-3(b)(2). PRS must attach to each Form 8813 
a computation of the 1446 tax due with respect to NRA that takes into 
account the amount of effectively connected net operating loss reported 
on NRA's updated certificate.
    (vii) Because NRA's certified net operating loss has not changed for 
the third and fourth installments, in lieu of attaching NRA's 
certificate, PRS may attach a statement containing NRA's name, TIN, and 
the certified net operating loss amount. However, PRS must attach NRA's 
certificate and a computation of the 1446 tax due with respect to NRA 
that takes into account NRA's certified net operating loss to the Form 
8805 filed with respect to NRA. See paragraph (d)(3) of this section.
    Example 5. IRS determines in subsequent taxable year that partner's 
certificate is defective because partner failed to timely file a U.S. 
income tax return. NRA and B form a partnership (PRS) in year 1 to 
conduct a trade or business in the United States. NRA and B provide PRS 
appropriate documentation under Sec.  1.1446-1 to establish their status 
for purposes of section 1446. In year 4, NRA timely submits a 
certificate under this section (using Form 8804-C) to be considered by 
PRS for its first installment period. The certificate reports that NRA 
reasonably expects to have an effectively connected net operating

[[Page 323]]

loss of $5,000 available to offset its allocable share of ECTI from PRS 
in year 4. Further, the certificate contains all of the necessary 
representations required under this section. PRS estimates for each 
installment period that NRA's allocable share of ECTI will be $5,000 for 
the taxable year. PRS's actual operating results for the year result in 
$5,000 of ECTI allocable to NRA.
    (i) PRS reasonably relies on (within the meaning of paragraph (a)(2) 
of this section) NRA's certificate when computing each installment 
payment during year 4 and the 1446 tax due on Form 8804 and 
appropriately considers the limitation in paragraph (c)(1)(i)(C) of this 
section. As a result, PRS paid $175 of 1446 tax on behalf of NRA for the 
taxable year ($5,000 of ECTI less $4,500 net operating loss deduction x 
.35 applicable percentage). As required under paragraph (d) of this 
section, PRS attached the certificate to the Form 8813 for the first 
installment period and the Form 8805 for year 4. Because NRA did not 
submit an updated certificate to PRS in year 4, PRS attached to the 
Forms 8813 for the second, third and fourth installment periods a 
statement containing NRA's name, TIN, and the certified net operating 
loss as well as the computation of 1446 tax due with respect to NRA 
reflecting the amount of net operating loss considered.
    (ii) In year 5, NRA timely submits to PRS a certificate under this 
section to be considered for the first installment period. The 
certificate represents that NRA reasonably expects to have an 
effectively connected net operating loss of $5,000 available to offset 
its allocable share of ECTI from PRS in year 5. For the first 
installment period, PRS estimates that NRA's allocable share of 
partnership ECTI is $5,000. PRS reasonably relies on the certificate for 
the first installment period and determines that it is required to make 
a 1446 tax installment payment of $43.75 ($5,000 allocable ECTI less 
$4,500 (certified net operating loss as limited under paragraph 
(c)(1)(i)(C) of this section) x .35 (1446 tax applicable percentage) x 
.25 (section 6655(e)(2)(B) percentage for the first installment 
period)). See Sec.  1.1446-3(b)(2). PRS makes the installment payment 
with the Form 8813 filed for the first installment period, and complies 
with paragraph (d)(3) of this section by attaching NRA's certificate and 
the computation of 1446 tax due with respect to NRA to the Form 8813.
    (iii) The IRS provides written notification to PRS on June 1, year 
5, (pursuant to paragraph (c)(3) of this section) that the certificate 
received from NRA in year 4 is defective because NRA failed to file a 
qualifying U.S. income tax return (within the meaning of paragraph 
(b)(2)(iii) of this section) for one of the preceding taxable years as 
required under paragraph (b)(1) of this section. The notice further 
states that PRS is not to rely on any certificate received from NRA in 
year 5.
    (iv) Under paragraph (d)(2)(ii) of this section, because the 
certificate submitted by NRA in year was determined to be defective for 
a reason other than the amount or character of the certified deductions 
and losses, under section 1461 PRS is fully liable for the 1446 tax due 
with respect to NRA's allocable share of ECTI year 4 without regard to 
the certificate. The total 1446 tax due for year 4 without regard to the 
certificate is $1,750 ($5,000 ECTI x .35) and PRS paid $175 of 1446 tax 
in year 4. Therefore, PRS owes $1,575 of 1446 tax. However, PRS may be 
deemed to have paid the outstanding 1446 tax due if NRA paid all of its 
U.S. tax due in year 4. See Sec.  1.1446-3(e).
    (v) However, because PRS did not have actual knowledge or reason to 
know that the certificate NRA submitted in year 4 was defective, PRS 
reasonably relied on the certificate for purposes of paragraph (d)(2) of 
this section. Therefore, PRS is not liable for an addition to the tax 
with respect to its underpayment of 1446 tax under the principles of 
section 6655 (as applied through Sec.  1.1446-3) for any installment 
period in year 4.
    (vi) However, PRS is generally liable for interest under section 
6601 and for the failure to pay addition to tax under section 6651(a)(2) 
on the $1,575 of 1446 tax due for year 4 for the period from April 15, 
year 5 (last date prescribed for payment of 1446 tax) to the date PRS 
pays the 1446 tax or is deemed to have paid the 1446 tax under Sec.  
1.1446-3(e).
    (vii) With respect to the year 5, PRS reasonably relied on NRA's 
certificate when computing its first installment payment (due on April 
15, year 5). Therefore, in accordance with paragraph (d)(2)(i) of this 
section, PRS will not be liable for an addition to the tax under the 
principles of section 6655 (as applied through Sec.  1.1446-3) for the 
first installment period. However, because the IRS provided written 
notification to PRS on June 1, year 5, to disregard any certificate 
received from NRA for year 5, PRS may not rely on any certificate 
received from NRA certificate (or any new certificate provided by NRA) 
when it computes its second installment payment in year 5. PRS is not 
permitted to consider any certificate submitted by NRA until the IRS 
provides written notification to PRS revoking or modifying the original 
notice. PRS's second installment payment in year 5 must include the 
additional amount of 1446 tax it would have paid for the first 
installment period without regard to the certificate received from NRA.
    Example 6. IRS determines in subsequent taxable year that partner's 
certificate is defective because partner's actual losses are less than 
amount certified and considered by the partnership. Assume the same 
facts as in Example 5, except that the IRS determines that NRA's 
certificate submitted in year 4 is defective

[[Page 324]]

because the actual effectively connected net operating loss available to 
NRA for year 4 was $1,000 rather than the $5,000 certified.
    (i) Under paragraph (d)(2)(ii) of this section, PRS is not relieved 
from its liability for 1446 tax under section 1461 when it relies on a 
certificate of losses from a foreign partner that is later determined to 
be defective. However, when the IRS determines that a partner's 
certificate is defective because of the amount of the certified 
deductions and losses, the partnership is liable for the 1446 tax, 
interest, additions to tax, and penalties to the extent the amount of 
certified deductions and losses taken into account when computing 1446 
tax (or, unless there was reasonable reliance on the certificate, any 
installment of such tax) is greater than the actual amount of available 
deductions and losses. Here, PRS considered the certified deductions and 
losses in the amount of $4,500. The IRS subsequently determined that NRA 
only had $1,000 of actual losses, only $900 of which were permitted to 
be considered under paragraph (c)(1)(i)(C) of this section. Accordingly, 
PRS is liable for the 1446 tax due with respect to the portion of the 
overstated losses that it considered when computing its 1446 tax. The 
remaining 1446 tax due for year 4 is $1,260 ($3,600 ($4,500 less $900) 
of excess losses considered x .35). However, PRS may be deemed to have 
paid the $1,260 of 1446 tax under Sec.  1.1446-3(e) if NRA has paid all 
of NRA's U.S. income tax.
    (ii) If PRS had considered only $900 (or a lesser amount) of NRA's 
certified net operating loss when computing and paying its 1446 tax 
during year 4 then, under paragraph (d)(2)(iii) of this section, PRS 
would not be liable for 1446 tax because it did not consider a net 
operating loss greater than the amount actually available to NRA.
    Example 7. Partner with different taxable year than partnership. PRS 
partnership has two equal partners, FC, a foreign corporation, and DC, a 
domestic corporation. PRS conducts a trade or business in the United 
States and generates effectively connected income. FC maintains a June 
30 fiscal taxable year end, while DC and PRS maintain a calendar taxable 
year end. FC and DC provide a valid Form W-8BEN and Form W-9, 
respectively, to PRS. FC and DC are the only persons that have ever been 
partners in PRS. For its year 1 through year 3 taxable years, PRS issued 
Forms 1065 (Schedule K-1) reporting in the aggregate $100 of net loss to 
each partner. For its year 4 taxable year, PRS issued Forms 1065 
(Schedule K-1) to its partners reporting $150 of loss to each partner. 
All of the losses reported on the Forms 1065 (Schedule K-1) are 
effectively connected to PRS's and FC's trade or business in the United 
States.
    (i) Assume that FC submits a valid certificate under this section 
certifying losses to the partnership for the partnership's year 5 
taxable year. Further, assume that FC's only source of effectively 
connected income, gain, deduction, or loss is the activity of PRS.
    (ii) For PRS's first installment period in year 5, FC may only 
certify deductions and losses under this section in the amount of $100 
(the losses as reported on the Forms 1065 (Schedule K-1) issued for 
PRS's year 1 through 3 taxable years). Under section 706, the taxable 
income of a partner shall include the income, gain, loss, deduction, or 
credit of the partnership for the partnership taxable year ending within 
or with the taxable year of the partner. PRS's year 4 calendar taxable 
year ends during FC's fiscal taxable year ending June 30, year 5. 
Therefore, under paragraph (c)(1) of this section, as of April 15, year 
5 (the last date FC may submit its first certificate under paragraph (c) 
of this section to have it considered for PRS's first installment due 
date of April 15, year 5), FC's allocable share of the PRS losses for 
years 1 through 3 are the only losses that FC can represent have been or 
will be reported on an FC U.S. income tax return filed for a taxable 
year ending prior to such installment due date.
    (iii) The result in paragraph (ii) of this Example 7 is the same for 
the year 5 second installment period, the due date of which is June 15, 
year 5.
    (iv) FC may submit an updated certificate under this section after 
June 30, year 5, which includes the $150 loss for year 4. PRS may 
consider such an updated certificate for its third installment period 
(due date September 15, year 5), provided the updated certificate is 
received by the due date for such installment in accordance with 
paragraph (c) of this section.
    Example 8. Failure to provide status update with respect to prior 
year unfiled returns. FC, a foreign corporation, and DC, a domestic 
corporation, form a partnership (PRS) to conduct a trade or business in 
the United States. FC and DC provide PRS appropriate documentation under 
Sec.  1.1446-1 to establish their status for purposes of section 1446. 
FC and DC are equal partners in PRS, and all partnership items are 
allocated equally between FC and DC.
    (i) In the current taxable year FC submits a certificate under this 
section using Form 8804-C prior to PRS's first installment due date. FC 
represents that it has filed or will file a qualifying U.S. income tax 
return (within the meaning of paragraph (b)(2)(iii) of this section) in 
each of the preceding three taxable years. FC specifies that it has not 
filed its U.S. income tax return for the immediately preceding taxable 
year. FC also represents that it will timely file its U.S. income tax 
return for the partnership taxable year during which the certificate is 
considered (and will timely pay all tax due with such return). Assume 
all other requirements

[[Page 325]]

under paragraph (c) of this section are met for FC's certificate to be 
valid.
    (ii) Provided that PRS does not possess actual knowledge or reason 
to know that FC's certificate is defective under paragraph (a)(2) of 
this section, PRS may reasonably rely on FC's certificate for its first, 
second, and third installment payments.
    (iii) If FC does not submit to PRS either an updated certificate or 
a status update as required by paragraph (c)(2)(ii)(B)(1) of this 
section by December 15th (PRS's final installment due date), PRS must 
disregard FC's certificate when computing its fourth installment payment 
of 1446 tax and when completing its Form 8804 for the taxable year. 
PRS's payment of 1446 tax for its fourth installment period must include 
the additional amount of 1446 tax it would have paid in the first, 
second and third installment periods had it not considered FC's 
certificate. Further, even if the status update is provided by December 
15th, PRS may only rely on the certificate if the status update does not 
contradict the original certificate and such update indicates that the 
immediately preceding year's return will be timely filed. Finally, even 
if the status update is provided by December 15th, FC must also submit 
an updated certificate to the partnership in accordance with paragraph 
(c) of this section within 10 days of the date FC timely files its U.S. 
income tax return for the preceding taxable year.
    Example 9. Partnership consideration of certified deductions and 
losses or de minimis certificate. For purposes of this example assume 
paragraph (c)(1)(ii) of this section may apply. On January 1, year 4, 
NRA and B form a partnership (PRS) to conduct a trade or business in the 
United States. NRA and B are equal partners in PRS and all partnership 
items are shared equally. NRA and B provide PRS appropriate 
documentation under Sec.  1.1446-1 to establish their status for 
purposes of section 1446. During years 1 through 3, NRA's only activity 
generating effectively connected items was an interest in partnership 
XYZ. XYZ allocated NRA a loss for all three years. NRA filed qualifying 
U.S. income tax returns (within the meaning of paragraph (b)(2)(iii) of 
this section) reporting its allocable share of losses from XYZ in years 
1 through 3. The XYZ partnership dissolved on December 31, year 3.
    (i) In year 4, NRA's only activity giving rise to effectively 
connected income, gain, deduction, or loss is its interest in PRS. NRA 
submits to PRS a valid certificate (using Form 8804-C) certifying under 
paragraph (c)(1)(i) its effectively connected net operating losses from 
years 1 through 3 and under (c)(1)(ii) of this section that its only 
activity giving rise to effectively connected income, gain, deduction, 
or loss for the PRS taxable year that ends with or within its taxable 
year is (and will be) its investment in PRS.
    (ii) During year 4, PRS allocates ECTI to NRA. If the 1446 tax 
otherwise due on the annualized amount allocated to NRA is less than 
$1,000, determined without regard to any deductions and losses certified 
by NRA under paragraph (c)(1)(i) of this section, PRS may consider the 
certificate received from NRA under paragraph (c)(1)(ii) of this section 
and not pay 1446 tax (or any installment of such tax) with respect to 
NRA. Alternatively, PRS may consider the deductions and losses certified 
by NRA under paragraph (c)(1)(i) of this section.
    (iii) Regardless of whether PRS considers NRA's certification under 
paragraph (c)(1)(i) or (c)(1)(ii) of this section in computing its 1446 
tax due with respect to NRA, PRS must file Form 8813 for all installment 
periods as well as a Form 8805 for NRA with its Form 8804. If PRS 
considers NRA's certification under paragraph (c)(1)(i) or (c)(1)(ii) of 
this section, PRS must attach to each Form 8813, as well as to the Form 
8805, a computation of the 1446 tax with respect to NRA that takes into 
account its consideration of NRA's certificate. In addition, PRS must 
attach NRA's certificate to the Form 8813 for the first installment 
period it considers the certificate, as well as to the Form 8805. For 
all subsequent installment periods, PRS may attach a statement 
containing NRA's name, and TIN. If PRS is relying on NRA's certified 
losses under paragraph (c)(1)(i) of this section, the statement must 
indicate the amount of losses and deductions NRA certified. If PRS is 
relying on NRA's certification under paragraph (c)(ii) of this section, 
the statement must indicate that it is relying on NRA meeting the 
requirements under paragraph (c)(1)(ii) of this section and the 1446 tax 
on the annualized amount allocated to NRA is less than $1,000. See 
paragraph (d)(3)(i) of this section.
    Example 10. Application of transition rule. NRA and B form a 
partnership (PRS) on January 1, 2004, to conduct a trade or business in 
the United States. NRA and B are equal partners in PRS and all 
partnership items are shared equally. NRA and B provide PRS appropriate 
documentation under Sec.  1.1446-1 to establish their status for 
purposes of section 1446. For its 2004 through 2007 tax years, PRS 
issued Forms 1065 (Schedule K-1) to NRA and B reporting a $1,000 net 
loss from its U.S. trade or business to each partner for each year (for 
an aggregate loss of $4,000 per partner). During the 2004 through 2007 
tax years, NRA's only activity generating effectively connected items 
was its investment in PRS.
    (i) On February 10, 2008, NRA submitted a certificate to PRS, 
reporting its aggregate $4,000 effectively connected loss to PRS, that 
met the requirements of Sec.  1.1446-6T(c) (See 26 CFR Part 1, revised 
as of April 1, 2007), as in effect before January 1, 2008. The 
certificate stated that NRA had timely filed its U.S. income tax returns 
for the 2004, 2005 and 2006

[[Page 326]]

tax years, and that it would timely file a U.S. income tax return for 
its 2007 tax year. For the first and second installments period in 2008, 
PRS estimates that it will earn ECTI of $10,000.
    (ii) Because the certificate submitted by NRA to PRS on February 10, 
2008, met the requirements of Sec.  1.1446-6T (See 26 CFR Part 1, 
revised as of April 1, 2007), as in effect before January 1, 2008, PRS 
may consider such certificate when computing its 1446 tax due for the 
first and second installment period even if the certificate does not 
meet all the requirements of paragraph (c) of this section.
    (iii) NRA timely files its U.S. income tax return for the 2007 tax 
year on July 24, 2008. In accordance with paragraph (c)(2)(ii)(B)(1) of 
this section, within 10 days of filing such return NRA prepares an 
updated certificate to be submitted to PRS certifying that it reasonably 
expects to have only $3,500 of losses available to reduce its allocable 
share of ECTI from PRS. Because the updated certificate will be 
submitted after July 28, 2008, to be valid the updated certificate must 
meet the requirements of paragraph (c) this section.

    (f) Effective/Applicability date. Except as otherwise provided in 
this paragraph (f), the rules of this section are applicable for 
partnership taxable years beginning after December 31, 2007. The rules 
of paragraphs (b)(3)(i)(B) through (D) shall apply to partnership 
taxable years beginning after July 28, 2008.
    (g) Transition rule. A certificate that met the requirements of 
Sec.  1.1446-6T(c) (See 26 CFR Part 1, revised as of April 1, 2007), as 
in effect before January 1, 2008, submitted on or before July 28, 2008 
by a partner that met the requirements of Sec.  1.1446-6T(b) (See 26 CFR 
Part 1, revised as of April 1, 2007), as in effect before January 1, 
2008, shall not be considered defective because it does not meet the 
requirements of this section. However, any certificate (including any 
updated certificates and status updates) submitted, or required to be 
submitted, under paragraph (c) of this section after July 28, 2008, must 
meet the requirements of this section. See paragraph (e)(2) Example 10 
of this section.

[T.D. 9394, 73 FR 23085, Apr. 29, 2008, as amended at 74 FR 14931, Apr. 
2, 2009; T.D. 9926, 85 FR 76935, Nov. 30, 2020]



Sec.  1.1446-7  Applicability dates.

    Sections 1.1446-1 through 1.1446-5 shall apply to partnership 
taxable years beginning after May 18, 2005. However, a partnership may 
elect to apply all of the provisions of Sec. Sec.  1.1446-1 through 
1.1446-5 to partnership taxable years beginning after December 31, 2004. 
A partnership shall make the election under this section by complying 
with the provisions of Sec. Sec.  1.1446-1 through Sec.  1.1446-5 and 
attaching a statement to the Form 8804 or Form 1042 annual return, filed 
for the taxable year in which the regulation provisions first apply, 
that indicates that the partnership is making the election under this 
section. The revisions to Sec. Sec.  1.1446-3(b)(2), 1.1446-
3(b)(3)(i)(A) and 1.1446-5(c)(2) contained in the final regulations 
published in 2008 apply to partnership taxable years beginning after 
December 31, 2007. See Sec.  1.1446-6(f) and (g) for the Effective/
Applicability date and Transition rule for Sec.  1.1446-6. Section 
1.1446-3 generally applies to returns filed on or after January 30, 2020 
and Sec.  1.1446-3T (as contained in 26 CFR part 1, revised as of April 
1, 2019) generally applies to returns filed before January 30, 2020. The 
addition of Sec.  1.1446-3(c)(4) applies to transfers of partnership 
interests that occur on or after January 29, 2021, except that a 
taxpayer may choose to apply Sec.  1.1446-3(c)(4) to transfers of 
partnership interests that occur on or after January 1, 2018. Sections 
1.1446-3(a)(2)(i), (d)(2)(vi), and (e)(4) and 1.1446-4(f)(1) apply to 
partnership taxable years beginning on or after November 30, 2020. For 
partnership taxable years beginning before November 30, 2020, see those 
sections as in effect and contained in 26 CFR part 1, revised as of 
April 1, 2020. Section 1.1446-4(b)(3) and (4), (c), (d), (e), and (f)(3) 
apply to distributions made on or after January 1, 2022. For 
distributions made before January 1, 2022, see Sec. Sec.  1.1446-4(b)(3) 
and (4), (c), (d), (e), and (f)(3), as contained in 26 CFR part 1, 
revised as of April 1, 2020. Sections 1.1446-1(c)(2)(ii)(G) and (H) and 
1.1446-2(b)(4)(iii) apply with respect to dispositions of U.S. real 
property interests and distributions described in section 897(h) 
occurring on or after December 29, 2022. For dispositions of U.S. real 
property interests and distributions described in section 897(h) 
occurring before December 29, 2022, see

[[Page 327]]

Sec. Sec.  1.1446-1(c)(2)(ii)(G) and (H), as contained in 26 CFR part 1, 
revised as of April 1, 2021.

[T.D. 9200, 70 FR 28717, May 18, 2005, as amended by T.D. 9394, 73 FR 
23085, Apr. 29, 2008; T.D. 9926, 85 FR 76935, Nov. 30, 2020; T.D. 9971, 
87 FR 80067, Dec. 29, 2022]



Sec.  1.1446(f)-1  General rules.

    (a) Overview. This section and Sec. Sec.  1.1446(f)-2 through 
1.1446(f)-5 provide rules for withholding, reporting, and paying tax 
under section 1446(f) upon the sale, exchange, or other disposition of 
certain interests in partnerships. This section provides definitions and 
general rules that apply for purposes of section 1446(f). Section 
1.1446(f)-2 provides withholding rules for the transfer of a non-
publicly traded partnership interest under section 1446(f)(1). Section 
1.1446(f)-3 provides rules that apply when a partnership is required to 
withhold under section 1446(f)(4) on distributions made to the 
transferee in an amount equal to the amount that the transferee failed 
to withhold plus interest. Section 1.1446(f)-4 provides special rules 
for the sale, exchange, or disposition of publicly traded partnership 
interests, for which the withholding obligation under section 1446(f)(1) 
is generally imposed on certain brokers that act on behalf of the 
transferor. Section 1.1446(f)-5 provides rules that address the 
liability for failure to withhold under section 1446(f) and rules 
regarding the liability of a transferor's or transferee's agent.
    (b) Definitions. This paragraph (b) provides definitions that apply 
for purposes of this section and Sec. Sec.  1.1446(f)-2 through 
1.1446(f)-5.
    (1) The term broker means any person, foreign or domestic, that, in 
the ordinary course of a trade or business during the calendar year, 
stands ready to effect sales made by others, and that, in connection 
with a transfer of a PTP interest, receives all or a portion of the 
amount realized on behalf of the transferor. The term broker includes a 
clearing organization (as defined in Sec.  1.1471-1(b)(21)). In the case 
of a U.S. clearing organization clearing or settling sales of PTP 
interests, however, see Sec.  1.1446(f)-4(a)(3) for an exception from 
the requirement to withhold on a sale of a PTP interest. The term broker 
does not include an escrow agent that does not effect sales other than 
transactions that are incidental to the purpose of escrow (such as sales 
to collect on collateral).
    (2) The term controlling partner means a partner that, together with 
any person that bears a relationship described in section 267(b) or 
707(b)(1) to the partner, owns directly or indirectly a 50 percent or 
greater interest in the capital, profits, deductions, or losses of the 
partnership at any time within the 12 months before the determination 
date (see paragraph (c)(4) of this section).
    (3) The term effect has the meaning provided in Sec.  1.6045-
1(a)(10).
    (4) The term foreign person means a person that is not a United 
States person, including a QI branch of a U.S. financial institution (as 
defined in Sec.  1.1471-1(b)(109)).
    (5) The term PTP interest means an interest in a publicly traded 
partnership if the interest is publicly traded on an established 
securities market or is readily tradable on a secondary market (or the 
substantial equivalent thereof).
    (6) The term publicly traded partnership has the same meaning as in 
section 7704 and Sec. Sec.  1.7704-1 through 1.7704-4 but does not 
include a publicly traded partnership treated as a corporation under 
that section.
    (7) The term TIN means the tax identifying number assigned to a 
person under section 6109.
    (8) The term transfer means a sale, exchange, or other disposition, 
and includes a distribution from a partnership to a partner, as well as 
a transfer treated as a sale or exchange under section 707(a)(2)(B).
    (9) The term transferee means any person, foreign or domestic, that 
acquires a partnership interest through a transfer, and includes a 
partnership that makes a distribution.
    (10) Except as otherwise provided in this paragraph, the term 
transferor means any person, foreign or domestic, that transfers a 
partnership interest. In the case of a trust, to the extent all or a 
portion of the income of the trust is treated as owned by the grantor or 
another person under sections 671 through 679 (such trust, a grantor

[[Page 328]]

trust), the term transferor means the grantor or such other person.
    (11) The term transferor's agent or transferee's agent means any 
person who represents the transferor or transferee (respectively) in any 
negotiation with another person relating to the transaction or in 
settling the transaction. A person will not be treated as a transferor's 
agent or a transferee's agent solely because it performs one or more of 
the activities described in Sec.  1.1445-4(f)(3) (relating to activities 
of settlement officers and clerical personnel).
    (12) The term United States person or U.S. person means a person 
described in section 7701(a)(30).
    (c) General rules of applicability--(1) In general. This paragraph 
(c) provides general rules that apply for purposes of this section and 
Sec. Sec.  1.1446(f)-2 through 1.1446(f)-5.
    (2) Certifications--(i) In general. This paragraph (c)(2) provides 
rules that are applicable to certifications described in this section 
and Sec. Sec.  1.1446(f)-2 through 1.1446(f)-5, except as otherwise 
provided therein, or as may be prescribed by the Commissioner in forms 
or instructions or in publications or guidance published in the Internal 
Revenue Bulletin (see Sec. Sec.  601.601(d)(2) and 601.602 of this 
chapter). A certification must provide the name and address of the 
person providing it. A certification must also be signed under penalties 
of perjury and, if the certification is provided by the transferor, must 
include a TIN if the transferor has, or is required to have, a TIN. A 
transferee (or other person required to withhold) may not rely on a 
certification if it knows that a transferor has, or is required to have, 
a TIN, and that TIN has not been provided with the certification. A 
certification includes any documents associated with the certification, 
such as statements from the partnership, IRS forms, withholding 
certificates, withholding statements, certifications, or other 
documentation. Documents associated with the certification form an 
integral part of the certification, and the penalties of perjury 
statement provided on the certification also applies to the associated 
documents. A certification (other than the certification described in 
Sec.  1.1446(f)-2(d)(2)) may not be relied upon if it is obtained 
earlier than 30 days before the transfer or any time after the transfer.
    (ii) Penalties of perjury. A certification signed under penalties of 
perjury must provide the following: ``Under penalties of perjury, I 
declare that I have examined the information on this document, and to 
the best of my knowledge and belief, it is true, correct, and 
complete.''
    (iii) Authority to sign certifications on behalf of a business 
entity. A certification provided by a business entity must be signed by 
an individual who is an officer, director, general partner, or managing 
member of the entity, or other individual that has authority to sign for 
the entity under local law.
    (iv) Electronic submission. A certification may be sent 
electronically, including as text in an email, an image embedded in an 
email, or a Portable Document Format (.pdf) attached to an email. An 
electronic certification, however, may not be relied upon if the person 
receiving the submission knows that the certification was transmitted by 
a person not authorized to do so by the person required to execute the 
certification.
    (v) Retention period. Any person that relies on a certification 
pursuant to this section and Sec. Sec.  1.1446(f)-2 through 1.1446(f)-5 
must retain the certification (including any documentation) for as long 
as it may be relevant to the determination of its withholding obligation 
under section 1446(f) or its withholding tax liability under section 
1461.
    (vi) Submission to IRS. The recipient of a certification is not 
required to mail a copy to the IRS, except as provided in Sec.  
1.1446(f)-2(b)(7) and (c)(4)(vi) (involving certifications relating to 
an income tax treaty), or as may be prescribed by the Commissioner in 
forms or instructions or in publications or guidance published in the 
Internal Revenue Bulletin (see Sec. Sec.  601.601(d)(2) and 601.602 of 
this chapter).
    (vii) Grantor trusts. A certification provided by a transferor that 
is a grantor or other owner of a grantor trust must identify the portion 
of the amount realized that is attributable to the grantor or other 
owner. A certification provided by a foreign grantor trust on behalf of 
a transferor that is a grantor or owner must also include a

[[Page 329]]

Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through 
Entity, or Certain U.S. Branches for United States Tax Withholding and 
Reporting), (or similar statement for a domestic grantor trust with a 
foreign grantor or owner), that includes a withholding statement that 
provides the percentage of the amount realized allocable to each grantor 
or owner of the trust, and any applicable certification for each grantor 
or owner. In the case of a certification so provided, a grantor or owner 
of the trust is treated as having provided the certification to the 
transferee (or broker).
    (3) Books and records. A partnership that relies on its books and 
records pursuant to this section and Sec. Sec.  1.1446(f)-2 through 
1.1446(f)-5 (including for purposes of providing a certification or 
other statement) must identify in its books and records the date on 
which the transfer occurred, the information on which the partnership 
relied, and the provisions of this section and Sec. Sec.  1.1446(f)-2 
through 1.1446(f)-5 supporting an exception from, or adjustment to, the 
partnership's obligation to withhold. The identification required by 
this paragraph (c)(3) must be made no later than 30 days after the date 
of the transfer. The partnership must retain the identified information 
in its books and records for the longer of five calendar years following 
the close of the last calendar year in which it relied on the 
information or for as long as it may be relevant to the determination of 
its withholding obligation under section 1446(f) or its withholding tax 
liability under section 1461.
    (4) Determination date--(i) In general. This paragraph (c)(4) 
provides rules for the determination date. The same determination date 
must be used for all purposes with respect to a transfer. Any statement, 
certification, or books and records with regard to a transfer must state 
the determination date. The determination date of a transfer must be one 
of the following--
    (A) The date of the transfer;
    (B) Any date that is no more than 60 days before the date of the 
transfer; or
    (C) The date that is the later of--
    (1) The first day of the partnership's taxable year in which the 
transfer occurs, as determined under section 706; or
    (2) The date, before the date of the transfer, of the most recent 
event described in Sec.  1.704-1(b)(2)(iv)(f)(5) or (b)(2)(iv)(s)(1) 
(revaluation event), irrespective of whether the capital accounts of the 
partners are adjusted in accordance with Sec.  1.704-1(b)(2)(iv)(f).
    (ii) Controlling partner. The determination date for a transferor 
that is a controlling partner is determined without regard to paragraph 
(c)(4)(i)(C) of this section.
    (5) IRS forms and instructions. Any reference to an IRS form 
includes its successor form. Any form must be filed in the manner 
prescribed by the Commissioner in forms or instructions or in 
publications or guidance published in the Internal Revenue Bulletin (see 
Sec. Sec.  601.601(d)(2) and 601.602 of this chapter).
    (d) Coordination with section 1445. A transferee that is otherwise 
required to withhold under section 1445(e)(5) or Sec.  1.1445-11T(d)(1) 
with respect to the amount realized, as well as under section 
1446(f)(1), will be subject to the payment and reporting requirements of 
section 1445 only, and not section 1446(f)(1), with respect to that 
amount. However, if the transferor has applied for a withholding 
certificate under the last sentence of Sec.  1.1445-11T(d)(1), the 
transferee must withhold the greater of the amounts required under 
section 1445(e)(5) or 1446(f)(1). A transferee that has complied with 
the withholding requirements under either section 1445(e)(5) or 
1446(f)(1), as applicable under this paragraph (d), will be deemed to 
satisfy the withholding requirement.
    (e) Applicability date. This section applies to transfers that occur 
on or after January 29, 2021.

[T.D. 9926, 85 FR 76935, Nov. 30, 2020]



Sec.  1.1446(f)-2  Withholding on the transfer of a non-publicly
traded partnership interest.

    (a) Transferee's obligation to withhold. Except as otherwise 
provided in this section, a transferee is required to withhold under 
section 1446(f)(1) a tax equal to 10 percent of the amount realized on 
any transfer of a partnership interest. This section does not apply to

[[Page 330]]

a transfer of a PTP interest that is effected through one or more 
brokers, including a distribution made with respect to a PTP interest 
held in an account with a broker. For rules regarding those transfers, 
see Sec.  1.1446(f)-4.
    (b) Exceptions to withholding--(1) In general. A transferee is not 
required to withhold under this section if it properly relies on a 
certification or its books and records as described in this paragraph 
(b). A transferee may not rely on a certification if it has actual 
knowledge that the certification is incorrect or unreliable. A 
partnership that is a transferee because it makes a distribution may not 
rely on its books and records if it knows, or has reason to know, that 
the information is incorrect or unreliable.
    (2) Certification of non-foreign status by transferor. A transferee 
may rely on a certification of non-foreign status from the transferor 
that states that the transferor is not a foreign person, states the 
transferor's name, TIN, and address, and is signed under penalties of 
perjury. For purposes of this paragraph (b)(2), a certification of non-
foreign status includes a valid Form W-9, Request for Taxpayer 
Identification Number and Certification. For purposes of this paragraph 
(b)(2), a transferee may rely on a valid Form W-9 from the transferor 
that it already possesses if the form meets the requirements of this 
paragraph (b)(2).
    (3) No realized gain by transferor--(i) In general. A transferee 
(other than a partnership that is a transferee because it makes a 
distribution) may rely on a certification from the transferor that 
states that the transfer of the partnership interest would not result in 
any realized gain (including ordinary income arising from the 
application of section 751 and Sec.  1.751-1) to the transferor as of 
the determination date (see Sec.  1.1446(f)-1(c)(4)). See paragraph 
(b)(6) of this section for rules that apply when the transferor realizes 
gain but is not required to recognize the gain under a provision of the 
Internal Revenue Code.
    (ii) No section 751 income. For purposes of paragraph (b)(3)(i) of 
this section, a transferor may rely on a certification from the 
partnership stating that the transfer of the partnership interest would 
not result in any ordinary income arising from the application of 
section 751 and Sec.  1.751-1 to the transferor as of the determination 
date. The certification from the partnership must be attached to, and 
forms part of, the certification of no realized gain that the transferor 
provides to the transferee.
    (iii) Partnership distributions. A partnership that is a transferee 
because it makes a distribution may rely on its books and records, or on 
a certification from the transferor, to determine that the distribution 
would not result in any realized gain to the transferor as of the 
determination date.
    (4) Less than 10 percent effectively connected gain--(i) In general. 
A transferee (other than a partnership that is a transferee because it 
makes a distribution) may rely on a certification from the partnership 
that states that--
    (A) If the partnership sold all of its assets at fair market value 
as of the determination date in the manner described in Sec.  
1.864(c)(8)-1(c), either--
    (1) The partnership would have no gain that would have been 
effectively connected with the conduct of a trade or business within the 
United States, or, if the partnership would have a net amount of such 
gain, the amount of the partnership's net gain that would have been 
effectively connected with the conduct of a trade or business within the 
United States would be less than 10 percent of the total net gain; or
    (2) The transferor would not have a distributive share of net gain 
from the partnership that would have been effectively connected with the 
conduct of a trade or business in the United States, or, if the 
transferor would have a distributive share of such gain from the 
partnership, the transferor's distributive share of net gain from the 
partnership that would have been effectively connected with the conduct 
of a trade or business within the United States would be less than 10 
percent of the transferor's distributive share of the total net gain 
from the partnership; or
    (B) The partnership was not engaged in a trade or business within 
the United States at any time during the taxable year of the partnership 
through the date of transfer.

[[Page 331]]

    (ii) Partnership distributions. A partnership that is a transferee 
because it makes a distribution may rely on its books and records to 
determine that paragraph (b)(4)(i)(A) of this section is satisfied as of 
the determination date or paragraph (b)(4)(i)(B) of this section is 
satisfied for the taxable year of the partnership through the date of 
transfer.
    (5) Less than 10 percent effectively connected income--(i) In 
general. A transferee (other than a partnership that is a transferee 
because it makes a distribution) may rely on a certification from the 
transferor that states that--
    (A) The transferor was a partner in the partnership throughout the 
look-back period described in paragraph (b)(5)(ii) of this section;
    (B) The transferor's distributive share of gross effectively 
connected income from the partnership, as reported on a Schedule K-1 
(Form 1065), Partner's Share of Income, Deductions, Credits, etc., or 
other statement required to be furnished under Sec.  1.6031(b)-1T, 
including any gross effectively connected income included in the 
distributive share of a partner that bears a relationship to the 
transferor described in section 267(b) or 707(b)(1), was less than $1 
million for each of the taxable years within the look-back period 
described in paragraph (b)(5)(ii) of this section;
    (C) The transferor's distributive share of gross effectively 
connected income from the partnership, as reported on a Schedule K-1 
(Form 1065), or other statement required to be furnished under Sec.  
1.6031(b)-1T, for each of the taxable years within the look-back period 
described in paragraph (b)(5)(ii) of this section, was less than 10 
percent of the transferor's total distributive share of gross income 
from the partnership for that year as determined under subchapter K of 
the Internal Revenue Code (as provided on a Schedule K-1 (Form 1065) or 
other statement required to be furnished under Sec.  1.6031(b)-1T); and
    (D) The transferor's distributive share of income or gain from the 
partnership that is effectively connected with the conduct of a trade or 
business within the United States or deductions or losses properly 
allocated and apportioned to that income in each of the taxable years 
within the look-back period described in paragraph (b)(5)(ii) of this 
section has been reported on a Federal income tax return (either filed 
by the transferor or, in the case of transferor that is a partnership, 
filed by its direct or indirect nonresident alien individual or foreign 
corporate partners) on or before the due date (including extensions), 
and all amounts due with respect to the reported amounts have been 
timely paid to the IRS, provided that the return was required to be 
filed when the transferor furnishes the certification (taking into 
account any extensions of time to file).
    (ii) Look-back period--(A) In general. The transferor's look-back 
period is the transferor's immediately prior taxable year and the two 
preceding taxable years.
    (B) Immediately prior taxable year. The transferor's immediately 
prior taxable year is the transferor's most recent taxable year--
    (1) With or within which a taxable year of the partnership ended; 
and
    (2) For which a Schedule K-1 (Form 1065) was due (including 
extensions) or furnished (if earlier) before the transfer.
    (C) Limitation. A transferee may not rely on a certification that is 
provided before the transferor's receipt of the Schedule K-1 (Form 1065) 
described in paragraph (b)(5)(ii)(B) of this section.
    (iii) No distributive share of gross income. A transferor that did 
not have a distributive share of gross income in any year described in 
paragraph (b)(5)(ii)(A) of this section cannot provide the certification 
described in this paragraph (b)(5).
    (iv) Partnership distributions. A partnership that is a transferee 
by reason of making a distribution may rely on its books and records to 
determine that the requirements in paragraphs (b)(5)(i)(A) through (C) 
of this section have been satisfied (subject to the rules in paragraphs 
(b)(5)(ii) and (iii) of this section). The partnership must also obtain 
a representation from the transferor stating that the requirement in 
paragraph (b)(5)(i)(D) of this section has been satisfied.
    (6) Certification of nonrecognition by transferor--(i) In general. A 
transferee may rely on a certification from the transferor that states 
that by reason of

[[Page 332]]

the operation of a nonrecognition provision of the Internal Revenue Code 
the transferor is not required to recognize any gain or loss with 
respect to the transfer. The certification must briefly describe the 
transfer and provide the relevant law and facts relating to the 
certification.
    (ii) Partial nonrecognition. Paragraph (b)(6)(i) of this section 
does not apply if only a portion of the gain realized on the transfer is 
subject to a nonrecognition provision. However, see paragraph (c)(4)(v) 
of this section for rules applicable to a transferor's claim for partial 
nonrecognition.
    (7) Income tax treaties--(i) In general. A transferee may rely on a 
certification from the transferor that states that the transferor is not 
subject to tax on any gain from the transfer pursuant to an income tax 
treaty in effect between the United States and a foreign country if the 
requirements of this paragraph (b)(7) are met. The transferor makes the 
certification on a withholding certificate (on a Form W-8BEN, 
Certificate of Foreign Status of Beneficial Owner for United States Tax 
Withholding and Reporting (Individuals), or Form W-8BEN-E, Certificate 
of Status of Beneficial Owner for United States Tax Withholding and 
Reporting (Entities)) that meets the requirements for validity under 
Sec.  1.1446-1(c)(2)(iv) (or an applicable substitute form that meets 
the requirements under Sec.  1.1446-1(c)(5)) and that contains the 
information necessary to support the claim for treaty benefits. A 
transferee may rely on a certification of treaty benefits only if, 
within 30 days after the date of the transfer, the transferee mails a 
copy of the certification to the Internal Revenue Service, at the 
address provided in Sec.  1.1445-1(g)(10), together with a cover letter 
providing the name, TIN, and address of the transferee and the 
partnership in which an interest was transferred.
    (ii) Treaty claim for less than all of the gain. Paragraph (b)(7)(i) 
of this section does not apply if treaty benefits apply to only a 
portion of the gain from the transfer. However, see paragraph (c)(4)(vi) 
of this section for rules applicable to situations in which treaty 
benefits apply to only a portion of the gain.
    (iii) Exclusive means to claim an exception from withholding based 
on treaty benefits. A transferor claiming treaty benefits with respect 
to all of the gain from the transfer must use the exception in this 
paragraph (b)(7) and not any other exception or determination procedure 
in paragraphs (b) and (c) of this section to claim an exception to 
withholding by reason of a claim of treaty benefits.
    (c) Determining the amount to withhold--(1) In general. A transferee 
that is required to withhold under this section must withhold 10 percent 
of the amount realized on the transfer of the partnership interest, 
except as otherwise provided in this paragraph (c). Any procedures in 
this paragraph (c) apply solely for purposes of determining the amount 
to withhold under section 1446(f)(1) and this section. A transferee may 
not rely on a certification if it has actual knowledge that the 
certification is incorrect or unreliable. A partnership that is a 
transferee because it makes a distribution may not rely on its books and 
records if it knows, or has reason to know, that the information is 
incorrect or unreliable.
    (2) Amount realized--(i) In general. The amount realized on the 
transfer of the partnership interest is determined under section 1001 
(including Sec. Sec.  1.1001-1 through 1.1001-5) and section 752 
(including Sec. Sec.  1.752-1 through 1.752-7). Thus, the amount 
realized includes the amount of cash paid (or to be paid), the fair 
market value of other property transferred (or to be transferred), the 
amount of any liabilities assumed by the transferee or to which the 
partnership interest is subject, and the reduction in the transferor's 
share of partnership liabilities. In the case of a distribution, the 
amount realized is the sum of the amount of cash distributed (or to be 
distributed), the fair market value of property distributed (or to be 
distributed), and the reduction in the transferor's share of partnership 
liabilities.
    (ii) Alternative procedures for transferee to determine share of 
partnership liabilities--(A) In general. A transferee (other than a 
partnership that is a transferee because it makes a distribution), as an 
alternative to determining the share of partnership liabilities

[[Page 333]]

under paragraph (c)(2)(i) of this section, may use the procedures of 
this paragraph (c)(2)(ii) to determine the extent to which a reduction 
in partnership liabilities is included in the amount realized.
    (B) Certification of liabilities by transferor. Except as otherwise 
provided in this section, a transferee may rely on a certification from 
a transferor, other than a controlling partner, that provides the amount 
of the transferor's share of partnership liabilities reported on the 
most recent Schedule K-1 (Form 1065) issued by the partnership. If the 
transferor's actual share of liabilities at the time of the transfer 
differs from the amount reported on that Schedule K-1 (Form 1065), the 
certification will not be treated as incorrect or unreliable if the 
transferor also certifies that it does not have actual knowledge of any 
events occurring after receiving the Schedule K-1 (Form 1065) and before 
the date of the transfer that would cause the amount of the transferor's 
share of partnership liabilities at the time of the transfer to differ 
by more than 25 percent from the amount shown on the Schedule K-1 (Form 
1065). A transferee may not rely on a certification if the last day of 
the partnership taxable year for which the Schedule K-1 (Form 1065) was 
provided was more than 22 months before the date of the transfer.
    (C) Certification of liabilities by partnership. A transferee may 
rely on a certification from a partnership that provides the amount of 
the transferor's share of partnership liabilities on the determination 
date. If the transferor's actual share of liabilities at the time of the 
transfer differs from the amount on the certification, the certification 
will not be treated as incorrect or unreliable if the partnership also 
certifies that it does not have actual knowledge of any events occurring 
after the determination date and before the date on which the 
partnership provides the certification to the transferee that would 
cause the amount of the transferor's share of partnership liabilities at 
the time of the transfer to differ by more than 25 percent from the 
amount shown on the certification by the partnership for the 
determination date.
    (iii) Partnership's determination of partnership liabilities for 
distributions. A partnership that is a transferee because it makes a 
distribution may rely on its books and records to determine the extent 
to which the transferor's share of partnership liabilities on the 
determination date are included in the amount realized. The information 
in the books and records will not be treated as incorrect or unreliable 
unless the partnership has actual knowledge, on or before the date of 
the distribution, of any events occurring after the determination date 
that would cause the amount of the transferor's share of partnership 
liabilities at the time of the transfer to differ by more than 25 
percent from the amount determined by the partnership as of the 
determination date.
    (iv) Certification by a foreign partnership of modified amount 
realized--(A) In general. When a transferor is a foreign partnership, a 
transferee may use the procedures of this paragraph (c)(2)(iv) to 
determine the amount realized. For purposes of this paragraph 
(c)(2)(iv)(A), the transferee may treat the modified amount realized as 
the amount realized to the extent that it may rely on a certification 
from the transferor providing the modified amount realized.
    (B) Determining modified amount realized. The modified amount 
realized is determined by multiplying the amount realized (as determined 
under this paragraph (c)(2), without regard to this paragraph 
(c)(2)(iv)) by the aggregate percentage computed as of the determination 
date. The aggregate percentage is the percentage of the gain (if any) 
arising from the transfer that would be allocated to presumed foreign 
taxable persons. For purposes of this paragraph (c)(2)(iv)(B), a 
presumed foreign taxable person is any direct or indirect partner of the 
transferor that has not provided either a certification of non-foreign 
status that meets the requirements of paragraph (b)(2) of this section 
or a certification of treaty benefits that states that the partner is 
not subject to tax on any gain from the transfer pursuant to an income 
tax treaty in effect between the United States and a foreign country. A 
valid certification of treaty benefits must meet the requirements of 
paragraph

[[Page 334]]

(b)(7) of this section (as applied to the partner claiming treaty 
benefits), including the requirement that the transferee mail a copy of 
the certification to the IRS within the time prescribed. For purposes of 
this paragraph (c)(2)(iv), an indirect partner is a person that owns an 
interest in the transferor indirectly through one or more foreign 
partnerships.
    (C) Certification. The certification is made by providing a 
withholding certificate (on Form W-8IMY, Certificate of Foreign 
Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for 
United States Tax Withholding and Reporting) that includes a withholding 
statement that provides the percentage of gain allocable to each direct 
or indirect partner and that provides whether each such person is a 
United States person, a foreign partner eligible for treaty benefits, or 
a presumed foreign taxable person. The certification must also include 
the certification of non-foreign status or the certification of treaty 
benefits from each direct or indirect partner that is not a presumed 
foreign taxable person.
    (3) Lack of money or property or lack of knowledge regarding 
liabilities. The amount to withhold equals the amount realized 
determined without regard to any decrease in the transferor's share of 
partnership liabilities if--
    (i) The amount otherwise required to be withheld under this 
paragraph (c) would exceed the amount realized determined without regard 
to the decrease in the transferor's share of partnership liabilities; or
    (ii) The transferee is unable to determine the amount realized 
because it does not have actual knowledge of the transferor's share of 
partnership liabilities (and has not received or cannot rely on a 
certification described in paragraph (c)(2)(ii)(B) or (C) of this 
section).
    (4) Certification of maximum tax liability--(i) In general. A 
transferee may use the procedures of this paragraph (c)(4) for 
determining the amount to withhold for purposes of section 1446(f)(1) 
and paragraph (a) of this section. A transferee (other than a 
partnership that is a transferee because it makes a distribution) may 
rely on a certification from a transferor that is a foreign corporation, 
a nonresident alien individual, a foreign partnership, or a foreign 
trust regarding the transferor's maximum tax liability as described in 
paragraph (c)(4)(ii) of this section. A partnership that is a transferee 
because it makes a distribution may instead rely on its books and 
records to determine the transferor's maximum tax liability if the books 
and records includes the information required by paragraphs (c)(4)(iii) 
and (iv) of this section. A transferor that is a foreign partnership or 
a foreign trust is treated as a nonresident alien individual for 
purposes of determining the transferor's maximum tax liability.
    (ii) Maximum tax liability. For purposes of this paragraph (c)(4), 
the term maximum tax liability means the amount of the transferor's 
effectively connected gain (as determined under paragraph (c)(4)(iii)(E) 
of this section) multiplied by the applicable percentage, as defined in 
Sec.  1.1446-3(a)(2).
    (iii) Required information. The certification must include--
    (A) A statement that the transferor is either a nonresident alien 
individual, a foreign corporation, a foreign partnership, or a foreign 
trust;
    (B) The transferor's adjusted basis in the transferred interest on 
the determination date;
    (C) The transferor's amount realized (determined in accordance with 
paragraph (c)(2) of this section) on the determination date;
    (D) Whether the transferor remains a partner immediately after the 
transfer;
    (E) The amount of outside ordinary gain and outside capital gain 
that would be recognized and treated as effectively connected gain under 
Sec.  1.864(c)(8)-1(b) on the determination date (effectively connected 
gain);
    (F) The transferor's maximum tax liability on the determination 
date;
    (G) A representation from the transferor that the transferor 
determined the amounts described in paragraph (c)(4)(iii)(E) of this 
section based on the statement described in paragraph (c)(4)(iv) of this 
section, if applicable; and

[[Page 335]]

    (H) A representation from the transferor that it has provided the 
transferee with a copy of the statement described in paragraph 
(c)(4)(iv) of this section.
    (iv) Partnership statement. A transferor may make the representation 
in paragraph (c)(4)(iii)(G) of this section only if the partnership 
provides to the transferor a statement (that meets the requirements for 
a certification under the general rules for applicability in Sec.  
1.1446(f)-1(c)) that includes--
    (A) The partnership's name, address, and TIN; and
    (B) The transferor's aggregate deemed sale EC ordinary gain, within 
the meaning of Sec.  1.864(c)(8)-1(c)(3)(ii)(A) (if any) and the 
transferor's aggregate deemed sale EC capital gain, within the meaning 
of Sec.  1.864(c)(8)-1(c)(3)(ii)(B) (if any), in each case, on the 
determination date.
    (v) Partial nonrecognition. If a nonrecognition provision applies to 
only a portion of the gain realized on the transfer, a certification 
described in paragraph (c)(4)(i) may be relied upon only if the 
certification also includes the information required in paragraph (b)(6) 
of this section (substituting ``a portion of the gain or loss'' for 
``any gain or loss'' in paragraph (b)(6)(i) of this section).
    (vi) Income tax treaties. If only a portion of the gain on the 
transfer is not subject to tax pursuant to an income tax treaty in 
effect between the United States and a foreign country, a certification 
described in paragraph (c)(4)(i) of this section may be relied upon only 
if the requirements of paragraph (b)(7)(i) of this section have been 
met, including the requirement to obtain the applicable withholding 
certificate indicating that the gain from the transfer is not subject to 
tax pursuant to an income tax treaty (substituting ``a portion of the 
gain'' for ``any gain'' in paragraph (b)(7)(i) of this section), and the 
requirement to mail a copy of the withholding certificate to the IRS.
    (d) Reporting and paying withheld amounts--(1) In general. A 
transferee required to withhold under this section must report and pay 
any tax withheld by the 20th day after the date of the transfer using 
Forms 8288, U.S. Withholding Tax Return for Dispositions by Foreign 
Persons of U.S. Real Property Interests, and 8288-A, Statement of 
Withholding on Dispositions by Foreign Persons of U.S. Real Property 
Interests, in accordance with the instructions to those forms. The IRS 
will stamp Form 8288-A to show receipt and mail a stamped copy to the 
transferor (at the address reported on the form). See paragraph (e)(2) 
of this section for the procedures for the transferor to claim a credit 
for amounts withheld. Forms 8288 and 8288-A must include the TINs of 
both the transferor and the transferee. If any required TIN is not 
provided, the transferee must still report and pay any tax withheld on 
Form 8288.
    (2) Certification of withholding to partnership for purposes of 
section 1446(f)(4). A transferee (other than a partnership that is a 
transferee because it makes a distribution) must certify to the 
partnership the extent to which it has satisfied its obligation to 
withhold under this section no later than 10 days after the transfer. 
The certification must either include a copy of Form 8288-A that the 
transferee files with respect to the transfer, or state the amount 
realized and the amount withheld on the transfer. The certification must 
also include any certifications that the transferee relied on to apply 
an exception to withholding under paragraph (b) of this section or to 
determine the amount to withhold under paragraph (c) of this section. A 
transferee that relied on a certification to apply an exception or 
adjustment to withholding remains liable under this section when the 
partnership knows, or has reason to know, that the certification is 
incorrect or unreliable. See Sec.  1.1446(f)-3 for rules regarding a 
partnership's obligation to withhold on distributions to a transferee 
when this certification establishes only partial satisfaction of the 
required amount, is not provided, or cannot be relied upon.
    (e) Effect of withholding on transferor--(1) In general. The 
withholding of tax by a transferee under this section does not relieve a 
foreign person from filing a U.S. tax return with respect to the 
transfer. See Sec. Sec.  1.6012-1(b)(1), 1.6012-2(g)(1), and 1.6031(a)-
1. Further, the withholding of tax by a transferee does not relieve a 
nonresident alien individual or foreign corporation subject to

[[Page 336]]

tax on gain by reason of section 864(c)(8) from paying any tax due with 
the return that has not been fully satisfied through withholding.
    (2) Manner of obtaining credit--(i) Individuals or corporations. 
Except as provided in paragraph (e)(3) of this section, an individual or 
corporation may claim a credit under section 33 for the amount withheld 
under this section by attaching to its applicable return the stamped 
copy of Form 8288-A provided to it under paragraph (d)(1) of this 
section.
    (ii) Partnerships, trusts, or estates. For a rule allowing a foreign 
partnership that is a transferor to claim a credit for the amount 
withheld under this section against its tax liability under section 
1446(a), see Sec.  1.1446-3(c)(4). For the rule providing the extent to 
which a foreign trust or estate may claim a credit for an amount 
withheld under this section, see Sec.  1.1462-1. Except as provided in 
paragraph (e)(3) of this section, a foreign partnership, trust, or 
estate claiming a credit for an amount withheld must attach to its 
applicable return the stamped copy of Form 8288-A provided to it under 
paragraph (d)(1) of this section. A foreign trust or estate must also 
provide any other information required in forms or instructions to any 
beneficiary or owner that is liable for tax on any of the gain under 
section 864(c)(8).
    (3) Failure to receive Form 8288-A. If a stamped copy of Form 8288-A 
has not been provided to the transferor by the IRS, the transferor may 
establish the amount of tax withheld by the transferee by attaching to 
its return substantial evidence of the amount. The transferor must 
attach to its return a statement that includes all of the information 
otherwise required to be provided on Form 8288-A.
    (f) Applicability date. This section applies to transfers that occur 
on or after January 29, 2021.

[T.D. 9926, 85 FR 76935, Nov. 30, 2020]



Sec.  1.1446(f)-3  Partnership's requirement to withhold under 
section 1446(f)(4) on distributions to transferee.

    (a) Partnership's obligation to withhold amounts not withheld by the 
transferee--(1) In general. If a transferee fails to withhold any amount 
required to be withheld under Sec.  1.1446(f)-2, the partnership in 
which the interest was transferred must withhold from any distributions 
with respect to the transferred interest pursuant to this section. To 
determine its withholding obligation under this paragraph (a)(1), a 
partnership may rely on a certification received from the transferee 
described in Sec.  1.1446(f)-2(d)(2) unless it knows, or has reason to 
know, that the certification is incorrect or unreliable. A partnership 
that already possesses a certification of non-foreign status (including 
a Form W-9) for the transferor that meets the requirements provided in 
Sec.  1.1446(f)-2(b)(2) may instead rely on this certification to 
determine that it has no withholding obligation under this paragraph 
(a)(1) unless it knows, or has reason to know, that the certification is 
incorrect or unreliable. A partnership that receives a certification 
described in Sec.  1.1446(f)-2(d)(2) that is inconsistent with the 
information on the certification of non-foreign status in its possession 
is treated as having actual knowledge, or reason to know, that the 
certification of non-foreign status is incorrect or unreliable.
    (2) Notification by IRS. A partnership that receives notification 
from the IRS that a transferee has provided incorrect information 
regarding the amount realized or amount withheld on the certification 
described in Sec.  1.1446(f)-2(d)(2), or has failed to pay the IRS the 
amount reported as withheld on the certification, must withhold the 
amount prescribed in the notification on distributions with respect to 
the transferred interest made on or after the date that is 15 days after 
it receives the notification. The IRS will not issue a notification on 
the basis that the amount realized on the certification described in 
Sec.  1.446(f)-2(d)(2) is incorrect if it determines that the transferee 
properly relied on a certification that included the incorrect 
information to compute the amount realized pursuant to Sec.  1.1446(f)-
2(c)(2).
    (3) Subsequent transferees. A partnership is not required to 
withhold under paragraph (a)(1) or (2) of this section on distributions 
that are made after the date on which the transferee disposes of the 
transferred interest, unless the partnership has actual knowledge that

[[Page 337]]

any person that acquires the transferee's interest in the partnership is 
a related person, i.e., a person that bears a relationship described in 
section 267(b) or 707(b)(1) with respect to the transferee or the 
transferor from which the transferee acquired the interest. A related 
person that acquires the transferee's interest is treated as liable for 
tax under section 1461 to the same extent that the transferee is liable 
for its failure to withhold under Sec.  1.1446(f)-2.
    (b) Exceptions to withholding--(1) Withholding has been satisfied by 
transferee. A partnership is not required to withhold under paragraph 
(a)(1) of this section if it relies on a certification described in 
Sec.  1.1446(f)-2(d)(2) received from the transferee (within the time 
prescribed in Sec.  1.1446(f)-2(d)(2)) that states that an exception to 
withholding described in Sec.  1.1446(f)-2(b) applies or that the 
transferee withheld the full amount required to be withheld (taking into 
account any adjustments under Sec.  1.1446(f)-2(c)) under Sec.  
1.1446(f)-2.
    (2) PTP interests. A partnership is not required to withhold under 
this section on distributions made with respect to a PTP interest.
    (3) Distributing partnerships. A partnership that is a transferee 
because it makes a distribution is not required to withhold under this 
section.
    (c) Withholding rules--(1) Timing of withholding--(i) In general. A 
partnership required to withhold under paragraph (a)(1) of this section 
must withhold on distributions made with respect to a transferred 
interest beginning on the later of--
    (A) The date that is 30 days after the date of transfer; or
    (B) The date that is 15 days after the date on which the partnership 
acquires actual knowledge that the transfer has occurred.
    (ii) Satisfaction of withholding obligation. A partnership is 
treated as satisfying its withholding obligation under paragraph (a)(1) 
of this section and may stop withholding on distributions with respect 
to a transferred interest on the earlier of--
    (A) The date on which the partnership completes withholding and 
paying the amount required to be withheld under paragraph (c)(2) of this 
section; or
    (B) The date on which the partnership receives and may rely on a 
certification from the transferee described in Sec.  1.1446(f)-2(d)(2) 
(without regard to whether the certification is received by the time 
prescribed in Sec.  1.1446(f)-2(d)(2)) that claims an exception to 
withholding under Sec.  1.1446(f)-2(b).
    (2) Amount to withhold--(i) In general. A partnership required to 
withhold under paragraph (a)(1) of this section must withhold the full 
amount of each distribution made with respect to the transferred 
interest until it has withheld--
    (A) A tax of 10 percent of the amount realized (determined solely 
under Sec.  1.1446(f)-2(c)(2)(i)) on the transfer, reduced by any amount 
withheld by the transferee; plus
    (B) Any interest computed under paragraph (c)(2)(ii) of this 
section.
    (ii) Computation of interest. The amount of interest required to be 
withheld under paragraph (a)(1) of this section is the amount of 
interest that would be required to be paid under section 6601 and Sec.  
301.6601-1 of this chapter if the amount that should have been withheld 
by the transferee was considered an underpayment of tax. For purposes of 
this paragraph (c)(2)(ii), interest is payable between the date that is 
20 days after the date of the transfer and the date on which the tax due 
under paragraph (a)(1) of this section is paid to the IRS.
    (iii) Certifications required. For purposes of paragraph 
(c)(2)(i)(A) of this section, a partnership must determine the amount 
realized on the transfer and any amount withheld by the transferee based 
on a certification from the transferee described in Sec.  1.1446(f)-
2(d)(2), without regard to whether the certification is received by the 
time prescribed in Sec.  1.1446(f)-2(d)(2). A partnership that does not 
receive or cannot rely on a certification from the transferee described 
in Sec.  1.1446(f)-2(d)(2) must withhold tax equal to the full amount of 
each distribution made with respect to a transferred interest until it 
receives a certification that it can rely on.
    (3) Coordination with other withholding provisions. Any amount 
required to be withheld on a distribution under any other provision of 
the Internal Revenue

[[Page 338]]

Code is not also required to be withheld under section 1446(f)(4) or 
this section.
    (d) Reporting and paying withheld amounts. The partnership must 
report and pay the tax withheld using Forms 8288, U.S. Withholding Tax 
Return for Dispositions by Foreign Persons of U.S. Real Property 
Interests, and 8288-C, Statement of Withholding Under Section 1446(f)(4) 
for Withholding on Dispositions by Foreign Persons of Partnership 
Interests, as provided in forms, instructions, or other guidance.
    (e) Effect of withholding on transferor and transferee--(1) 
Transferor. The withholding of tax by a partnership under this section 
does not relieve a foreign person from filing a U.S. income tax return 
with respect to the transfer. See Sec. Sec.  1.6012-1(b)(1), 1.6012-
2(g)(1), and 1.6031(a)-1. Further, the withholding of tax by a 
partnership does not relieve a nonresident alien individual or foreign 
corporation subject to tax on gain by reason of section 864(c)(8) from 
paying any tax due with the return that has not been fully satisfied 
through withholding. An individual or corporation is not allowed a 
credit under section 33 for amounts withheld on distributions to the 
transferee under this section. See, however, Sec. Sec.  1.1446(f)-5(a) 
and 1.1463-1(a), which generally provide that tax will not be 
recollected if paid by another person.
    (2) Transferee. A transferee is treated as satisfying its 
withholding tax liability under Sec.  1.1446(f)-2 to the extent that a 
partnership withholds tax (which does not include interest) under this 
section. Interest computed under paragraph (c)(2)(ii) of this section 
that is withheld by the partnership from the transferee is treated as 
interest paid by the transferee with respect to its withholding tax 
liability under Sec.  1.1446(f)-2. An excess amount under this section 
is the amount of tax and interest withheld under this section that 
exceeds the transferee's withholding tax liability under Sec.  
1.1446(f)-2 plus any interest owed by the transferee with respect to 
such liability. A transferee may claim a refund for the excess amount if 
payments have been made in excess of the tax which is properly due by 
the transferee for the tax period.
    (f) Applicability date. This section applies to transfers that occur 
on or after January 1, 2022.

[T.D. 9926, 85 FR 76935, Nov. 30, 2020]



Sec.  1.1446(f)-4  Withholding on the transfer of a publicly 
traded partnership interest.

    (a) Obligation to withhold on a transfer of a PTP interest--(1) In 
general. If a transfer of a PTP interest is effected through one or more 
brokers (as defined in Sec.  1.1446(f)-1(b)(1)), the transferee is not 
required to withhold under section 1446(f)(1) andSec.  1.1446(f)-2. 
Rather, any broker required to withhold under paragraph (a)(2) of this 
section must withhold a tax equal to 10 percent of the amount realized 
(as defined in paragraph (c)(2) of this section) on the transfer of a 
PTP interest, except as otherwise provided in this section. For cases in 
which a publicly traded partnership is liable for withholding under this 
section, see paragraphs (b)(3)(i) and (c)(2)(iii) of this section.
    (2) Broker's requirement to withhold--(i) In general. Except as 
otherwise provided in this section, a broker is required to withhold 
under this section if it pays an amount realized to another broker that 
it is required to treat as a foreign person, or if a broker pays an 
amount realized to a foreign transferor that is its customer.
    (ii) Payments to foreign brokers. A broker that pays an amount 
realized from the transfer of a PTP interest to another broker that it 
is required to treat as a foreign person must withhold under this 
section unless the first-mentioned broker obtains documentation on which 
it may rely establishing that the second-mentioned broker is described 
in paragraph (a)(2)(ii)(A) or (B) of this section. A broker must treat 
any broker to which it pays an amount realized from the transfer of a 
PTP interest as a foreign person unless it obtains, or already 
possesses, documentation (including a certification of non-foreign 
status) on which it may rely that establishes that the other broker is a 
U.S. person. A broker may rely on documentation described in this 
paragraph (a)(2)(ii), or in paragraph (a)(2)(ii)(A) or (B) of this 
section, unless it has actual knowledge that the

[[Page 339]]

documentation is unreliable or incorrect.
    (A) A broker is described in this paragraph (a)(2)(ii)(A) if it is a 
qualified intermediary (as defined in Sec.  1.1441-1(e)(5)(ii)) that 
provides a valid qualified intermediary withholding certificate (as 
described in Sec.  1.1441-1(e)(3)(ii)) that states that it assumes 
primary withholding responsibility for the payment.
    (B) A broker is described in this paragraph (a)(2)(ii)(B) if it is a 
U.S. branch of a foreign person (as described in Sec.  1.1441-
1(b)(2)(iv)) that provides a valid U.S. branch withholding certificate 
(as described in Sec.  1.1441-1(e)(3)(v), but without regard to the 
requirement in Sec.  1.1441-1(e)(3)(v) that the certificate state that 
the amount is not effectively connected with a trade or business within 
the United States) that states that the U.S. branch agrees to be treated 
as a U.S. person with respect to the payment.
    (iii) Payments to foreign transferors that are customers of the 
broker. A broker that pays an amount realized to a foreign transferor 
that is its customer (as defined in Sec.  1.6045-1(a)(2)) from the 
transfer of a PTP interest is required to withhold under this section 
unless an exception under paragraph (b) of this section applies.
    (3) Exception from certain withholding by U.S. clearing 
organizations. A broker that is a U.S. clearing organization clearing or 
settling a sale of a PTP interest is not required to withhold on the 
amount realized from the sale. However, see Sec.  1.1461-
1(c)(2)(i)(R)(2) for the requirement that a U.S. clearing organization 
acting as a central counterparty report on Form 1042-S sales of PTP 
interests that it clears and settles on a net basis.
    (4) Exception when withholding already satisfied. A broker that 
receives from another broker an amount realized from the transfer of a 
PTP interest is required to withhold under this section unless the other 
broker has withheld the full amount required. A broker that receives 
from another broker an amount realized from the transfer of a PTP 
interest may treat the withholding as having been satisfied on the full 
amount required unless it knows or has reason to know that the 
withholding obligation has not already been satisfied. A broker that is 
a qualified intermediary determines its withholding requirement for 
purposes of this paragraph (a)(4) in accordance with its qualified 
intermediary agreement.
    (5) Documentation obtained from another person to determine a 
broker's status. A U.S. clearing organization may act as an agent for a 
broker receiving an amount realized from another broker that is a member 
of the clearing organization for purposes of furnishing valid 
documentation described in paragraph (a)(2) of this section of the 
first-mentioned broker's status to such other broker, provided the 
clearing organization notifies the first-mentioned broker and such 
broker has the ability to opt out. A broker that obtains documentation 
from a clearing organization under this paragraph (a)(5) for a broker to 
which the first-mentioned broker is paying an amount realized may rely 
on such documentation unless it has actual knowledge that the 
documentation is incorrect or unreliable.
    (6) Date of withholding with respect to a transfer other than a 
distribution. For a transfer of a PTP interest that is not a 
distribution, a broker is required to apply the principles of Sec.  
31.3406(a)-4(b)(1) of this chapter to determine the date on which to 
withhold under this section.
    (7) Payments to qualified intermediaries not assuming primary 
withholding responsibility. With respect to the transfer of a PTP 
interest, if a broker pays the amount realized to a foreign person that 
the broker may treat as a qualified intermediary (as defined in Sec.  
1.1441-1(e)(5)(ii)) that does not assume primary withholding 
responsibility for the payment based on a valid qualified intermediary 
withholding certificate described in Sec.  1.1441-1(e)(3)(ii) upon which 
the broker may rely under paragraph (a)(2) of this section, the broker 
may withhold as provided in this paragraph (a)(7). Under this paragraph 
(a)(7), a broker may withhold under this section by reference to the 
amount of the payment that the broker can reliably determine, based on 
the withholding statement provided with the

[[Page 340]]

withholding certificate, is allocable to--
    (i) Foreign transferors included in a chapter 3 withholding rate 
pool (as described in Sec.  1.1441-1(e)(5)(v)(C)) that are subject to a 
10 percent rate of withholding on the payment of the amount realized;
    (ii) Foreign transferors included in a chapter 3 withholding rate 
pool (as described in Sec.  1.1441-1(e)(5)(v)(C)) that qualify for an 
exception from withholding on the payment of the amount realized under 
paragraph (b) of this section;
    (iii) Each foreign transferor for which a form acceptable under 
Sec.  1.1446-1 is provided; or
    (iv) U.S. transferors, based on a valid Form W-9 provided for each 
such transferor to the extent that the transferor is not included in a 
chapter 4 withholding rate pool of U.S. payees (as described in Sec.  
1.1441-1(e)(5)(v)(C), to the extent permitted for purposes of chapter 4 
of the Internal Revenue Code).
    (8) Qualified intermediary or U.S. branch withholding requirement. A 
broker that is a qualified intermediary (as defined in Sec.  1.1441-
1(e)(5)(ii)) or U.S. branch must assume primary withholding 
responsibility under this section for a distribution from a publicly 
traded partnership for which the qualified intermediary or U.S. branch 
acts as a nominee for purposes of section 1446(a). See Sec.  1.1446-
4(b)(3).
    (b) Exceptions to withholding--(1) In general. A broker is not 
required to withhold under this section if it properly relies on a 
certification described in paragraph (b)(2), (5), or (6) of this 
section, a qualified notice described in paragraph (b)(3) of this 
section, or if the exception described in paragraph (b)(4) of this 
section applies. A broker may not rely on a certification described in 
this paragraph (b) if it has actual knowledge that the certification is 
incorrect or unreliable.
    (2) Certification of non-foreign status. A broker may rely on a 
certification of non-foreign status that it obtains from the transferor. 
A certification of non-foreign status under this section means a Form W-
9, Request for Taxpayer Identification Number and Certification, or 
valid substitute form, that meets the requirements of Sec.  1.1441-
1(d)(2). For purposes of this paragraph (b)(2), a broker may rely on a 
valid form that it already possesses from the transferor. A broker may 
instead rely on certification from a second broker (as defined in Sec.  
1.6045-1(a)(1)) that acts as an agent for the transferor when the second 
broker does not receive the amount realized from the transfer of the PTP 
interest. This certification must state that the second broker has 
collected a valid certification of non-foreign status (within the 
meaning of this paragraph (b)(2)) from the transferor, and it must 
include the transferor's TIN and status as a foreign or U.S. person.
    (3) Less than 10 percent effectively connected gain by partnership--
(i) In general. A broker may rely on a qualified notice described in 
paragraph (b)(3)(iii) of this section that states that the 10-percent 
exception applies, as determined under paragraph (b)(3)(ii) of this 
section. In a case in which a broker properly relies on a qualified 
notice under paragraph (b)(1) of this section that results in 
underwithholding on a transfer of a PTP interest, the publicly traded 
partnership that issued the notice is solely liable for the 
underwithheld tax under section 1461. A publicly traded partnership's 
liability referenced in the preceding sentence, however, applies only 
when the publicly traded partnership fails to make a reasonable estimate 
of the amounts required for determining the applicability of the 10-
percent exception.
    (ii) 10-percent exception--(A) In general. The 10-percent exception 
applies to a transfer if, on the PTP designated date described in 
paragraph (b)(3)(ii)(B) of this section--
    (1) If the publicly traded partnership sold all of its assets at 
fair market value in the manner described in Sec.  1.864(c)(8)-1(c), 
either--
    (i) The amount of net gain that would have been effectively 
connected with the conduct of a trade or business within the United 
States would be less than 10 percent of the total net gain; or
    (ii) No gain would have been effectively connected with the conduct 
of a trade or business in the United States; or
    (2) The partnership was not engaged in a trade or business within 
the United States at any time during the

[[Page 341]]

taxable year of the partnership through the PTP designated date.
    (B) PTP designated date. The PTP designated date for a transfer is 
any date for a deemed sale determination that is designated by the 
publicly traded partnership in a qualified notice described in paragraph 
(b)(3)(iii) of this section, provided that the PTP designated date 
occurs on or after the date that is 92 days before the date on which the 
publicly traded partnership posted the qualified notice naming the PTP 
designated date.
    (iii) Qualified notice--(A) In general. Except as provided in 
paragraphs (b)(3)(iii)(B) and (C) of this section, a qualified notice 
described in this paragraph (b)(3)(iii) is the most recent qualified 
notice (within the meaning of Sec.  1.1446-4(b)(4)) posted by the 
publicly traded partnership.
    (B) Qualified notice posting date requirement. A qualified notice is 
described in this paragraph (b)(3)(iii) only if the publicly traded 
partnership has posted it within the 92-day period ending on the date of 
the transfer. For a transfer that is a distribution by the publicly 
traded partnership, the qualified notice is described in paragraph 
(b)(3)(iii) of this section only if the qualified notice is posted with 
respect to the distribution.
    (C) Recent posting of qualified notice. If the most recent qualified 
notice posted by the publicly traded partnership was posted during the 
10-day period ending on the date of the transfer, a broker may instead 
rely on the immediately preceding qualified notice (within the meaning 
of Sec.  1.1446-4(b)(4)) posted by the publicly traded partnership, 
provided that it satisfies the condition described in paragraph 
(b)(3)(iii)(B) of this section.
    (4) Amount subject to withholding under section 3406. A broker is 
not required to withhold under this section if the amount realized from 
the transfer of the PTP interest is subject to withholding under Sec.  
31.3406(b)(3)-2 of this chapter.
    (5) Income tax treaties. A broker may rely on a certification from 
the transferor that states that the transferor is not subject to tax on 
any gain from the transfer pursuant to an income tax treaty in effect 
between the United States and a foreign country if the requirements of 
this paragraph (b)(5) are met. The transferor makes the certification on 
a withholding certificate (on a Form W-8BEN, Certificate of Foreign 
Status of Beneficial Owner for United States Tax Withholding and 
Reporting (Individuals), or Form W-8BEN-E, Certificate of Status of 
Beneficial Owner for United States Tax Withholding and Reporting 
(Entities)) that meets the requirements for validity under Sec.  1.1446-
1(c)(2)(iv) (or an applicable substitute form that meets the 
requirements under Sec.  1.1446-1(c)(5)) and that contains the 
information necessary to support the claim for treaty benefits. For 
purposes of this paragraph (b)(5), a broker may rely on a withholding 
certificate that it already possesses from the transferor that meets the 
requirements of this paragraph (b)(5) unless it has actual knowledge 
that the information is incorrect or unreliable. The exception in this 
paragraph (b)(5) does not apply if treaty benefits apply to only a 
portion of the gain from the transfer.
    (6) Foreign dealers that provide Form W-8ECI. A broker may rely on a 
certification provided by a transferor that certifies that it is a 
dealer in securities (as defined in section 475(c)(1)) and that any gain 
from the transfer of the PTP interest is effectively connected with the 
conduct of a trade or business within the United States without regard 
to the provisions of section 864(c)(8). The certification described in 
the preceding sentence is made on 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, that meets the requirements 
for validity under Sec.  1.1446-1(c)(2)(iv) (or an applicable substitute 
form that meets the requirements under Sec.  1.1446-1(c)(5)) and that 
contains any other information required in the instructions to the form. 
A broker may rely on a withholding certificate that it already possesses 
from the transferor that meets the requirements of this paragraph (b)(6) 
unless it has actual knowledge that the information is incorrect or 
unreliable.
    (c) Determining the amount to withhold--(1) In general. A broker 
that is required to withhold under this section must withhold 10 percent 
of the

[[Page 342]]

amount realized on the transfer of the PTP interest, except as provided 
in this paragraph (c). Any procedures in this paragraph (c) apply solely 
for purposes of determining the amount to withhold under section 
1446(f)(1) and this section. A broker may not rely on a certification 
described in this paragraph (c) if it has actual knowledge that the 
certification is incorrect or unreliable.
    (2) Amount realized--(i) In general. Solely for purposes of this 
section, the amount realized is the amount of gross proceeds (as defined 
in Sec.  1.6045-1(d)(5)) paid or credited upon the transfer to the 
customer or other broker (as applicable), or, in the case of a 
distribution, the amount determined under paragraph (c)(2)(iii) of this 
section.
    (ii) Certification by a foreign partnership of modified amount 
realized--(A) In general. When a transferor is a foreign partnership, a 
broker may use the procedures of this paragraph (c)(2)(ii) to determine 
the amount realized. For purposes of this paragraph (c)(2)(ii)(A), the 
broker may treat the modified amount realized as the amount realized to 
the extent it may rely on a certification from the transferor providing 
the modified amount realized.
    (B) Determining modified amount realized. The modified amount 
realized is determined by multiplying the amount realized (as determined 
under this paragraph (c)(2), without regard to this paragraph 
(c)(2)(ii)) by the aggregate percentage computed as of the determination 
date (see Sec.  1.1446(f)-1(c)(4)). The aggregate percentage is the 
percentage of the gain (if any) arising from the transfer that would be 
allocated to presumed foreign taxable persons. For purposes of this 
paragraph (c)(2)(ii)(B), a presumed foreign taxable person is any direct 
or indirect partner of the transferor that has not provided either a 
certification of non-foreign status that meets the requirements of 
paragraph (b)(2) of this section or a certification of treaty benefits 
that states that the partner is not subject to tax on any gain from the 
transfer pursuant to an income tax treaty in effect between the United 
States and a foreign country. A valid certification of treaty benefits 
must meet the requirements of paragraph (b)(5) of this section (as 
applied to the partner claiming treaty benefits). For purposes of this 
paragraph (c)(2)(ii), an indirect partner is a person that owns an 
interest in the transferor indirectly through one or more foreign 
partnerships.
    (C) Certification. The certification is made by providing a 
withholding certificate (on Form W-8IMY, Certificate of Foreign 
Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for 
United States Tax Withholding and Reporting) that includes a withholding 
statement that provides the percentage of gain allocable to each direct 
or indirect partner and that provides whether each such person is a 
United States person, a foreign partner eligible for treaty benefits, or 
a presumed foreign taxable person. The certification must also include 
the certification of non-foreign status or the certification of treaty 
benefits from each direct or indirect partner that is not a presumed 
foreign taxable person. For purposes of this paragraph (c)(2)(ii), a 
broker may rely on a withholding certificate and withholding statement 
that it already possesses from the partnership unless it has actual 
knowledge that the information is incorrect or unreliable.
    (iii) Determination of amount realized on a distribution. The amount 
realized on a distribution from a publicly traded partnership is the 
amount of the distribution reduced by the portion of the distribution 
that is attributable to the cumulative net income of the partnership. 
The cumulative net income is the net income earned by the publicly 
traded partnership since its formation that has not been previously 
distributed by the partnership. A publicly traded partnership identifies 
such excess portion of the distribution as an amount in excess of 
cumulative net income on a qualified notice (within the meaning of Sec.  
1.1446-4(b)(4)) posted with respect to the distribution. If a broker 
properly withholds based on the qualified notice (applying the rules of 
Sec.  1.1446-4(d)(1) to the distribution), the broker is not liable for 
any underwithholding on any amount attributable to an amount in excess 
of cumulative net income. Rather, the publicly traded partnership that 
issued the qualified notice is solely liable for the underwithheld tax 
under

[[Page 343]]

section 1461 on such amount that results from a broker's reliance on the 
notice.
    (d) Reporting and paying withheld amounts. A broker that is required 
to withhold under this section must pay the withheld tax pursuant to the 
deposit rules in Sec.  1.6302-2. For rules regarding reporting on 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, that apply to a broker that withholds under this section, 
see Sec.  1.1461-1(b) and (c). For rules regarding when an amount 
realized on the transfer of a PTP interest is reportable on a Form 1042-
S (including in certain cases in which withholding is not required), see 
Sec.  1.1461-1(c)(2)(i)(Q) and (R). A broker that pays the amount 
realized to a foreign partnership must issue a Form 1042-S directly to 
the partnership rather than issuing a form to each of the partners of 
the partnership. See Sec.  1.1461-1(c)(1)(ii)(A)(8) (treating the 
foreign partnership as a recipient for reporting purposes). A broker 
making a payment to a U.S. branch treated as a U.S. person must not 
treat the branch as a U.S. person for purposes of reporting the payment 
made to the branch. Therefore, a payment to that U.S. branch must be 
reported on Form 1042-S. See Sec.  1.1461-1(c). A Form 1042-S issued 
directly to the transferor must include the TIN of the transferor unless 
the broker does not know the TIN at the time of issuance.
    (e) Effect of withholding on transferor--(1) In general. The 
withholding of tax under this section does not relieve a foreign person 
from filing a U.S. tax return with respect to the transfer. See 
Sec. Sec.  1.6012-1(b)(1), 1.6012-2(g)(1), and 1.6031(a)-1. Further, the 
withholding of tax by a broker does not relieve a nonresident alien 
individual or foreign corporation subject to tax on gain by reason of 
section 864(c)(8) from paying any tax due with the return that has not 
been fully satisfied through withholding.
    (2) Manner of obtaining credit--(i) Individuals and corporations. An 
individual or corporation may claim a credit under section 33 for the 
amount withheld under this section by attaching to its applicable return 
a copy of a Form 1042-S that includes its TIN (or as otherwise provided 
in IRS forms or instructions).
    (ii) Partnerships, trusts, or estates. For a rule allowing a foreign 
partnership that is a transferor to claim a credit for the amount 
withheld under this section against its obligation to withhold under 
section 1446(a), see Sec.  1.1446-3(c)(4). For the rule providing the 
extent to which a foreign trust or estate may claim a credit for an 
amount withheld under this section, see Sec.  1.1462-1. A foreign 
partnership, trust, or estate claiming a credit for an amount withheld 
must attach to its applicable return the Form 1042-S provided to it 
under paragraph (d) of this section (or as otherwise provided in IRS 
forms or instructions). A foreign trust or estate must also provide any 
information required in forms or instructions to any beneficiary or 
owner that is liable for tax on any of the gain under section 864(c)(8).
    (f) Applicability date. This section applies to transfers that occur 
on or after January 1, 2022.

[T.D. 9926, 85 FR 76935, Nov. 30, 2020]



Sec.  1.1446(f)-5  Liability for failure to withhold.

    (a) Liability for failure to withhold. Every person required to 
withhold and pay tax under section 1446(f), but that fails to do so, is 
liable for the tax under section 1461, plus any applicable interest, 
penalties, or additions to tax. A partnership that failed to withhold 
and pay tax under Sec.  1.1446(f)-3 is liable only for the amount of tax 
that it failed to collect (but not any interest computed on that amount 
under Sec.  1.1446(f)-3(c)(2)(ii)), plus any interest, penalties, or 
additions to tax with regard to the partnership's failure to withhold.
    (b) Tax liability otherwise satisfied. Under section 1463, if the 
tax required to be withheld under section 1446(f) is paid by another 
person required to withhold under section 1446(f), or by the nonresident 
alien individual or foreign corporation subject to tax on gain resulting 
from section 864(c)(8), the tax will not be recollected. The person 
required to withhold must establish proof of payment by another person 
required to withhold or by the nonresident alien

[[Page 344]]

individual or foreign corporation subject to the tax on gain resulting 
from section 864(c)(8). The person required to withhold may show that a 
reduced rate of withholding was appropriate by establishing the amount 
of tax due by the foreign transferor (as defined in Sec.  1.864(c)(8)-
1(g)(3)) on gain resulting from section 864(c)(8). The person required 
to withhold under section 1446(f) is not relieved from liability for any 
interest, penalties, or additions to tax that would otherwise apply. 
However, if the person required to withhold establishes to the 
satisfaction of the Commissioner that no gain on the transfer is treated 
as effectively connected with the conduct of a trade or business within 
the United States under section 864(c)(8), no interest, penalties, or 
additions to tax will apply.
    (c) Liability of agents--(1) Duty to provide notice of false 
certification. A transferee's or transferor's agent (other than a broker 
required to withhold under Sec.  1.1446(f)-4) must provide notice to a 
transferee (or other person required to withhold) if that person is 
furnished with a certification described in Sec. Sec.  1.1446(f)-1 
through 1.1446(f)-4 that the agent knows is false. A person required to 
withhold may not rely on a certification if it receives the notice 
described in this paragraph (c)(1).
    (2) Procedural requirements. Any agent who is required to provide 
notice under paragraph (c)(1) of this section must do so in writing 
(including by electronic submission) as soon as possible after learning 
of the false certification. If the agent first learns of the false 
certification before the date of transfer, notice must be given by the 
third day following that discovery but no later than the date of 
transfer (before the transferee's payment of consideration). If an agent 
first learns of a false certification after the date of transfer, notice 
must be given by the third day following that discovery. The notice must 
also explain the possible consequences to the recipient of a failure to 
withhold. The notice need not disclose the information on which the 
agent's statement is based. The agent must also furnish a copy of the 
notice to the IRS by the date on which the notice is required to be 
given to the recipient. The copy of the notice must be delivered to the 
address provided in Sec.  1.1445-1(g)(10) and must be accompanied by a 
cover letter stating that the copy is being filed pursuant to the 
requirements of this paragraph (c)(2).
    (3) Failure to provide notice. Any agent who is required to provide 
notice under paragraph (c)(1) of this section, but fails to do so in the 
manner required in paragraph (c)(2) of this section, is liable for the 
tax that the person who should have been provided notice in accordance 
with paragraph (c)(2) of this section was required to withhold under 
section 1446(f) if the notice had been given.
    (4) Limitation on liability. An agent's liability under paragraph 
(c)(3) of this section is limited to the amount of compensation that the 
agent derives from the transaction. In addition, an agent that assists 
in the preparation of, or fails to disclose knowledge of, a false 
certification may be liable for civil and criminal penalties.
    (d) Applicability date. This section applies to transfers that occur 
on or after January 29, 2021.

[T.D. 9926, 85 FR 76935, Nov. 30, 2020]

                         Tax-Free Covenant Bonds



Sec.  1.1451-1  Tax-free covenant bonds issued before January 1, 1934.

    (a) Rates of withholding--(1) Rate of 2 percent. Withholding of a 
tax equal to 2 percent is required in the case of interest upon bonds or 
other corporate obligations containing a tax-free covenant and issued 
before January 1, 1934, paid to an individual, a fiduciary, or a 
partnership, whether resident or nonresident, or to a nonresident 
foreign corporation, regardless of whether the liability assumed by the 
obligor is less than, equal to, or greater than 2 percent.
    (2) Rate of 30 percent. Notwithstanding subparagraph (1) of this 
paragraph, if the liability assumed by the obligor does not exceed 2 
percent of the interest, withholding is required at the rate of 30 
percent in the case of payments to a nonresident alien individual, a 
nonresident partnership composed in whole or in part of nonresident 
aliens, a nonresident foreign corporation, or an owner who is unknown to 
the withholding agent.

[[Page 345]]

    (3) Obligations of resident payers. The rates of withholding 
specified in subparagraphs (1) and (2) of this paragraph are applicable 
to interest on such tax-free covenant bonds issued by a domestic 
corporation or by a resident foreign corporation.
    (4) Obligations of nonresident payers. A nonresident foreign 
corporation having a fiscal or paying agent in the United States is 
required to withhold a tax of 2 percent in the case of interest upon its 
tax-free covenant bonds issued before January 1, 1934, which is paid to 
an individual or fiduciary who is a citizen or resident of the United 
States, to a partnership any member of which is a citizen or resident, 
or to an unknown owner.
    (5) Interest from sources without the United States. Withholding is 
not required under section 1451 in the case of interest upon bonds or 
other corporate obligations issued before January 1, 1934, and 
containing a tax-free covenant if the interest is not to be treated as 
income from sources within the United States and the payments are made 
to a nonresident alien, a partnership composed wholly of nonresident 
aliens, or a nonresident foreign corporation.
    (6) Tax treaties. The rates of tax to be withheld in accordance with 
this paragraph shall be reduced as may be provided by treaty with any 
country. See section 894 and Sec.  1.1441-6 relating to income subject 
to a reduced rate of, or an exemption from, income tax pursuant to an 
income tax convention.
    (b) Date of issue. The withholding provisions of section 1451 are 
applicable only to bonds, mortgages, or deeds of trust, or other similar 
obligations of a corporation which were issued before January 1, 1934, 
and which contain a tax-free covenant. For the purpose of section 1451, 
bonds, mortgages, or deeds of trust, or other similar obligations of a 
corporation, are issued when delivered. If a broker or other person acts 
as selling agent of the obligor, the obligation is issued when delivered 
by the agent to the purchaser. If a broker or other person purchases the 
obligation outright for the purpose of holding or reselling it, the 
obligation is issued when delivered to such broker or other person.
    (c) Extended maturity date. In cases where on or after January 1, 
1934, the maturity date of bonds or other obligations of a corporation 
is extended, the bonds or other obligations shall be considered to have 
been issued on or after January 1, 1934. The interest on such 
obligations is not subject to the withholding provisions of section 1451 
but falls within the class of interest described in section 1441. See 
paragraph (c)(5)(iii) of Sec.  1.1441-3.
    (d) Covenant in trust deed. Bonds issued under a trust deed 
containing a tax-free covenant are treated as if they contain such a 
covenant. If neither the bonds nor the trust deeds given by the obligor 
to secure them contained a tax-free covenant, but the original trust 
deeds were modified before January 1, 1934, by supplemental agreements 
containing a tax-free covenant executed by the obligor corporation and 
the trustee, the bonds issued before January 1, 1934, are subject to the 
provisions of section 1451, provided appropriate authority existed for 
the modification of the trust deeds in this manner. The authority must 
have been contained in the original trust deeds or actually secured from 
the bondholders.
    (e) Notation showing date of issue. In order that the date of issue 
of bonds, mortgages, deeds of trust, or other similar corporate 
obligations containing a tax-free covenant may be readily determined by 
the owner for the purpose of preparing the ownership certificates 
required by Sec.  1.1461-1, the issuing or debtor corporation shall 
indicate the date of issue by an appropriate notation, or use the phrase 
``issued on or after January 1, 1934,'' on each such obligation or in a 
statement accompanying the delivery of the obligation.
    (f) Effect of withholding on income taxes of bondholder and issuing 
corporation--(1) Federal tax. In the case of corporate bonds or other 
corporate obligations issued before January 1, 1934, and containing a 
tax-free covenant, the corporation paying a Federal tax, or any part of 
it, for someone else pursuant to its agreement is not entitled to deduct 
such payment from its gross income on any ground; nor shall the tax so 
paid be included in the gross income of the bondholder. The amount of 
the

[[Page 346]]

tax so paid may, nevertheless, be claimed by the bondholder in 
accordance with paragraph (a) of Sec.  1.1462-1 as a credit against the 
total amount of income tax due. See also section 32. The tax so paid by 
the corporation upon tax-free covenant bond interest payable to a 
domestic or resident fiduciary and allocable to any nonresident alien 
beneficiary under section 652 or 662 is allowable, pro rata, as a credit 
against:
    (i) The tax required to be withheld by the fiduciary in accordance 
with paragraph (f) of Sec.  1.1441-3 from the income of the beneficiary, 
and
    (ii) The total income tax computed in the return of the beneficiary, 
as indicated in paragraph (a) of Sec.  1.1462-1.
    (2) State taxes. In the case of corporate bonds or other obligations 
containing an appropriate tax-free covenant, the corporation paying for 
someone else, pursuant to its agreement, a State tax or any tax other 
than a Federal tax may deduct such payment as interest paid on 
indebtedness.
    (g) Alien resident of Puerto Rico. For purposes of this section the 
term ``nonresident alien individual'' includes an alien resident of 
Puerto Rico.
    (h) Other rules for withholding of tax under section 1451. The rules 
for withholding stated in paragraphs (c) (2) and (3), (f), and (g) of 
Sec.  1.1441-3 shall also apply for purposes of withholding the tax 
under this section.

[T.D. 6500, 25 FR 12076, Nov. 26, 1960, as amended by T.D. 7157, 36 FR 
25228, Dec. 30, 1971]



Sec.  1.1451-2  Exemptions from withholding under section 1451.

    (a) Claiming personal exemptions. Withholding under Sec.  1.1451-1 
from interest on bonds or other obligations of corporations issued 
before January 1, 1934, and containing a tax-free covenant shall not be 
required if there is filed with the withholding agent when presenting 
coupons for payment, or not later than February 1 of the following year, 
an ownership certificate on Form 1000 stating:
    (1) In the case of a citizen or resident of the United States, that 
his taxable income does not exceed his deductions for personal 
exemptions allowed under section 151; or
    (2) In the case of an estate or trust the fiduciary of which is a 
citizen or resident of the United States, that its taxable income does 
not exceed the deduction for the personal exemption allowed under 
section 642(b).
    (b) Claiming residence in United States. To claim residence in the 
United States for purposes of section 1451, see Sec.  1.1441-5.
    (c) Other exemptions. The exemptions allowed by paragraphs (d) and 
(h) of Sec.  1.1441-4 shall also apply for purposes of section 1451.

[T.D. 6500, 25 FR 12077, Nov. 26, 1960, as amended by T.D. 6908, 31 FR 
16774, Dec. 31, 1966]

                  Application of Withholding Provisions



Sec.  1.1461-1  Payment and returns of tax withheld.

    (a) Payment of withheld tax--(1) Deposits of tax. Every withholding 
agent who withholds tax pursuant to chapter 3 of the Internal Revenue 
Code (Code) and the regulations under such chapter shall deposit such 
amount of tax as provided in Sec.  1.6302-2(a). If for any reason the 
total amount of tax required to be returned for any calendar year 
pursuant to paragraph (b) of this section has not been deposited 
pursuant to Sec.  1.6302-2, the withholding agent shall pay the balance 
of tax due for such year at such place as the Internal Revenue Service 
(IRS) shall specify. The tax shall be paid when filing the return 
required under paragraph (b)(1) of this section for such year, unless 
the IRS specifies otherwise. With respect to withholding under section 
1446, this section shall apply only to publicly traded partnerships and 
nominees that withhold under Sec.  1.1446-4 and brokers and publicly 
traded partnerships that withhold (or are otherwise liable for 
underwithholding) under Sec.  1.1446(f)-4 on transfers of publicly 
traded partnership interests. See Sec.  1.1461-3 regarding withholding 
tax liabilities under sections 1446(a) and 1446(f) and penalties that 
apply for failure to withhold under either of those sections.
    (2) Penalties for failure to pay tax. For penalties and additions to 
the tax for failure to timely pay the tax required to be withheld under 
chapter 3 of the

[[Page 347]]

Code, see sections 6656, 6672, and 7202 and the regulations under those 
sections.
    (b) Income tax return--(1) General rule. A withholding agent shall 
make an income tax return on Form 1042 (or such other form as the IRS 
may prescribe) for income paid during the preceding calendar year that 
the withholding agent is required to report on an information return on 
Form 1042-S (or such other form as the IRS may prescribe) under 
paragraph (c)(1) of this section. See section 6011 and Sec.  1.6011-
1(c). The withholding agent must file the return on or before March 15 
of the calendar year following the year in which the income was paid. 
The return must show the aggregate amount of income paid and tax 
withheld required to be reported on all the Forms 1042-S for the 
preceding calendar year by the withholding agent, in addition to such 
information as is required by the form and accompanying instructions. 
See Sec.  1.1474-1(c) for the requirement to show the aggregate chapter 
4 reportable amounts and tax withheld on Form 1042. A single Form 1042 
may be filed by a withholding agent to report amounts under chapters 3 
and 4, including tax withheld. Withholding certificates or other 
statements or information provided to a withholding agent are not 
required to be attached to the return. A return must be filed under this 
paragraph (b)(1) even though no tax was required to be withheld during 
the preceding calendar year. The withholding agent must retain a copy of 
Form 1042 for the applicable statute of limitations on assessments and 
collection with respect to the amounts required to be reported on the 
Form 1042. See section 6501 and the regulations thereunder for the 
applicable statute of limitations. Adjustments to the total amount of 
tax withheld, as described in Sec.  1.1461-2, shall be stated on the 
return as prescribed by the form and accompanying instructions.
    (2) Amended returns. An amended return may be filed on a Form 1042 
or such other form as the IRS may prescribe. An amended return must 
include such information as the form or accompanying instructions shall 
require, including, with respect to any information that has changed 
from the time of the filing of the return, the information that was 
shown on the original return and the corrected information.
    (c) Information returns--(1) Filing requirement--(i) In general. A 
withholding agent (other than an individual who is not acting in the 
course of a trade or business with respect to a payment) must make an 
information return on Form 1042-S, ``Foreign Person's U.S. Source Income 
Subject to Withholding,'' (or such other form as the IRS may prescribe) 
to report the amounts subject to reporting, as defined in paragraph 
(c)(2) of this section, that were paid during the preceding calendar 
year. Notwithstanding the preceding sentence, any person that withholds 
or is required to withhold an amount under section 1441, 1442, or 1443 
or Sec.  1.1446-4(a) (applicable to publicly traded partnerships 
required to pay tax under section 1446(a) on distributions) or Sec.  
1.1446(f)-4(a) (applicable to brokers required to withhold on transfers 
of publicly traded partnership interests) must file a Form 1042-S for 
the payment withheld upon whether or not that person is engaged in a 
trade or business and whether or not the payment is an amount subject to 
reporting. A Form 1042-S shall be prepared for each recipient of an 
amount subject to reporting and for each single type of income payment. 
The Form 1042-S shall be prepared in such manner as the form and 
accompanying instructions prescribe. One copy of the Form 1042-S shall 
be filed with the IRS on or before March 15th of the calendar year 
following the year in which the amount subject to reporting was paid. It 
shall be filed with a transmittal form as provided in the instructions 
to the Form 1042-S and to the transmittal form. Withholding 
certificates, documentary evidence, or other statements or documentation 
provided to a withholding agent are not required to be attached to the 
form. Another copy of the Form 1042-S must be furnished to the recipient 
for whom the form is prepared (or any other person, as required under 
this paragraph (c) or the instructions to the form) on or before March 
15 of the calendar year following the year in which the amount subject 
to reporting was paid. The withholding agent must

[[Page 348]]

retain a copy of each Form 1042-S for the statute of limitations on 
assessment and collection applicable to the Form 1042 to which the Form 
1042-S relates. A withholding agent required by this section 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). A withholding agent that meets the 
requirements of that section for providing electronic copies to 
recipients may apply these rules to payments made in calendar year 2016.
    (ii) Recipient--(A) Defined. For purposes of this section, the term 
recipient means--
    (1) A beneficial owner as defined in Sec.  1.1441-1(c)(6), including 
a foreign estate or a foreign complex trust, as defined in Sec.  1.1441-
1(c)(25);
    (2) A qualified intermediary as defined in Sec.  1.1441-1(e)(5)(ii);
    (3) A withholding foreign partnership as defined in Sec.  1.1441-
5(c)(2) or a withholding foreign trust under Sec.  1.1441-5(e)(5)(v);
    (4) A territory financial institution treated as a U.S. person under 
Sec.  1.1441-1(b)(2)(iv)(A);
    (5) A U.S. branch that is treated as a U.S. person under Sec.  
1.1441-1(b)(2)(iv)(A);
    (6) A nonwithholding foreign partnership or a foreign simple trust 
as defined in Sec.  1.1441-1(c)(24), but only to the extent the income 
is (or is treated as) effectively connected with the conduct of a trade 
or business in the United States by such entity, or if the 
nonwithholding foreign partnership or foreign simple trust is also 
described in paragraph (c)(1)(ii)(A)(9) or (c)(1)(ii)(A)(10) of this 
section;
    (7) A payee, as defined in Sec.  1.1441-1(b)(2) that is presumed to 
be a foreign person under the presumption rules of Sec.  1.1441-1(b)(3); 
1.1441-5(d) or (e)(6), or 1.6049-5(d);
    (8) A partner (including a foreign partnership or a partner for 
which a qualified intermediary provides partner-specific documentation 
under Sec.  1.1446-4(e)) receiving a distribution from a publicly traded 
partnership subject to withholding under section 1446(a) and Sec.  
1.1446-4 on distributions of effectively connected income, and a partner 
(including a foreign partnership or a partner for which a qualified 
intermediary provides partner-specific documentation under Sec.  
1.1446(f)-4(a)(7)) receiving an amount realized from a transfer of a 
publicly traded partnership interest under section 1446(f)(1) and Sec.  
1.1446(f)-4.
    (9) A foreign intermediary, nonwithholding foreign partnership, or 
nonwithholding foreign trust that is a participating FFI or registered 
deemed-compliant FFI with respect to a chapter 4 reporting pool of U.S. 
payees;
    (10) A participating FFI or a registered deemed-compliant FFI that 
is a recipient of a withholdable payment described in Sec.  1.1474-
1(d)(1)(ii)(A)(1)(iii); and
    (11) Any other person as required on Form 1042-S or the instructions 
to the form.
    (B) Persons that are not recipients. A recipient does not include--
    (1) A nonqualified intermediary, except with respect to a payment 
(or portion of a payment) for which a nonqualified intermediary that is 
an FFI is a recipient reporting as described in Sec.  1.1474-
1(d)(1)(ii)(A)(1)(iii), or if the nonqualified intermediary is also 
described in paragraph (c)(1)(ii)(A)(9) or (c)(1)(ii)(A)(10) of this 
section;
    (2) A payee included in a chapter 3 or chapter 4 withholding rate 
pool;
    (3) A flow-through entity, as defined in Sec.  1.1441-1(c)(23) (to 
the extent it is receiving amounts subject to reporting other than 
income effectively connected with the conduct of a trade or business in 
the United States), that is not a recipient described in paragraphs 
(c)(1)(ii)(A)(9) or (c)(1)(ii)(A)(10) of this section;
    (4) A U.S. branch (including a territory financial institution) 
described in Sec.  1.1441-1(b)(2)(iv)(A) that is not treated as a U.S. 
person under that section and is not a recipient described in paragraphs 
(c)(1)(ii)(A)(9) or (10) of this section; and
    (5) A foreign broker withheld upon under Sec.  1.1446(f)-4(a)(2)(ii) 
by another

[[Page 349]]

broker paying an amount realized from the transfer of a PTP interest.
    (C) Coordination with chapter 4 reporting. See Sec.  1.1474-
1(d)(1)(ii)(A) for persons that are defined as recipients of a 
withholdable payment of U.S. source FDAP income for purposes of chapter 
4 in addition to the persons that are recipients under this paragraph 
(c)(1)(ii).
    (2) Amounts subject to reporting--(i) In general. Subject to the 
exceptions described in paragraph (c)(2)(ii) of this section, amounts 
subject to reporting on Form 1042-S are amounts paid to a foreign payee 
or partner (including persons presumed to be foreign) that are amounts 
subject to withholding as defined in Sec.  1.1441-2(a), distributions of 
effectively connected income under Sec.  1.1446-4, or amounts realized 
from transfers of PTP interests under Sec.  1.1446(f)-4. Amounts subject 
to reporting include amounts subject to withholding even if no amount is 
deducted and withheld from the payment because of a treaty or Internal 
Revenue Code exception to taxation or because an amount withheld was 
reimbursed to the payee under the adjustment procedures of Sec.  1.1461-
2. In addition, amounts subject to reporting include any amounts paid to 
a foreign payee on which a withholding agent withheld (including under 
Sec.  1.1441-2(e)(7)) an amount (either under chapter 3 of the Internal 
Revenue Code or section 3406) whether or not the amount is subject to 
withholding. Amounts subject to reporting include, but are not limited 
to, the following items--
    (A) The entire amount of a corporate distribution (whether actual or 
deemed) irrespective of any estimate of the portion of the distribution 
that represents a taxable dividend;
    (B) Interest, including the portion of a notional principal contract 
payment that is characterized as interest. Interest shall also be 
reported on Form 1042-S if it is bank deposit interest paid to 
nonresident alien individuals as required under Sec.  1.6049-8;
    (C) Rents;
    (D) Royalties;
    (E) Compensation for dependent and independent personal services 
performed in the United States;
    (F) Annuities;
    (G) Pension distributions and other deferred income;
    (H) Gambling winnings that are not exempt from tax under section 
871(j);
    (I) Income from the cancellation of indebtedness unless the 
withholding agent is unrelated to the debtor and does not have knowledge 
of the facts that give rise to the payment (see Sec.  1.1441-2(d));
    (J) Amounts that are (or are presumed to be) effectively connected 
with the conduct of a trade or business in the United States (including 
deposit interest as defined in sections 871(i)(2)(A) and 881(d)) even if 
no withholding certificate is required to be furnished by the payee or 
beneficial owner. In the case of amounts paid on a notional principal 
contract described in Sec.  1.1441-4(a)(3) that are presumed to be 
effectively connected with the conduct of a trade or business in the 
United States, the amount required to be reported is limited to the 
amount of cash paid from the notional principal contract;
    (K) Scholarship, fellowship, or grant income and compensation for 
personal services that is not excludible from gross income under section 
117 (whether or not the taxable scholarship, fellowship, grant income, 
or compensation for personal services is exempt from tax under an income 
tax treaty) paid to foreign students, trainees, teachers, or 
researchers;
    (L) Dividend equivalents as described in section 871(m) and the 
regulations thereunder;
    (M) Any dividend or any payment that references a dividend from an 
underlying security pursuant to a securities lending or sale-repurchase 
transaction paid to a qualified derivatives dealer even when the 
withholding agent is not required to withhold on the payment pursuant to 
Sec.  1.1441-1(b)(4)(xxi), (xxii), or (xxiii);
    (N) Amounts paid to foreign governments, international 
organizations, or the Bank for International Settlements, whether or not 
documentation must be provided;
    (O) Original issue discount paid on the redemption of an OID 
obligation. The amount to be reported is the amount of OID includible in 
the gross income of the holder of the obligation,

[[Page 350]]

if known, or, if not known, the total amount of original issue discount 
determined as if the holder held the obligation from its original 
issuance. A withholding agent may determine the total amount of OID by 
using the most recently published ``List of Original Issue Discount 
Instruments,'' (Publication 1212, available from the IRS Forms 
Distribution Centers);
    (P) The amount of any distribution made by a publicly traded 
partnership that is an amount subject to withholding under Sec.  1.1446-
4, or that is paid to a qualified intermediary or a U.S. branch of a 
foreign person that agrees to be treated as a U.S. person;
    (Q) Except with respect to a broker that is a U.S. clearing 
organization, an amount realized on the transfer of a PTP interest under 
Sec.  1.1446(f)-4 (unless an exception to withholding applies under 
Sec.  1.1446(f)-4(b)(2) through (4)); and
    (R) In the case of a broker that is a U.S. clearing organization--
    (1) An amount realized (as determined under Sec.  1.1446(f)-
4(c)(2)(iii)) on a distribution made by a publicly traded partnership 
for which withholding is required under Sec.  1.1446(f)-4(a); and
    (2) An amount realized on the sale of a PTP interest cleared and 
settled through a net settlement system maintained by the clearing 
organization acting as a central counterparty in the sale (with the 
reporting on the non-netted amount), unless an exception to withholding 
would apply under Sec.  1.1446(f)-4(b)(2) or (3).
    (ii) Exceptions to reporting. The amounts listed in this paragraph 
(c)(2)(ii) are not required to be reported on Form 1042-S--
    (A) Interest (including original issue discount) that is deposit 
interest under sections 871(i)(2)(A) and 881(d) and that is not 
effectively connected with the conduct of a trade or business in the 
United States, unless reporting is required under Sec.  1.6049-8 
(regarding payments to certain foreign residents) or is interest that is 
effectively connected with the conduct of a trade or business in the 
United States;
    (B) Interest or original issue discount on certain short-term 
obligations, described in section 871(g)(1)(B) or 881(a)(3);
    (C) Interest paid on obligations sold between interest payment dates 
and the portion of the purchase price of an OID obligation that is sold 
or exchanged in a transaction other than a redemption, unless the sale 
or exchange is part of a plan, the principal purpose of which is to 
avoid tax and the withholding agent has actual knowledge or reason to 
know of such plan (see Sec.  1.1441-2(a)(5) and (6));
    (D) Any item required to be reported on a Form W-2, including an 
item required to be shown on Form W-2 solely by reason of Sec.  1.6041-2 
(relating to return of information for payments to employees) or Sec.  
1.6052-1 (relating to information regarding payment of wages in the form 
of group-term life insurance);
    (E) Any item required to be reported on Form 1099, and such other 
forms as are prescribed pursuant to the information reporting provisions 
of sections 6041 through 6050W and the regulations under those sections;
    (F) Amounts paid on a notional principal contract described in Sec.  
1.1441-4(a)(3)(i) that are not effectively connected with the conduct of 
a trade or business in the United States (or not treated as effectively 
connected pursuant to Sec.  1.1441-4(a)(3)(ii));
    (G) Amounts required to be reported on Form 8288 (U.S. Withholding 
Tax Return for Dispositions by Foreign Persons of U.S. Real Property 
Interests) or Form 8804 (Annual Return for Partnership Withholding Tax 
(section 1446)). A withholding agent that must report a distribution 
partly on a Form 8288 or 8804 and partly on a Form 1042-S may elect to 
report the entire amount on a Form 8288 or 8804;
    (H) Interest (including original issue discount) paid with respect 
to foreign-targeted registered obligations issued before January 1, 
2016, that are described in Sec.  1.871-14(e)(2) to the extent the 
documentation requirements described in Sec.  1.871-14(e)(3) and (e)(4) 
are required to be satisfied (taking into account the provisions of 
Sec.  1.871-14(e)(4)(ii), if applicable;
    (I) Interest on a foreign-targeted bearer obligation (see Sec. Sec.  
1.1441-1(b)(4)(i) and 1.1441-2(a)) issued before March 19, 2012;

[[Page 351]]

    (J) Except as provided in Sec.  1.1461-1(c)(2)(i)(M), any payment to 
a qualified derivatives dealer when the withholding agent is not 
required to withhold on the payment pursuant to Sec.  1.1441-
1(b)(4)(xxi), (xxii), or (xxiii). This exception does not apply to 
withholding agents that are qualified derivatives dealers;
    (K) Gain described in section 301(c)(3); and
    (L) Amounts described in Sec.  1.1441-1(b)(4)(xviii) (dealing with 
certain amounts paid by the U.S. government).
    (iii) Applicability date. Paragraph (c)(2) of this section applies 
beginning January 19, 2017.
    (3) Required information. The information required to be furnished 
under this paragraph (c)(3) shall be based upon the information provided 
by or on behalf of the recipient of an amount subject to reporting (as 
corrected and supplemented based on the withholding agent's actual 
knowledge) or the presumption rules of Sec. Sec.  1.1441-1(b)(3), 
1.1441-4(a), 1.1441-5(d) and (e), 1.1441-9(b)(3), 1.1446-1(c)(3) (as 
applied to publicly traded partnerships required to pay tax under 
section 1446 on distributions of effectively connected income) or 
1.6049-5(d). The reference in the previous sentence to presumption rules 
applicable to withholding under section 1446 shall apply to partnership 
taxable years beginning after May 18, 2005, or such earlier time as the 
regulations under Sec. Sec.  1.1446-1 through 1.1446-5 apply by reason 
of an election under Sec.  1.1446-7. The Form 1042-S must include the 
following information, if applicable--
    (i) The name, address, taxpayer identifying number of the 
withholding agent, and the withholding agent's status for chapter 3 
purposes (based on the status codes applicable for chapter 3 purposes 
provided on the form);
    (ii) A description of each category of income paid based on the 
income codes provided on the form (e.g., interest, dividends, royalties, 
etc.) and the aggregate amount in each category expressed in U.S. 
dollars;
    (iii) For a payment not subject to withholding under chapter 4, the 
rate of withholding applied or the basis for exempting the payment from 
withholding under chapter 3, and the exemption applicable to the payment 
for chapter 4 purposes (based on the exemption codes provided on the 
form);
    (iv) The name and address of the recipient;
    (v) The name and address of any nonqualified intermediary, flow-
through entity, or U.S. branch as described in Sec.  1.1441-1(b)(2)(iv) 
(other than a branch that is treated as a U.S. person) to which the 
payment was made;
    (vi) The taxpayer identifying number of the recipient if required 
under Sec.  1.1441-1(e)(4)(vii) or if actually known to the withholding 
agent making the return;
    (vii) The taxpayer identifying number of a nonqualified intermediary 
or flow-through entity (to the extent it is not a recipient) or other 
flow-through entity to the extent it is known to the withholding agent;
    (viii) The country (based on the country codes provided on the form) 
of the recipient and of any nonqualified intermediary or flow-through 
entity the name of which appears on the form; and
    (ix) Such information as the form or the instructions may require in 
addition to, or in lieu of, information required under this paragraph 
(c)(3).
    (4) Method of reporting--(i) Payments by U.S. withholding agents to 
recipients. A withholding agent that is a U.S. person (other than a 
foreign branch of a U.S. person that is a qualified intermediary as 
defined in Sec.  1.1441-1(e)(5)(ii) that makes payments of amounts 
subject to reporting on Form 1042-S must file a separate Form 1042-S for 
each recipient who receives such amount. For purposes of this paragraph 
(c)(4), a U.S. person includes a U.S. branch (including a territory 
financial institution) described in Sec.  1.1441-1(b)(2)(iv)(A) that is 
treated as a U.S. person. Except as may otherwise be required on Form 
1042-S or the instructions to the form, only payments for which the 
income code, exemption code, withholding rate, and recipient code are 
the same may be reported on a single Form 1042-S. See paragraph 
(c)(4)(ii) of this section for reporting of payments made to a person 
that is not a recipient. See Sec.  1.1474-1(d)(4) for additional 
requirements that may apply for reporting on Form 1042-S with respect to 
a

[[Page 352]]

withholdable payment that is a chapter 4 reportable amount.
    (A) Payments to beneficial owners. If a U.S. withholding agent makes 
a payment directly to a beneficial owner it must complete Form 1042-S 
treating the beneficial owner as the recipient. Under the grace period 
rule of Sec.  1.1441-1(b)(3)(iv), a U.S. withholding agent may, under 
certain circumstances, treat a payee as a foreign person while the 
withholding agent awaits a valid withholding certificate. A U.S. 
withholding agent who relies on the grace period rule to treat a payee 
as a foreign person must file a Form 1042-S to report all payments on 
Form 1042-S during the period that person was presumed to be foreign 
even if that person is later determined to be a U.S. person based on 
appropriate documentation or is presumed to be a U.S. person after the 
grace period ends. In the case of joint owners, a withholding agent may 
provide a single Form 1042-S made out to the owner whose status the U.S. 
withholding agent relied upon to determine the applicable rate of 
withholding. If, however, any one of the owners requests its own Form 
1042-S, the withholding agent must furnish a Form 1042-S to the person 
who requests it. If more than one Form 1042-S is issued for a single 
payment, the aggregate amount paid and tax withheld that is reported on 
all Forms 1042-S cannot exceed the total amounts paid to joint owners 
and the tax withheld thereon.
    (B) Payments to a qualified intermediary, a withholding foreign 
partnership, or a withholding foreign trust. A U.S. withholding agent 
that makes payments to a qualified intermediary (whether or not the 
qualified intermediary assumes primary withholding responsibility for 
purposes of chapter 3 and chapter 4 of the Code), a withholding foreign 
partnership, or a withholding foreign trust shall complete Forms 1042-S 
treating the qualified intermediary, withholding foreign partnership, or 
withholding foreign trust as the recipient. The U.S. withholding agent 
must complete a separate Form 1042-S for each chapter 3 and chapter 4 
withholding rate pool with respect to each qualified intermediary. A 
qualified intermediary that does not assume primary withholding 
responsibility on all payments it receives provides information 
regarding the proportions of income subject to a particular withholding 
rate (i.e., a chapter 3 withholding rate pool) to the withholding agent 
on a withholding statement associated with a qualified intermediary 
withholding certificate. In such a case, the U.S. withholding agent must 
complete a separate Form 1042-S for each chapter 3 and chapter 4 
withholding rate pool with respect to the qualified intermediary. To the 
extent a qualified intermediary is required to report a payment under 
chapter 61, it may provide a U.S. withholding agent with information 
regarding withholding rate pools for U.S. non-exempt recipients (as 
defined under Sec.  1.1441-1(c)(21)). Amounts paid with respect to such 
withholding rate pools must be reported on a Form 1099 completed for 
each U.S. non-exempt recipient to the extent such U.S. non-exempt 
recipient is subject to Form 1099 reporting and is not reported on Form 
1042-S. See, however, Sec.  1.1441-1(e)(5)(v)(C) for when a qualified 
intermediary may provide a chapter 4 withholding rate pool of U.S payees 
(in lieu of reporting such payees on a withholding statement) and for 
the withholding rate pools (including chapter 4 withholding rate pools) 
otherwise reportable on a withholding statement provided by a qualified 
intermediary.
    (C) Amounts paid to U.S. branches treated as U.S. persons. A U.S. 
withholding agent making a payment to a U.S. branch of a foreign person 
(including a territory financial institution) described in Sec.  1.1441-
1(b)(2)(iv)(A) shall complete Form 1042-S as follows--
    (1) If the branch has provided the U.S. withholding agent with a 
withholding certificate that evidences its agreement with the 
withholding agent to be treated as a U.S. person, the U.S. withholding 
agent files Forms 1042-S treating the U.S. branch or territory financial 
institution as the recipient;
    (2) If the branch has provided the U.S. withholding agent with a 
withholding certificate that transmits information regarding beneficial 
owners, qualified intermediaries, withholding foreign partnerships, or 
other recipients, the U.S. withholding agent must

[[Page 353]]

complete a separate Form 1042-S for each recipient whose documentation 
is associated with the U.S. branch's or territory financial 
institution's withholding certificate; or
    (3) If the U.S. withholding agent cannot reliably associate a 
payment with a valid withholding certificate from the U.S. branch, it 
shall treat the U.S. branch as the recipient and report the income as 
effectively connected with the conduct of a trade or business in the 
United States except as otherwise provided in Sec.  1.1441-
1(b)(2)(iv)(B)(4).
    (D) Dual Claims. A U.S. withholding agent may make a payment to a 
foreign entity that is simultaneously claiming a reduced rate of tax on 
its own behalf for a portion of the payment and a reduced rate on behalf 
of persons in their capacity as interest holders in that entity on the 
remaining portion. See Sec.  1.1441-6(b)(2)(iii). If the claims are 
consistent and the withholding agent accepts the multiple claims, the 
withholding agent must file a separate Form 1042-S for those payments 
for which the entity is treated as the beneficial owner and Forms 1042-S 
for each of the interest holders in the entity for which the interest 
holder is treated as the recipient. For those payments for which the 
interest holder in an entity is treated as the recipient, the U.S. 
withholding agent shall prepare the Form 1042-S in the same manner as a 
payment made to a nonqualified intermediary or flow-through entity as 
set forth in paragraph (c)(4)(ii) of this section. If the claims are 
consistent but the withholding agent has not chosen to accept the 
multiple claims, or if the claims are inconsistent, the withholding 
agent must file a separate Form 1042-S for the person or persons it has 
chosen to treat as the recipients.
    (ii) Payments made by U.S. withholding agents to persons that are 
not recipients--(A) Amounts paid to a nonqualified intermediary, a flow-
through entity, and certain U.S. branches. If a U.S. withholding agent 
makes a payment to a nonqualified intermediary, a flow-through entity, 
or a U.S. branch (including a territory financial institution) described 
in Sec.  1.1441-1(b)(2)(iv) (other than a U.S. branch or territory 
financial institution that is treated as a U.S. person), it must 
complete a separate Form 1042-S for each recipient to the extent the 
withholding agent can reliably associate a payment with valid 
documentation (within the meaning of Sec.  1.1441-1(b)(2)(vii)) from the 
recipient which is associated with the withholding certificate provided 
by the nonqualified intermediary, flow-through entity, or U.S. branch or 
territory financial institution. See Sec.  1.1474-1(d)(4)(i) for when a 
withholding agent may report a chapter 4 reportable amount made to such 
an entity in a chapter 4 withholding rate pool. See also Sec.  1.1441-
1(e)(3)(iv)(A) for when a withholding statement provided by a 
nonqualified intermediary may include a chapter 4 withholding rate pool 
of U.S. payees. If a payment is reported by the withholding agent in a 
chapter 4 withholding rate pool, the withholding agent must report on 
Form 1042-S the nonqualified intermediary or flow-through entity as a 
recipient associated with the applicable chapter 4 withholding rate 
pool. If a payment is made through tiers of nonqualified intermediaries 
or flow-through entities, the withholding agent must nevertheless 
complete Form 1042-S for the recipient to the extent it can reliably 
associate the payment with documentation from the recipient. A 
withholding agent that is completing a Form 1042-S for a recipient that 
receives a payment through a nonqualified intermediary, a flow-through 
entity, or a U.S. branch or territory financial institution must include 
on the Form 1042-S the name of the nonqualified intermediary, flow-
through entity, U.S. branch or territory financial institution from 
which the recipient directly receives the payment. If a U.S. withholding 
agent cannot reliably associate the payment, or any portion of the 
payment, with valid documentation from a recipient either because no 
such documentation has been provided or because the nonqualified 
intermediary, flow-through entity, or U.S. branch or territory financial 
institution has failed to provide sufficient allocation information so 
that the withholding agent can associate the payment, or any portion 
thereof, with

[[Page 354]]

valid documentation, then the withholding agent must report the payments 
as made to an unknown recipient in accordance with the appropriate 
presumption rules for that payment. Thus, if the payment is not a 
withholdable payment and under the presumption rules the payment is 
presumed to be made to a foreign person, the withholding agent must 
generally withhold 30 percent of the payment and report the payment on 
Form 1042-S made out to an unknown recipient and shall also include the 
name of the nonqualified intermediary, flow-through entity, U.S. branch 
or territory financial institution that received the payment on behalf 
of the unknown recipient. If, however, the recipient is presumed to be a 
U.S. non-exempt recipient (as defined in Sec.  1.1441-1(c)(21)), the 
withholding agent must withhold on the payment as required under section 
3406 and report the payment as required under chapter 61 of the Code. 
See Sec.  1.1474-1(d)(4) for reporting requirements that apply to 
payments of chapter 4 reportable amounts paid to nonqualified 
intermediaries and flow-through entities. If, however, the payment is a 
withholdable payment, the withholding agent must report the payment as 
made to a chapter 4 withholding rate pool of nonparticipating FFIs in 
accordance with the presumption rule under Sec.  1.1471-3(f)(5). For a 
payment to a foreign partnership on the transfer of a publicly traded 
partnership interest subject to Sec.  1.1446(f)-4(a), see paragraph 
(c)(1)(ii)(A)(8) of this section (treating the foreign partnership as a 
recipient).
    (B) Disregarded entities. If a U.S. withholding agent makes a 
payment to a disregarded entity but receives a valid withholding 
certificate or other documentary evidence from a foreign person that is 
the single owner of a disregarded entity, the withholding agent must 
file a Form 1042-S treating the foreign single owner as the recipient. 
The taxpayer identifying number on the Form 1042-S, if required, must be 
the foreign single owner's TIN.
    (iii) Reporting by qualified intermediaries, withholding foreign 
partnerships, and withholding foreign trusts. A qualified intermediary, 
a withholding foreign partnership, and a withholding foreign trust shall 
report payments on Form 1042-S as provided in their agreements with the 
IRS and the instructions to the form.
    (iv) Reporting by a nonqualified intermediary, flow-through entity, 
and certain U.S. branches. A nonqualified intermediary, flow-through 
entity, or U.S. branch (including a territory financial institution) 
described in Sec.  1.1441-1(e)(2)(iv) (other than a U.S. branch or 
territory financial institution that is treated as a U.S. person) is a 
withholding agent and must file Forms 1042-S for amounts paid to 
recipients in the same manner as a U.S. withholding agent. A Form 1042-S 
will not be required, however, if another withholding agent has reported 
the same amount for which the nonqualified intermediary, flow-through 
entity, or U.S. branch would be required to file a return and the entire 
amount that should be withheld from such payment has been withheld 
(including withholding and reporting in accordance with the applicable 
presumption rule for the payment). A nonqualified intermediary, flow-
through entity, or U.S. branch must report payments made to recipients 
to the extent it has failed to provide the appropriate documentation to 
another withholding agent together with the information required for 
that withholding agent to reliably associate the payment with the 
recipient documentation or to the extent it knows, or has reason to 
know, that less than the required amount has been withheld. A 
nonqualified intermediary or flow-through entity that is required to 
report a payment on Form 1042-S must follow the same rules as apply to a 
U.S. withholding agent under paragraphs (c)(4)(i) and (ii) of this 
section.
    (v) Pro rata reporting for allocation failures. If a nonqualified 
intermediary, flow-through entity, or U.S. branch (including a territory 
financial institution) described in Sec.  1.1441-1(b)(2)(iv) (other than 
a U.S. branch or territory financial institution treated as a U.S. 
person) uses the alternative procedures of Sec.  1.1441-1(e)(3)(iv)(D) 
and fails to provide information sufficient to allocate the amount 
subject to reporting paid to a withholding rate pool to the payees 
identified for that pool, then the

[[Page 355]]

withholding agent shall report the payment in accordance with the rule 
provided in Sec.  1.1441-1(e)(3)(iv)(D)(6).
    (vi) Other withholding agents. Any person that is a withholding 
agent not described in paragraph (c)(4)(i), (iii), or (iv) of this 
section (e.g., a foreign person that is not a qualified intermediary, 
flow-through entity, or U.S. branch) shall file Form 1042-S in the same 
manner as a U.S. withholding agent and in accordance with the 
instructions to the form.
    (d) Report of taxpayer identifying numbers. When so required under 
procedures that the IRS may prescribe in published guidance (see Sec.  
601.601(d)(2) of this chapter), a withholding agent must attach to the 
Form 1042 a list of all the taxpayer identifying numbers (and 
corresponding names) that have been furnished to the withholding agent 
and upon which the withholding agent has relied to grant a reduced rate 
of withholding and that are not otherwise required to be reported on a 
Form 1042-S under the provisions of this section.
    (e) Indemnification of withholding agent. A withholding agent is 
indemnified against the claims and demands of any person for the amount 
of any tax it deducts and withholds in accordance with the provisions of 
chapter 3 of the Code and the regulations under that chapter. A 
withholding agent that withholds based on a reasonable belief that such 
withholding is required under chapter 3 of the Code and the regulations 
under that chapter is treated for purposes of section 1461 and this 
paragraph (e) as having withheld tax in accordance with the provisions 
of chapter 3 of the Code and the regulations under that chapter. In 
addition, a withholding agent is indemnified against the claims and 
demands of any person for the amount of any payments made in accordance 
with the grace period provisions set forth in Sec.  1.1441-1(b)(3)(iv). 
This paragraph (e) does not apply to relieve a withholding agent from 
tax liability under chapter 3 of the Code or the regulations under that 
chapter.
    (f) Amounts paid not constituting gross income. Any amount withheld 
in accordance with Sec.  1.1441-3 shall be reported and paid in 
accordance with this section, even though the amount paid to the 
beneficial owner may not constitute gross income in whole or in part. 
For this purpose, a reference in this section and Sec.  1.1461-2 to an 
amount shall, where appropriate, be deemed to refer to the amount 
subject to withholding under Sec.  1.1441-3.
    (g) Extensions of time to file Forms 1042 and 1042-S. The IRS may 
grant an extension of time in which to file a Form 1042 or a Form 1042-
S. Form 2758, Application for Extension of Time to File Certain Excise, 
Income, Information, and Other Returns (or such other form as the IRS 
may prescribe), must be used to request an extension of time for a Form 
1042. Form 8809, Request for Extension of Time to File Information 
Returns (or such other form as the IRS may prescribe) must be used to 
request an extension of time for a Form 1042-S. The request must contain 
a statement of the reasons for requesting the extension and such other 
information as the forms or instructions may require. It must be mailed 
or delivered not later than March 15 of the year following the end of 
the calendar year for which the return will be filed.
    (h) Penalties. For penalties and additions to the tax for failure to 
file returns or furnish statements in accordance with this section, see 
sections 6651, 6662, 6663, 6721, 6722, 6723, 6724(c), 7201, 7203, and 
the regulations under those sections.
    (i) Reporting in electronic form. See Sec. Sec.  301.6011-2(b) and 
301.6011-15 of this chapter for the requirements of a withholding agent 
that is not a financial institution with respect to the filing of Forms 
1042-S and 1042 in electronic form. See Sec.  301.1474-1(a) of this 
chapter, which applies for purposes of this section to a withholding 
agent that is a financial institution with respect to the filing of 
Forms 1042 and 1042-S in electronic form.
    (j) Applicability date. The rules of this section apply to returns 
required to be filed for taxable years ending on or after December 31, 
2023. (For returns required to be filed for taxable years ending before 
December 31, 2023, see this section as in effect and contained in 26 CFR 
part 1, as revised April 1, 2022.)

[T.D. 8734, 62 FR 53467, Oct. 14, 1997]

[[Page 356]]


    Editorial Note: For Federal Register citations affecting Sec.  
1.1461-1, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec.  1.1461-2  Adjustments for overwithholding or underwithholding of tax.

    (a) Adjustments of overwithheld tax--(1) In general. Except as 
otherwise provided in this paragraph (a)(1), a withholding agent that 
has overwithheld under chapter 3 of the Internal Revenue Code, and made 
a deposit of the tax as provided in Sec.  1.6302-2(a), may adjust the 
overwithheld amount either pursuant to the reimbursement procedure 
described in paragraph (a)(2) of this section or pursuant to the set-off 
procedure described in paragraph (a)(3) of this section. The rules in 
the preceding sentence do not apply to partnerships or nominees required 
to withhold under section 1446(a), other than on a distribution by a 
publicly traded partnership subject to withholding under Sec.  1.1446-
4(a) and a payment of an amount realized on the transfer of an interest 
in a publicly traded partnership subject to Sec.  1.1446(f)-4.
    (2) Reimbursement of tax--(i) General rule. Under the reimbursement 
procedure, the withholding agent repays the beneficial owner or payee 
for the amount of tax overwithheld. In such a case, the withholding 
agent may reimburse itself by reducing, by the amount of tax actually 
repaid to the beneficial owner or payee, the amount of any deposit of 
tax made by the withholding agent under Sec.  1.6302-2(a)(1)(iii) for 
any subsequent payment period occurring before the end of the calendar 
year following the calendar year of overwithholding. Any such reduction 
that occurs for a payment period in the calendar year following the 
calendar year of overwithholding shall be allowed only if--
    (A) The repayment to the beneficial owner or payee occurs before the 
earlier of the due date (not including extensions) for filing Form 1042-
S for the calendar year of overwithholding or the date the Form 1042-S 
is actually filed with the IRS; and
    (B) The withholding agent states on a timely filed (not including 
extensions) Form 1042 for the calendar year of overwithholding, that the 
filing of the Form 1042 constitutes a claim for credit in accordance 
with Sec.  1.6414-1.
    (ii) Record maintenance. If the beneficial owner is repaid an amount 
of withholding tax under the provisions of this paragraph (a)(2), the 
withholding agent shall keep as part of its records a receipt showing 
the date and amount of repayment and the withholding agent must provide 
a copy of such receipt to the beneficial owner. For this purpose, a 
canceled check or an entry in a statement is sufficient provided that 
the check or statement contains a specific notation that it is a refund 
of tax overwithheld.
    (3) Set-offs. Under the set-off procedure, the withholding agent may 
repay the beneficial owner or payee by applying the amount overwithheld 
against any amount which otherwise would be required under chapter 3 of 
the Code or the regulations thereunder to be withheld from income paid 
by the withholding agent to such person before the earlier of the due 
date (without regard to extensions) for filing the Form 1042-S for the 
calendar year of overwithholding or the date that the Form 1042-S is 
actually filed with the IRS. For purposes of making a return on Form 
1042 or 1042-S (or an amended form) for the calendar year of 
overwithholding and for purposes of making a deposit of the amount 
withheld, the reduced amount shall be considered the amount required to 
be withheld from such income under chapter 3 of the Code and the 
regulations thereunder.
    (4) Examples. The principles of this paragraph (a) are illustrated 
by the following examples:

    Example 1. (i) N is a nonresident alien individual who is a resident 
of the United Kingdom. In December 2001, a domestic corporation C pays a 
dividend of $100 to N, at which time C withholds $30 and remits the 
balance of $70 to N. On February 10, 2002, prior to the time that C 
files its Form 1042 and Form 1042-S with respect to the payment, N 
furnishes a valid Form W-8 described in Sec.  1.1441-1(e)(2)(i) upon 
which C may rely to reduce the rate of withholding to 15% under the 
provisions of the U.S.-U.K. tax treaty. Consequently, N advises C that 
its tax liability is only $15 and not $30 and requests reimbursement of 
$15. Although C has already deposited the $30 that was withheld, as 
required by Sec.  1.6302-2(a)(1)(iv), C repays N in the amount of $15.

[[Page 357]]

    (ii) During 2001, C makes no other payments upon which tax is 
required to be withheld under chapter 3 of the Code; accordingly, its 
return on Form 1042 for such year, which is filed on March 15, 2002, 
shows total tax withheld of $30, an adjusted total tax withheld of $15, 
and $30 previously paid for such year. Pursuant to Sec.  1.6414-1(b), C 
claims a credit for the overpayment of $15 shown on the Form 1042 for 
2001. Accordingly, it is permitted to reduce by $15 any deposit required 
by Sec.  1.6302-2 to be made of tax withheld during the calendar year 
2002. The Form 1042-S required to be filed by C with respect to the 
dividend of $100 paid to N in 2001 is required to show tax withheld 
under chapter 3 of $30 and tax repaid to N of $15.
    Example 2. The facts are the same as in Example 1. In addition, 
during 2002, C makes payments to N upon which it is required to withhold 
$200 under chapter 3 of the Code, all of which is withheld in June 2002. 
Pursuant to Sec.  1.6302-2(a)(1)(iii), C deposits the amount of $185 on 
July 15, 2002 ($200 less the $15 for which credit is claimed on the Form 
1042 for 2001). On March 15, 2003, C Corporation files its return on 
Form 1042 for calendar year 2002, which shows total tax withheld of 
$200, $185 previously deposited by C, and $15 allowable credit.
    Example 3. The facts are the same as in Example 1. Under Sec.  
1.6302-2(a)(1)(ii), C is required to deposit on a quarter-monthly basis 
the tax withheld under chapter 3 of the Code. C withholds tax of $100 
between February 8 and February 15, 2002, and deposits $75 [($100 x 90%) 
less $15] of the withheld tax within 3 banking days after February 15, 
2002, and by depositing $10 [($100-$15) less $75] within 3 banking days 
after March 15, 2002.
    (b) Withholding of additional tax when underwithholding occurs. A 
withholding agent may withhold from future payments (including 
distributions of effectively connected income subject to withholding 
under Sec.  1.1446-4 and the amount realized from the transfer of an 
interest in a publicly traded partnership subject to Sec.  1.1446(f)-4) 
made to a beneficial owner the tax that should have been withheld from 
previous payments to that beneficial owner under chapter 3 of the Code. 
In the alternative, the withholding agent may satisfy the tax from 
property that it holds in custody for the beneficial owner or property 
over which it has control. Such additional withholding or satisfaction 
of the tax owed may only be made before the date that the Form 1042 is 
required to be filed (not including extensions) for the calendar year in 
which the underwithholding occurred. See Sec.  1.6302-2 for making 
deposits of tax or Sec.  1.1461-1(a) for making payment of the balance 
due for a calendar year. See also Sec. Sec.  1.1461-1, 1.1461-3, and 
1.1446-1 through 1.1446-7 for rules relating to withholding under 
section 1446.
    (c) Definition. For purposes of this section, the term payment 
period means the period for which the withholding agent is required by 
Sec.  1.6302-2(a)(1) to make a deposit of tax withheld under chapter 3 
of the Code.
    (d) Applicability date. This section applies to payments made on or 
after January 1, 2022. For payments made before January 1, 2022, see 
this section as in effect and contained in 26 CFR part 1, as revised 
April 1, 2020.

[T.D. 8734, 62 FR 53470, 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. 9200, 
70 FR 28741, May 18, 2005; T.D. 9658, 79 FR 12792, Mar. 6, 2014; T.D. 
9808, 82 FR 2105, Jan. 6, 2017; T.D. 9926, 85 FR 76946, Nov. 30, 2020]



Sec.  1.1461-3  Withholding under section 1446.

    For rules relating to the withholding tax liability of a 
partnership, nominee, or transferee under section 1446, see Sec. Sec.  
1.1446-1 through 1.1446-7 and 1.1446(f)-1 through 1.1446(f)-5. For 
interest, penalties, and additions to the tax for failure to timely pay 
the tax required to be paid under section 1446, see sections 6601, 6651, 
6655 (in the case of publicly traded partnerships, see section 6656), 
6672, and 7202 and the regulations under those sections. For additional 
penalties and additions to the tax for failure to comply with the 
regulations under section 1446, see sections 6651, 6662, 6663, 6721, 
6722, 6723, 6724(c), 7201, 7203, and the regulations under those 
sections. The references in this section to Sec. Sec.  1.1446-1 through 
1.1446-7 apply to partnership taxable years beginning after May 18, 
2005, or such earlier time as the regulations under Sec. Sec.  1.1446-1 
through 1.1446-5 apply by reason of an election under Sec.  1.1446-7, 
and the references in this section to Sec. Sec.  1.1446(f)-1 through 
1.1446(f)-5 shall apply with respect to returns for transfers that occur 
on or after January 29, 2021.

[T.D. 9200, 70 FR 28741, May 18, 2005, as amended by T.D. 9926, 85 FR 
76946, Nov. 30, 2020]

[[Page 358]]



Sec.  1.1462-1  Withheld tax as credit to recipient of income.

    (a) Creditable tax. The entire amount of the income from which the 
tax is required to be withheld (including amounts calculated under the 
gross-up formula in Sec.  1.1441-3(f)(1)) shall be included in gross 
income in the return required to be made by the beneficial owner of the 
income, without deduction for the amount required to be or actually 
withheld, but the amount of tax actually withheld shall be allowed as a 
credit against the total income tax computed in the beneficial owner's 
return.
    (b) Amounts paid to persons who are not the beneficial owner. 
Amounts withheld at source under chapter 3 of the Internal Revenue Code 
on payments to (or effectively connected taxable income allocable to) a 
fiduciary, partnership, or intermediary are deemed to have been paid by 
the taxpayer ultimately liable for the tax upon such income. Thus, for 
example, if a beneficiary of a trust is subject to the taxes imposed by 
section 1, 2, 3, or 11 upon any portion of the income received from a 
foreign trust, the part of any amount withheld at source which is 
properly allocable to the income so taxed to such beneficiary shall be 
credited against the amount of the income tax computed upon the 
beneficiary's return, and any excess shall be refunded. See Sec.  
1.1446-3 for examples applying this rule in the context of a partnership 
interest held by a foreign trust or estate. Further, if a partnership 
withholds an amount under chapter 3 of the Internal Revenue Code with 
respect to the allocable share of a partner that is a partnership 
(upper-tier partnership) or with respect to the allocable share of 
partners in an upper-tier partnership, such amount is deemed to have 
been withheld by the upper-tier partnership. See Sec.  1.1446-5 for 
rules applicable to tiered partnership structures. References in this 
paragraph (b) to withholding under section 1446 shall apply to 
partnership taxable years beginning after May 18, 2005, or such earlier 
time as the regulations under Sec. Sec.  1.1446-1 through 1.1446-5 apply 
by reason of an election under Sec.  1.1446-7.
    (c) Effective date. Unless otherwise provided in this section, this 
section applies to payments made after December 31, 2000.

[T.D. 8734, 62 FR 53471, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72188, Dec. 31, 1998; T.D. 9200, 70 FR 28741, May 18, 2005]



Sec.  1.1463-1  Tax paid by recipient of income.

    (a) Tax paid. If the tax required to be withheld under chapter 3 of 
the Internal Revenue Code is paid by the beneficial owner of the income 
or by the withholding agent, it shall not be re-collected from the 
other, regardless of the original liability therefor. However, this 
section does not relieve the person that did not withhold tax from 
liability for interest or any penalties or additions to tax otherwise 
applicable. See Sec.  1.1441-7(b) for additional applicable rules. See 
Sec. Sec.  1.1446-3(e) and (f) and 1.1446(f)-5(a) for application of the 
rule of this paragraph (a), and for additional rules, in which the 
withholding tax was required to be paid under section 1446. The 
references in the previous sentence to Sec.  1.1446-3(e) and (f) apply 
to partnership taxable years beginning after May 18, 2005, or such 
earlier time as the regulations under Sec. Sec.  1.1446-1 through 
1.1446-5 apply by reason of an election under Sec.  1.1446-7, and the 
reference in the previous sentence to Sec.  1.1446(f)-5(a) shall apply 
to the tax required to be withheld under section 1446(f) for transfers 
that occur on or after January 29, 2021.
    (b) Effective date. Unless otherwise provided in this section, this 
section applies to failures to withhold occurring after December 31, 
2000.

[T.D. 8734, 62 FR 53471, 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. 9200, 
70 FR 28741, May 18, 2005; T.D. 9926, 85 FR 76946, Nov. 30, 2020]



Sec.  1.1464-1  Refunds or credits.

    (a) In general. The refund or credit under chapter 65 of the Code of 
an overpayment of tax which has actually been withheld at the source 
under chapter 3 of the Code shall be made to the taxpayer from whose 
income the amount of such tax was in fact withheld. To the extent that 
the overpayment under chapter 3 was not in fact

[[Page 359]]

withheld at the source, but was paid, by the withholding agent the 
refund or credit under chapter 65 of the overpayment shall be made to 
the withholding agent. Thus, where a debtor corporation assumes 
liability pursuant to its tax-free covenant for the tax required to be 
withheld under chapter 3 upon interest and pays the tax in behalf of its 
bondholder, and it can be shown that the bondholder is not in fact 
liable for any tax, the overpayment of tax shall be credited or refunded 
to the withholding agent in accordance with chapter 65 since the tax was 
not actually deducted and withheld from the interest paid to the 
bondholder. In further illustration, where a withholding agent who is 
required by chapter 3 to withhold $300 tax from rents paid to a 
nonresident alien individual mistakenly withholds $320 and mistakenly 
pays $350 as internal revenue tax, the amount of $30 shall be credited 
or refunded to the withholding agent in accordance with chapter 65 and 
the amount of $20 shall be credited or refunded in accordance with such 
chapter to the person from whose income such amount has been withheld. 
With respect to section 1446(a), this section applies only to a publicly 
traded partnership or nominee described in Sec.  1.1446-4 and, with 
respect to section 1446(f), only to a publicly traded partnership or 
broker described in Sec.  1.1446(f)-4.
    (b) Tax repaid to payee. For purposes of this section and Sec.  
1.6414-1, any amount of tax withheld under chapter 3 of the Code, which, 
pursuant to paragraph (a)(1) of Sec.  1.1461-2, is repaid by the 
withholding agent to the person from whose income such amount was 
erroneously withheld shall be considered as tax which, within the 
meaning of sections 1464 and 6414, was not actually withheld by the 
withholding agent.
    (c) Applicability date. The last sentence of paragraph (a) of this 
section applies to nominees and publicly traded partnerships described 
in Sec.  1.1446-4 for partnership taxable years beginning after April 
29, 2008, and to brokers required to withhold and publicly traded 
partnerships liable for underwithholding under Sec.  1.1446(f)-4 on 
transfers that occur on or after January 1, 2022.

[T.D. 6922, 32 FR 8713, June 17, 1967, as amended by T.D. 8804, 63 FR 
72188, Dec. 31, 1998; T.D. 9394, 73 FR 23085, Apr. 29, 2008; 74 FR 
14932, Apr. 2, 2009; T.D. 9926, 85 FR 76946, Nov. 30, 2020]

         Information Reporting by Foreign Financial Institutions



Sec.  1.1471-0  Outline of regulation provisions for sections 1471 
through 1474.

    This section lists the table of contents for Sec. Sec.  1.1471-1 
through 1.1474-7 and Sec.  301.1474-1 of this chapter.

           Sec.  1.1471-1 Scope of chapter 4 and definitions.

    (a) Scope of chapter 4 of the Internal Revenue Code.
    (b) Definitions.
    (1) Account.
    (2) Account holder.
    (3) Active NFFE.
    (4) AML due diligence.
    (5) Annuity contract.
    (6) Assumes primary withholding responsibility.
    (7) Backup withholding.
    (8) Beneficial owner.
    (9) Blocked account.
    (10) Branch.
    (11) Broker.
    (12) Cash value.
    (13) Cash value insurance contract.
    (14) Certified deemed-compliant FFI.
    (15) Change in circumstances.
    (16) Chapter 3.
    (17) Chapter 4.
    (18) Chapter 4 reportable amount.
    (19) Chapter 4 status.
    (20) Chapter 4 withholding rate pool.
    (21) Clearing organization.
    (22) Complex trust.
    (23) Consolidated obligations.
    (24) Custodial account.
    (25) Custodial institution.
    (26) Customer master file.
    (27) Deemed-compliant FFI.
    (28) Deferred annuity contract.
    (29) Depository account.
    (30) Depository institution.
    (31) Direct reporting NFFE.
    (32) Documentary evidence.
    (33) Documentation.
    (34) Dormant account.
    (35) Effective date of the FFI agreement.
    (36) EIN.
    (37) Election to be withheld upon.
    (38) Electronically searchable information.
    (39) Entity.
    (40) Entity account.
    (41) Excepted NFFE.
    (42) Exempt beneficial owner.

[[Page 360]]

    (43) Exempt recipient.
    (44) Expanded affiliated group.
    (45) FATF.
    (46) FATF-compliant jurisdiction.
    (47) FFI.
    (48) FFI agreement.
    (49) Financial account.
    (50) Financial institution.
    (51) Flow-through entity.
    (52) Flow-through withholding certificate.
    (53) Foreign entity.
    (54) Foreign passthru payment.
    (55) Foreign payee.
    (56) Foreign person.
    (57) GIIN.
    (58) Grandfathered obligation.
    (59) Grantor trust.
    (60) Gross proceeds.
    (61) Group annuity contract.
    (62) Group insurance contract.
    (63) Immediate annuity.
    (64) Individual account.
    (65) Insurance company.
    (66) Insurance contract.
    (67) Intergovernmental agreement (IGA).
    (68) Intermediary.
    (69) Intermediary withholding certificate.
    (70) Investment entity.
    (71) Investment-linked annuity contract.
    (72) Investment-linked insurance contract.
    (73) IRS FFI list.
    (74) Life annuity contract.
    (75) Life insurance contract.
    (76) Limited branch.
    (77) Limited FFI.
    (78) Model 1 IGA.
    (79) Model 2 IGA.
    (80) NFFE.
    (81) Non-exempt recipient.
    (82) Nonparticipating FFI.
    (83) Nonreporting IGA FFI.
    (84) Non-U.S. account.
    (85) NQI.
    (86) NWP.
    (87) NWT.
    (88) Offshore obligation.
    (89) Owner.
    (90) Owner-documented FFI.
    (91) Participating FFI.
    (92) Participating FFI group.
    (93) Partnership.
    (94) Passive NFFE.
    (95) Passthru payment.
    (96) Payee.
    (97) Payment with respect to an offshore obligation.
    (98) Payor.
    (99) Permanent residence address.
    (100) Person.
    (101) Preexisting account.
    (102) Preexisting entity account.
    (103) Preexisting individual account.
    (104) Preexisting obligation.
    (105) Pre-FATCA Form W-8.
    (106) Prima facie FFI.
    (107) QI.
    (108) QI agreement.
    (109) QI branch of a U.S. financial institution.
    (110) Recalcitrant account holder.
    (111) Registered deemed-compliant FFI.
    (112) Relationship manager.
    (113) Reportable payment.
    (114) Reporting Model 1 FFI.
    (115) Reporting Model 2 FFI.
    (116) Responsible officer.
    (117) Restricted distributor.
    (118) Simple trust.
    (119) Specified insurance company.
    (120) Specified U.S. person.
    (121) Sponsored FFI.
    (122) Sponsored FFI group.
    (123) Sponsored direct reporting NFFE.
    (124) Sponsoring entity.
    (125) Standardized industry coding system.
    (126) Standing instructions to pay amounts.
    (127) Subject to withholding.
    (128) Substantial U.S. owner.
    (129) Territory entity.
    (130) Territory financial institution.
    (131) Territory financial institution treated as a U.S. person.
    (132) Territory NFFE.
    (133) TIN.
    (134) U.S. account.
    (135) U.S. branch treated as a U.S. person.
    (136) U.S. financial institution.
    (137) U.S. indicia.
    (138) U.S. owned foreign entity.
    (139) U.S. payee.
    (140) U.S. payor.
    (141) U.S. person.
    (142) U.S. source FDAP income.
    (143) U.S. territory.
    (144) U.S. withholding agent.
    (145) Withholdable payment.
    (146) Withholding.
    (147) Withholding agent.
    (148) Withholding certificate.
    (149) WP.
    (150) Written statement.
    (151) WT.
    (c) Effective/applicability date.

 Sec.  1.1471-2 Requirement to deduct and withhold tax on withholdable 
                        payments to certain FFIs.

    (a) Requirement to withhold on payments to FFIs.
    (1) General rule of withholding.
    (2) Special withholding rules.
    (i) Requirement to withhold on payments of U.S. source FDAP income 
to participating FFIs and deemed-compliant FFIs that are NQIs, NWPs, or 
NWTs, and U.S. branches acting as intermediaries.
    (ii) Residual withholding responsibility of intermediaries and flow-
through entities.
    (iii) Requirement to withhold if a participating FFI or registered 
deemed-compliant FFI makes an election to be withheld upon.
    (A) Election to be withheld upon for U.S. source FDAP income.

[[Page 361]]

    (B) Election to be withheld upon for gross proceeds.
    (iv) Withholding obligation of a territory financial institution.
    (v) Withholding obligation of a foreign branch of a U.S. financial 
institution.
    (vi) Payments of gross proceeds.
    (3) Coordination of withholding under sections 1471(a) and (b).
    (4) Payments for which no withholding is required.
    (i) Exception to withholding if the withholding agent lacks control, 
custody, or knowledge.
    (A) In general.
    (B) Example.
    (ii) Exception to withholding for certain payments made prior to 
July 1, 2016 (transitional).
    (iii) Payments to a participating FFI.
    (iv) Payments to a deemed-compliant FFI.
    (v) Payments to an exempt beneficial owner.
    (vi) Payments to a territory financial institution.
    (vii) Payments to an account held with a clearing organization with 
FATCA-compliant membership.
    (viii) Payments to certain excepted accounts.
    (5) Withholding requirements if source or character of payment is 
unknown.
    (b) Grandfathered obligations.
    (1) Grandfathered treatment of outstanding obligations.
    (2) Definitions.
    (i) Grandfathered obligation.
    (ii) Obligation.
    (iii) Date outstanding.
    (iv) Material modification.
    (3) Application to flow-through entities.
    (i) Partnerships.
    (ii) Simple trusts.
    (iii) Grantor trusts.
    (4) Determination by withholding agent of grandfathered treatment.
    (i) In general.
    (ii) Determination of material modification.
    (iii) Record retention.
    (c) Effective/applicability date.

                 Sec.  1.1471-3 Identification of payee.

    (a) Payee defined.
    (1) In general.
    (2) Payee with respect to a financial account.
    (3) Exceptions.
    (i) Certain foreign agents or intermediaries.
    (ii) Foreign flow-through entity.
    (iii) U.S. intermediary or agent of a foreign person.
    (iv) Territory financial institution.
    (v) Disregarded entity or limited branch.
    (vi) U.S. branch of treated as a U.S. person.
    (vii) Foreign branch of a U.S. person.
    (b) Determination of payee's status.
    (1) Determining whether a payment is received by an intermediary.
    (2) Determination of entity type.
    (3) Determination of whether the payment is made to a QI, WP, or WT.
    (4) Determination of whether the payee is receiving effectively 
connected income.
    (c) Rules for reliably associating a payment with a withholding 
certificate or other appropriate documentation.
    (1) In general.
    (2) Reliably associating a payment with documentation if a payment 
is made through an intermediary or flow-through entity that is not the 
payee.
    (i) In general.
    (ii) Exception to entity account documentation rules for an offshore 
account of an intermediary or flow-through entity.
    (3) Requirements for validity of certificates.
    (i) Form W-9.
    (ii) Beneficial owner withholding certificate (Form W-8BEN).
    (iii) Withholding certificate of an intermediary, flow-through 
entity, or U.S. branch (Form W-8IMY).
    (A) In general.
    (B) Withholding statement.
    (1) In general.
    (2) Special requirements for an FFI withholding statement.
    (3) Special requirements for a chapter 4 withholding statement.
    (4) Special requirements for an exempt beneficial owner withholding 
statement.
    (5) Nonqualified intermediary withholding statement.
    (C) Failure to provide allocation information.
    (D) Special rules applicable to a withholding certificate of a QI 
that assumes primary withholding responsibility under chapter 3.
    (E) Special rules applicable to a withholding certificate of a QI 
that does not assume primary withholding responsibility under chapter 3.
    (F) Special rules applicable to a withholding certificate of a 
territory financial institution that agrees to be treated as a U.S. 
person.
    (G) Special rules applicable to a withholding certificate of a 
territory financial institution that does not agree to be treated as a 
U.S. person.
    (H) Rules applicable to a withholding certificate of a U.S. branch.
    (iv) Certificate for exempt status (Form W-8EXP).
    (v) Certificate for effectively connected income (Form W-8ECI).
    (4) Requirements for written statements.
    (5) Requirements for documentary evidence.
    (i) Foreign status.

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    (A) Certificate of residence.
    (B) Individual government identification.
    (C) QI documentation.
    (D) Entity government documentation.
    (E) Third-party credit report.
    (ii) Chapter 4 status.
    (A) General documentary evidence.
    (B) Preexisting obligation documentary evidence.
    (C) Payee-specific documentary evidence.
    (6) Applicable rules for withholding certificates, written 
statements, and documentary evidence.
    (i) Who may sign the withholding certificate or written statement.
    (ii) Period of validity.
    (A) General rule.
    (B) Indefinite validity.
    (C) Indefinite validity in the case of certain offshore obligations.
    (D) Exception for certificate for effectively connected income.
    (E) Change in circumstances.
    (1) Defined.
    (2) Obligation to notify withholding agent of a change in 
circumstances.
    (3) Withholding agent's obligation with respect to a change in 
circumstances.
    (iii) Record retention.
    (A) In general.
    (B) Exception for documentary evidence received with respect to 
offshore obligations.
    (iv) Electronic transmission of withholding certificate, written 
statement, and documentary evidence.
    (v) Acceptable substitute withholding certificate.
    (A) In general.
    (B) Non-IRS form for individuals.
    (vi) Electronic confirmation of TIN on withholding certificate.
    (vii) Reliance on a prior version of a withholding certificate.
    (7) Curing documentation errors.
    (i) Curing inconsequential errors on a withholding certificate.
    (ii) Documentation received after the time of payment.
    (8) Documentation furnished on account-by-account basis unless 
exception provided for sharing documentation within expanded affiliated 
group.
    (i) Single branch systems.
    (ii) Universal account systems.
    (iii) Shared account systems.
    (iv) Document sharing for gross proceeds.
    (v) Preexisting account.
    (9) Reliance on documentation collected by or certifications 
provided by other persons.
    (i) Shared documentation system maintained by an agent.
    (ii) Third-party data providers.
    (iii) Reliance on certification provided by introducing brokers.
    (iv) Reliance on documentation and certifications provided between 
principals and agents.
    (A) In general.
    (B) Reliance upon certification of the principal.
    (C) Document sharing.
    (D) Examples.
    (v) Reliance upon documentation for accounts acquired in merger or 
bulk acquisition for value.
    (d) Documentation requirements to establish payee's chapter 4 
status.
    (1) Reliance on pre-FATCA Form W-8.
    (2) Identification of U.S. persons.
    (i) In general.
    (ii) Reliance on documentary evidence.
    (iii) Preexisting obligations.
    (3) Identification of individuals that are foreign persons.
    (i) In general.
    (ii) Exception for offshore obligations.
    (4) Identification of participating FFIs and registered deemed-
compliant FFIs.
    (i) In general.
    (ii) Exception for payments made prior to January 1, 2017, with 
respect to preexisting obligations (transitional).
    (iii) Exception for offshore obligations.
    (iv) Exceptions for payments to reporting Model 1 FFIs.
    (v) Reason to know.
    (vi) Sponsored investment entities and sponsored controlled foreign 
corporations.
    (A) In general.
    (B) Payments made prior to January 1, 2017 (transitional).
    (C) Payments made after December 31, 2016, to payees documented 
prior to January 1, 2017.
    (5) Identification of certified deemed-compliant FFIs.
    (i) In general.
    (ii) Sponsored, closely-held investment vehicles.
    (A) In general.
    (B) Offshore obligations.
    (iii) Certain investment entities that do not maintain financial 
accounts.
    (A) In general.
    (B) Offshore obligations.
    (6) Identification of owner-documented FFIs.
    (i) In general.
    (ii) Auditor's letter substitute.
    (iii) Documentation for owners and debt holders of payee.
    (iv) Content of FFI owner reporting statement.
    (v) Exception for preexisting obligations (transitional).
    (vi) Exception for offshore obligations.
    (vii) Exception for certain offshore obligations of $1,000,000 or 
less.
    (7) Nonreporting IGA FFIs.
    (i) In general.
    (ii) Exception for offshore obligations.
    (8) Identification of nonparticipating FFIs.
    (i) In general.

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    (ii) Special documentation rules for payments made to an exempt 
beneficial owner through a nonparticipating FFI.
    (9) Identification of exempt beneficial owners.
    (i) Identification of foreign governments, governments of U.S. 
territories, international organizations, and foreign central banks of 
issue.
    (A) In general.
    (B) Exception for offshore obligations.
    (C) Exception for preexisting offshore obligations.
    (ii) Identification of retirement funds.
    (A) In general.
    (B) Exception for offshore obligations.
    (C) Exception for preexisting offshore obligations.
    (iii) Identification of entities wholly owned by exempt beneficial 
owners.
    (10) Identification of territory financial institutions.
    (i) Identification of territory financial institutions that are 
beneficial owners.
    (A) In general.
    (B) Exception for preexisting offshore obligations.
    (ii) Identification of territory financial institutions acting as 
intermediaries or that are flow-through entities.
    (iii) Reason to know.
    (11) Identification of excepted NFFEs.
    (i) Identification of excepted nonfinancial group entities.
    (A) In general.
    (B) Exception for offshore obligations.
    (ii) Identification of excepted nonfinancial start-up companies.
    (A) In general.
    (B) Exception for offshore obligations.
    (C) Exception for preexisting offshore obligations.
    (iii) Identification of excepted nonfinancial entities in 
liquidation or bankruptcy.
    (A) In general.
    (B) Exception for offshore obligations.
    (C) Exception for preexisting offshore obligations.
    (iv) Identification of section 501(c) organizations.
    (A) In general.
    (B) Reason to know.
    (v) Identification of non-profit organizations.
    (A) In general.
    (B) Exception for offshore obligations.
    (C) Exception for preexisting offshore obligations.
    (D) Reason to know.
    (vi) Identification of NFFEs that are publicly traded corporations.
    (A) Exception for offshore obligations.
    (B) Exception for preexisting offshore obligations.
    (vii) Identification of NFFE affiliates.
    (A) Exception for offshore obligations.
    (B) Exception for preexisting offshore obligations.
    (viii) Identification of excepted territory NFFEs.
    (A) Exception for payments made prior to January 1, 2017, with 
respect to preexisting obligations of $1,000,000 or less (transitional).
    (B) Exception for offshore obligations.
    (C) Exception for preexisting offshore obligations of $1,000,000 or 
less.
    (ix) Identification of active NFFEs.
    (A) Exception for offshore obligations.
    (B) Exception for preexisting offshore obligations.
    (C) Limit on reason to know.
    (x) Identifying a direct reporting NFFE (other than a sponsored 
direct reporting NFFE).
    (A) In general.
    (B) Exception for offshore obligations.
    (C) Special rule for preexisting offshore obligations.
    (xi) Identifying a sponsored direct reporting NFFE.
    (A) In general.
    (1) Payments made prior to January 1, 2017 (transitional).
    (2) Payments made after December 31, 2016, to payees documented 
prior to January 1, 2017.
    (B) Exception for offshore obligations.
    (xii) Identification of excepted inter-affiliate FFI.
    (A) In general.
    (B) Offshore obligations.
    (C) Reason to know.
    (12) Identification of passive NFFEs.
    (i) Exception for offshore obligations.
    (ii) Special rule for preexisting offshore obligations.
    (iii) Required owner certification for passive NFFEs.
    (A) In general.
    (B) Exception for preexisting obligations of $1,000,000 or less 
(transitional).
    (e) Standards of knowledge.
    (1) In general.
    (2) Notification by the IRS.
    (3) GIIN verification.
    (i) In general.
    (ii) Special rules for reporting Model 1 FFIs. (iii) Special rules 
for direct reporting NFFEs.
    (iv) Special rules for sponsored direct reporting NFFEs and 
sponsoring entities.
    (A) Sponsored direct reporting NFFEs.
    (B) Sponsoring entities (transitional).
    (4) Reason to know.
    (i) Reason to know regarding an entity's chapter 4 status.
    (ii) Reason to know applicable to withholding certificates.
    (A) In general.
    (B) Withholding certificate provided by an FFI.

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    (iii) Reason to know applicable to written statements.
    (iv) Reason to know applicable to documentary evidence.
    (A) In general.
    (B) Standards of knowledge applicable to certain types of 
documentary evidence.
    (v) Specific standards of knowledge applicable when only documentary 
evidence is a code or classification described in paragraph 
(c)(5)(ii)(B) of this section.
    (A) U.S. indicia for entities.
    (B) Documentation required to cure U.S. indicia.
    (vi) Specific standards of knowledge applicable to documentation 
received from intermediaries and flow-through entities.
    (A) In general.
    (B) Limits on reason to know with respect to documentation received 
from participating FFIs and registered deemed-compliant FFIs that are 
intermediaries or flow-through entities.
    (vii) Limits on reason to know.
    (A) Scope of review for preexisting obligations of entities.
    (B) Reason to know there are U.S. indicia associated with 
preexisting obligations.
    (C) Reason to know there are U.S. indicia associated with 
preexisting offshore obligations.
    (D) Limits on reason to know for multiple obligations belonging to a 
single person.
    (viii) Reasonable explanation supporting claim of foreign status.
    (5) Conduit financing arrangements.
    (6) Additional guidance.
    (f) Presumptions regarding chapter 4 status of the person receiving 
the payment in the absence of documentation.
    (1) In general.
    (2) Presumptions of classification as an individual or entity and 
entity as the beneficial owner.
    (3) Presumptions of U.S. or foreign status. (4) Presumption of 
chapter 4 status for a foreign entity.
    (5) Presumption of chapter 4 status of payee with respect to a 
payment to an intermediary or flow-through entity.
    (6) Presumption of effectively connected income for payments to 
certain U.S. branches.
    (7) Joint payees.
    (i) In general.
    (ii) Exception for offshore obligations.
    (8) Rebuttal of presumptions.
    (9) Effect of reliance on presumptions and of actual knowledge or 
reason to know otherwise.
    (i) In general.
    (ii) Actual knowledge or reason to know that amount of withholding 
is greater than is required under the presumptions or that reporting of 
the payment is required.
    (g) Effective/applicability date.

                      Sec.  1.1471-4 FFI agreement.

    (a) In general.
    (1) Withholding.
    (2) Identification and documentation of account holders.
    (3) Reporting.
    (4) Expanded affiliated group.
    (5) Verification.
    (6) Event of default.
    (7) Refunds.
    (b) Withholding requirements.
    (1) In general.
    (2) Withholding determination.
    (3) Satisfaction of withholding requirements.
    (i) In general.
    (ii) Withholding not required.
    (iii) Election to withhold under section 3406.
    (4) Foreign passthru payments.
    (5) Withholding on limited FFIs and limited branches.
    (i) Limited FFIs.
    (ii) Limited branches.
    (6) Special rule for dormant accounts.
    (7) Withholding requirements for U.S. branches of FFIs treated as 
U.S. persons.
    (c) Due diligence for the identification and documentation of 
account holders and payees.
    (1) Scope of paragraph.
    (2) General rules for the identification and documentation of 
account holders and payees.
    (i) Overview.
    (ii) Standards of knowledge.
    (A) In general.
    (B) Limits on reason to know with respect to certain accounts 
acquired in merger of bulk acquisition.
    (1) In general.
    (2) Participating FFIs and certain deemed-compliant FFIs that apply 
the due diligence rules, and U.S. financial institutions.
    (iii) Change in circumstances.
    (A) Obligation to identify a change in circumstances.
    (B) Definition of change in circumstances.
    (C) Requirements following a change in circumstances.
    (iv) Record retention.
    (v) Documentation rules for U.S. branches of FFIs that are treated 
as U.S. persons.
    (3) Identification and documentation procedure for entity accounts 
and payees.
    (i) In general.
    (ii) Timeframe for applying identification and documentation 
procedure for entity accounts and payees.
    (iii) Documentation exception for certain preexisting entity 
accounts.
    (A) Accounts to which this exception applies.
    (B) Aggregation of entity accounts.
    (C) Election to forgo exception.

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    (4) Identification and documentation procedure for individual 
accounts other than preexisting accounts.
    (i) In general.
    (ii) Reliance on third-party for identification of individual 
accounts other than preexisting accounts.
    (iii) Alternative identification and documentation procedure for 
certain cash value insurance or annuity contracts.
    (A) Group cash value insurance contracts or group annuity contracts.
    (B) Accounts held by beneficiaries of a cash value insurance 
contract that is a life insurance contract.
    (5) Identification and documentation procedure for preexisting 
individual accounts.
    (i) In general.
    (ii) Special rule for preexisting individual accounts previously 
documented as U.S. accounts for purposes of chapter 3 or 61.
    (iii) Exceptions for certain low value preexisting individual 
accounts.
    (A) Accounts to which an exception applies.
    (B) Aggregation of accounts.
    (C) Election to forgo exception.
    (iv) Specific identification and documentation procedures for 
preexisting individual accounts.
    (A) In general.
    (B) U.S. indicia and relevant documentation rules.
    (1) U.S. indicia.
    (2) Documentation to be retained upon identifying U.S. indicia.
    (i) Designation of account holder as a U.S. citizen or resident.
    (ii) Unambiguous indication of a U.S. place of birth.
    (iii) U.S. address or U.S. mailing address.
    (iv) Only U.S. telephone numbers.
    (v) U.S. telephone numbers and non-U.S. telephone numbers.
    (vi) Standing instructions to pay amounts.
    (vii) Power of attorney or signatory authority granted to a person 
with a U.S. address or ``in-care-of'' address or ``hold mail'' address.
    (C) Electronic search for identifying U.S. indicia.
    (D) Enhanced review for identifying U.S. indicia in the case of 
certain high-value accounts.
    (1) In general.
    (2) Relationship manager inquiry.
    (3) Additional review of non-electronic records.
    (4) Limitations on the enhanced review in the case of comprehensive 
electronically searchable information.
    (E) Exception for preexisting individual accounts previously 
documented as held by foreign individuals.
    (6) Examples.
    (7) Certifications of responsible officer.
    (d) Account reporting.
    (1) Scope of paragraph.
    (2) Reporting requirements in general.
    (i) Accounts subject to reporting.
    (ii) Financial institution required to report an account.
    (A) In general.
    (B) Special reporting of account holders of territory financial 
institutions.
    (C) Special reporting of account holders of a sponsored FFI.
    (D) Special reporting of accounts held by owner-documented FFIs.
    (E) Requirement to identify the GIIN of a branch that maintains an 
account.
    (F) Reporting by participating FFIs and registered deemed-compliant 
FFIs (including QIs, WPs, WTs, and certain U.S. branches not treated as 
U.S. persons) for accounts of nonparticipating FFIs (transitional).
    (G) Combined reporting on Form 8966 following merger or bulk 
acquisition.
    (iii) Special U.S. account reporting rules for U.S. payors.
    (A) Special reporting rule for U.S. payors other than U.S. branches.
    (B) Special reporting rules for U.S. branches treated as U.S. 
persons.
    (C) Rules for U.S. branches of FFIs not treated as U.S. persons.
    (3) Reporting of accounts under section 1471(c)(1).
    (i) In general.
    (ii) Accounts held by specified U.S. persons.
    (iii) Accounts held by U.S. owned foreign entities.
    (iv) Special reporting of accounts held by owner-documented FFIs.
    (v) Form for reporting accounts under section 1471(c)(1).
    (vi) Time and manner of filing.
    (vii) Extensions in filing.
    (4) Descriptions applicable to reporting requirements of Sec.  
1.1471-4(d)(3).
    (i) Address.
    (ii) Account number.
    (iii) Account balance or value.
    (A) In general.
    (B) Currency translation of account balance or value.
    (iv) Payments made with respect to an account.
    (A) Depository accounts.
    (B) Custodial accounts.
    (C) Other accounts.
    (D) Transfers and closings of deposit, custodial, insurance, and 
annuity financial accounts.
    (E) Amount and character of payments subject to reporting.
    (F) Currency translation.
    (v) Record retention requirements.
    (5) Election to perform chapter 61 reporting.
    (i) In general.
    (A) Election under section 1471(c)(2).

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    (B) Election to report in a manner similar to section 6047(d).
    (ii) Additional information to be reported.
    (iii) Special reporting of accounts held by owner-documented FFIs.
    (iv) Branch reporting.
    (v) Time and manner of making the election.
    (vi) Revocation of election.
    (vii) Filing of information under election.
    (6) Reporting on recalcitrant account holders.
    (i) In general.
    (ii) Definition of dormant account.
    (iii) End of dormancy.
    (iv) Forms.
    (v) Time and manner of filing.
    (vi) Extensions in filing.
    (vii) Record retention requirements.
    (7) Special reporting rules with respect to the 2014 and 2015 
calendar years.
    (i) In general.
    (ii) Participating FFIs that report under Sec.  1.1471-4(d)(3).
    (A) Reporting with respect to the 2014 calendar year.
    (B) Reporting with respect to the 2015 calendar year.
    (iii) Participating FFIs that report under Sec.  1.1471-4(d)(5).
    (iv) Forms for reporting.
    (A) In general.
    (B) Special determination date and timing for reporting with respect 
to the 2014 calendar year.
    (8) Reporting requirements of QIs, WPs and WTs.
    (9) Examples.
    (e) Expanded affiliated group requirements.
    (1) In general.
    (2) Limited branches.
    (i) In general.
    (ii) Branch defined.
    (iii) Limited branch defined.
    (iv) Conditions for limited branch status.
    (v) Term of limited branch status (transitional).
    (vi) Exception from restriction on opening U.S. accounts and 
nonparticipating FFI accounts.
    (3) Limited FFI.
    (i) In general.
    (ii) Limited FFI defined.
    (iii) Conditions for limited FFI status.
    (iv) Period for limited FFI status (transitional).
    (v) Exception from registration requirement.
    (A) Conditions for exception.
    (B) Confirmation requirements of lead FI.
    (vi) Exception from restriction on opening U.S. accounts and 
nonparticipating FFI accounts.
    (4) Special rule for QIs.
    (f) Verification.
    (1) In general.
    (2) Compliance program.
    (i) In general.
    (ii) Consolidated compliance program.
    (A) In general.
    (B) Requirements of compliance FI.
    (1) Periodic certification.
    (i) In general.
    (ii) Late-joining electing FFIs.
    (2) Preexisting account certification.
    (3) Certification of compliance.
    (i) In general.
    (ii) Certification of effective internal controls.
    (iii) Qualified certification.
    (iv) Material failures defined.
    (4) IRS review of compliance.
    (i) General inquiries.
    (ii) Inquiries regarding substantial non-compliance.
    (g) Event of default.
    (1) Defined.
    (2) Notice of event of default.
    (3) Remediation of event of default.
    (h) Collective credit or refund procedures for overpayments.
    (1) In general.
    (2) Persons for which a collective refund is not permitted.
    (3) Payments for which a collective refund is permitted.
    (4) Procedural and other requirements for collective refund.
    (i) Legal prohibitions on reporting U.S. accounts and withholding.
    (1) In general.
    (2) Requesting waiver or closure of a U.S. account.
    (3) Legal prohibitions preventing withholding.
    (i) In general.
    (ii) Block or transfer accounts or obligations.
    (j) Effective/applicability date.
    (1) In general.
    (2) Special applicability date.

         Sec.  1.1471-5 Definitions applicable to section 1471.

    (a) U.S. accounts.
    (1) In general.
    (2) Definition of U.S. account.
    (3) Account holder.
    (i) In general.
    (ii) Financial accounts held by agents that are not financial 
institutions.
    (iii) Jointly held accounts.
    (iv) Account holder for insurance and annuity contracts.
    (v) Examples.
    (4) Exceptions to U.S. account status.
    (i) Exception for certain individual accounts of participating FFIs.
    (ii) Election to forgo exception.
    (iii) Example.
    (b) Financial accounts.
    (1) In general.
    (i) Depository account.
    (ii) Custodial account.

[[Page 367]]

    (iii) Equity or debt interest.
    (A) Equity or debt interests in an investment entity.
    (B) Certain equity or debt interests in a holding company or 
treasury center.
    (C) Equity or debt interests in other financial institutions.
    (iv) Insurance and annuity contracts.
    (2) Exceptions.
    (i) Certain savings accounts.
    (A) Retirement and pension accounts.
    (B) Non-retirement savings accounts.
    (C) Rollovers.
    (D) Coordination with section 6038D.
    (E) Account that is tax-favored.
    (ii) Certain term life insurance contracts.
    (iii) Account held by an estate.
    (iv) Certain escrow accounts.
    (v) Certain annuity contracts.
    (vi) Account or product excluded under an intergovernmental 
agreement.
    (3) Definitions.
    (i) Depository account.
    (A) In general.
    (B) Exceptions.
    (ii) Custodial account.
    (iii) Equity interest in certain entities.
    (A) Partnership.
    (B) Trust.
    (iv) Regularly traded on an established securities market.
    (v) Value of interest determined, directly or indirectly, primarily 
by reference to assets that give rise (or could give rise) to 
withholdable payments.
    (A) Equity interest.
    (B) Debt interest. (vi) Return earned on the interest (including 
upon a sale, exchange, or redemption) determined, directly or 
indirectly, primarily by reference to one or more investment entities or 
passive NFFEs.
    (A) Equity interest.
    (B) Debt interest. (vii) Cash value insurance contract.
    (A) In general.
    (B) Cash value.
    (C) Amounts excluded from cash value.
    (D) Policyholder dividend.
    (4) Account balance or value.
    (i) In general.
    (ii) Special rule for immediate annuity.
    (A) Immediate annuities without minimum benefit guarantees.
    (B) Immediate annuities with a minimum benefit guarantee.
    (C) Net present value of amounts payable in future periods.
    (iii) Account aggregation requirements.
    (A) In general.
    (B) Aggregation rule for relationship managers.
    (C) Examples.
    (iv) Currency translation of balance or value.
    (5) Account maintained by financial institution.
    (c) U.S. owned foreign entity.
    (d) Definition of FFI.
    (e) Definition of financial institution.
    (1) In general.
    (2) Banking or similar business.
    (i) In general.
    (ii) Exception for certain lessors and lenders.
    (iii) Application of section 581.
    (iv) Effect of local regulation.
    (3) Holding financial assets for others as a substantial portion of 
its business.
    (i) Substantial portion.
    (A) In general.
    (B) Special rule for start-up entities.
    (ii) Income attributable to holding financial assets and related 
financial services.
    (iii) Effect of local regulation.
    (4) Investment entity.
    (i) In general.
    (ii) Financial assets.
    (iii) Primarily conducts as a business.
    (A) In general.
    (B) Special rule for start-up entities.
    (iv) Primarily attributable to investing, reinvesting, or trading in 
financial assets.
    (A) In general.
    (B) Special rule for start-up entities.
    (v) Examples.
    (5) Exclusions.
    (i) Excepted nonfinancial group entities.
    (A) In general.
    (B) Nonfinancial group.
    (C) Holding company.
    (D) Treasury center.
    (E) Captive finance company.
    (ii) Excepted nonfinancial start-up companies or companies entering 
a new line of business.
    (A) In general.
    (B) Exception for investment funds.
    (iii) Excepted nonfinancial entities in liquidation or bankruptcy.
    (iv) Excepted inter-affiliate FFI.
    (v) Section 501(c) entities.
    (vi) Non-profit organizations.
    (6) Reserving activities of an insurance company.
    (f) Deemed-compliant FFIs.
    (1) Registered deemed-compliant FFIs.
    (i) Registered deemed-compliant FFI categories.
    (A) Local FFIs.
    (B) Nonreporting members of participating FFI groups.
    (C) Qualified collective investment vehicles.
    (D) Restricted funds.
    (E) Qualified credit card issuers and servicers.
    (F) Sponsored investment entities and controlled foreign 
corporations.
    (ii) Procedural requirements for registered deemed-compliant FFIs.
    (iii) Deemed-compliant FFI that is merged or acquired.

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    (iv) IRS review of compliance by registered deemed-compliant FFIs.
    (A) General inquiries.
    (B) Inquiries regarding substantial non-compliance.
    (2) Certified deemed-compliant FFIs.
    (i) Nonregistering local bank.
    (ii) FFIs with only low-value accounts.
    (iii) Sponsored, closely-held investment vehicles.
    (iv) Limited life debt investment entities (transitional).
    (v) Certain investment entities that do not maintain financial 
accounts.
    (3) Owner-documented FFIs.
    (i) In general.
    (ii) Requirements of owner-documented FFI status.
    (4) Definition of a restricted distributor.
    (g) Recalcitrant account holders.
    (1) Scope.
    (2) Recalcitrant account holder.
    (3) Start of recalcitrant account holder status.
    (i) Preexisting accounts identified under the procedures described 
in Sec.  1.1471-4(c) for identifying U.S. accounts.
    (A) In general.
    (B) Accounts other than high-value accounts.
    (C) High-value accounts.
    (D) Preexisting accounts that become high-value accounts.
    (ii) Accounts that are not preexisting accounts and accounts 
requiring name/TIN correction.
    (iii) Accounts with changes in circumstances.
    (4) End of recalcitrant account holder status.
    (h) Passthru payment.
    (1) Defined.
    (2) Foreign passthru payment.
    (i) Expanded affiliated group.
    (1) Scope of paragraph.
    (2) Expanded affiliated group defined.
    (3) Member of expanded affiliated group.
    (4) Ownership test.
    (i) Corporations.
    (A) Stock not to include certain preferred stock.
    (B) Valuation.
    (ii) Partnerships.
    (iii) Trusts.
    (5) Treatment of warrants, options, and obligations convertible into 
equity for determining ownership.
    (6) Exception for FFIs holding certain capital investments.
    (7) Seed capital.
    (8) Anti-abuse rule.
    (9) Exception for limited life debt investment entities.
    (10) Partnerships, trusts, and other non-corporate entities.
    (j) Sponsoring entity verification.
    (1) In general.
    (2) Compliance program.
    (3) Certification of compliance.
    (i) Certification requirement.
    (A) In general.
    (B) Extension of time for the certification period ending on 
December 31, 2017.
    (ii) Late-joining sponsored FFIs.
    (iii) Certification period.
    (iv) Additional certifications or information.
    (v) Certifications regarding sponsoring entity and sponsored FFI 
requirements.
    (vi) Certifications regarding internal controls.
    (A) Certification of effective internal controls.
    (B) Qualified certification.
    (vii) Material failures defined.
    (4) IRS review of compliance.
    (i) General inquiries.
    (ii) Inquiries regarding substantial non-compliance.
    (iii) Compliance procedures for a sponsored FFI subject to a Model 2 
IGA.
    (5) Preexisting account certification.
    (6) Sponsorship agreement.
    (k) Sponsoring entity event of default.
    (1) Defined.
    (2) Notice of event of default.
    (3) Remediation of event of default.
    (4) Termination.
    (i) In general.
    (ii) Termination of sponsoring entity.
    (iii) Termination of sponsored FFI.
    (iv) Reconsideration of notice of default or notice of termination.
    (v) Sponsoring entity of sponsored FFIs subject to a Model 2 IGA.
    (l) Trustee-documented trust verification.
    (1) Compliance program.
    (2) Certification of compliance.
    (i) Certification requirement.
    (A) In general.
    (B) Extension of time for the certification period ending on 
December 31, 2017.
    (ii) Late-joining trustee-documented trusts.
    (iii) Certification period.
    (iv) Certifications.
    (3) IRS review of compliance by trustees of trustee-documented 
trusts.
    (i) General inquiries.
    (ii) Inquiries regarding substantial non-compliance.
    (m) Applicability date.

 Sec.  1.1471-6 Payments beneficially owned by exempt beneficial owners.

    (a) In general.
    (b) Any foreign government, any political subdivision of a foreign 
government, or any wholly owned agency or instrumentality of any one or 
more of the foregoing.
    (1) Integral part.
    (2) Controlled entity.
    (3) Inurement to the benefit of private persons.

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    (c) Any international organization or any wholly owned agency or 
instrumentality thereof.
    (d) Foreign central bank of issue.
    (1) In general.
    (2) Separate instrumentality.
    (3) Bank for International Settlements.
    (4) Income on certain transactions.
    (e) Governments of U.S. territories.
    (f) Certain retirement funds.
    (1) Treaty-qualified retirement fund.
    (2) Broad participation retirement fund.
    (3) Narrow participation retirement funds.
    (4) Fund formed pursuant to a plan similar to a section 401(a) plan.
    (5) Investment vehicles exclusively for retirement funds.
    (6) Pension fund of an exempt beneficial owner.
    (7) Example.
    (g) Entities wholly owned by exempt beneficial owners.
    (h) Exception for commercial activities.
    (1) General rule.
    (2) Limitation.
    (i) Effective/applicability date.

                  Sec.  1.1472-1 Withholding on NFFEs.

    (a) In general.
    (b) Withholdable payments made to an NFFE.
    (1) In general.
    (2) Transitional relief.
    (c) Exceptions.
    (1) Payments to an excepted NFFE.
    (i) Publicly traded corporation.
    (A) Regularly traded.
    (B) Special rules regarding the regularly traded requirement.
    (1) Year of initial public offering.
    (2) Classes of stock treated as meeting the regularly traded 
requirement.
    (3) Anti-abuse rule.
    (C) Established securities market.
    (1) In general.
    (2) Foreign exchange with multiple tiers.
    (3) Computation of dollar value of stock traded.
    (ii) Certain affiliated entities related to a publicly traded 
corporation.
    (iii) Certain territory entities.
    (iv) Active NFFEs.
    (A) Passive income.
    (B) Exceptions from passive income treatment.
    (C) Methods of measuring assets.
    (v) Excepted nonfinancial entities.
    (vi) Direct reporting NFFEs.
    (vii) Sponsored direct reporting NFFEs.
    (2) Payments made to an exempt beneficial owner.
    (3) Definition of direct reporting NFFE.
    (4) Election to be treated as a direct reporting NFFE.
    (i) Manner of making election.
    (ii) Effective date of election.
    (iii) Revocation of election by NFFE.
    (iv) Revocation of election by Commissioner.
    (v) Event of default.
    (vi) Notice of event of default.
    (vii) Remediation of event of default.
    (5) Election by a direct reporting NFFE to be treated as a sponsored 
direct reporting NFFE.
    (i) Definition of sponsored direct reporting NFFE.
    (ii) Requirements for sponsoring entity of a sponsored direct 
reporting NFFE.
    (iii) Revocation of status as sponsoring entity.
    (iv) Liability of sponsoring entity.
    (d) Rules for determining payee and beneficial owner.
    (1) In general.
    (2) Payments made to a NFFE that is a QI, WP, or WT.
    (3) Payments made to a partner or beneficiary of an NFFE that is an 
NWP or NWT.
    (4) Payments made to a beneficial owner that is an NFFE.
    (5) Absence of valid documentation.
    (e) Information reporting requirements.
    (1) Reporting on withholdable payments.
    (2) Reporting on substantial U.S. owners.
    (f) Sponsoring entity verification.
    (1) In general.
    (2) Certification of compliance.
    (i) Certification requirement.
    (A) In general.
    (B) Extension of time for the certification period ending on 
December 31, 2017.
    (ii) Late-joining sponsored direct reporting NFFEs.
    (iii) Certification period.
    (iv) Certifications.
    (3) IRS review of compliance.
    (i) General inquiries.
    (ii) Inquiries regarding substantial non-compliance.
    (4) Sponsorship agreement.
    (g) Sponsoring entity event of default.
    (1) Defined.
    (2) Notice of event of default.
    (3) Remediation of event of default.
    (4) Termination.
    (i) In general.
    (ii) Termination of sponsoring entity.
    (iii) Termination of sponsored direct reporting NFFE.
    (iv) Reconsideration of notice of default or notice of termination.
    (h) Effective/applicability date.

                Sec.  1.1473-1 Section 1473 definitions.

    (a) Definition of withholdable payment.
    (1) In general.
    (2) U.S. source FDAP income defined.
    (i) In general.
    (A) FDAP income defined.
    (B) U.S. source.
    (C) Exceptions to withholding on U.S. source FDAP income not 
applicable under chapter 4.

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    (ii) Special rule for certain interest.
    (iii) Original issue discount.
    (iv) REMIC residual interests.
    (v) Withholding liability of payee that is satisfied by withholding 
agent.
    (vi) Special rule for sales of interest bearing debt obligations.
    (vii) Payment of U.S. source FDAP income.
    (A) Amount of payment of U.S. source FDAP income.
    (B) When payment of U.S. source FDAP income is made.
    (3) Gross proceeds defined.
    (i) Sale or other disposition.
    (A) In general.
    (B) Special rule for sales effected by brokers.
    (C) Special rule for gross proceeds from sales settled by a clearing 
organization.
    (ii) Property of a type that can produce interest or dividend 
payments that would be U.S. source FDAP income.
    (A) In general.
    (B) Contracts producing dividend equivalent payments.
    (C) Regulated investment company distributions.
    (iii) Payment of gross proceeds.
    (A) When gross proceeds are paid.
    (B) Amount of gross proceeds.
    (4) Payments not treated as withholdable payments.
    (i) Certain short-term obligations.
    (ii) Effectively connected income.
    (iii) Excluded nonfinancial payments.
    (iv) Gross proceeds from sales of excluded property.
    (v) Fractional shares.
    (vi) Offshore payments of U.S. source FDAP income prior to 2017 
(transitional).
    (vii) Collateral arrangements prior to 2017 (transitional).
    (viii) Certain dividend equivalents.
    (5) Special payment rules for flow-through entities, complex trusts, 
and estates.
    (i) In general.
    (ii) Partnerships.
    (iii) Simple trusts.
    (iv) Complex trusts and estates.
    (v) Grantor trusts.
    (vi) Special rule for an NWP or NWT.
    (vii) Special rules for determining when gross proceeds are treated 
as paid to a partner, owner, or beneficiary of a flow-through entity.
    (6) Reporting of withholdable payments.
    (7) Example.
    (b) Substantial U.S. owner.
    (1) Definition.
    (2) Indirect ownership of foreign entities.
    (i) Indirect ownership of stock.
    (ii) Indirect ownership in a foreign partnership or ownership of a 
beneficial interest in a foreign trust.
    (iii) Ownership and holdings through options.
    (iv) Determination of proportionate interest.
    (v) Interests owned or held by a related person.
    (3) Beneficial interest in a foreign trust.
    (i) In general.
    (ii) Determining the 10 percent threshold in the case of a 
beneficial interest in a foreign trust.
    (4) Exceptions.
    (i) De minimis amount or value exception.
    (ii) Trusts wholly owned by certain U.S. persons.
    (5) Special rule for certain financial institutions.
    (6) Determination dates for substantial U.S. owners.
    (7) Examples.
    (c) Specified U.S. person.
    (d) Withholding agent.
    (1) In general.
    (2) Participating FFIs and registered deemed-compliant FFIs as 
withholding agents.
    (3) Grantor trusts as withholding agents.
    (4) Deposit and return requirements.
    (5) Multiple withholding agents.
    (6) Exception for certain individuals.
    (e) Foreign entity.
    (f) Effective/applicability date.

    Sec.  1.1474-1 Liability for withheld tax and withholding agent 
                               reporting.

    (a) Payment and returns of tax withheld.
    (1) In general.
    (2) Withholding agent liability.
    (3) Use of agents.
    (i) In general.
    (ii) Authorized agent.
    (iii) Liability of withholding agent acting through an agent.
    (4) Liability for failure to obtain documentation timely or to act 
in accordance with applicable presumptions.
    (i) In general.
    (ii) Withholding satisfied by another withholding agent.
    (b) Payment of withheld tax.
    (1) In general.
    (2) Special rule for foreign passthru payments and payments of gross 
proceeds that include an undetermined amount of income subject to tax.
    (c) Income tax return.
    (1) In general.
    (2) Participating FFIs, registered deemed-compliant FFIs, and U.S. 
branches treated as U.S. persons.
    (3) Amended returns.
    (d) Information returns for payment reporting.
    (1) Filing requirement.
    (i) In general.
    (ii) Recipient.
    (A) Defined.
    (B) Persons that are not recipients.
    (2) Amounts subject to reporting.

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    (i) In general.
    (ii) Exception to reporting.
    (iii) Coordination with chapter 3.
    (3) Required information.
    (4) Method of reporting.
    (i) Payments by U.S. withholding agent to recipients.
    (A) Payments to certain entities that are beneficial owners.
    (B) Payments to participating FFIs, deemed-compliant FFIs, and 
certain QIs.
    (C) Amounts paid to a U.S. branch.
    (D) Amounts paid to territory financial institutions that are flow-
through entities or acting as intermediaries.
    (E) Amounts paid to NFFEs.
    (ii) Payments made by withholding agents to certain entities that 
are not recipients.
    (A) Entities that provide information for a withholding agent to 
perform specific payee reporting.
    (B) Nonparticipating FFI that is a flow-through entity or 
intermediary.
    (C) Disregarded entities.
    (iii) Reporting by participating FFIs and deemed-compliant FFIs 
(including QIs, WPs, and WTs) and U.S. branches not treated as U.S. 
persons.
    (A) In general.
    (B) Special reporting requirements of participating FFIs, deemed-
compliant FFIs, FFIs that make an election under section 1471(b)(3), and 
U.S. branches not treated as U.S. persons.
    (C) Reporting by a U.S. branch treated as a U.S. person.
    (iv) Reporting by territory financial institutions.
    (v) Nonparticipating FFIs.
    (vi) Other withholding agents.
    (vii) Combined Form 1042-S reporting.
    (e) Reporting in electronic form.
    (f) Indemnification of withholding agent.
    (g) Extensions of time to file Forms 1042 and 1042-S.
    (h) Penalties.
    (i) Additional reporting requirements with respect to U.S. owned 
foreign entities and owner-documented FFIs.
    (1) Reporting by certain withholding agents with respect to owner-
documented FFIs.
    (2) Reporting by certain withholding agents with respect to U.S. 
owned foreign entities that are NFFEs.
    (3) Cross reference to reporting by participating FFIs.
    (4) Extensions of time to file.
    (j) Applicability date.

 Sec.  1.1474-2 Adjustments for overwithholding or underwithholding of 
                                  tax.

    (a) Adjustments of overwithheld tax.
    (1) In general.
    (2) Overwithholding.
    (3) Reimbursement of tax.
    (i) General rule.
    (ii) Record maintenance.
    (4) Set-offs.
    (5) Examples.
    (b) Withholding of additional tax when underwithholding occurs.
    (c) Effective/applicability date.

  Sec.  1.1474-3 Withheld tax as credit to beneficial owner of income.

    (a) Creditable tax.
    (b) Amounts paid to persons that are not the beneficial owners.
    (c) Effective/applicability date.

                   Sec.  1.1474-4 Tax paid only once.

    (a) Tax paid.
    (b) Effective/applicability date.

                   Sec.  1.1474-5 Refunds or credits.

    (a) Refund and credit.
    (1) In general.
    (2) Limitation to refund and credit for a nonparticipating FFI.
    (3) Requirement to provide additional documentation for certain 
beneficial owners.
    (i) In general.
    (ii) Claim of reduced withholding under an income tax treaty.
    (iii) Additional documentation to be furnished to the IRS for 
certain NFFEs.
    (b) Tax repaid to payee.
    (c) Effective/applicability date.

    Sec.  1.1474-6 Coordination of chapter 4 with other withholding 
                               provisions.

    (a) In general.
    (b) Coordination of withholding for amounts subject to withholding 
under sections 1441, 1442, and 1443.
    (1) In general.
    (2) When withholding is applied.
    (3) Special rule for certain substitute dividend payments.
    (c) Coordination with amounts subject to withholding under section 
1445.
    (1) In general.
    (2) Determining the amount of the distribution from certain domestic 
corporations subject to section 1445 or chapter 4 withholding.
    (d) Coordination with section 1446.
    (1) In general.
    (2) Determining the amount of distribution subject to section 1446.
    (e) Example.
    (f) Coordination with section 3406.
    (g) Effective/applicability date.

             Sec.  1.1474-7 Confidentiality of information.

    (a) Confidentiality of information.
    (b) Exception for disclosure of participating FFIs.
    (c) Effective/applicability date.

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     Sec.  301.1474-1 Required use of electronic form for financial 
        institutions filing Form 1042, Form 1042-S, or Form 8966.

    (a) Financial institutions filing certain information returns.
    (b) Waiver.
    (c) Failure to file.
    (d) Meaning of terms.
    (1) Magnetic media or electronic form.
    (2) Financial institution.
    (e) Applicability date.

[T.D. 9610, 78 FR 5899, Jan. 28, 2013; 78 FR 55203, Sept. 10, 2013; as 
amended by T.D. 9809, 82 FR 2144, Jan. 6, 2017; T.D. 9852, 84 FR 10979, 
Mar. 25, 2019; T.D. 9890, 85 FR 204, Jan. 2, 2020; T.D. 9972, 88 FR 
11763, Feb. 23, 2023]



Sec.  1.1471-1  Scope of chapter 4 and definitions.

    (a) Scope of chapter 4 of the Internal Revenue Code. Sections 
1.1471-1 through 1.1474-7 provide rules for withholding when a 
withholding agent makes a payment to an FFI or NFFE and prescribe the 
requirements for and definitions relevant to FFIs and NFFEs to which 
withholding will not apply. Section 1.1471-1 provides definitions for 
terms used in chapter 4 of the Internal Revenue Code (Code) and the 
regulations thereunder. Section 1.1471-2 provides rules for withholding 
under section 1471(a) on payments to FFIs, including the exception from 
withholding for payments made with respect to certain grandfathered 
obligations. Section 1.1471-3 provides rules for determining the payee 
of a payment and the documentation requirements to establish a payee's 
chapter 4 status. Section 1.1471-4 describes the requirements of an FFI 
agreement under section 1471(b) and the application of sections 1471(b) 
and (c) to an expanded affiliated group of FFIs. Section 1.1471-5 
defines terms relevant to section 1471 and the FFI agreement and defines 
categories of FFIs that will be deemed to have met the requirements of 
section 1471(b) pursuant to section 1471(b)(2). Section 1.1471-6 defines 
classes of beneficial owners of payments that are exempt from 
withholding under chapter 4. Section 1.1472-1 provides rules for 
withholding when a withholding agent makes a payment to an NFFE, and 
defines categories of NFFEs that are not subject to withholding. Section 
1.1473-1 provides definitions of the statutory terms in section 1473. 
Section 1.1474-1 provides rules relating to a withholding agent's 
liability for withheld tax, filing of income tax and information 
returns, and depositing of tax withheld. Section 1.1474-2 provides rules 
relating to adjustments for overwithholding and underwithholding of tax. 
Section 1.1474-3 provides the circumstances in which a credit is allowed 
to a beneficial owner for a withheld tax. Section 1.1474-4 provides that 
a chapter 4 withholding obligation need only be collected once. Section 
1.1474-5 contains rules relating to credits and refunds of tax withheld. 
Section 1.1474-6 provides rules coordinating withholding under sections 
1471 and 1472 with withholding provisions under other sections of the 
Code. Section 1.1474-7 provides the confidentiality requirement for 
information obtained to comply with the requirements of chapter 4. Any 
reference in the provisions of sections 1471 through 1474 to an amount 
that is stated in U.S. dollars includes the foreign currency equivalent 
of that amount. Except as otherwise provided, the provisions of sections 
1471 through 1474 and the regulations thereunder apply only for purposes 
of chapter 4. See Sec.  301.1474-1 of this chapter for the requirements 
for reporting on magnetic media that apply to financial institutions 
making payments or otherwise reporting accounts pursuant to chapter 4.
    (b) Definitions. Except as otherwise provided in this paragraph (b) 
or under the terms of an applicable Model 2 IGA, the following 
definitions apply for purposes of sections 1471 through 1474 and the 
regulations under those sections.
    (1) Account. The term account means a financial account as defined 
in Sec.  1.1471-5(b).
    (2) Account holder. The term account holder means the person who 
holds an account, as determined under Sec.  1.1471-5(a)(3).
    (3) Active NFFE. The term active NFFE has the meaning set forth in 
Sec.  1.1472-1(c)(1)(iv).
    (4) AML due diligence. The term AML due diligence means the customer 
due diligence procedures of a financial institution pursuant to the 
anti-money laundering or similar requirements to which the financial 
institution, or

[[Page 373]]

branch thereof, is subject. This includes identifying the customer 
(including the owners of the customer), understanding the nature and 
purpose of the account, and ongoing monitoring.
    (5) Annuity contract. The term annuity contract means a contract 
under which the issuer agrees to make payments for a period of time 
determined in whole or in part by reference to the life expectancy of 
one or more individuals. The term also includes a contract that is 
considered to be an annuity contract in accordance with the law, 
regulation, or practice of the jurisdiction in which the contract was 
issued, and under which the issuer agrees to make payments for a term of 
years. For purposes of the preceding sentence, it is immaterial whether 
a contract satisfies any of the substantive U.S. tax rules (for example, 
sections 72(s), 72(u), 817(h), and the investor control prohibition) 
applicable to the taxation of a contract holder or issuer.
    (6) Assumes primary withholding responsibility. The term assumes 
primary withholding responsibility refers to when a QI, territory 
financial institution, or U.S. branch assumes responsibility for 
withholding on a payment for purposes of chapters 3 and 4 as if it were 
a U.S. person. A QI may only assume primary withholding responsibility 
if it does not make an election to be withheld upon with respect to the 
payment.
    (7) Backup withholding. The term backup withholding means the 
withholding required under section 3406.
    (8) Beneficial owner. Except as provided in Sec.  1.1472-1(d), Sec.  
1.1471-6(d)(4), and Sec.  1.1471-6(f), the term beneficial owner has the 
meaning set forth in Sec.  1.1441-1(c)(6).
    (9) Blocked account. The term blocked account has the meaning set 
forth in Sec.  1.1471-4(e)(2)(iii)(B).
    (10) Branch. With respect to a financial institution, the term 
branch means a unit, business, or office of a financial institution that 
is treated as a branch under the regulatory regime of a country or that 
is otherwise regulated under the laws of a country as separate from 
other offices, units, or branches of the financial institution and also 
includes an entity that is disregarded as an entity separate from the 
financial institution (including branches maintained by such disregarded 
entity). A branch includes a unit, business, or office of a financial 
institution located in a country in which it is resident, and a unit, 
business, or office of a financial institution located in the country in 
which the financial institution is created or organized. All units, 
businesses, and offices of a participating FFI located in a single 
country, and all entities disregarded as entities separate from a 
participating FFI and located in a single country, shall be treated as a 
single branch and may use the same GIIN. An account will be treated as 
maintained by a branch or disregarded entity if the rights and 
obligations of the account holder and the participating FFI with regard 
to such account (including any assets held in the account) are governed 
by the laws of the country of the branch or disregarded entity.
    (11) Broker. The term broker means any person, 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. Examples of a 
broker include an obligor that regularly issues and retires its own debt 
obligations, a corporation that regularly redeems its own stock, and a 
clearing organization that effects sales of securities for its members. 
A broker does not include an international organization described in 
Sec.  1.1471-6(c) that redeems or retires an obligation of which it is 
the issuer, a stock transfer agent that records transfers of stock for a 
corporation if the nature of the activities of the agent is such that 
the agent ordinarily would not know the gross proceeds from sales, an 
escrow agent that effects no sales other than transactions incidental to 
the purpose of the escrow (such as sales to collect on collateral), or a 
corporation that issues and retires long-term debt on an irregular 
basis.
    (12) Cash value. The term cash value has the meaning set forth in 
Sec.  1.1471-5(b)(3)(vii)(B).
    (13) Cash value insurance contract. The term cash value insurance 
contract has the meaning set forth in Sec.  1.1471-5(b)(3)(vii).
    (14) Certified deemed-compliant FFI. The term certified deemed-
compliant FFI

[[Page 374]]

means an FFI described in Sec.  1.1471-5(f)(2).
    (15) Change in circumstances. The term change in circumstances has 
the meaning set forth in Sec.  1.1471-3(c)(6)(ii)(E) for withholding 
agents and, in the case of a participating FFI, has the meaning set 
forth in Sec.  1.1471-4(c)(2)(iii).
    (16) Chapter 3. For purposes of chapter 4, the term chapter 3 means 
sections 1441 through 1464 and the regulations thereunder, but does not 
include sections 1445 and 1446 and the regulations thereunder, unless 
the context indicates otherwise.
    (17) Chapter 4. The term chapter 4 means sections 1471 through 1474 
and the regulations thereunder.
    (18) Chapter 4 reportable amount. The term chapter 4 reportable 
amount has the meaning set forth in Sec.  1.1474-1(d)(2)(i).
    (19) Chapter 4 status. The term chapter 4 status means a person's 
status as a U.S. person, a specified U.S. person, an individual that is 
a foreign person, a participating FFI, a deemed-compliant FFI, a 
restricted distributor, an exempt beneficial owner, a nonparticipating 
FFI, a territory financial institution, an excepted NFFE, or a passive 
NFFE.
    (20) Chapter 4 withholding rate pool. The term chapter 4 withholding 
rate pool means a pool of payees that are nonparticipating FFIs provided 
on a chapter 4 withholding statement (as described in Sec.  1.1471-
3(c)(3)(iii)(B)(3)) to which a withholdable payment is allocated. The 
term chapter 4 withholding rate pool also means a pool provided on an 
FFI withholding statement (as described in Sec.  1.1471-
3(c)(3)(iii)(B)(2)) to which a withholdable payment is allocated to--
    (i) A pool of payees consisting of each class of recalcitrant 
account holders described in Sec.  1.1471-4(d)(6) (or with respect to an 
FFI that is a QI, a single pool of recalcitrant account holders without 
the need to subdivide into each class of recalcitrant account holders 
described in Sec.  1.1471-4(d)(6)), including a separate pool of account 
holders to which the escrow procedures for dormant accounts apply; or
    (ii) A pool of payees that are U.S. persons as described in Sec.  
1.1471-3(c)(3)(iii)(B)(2).
    (21) Clearing organization. The term clearing organization means an 
entity that is in the business of holding securities for its member 
organizations or clearing trades of securities and transferring, or 
instructing the transfer of, securities by credit or debit to the 
account of a member without the necessity of physical delivery of the 
securities.
    (22) Complex trust. A complex trust is a trust that is not a simple 
trust or a grantor trust.
    (23) Consolidated obligations. The term consolidated obligations 
means multiple obligations that a withholding agent (including a 
withholding agent that is an FFI) has chosen to treat as a single 
obligation in order to treat the obligations as preexisting obligations 
pursuant to paragraph (b)(104)(ii) of this section or in order to share 
documentation between the obligations pursuant to Sec.  1.1471-3(c)(8). 
A withholding agent that has opted to treat multiple obligations as 
consolidated obligations pursuant to the previous sentence must also 
treat the obligations as a single obligation for purposes of satisfying 
the standards of knowledge requirements set forth in Sec. Sec.  1.1471-
3(e) and 1.1471-4(c)(2)(ii), and for purposes of determining the balance 
or value of any of the obligations when applying any of the account 
thresholds applicable to due diligence or reporting as set forth in 
Sec. Sec.  1.1471-3(c)(6)(ii), 1.1471-3(d), 1.1471-4(c), 1.1471-5(a)(4), 
and 1.1471-5(b)(3)(vii). For example, with respect to consolidated 
obligations, if a withholding agent has reason to know that the chapter 
4 status assigned to the account holder or payee of one of the 
consolidated obligations is inaccurate, then it has reason to know that 
the chapter 4 status assigned for all other consolidated obligations of 
the account holder or payee is inaccurate. Similarly, to the extent that 
an account balance or value is relevant for purposes of applying any 
account threshold to one or more of the consolidated obligations, the 
withholding agent must aggregate the balance or value of all such 
consolidated obligations.
    (24) Custodial account. The term custodial account has the meaning 
set forth in Sec.  1.1471-5(b)(3)(ii).

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    (25) Custodial institution. The term custodial institution has the 
meaning set forth in Sec.  1.1471-5(e)(1)(ii).
    (26) Customer master file. A customer master file includes the 
primary files of a withholding agent, participating FFI, or deemed-
compliant FFI for maintaining account holder information, such as 
information used for contacting account holders and for satisfying AML 
due diligence.
    (27) Deemed-compliant FFI. The term deemed-compliant FFI means an 
FFI that is treated, pursuant to section 1471(b)(2) and Sec.  1.1471-
5(f), as meeting the requirements of section 1471(b). The term deemed-
compliant FFI also includes a QI branch of a U.S. financial institution 
that is a reporting Model 1 FFI.
    (28) Deferred annuity contract. The term deferred annuity contract 
means an annuity contract other than an immediate annuity contract.
    (29) Depository account. The term depository account has the meaning 
set forth in Sec.  1.1471-5(b)(3)(i).
    (30) Depository institution. The term depository institution has the 
meaning set forth in Sec.  1.1471-5(e)(1)(i).
    (31) Direct reporting NFFE. The term direct reporting NFFE has the 
meaning set forth in Sec.  1.1472-1(c)(3).
    (32) Documentary evidence. The term documentary evidence means 
documents, other than a withholding certificate or written statement, 
that a withholding agent is permitted to rely upon to determine the 
chapter 4 status of a person in accordance with Sec.  1.1471-3(c)(5).
    (33) Documentation. The term documentation means withholding 
certificates, written statements, documentary evidence, and other 
documents that may be relevant in determining a person's chapter 4 
status, including any document containing a determination of the account 
holder's citizenship or residency for tax or AML due diligence purposes 
or an account holder's claim of citizenship or residency for tax or AML 
due diligence purposes.
    (34) Dormant account. The term dormant account has the meaning set 
forth in Sec.  1.1471-4(d)(6)(ii).
    (35) Effective date of the FFI agreement. The term effective date of 
the FFI agreement with respect to an FFI or a branch of an FFI that is a 
participating FFI means the date on which the IRS issues a GIIN to the 
FFI or branch. For participating FFIs that receive a GIIN prior to June 
30, 2014, the effective date of the FFI agreement is June 30, 2014.
    (36) EIN. The term EIN means an employer identification number (also 
known as a federal tax identification number) described in Sec.  
301.6109-1(a)(1)(i) of this chapter.
    (37) Election to be withheld upon. The term election to be withheld 
upon has the meaning set forth in Sec.  1.1471-2(a)(2)(iii).
    (38) Electronically searchable information. The term electronically 
searchable information means information that a withholding agent or FFI 
maintains in its tax reporting files, customer master files, or similar 
files, and that is stored in the form of an electronic database against 
which standard queries in programming languages, such as Structured 
Query Language, may be used. Information, data, or files are not 
electronically searchable merely because they are stored in an image 
retrieval system (such as portable document format (.pdf) or scanned 
documents).
    (39) Entity. The term entity means any person other than an 
individual.
    (40) Entity account. The term entity account means an account held 
by one or more entities.
    (41) Excepted NFFE. The term excepted NFFE means a NFFE that is 
described in Sec.  1.1472-1(c)(1).
    (42) Exempt beneficial owner. The term exempt beneficial owner means 
any person described in Sec.  1.1471-6(b) through (g) or that is 
otherwise treated as an exempt beneficial owner pursuant to a Model 1 
IGA or Model 2 IGA.
    (43) Exempt recipient. The term exempt recipient means a person 
described in Sec.  1.6049-4(c)(1)(ii) (for interest, dividends, and 
royalties), a person described in Sec.  1.6045-2(b)(2)(i) (for broker 
proceeds), and a person described in Sec.  1.6041-3(q) (for rents, 
amounts paid on notional principal contracts, and other fixed or 
determinable income).
    (44) Expanded affiliated group. The term expanded affiliated group 
has the meaning set forth in Sec.  1.1471-5(i)(2).
    (45) FATF. The term FATF means the Financial Action Task Force, an 
inter-governmental body that develops and promotes international 
policies to

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combat money laundering and terrorist financing.
    (46) FATF-compliant jurisdiction. The term FATF-compliant 
jurisdiction means a jurisdiction that--
    (i) Is not subject to a FATF call on its members and other 
jurisdictions to apply counter-measures to protect the international 
financial system from the on-going and substantial money laundering and 
terrorist financing risks emanating from the jurisdiction;
    (ii) Is not a jurisdiction with strategic AML/CFT (anti-money 
laundering and combating the financing of terrorism) deficiencies that 
has not made sufficient progress in addressing the deficiencies or has 
not committed to an action plan developed with the FATF to address the 
deficiencies; and
    (iii) Is not a jurisdiction with strategic AML/CFT deficiencies that 
the FATF has identified as not making sufficient progress on its action 
plan agreed upon with the FATF.
    (47) FFI. The term FFI or foreign financial institution has the 
meaning set forth in Sec.  1.1471-5(d).
    (48) FFI agreement. The term FFI agreement means an agreement that 
is described in Sec.  1.1471-4(a). An FFI agreement includes a QI 
agreement, a WP agreement, and a WT agreement that is entered into by an 
FFI (other than an FFI that is a registered deemed-compliant FFI, 
including a reporting Model 1 FFI) and that has an effective date or 
renewal date on or after June 30, 2014. The term FFI agreement also 
includes a QI agreement that is entered into by a foreign branch of a 
U.S. financial institution (other than a branch that is a reporting 
Model 1 FFI) and that has an effective date or renewal date on or after 
June 30, 2014.
    (49) Financial account. The term financial account has the meaning 
set forth in Sec.  1.1471-5(b).
    (50) Financial institution. The term financial institution has the 
meaning set forth in Sec.  1.1471-5(e) and includes a financial 
institution as defined in an applicable Model 1 or Model 2 IGA.
    (51) Flow-through entity. The term flow-through entity means a 
partnership, simple trust, or grantor trust, as determined under U.S. 
tax principles.
    (52) Flow-through withholding certificate. The term flow-through 
withholding certificate means a Form W-8IMY submitted by a foreign 
partnership, foreign simple trust, or foreign grantor trust.
    (53) Foreign entity. The term foreign entity has the meaning set 
forth in Sec.  1.1473-1(e).
    (54) Foreign passthru payment. The term foreign passthru payment has 
the meaning set forth in Sec.  1.1471-5(h)(2).
    (55) Foreign payee. The term foreign payee means any payee other 
than a U.S. payee.
    (56) Foreign person. The term foreign person means any person other 
than a U.S. person and includes a QI branch of a U.S. financial 
institution.
    (57) GIIN. The term GIIN or Global Intermediary Identification 
Number means the identification number that is assigned to a 
participating FFI or registered deemed-compliant FFI. The term GIIN or 
Global Intermediary Identification Number also includes the 
identification number assigned to a reporting Model 1 FFI for purposes 
of identifying such entity to withholding agents. All GIINs will appear 
on the IRS FFI list.
    (58) Grandfathered obligation. The term grandfathered obligation has 
the meaning set forth in Sec.  1.1471-2(b).
    (59) Grantor trust. A grantor trust is a trust with respect to which 
one or more persons are treated as owners of all or a portion of the 
trust under sections 671 through 679. If only a portion of the trust is 
treated as owned by a person, that portion is a grantor trust with 
respect to that person.
    (60) Gross proceeds. The term gross proceeds has the meaning set 
forth in Sec.  1.1473-1(a)(3).
    (61) Group annuity contract. The term group annuity contract means 
an annuity contract under which the obligees are individuals who are 
affiliated through an employer, trade association, labor union, or other 
association or group.
    (62) Group insurance contract. The term group insurance contract 
means an insurance contract that--
    (i) Provides coverage on individuals who are affiliated through an 
employer, trade association, labor union, or other association or group; 
and
    (ii) Charges a premium for each member of the group (or member of a

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class within the group) that is determined without regard to the 
individual health characteristics other than age, gender, and smoking 
habits of the member (or class of members) of the group.
    (63) Immediate annuity. The term immediate annuity means an annuity 
contract that--
    (i) Is purchased with a single premium or annuity consideration; and
    (ii) No later than one year from the purchase date of the contract 
commences to pay annually or more frequently substantially equal 
periodic payments.
    (64) Individual account. The term individual account means an 
account held by one or more individuals.
    (65) Insurance company. The term insurance company means an entity 
or arrangement--
    (i) That is regulated as an insurance business under the laws, 
regulations, or practices of any jurisdiction in which the company does 
business;
    (ii) The gross income of which (for example, gross premiums and 
gross investment income) arising from insurance, reinsurance, and 
annuity contracts for the immediately preceding calendar year exceeds 50 
percent of total gross income for such year; or
    (iii) The aggregate value of the assets of which associated with 
insurance, reinsurance, and annuity contracts at any time during the 
immediately preceding calendar year exceeds 50 percent of total assets 
at any time during such year.
    (66) Insurance contract. The term insurance contract means a 
contract (other than an annuity contract) under which the issuer in 
exchange for consideration agrees to pay an amount upon the occurrence 
of a specified contingency involving mortality, morbidity, accident, 
liability, or property risk.
    (67) Intergovernmental agreement (IGA). The term intergovernmental 
agreement or IGA means any applicable Model 1 or Model 2 IGA.
    (68) Intermediary. The term intermediary has the meaning set forth 
in Sec.  1.1441-1(c)(13).
    (69) Intermediary withholding certificate. The term intermediary 
withholding certificate means a Form W-8IMY submitted by an 
intermediary.
    (70) Investment entity. The term investment entity has the meaning 
set forth in Sec.  1.1471-5(e)(1)(iii).
    (71) Investment-linked annuity contract. The term investment-linked 
annuity contract means an annuity contract under which benefits or 
premiums are adjusted to reflect the investment return or market value 
of assets associated with the contract.
    (72) Investment-linked insurance contract. The term investment-
linked insurance contract means an insurance contract under which 
benefits, premiums, or the period of coverage are adjusted to reflect 
the investment return or market value of assets associated with the 
contract.
    (73) IRS FFI list. The term IRS FFI list means the list published by 
the IRS that contains the names and GIINs for all participating FFIs, 
registered deemed-compliant FFIs, and reporting Model 1 FFIs.
    (74) Life annuity contract. The term life annuity contract means an 
annuity contract that provides for payments over the life or lives of 
one or more individuals.
    (75) Life insurance contract. The term life insurance contract means 
an insurance contract under which the issuer, in exchange for 
consideration, agrees to pay an amount upon the death of one or more 
individuals. That a contract provides one or more payments (for example, 
for endowment benefits or disability benefits) in addition to a death 
benefit will not cause the contract to be other than a life insurance 
contract. For purposes of the preceding sentence, it is immaterial 
whether a contract satisfies any of the substantive U.S. tax rules (for 
example, sections 101(f), 817(h), 7702, or investor control prohibition) 
applicable to the taxation of the contract holder or issuer.
    (76) Limited branch. The term limited branch has the meaning set 
forth in Sec.  1.1471-4(e)(2)(iii). With respect to a reporting Model 2 
FFI, a limited branch is a branch of the reporting Model 2 FFI that 
operates in a jurisdiction that prevents such branch from fulfilling the 
requirements of a participating FFI or deemed-compliant FFI, or that

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cannot fulfill the requirements of a participating FFI or deemed-
compliant FFI due to the expiration of the transitional rule for limited 
branches under Sec.  1.1471-4(e)(2)(v), and for which the reporting 
Model 2 FFI meets the terms of the applicable Model 2 IGA with respect 
to the branch.
    (77) Limited FFI. The term limited FFI has the meaning set forth in 
Sec.  1.1471-4(e)(3)(ii). With respect to a reporting Model 2 FFI, a 
limited FFI is a related entity that operates in a jurisdiction that 
prevents the entity from fulfilling the requirements of a participating 
FFI or deemed-compliant FFI or that cannot fulfill the requirements of a 
participating FFI or deemed-compliant FFI due to the expiration of the 
transitional rule for limited FFIs under Sec.  1.1471-4(e)(3)(iv), and 
for which the reporting Model 2 FFI meets the requirements of the 
applicable Model 2 IGA with respect to the entity.
    (78) Model 1 IGA. The term Model 1 IGA means an agreement or 
arrangement between the United States or the Treasury Department and a 
foreign government or one or more agencies thereof to implement FATCA 
through reporting by financial institutions to such foreign government 
or agency thereof, followed by automatic exchange of the reported 
information with the IRS. The IRS will publish a list identifying all 
countries that are treated as having in effect a Model 1 IGA.
    (79) Model 2 IGA. The term Model 2 IGA means an agreement or 
arrangement between the United States or the Treasury Department and a 
foreign government or one or more agencies thereof to facilitate the 
implementation of FATCA through reporting by financial institutions 
directly to the IRS in accordance with the requirements of an FFI 
agreement, supplemented by the exchange of information between such 
foreign government or agency thereof and the IRS. The IRS will publish a 
list identifying all countries that are treated as having in effect a 
Model 2 IGA.
    (80) NFFE. The term NFFE or non-financial foreign entity means a 
foreign entity that is not a financial institution (including a 
territory NFFE). The term also means a foreign entity treated as an NFFE 
pursuant to a Model 1 IGA or Model 2 IGA.
    (81) Non-exempt recipient. The term non-exempt recipient means a 
person that is not an exempt recipient.
    (82) Nonparticipating FFI. The term nonparticipating FFI means an 
FFI other than a participating FFI, a deemed-compliant FFI, or an exempt 
beneficial owner.
    (83) Nonreporting IGA FFI. The term nonreporting IGA FFI means an 
FFI that is a resident of, or located or established in, a Model 1 or 
Model 2 IGA jurisdiction, as the context requires, and that meets the 
requirements of one of the following--
    (i) A nonreporting financial institution described in Annex II of 
the Model 1 IGA;
    (ii) A nonreporting financial institution described in Annex II of 
the Model 2 IGA;
    (iii) A registered deemed-compliant FFI described in Sec.  1.1471-
5(f)(1)(i)(A) through (F);
    (iv) A certified deemed-compliant FFI described in Sec.  1.1471-
5(f)(2)(i) through (v); or
    (v) An exempt beneficial owner described in Sec.  1.1471-6.
    (84) Non-U.S. account. The term non-U.S. account means an account 
that is not a U.S. account and that does not have an account holder that 
is a nonparticipating FFI or recalcitrant account holder.
    (85) NQI. The term NQI or nonqualified intermediary has the meaning 
set forth in Sec.  1.1441-1(c)(14).
    (86) NWP. The term NWP or nonwithholding foreign partnership means a 
foreign partnership that is not a withholding foreign partnership.
    (87) NWT. The term NWT or nonwithholding foreign trust means a 
foreign trust as defined in section 7701(a)(31)(B) that is a simple 
trust or grantor trust and is not a withholding foreign trust.
    (88) Offshore obligation. The term offshore obligation means an 
offshore obligation defined in Sec.  1.6049-5(c)(1) (by substituting the 
terms withholding agent or financial institution for the term payor).
    (89) Owner. The term owner means a person described in Sec.  1.1473-
1(b)(1), without regard to whether such person is a U.S. person and 
without regard to

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whether such person owns a ten percent interest in the entity. The term 
also includes a person that owns a discretionary interest in a trust and 
receives a distribution during the calendar year.
    (90) Owner-documented FFI. The term owner-documented FFI means an 
FFI described in Sec.  1.1471-5(f)(3).
    (91) Participating FFI. The term participating FFI means an FFI that 
has agreed to comply with the requirements of an FFI agreement with 
respect to all branches of the FFI, other than a branch that is a 
reporting Model 1 FFI or a U.S. branch. The term participating FFI also 
includes an FFI described in a Model 2 IGA that has agreed to comply 
with the requirements of an FFI agreement with respect to a branch (a 
reporting Model 2 FFI), and a QI branch of a U.S. financial institution, 
unless such branch is a reporting Model 1 FFI.
    (92) Participating FFI group. The term participating FFI group means 
an expanded affiliated group that includes one or more participating 
FFIs and meets the requirements of Sec.  1.1471-4(e)(1). The term 
participating FFI group also means an expanded affiliated group in which 
one or more members of the group is a reporting Model 1 FFI and each 
member of the group that is an FFI is a registered deemed-compliant FFI, 
nonreporting IGA FFI, limited FFI, or retirement fund described in Sec.  
1.1471-6(f).
    (93) Partnership. The term partnership has the meaning set forth in 
Sec.  301.7701-2(c)(1) of this chapter.
    (94) Passive NFFE. The term passive NFFE means an NFFE other than an 
excepted NFFE.
    (95) Passthru payment. The term passthru payment has the meaning set 
forth in Sec.  1.1471-5(h).
    (96) Payee. The term payee has the meaning set forth in Sec.  
1.1471-3(a).
    (97) Payment with respect to an offshore obligation. The term 
payment with respect to an offshore obligation means a payment made 
outside of the United States, within the meaning of Sec.  1.6049-5(e), 
with respect to an offshore obligation.
    (98) Payor. The term payor has the meaning set forth in Sec. Sec.  
31.3406(a)-2 and 1.6049-4(a)(2) and generally includes a withholding 
agent.
    (99) Permanent residence address. The term permanent residence 
address has the meaning set forth in Sec.  1.1441-1(c)(38).
    (100) Person. The term person has the meaning set forth in section 
7701(a)(1) and the regulations thereunder and includes an entity or 
arrangement that is an insurance company. The term person also includes, 
with respect to a withholdable payment, a QI branch of a U.S. financial 
institution.
    (101) Preexisting account. The term preexisting account means a 
financial account that is a preexisting obligation.
    (102) Preexisting entity account. The term preexisting entity 
account means a preexisting account held by one or more entities.
    (103) Preexisting individual account. The term preexisting 
individual account means a preexisting account held by one or more 
individuals.
    (104) Preexisting obligation--(i) The term preexisting obligation 
means any account, instrument, contract, debt, or equity interest 
maintained, executed, or issued by the withholding agent that is 
outstanding on June 30, 2014. With respect to a participating FFI, the 
term preexisting obligation means any account, instrument, or contract 
(including any debt or equity interest) maintained, executed, or issued 
by the FFI that is outstanding on the effective date of the FFI 
agreement. With respect to a registered deemed-compliant FFI, a 
preexisting obligation means any account, instrument, or contract 
(including any debt or equity interest) that is maintained, executed, or 
issued by the FFI prior to the later of the date that the FFI registers 
as a deemed-compliant FFI pursuant to Sec.  1.1471-5(f)(1) and receives 
a GIIN or the date the FFI is required to implement its account opening 
procedures under Sec.  1.1471-5(f). Notwithstanding the previous 
provisions of this paragraph (b)(104)(i), a preexisting obligation 
includes an obligation held by an entity that is issued, opened, or 
executed on or after July 1, 2014, and before January 1, 2015, by or 
with a withholding agent or FFI that treats the obligation as a 
preexisting obligation. See

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Sec. Sec.  1.1471-2(a)(4)(ii), 1.1472-1(b)(2), and 1.1471-4(c)(3) for 
the due diligence requirements applicable to preexisting obligations for 
withholding agents and participating FFIs.
    (ii) The term preexisting obligation also includes any obligation 
(referring to an account, instrument, contract, debt, or equity 
interest) of an account holder or payee, regardless of the date such 
obligation was entered into, if--
    (A) The account holder or payee also holds with the withholding 
agent (or a member of the withholding agent's expanded affiliated group 
or sponsored FFI group) an account, instrument, contract, or equity 
interest that is a preexisting obligation under paragraph (b)(104)(i) of 
this section;
    (B) The withholding agent (and, as applicable, the member of the 
withholding agent's expanded affiliated group or sponsored FFI group) 
treats both of the aforementioned obligations, and any other obligations 
of the payee or account holder that are treated as preexisting 
obligations under this paragraph (b)(104)(ii), as consolidated 
obligations; and
    (C) With respect to an obligation that is subject to AML due 
diligence, the withholding agent is permitted to satisfy such AML due 
diligence for the obligation by relying upon the AML due diligence 
performed for the preexisting obligation described in paragraph 
(b)(104)(i) of this section.
    (105) Pre-FATCA Form W-8. The term pre-FATCA Form W-8 means a 
version of a Form W-8 that was issued by the IRS prior to 2013 
(including an acceptable substitute form based on such version) and that 
does not contain chapter 4 statuses but otherwise meets the requirements 
of Sec.  1.1441-1(e)(1)(ii) applicable to such certificate (or 
substitute form) and has not expired, or a Form W-8 that was issued 
prior to 2013 and furnished by an individual to establish such 
individual's foreign status but otherwise meets the requirements of 
Sec.  1.1441-1(e)(1)(ii) applicable to such certificate and has not 
expired.
    (106) Prima facie FFI. The term prima facie FFI means an entity 
described in Sec.  1.1471-2(a)(4)(ii)(B).
    (107) QI. The term QI or qualified intermediary has the meaning set 
forth in Sec.  1.1441-1(e)(5)(ii).
    (108) QI agreement. The term QI agreement means the agreement 
described in Sec.  1.1441-1(e)(5)(iii).
    (109) QI branch of a U.S. financial institution. The term QI branch 
of a U.S. financial institution means a foreign branch of a U.S. 
financial institution for which a QI agreement is in effect.
    (110) Recalcitrant account holder. The term recalcitrant account 
holder has the meaning set forth in Sec.  1.1471-5(g).
    (111) Registered deemed-compliant FFI. The term registered deemed-
compliant FFI means an FFI described in Sec.  1.1471-5(f)(1). The term 
registered deemed-compliant FFI also includes a QI branch of a U.S. 
financial institution that is a reporting Model 1 FFI.
    (112) Relationship manager. A relationship manager is an officer or 
other employee of an FFI who is assigned responsibility for specific 
account holders on an on-going basis (including as an officer or 
employee that is a member of an FFI's private banking department), 
advises account holders regarding their banking, investment, trust, 
fiduciary, estate planning, or philanthropic needs, and recommends, 
makes referrals to, or arranges for the provision of financial products, 
services, or other assistance by internal or external providers to meet 
those needs. Notwithstanding the previous sentence, a person is only a 
relationship manager with respect to an account that has a balance or 
value of more than $1,000,000, taking into account the aggregation rules 
described in Sec.  1.1471-5(b)(4)(iii)(A) and (B).
    (113) Reportable payment. The term reportable payment means a 
payment of interest or dividends (as defined in section 3406(b)(2)) and 
other reportable payments (as defined in section 3406(b)(3)).
    (114) Reporting Model 1 FFI. The term reporting Model 1 FFI means an 
FFI with respect to which a foreign government or agency thereof agrees 
to obtain and exchange information pursuant to a Model 1 IGA, other than 
an FFI that is treated as a nonparticipating FFI under the Model 1 IGA.
    (115) Reporting Model 2 FFI. The term reporting Model 2 FFI means a 
participating FFI that is described in Sec.  1.1471-1(b)(91).

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    (116) Responsible officer. The term responsible officer means, with 
respect to a participating FFI, an officer of any participating FFI or 
reporting Model 1 FFI in the participating FFI's expanded affiliated 
group with sufficient authority to fulfill the duties of a responsible 
officer described in Sec.  1.1471-4, which include the requirement to 
periodically certify to the IRS regarding the FFI's compliance with its 
FFI agreement. The term responsible officer means, in the case of a 
registered deemed-compliant FFI, an officer of any deemed-compliant FFI 
or participating FFI in the deemed-compliant FFI's expanded affiliated 
group with sufficient authority to ensure that the FFI meets the 
applicable requirements of Sec.  1.1471-5(f). The term responsible 
officer means, with respect to a sponsoring entity, an officer of the 
sponsoring entity or an officer of an entity that establishes and 
maintains policies and procedures for, and has general oversight over, 
the sponsoring entity, provided such officer has sufficient authority to 
fulfill the duties of a responsible officer described in Sec.  1.1471-
5(j) or Sec.  1.1472-1(f) (as applicable). If a participating FFI elects 
to be part of a consolidated compliance program, the term responsible 
officer means an officer of the compliance FI (as described in Sec.  
1.1471-4(f)) with sufficient authority to fulfill the duties of a 
responsible officer described in Sec.  1.1471-4(f)(2) and (3) on behalf 
of each FFI in the compliance group. In the case of an FI or sponsoring 
entity that is an investment entity, for purposes of this paragraph 
(b)(116), the responsible officer may be, in lieu of an officer of the 
investment entity, an individual who is a director, managing member, or 
general partner of the investment entity or, if the general partner or 
managing member of the investment entity is itself an entity, an 
individual who is an officer, director, managing member, or general 
partner of such other entity.
    (117) Restricted distributor. The term restricted distributor means 
an entity described in Sec.  1.1471-5(f)(4).
    (118) Simple trust. The term simple trust means a trust that meets 
the requirements of section 651(a)(1) and (2).
    (119) Specified insurance company. The term specified insurance 
company has the meaning set forth in Sec.  1.1471-5(e)(1)(iv).
    (120) Specified U.S. person. The term specified U.S. person or 
specified United States person has the meaning set forth in Sec.  
1.1473-1(c).
    (121) Sponsored FFI. The term sponsored FFI means any entity 
described in Sec.  1.1471-5(f)(1)(i)(F) (describing sponsored investment 
entities and sponsored controlled foreign corporations) or Sec.  1.1471-
5(f)(2)(iii) (describing sponsored, closely held investment vehicles). 
The term sponsored FFI also means a sponsored investment entity, a 
sponsored controlled foreign corporation, or a sponsored, closely held 
investment vehicle treated as deemed-compliant under an applicable Model 
2 IGA.
    (122) Sponsored FFI group. The term sponsored FFI group means a 
group of sponsored FFIs that share the same sponsoring entity.
    (123) Sponsored direct reporting NFFE. The term sponsored direct 
reporting NFFE has the meaning set forth in Sec.  1.1472-1(c)(5).
    (124) Sponsoring entity. The term sponsoring entity means (i) an 
entity that registers with the IRS and agrees to perform the due 
diligence, withholding, and reporting obligations of one or more FFIs 
pursuant to Sec.  1.1471-5(f)(1)(i)(F) or (f)(2)(iii); or (ii) an entity 
that registers with the IRS and agrees to perform the due diligence and 
reporting obligations of one or more direct reporting NFFEs pursuant to 
Sec.  1.1472-1(c)(5).
    (125) Standardized industry coding system. The term standardized 
industry coding system means a coding system used by the withholding 
agent or FFI to classify account holders by business type for purposes 
other than U.S. tax purposes and that was implemented by the withholding 
agent by the later of January 1, 2012, or six months after the date the 
withholding agent was formed or organized.
    (126) Standing instructions to pay amounts. The term standing 
instructions to pay amounts means current payment instructions provided 
by the account holder, or an agent of the account holder, that will 
repeat without further instructions being provided by the account 
holder. Therefore, for example, a

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payment instruction to make an isolated payment is not a standing 
instruction to pay amounts, even if the instructions are given one year 
in advance. However, an instruction to make payments indefinitely is a 
standing instruction to pay amounts for the period during which such 
instructions are in effect, even if such instructions are amended after 
a single payment.
    (127) Subject to withholding. The term subject to withholding, with 
respect to an amount, means an amount for which withholding is required 
under chapter 4 or an amount for which chapter 4 withholding was 
otherwise applied.
    (128) Substantial U.S. owner. The term substantial U.S. owner or 
substantial United States owner has the meaning set forth in Sec.  
1.1473-1(b). In the case of a reporting Model 2 FFI, in applying this 
section with respect to a passive NFFE the term substantial U.S. owner 
means a controlling person as defined in the applicable Model 2 IGA.
    (129) Territory entity. The term territory entity means any entity 
that is incorporated or organized under the laws of any U.S. territory.
    (130) Territory financial institution. The term territory financial 
institution means a financial institution that is incorporated or 
organized under the laws of any U.S. territory, not including a 
territory entity that is an investment entity but that is not a 
depository institution, custodial institution, or specified insurance 
company.
    (131) Territory financial institution treated as a U.S. person. The 
term territory financial institution treated as a U.S. person means a 
territory financial institution that is treated as a U.S. person under 
Sec.  1.1471-3(a)(3)(iv).
    (132) Territory NFFE. The term territory NFFE means a territory 
entity that is not a financial institution, including a territory entity 
that is an investment entity but is not a depository institution, 
custodial institution, or specified insurance company.
    (133) TIN. The term TIN means the tax identifying number assigned to 
a person under section 6109.
    (134) U.S. account. The term U.S. account or United States account 
has the meaning set forth in Sec.  1.1471-5(a).
    (135) U.S. branch treated as a U.S. person. The term U.S. branch 
treated as a U.S. person means a U.S. branch that agrees to be treated 
as a U.S. person as described in Sec.  1.1441-1(b)(2)(iv)(A). For the 
due diligence, withholding, and reporting requirements of a U.S. branch 
of an FFI treated as a U.S. person for purposes of chapter 4, see Sec.  
1.1471-4(b)(7), (c)(2)(v), (d)(2)(iii)(B), Sec.  1.1472-1(a), and Sec.  
1.1474-1(i)(1) and (2).
    (136) U.S. financial institution. The term U.S. financial 
institution means a financial institution that is a U.S. person, 
including a U.S. branch treated as a U.S. person.
    (137) U.S. indicia. The term U.S. indicia has the meaning set forth 
in Sec.  1.1471-4(c)(5)(iv)(B) when applied to an individual and as set 
forth in Sec.  1.1471-3(e)(4)(v)(A) when applied to an entity.
    (138) U.S. owned foreign entity. The term U.S. owned foreign entity 
or United States owned foreign entity has the meaning set forth in Sec.  
1.1471-5(c).
    (139) U.S. payee. The term U.S. payee means any payee that is a U.S. 
person.
    (140) U.S. payor. The term U.S. payor means a U.S. payor or U.S. 
middleman as defined in Sec.  1.6049-5(c)(5).
    (141) U.S. person--(i) Except as otherwise provided in paragraph 
(b)(141)(ii) of this section, the term U.S. person or United States 
person means a person described in section 7701(a)(30), the United 
States government (including an agency or instrumentality thereof), a 
State (including an agency or instrumentality thereof), or the District 
of Columbia (including an agency or instrumentality thereof). The term 
U.S. person or United States person also means a foreign insurance 
company that has made an election under section 953(d), provided that 
either the foreign insurance company is not a specified insurance 
company (as described in Sec.  1.1471-5(e)(1)(iv)), or the foreign 
insurance company is a specified insurance company and is licensed to do 
business in any State.
    (ii) The term U.S. person or United States person does not include a 
foreign insurance company that has made an election under section 953(d) 
if it is a specified insurance company and is not licensed to do 
business in any State. An individual will not be treated as a U.S. 
person for a taxable year or any

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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 the individual's 
U.S. tax liability. A U.S. person does not include an alien individual 
who has made an election under section 6013(g) or (h) to be treated as a 
resident of the United States.
    (142) U.S. source FDAP income. The term U.S. source FDAP income has 
the meaning set forth in Sec.  1.1473-1(a)(2).
    (143) U.S. territory. 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.
    (144) U.S. withholding agent. The term U.S. withholding agent means 
a withholding agent that is either a U.S. person or a U.S. branch of a 
foreign person.
    (145) Withholdable payment. The term withholdable payment has the 
meaning set forth in Sec.  1.1473-1(a).
    (146) Withholding. The term withholding means the deduction and 
withholding of tax at the applicable rate from a payment.
    (147) Withholding agent. The term withholding agent has the meaning 
set forth in Sec.  1.1473-1(d).
    (148) Withholding certificate. The term withholding certificate 
means a Form W-8, Form W-9, or any other certificate that under the Code 
or regulations certifies or establishes the chapter 4 status of a payee 
or beneficial owner.
    (149) WP. The term WP or withholding foreign partnership means a 
foreign partnership that has executed the agreement described in Sec.  
1.1441-5(c)(2)(ii).
    (150) Written statement. The term written statement has the meaning 
set forth in Sec.  1.1471-3(c)(4).
    (151) WT. The term WT or withholding foreign trust means a foreign 
grantor trust or foreign simple trust that has executed the agreement 
described in Sec.  1.1441-5(e)(5)(v).
    (c) Applicability date. This section generally applies beginning on 
January 6, 2017, except for paragraphs (b)(116) and (121) of this 
section, which apply beginning on March 25, 2019. However, taxpayers may 
apply these provisions as of January 28, 2013. (For the rules that 
otherwise apply beginning on January 6, 2017, and before March 25, 2019, 
see this section as in effect and contained in 26 CFR part 1 revised 
April 1, 2018. For rules that otherwise apply beginning on January 28, 
2013, and before January 6, 2017, see this section as in effect and 
contained in 26 CFR part 1 revised April 1, 2016.)

[T.D. 9610, 78 FR 5906, Jan. 28, 2013; 78 FR 55203, Sept. 10, 2013, as 
amended by T.D. 9657, 79 FR 12825, Mar. 6, 2014; T.D. 9809, 82 FR 2148, 
Jan. 6, 2017; T.D. 9852, 84 FR 10980, Mar. 25, 2019; T.D. 9890, 85 FR 
204, Jan. 2, 2020]



Sec.  1.1471-2  Requirement to deduct and withhold tax on withholdable 
payments to certain FFIs.

    (a) Requirement to withhold on payments to FFIs--(1) General rule of 
withholding. Under section 1471(a), notwithstanding any exemption from 
withholding under any other provision of the Code or regulations, a 
withholding agent must withhold 30 percent of any withholdable payment 
made after June 30, 2014, to a payee that is an FFI unless either the 
withholding agent can reliably associate the payment with documentation 
upon which it is permitted to rely to treat the payment as exempt from 
withholding under paragraph (a)(4) of this section or the payment is 
made under a grandfathered obligation that is described in paragraph (b) 
of this section or constitutes gross proceeds from the disposition of 
such an obligation. A withholding agent that is making a payment must 
determine who the payee is under Sec.  1.1471-3(a) with respect to that 
payment and the chapter 4 status of such payee. See Sec.  1.1471-3 for 
requirements for determining the chapter 4 status of a payee, including 
additional documentation requirements that apply when a payment is made 
to an intermediary or flow-through entity that is not the payee. 
Withholding under this section applies without regard to whether the 
payee receives a withholdable payment as a beneficial owner or as an 
intermediary. See paragraph (a)(2)(iv) of this section for a description 
of the withholding requirements imposed on territory financial 
institutions as withholding agents

[[Page 384]]

under chapter 4. In the case of a withholdable payment to a NFFE, a 
withholding agent is required to determine whether withholding applies 
under section 1472 and Sec.  1.1472-1. Except as otherwise provided in 
the regulations under chapter 4, a withholding obligation arises on the 
date a payment is made, as determined under Sec.  1.1473-1(a).
    (2) Special withholding rules--(i) Requirement to withhold on 
payments of U.S. source FDAP income to participating FFIs and deemed-
compliant FFIs that are NQIs, NWPs, or NWTs, and U.S. branches acting as 
intermediaries. A withholding agent that, after June 30, 2014, makes a 
payment of U.S. source FDAP income to a participating FFI or deemed-
compliant FFI that is an NQI receiving the payment as an intermediary, 
or a NWP or NWT, must withhold 30 percent of the payment unless the 
withholding is reduced under this paragraph (a)(2)(i). A withholding 
agent is not required to withhold on a payment, or portion of a payment, 
that it can reliably associate, in the manner described in Sec.  1.1471-
3(c)(2), with a valid intermediary or flow-through withholding 
certificate that meets the requirements of Sec.  1.1471-3(d)(4) and a 
withholding statement that meets the requirements of Sec.  1.1471-
3(c)(3)(iii)(B) and that allocates the payment or portion of the payment 
to payees for which no withholding is required under chapter 4. Further, 
a withholding agent is not required to withhold on a payment that it can 
reliably associate with documentation indicating that the payee is a 
U.S. branch treated as a U.S. person (as defined in Sec.  1.1471-
1(b)(135)) or is a U.S. branch of an FFI that is not treated as a U.S. 
person but that applies the rules described in Sec.  1.1471-
4(d)(2)(iii)(C). See also Sec.  1.1471-3(c)(3)(iii)(H) for the rules for 
valid documentation of a U.S. branch.
    (ii) Residual withholding responsibility of intermediaries and flow-
through entities. An intermediary or flow-through entity that receives a 
withholdable payment after June 30, 2014, is required to withhold on 
such payment to the extent required under chapter 4. Notwithstanding the 
previous sentence, an intermediary or flow-through entity is not 
required to withhold if another withholding agent has withheld the full 
amount required. Further, an NQI, NWP, or NWT is not required to 
withhold with respect to a withholdable payment under chapter 4 if it 
has provided a valid intermediary withholding certificate or flow-
through withholding certificate and all of the information required by 
Sec.  1.1471-3(c)(3)(iii), and it does not know, and has no reason to 
know, that another withholding agent failed to withhold the correct 
amount. A QI's, WP's, or WT's obligation to withhold and report is 
determined in accordance with its QI agreement, WP agreement, or WT 
agreement.
    (iii) Requirement to withhold if a participating FFI or registered 
deemed-compliant FFI makes an election to be withheld upon. A person 
that otherwise would be a payee with respect to a payment but that makes 
an election to be withheld upon does not agree to accept primary 
withholding responsibility for the payment under chapter 3 or 4. 
Accordingly, such person cannot be treated as the payee and the 
withholding agent must determine whether it must withhold based on the 
chapter 4 status of the payee on whose behalf the person is receiving 
the payment. The election to be withheld upon is only available to the 
extent provided in paragraph (a)(2)(iii)(A) and (B) of this section. The 
election is not available to an entity that is required to accept 
primary withholding responsibility for the payment, such as a WP or WT 
receiving a payment of U.S. source FDAP income, or an entity that 
already must be withheld upon because it may not accept primary 
withholding responsibility for the payment and, as such, already must 
pass up documentation with respect to the payee to the withholding 
agent, such as a participating FFI that is an NQI receiving a payment of 
U.S. source FDAP income.
    (A) Election to be withheld upon for U.S. source FDAP income. A 
withholding agent is required to withhold with respect to a payment, or 
portion of a payment, that is U.S. source FDAP income subject to 
withholding that is made after June 30, 2014, to a QI that has elected 
in accordance with this paragraph to be withheld upon, unless such 
withholding agent also makes an election to be withheld upon under this

[[Page 385]]

paragraph (a)(2)(iii)(A) or is an FFI that may not accept primary 
withholding responsibility for the payment. In such case, the 
withholding agent must withhold 30 percent of the portion of the payment 
that is allocable, pursuant to a withholding statement described in 
Sec.  1.1471-3(c)(3)(iii)(B) provided by the QI, to recalcitrant account 
holders and nonparticipating FFIs. If no such allocation information is 
provided, the withholding agent must apply the presumption rules of 
Sec.  1.1471-3(f) to determine the chapter 4 status of the payee. A QI 
that is an FFI and that makes the election to be withheld upon with 
respect to a payment of U.S. source FDAP income may not assume primary 
withholding responsibility under chapter 3 for that payment. Conversely, 
a QI that is an FFI and that does not make the election to be withheld 
upon with respect to a payment of U.S. source FDAP income is required to 
assume primary withholding responsibility under chapter 3 for that 
payment. The election to be withheld upon is only available with respect 
to a payment of U.S. source FDAP income if--
    (1) The withholding agent is a participating FFI, reporting Model 1 
FFI, QI, or a U.S. withholding agent;
    (2) The person who receives the payment is a participating FFI or 
registered deemed-compliant FFI that acts as a QI with respect to the 
payment;
    (3) The person who receives the payment provides the withholding 
agent, at or before the time of the payment, with a valid intermediary 
withholding certificate with respect to the payment that notifies the 
withholding agent that it has elected to be withheld upon, certifies 
that it is not assuming primary withholding responsibility under chapter 
3, and designates whether such election is made for all accounts held 
with the withholding agent or for the specific accounts identified on 
the withholding certificate; and
    (4) The intermediary withholding certificate is accompanied by a 
withholding statement described in Sec.  1.1471-3(c)(3)(iii)(B).
    (B) Election to be withheld upon for gross proceeds. [Reserved]
    (iv) Withholding obligation of a territory financial institution. A 
territory financial institution that is a flow-through entity or that 
acts as an intermediary with respect to a withholdable payment has an 
obligation to withhold (to the extent required under this section and 
Sec.  1.1472-1(b)) if it agrees to be treated as a U.S. person with 
respect to the payment for purposes of both chapter 4 and Sec.  1.1441-
1(b)(2)(iv)(A). A territory financial institution that is a flow-through 
entity or that acts as an intermediary with respect to a withholdable 
payment is not required to withhold under paragraph (a)(1) of this 
section or Sec.  1.1472-1(b), however, if it has provided the 
withholding agent that is a U.S. withholding agent, participating FFI, 
reporting Model 1 FFI, or QI with all of the documentation described in 
Sec.  1.1471-3(c)(3)(iii) (in which it has not agreed to be treated as a 
U.S. person with respect to the payment), and it does not know, or have 
reason to know, that another withholding agent failed to withhold the 
correct amount or failed to report the payment correctly under Sec.  
1.1474-1(d).
    (v) Withholding obligation of a foreign branch of a U.S. financial 
institution. A foreign branch of a U.S. financial institution is a U.S. 
withholding agent and a payee that is a U.S. person, and is generally 
not an FFI. However, a foreign branch of a U.S. financial institution 
that is also a reporting Model 1 FFI is both a withholding agent and a 
registered deemed-compliant FFI. Additionally, a QI branch of a U.S. 
financial institution is both a withholding agent and either a 
participating FFI or a registered deemed-compliant FFI. Therefore, a 
foreign branch of a U.S. financial institution is not subject to 
withholding under chapter 4 but has an obligation to withhold under this 
section and Sec.  1.1472-1 and may be liable for the tax if it fails to 
do so. See Sec.  1.1471-2(a) (requirement to withhold on payments to 
FFIs) and Sec.  1.1471-3(a)(3)(iii) (U.S. intermediary or agent of a 
foreign person). A foreign branch that is a reporting Model 1 FFI or a 
reporting Model 2 FFI may apply the procedures under Annex I of an 
applicable IGA to document the chapter 4 status of a payee of a 
withholdable payment that is a holder of an account maintained by the 
branch in the Model 1 or Model 2 IGA jurisdiction. A QI branch of a U.S.

[[Page 386]]

financial institution must withhold in accordance with this chapter as 
provided in the QI agreement in addition to meeting its obligations 
under either Sec.  1.1471-4(b) and its FFI agreement or Sec.  1.1471-
5(f).
    (vi) Payments of gross proceeds. [Reserved]
    (3) Coordination of withholding under sections 1471(a) and (b). The 
following entities are deemed to satisfy their withholding obligations 
under section 1471(a) and this section: participating FFIs that comply 
with the withholding requirements of Sec.  1.1471-4(b); exempt 
beneficial owners; section 501(c) entities described in Sec.  1.1471-
5(e)(5)(v); and nonprofit organizations described in Sec.  1.1471-
5(e)(5)(vi). See Sec.  1.1471-5(f) for when a deemed-compliant FFI is 
deemed to satisfy its withholding obligations under section 1471(a) and 
this section.
    (4) Payments for which no withholding is required. A withholding 
agent that has determined, in accordance with the documentation 
requirements and other rules provided in Sec.  1.1471-3, that the payee 
of a withholdable payment is a foreign entity must determine whether the 
payment is exempt from withholding. Paragraphs (a)(4)(i) through (viii) 
of this section describe the circumstances in which a withholdable 
payment is not subject to withholding under section 1471(a) and this 
section.
    (i) Exception to withholding if the withholding agent lacks control, 
custody, or knowledge--(A) In general. A withholding agent that is not 
related to the payee or beneficial owner has an obligation to withhold 
under chapter 4 only to the extent that, at any time between the date 
that the obligation to withhold would arise (but for the provisions of 
this paragraph (a)(4)(i)) and the due date for filing the return on Form 
1042 (including extensions) for the year in which the payment occurs, it 
has control over or custody of money or property owned by the payee or 
beneficial owner from which to withhold an amount and has knowledge of 
the facts that give rise to the payment. The exemption from the 
obligation to withhold under this paragraph (a)(4)(i) does not apply, 
however, to payments with respect to stock or other securities or if the 
lack of control or custody of money or property from which to withhold 
is part of a pre-arranged plan known to the withholding agent to avoid 
withholding under section 1471 or 1472. A withholding agent does not 
lack control over money or property for purposes of this paragraph 
(a)(4)(i) if the withholding agent directs another party to make the 
payment. Thus, for example, a principal does not cease to have control 
over a payment when it contracts with a paying agent to make the 
payments to its account holders in lieu of paying the account holders 
directly. Further, a withholding agent does not lack knowledge of the 
facts that give rise to a payment merely because the withholding agent 
does not know the character or source of the payment for U.S. tax 
purposes. See paragraph (a)(5) of this section for rules addressing a 
withholding agent's obligations when the withholding agent has knowledge 
of the facts that give rise to the payment, but the character or source 
of the payment is not known. For purposes of this paragraph (a)(4)(i), a 
withholding agent is related to the payee or beneficial owner if it is 
related within the meaning of section 482. Any exemption from 
withholding pursuant to this paragraph (a)(4)(i) applies without a 
requirement that documentation be furnished to the withholding agent. 
The special rules set forth in Sec.  1.1441-2(d)(2) through (4), 
regarding the obligation of a withholding agent with respect to 
cancellation of debt, the satisfaction of a tax liability following 
underwithholding by a withholding agent, and amounts described in Sec.  
1.860G-3(b)(1) (regarding certain partnership allocations of REMIC net 
income with respect to a REMIC residual interest) also apply for 
purposes of chapter 4.
    (B) Example. A, an individual, owns stock in DC, a domestic 
corporation, through a custodian, Bank 1, that is a participating FFI. A 
also has a money market account at Bank 2, which is also a participating 
FFI. DC pays a dividend of $1,000 that is deposited in A's custodial 
account at Bank 1. A then directs Bank 1 to transfer $1,000 to A's money 
market account at Bank 2. With respect to the payment of the dividend 
into A's custodial account with Bank 1, both DC and Bank 1 are 
withholding

[[Page 387]]

agents making a withholdable payment for which they have custody, 
control, and knowledge. See Sec.  1.1473-1(a)(2)(vii)(B) and (d). 
Therefore, both DC and Bank 1 have an obligation to withhold on the 
payment unless they can reliably associate the payment with 
documentation sufficient to treat the respective payees as not subject 
to withholding under chapter 4. With respect to the wire transfer of 
$1,000 from A's account at Bank 1 to A's account at Bank 2, neither Bank 
1 nor Bank 2 is required to withhold with respect to the transfer 
because neither bank has knowledge of the facts that gave rise to the 
payment. Even though Bank 1 is a custodian with respect to A's interest 
in DC and has knowledge regarding the $1,000 dividend paid to A, once 
Bank 1 credits the $1,000 dividend to A's account, the $1,000 becomes 
A's property. When A transfers the $1,000 to its account at Bank 2, this 
constitutes a separate payment about which Bank 1 has no knowledge 
regarding the type of payment made. Further, Bank 2 only has knowledge 
that it receives $1,000 to be credited to A's account but has no 
knowledge regarding the type of payment made. Accordingly, Bank 1 and 
Bank 2 have no withholding obligation with respect to the transfer from 
A's custodial account at Bank 1 to A's money market account at Bank 2.
    (ii) Exception to withholding for certain payments made prior to 
July 1, 2016 (transitional)--(A) In general. For any withholdable 
payment made prior to July 1, 2016, with respect to a preexisting 
obligation for which a withholding agent does not have documentation 
indicating the payee's status as a nonparticipating FFI, the withholding 
agent is not required to withhold under this section and section 1471(a) 
unless the payee is a prima facie FFI.
    (B) Prima facie FFIs. If the payee is a prima facie FFI, the 
withholding agent must treat the payee as a nonparticipating FFI 
beginning on January 1, 2015, until the date the withholding agent 
obtains documentation sufficient to establish a different chapter 4 
status of the payee. A prima facie FFI means any payee if--
    (1) The withholding agent has available as part of its 
electronically searchable information a designation for the payee as a 
QI or NQI; or
    (2) For an account maintained in the United States, the payee is 
presumed to be a foreign entity under Sec.  1.1471-3(f) or is documented 
as a foreign entity for purposes of chapter 3 or 61, and the withholding 
agent has recorded as part of its electronically searchable information 
one of the following North American Industry Classification System or 
Standard Industrial Classification codes indicating that the payee is a 
financial institution:
    (i) Commercial Banking (NAICS 522110).
    (ii) Savings Institutions (NAICS 522120).
    (iii) Credit Unions (NAICS 522130).
    (iv) Other Depositary Credit Intermediation (NAICS 522190).
    (v) Investment Banking and Securities Dealing (NAICS 523110).
    (vi) Securities Brokerage (NAICS 523120).
    (vii) Commodity Contracts Dealing (NAICS 523130).
    (viii) Commodity Contracts Brokerage (NAICS 523140).
    (ix) Miscellaneous Financial Investment Activities (NAICS 523999).
    (x) Open-End Investment Funds (NAICS 525910).
    (xi) Commercial Banks, NEC (SIC 6029).
    (xii) Branches and Agencies of Foreign Banks (branches) (SIC 6081).
    (xiii) Foreign Trade and International Banking Institutions (SIC 
6082).
    (xiv) Asset-Backed Securities (SIC 6189).
    (xv) Security & Commodity Brokers, Dealers, Exchanges & Services 
(SIC 6200).
    (xvi) Security Brokers, Dealers & Flotation Companies (SIC 6211).
    (xvii) Commodity Contracts Brokers & Dealers (SIC 6221).
    (xviii) Unit Investment Trusts, Face-Amount Certificate Offices, and 
Closed-End Management Investment Offices (SIC 6726).
    (iii) Payments to a participating FFI. Except to the extent provided 
in paragraph (a)(2)(i) of this section, a withholding agent is not 
required to withhold under section 1471(a) and this section on a 
withholdable payment made to a payee that the withholding agent

[[Page 388]]

can treat as a participating FFI in accordance with Sec.  1.1471-
3(d)(4). For this purpose, a limited branch of a participating FFI is 
treated as a nonparticipating FFI.
    (iv) Payments to a deemed-compliant FFI. Except to the extent 
provided in paragraph (a)(2)(i) or (iii) of this section, a withholding 
agent is not required to withhold under section 1471(a) and this section 
on a withholdable payment made to a payee that the withholding agent can 
treat as a deemed-compliant FFI in accordance with Sec.  1.1471-3(d)(4) 
through (7). For this purpose, a limited branch of a deemed-compliant 
FFI is treated as a nonparticipating FFI.
    (v) Payments to an exempt beneficial owner. A withholding agent is 
not required to withhold under section 1471(a) and this section on a 
withholdable payment to the extent that the withholding agent can 
reliably associate the payment with documentation to determine the 
portion of the payment that is allocable to an exempt beneficial owner 
in accordance with Sec.  1.1471-3(d)(8). For example, a withholding 
agent is not required to withhold under this section on a withholdable 
payment made to a payee that is an exempt beneficial owner with respect 
to the payment, to a nonparticipating FFI to the extent that the 
nonparticipating FFI receives the payment as an intermediary on behalf 
of one or more of its account holders that are exempt beneficial owners, 
or to a flow-through entity to the extent that the flow-through entity 
receives the payment with respect to one or more of its partners, 
beneficiaries, or owners (as applicable) that are exempt beneficial 
owners. See Sec.  1.1471-3(d)(8)(ii) for special rules for a withholding 
agent to determine the portion of a withholdable payment that is 
beneficially owned by an exempt beneficial owner in the case of a 
payment made to a nonparticipating FFI.
    (vi) Payments to a territory financial institution. A withholding 
agent is not required to withhold under section 1471(a) and this section 
on a withholdable payment made to a payee that the withholding agent can 
treat as a territory financial institution that beneficially owns the 
payment in accordance with Sec.  1.1471-3(d)(10)(i). A withholding agent 
also is not required to withhold under this section on a withholdable 
payment that the withholding agent can treat, in accordance with Sec.  
1.1471-3(d)(10)(ii), as made to a territory financial institution that 
is a flow-through entity or that acts as an intermediary with respect to 
the payment and that has agreed to be treated as a U.S. person for 
purposes of chapters 3 and 4 with respect to the payment. A territory 
financial institution's agreement to be treated as a U.S. person for 
purposes of this section must be evidenced by a withholding certificate 
described in Sec.  1.1471-3(c)(3)(iii)(F) furnished by the territory 
financial institution to the withholding agent.
    (vii) Payments to an account held with a clearing organization with 
FATCA-compliant membership. [Reserved]
    (viii) Payments to certain excepted accounts. A withholding agent is 
not required to withhold under chapter 4 on a withholdable payment made 
to an account described in Sec.  1.1471-5(b)(2).
    (5) Withholding requirements if source or character of payment is 
unknown--(i) General rule. If a withholding agent has knowledge of the 
facts that give rise to a payment but is unable to determine at the time 
of payment the character of the payment sufficiently to determine 
whether it is a withholdable payment, such payment must be treated as a 
withholdable payment. If a withholding agent has knowledge of the facts 
that give rise to a payment but is unable to determine at the time of 
payment the source of the payment, such payment must be treated as U.S. 
source income. For example, if a withholding agent does not know at the 
time of payment the amount of the payment that is a withholdable 
payment, because that calculation depends on facts that are not known at 
the time of payment (for example, because the withholding agent does not 
know whether services were performed in the United States or whether the 
payment constitutes income to the recipient) the withholding agent must 
withhold an amount necessary to ensure that the amount withheld is not 
less than 30 percent of the amount that could be a withholdable payment, 
subject to the

[[Page 389]]

limitation that the withheld amount must not exceed 30 percent of the 
amount paid. Notwithstanding this paragraph (a)(5), a withholding agent 
may presume a payment to be effectively connected with the conduct of a 
trade or business in the United States, and thus, not a withholdable 
payment, if it can do so under Sec.  1.1471-3(f)(6) (regarding payments 
to certain U.S. branches).
    (ii) Optional escrow procedure. With respect to a payment described 
in paragraph (a)(5) of this section, the withholding agent may elect to 
retain 30 percent of the payment to hold in escrow until the earlier of 
the date that the amount of the withholdable payment can be determined 
or one year from the date the amount is placed in escrow, at which time 
either the withholding becomes due under this section or, to the extent 
that it is determined that the payment is of a type for which no 
withholding is required, the escrowed amount must be paid to the payee.
    (b) Grandfathered obligations--(1) Grandfathered treatment of 
outstanding obligations. Notwithstanding Sec.  1.1473-1(a), a 
withholdable payment does not include any payment made under a 
grandfathered obligation described in paragraph (b)(2)(i)(A) of this 
section, or any gross proceeds from the disposition of such an 
obligation. Notwithstanding Sec.  1.1471-5(h), a foreign passthru 
payment does not include any payment made under a grandfathered 
obligation described in paragraph (b)(2)(i)(A) or (B) of this section, 
or any gross proceeds from the disposition of such an obligation. A 
premium paid with regard to an insurance contract or annuity contract 
that is a grandfathered obligation is treated as a payment made under a 
grandfathered obligation.
    (2) Definitions. The following definitions apply solely for purposes 
of this paragraph (b).
    (i) Grandfathered obligation--(A) The term grandfathered obligation 
means--
    (1) Any obligation outstanding on July 1, 2014;
    (2) Any obligation that gives rise to a withholdable payment solely 
because the obligation is treated as giving rise to a dividend 
equivalent pursuant to section 871(m) and the regulations thereunder, 
provided that the obligation is executed on or before the date that is 
six months after the date on which obligations of its type are first 
treated as giving rise to dividend equivalents;
    (3) Any agreement requiring a secured party to make a payment with 
respect to, or to repay, collateral posted to secure a grandfathered 
obligation. If collateral (or a pool of collateral) secures both 
grandfathered obligations and obligations that are not grandfathered, 
the collateral posted to secure the grandfathered obligations may be 
determined by allocating (pro rata by value) the collateral (or each 
item comprising the pool of collateral) to all outstanding obligations 
secured by the collateral (or pool of collateral) or, if the collateral 
cannot be allocated pro rata to all obligations, by allocating all 
collateral to obligations that are not grandfathered and withholding to 
the extent required under chapter 4; and
    (4) Any obligation that gives rise to substitute interest (as 
defined in Sec.  1.861-2(a)(7)) that arises from the payee posting a 
grandfathered obligation described in paragraph (b)(2)(i)(A)(1) of this 
section as collateral.
    (B) Solely for purposes of a foreign passthru payment, the term 
grandfathered obligation also includes any obligation that is executed 
on or before the date that is six months after the date on which final 
regulations defining the term foreign passthru payment are filed with 
the Federal Register.
    (ii) Obligation--(A) Except as otherwise provided in paragraph 
(b)(2)(ii)(B) of this section, the term obligation means any legally 
binding agreement or instrument. An obligation for purposes of this 
paragraph (b)(2)(i) includes, for example--
    (1) A debt instrument (for example, a bond, guaranteed investment 
certificate, or term deposit);
    (2) An agreement to extend credit for a fixed term (for example, a 
line of credit or a revolving credit facility), provided that the 
agreement as of its issue date fixes the material terms (including a 
stated maturity date) under which the credit will be provided;

[[Page 390]]

    (3) A derivatives transaction entered into between counterparties 
under an ISDA Master Agreement that is evidenced by a confirmation;
    (4) A life insurance contract under which the entire contract value 
is payable no later than upon the death of the individual(s) insured 
under the contract but, in the case of a life insurance contract that 
contains a provision that permits the substitution of a new individual 
as the insured under the contract, only until a substitution occurs; and
    (5) An immediate annuity contract payable for a period certain or 
for the life of the annuitant.
    (B) An obligation for purposes of this paragraph (b)(2)(ii) does not 
include any legal agreement or instrument that--
    (1) Is treated as equity for U.S. tax purposes;
    (2) Lacks a stated expiration or term (for example, a savings 
deposit or demand deposit, a deferred annuity contract, or an annuity 
contract that permits a substitution of a new individual as the 
annuitant under the contract);
    (3) Is a brokerage agreement, custodial agreement, investment linked 
insurance contract, investment linked annuity contract, or similar 
agreement to hold financial assets for the account of others and to make 
and receive payments of income and other amounts with respect to such 
assets; or
    (4) Is a master agreement that merely sets forth standard terms and 
conditions that are intended to apply to a series of transactions 
between parties but that does not set forth all of the specific terms 
necessary to conclude a particular transaction.
    (iii) Date outstanding. Except as provided in the following 
sentence, an obligation that constitutes indebtedness for U.S. tax 
purposes is outstanding on the date provided in paragraph (b)(2)(i) if 
it has an issue date before such date. In all other cases, including an 
agreement described in paragraph (b)(2)(ii)(A)(2) of this section, an 
obligation is outstanding on the date provided in paragraph (b)(2)(i) if 
a legally binding agreement establishing the obligation was executed 
between the parties to the agreement before such date. Any material 
modification of an outstanding obligation will result in the obligation 
being treated as newly issued or executed as of the effective date of 
such modification.
    (iv) Material modification. In the case of an obligation that 
constitutes indebtedness for U.S. tax purposes, a material modification 
is any significant modification of the debt instrument as defined in 
Sec.  1.1001-3(e). For life insurance contracts, a material modification 
includes any substitution of the insured under the contract. In all 
other cases, whether a modification of an obligation is material is 
determined based on the facts and circumstances.
    (3) Application to flow-through entities--(i) Partnerships. A 
payment made under a grandfathered obligation includes a payment made to 
a partnership with respect to such obligation and a payment made with 
respect to a partnership's disposition of such obligation. A payment 
made under a grandfathered obligation also includes the income from such 
obligation that is includible in the gross income of a partner with 
respect to a capital or profits interest in the partnership and the 
gross proceeds allocated to a partner from the disposition of such 
obligation as determined under Sec.  1.1473-1(a)(5)(vii).
    (ii) Simple trusts. A payment made under a grandfathered obligation 
includes a payment made to a simple trust with respect to such 
obligation, including a payment made with respect to a simple trust's 
disposition of such obligation. A payment made under a grandfathered 
obligation also includes income from such obligation that is includible 
in the income of a beneficiary and further includes a beneficiary's 
share of the gross proceeds from a disposition of such obligation as 
determined under Sec.  1.1473-1(a)(5)(vii).
    (iii) Grantor trusts. A payment made under a grandfathered 
obligation includes a payment made to a grantor trust with respect to 
such obligation, including a payment made with respect to the trust's 
disposition of such obligation. A payment made under a grandfathered 
obligation also includes income from such obligation that is includible 
in the gross income of a person that is treated as an owner of the trust

[[Page 391]]

and the gross proceeds from the disposition of such obligation to the 
extent such owner is treated as owning the portion of the trust that 
consists of the obligation.
    (4) Determination by withholding agent of grandfathered treatment--
(i) In general. A withholding agent other than the issuer of the 
obligation (or agent of the issuer) may, absent actual knowledge, rely 
on a written statement by the issuer of the obligation to determine if 
such obligation meets the requirements for grandfathered treatment 
provided under this paragraph (b).
    (ii) Determination of material modification. For purposes of 
paragraph (b)(2)(iv) of this section (defining material modification), a 
withholding agent, other than the issuer of the obligation (or an agent 
of the issuer), is required to treat a modification of the obligation as 
material only if the withholding agent has actual knowledge thereof, 
such as in the event the withholding agent receives a disclosure 
indicating that there has been or will be a material modification to 
such obligation. The issuer of the obligation (or an agent of the 
issuer) that is a withholding agent is required to treat a modification 
of the obligation as material if the withholding agent knows or has 
reason to know that a material modification has occurred with respect to 
the obligation.
    (iii) Record retention. A withholding agent that relies on a 
document provided by the issuer of an obligation as described in 
paragraph (b)(4)(i) or (ii) of this section must retain such document in 
its records for the applicable period of limitations on assessment and 
collection with respect to amounts paid under the obligation or from 
disposition of the obligation.
    (c) Effective/applicability date. This section applies on January 6, 
2017. However, taxpayers may apply these provisions as of January 28, 
2013. (For the rules that apply beginning on January 28, 2013, and 
before January 6, 2017, see this section as in effect and contained in 
26 CFR part 1 revised April 1, 2016.)

[T.D. 9610, 78 FR 5911, Jan. 28, 2013; 78 FR 55203, Sept. 10, 2013, as 
amended by T.D. 9657, 79 FR 12828, Mar. 6, 2014; 79 FR 37176, July 1, 
2014; T.D. 9809, 82 FR 2150, Jan. 6, 2017; 82 FR 29729, June 30, 2017]



Sec.  1.1471-3  Identification of payee.

    (a) Payee defined--(1) In general. Except as otherwise provided in 
this paragraph (a), for purposes of chapter 4 a payee is the person to 
whom a payment is made, regardless of whether such person is the 
beneficial owner of the amount.
    (2) Payee with respect to a financial account. For purposes of 
payments made to a financial account and except as otherwise provided in 
paragraph (a)(3) of this section, the payee is the holder of the 
financial account.
    (3) Exceptions--(i) Certain foreign agents or intermediaries--(A) 
Except as otherwise provided in paragraphs (a)(3)(iv) and (vi) of this 
section (applicable to territory financial institutions and certain U.S. 
branches), a foreign person that is acting as an agent or intermediary 
with respect to a payment in accordance with paragraph (b)(1) of this 
section is not the payee if such foreign person is--
    (1) An NFFE, unless the NFFE is a QI that has assumed primary 
withholding responsibility; or
    (2) In the case of a payment of U.S. source FDAP income, a 
participating FFI, deemed-compliant FFI, or restricted distributor, 
unless the participating FFI, deemed-compliant FFI, or restricted 
distributor is a QI that has assumed primary withholding responsibility.
    (B) In the case of an agent or intermediary described in paragraph 
(a)(3)(i)(A) of this section, the payee is the person or persons for 
whom the agent or intermediary collects the payment. Thus, for example, 
the payee of a payment of U.S. source FDAP income that the withholding 
agent can reliably associate with a withholding certificate from a QI 
that does not assume primary withholding responsibility with respect to 
the payment under chapter 3, or a payment to a participating FFI that is 
an NQI, is the person or persons for whom the QI or NQI acts.

[[Page 392]]

    (ii) Foreign flow-through entity--(A) A foreign entity that is a 
flow-through entity is a payee with respect to a payment only if the 
flow-through entity is--
    (1) An FFI that is not a participating FFI or deemed-compliant FFI, 
or restricted distributor receiving a payment of U.S. source FDAP 
income;
    (2) An excepted NFFE that is not acting as an agent or intermediary 
with respect to the payment;
    (3) A WP or WT that is not acting as an agent or intermediary with 
respect to the payment; or
    (4) Receiving income that is (or is deemed to be) effectively 
connected with the conduct of a trade or business in the United States, 
or receiving a payment of gross proceeds from the sale of property that 
can produce income that is effectively connected with the conduct of a 
trade or business in the United States and that is excluded from the 
definition of a withholdable payment under Sec.  1.1473-1(a)(4).
    (B) A withholding agent that makes a withholdable payment to a flow-
through entity that is not described in paragraphs (a)(3)(ii)(A)(1) 
through (3) of this section will be required to treat the partner, 
beneficiary, or owner (as applicable) as the payee (looking through 
partners, beneficiaries, and owners that are themselves flow-through 
entities that are not described in paragraphs (a)(3)(ii)(A)(1) through 
(3)).
    (iii) U.S. intermediary or agent of a foreign person. A withholding 
agent that makes a withholdable payment to a U.S. person and has actual 
knowledge that the person receiving the payment is acting as an 
intermediary or agent of a foreign person with respect to the payment 
must treat such foreign person, and not the intermediary or agent, as 
the payee of such payment. Notwithstanding the previous sentence, a 
withholding agent that makes a withholdable payment to a U.S. financial 
institution or a U.S. insurance broker (to the extent such withholdable 
payment is a payment of premiums) that is acting as an intermediary or 
agent with respect to the payment on behalf of one or more foreign 
persons may treat the U.S. financial institution or U.S. insurance 
broker as the payee if the withholding agent does not have reason to 
know that the U.S. financial institution or U.S. insurance broker will 
not comply with its obligations to withhold under sections 1471 and 
1472.
    (iv) Territory financial institution. A withholding agent that makes 
a withholdable payment to a territory financial institution that is a 
flow-through entity or is acting as an intermediary or agent with 
respect to the payment may treat the territory financial institution as 
the payee only if the territory financial institution has agreed (as 
evidenced by a withholding certificate described in paragraphs 
(c)(3)(iii)(A) and (F) of this section) to be treated as a U.S. person 
with respect to the payment for purposes of both chapters 3 and 4. In 
all other cases, the withholding agent must treat as the payee the 
partner, beneficiary, or owner (as applicable) of the territory 
financial institution that is a flow-through entity (looking through 
partners, beneficiaries, and owners that are themselves flow-through 
entities that are not described in paragraphs (a)(3)(ii)(A)(1) through 
(3)) or the person on whose behalf the territory financial institution 
is acting.
    (v) Disregarded entity or limited branch. Except as otherwise 
provided in paragraph (a)(3)(v) through (vii) of this section, a 
withholding agent that makes a withholdable payment to an entity that is 
disregarded for U.S. federal tax purposes under Sec.  301.7701-
2(c)(2)(i) of this chapter as an entity separate from its single owner 
must treat the single owner as the payee. The rules under Sec.  1.1471-
3(d)(4) and (e)(3) apply to determine the circumstances under which a 
withholding agent may treat a payment made to a disregarded entity owned 
by an FFI as made to a payee that is a participating FFI or registered 
deemed-compliant FFI, and not as a payment made to a payee that is a 
nonparticipating FFI. A withholding agent that makes a payment to a 
limited branch (including an entity disregarded as a separate entity 
from its owner if such owner is an FFI and the disregarded entity is 
unable to comply with the terms of an FFI agreement with respect to 
accounts that it maintains) will be required to treat the

[[Page 393]]

payment as being made to a nonparticipating FFI.
    (vi) U.S. branch treated as a U.S. person. A withholdable payment to 
a U.S. branch is a payment to a U.S. person if the U.S. branch is 
treated as a U.S. person (as defined in Sec.  1.1471-1(b)(135)). In such 
case, the U.S. branch is treated as the payee. A U.S. branch treated as 
a U.S. person, however, is not treated as a U.S. person for purposes of 
the withholding certificate it may provide to a withholding agent for 
purposes of chapter 4. Accordingly, a U.S. branch treated as a U.S. 
person must furnish a withholding certificate on a Form W-8 to certify 
its chapter 4 status (and not a Form W-9, ``Request for Taxpayer 
Identification Number and Certification''). See also paragraph (f)(6) of 
this section for the rules under which a withholding agent can presume a 
payment to a U.S. branch constitutes income that is effectively 
connected with a U.S. trade or business. A U.S. branch treated as a U.S. 
person may not make an election to be withheld upon, as described in 
section 1471(b)(3) and Sec.  1.1471-2(a)(2)(iii), for purposes of 
chapter 4. See Sec.  1.1471-4(c)(2)(v) for the rule requiring a U.S. 
branch treated as a U.S. person to apply the due diligence rules 
applicable to a U.S. withholding agent. See also Sec.  1.1474-1(i)(1) 
and (2) for the requirement of a U.S. branch to report information 
regarding certain U.S. owners of owner documented FFIs and passive 
NFFEs. See Sec.  1.1471-4(d) for rules for when a U.S. branch reports as 
a U.S. person.
    (vii) Foreign branch of a U.S. person. A payment to a foreign branch 
of a U.S. person is generally a payment to a U.S. payee. However, a 
payment to a foreign branch of a U.S. financial institution will be 
treated as a payment to an FFI if the foreign branch is a QI that is 
acting as an intermediary with respect to the payment. Therefore, a 
foreign branch that is a QI will provide the withholding agent with an 
intermediary withholding certificate and the withholding agent will 
report the payment as having been made to the foreign branch on a Form 
1042-S.
    (b) Determination of payee's status. Except as otherwise provided in 
this section, a withholding agent must base its determination of the 
chapter 4 status of a payee on documentation that the withholding agent 
can reliably associate with such payment. If a withholding agent makes a 
payment to a person that is not the payee, the withholding agent will be 
required to determine the chapter 4 status of each intermediary or flow-
through entity in the payment chain until the withholding agent is able 
to identify the payee. Paragraph (c) of this section provides rules for 
when a withholding agent can reliably associate a payment with 
appropriate documentation. Paragraph (d) of this section provides 
documentation requirements applicable to each class of payees, including 
exceptions for payments made with respect to offshore obligations or 
preexisting obligations. Paragraph (e) provides standards for 
determining when a withholding agent will be considered to have reason 
to know that a claim of exemption from withholding is unreliable or 
incorrect. Paragraph (f) of this section provides presumptions that 
apply for purposes of determining a payee's chapter 4 status in the 
absence of documentation or if the documentation provided is unreliable 
or incorrect.
    (1) Determining whether a payment is received by an intermediary. A 
withholding agent must treat the person who receives a payment as an 
intermediary if it can reliably associate the payment with a valid 
intermediary withholding certificate on which the person who receives 
the payment claims to be a QI or NQI. A U.S. person's foreign branch 
that is acting in its capacity as a QI is treated as a foreign 
intermediary. A withholding agent that makes a payment with respect to 
an offshore obligation must also treat the person who receives the 
payment as an intermediary if the person has provided written 
notification, whether or not such notification is signed, that it 
accepts the payment on behalf of another person or persons. A 
withholding agent may rely on the type of certificate furnished as 
determinative of whether the person who receives the payment is an 
intermediary, unless the withholding agent knows or has reason to know 
that the certificate is incorrect. For example, a withholding agent that 
receives a beneficial owner withholding certificate from an

[[Page 394]]

FFI may treat the FFI as the beneficial owner unless it has information 
in its records that would indicate otherwise or the certificate contains 
information that is not consistent with beneficial owner status (for 
example, sub-account numbers that do not correspond to accounts 
maintained by the withholding agent for such person or names of one or 
more persons other than the person submitting the withholding 
certificate). If the FFI receives a payment in part as a beneficial 
owner and in part as an intermediary, the withholding agent may request 
that the FFI furnish two certificates, that is, a beneficial owner 
certificate for the amounts it receives as a beneficial owner, and an 
intermediary withholding certificate for the amounts it receives as an 
intermediary. A withholding agent that cannot reliably associate a 
payment with documentation sufficient to treat the person who receives 
the payment as an intermediary or as other than an intermediary pursuant 
to this paragraph (b)(1) must follow the presumption rules set forth in 
paragraph (f)(5) of this section to determine whether it must treat the 
person who receives the payment as an intermediary. A determination that 
a payment is made to an intermediary under this paragraph (b)(1) is not 
a determination that the payment can be reliably associated with 
documentation. See paragraph (c)(2) of this section for rules on 
reliably associating a payment with documentation if such payment is 
made through an intermediary.
    (2) Determination of entity type. A person's entity classification 
for purposes of chapter 4 is the person's entity classification for U.S. 
federal income tax purposes. Thus, for example, an entity that is 
disregarded as a legal entity in its country of organization or an 
arrangement that does not have a legal personality and is not a 
juridical person in the country in which it was organized will be 
treated as an entity for purposes of chapter 4 if it is an entity for 
U.S. federal income tax purposes. A withholding agent may rely upon a 
person's entity classification contained in a valid Form W-8 or W-9 if 
the withholding agent has no reason to know that the entity 
classification is incorrect. A withholding agent that makes a payment 
with respect to an offshore obligation may also rely upon a written 
notification provided by the person who receives the payment, regardless 
of whether such notification is signed, that indicates the person's 
entity classification (other than as a QI, WP, or WT) unless the 
withholding agent knows or has reason to know that the entity 
classification indicated by the person who receives the payment is 
incorrect. A withholding agent may not rely on a person's claim of 
classification other than as a corporation if the person's name 
indicates that the person is a per se corporation described in Sec.  
301.7701-2(b)(8) of this chapter unless the certificate or written 
statement contains a statement that the person is a grandfathered per se 
corporation described in Sec.  301.7701-2(b)(8) and that its 
grandfathered status has not been terminated.
    (3) Determination of whether the payment is made to a QI, WP, or WT. 
A withholding agent may treat the person who receives a payment as a QI, 
WP, or WT if the withholding agent can reliably associate the payment 
with a valid Form W-8IMY, as described in paragraph (c)(3)(iii) of this 
section, that indicates that the person who receives the payment is a 
QI, WP, or WT, provides the person's QI-EIN, WP-EIN, or WT-EIN, and the 
person's GIIN, if applicable.
    (4) Determination of whether the payee is receiving effectively 
connected income. A withholding agent may treat a payment as being made 
to a payee that is receiving income that is effectively connected with a 
trade or business in the United States, or gross proceeds from the sale 
of property that can produce income that is effectively connected with 
the conduct of a trade or business in the United States, if it can 
reliably associate the payment with a valid Form W-8ECI described in 
paragraph (c)(3)(v) of this section or if it can do so under the 
presumption rule in paragraph (f)(6) of this section.
    (c) Rules for reliably associating a payment with a withholding 
certificate or other appropriate documentation--(1) In general. A 
withholding agent can reliably associate a withholdable payment with 
valid documentation if, before the

[[Page 395]]

payment, it has obtained (either directly from the payee or through its 
agent) valid documentation appropriate to the payee's chapter 4 status 
as described in paragraph (d) of this section, it can reliably determine 
how much of the payment relates to the valid documentation, and it does 
not know or have reason to know that any of the information, 
certifications, or statements in, or associated with, the documentation 
are unreliable or incorrect. Thus, a withholding agent cannot reliably 
associate a withholdable payment with valid documentation provided by a 
payee to the extent such documentation appears unreliable or incorrect 
with respect to the claims made, or to the extent that information 
required to allocate all or a portion of the payment to each payee is 
unreliable or incorrect. A withholding agent may rely on information and 
certifications contained in withholding certificates or other 
documentation without having to inquire into the truthfulness of the 
information or certifications, unless it knows or has reason to know 
that the information or certifications are untrue. A withholding agent 
may rely upon the same documentation for purposes of both chapters 3 and 
4 provided the documentation is sufficient to meet the requirements of 
each chapter. Alternatively, a withholding agent may elect to rely upon 
the presumption rules of paragraph (f) of this section in lieu of 
obtaining documentation from the payee. A withholding certificate will 
be considered provided by a payee if a withholding agent obtains the 
certificate from a third party repository (rather than directly from the 
payee or through its agent) and the requirements in Sec.  1.1441-
1(e)(4)(iv)(E) are satisfied. A withholding certificate obtained from a 
third party repository must still be reviewed by the withholding agent 
in the same manner as any other documentation to determine whether it 
may be relied upon for chapter 4 purposes. A withholding agent may rely 
on an electronic signature on a withholding certificate if the 
requirements in Sec.  1.1441-1(e)(4)(i)(B) are satisfied.
    (2) Reliably associating a payment with documentation if a payment 
is made through an intermediary or flow-through entity that is not the 
payee--(i) In general. A withholding agent that makes a payment to a 
foreign intermediary or foreign flow-through entity that is not the 
payee under paragraph (a) of this section can reliably associate the 
payment with valid documentation if, in addition to the documentation 
described in paragraph (d) of this section that is relevant to each 
payee, the withholding agent also has obtained a valid Form W-8IMY, 
described in paragraph (c)(3)(iii) of this section, from the 
intermediary or flow-through entity (and, with respect to a payment made 
through a chain of intermediaries or flow-through entities, has received 
a valid Form W-8IMY from each intermediary or flow-through entity in 
that chain). An intermediary or flow-through entity that is a 
participating FFI or registered deemed-compliant FFI receiving a payment 
of U.S. source FDAP income may, in lieu of providing the withholding 
agent with documentation for each payee, provide pooled allocation 
information to the extent and in the manner permitted by paragraph 
(c)(3)(iii)(B)(2) of this section. With respect to the documentation 
provided for the owners of a foreign flow-through entity, the foreign 
flow-through entity is permitted to provide the documentary evidence 
described in paragraph (d) of this section applicable to each payee in 
lieu of a withholding certificate, regardless of whether the payment is 
made with respect to an offshore obligation.
    (ii) Exception to entity account documentation rules for an offshore 
account of an intermediary or flow-through entity. In the case of an 
offshore account held by an intermediary or flow-through entity not 
receiving a payment of U.S. source FDAP income, an FFI may, in lieu of 
obtaining a withholding certificate, reliably associate such account 
with valid documentation if the FFI has obtained a written statement 
certifying as to the account holder's chapter 4 status and stating that 
the account holder is a flow-through entity or is acting as an 
intermediary with respect to the payment. In such case, the intermediary 
or flow-through entity will also be required to provide the withholding 
statement that generally

[[Page 396]]

accompanies the Form W-8IMY, designating the payees and the appropriate 
amount that should be allocated to each payee, and valid documentation 
for each payee. If no such withholding statement or underlying 
documentation is provided, the payment will be treated as made to a 
nonparticipating FFI.
    (3) Requirements for validity of certificates--(i) Form W-9. A valid 
Form W-9, or a substitute form, must meet the requirements prescribed in 
Sec.  31.3406(h)-3 of this chapter, including the requirement that the 
form contain the payee's name and TIN, and be signed and dated under 
penalties of perjury by the payee or a person authorized to sign for the 
payee pursuant to sections 6061 through 6063 and the regulations 
thereunder. A foreign person, including a U.S. branch of a foreign 
person that is treated as a U.S. person under Sec.  1.1441-1(b)(2)(iv), 
or a foreign branch of a U.S. financial institution that is a QI, may 
not provide a Form W-9.
    (ii) Beneficial owner withholding certificate (Form W-8BEN). A 
beneficial owner withholding certificate includes a Form W-8BEN (or a 
substitute form) and such other form as the IRS may prescribe. A 
beneficial owner withholding certificate is valid only if its validity 
period has not expired, it is signed under penalties of perjury by a 
person with authority to sign for the person whose name is on the form, 
and it contains--
    (A) The person's name, permanent residence address, and TIN (if 
required);
    (B) A certification that the person is not a U.S. citizen (if the 
person is an individual) or a certification of the country under the 
laws of which the person is created, incorporated, or governed (for a 
person other than an individual);
    (C) The person's entity classification for U.S. tax purposes;
    (D) The person's chapter 4 status; and
    (E) Such other information required under paragraph (d) of this 
section applicable to the chapter 4 status selected or otherwise 
required by the regulations under section 1471 or 1472, or by the form 
or its accompanying instructions in addition to, or in lieu of, the 
information described in this paragraph (c)(3)(ii).
    (iii) Withholding certificate of an intermediary, qualified 
intermediary, flow-through entity, or U.S. branch (Form W-8IMY)--(A) In 
general. A withholding certificate of an intermediary, qualified 
intermediary, flow-through entity, or U.S. branch of such entity 
(whether or not such branch is treated as a U.S. person) is valid for 
purposes of chapter 4 only if it is furnished on a Form W-8IMY, an 
acceptable substitute form, or such other form as the IRS may prescribe, 
it is signed under penalties of perjury by a person with authority to 
sign for the person named on the form, its validity period has not 
expired, and it contains the following information, statements, and 
certifications--
    (1) The name and permanent residence address of the person.
    (2) The country under the laws of which the person is created, 
incorporated, or governed.
    (3) The person's entity classification for U.S. tax purposes.
    (4) The person's chapter 4 status.
    (5) A GIIN, in the case of a participating FFI or a registered 
deemed-compliant FFI (including a QI, WP, or WT that is a participating 
FFI or registered deemed-compliant FFI), and an EIN in the case of a QI, 
WP, or WT. Additionally, if a branch (other than a U.S. branch) of a 
participating FFI or registered deemed-compliant FFI outside of its 
country of residence acts as an intermediary, a GIIN of such branch must 
be provided on the withholding certificate. In the case of a U.S. 
branch, see the rules in paragraph (c)(3)(iii)(H) of this section.
    (6) In the case of an intermediary certificate, a certification 
that, with respect to accounts listed on the withholding statement, the 
intermediary is not acting for its own account.
    (7) With respect to a withholding certificate of a QI, a 
certification that it is acting as a QI with respect to the accounts 
listed on the withholding statement.
    (8) In the case of a participating FFI or registered deemed-
compliant FFI (including a U.S. branch of either such entities that is 
not treated as a U.S. person) that is an NQI, NWP, NWT, or

[[Page 397]]

a QI that makes an election to be withheld upon, an FFI withholding 
statement that meets the requirements of paragraphs (c)(3)(iii)(B)(1) 
and (2) of this section.
    (9) In the case of a territory financial institution that does not 
agree to be treated as a U.S. person or a U.S. branch that is not a U.S. 
branch of a participating FFI, registered deemed-compliant FFI, or 
nonparticipating FFI, a chapter 4 withholding statement that meets the 
requirements of paragraphs (c)(3)(iii)(B)(1) and (3) of this section.
    (10) In the case of an NFFE or certified deemed-compliant FFI that 
is an NQI, NWP, or NWT and is not the payee, a chapter 4 withholding 
statement that meets the requirements of paragraphs (c)(3)(iii)(B)(1) 
and (3) of this section.
    (11) In the case of a nonparticipating FFI receiving a payment on 
behalf of one or more exempt beneficial owners, an exempt beneficial 
owner withholding statement that meets the requirements of paragraphs 
(c)(3)(iii)(B)(1) and (4) of this section.
    (12) Any other information, certifications, or statements as may be 
required by the form or its accompanying instructions in addition to, or 
in lieu of, the information and certifications described in this 
paragraph.
    (B) Withholding statement--(1) In general. A withholding statement 
forms an integral part of the withholding certificate and the penalties 
of perjury statement provided on the withholding certificate applies to 
the withholding statement as well. The withholding statement may be 
provided in any manner, and in any form, to which the person submitting 
the form and the withholding agent mutually agree, including 
electronically. A withholding statement may be provided electronically 
only if it meets the requirements of Sec.  1.1441-1(e)(3)(iv)(B). The 
withholding statement must be updated as often as necessary for the 
withholding agent to meet its reporting and withholding obligations 
under chapter 4. A withholding agent will be liable for tax, interest, 
and penalties under Sec.  1.1474-1(a) to the extent it does not follow 
the presumption rules of paragraph (f) of this section for any payment, 
or portion thereof, for which a withholding statement is required and 
the withholding agent does not have a valid withholding statement prior 
to making a payment. A withholding agent that is making a withholdable 
payment for which a withholding statement is also required for purposes 
of chapter 3 may only rely upon the withholding statement if, in 
addition to providing the information required by paragraph 
(c)(3)(iii)(B) of this section, the withholding statement also includes 
all of the information required for purposes of chapter 3 and specifies 
the chapter 4 status of each payee or pool of payees identified on the 
withholding statement for purposes of chapter 3.
    (2) Special requirements for an FFI withholding statement--(i) An 
FFI withholding statement may include either payee-specific information 
or pooled information that indicates the portion of the payment 
allocable to a chapter 4 withholding rate pool of U.S. payees, each 
class of recalcitrant account holders described in Sec.  1.1471-
1(b)(20)(i), or a class of nonparticipating FFIs. In addition, an FFI 
withholding statement may include an allocation of a portion of the 
payment to a pool of account holders (other than nonqualified 
intermediaries and flow-through entities) for whom no reporting is 
required on any of Forms 1042-S, 1099, and 8966, provided that the FFI 
provides to the withholding agent for each account holder payee-specific 
information (including the payee's chapter 4 status (using the 
applicable status code used for filing Form 1042-S)) and any other 
information required for purposes of chapter 3 or 61 on the withholding 
statement, and the FFI provides documentation for each account holder in 
the pool (an exempt payee pool). For example, a participating FFI may 
provide on its withholding statement an exempt payee pool for a payment 
of U.S. source interest on a bank deposit not subject to withholding or 
reporting under chapter 4 that is allocable to a pool of foreign account 
holders (that is, a withholdable payment that is not reported on any of 
Forms 1042-S, 1099, and 8966) and provide to the withholding agent 
documentation for each account holder included in the pool. If

[[Page 398]]

payee-specific information is provided for purposes of chapter 4 it must 
indicate both the portion of the payment allocated to each payee and 
each payee's chapter 4 status (using the applicable status code used for 
filing Form 1042-S). A participating FFI that applies the escrow 
procedures described in Sec.  1.1471-4(b)(6) for dormant accounts must 
also indicate the portion of the payment allocated to a chapter 4 
withholding rate pool of recalcitrant account holders that hold dormant 
accounts for which the participating FFI (and not the withholding agent) 
will withhold in escrow. The withholding statement provided by a 
participating FFI that applies the election to backup withhold under 
Sec.  1.1471-4(b)(3)(iii) must also indicate the portion of the 
reportable payment that is a withholdable payment allocated to each 
recalcitrant account holder subject to backup withholding under section 
3406. See section 3406 for when backup withholding is required, 
including the exception to backup withholding under Sec.  31.3406(g)-
1(e). Regardless of whether the FFI withholding statement provides 
information on a pooled or payee-specific basis, a withholding statement 
provided by an FFI other than an FFI acting as a WP, WT, or QI with 
respect to the account must also identify each intermediary or flow-
through entity that receives the payment and such entity's chapter 4 
status (using the applicable status code used for filing Form 1042-S) 
and GIIN (when required under paragraph (d) of this section), when 
applicable. An FFI withholding statement must also include any other 
information that the withholding agent or payor reasonably requests in 
order to fulfill its obligations under chapter 4, and chapters 3 and 61, 
if applicable.
    (ii) An FFI withholding statement provided by a reporting Model 2 
FFI or a reporting Model 1 FFI may indicate, with respect to a 
withholdable payment, that the payment is allocable to a chapter 4 
withholding rate pool of U.S. payees, which is comprised of account 
holders receiving a payment that is not subject to withholding under 
chapter 3 or 4 or to backup withholding under section 3406 and that are, 
with respect to a reporting Model 2 FFI, the holders of non-consenting 
U.S. accounts as described in an applicable IGA when the FFI reports the 
accounts in one of the pools described in Sec.  1.1471-4(d)(6) for the 
year in which the payment is made; or with respect to a reporting Model 
1 FFI, the holders of accounts that have U.S. indicia for which 
appropriate documentation sufficient to treat the accounts as held by 
other than specified U.S. persons has not been provided pursuant to an 
applicable Model 1 IGA and the reporting Model 1 FFI reports the 
accounts as U.S. reportable accounts pursuant to the applicable Model 1 
IGA for the year in which the payment is made.
    (iii) An FFI withholding statement provided by a participating FFI 
or registered deemed-compliant FFI that is a non-U.S. payor (a payor 
other than a U.S. payor as defined in Sec.  1.6049-5(c)(5)) may 
indicate, with respect to a withholdable payment, that the payment is 
allocable to a chapter 4 withholding rate pool of U.S. payees (in 
addition to the U.S. payees described in paragraph (c)(3)(iii)(B)(2)(ii) 
of this section), which is comprised of account holders that are not 
subject to withholding under chapter 3 or 4 or to backup withholding 
under section 3406 and that are, with respect to a participating FFI 
(including a reporting Model 2 FFI), account holders that hold U.S. 
accounts (as defined in Sec.  1.1471-1(b)(134) and an applicable Model 2 
IGA) that the FFI reports as U.S. accounts pursuant to Sec.  1.1471-
4(d)(3) or (5) for the year in which the payment is made; with respect 
to a registered deemed-compliant FFI (other than a reporting Model 1 
FFI), account holders of U.S. accounts that the FFI reports pursuant to 
the conditions of its applicable deemed-compliant status under Sec.  
1.1471-5(f)(1) for the year in which the payment is made; or with 
respect to a reporting Model 1 FFI, account holders of U.S. accounts 
that the reporting Model 1 FFI reports as reportable U.S. accounts 
pursuant to an applicable Model 1 IGA, and which includes the U.S. TINs 
of such account holders, for the year in which the payment is made.
    (iv) An FFI withholding statement provided by a participating FFI or 
a registered deemed-compliant FFI may include a certification that the 
FFI is

[[Page 399]]

reporting, for the year in which the payment is made, an account held by 
a passive NFFE with one or more substantial U.S. owners (or, with 
respect to a reporting Model 1 FFI or reporting Model 2 FFI, one or more 
controlling persons that are specified U.S. persons, as defined in an 
applicable IGA) as a U.S. account (excluding a non-consenting U.S. 
account or an account held by a recalcitrant account holder) or, with 
respect to a reporting Model 1 FFI, a U.S. reportable account, in 
accordance with the terms of the FFI agreement or an applicable IGA.
    (v) An FFI withholding statement provided by a participating FFI or 
a reporting Model 1 FFI may include a certification that the FFI is 
reporting to the IRS for the year of the payment all of the information 
described in Sec.  1.1471-4(d) or Sec.  1.1474-1(i)(1) (as applicable) 
with respect to all specified U.S. persons described in Sec.  1.1471-
3(d)(6)(iv)(A)(1) and (2) with respect to an account holder or payee 
that the FFI has agreed to treat as an owner-documented FFI.
    (3) Special requirements for a chapter 4 withholding statement. A 
chapter 4 withholding statement must contain the name, address, TIN (if 
any), entity type, and chapter 4 status (using the applicable status 
code used for filing Form 1042-S) of each payee, the amount allocated to 
each payee, a valid withholding certificate or other appropriate 
documentation sufficient to establish the chapter 4 status of each 
payee, and each intermediary or flow-through entity that receives the 
payment on behalf of the payee, in accordance with paragraph (d) of this 
section, and any other information the withholding agent reasonably 
requests in order to fulfill its obligations under chapter 4. 
Notwithstanding the prior sentence, a chapter 4 withholding statement is 
permitted to provide pooled allocation information with respect to 
payees that are treated as nonparticipating FFIs (in lieu of providing 
the withholding agent with documentation for each payee). A chapter 4 
withholding statement may include an allocation of a portion of the 
payment to a pool of payees (rather than to each payee) for whom no 
reporting is required on any of Forms 1042-S, 1099, and 8966, provided 
each payee is identified on the withholding statement and documentation 
is provided to the withholding agent for each payee included in the 
pool. If the withholdable payment is a reportable amount under chapter 
3, see the provisions of Sec.  1.1441-1(e)(3)(iv)(C) for any additional 
information that may be required on the withholding statement (including 
pooled information under the alternative procedures described in Sec.  
1.1441-1(e)(3)(iv)(D), if applicable).
    (4) Special requirements for an exempt beneficial owner withholding 
statement. An exempt beneficial owner withholding statement must include 
the name, address, TIN (if any), entity type, and chapter 4 status 
(using the applicable status code used for filing Form 1042-S) of each 
exempt beneficial owner on behalf of which the nonparticipating FFI is 
receiving the payment, the amount of the payment allocable to each 
exempt beneficial owner, a valid withholding certificate or other 
documentation sufficient to establish the chapter 4 status of each 
exempt beneficial owner in accordance with paragraph (d) of this 
section, and any other information the withholding agent reasonably 
requests in order to fulfill its obligations under chapter 4. The 
withholding statement must allocate the remainder of the payment that is 
not allocated to an exempt beneficial owner to the nonparticipating FFI 
receiving the payment. With respect to the amount of the payment 
allocable to each exempt beneficial owner and subject to withholding 
under chapter 3, see Sec.  1.1441-1(e)(3)(iv).
    (5) Nonqualified intermediary withholding statement. A withholding 
agent that is making a withholdable payment to a nonqualified 
intermediary for which a withholding statement is required under 
chapters 3 or 4 may accept a withholding statement that meets the 
requirements described in Sec.  1.1441-1(e)(3)(iv)(C)(3)(i) or (ii).
    (C) Failure to provide allocation information. A withholding 
certificate that fails to provide allocation information or any of the 
required documentation for one or more of the payees will not be treated 
as invalid with respect to the persons for whom valid documentation and 
allocation information is

[[Page 400]]

properly provided. The portion of the payment that is not reliably 
associated with underlying documentation or that is not properly 
allocated will be treated in accordance with the presumption rules set 
forth in paragraph (f) of this section. For example, assume a 
withholding certificate that is provided by a participating FFI that is 
an NQI includes an FFI withholding statement that indicates that 50 
percent of the payment is allocable to payees that are exempt for 
purposes of chapter 4 but does not allocate the remaining 50 percent of 
the payment for purposes of chapter 4. In such case, the withholding 
agent may treat 50 percent of the payment as exempt from chapter 4 and 
the remaining 50 percent that was not allocated will be treated, under 
the presumption rules set forth in paragraph (f) of this section, as 
made to a pool of payees that are nonparticipating FFIs.
    (D) Special rules applicable to a withholding certificate of a QI 
that assumes primary withholding responsibility under chapter 3. A QI 
that assumes primary withholding responsibility under chapter 3 for a 
payment may not make an election to be withheld upon, as described in 
Sec.  1.1471-2(a)(2)(iii), with respect to that payment. Thus, if a QI 
assumes primary withholding responsibility under chapter 3 with respect 
to a payment of U.S. source FDAP income, in addition to the other 
requirements described in paragraph (c)(3)(iii)(A) of this section, a 
withholding agent can reliably associate the payment with a valid 
withholding certificate only when the QI has also indicated on the 
intermediary withholding certificate that it will assume primary 
withholding responsibility for that payment for purposes of chapter 4.
    (E) Special rules applicable to a withholding certificate of a QI 
that does not assume primary withholding responsibility under chapter 3. 
A QI that does not assume primary withholding responsibility under 
chapter 3 with respect to a payment of U.S. source FDAP income will be 
required to make the election to be withheld upon with respect to that 
payment. Thus, if a QI does not assume primary withholding 
responsibility under chapter 3, a withholding agent can reliably 
associate a payment of U.S. source FDAP income with a valid withholding 
certificate only when, in addition to the other information required by 
paragraph (c)(3)(iii)(A) of this section, the withholding certificate 
indicates that the QI does not assume primary withholding responsibility 
for that payment for purposes of chapter 4.
    (F) Special rules applicable to a withholding certificate of a 
territory financial institution that agrees to be treated as a U.S. 
person. A withholding agent may reliably associate a payment with an 
intermediary withholding certificate or flow-through withholding 
certificate of a territory financial institution that agrees to be 
treated as a U.S. person if, in addition to the other information 
required by paragraph (c)(3)(iii)(A) of this section, the certificate 
contains an EIN of the territory financial institution and a 
certification that the territory financial institution agrees to be 
treated as a U.S. person and accepts primary withholding responsibility 
with respect to the payment for purposes of both chapters 3 and 4.
    (G) Special rules applicable to a withholding certificate of a 
territory financial institution that does not agree to be treated as a 
U.S. person. A withholding agent may reliably associate a payment with 
an intermediary withholding certificate or a flow-through withholding 
certificate of a territory financial institution that does not agree to 
be treated as a U.S. person if, in addition to the information required 
by paragraph (c)(3)(iii)(A) of this section, the certificate indicates 
that the institution has not agreed to be treated as a U.S. person for 
purposes of chapter 4 and the institution provides a withholding 
statement described in paragraphs (c)(3)(iii)(B)(1) and (3) of this 
section.
    (H) Rules applicable to a withholding certificate of a U.S. branch. 
A withholding agent may reliably associate a payment with a withholding 
certificate of a U.S. branch of an FFI that is treated as a U.S. person 
for purposes of Sec.  1.1441-1(b)(2)(iv) if, in addition to the other 
information required by paragraph (c)(2)(iii)(A) of this section, the 
certificate contains the EIN of the U.S. branch and a certification that 
the U.S. branch is described in paragraph Sec.  1.1441-1(b)(2)(iv) and, 
accordingly, is

[[Page 401]]

required to accept primary withholding responsibility with respect to 
the payment for purposes of both chapters 3 and 4. A withholding agent 
may reliably associate a payment with a withholding certificate of a 
U.S. branch of an FFI that is not treated as a U.S. person and that 
applies the rules described in Sec.  1.1471-4(d)(2)(iii)(C) if, in 
addition to the other information required by paragraph (c)(2)(iii)(A) 
of this section, the certificate contains the EIN of the U.S. branch and 
a certification that the U.S. branch applies the rules described in 
Sec.  1.1471-4(d)(2)(iii)(C). However, the requirement to obtain the 
certification that a U.S. branch applies the rules described in Sec.  
1.1471-4(d)(2)(iii)(C) shall not apply to payments made on or before 
June 30, 2017.
    (iv) Certificate for exempt status (Form W-8EXP). A Form W-8EXP is 
valid only if it contains the name, address, and chapter 4 status of the 
payee, the relevant certifications or documentation, and any other 
requirements indicated in the instructions to the form, and is signed 
under penalties of perjury by a person with authority to sign for the 
payee.
    (v) Certificate for effectively connected income (Form W-8ECI). A 
Form W-8ECI is valid only if, in addition to meeting the requirements in 
the instructions to the form, it contains the name, address, and TIN of 
the payee (other than a GIIN), represents that the amounts for which the 
certificate is furnished are effectively connected with the conduct of a 
trade or business in the United States and are includable in the payee's 
gross income for the taxable year (or are gross proceeds from the sale 
of property that can produce income that is effectively connected with 
the conduct of a trade or business in the United States), and is signed 
under penalties of perjury by a person with authority to sign for the 
payee.
    (4) Requirements for written statements. A written statement is a 
statement by the payee, or other person receiving the payment, that 
provides the person's chapter 4 status and any other information 
reasonably requested by the withholding agent to fulfill its obligations 
under chapter 4 with respect to the payment, such as whether the person 
is receiving the payment as a beneficial owner, intermediary, or flow-
through entity. A written statement is valid only if it is provided by a 
person with respect to an offshore obligation, contains the name of the 
person, the person's address, the certifications relevant to the 
person's chapter 4 status (as contained on a withholding certificate), 
any additional information required with respect to the chapter 4 status 
claimed as provided under paragraph (d) of this section (for example, a 
GIIN), and a signed and dated certification that the information 
provided on the form is accurate and will be updated by the individual 
within 30 days of a change in circumstances that causes the form to 
become incorrect. A written statement may be submitted in any form that 
is acceptable to the withholding agent, including a statement made as 
part of the account opening documentation. A written statement may be 
used in lieu of a withholding certificate only to the extent provided 
under Sec.  1.1471-3(d), as applicable to the chapter 4 status claimed.
    (5) Requirements for documentary evidence. Documentary evidence with 
respect to a payee is only reliable if it contains sufficient 
information to support the payee's claim of chapter 4 status.
    (i) Foreign status. Acceptable documentary evidence supporting a 
claim of foreign status includes the following types of documentation if 
the documentation contains a permanent residence address for the person 
named on the documentation (or indicates the country in which a person 
that is an individual is a resident or citizen or the country in which a 
person that is an entity has a permanent residence or is incorporated or 
organized, if the withholding agent has otherwise obtained a current 
permanent residence address for the person)--
    (A) Certificate of residence. A certificate of residence issued by 
an appropriate tax official of the country in which the payee claims to 
be a resident that indicates that the payee has filed its most recent 
income tax return as a resident of that country;
    (B) Individual government identification. With respect to an 
individual, any

[[Page 402]]

valid identification issued by an authorized government body (for 
example, a government or agency thereof, or a municipality), that is 
typically used for identification purposes;
    (C) QI documentation. With respect to an account maintained in a 
jurisdiction with anti-money laundering rules that have been approved by 
the IRS in connection with a QI agreement (as referenced in Sec.  
1.1441-1(e)(5)(iii)), any of the documents other than a Form W-8 or W-9 
referenced in the jurisdiction's attachment to the QI agreement for 
identifying individuals or entities;
    (D) Entity government documentation. With respect to an entity, any 
documentation that substantiates that the entity is actually organized 
or created under the laws of a foreign country; and
    (E) Third-party credit report. For a payment made with respect to an 
offshore obligation to an individual, a third-party credit report that 
is obtained pursuant to the conditions described in Sec.  1.1471-
4(c)(4)(ii).
    (ii) Chapter 4 status. Acceptable documentary evidence supporting an 
entity's claim of chapter 4 status includes--
    (A) General documentary evidence. With respect to an entity other 
than a participating FFI or registered deemed-compliant FFI, any 
organizational document (such as articles of incorporation or a trust 
agreement), financial statement, third-party credit report, letter from 
a government agency, or statement from a government Web site, agency, or 
registrar (such as an SEC report) to the extent permitted in paragraphs 
(d) and (e) of this section;
    (B) Preexisting obligation documentary evidence. With respect to a 
preexisting obligation of an entity, any classification in the 
withholding agent's records with respect to the payee that was 
determined based on documentation supplied by the payee (or other person 
receiving the payment) or a standardized industry coding system and that 
was recorded by the withholding agent consistent with its normal 
business practices for AML or another regulatory purpose (other than for 
tax purposes), to the extent permitted by paragraph (d) of this section 
and provided there is no U.S. indicia associated with the payee for 
which appropriate curing documentation has not been obtained as set 
forth in paragraph (e) of this section; and
    (C) Payee-specific documentary evidence. A letter from an auditor or 
attorney with a location in the United States that is not related to the 
withholding agent or payee and is subject to the authority of a 
regulatory body that governs the auditor's or attorney's review of the 
chapter 4 status of the payee, any bankruptcy filing, corporate 
resolution, copy of a stock market index or other document to the extent 
permitted in the specific payee documentation requirements in paragraph 
(d) and (e) of this section.
    (6) Applicable rules for withholding certificates, written 
statements, and documentary evidence. The provisions in this paragraph 
(c)(6) describe standards generally applicable to withholding 
certificates on Forms W-8 (or substitute forms), written statements, and 
documentary evidence furnished to establish the payee's chapter 4 
status. These provisions do not apply to Forms W-9 (or their 
substitutes). For corresponding provisions regarding the Form W-9 (or a 
substitute Form W-9), see section 3406 and the regulations thereunder.
    (i) Who may sign the withholding certificate or written statement. A 
withholding certificate (including an acceptable substitute) or written 
statement may be signed by any person authorized to sign a declaration 
under penalties of perjury on behalf of the person whose name is on the 
certificate or written statement, as provided in sections 6061 through 
6063 and the regulations thereunder. A person authorized to sign a 
withholding certificate or written statement includes an officer or 
director of a corporation, a partner of a partnership, a trustee of a 
trust, an executor of an estate, any foreign equivalent of the former 
titles, and any other person that has been provided written 
authorization by the individual or entity named on the certificate or 
written statement to sign documentation on such person's behalf.

[[Page 403]]

    (ii) Period of validity--(A) General rule. Except as provided 
otherwise in paragraphs (c)(6)(ii)(B) and (C) of this section, a 
withholding certificate or written statement will remain valid until the 
last day of the third calendar year following the year in which the 
withholding certificate or written statement is signed. Documentary 
evidence is generally valid until the last day of the third calendar 
year following the year in which the documentary evidence is provided to 
the withholding agent. Nevertheless, documentary evidence that contains 
an expiration date may be treated as valid until that expiration date if 
doing so would provide a longer period of validity than the three-year 
period. Notwithstanding the validity periods permitted by paragraphs 
(c)(6)(ii)(A) through (D) of this section, a withholding certificate, 
written statement, and documentary evidence will cease to be valid if 
the withholding agent has knowledge of a change in circumstances that 
makes the information on the documentation incorrect. Therefore, a 
withholding agent is required to institute procedures to ensure that any 
change to the customer master files that constitutes a change in 
circumstances described in paragraph (c)(6)(ii)(E) of this section is 
identified by the withholding agent. In addition, a withholding agent is 
required to notify any person providing documentation of the person's 
obligation to notify the withholding agent of a change in circumstances.
    (B) Indefinite validity. Notwithstanding paragraph (c)(6)(ii)(A) of 
this section, the following certificates (or parts of certificates), 
written statements, or documentary evidence shall remain valid until the 
withholding agent has knowledge of a change in circumstances that makes 
the information on the documentation incorrect--
    (1) A withholding certificate or written statement provided by a 
participating FFI or registered deemed-compliant FFI that has furnished 
a valid GIIN that has been verified by the withholding agent in the 
manner set forth in paragraph (e)(3) of this section;
    (2) A beneficial owner withholding certificate and documentary 
evidence supporting the individual's claim of foreign status when both 
are provided together (as defined in Sec.  1.1441-1(e)(4)(ii)(B)(1)) by 
an individual claiming foreign status, if the withholding agent does not 
have a current U.S. residence or U.S. mailing address for the payee and 
does not have one or more current U.S. telephone numbers that are the 
only telephone numbers the withholding agent has for the payee;
    (3) A beneficial owner withholding certificate that is provided by 
an entity described in paragraph (c)(6)(ii)(C)(2) of this section (other 
than an entity described in paragraph (c)(6)(ii)(C)(2)(iii) of this 
section) and documentary evidence establishing the entity's foreign 
status when both are received by the withholding agent before the 
validity period of either would otherwise expire under paragraph 
(c)(6)(ii)(A) of this section;
    (4) A withholding certificate of an intermediary, flow-through 
entity, or U.S. branch (not including the withholding certificates, 
written statements, or documentary evidence of the payees, or 
withholding statements associated with the withholding certificate);
    (5) A withholding certificate, written statement, or documentary 
evidence furnished by a foreign government, government of a U.S. 
territory, foreign central bank (including the Bank for International 
Settlements), international organization, or entity that is wholly owned 
by any such entities;
    (6) Documentary evidence that is not generally renewed or amended 
(such as a certificate of incorporation); and
    (7) For the validity period of a beneficial owner withholding 
certificate provided by an entity described in paragraph 
(c)(6)(ii)(C)(2)(iii) of this section, see Sec.  1.1441-1(e)(4)(ii).
    (C) Indefinite validity in the case of certain offshore obligations. 
Notwithstanding paragraph (c)(6)(ii)(A) of this section, the following 
certificates, written statements, and documentary evidence that are 
provided with respect to offshore obligations shall remain valid until a 
change in circumstances occurs that makes the information on the 
documentation incorrect--
    (1) A withholding certificate or documentary evidence provided by an 
individual claiming foreign status if the

[[Page 404]]

withholding agent does not have a current U.S. residence or U.S. mailing 
address for the payee, does not have one or more current U.S. telephone 
numbers that are the only telephone numbers the withholding agent has 
for the payee, and has not been provided standing instructions to make a 
payment in the United States for the obligation;
    (2) A withholding certificate, written statement, or documentary 
evidence provided by one of the following entities if such entity is the 
payee--
    (i) A retirement fund described in Sec.  1.1471-6(f) or an entity 
that is wholly owned by such a retirement fund;
    (ii) An excepted nonfinancial group entity described in Sec.  
1.1471-5(e)(5)(i);
    (iii) A section 501(c) entity described in Sec.  1.1471-5(e)(5)(v);
    (iv) A non-profit organization described in Sec.  1.1471-
5(e)(5)(vi);
    (v) A nonreporting IGA FFI;
    (vi) A territory financial institution;
    (vii) An NFFE whose stock is regularly traded as described in Sec.  
1.1472-1(c)(1)(i);
    (viii) An NFFE affiliate described in Sec.  1.1472-1(c)(1)(ii);
    (ix) An active NFFE that the withholding agent has determined, 
through its AML due diligence, is engaged in a business other than that 
of a financial institution, and ongoing monitoring of the account for 
purposes of AML due diligence does not indicate that the determination 
is incorrect; and
    (x) A sponsored FFI described in Sec.  1.1471-5(f)(1)(i)(F);
    (3) A withholding certificate or written statement of an owner-
documented FFI, but not including the withholding statements, 
documentary evidence, and withholding certificates of its owners (unless 
such documentation is permitted indefinite validity under another 
provision);
    (4) An owner reporting statement associated with a withholding 
certificate of an owner-documented FFI, provided the account balance of 
all accounts held by such owner-documented FFI with the withholding 
agent does not exceed $1,000,000 on the later of June 30, 2014, or the 
last day of the calendar year in which the account was opened, and the 
last day of each subsequent calendar year preceding the payment, 
applying the aggregation principles of Sec.  1.1471-5(b)(4)(iii), and 
the owner-documented FFI does not have any contingent beneficiaries or 
designated classes with unidentified beneficiaries; and
    (5) A withholding certificate of a passive NFFE or excepted 
territory NFFE, provided the account balance of all accounts held by 
such entity with the withholding agent does not exceed $1,000,000 on the 
later of June 30, 2014, or the last day of the calendar year in which 
the account was opened, and the last day of each subsequent calendar 
year preceding the payment, applying the aggregation principles of Sec.  
1.1471-5(b)(4)(iii), and the withholding agent does not know or have 
reason to know that the entity has any contingent beneficiaries or 
designated classes with unidentified beneficiaries.
    (D) Exception for certificate for effectively connected income. 
Notwithstanding paragraphs (c)(6)(ii)(B) to (C) of this section, the 
period of validity of a withholding certificate furnished to a 
withholding agent to claim a reduced rate of withholding for income that 
is effectively connected with the conduct of a trade or business within 
the United States shall be limited to the three-year period described in 
paragraph (c)(6)(ii)(A) of this section.
    (E) Change in circumstances--(1) Defined. For purposes of this 
chapter, a person is considered to have a change in circumstances only 
if such change would affect the chapter 4 status of the person. A change 
in circumstances includes any change that results in the addition of 
information described in paragraph (e)(4) relevant to a person's claim 
of foreign status (that is, U.S. indicia that is not otherwise cured by 
documentation on file and that is relevant to the chapter 4 status 
claimed) or otherwise conflicts with such person's claim of chapter 4 
status. Unless stated otherwise, a change of address or telephone number 
is a change in circumstances for purposes of this paragraph 
(c)(6)(ii)(E) only if it changes to an address or telephone number in 
the United States. A change in circumstances affecting the withholding 
information provided to the withholding agent, including allocation 
information or withholding pools contained in a withholding statement or

[[Page 405]]

owner reporting statement, will terminate the validity of the 
withholding certificate with respect to the information that is no 
longer reliable, until the information is updated.
    (2) Obligation to notify withholding agent of a change in 
circumstances. If a change in circumstances makes any information on a 
certificate or other documentation incorrect, then the person whose name 
is on the certificate or other documentation must inform the withholding 
agent within 30 days of the change and furnish a new certificate, a new 
written statement, or new documentary evidence. Notwithstanding the 
previous sentence, if an FFI's chapter 4 status changes solely because 
the jurisdiction in which the FFI is resident, organized, or located is 
later treated as having an IGA in effect (including a jurisdiction that 
had a Model 2 IGA in effect and is later treated as having a Model 1 IGA 
in effect) or ceases to be treated as having an IGA in effect, in lieu 
of providing a new withholding certificate, the FFI may, within 30 days 
of such change in circumstances, provide to the withholding agent oral 
or written confirmation (including by email) of the change in the FFI's 
chapter 4 status. If an intermediary or a flow-through entity becomes 
aware that a certificate or other appropriate documentation it has 
furnished to the person from whom it collects a payment is no longer 
valid because of a change in the circumstances of the person who issued 
the certificate or furnished the other appropriate documentation, then 
the intermediary or flow-through entity must notify the person from whom 
it collects the payment of the change in circumstances within 30 days of 
the date that it knows or has reason to know of the change in 
circumstances. It must also obtain a new withholding certificate or new 
appropriate documentation to replace the existing certificate or 
documentation the validity of which has expired due to the change in 
circumstances.
    (3) Withholding agent's obligation with respect to a change in 
circumstances. A certificate or other documentation becomes invalid on 
the date that the withholding agent holding the certificate or 
documentation knows or has reason to know that circumstances affecting 
the correctness of the certificate or documentation have changed. A 
withholding agent will not have reason to know of a change in 
circumstances with respect to an FFI's chapter 4 status that results 
solely because a jurisdiction is later treated as having an IGA in 
effect (including a jurisdiction that had a Model 2 IGA in effect and is 
later treated as having a Model 1 IGA in effect) until the withholding 
agent obtains the confirmation of a change in the FFI's chapter 4 status 
described in paragraph (c)(6)(ii)(E)(2) of this section (which will 
become part of the FFI's withholding certificate or other documentation 
retained by the withholding agent). A withholding agent will have reason 
to know of a change in circumstances with respect to an FFI's chapter 4 
status that results solely because the jurisdiction in which the FFI is 
resident, organized, or located ceases to be treated as having an IGA in 
effect on the date that the jurisdiction ceases to be treated as having 
an IGA in effect. A withholding agent may choose to treat a person as 
having the same chapter 4 status that it had prior to the change in 
circumstances until the earlier of 90 days from the date that the 
certificate or documentation became invalid due to the change in 
circumstances or the date that a new certificate or new documentation is 
obtained. See, however, Sec.  1.1441-1(e)(4)(ii)(D) for requirements, 
including the requirement to withhold under chapter 3 or section 3406, 
applicable when a change in circumstances occurs for purposes of chapter 
3 and the related grace period allowed under Sec.  1.1441-1(b)(3)(iv). A 
withholding agent may rely on a certificate without having to inquire 
into possible changes of circumstances that may affect the validity of 
the statement, unless it knows or has reason to know that circumstances 
have changed. A withholding agent may require a new certificate or 
additional documentation at any time prior to a payment, regardless of 
whether the withholding agent knows or has reason to know that any 
information stated on the certificate or documentation has changed.
    (4) [Reserved]. For further guidance, see Sec.  1.1471-
3T(c)(6)(ii)(E)(4).

[[Page 406]]

    (iii) Record Retention--(A) In general. A withholding agent must 
retain each withholding certificate, written statement, or copy of 
documentary evidence for as long as it may be relevant to the 
determination of the withholding agent's tax liability under section 
1474(a) and Sec.  1.1474-1. A withholding agent may retain an original, 
certified copy, or photocopy (including a microfiche, electronic scan, 
or similar means of electronic storage) of the withholding certificate, 
written statement, or documentary evidence. With respect to documentary 
evidence, the withholding agent must also note in its records the date 
on which the document was received and reviewed. Any documentation that 
is stored electronically must be made available in hard copy form to the 
IRS upon request during an examination.
    (B) Exception for documentary evidence received with respect to 
offshore obligations. A withholding agent that is making a payment with 
respect to an offshore obligation and is not required to retain copies 
of documentation reviewed pursuant to its AML due diligence, may, in 
lieu of retaining the documents as set forth in paragraph 
(c)(6)(iii)(A), retain a notation of the type of documentation reviewed, 
the date the documentation was reviewed, the document's identification 
number (if any) (for example, a passport number), and whether such 
documentation contained any U.S. indicia. The previous sentence applies 
with respect to an offshore obligation that is also a preexisting 
obligation, except, in such case, the requirement to record whether the 
documentation contained U.S. indicia does not apply. See also Sec.  
1.1471-4(c)(2)(iv) for the record retention requirements of a 
participating FFI.
    (iv) Electronic transmission of withholding certificate, written 
statement, and documentary evidence. A withholding agent may accept a 
withholding certificate (including an acceptable substitute form), a 
written statement, or other such form as the IRS may prescribe, 
electronically in accordance with the requirements set forth in Sec.  
1.1441-1(e)(4)(iv).
    (v) Acceptable substitute withholding certificate--(A) In general. A 
withholding agent may substitute its own form for an official Form W-8 
(or such other official form as the IRS may prescribe). A substitute 
form will be acceptable if it contains provisions that are substantially 
similar to those of the official form, it contains the same 
certifications relevant to the transactions as are contained on the 
official form and these certifications are clearly set forth, and the 
substitute form includes a signature-under-penalties-of-perjury 
statement identical to the one on the official form. The substitute form 
is acceptable even if it does not contain all of the provisions 
contained on the official form, so long as it contains those provisions 
that are relevant to the transaction for which it is furnished. A 
withholding agent may choose to provide a substitute form that does not 
include all of the chapter 4 statuses provided on the official version 
but the substitute form must include any chapter 4 status for which 
withholding may apply, such as the categories for a nonparticipating FFI 
or passive NFFE. A withholding agent that uses a substitute form must 
furnish instructions relevant to the substitute form only to the extent 
and in the manner specified in the instructions to the official form. A 
withholding agent may use a substitute form that is written in a 
language other than English and may accept a form that is filled out in 
a language other than English, but the withholding agent must make 
available an English translation of the form and its contents to the IRS 
upon request. A withholding agent may refuse to accept a certificate 
(including the official Form W-8) from a person if the certificate 
provided is not an acceptable substitute form provided by the 
withholding agent, but only if the withholding agent furnishes the 
person with an acceptable substitute form within five business days of 
receipt of an unacceptable form from the person. In that case, the 
substitute form is acceptable only if it contains a notice that the 
withholding agent has refused to accept the form submitted by the person 
and that the person must submit the acceptable form provided by the 
withholding agent in order for the

[[Page 407]]

person to be treated as having furnished the required withholding 
certificate.
    (B) Non-IRS form for individuals. A withholding agent may also 
substitute its own form for an official Form W-8BEN (for individuals), 
regardless of whether the substitute form is titled a Form W-8. However, 
in addition to the name and address of the individual that is the payee 
or beneficial owner, the substitute form must provide all countries in 
which the individual is resident for tax purposes, country of birth, a 
tax identification number (if any) for each country of residence, the 
individual's date of birth, and must contain a signed and dated 
certification made under penalties of perjury that the information 
provided on the form is accurate and will be updated by the individual 
within 30 days of a change in circumstances that causes the form to 
become incorrect. Notwithstanding the previous sentence, the signed 
certification provided on a form need not be signed under penalties of 
perjury if the form is accompanied by documentary evidence that supports 
the individual's claim of foreign status. Such documentary evidence may 
be the same documentary evidence that is used to support foreign status 
in the case of a payee whose account has U.S. indicia as described in 
paragraph (e) of this section or Sec.  1.1471-4(c)(4)(i)(A). The form 
may also request other information required for purposes of tax or AML 
due diligence in the United States or in other countries.
    (vi) Electronic confirmation of TIN on withholding certificate. The 
Commissioner may prescribe procedures in a revenue procedure or other 
appropriate guidance to require a withholding agent to confirm 
electronically with the IRS information concerning any TIN stated on a 
withholding certificate.
    (vii) Reliance on a prior version of a withholding certificate. Upon 
the issuance by the IRS of an updated version of a withholding 
certificate, a withholding agent may continue to accept the prior 
version of the withholding certificate in accordance with the 
requirements of Sec.  1.1441-1(e)(4)(viii)(C) and without regard to 
whether a withholdable payment associated with the certificate is 
subject to withholding under Sec.  1.1441-2(a).
    (7) Curing documentation errors. The provisions in this paragraph 
(c)(7) describe standards generally applicable to withholding 
certificates (Forms W-8 or substitute forms), written statements, and 
documentary evidence furnished to establish the payee's chapter 4 
status. These provisions do not apply to Forms W-9 (or their 
substitutes). For corresponding provisions regarding the Form W-9 (or a 
substitute Form W-9), see section 3406 and the regulations thereunder.
    (i) Curing inconsequential errors on a withholding certificate. A 
withholding agent may treat a withholding certificate as valid, 
notwithstanding that the withholding certificate contains an 
inconsequential error, if the withholding agent has sufficient 
documentation on file to supplement the information missing from the 
withholding certificate due to the error. In such case, the 
documentation relied upon to cure the inconsequential error must be 
conclusive. For example, a withholding certificate in which the 
individual submitting the form abbreviated the country of residence in 
an ambiguous way may be treated as valid, notwithstanding the 
abbreviation, if the withholding agent has government issued 
identification for the person from a country that reasonably matches the 
abbreviation. On the other hand, an ambiguous abbreviation for the 
country of residence that does not reasonably match the country of 
residence shown on the person's passport is not an inconsequential 
error. A failure to select an entity type on a withholding certificate 
is not an inconsequential error, even if the withholding agent has an 
organization document for the entity that provides sufficient 
information to determine the person's entity type, if the person was 
eligible to make an election under Sec.  301.7701-3(c)(1)(i) of this 
chapter (that is, a check-the-box election). A failure to check a box to 
make a required certification on the withholding certificate or to 
provide a country of residence or a country under which treaty benefits 
are sought is not an inconsequential error. In addition, information on 
a withholding

[[Page 408]]

certificate that contradicts other information contained on the 
withholding certificate or in the customer master file is not an 
inconsequential error.
    (ii) Documentation received after the time of payment. Proof that 
withholding was not required under the provisions of chapter 4 and the 
regulations thereunder also may be established after the date of payment 
by the withholding agent on the basis of a valid withholding certificate 
and/or other appropriate documentation that was furnished after the date 
of payment but that was effective as of the date of payment. A 
withholding certificate furnished after the date of payment will be 
considered effective as of the date of the payment if the certificate 
contains a signed affidavit (either at the bottom of the form or on an 
attached page) that states that the information and representations 
contained on the certificate were accurate as of the time of the 
payment. A certificate obtained within 30 days after the date of the 
payment will not be considered to be unreliable solely because it does 
not contain an affidavit. However, in the case of a withholding 
certificate of an individual received more than a year after the date of 
payment, the withholding agent will be required to obtain, in addition 
to the withholding certificate and affidavit, documentary evidence 
described in paragraph (c)(5)(i) of this section that supports the 
individual's claim of foreign status. In the case of a withholding 
certificate of an entity received more than a year after the date of 
payment, the withholding agent will be required to obtain, in addition 
to the withholding certificate and affidavit, documentary evidence 
specified in paragraph (c)(5)(ii) of this section that supports the 
chapter 4 status claimed. If documentation other than a withholding 
certificate is submitted from a payee more than a year after the date of 
payment, the withholding agent will be required to also obtain from the 
payee a withholding certificate and affidavit supporting the chapter 4 
status claimed as of the date of the payment. See, however, Sec.  
1.1441-1(b)(7)(ii) for special rules that apply when a withholding 
certificate is received after the date of the payment to claim that 
income is effectively connected with the conduct of a U.S. trade or 
business (as applied for purposes of this paragraph (c)(7)(ii) to a 
claim to establish that the payment is not a withholdable payment under 
Sec.  1.1473-1(a)(4)(ii) rather than to claim an exemption described in 
Sec.  1.1441-4(a)(1)).
    (8) Documentation furnished on account-by-account basis unless 
exception provided for sharing documentation within expanded affiliated 
group. Except as otherwise provided in this paragraph (c)(8), a 
withholding agent that is a financial institution with which a customer 
may open an account must obtain withholding certificates, written 
statements, Forms W-9, or documentary evidence on an account-by-account 
basis. Notwithstanding the previous sentence, a withholding agent may 
rely upon the withholding certificate, written statement, or documentary 
evidence furnished by a customer under any one or more of the 
circumstances described in this paragraph (c)(8).
    (i) Single branch systems. A withholding agent may rely on 
documentation furnished by a customer for another account if both 
accounts are held at the same branch location and both accounts are 
treated as consolidated obligations.
    (ii) Universal account systems. A withholding agent may rely on 
documentation furnished by a customer for an account held at another 
branch location of the same withholding agent or at a branch location of 
a member of the expanded affiliated group of the withholding agent if 
the withholding agent treats all accounts that share documentation as 
consolidated obligations and the withholding agent and the other branch 
location or expanded affiliated group member are part of a universal 
account system that uses a customer identifier that can be used to 
retrieve systematically all other accounts of the customer. A 
withholding agent that opts to rely upon the chapter 4 status designated 
for the payee in the universal account system without obtaining and 
reviewing copies of the documentation supporting the status must be able 
to produce all documentation (or a notation of the documentary evidence 
reviewed if the withholding

[[Page 409]]

agent is not required to retain copies of the documentary evidence) 
relevant to the chapter 4 status claimed upon request by the IRS and 
will be liable for any underwithholding that results from any failure to 
assign the correct status based upon the available information.
    (iii) Shared account systems. A withholding agent may rely on 
documentation furnished by a customer for an account held at another 
branch location of the same withholding agent or at a branch location of 
a member of the expanded affiliated group of the withholding agent if 
the withholding agent treats all accounts that share documentation as a 
consolidated obligation and the withholding agent and the other branch 
location or expanded affiliated group member share an information 
system, electronic or otherwise, that is described in this paragraph 
(c)(8)(iii). The system must allow the withholding agent to easily 
access data regarding the nature of the documentation, the information 
contained in the documentation (including a copy of the documentation 
itself), and the validity status of the documentation. The information 
system must also allow the withholding agent to easily transmit data 
into the system regarding any facts of which it becomes aware that may 
affect the reliability of the documentation. The withholding agent must 
be able to establish, to the extent applicable, how and when it has 
transmitted data regarding any facts of which it became aware that may 
affect the reliability of the documentation and must be able to 
establish that any data it has transmitted to the information system has 
been processed and appropriate due diligence has been exercised 
regarding the validity of the documentation. A withholding agent that 
opts to rely upon the chapter 4 status designated for the payee in the 
shared account system without obtaining and reviewing copies of the 
documentation supporting the status must be able to produce all 
documentation (or a notation of the documentary evidence reviewed if the 
withholding agent is not required to retain copies of the documentary 
evidence) relevant to the chapter 4 status claimed upon request by the 
IRS and will be liable for any underwithholding that results from any 
failure to assign the correct status based upon the available 
information.
    (iv) Document sharing for gross proceeds. [Reserved]
    (v) Preexisting account. A withholding agent may rely on 
documentation furnished by a payee for a preexisting account held at 
another branch location of the same withholding agent or at a branch 
location of a member of the expanded affiliated group of the withholding 
agent if the withholding agent obtains and reviews copies of such 
documentation supporting the chapter 4 status designated for the payee 
and the withholding agent has no reason to know that, at the time the 
documentation is obtained by the withholding agent, the documentation is 
unreliable or incorrect. For example, the withholding agent may not rely 
on documentation furnished by a payee for a preexisting account held at 
another branch location of the same withholding agent or at a branch 
location of a member of the expanded affiliated group of the withholding 
agent if, based on information in the withholding agent's account 
records, the withholding agent has reason to know that such 
documentation is unreliable or incorrect.
    (9) Reliance on documentation collected by or certifications 
provided by other persons--(i) Shared documentation system maintained by 
an agent. A withholding agent may rely on documentation collected by an 
agent (including a fund advisor for mutual funds, hedge funds, or a 
private equity group) of the withholding agent. The agent may retain the 
documentation as part of an information system maintained for a single 
withholding agent or multiple withholding agents provided that under the 
system, any withholding agent on behalf of which the agent retains 
documentation may easily access data regarding the nature of the 
documentation, the information contained in the documentation (including 
a copy of the documentation itself) and its validity, and must allow 
such withholding agent to easily transmit data, either directly into an 
electronic system or by providing such information to the agent,

[[Page 410]]

regarding any facts of which it becomes aware that may affect the 
reliability of the documentation. The withholding agent must be able to 
establish, to the extent applicable, how and when it has transmitted 
data regarding any facts of which it became aware that may affect the 
reliability of the documentation and must be able to establish that any 
data it has transmitted has been processed and appropriate due diligence 
has been exercised regarding the validity of the documentation. The 
agent must have a system in effect to ensure that any information it 
receives regarding facts that affect the reliability of the 
documentation or the chapter 4 status assigned to the customer are 
provided to all withholding agents for which the agent retains the 
documentation and any chapter 4 status assigned by the agent is amended 
to incorporate such information. A withholding agent that opts to rely 
upon the chapter 4 status assigned by the agent without obtaining and 
reviewing copies of the documentation supporting the status must be able 
to produce all documentation relevant to the chapter 4 status claimed 
upon request by the IRS and will be liable for any underwithholding that 
results from a failure of the agent to assign the correct status based 
upon the available information. See Sec.  1.1474-1(a) for a withholding 
agent's liability when it relies upon an agent for chapter 4 purposes. 
This paragraph (c)(9)(i) does not apply to a withholding certificate 
provided by a QI, a withholding certificate provided by a territory 
financial institution that elects to be treated as a U.S. person, or any 
withholding statement, unless the person submitting the form 
specifically identifies the withholding agents for which the 
certificates and/or statements are provided.
    (ii) Third-party data providers. A withholding agent may rely upon 
documentation collected by a third-party data provider with respect to 
an entity, subject to the conditions described in this paragraph 
(c)(9)(ii).
    (A) The third-party data provider must have collected documentation 
that is sufficient to determine the chapter 4 status of the entity under 
paragraph (d) of this section.
    (B) The third-party data provider must be in the business of 
providing credit reports or business reports to customers unrelated to 
it and must have reviewed all information it has for the entity and 
verified that such additional information does not conflict with the 
chapter 4 status claimed by the entity. For purposes of this paragraph 
(c)(9)(ii)(B), a customer is related to a third-party data provider if 
they have a relationship with each other that is described in section 
267(b).
    (C) The third-party data provider must notify the entity submitting 
the documentation that such entity must notify the third-party data 
provider in the event of a change in circumstances within 30 days of the 
change in circumstances, and the third-party data provider must be 
obligated under its contract with the withholding agent to notify the 
withholding agent if a change in circumstances occurs.
    (D) The withholding agent may not rely upon a chapter 4 status 
provided by a third-party data provider if the withholding agent knows 
or has reason to know that the chapter 4 status is unreliable or 
incorrect based on information in the withholding agent's account 
records, or if the documentation or information provided by the third-
party data provider does not support the chapter 4 status claimed.
    (E) The withholding agent must be able to submit copies of the 
documentation received from the third-party data provider upon request 
to the IRS and will remain liable for any underwithholding that occurs 
as a result of its reliance on information provided by the third-party 
data provider if the documentation is invalid or unreliable.
    (F) This paragraph (c)(9)(ii) does not apply to a withholding 
statement or a withholding certificate that contains an election to 
accept withholding or reporting responsibility (such as one made by a 
QI, territory financial institution, or U.S. branch) provided by a 
third-party data provider.

[[Page 411]]

    (iii) Reliance on certification provided by introducing brokers--(A) 
A withholding agent may rely on a certification of a broker indicating 
the broker's determination of a payee's chapter 4 status and indicating 
that the broker holds valid documentation sufficient to determine the 
payee's chapter 4 status under paragraph (d) of this section with 
respect to any readily tradable instrument as defined in Sec.  
31.3406(h)-1(d) of this chapter if the conditions in paragraph 
(c)(9)(iii)(B) of this section are satisfied and the broker is either--
    (1) A U.S. person (including a U.S. branch that is treated as a U.S. 
person) that is acting as the agent of the payee; or
    (2) A participating FFI or a reporting Model 1 FFI that is acting as 
the agent of the payee with respect to an obligation and receiving all 
payments from the withholding agent with respect to such obligation as 
an intermediary on behalf of the payee.
    (B) The certification from the broker must be in writing or in 
electronic form and contain all of the information required of a chapter 
4 withholding statement described in paragraph (c)(3)(iii)(B)(3). 
Notwithstanding this paragraph (c)(9)(iii), a withholding agent may not 
rely upon a certification provided by a broker if it knows or has reason 
to know that the broker has not obtained valid documentation as 
represented or the information contained in the certification is 
otherwise inaccurate. A broker that chooses to provide a certification 
under this paragraph (c)(9)(iii) will be responsible for applying the 
rules set forth in the regulations under section 1471 and 1472 to the 
withholding certificates, written statements, or documentary evidence 
obtained from the payee and shall be liable for any underwithholding 
that occurs as a result of the broker's failure to reasonably apply such 
rules.
    (iv) Reliance on documentation and certifications provided between 
principals and agents--(A) In general. Subject to the conditions under 
Sec.  1.1474-1(a)(3), a withholding agent is permitted to use an agent 
to fulfill its chapter 4 obligations and such agent's actions are 
imputed to the principal. However, an agent that makes a payment 
pursuant to an agency arrangement (paying agent) is also a withholding 
agent with respect to the payment unless an exception under Sec.  
1.1473-1(d) applies. Therefore, the paying agent will have its own 
obligation to determine the chapter 4 status of the payee and withhold 
upon the payment if required. Although a paying agent is generally a 
withholding agent for purposes of chapter 4, the financial accounts to 
which it makes payments are not necessarily financial accounts of the 
paying agent. See the rules under Sec.  1.1471-5(b)(5) to determine when 
a financial institution maintains a financial account. In addition, the 
status of a payment as made with respect to an offshore obligation or as 
a preexisting obligation will be determined based on such obligation's 
status in relation to the principal. Further, the due diligence required 
with respect to the payment will be determined by the status of the 
principal and not the paying agent. Consequently, a payment that is 
made, for example, by a paying agent that is a foreign entity on behalf 
of a principal that is a U.S. withholding agent will be subject to the 
due diligence applicable to the principal. See Sec.  1.1474-1(a)(3) for 
rules regarding the reporting obligations of a principal and agent in 
the case of a payment made by an agent of behalf of a principal.
    (B) Reliance upon certification of the principal. An agent that 
makes a payment on behalf of a principal that it may treat, pursuant to 
paragraph (d) of this section, as a U.S. withholding agent, 
participating FFI, or reporting Model 1 FFI may rely upon a 
certification provided by the principal indicating that the principal 
has obtained valid documentation sufficient to determine the chapter 4 
status of the payee and may rely upon the principal's determination as 
to the payee's chapter 4 status. In such a case, the agent will be 
permitted to rely upon the certification provided by the principal when 
determining whether it is required to withhold on the payment and will 
not be liable for any underwithholding that occurs as a result of the 
principal's failure to properly determine the chapter 4 status of the 
payee unless the agent knows or has

[[Page 412]]

reason to know the certification provided by the principal is 
inaccurate.
    (C) Document sharing. In lieu of obtaining a certification from the 
principal as described in paragraph (c)(9)(iv)(B) of this section, or 
when reliance upon such certification is not permitted, an agent that 
makes a payment on behalf of a principal may rely upon copies of 
documentation provided to the principal with respect to the payment. 
However, in such case, both the principal and the agent are obligated to 
determine the chapter 4 status of the payee based upon the documentation 
and ensure that adequate withholding occurs with respect to the payment. 
While a principal is imputed the knowledge of the agent with respect to 
the payment, the agent is not imputed the knowledge of the principal.
    (D) Examples--(1) Example 1. Paying agent that does not collect 
documentation. A fund, P, that is a participating FFI contracts with a 
U.S. person, A, to make payments to its account holders with respect to 
their equity interests in P. P contracts with another agent, B, to 
obtain documentation sufficient to determine the chapter 4 status of 
such account holders. Based on the documentation it collects, B 
determines that none of P's account holders are subject to withholding. 
P provides a certification to A indicating that it has obtained 
documentation sufficient to determine the chapter 4 status of P's 
account holders and that each payee is not subject to withholding under 
chapter 4. As the actions of B, as P's agent, are attributed to P, P may 
provide a certification to A indicating that it has determined the 
chapter 4 status of its payees, even if it is B, and not P, who made the 
determinations. However, P will be liable for any underwithholding that 
results from a failure by B to reasonably apply the rules under chapter 
4. A is permitted to rely upon the certification provided by P and, 
accordingly, is not required to withhold on the payments made to P's 
account holders and would not be liable for any underwithholding that 
results if the determinations made by B are incorrect unless A had 
reason to know that chapter 4 status claimed was inaccurate.
    (ii) Example 2. Paying agent that collects documentation. A fund, P, 
that is a participating FFI contracts with a U.S. person, A, to make a 
payment to its account holders on its behalf. P also contracts with A to 
obtain documentation sufficient to determine the chapter 4 status of P's 
account holders. Based on the documentation it collects, A determines 
that none of P's account holders are subject to withholding. As the 
actions of A, as P's agent, are imputed to P, P will be liable for any 
underwithholding that results from a failure by A to reasonably apply 
the rules under chapter 4. P is also required to retain the 
documentation upon which A relied in determining the chapter 4 status of 
its account holders. Because A performed the due diligence on behalf of 
P, A will have reason to know if any of the chapter 4 determinations 
made based on the documentation received were made incorrectly, and, as 
a withholding agent with respect to the payment, is liable, in addition 
to P, for any underwithholding that results from an incorrect 
determination that withholding was not required. This result applies 
regardless of whether A retains copies of the documentation obtained 
with respect to P's account holders or receives a certification from P 
indicating that P has obtained documentation sufficient to determine the 
chapter 4 status of its account holders and that each payee is not 
subject to withholding under chapter 4.
    (v) Reliance upon documentation for accounts acquired in merger or 
bulk acquisition for value. A withholding agent that acquires an account 
from a predecessor or transferor in a merger or bulk acquisition of 
accounts for value is permitted to rely upon valid documentation (or 
copies of valid documentation) collected by the predecessor or 
transferor. In addition, a withholding agent that acquires an account in 
a merger or bulk acquisition of accounts for value, other than a related 
party transaction, from a U.S. withholding agent, a participating FFI 
that has completed all due diligence required under its agreement with 
respect to the accounts transferred, or a reporting Model 1 FFI that has 
completed all due diligence required pursuant to the applicable Model 1 
IGA, may also rely upon the

[[Page 413]]

predecessor's or transferor's determination of the chapter 4 status of 
an account holder for a transition period of the lesser of six months 
from the date of the merger or until the acquirer knows that the claim 
of status is inaccurate or a change in circumstances occurs. At the end 
of the transition period, the acquirer will be permitted to rely upon 
the predecessor's determination as to the chapter 4 status of the 
account holder only if the documentation that the acquirer has for the 
account holder, including documentation obtained from the predecessor or 
transferor, supports the chapter 4 status claimed. An acquirer that 
discovers at the end of the transition period that the chapter 4 status 
assigned by the predecessor or transferor to the account holder was 
incorrect and, as a result, has not withheld as it would have been 
required to but for its reliance upon the predecessor's determination, 
will be required to withhold on payments made after the transition 
period, if any, to the account holder equal to the amount of tax that 
should have been withheld during the transition period but for the 
erroneous classification as to the account holder's status. For purposes 
of this paragraph (c)(9)(v), a related party transaction is a merger or 
sale of accounts in which either the acquirer is in the same expanded 
affiliated group as the predecessor or transferor prior to or after the 
merger or acquisition or the predecessor or transferor (or shareholders 
of the predecessor or transferor) obtains a controlling interest in the 
acquirer or in a newly formed entity created for purposes of the merger 
or acquisition. See Sec.  1.1471-4(c)(2)(ii)(B) for an additional 
allowance for a participating FFI to rely upon the determination made by 
another participating FFI as to the chapter 4 status of an account 
obtained as part of a merger or bulk acquisition for value.
    (d) Documentation requirements to establish payee's chapter 4 
status. Unless the withholding agent knows or has reason to know 
otherwise, a withholding agent may rely on the provisions of this 
paragraph (d) to determine the chapter 4 status of a payee (or other 
person that receives a payment). Except as otherwise provided in this 
paragraph (d), a withholding agent is required to obtain a valid 
withholding certificate or a Form W-9 from a payee in order to treat the 
payee as having a particular chapter 4 status. Paragraphs (d)(1) through 
(12) of this section indicate when it is appropriate for a withholding 
agent to rely upon a written statement, documentary evidence, or other 
information in lieu of a Form W-8 or W-9. Paragraphs (d)(1) through (12) 
of this section also prescribe additional documentation requirements 
that must be met in certain cases in order to treat a payee as having a 
specific chapter 4 status and specific standards of knowledge that apply 
to a particular payee, in addition to the general standards of knowledge 
set forth in paragraph (e) of this section. This paragraph (d) also 
provides the circumstances in which special documentation rules are 
permitted with respect to preexisting obligations. A withholding agent 
may not rely on documentation described in this paragraph (d) if the 
documentation is not valid or cannot reliably be associated with the 
payment pursuant to the requirements of paragraph (c) of this section, 
or the withholding agent knows or has reason to know that such 
documentation is incorrect or unreliable as described in paragraphs (d) 
and (e) of this section. If the chapter 4 status of a payee cannot be 
determined under this paragraph (d) based on documentation received, a 
withholding agent must apply the presumption rules in paragraph (f) to 
determine the chapter 4 status of the payee.
    (1) Reliance on pre-FATCA Form W-8. To establish a payee's status as 
a foreign individual, foreign government, government of a U.S. 
territory, or international organization, a withholding agent may rely 
upon a pre-FATCA Form W-8 in lieu of obtaining an updated version of the 
withholding certificate. This reliance is only available in the case of 
a payee that is an international organization if such payee is described 
under section 7701(a)(18). To establish the chapter 4 status of a payee 
that is not a foreign individual, a foreign government, or an 
international organization, a withholding agent may, for payments made 
prior to January 1, 2017, rely upon a

[[Page 414]]

pre-FATCA Form W-8 in lieu of obtaining an updated version of the 
withholding certificate if the withholding agent has one or more forms 
of documentary evidence described in paragraphs (c)(5)(ii), as 
necessary, to establish the chapter 4 status of the payee and the 
withholding agent has obtained any additional documentation or 
information required for the particular chapter 4 status (such as 
withholding statements, certifications as to owners, or required 
documentation for underlying owners), as set forth under the specific 
payee rules in paragraphs (d)(2) through (12) of this section. See 
paragraph (d)(4)(ii) and (iv) of this section for specific requirements 
applicable when relying upon a pre-FATCA Form W-8 for a participating 
FFI or registered deemed-compliant FFI. This paragraph (d)(1) does not 
apply to nonregistering local banks, FFIs with only low-value accounts, 
sponsored FFIs, owner-documented FFIs, territory financial institutions 
that are not the beneficial owners of the payment, foreign central banks 
(other than a foreign central bank specifically identified as an exempt 
beneficial owner under a Model 1 IGA or Model 2 IGA), or international 
organizations not described under section 7701(a)(18).
    (2) Identification of U.S. persons--(i) In general. A withholding 
agent must treat a payee as a U.S. person, including a payee that is a 
foreign branch of a U.S. person (other than a branch that is treated as 
a QI) or is an FFI that has elected to be treated as a U.S. person for 
tax purposes under section 953(d), if it has a valid Form W-9 associated 
with the payee or if it must presume the payee is a U.S. person under 
the presumption rules set forth in paragraph (f) of this section. 
Consistent with the presumption rules in paragraph (f)(3) of this 
section, a withholding agent must treat a payee that has provided a 
valid Form W-9 as a specified U.S. person unless the Form W-9 contains a 
certification that the payee is other than a specified U.S. person. 
Notwithstanding the foregoing, a withholding agent receiving a Form W-9 
indicating that the payee is other than a specified U.S. person must 
treat the payee as a specified U.S. person if the withholding agent 
knows or has reason to know that the payee's claim that it is other than 
a specified U.S. person is incorrect. For example, a withholding agent 
that receives a Form W-9 from a payee that is an individual would be 
required to treat the payee as a specified U.S. person regardless of 
whether the Form W-9 indicates that the payee is not a specified U.S. 
person, because an individual that is a U.S. person is not excepted from 
the definition of a specified U.S. person.
    (ii) Reliance on documentary evidence. A withholding agent may also 
treat the payee as a U.S. person that is other than a specified U.S. 
person if the withholding agent has documentary evidence described in 
paragraphs (c)(5)(i)(C) and (D) of this section or general documentary 
evidence (as described in paragraph (c)(5)(ii)(A) of this section) that 
both establishes that the payee is a U.S. person and establishes (either 
through the documentation or the application of the rules in Sec.  
1.6049-4(c)(1)(ii) or paragraph (f)(3) of this section) that the payee 
is an exempt recipient. For purposes of the previous sentence, an exempt 
recipient means with respect to a withholding agent other than a 
participating FFI or registered deemed-compliant FFI, an exempt 
recipient under Sec.  1.6049-4(c)(1)(ii) or, with respect to a 
withholding agent that is a participating FFI or registered deemed-
compliant FFI, a U.S. person other than a specified U.S. person as 
described under Sec.  1.1473-1(c).
    (iii) Preexisting obligations. As an alternative to applying the 
rules in paragraphs (d)(2)(i) and (ii) of this section, a withholding 
agent that makes a payment with respect to a preexisting obligation may 
treat a payee as a U.S. person if it has a notation in its files that it 
has previously reviewed a Form W-9 that established that the payee is a 
U.S. person and has retained the payee's TIN. A withholding agent, other 
than a participating FFI or registered deemed-compliant FFI, may also 
treat a payee of a payment with respect to a preexisting obligation as a 
U.S. person if it has previously classified the payee as a U.S. person 
for purposes of chapter 3 or 61 and established (through the 
documentation or the application of the rules in Sec.  1.6049-
4(c)(1)(ii)) that the

[[Page 415]]

payee is an exempt recipient for purposes of chapter 61.
    (3) Identification of individuals that are foreign persons--(i) In 
general. A withholding agent may treat a payee as an individual that is 
a foreign person if the withholding agent has a withholding certificate 
identifying the payee as such a person.
    (ii) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat the 
payee as an individual that is a foreign person if it obtains 
documentary evidence supporting the payee's claim of status as a foreign 
individual (as described in paragraph (c)(5)(i)) or if the payee is 
presumed to be an individual that is a foreign person under the 
presumption rules set forth in paragraph (f) of this section.
    (4) Identification of participating FFIs and registered deemed-
compliant FFIs--(i) In general. Except as otherwise provided in 
paragraphs (d)(4)(ii) through (iv) or paragraphs (e)(3)(i) and (ii) of 
this section, a withholding agent may treat a payee as a participating 
FFI or registered deemed-compliant FFI only if the withholding agent has 
a withholding certificate identifying the payee as a participating FFI, 
registered deemed-compliant FFI, or branch thereof (including an entity 
that is disregarded as an entity separate from the FFI), and the 
withholding certificate contains a GIIN described in paragraph (e)(3) of 
this section that is verified against the published IRS FFI list in the 
manner described in paragraph (e)(3) of this section (indicating when a 
withholding agent may rely upon a GIIN). For when a withholding agent 
may treat a payee as a registered deemed-compliant FFI that is a 
sponsored investment entity or sponsored controlled foreign corporation, 
see paragraph (d)(4)(vi) of this section. See paragraph (c)(3)(iii) of 
this section for additional requirements that apply to a valid 
withholding certificate provided by a participating FFI or registered 
deemed-compliant FFI that is a flow-through entity or is acting as an 
intermediary with respect to the payment.
    (ii) Exception for payments made prior to January 1, 2017, with 
respect to preexisting obligations (transitional). For payments made 
prior to January 1, 2017, with respect to a preexisting obligation, a 
withholding agent may treat a payee as a participating FFI or registered 
deemed-compliant FFI, or branch thereof (including an entity that is 
disregarded as an entity separate from the FFI), if the payee has 
provided the withholding agent with a pre-FATCA Form W-8 and (either 
orally or in writing) its GIIN and has indicated whether it is a 
participating FFI or a registered deemed-compliant FFI (or whether such 
branch or disregarded entity is treated as a participating FFI or a 
registered deemed-compliant FFI), and the withholding agent has verified 
the GIIN of the FFI, branch, or disregarded entity, as the context 
requires, in the manner described in paragraph (e)(3) of this section.
    (iii) Exception for offshore obligations. A withholding agent that 
makes a payment, other than a payment of U.S. source FDAP income, with 
respect to an offshore obligation may treat a payee as a participating 
FFI or registered deemed-compliant FFI, or branch thereof (including an 
entity that is disregarded as an entity separate from the FFI), if the 
payee provides the withholding agent with its GIIN and states whether 
the payee is a participating FFI or a registered deemed-compliant FFI, 
and the withholding agent verifies the GIIN in the manner described in 
paragraph (e)(3) of this section. A withholding agent that makes a 
payment of U.S. source FDAP income with respect to an offshore 
obligation may treat the payee as a participating FFI or registered 
deemed-compliant FFI, or branch thereof (including an entity that is 
disregarded as an entity separate from the FFI) if--
    (A) The payee provides the withholding agent with--
    (1) A written statement that contains the payee's GIIN, states that 
the payee is the beneficial owner of the payment, and indicates whether 
the payee is treated as a participating FFI or a registered deemed-
compliant FFI, as appropriate; and
    (2) Documentary evidence supporting the payee's claim of foreign 
status; and
    (B) The withholding agent verifies the GIIN in the manner described 
in paragraph (e)(3) of this section.

[[Page 416]]

    (iv) Exceptions for payments to reporting Model 1 FFIs. (A) For 
payments made prior to January 1, 2015, a withholding agent may treat a 
payee that is an FFI or branch of an FFI (including an entity that is 
disregarded as an entity separate from the FFI) as a reporting Model 1 
FFI if it receives a withholding certificate from the payee indicating 
that the payee is a reporting Model 1 FFI and the country in which the 
payee is a reporting Model 1 FFI, regardless of whether the certificate 
contains a GIIN for the payee.
    (B) For payments made prior to January 1, 2015, with respect to a 
preexisting obligation, a withholding agent may treat a payee as a 
reporting Model 1 FFI if it obtains a pre-FATCA Form W-8 from the payee, 
and the payee indicates (either orally or in writing) that it is a 
reporting Model 1 FFI and the country in which it is a reporting Model 1 
FFI, regardless of whether the certificate contains a GIIN for the 
payee.
    (C) For payments made prior to January 1, 2015, with respect to an 
offshore obligation, a withholding agent may treat a payee as a 
reporting Model 1 FFI if the payee informs the withholding agent that 
the payee is a reporting Model 1 FFI and provides the country in which 
the payee is a reporting Model 1 FFI. In the case of a payment of U.S. 
source FDAP income, such payee must also provide a written statement 
that it is the beneficial owner and documentary evidence supporting the 
payee's claim of foreign status (as described in paragraph (c)(5)(i) of 
this section).
    (D) For payments made on or after January 1, 2015, that do not 
constitute U.S. source FDAP income, the withholding agent may continue 
to treat a payee as a reporting Model 1 FFI if the payee provides the 
withholding agent with its GIIN, either orally or in writing, and the 
withholding agent verifies the GIIN in the manner described in paragraph 
(e)(3) of this section.
    (v) Reason to know. See paragraph (e) of this section for when a 
withholding agent will have reason to know that a withholding 
certificate or written statement provided by a payee claiming status as 
a participating FFI or registered deemed-compliant FFI is incorrect or 
invalid.
    (vi) Sponsored investment entities and sponsored controlled foreign 
corporations--(A) In general. A withholding agent may treat a payee as a 
sponsored investment entity or sponsored controlled foreign corporation 
if the withholding agent has a withholding certificate identifying the 
payee as a sponsored investment entity or sponsored controlled foreign 
corporation (as applicable) and the withholding certificate includes the 
GIIN of the sponsored investment entity or sponsored controlled foreign 
corporation entity (as applicable), which the withholding agent has 
verified against the published IRS FFI list in the manner described in 
paragraph (e)(3)(i) of this section.
    (B) Payments made prior to January 1, 2017 (transitional). For 
payments made prior to January 1, 2017, a sponsored investment entity or 
sponsored controlled foreign corporation may provide the GIIN of its 
sponsoring entity on the withholding certificate, which the withholding 
agent must verify against the published IRS FFI list in the manner 
described in paragraph (e)(3)(i) of this section.
    (C) Payments made after December 31, 2016, to payees documented 
prior to January 1, 2017. For a payment made after December 31, 2016, to 
a payee that the withholding agent has documented prior to January 1, 
2017, as a sponsored investment entity or sponsored controlled foreign 
corporation with a valid withholding certificate that includes the GIIN 
of the sponsoring entity, the withholding agent must obtain and verify 
the GIIN of the sponsored investment entity or sponsored controlled 
foreign corporation against the published IRS FFI list in the manner 
described in paragraph (e)(3)(i) of this section by March 31, 2017. 
Notwithstanding the preceding sentence, a GIIN is not required for a 
payee that provides a valid withholding certificate prior to January 1, 
2017, that identifies the payee as a sponsored FFI and includes the GIIN 
of the sponsoring entity if the withholding agent determines, based on 
information provided on the withholding certificate, that the sponsored 
entity is resident, organized, or

[[Page 417]]

located in a jurisdiction that is treated as having a Model 1 IGA in 
effect. A withholding agent required to obtain a GIIN of the sponsored 
investment entity or sponsored controlled foreign corporation under this 
paragraph (d)(4)(vi)(C) may obtain such GIIN by oral or written 
confirmation (including by email) rather than obtaining a new 
withholding certificate, provided that the withholding agent retains a 
record of the confirmation, which will become part of the withholding 
certificate.
    (5) Identification of certified deemed-compliant FFIs--(i) In 
general. Except as otherwise provided in this paragraph (d)(5), a 
withholding agent may treat a payee as a certified deemed-compliant FFI, 
other than a sponsored, closely held investment vehicle, if the 
withholding agent has a withholding certificate that identifies the 
payee as a certified deemed-compliant FFI, and the withholding 
certificate contains a certification by the payee that it meets the 
requirements to qualify as the type of certified deemed-compliant FFI 
identified on the withholding certificate. See paragraph (c)(3)(iii) of 
this section for additional requirements that apply to a valid 
withholding certificate provided by a certified deemed-compliant FFI 
that is a flow-through entity or is acting as an intermediary with 
respect to the payment, or by a U.S. branch of a certified deemed-
compliant FFI.
    (ii) Sponsored, closely held investment vehicles--(A) In general. A 
withholding agent may treat a payee as a sponsored, closely held 
investment vehicle described in Sec.  1.1471-5(f)(2)(iii) if the 
withholding agent can reliably associate the payment with a withholding 
certificate that identifies the payee as a sponsored, closely held 
investment vehicle and includes the sponsoring entity's GIIN, which the 
withholding agent has verified against the published IRS FFI list in the 
manner described in paragraph (e)(3) of this section. In addition to the 
standards of knowledge rules indicated in paragraph (e) of this section, 
a withholding agent will have reason to know that the payee is not a 
sponsored, closely held investment vehicle described in Sec.  1.1471-
5(f)(2)(iii) if its AML due diligence indicates that the payee has in 
excess of 20 individual investors that own direct and/or indirect 
interests in the payee. See paragraph (c)(3)(iii) of this section for 
additional requirements that apply to a valid withholding certificate 
provided by a sponsored, closely held investment vehicle that is a flow-
through entity or is acting as an intermediary with respect to the 
payment, or by a U.S. branch of such vehicle.
    (B) Offshore obligations. A withholding agent that makes a payment 
with respect to an offshore obligation may treat a payee as a sponsored, 
closely held investment vehicle if it obtains a written statement that 
indicates that the payee is a sponsored, closely held investment 
vehicle, and provides the sponsoring entity's GIIN, which the 
withholding agent has verified in the manner described in paragraph 
(e)(3) of this section. In the case of a payment of U.S. source FDAP 
income, the written statement must also indicate that the payee is the 
beneficial owner and must be supplemented with documentary evidence 
supporting the payee's claim of foreign status (as described in 
paragraph (c)(5)(i) of this section).
    (iii) Certain investment entities that do not maintain financial 
accounts--(A) In general. A withholding agent may treat a payee as an 
investment entity that does not maintain financial accounts described in 
Sec.  1.1471-5(f)(2)(v) if the withholding agent can reliably associate 
the payment with a withholding certificate that identifies the payee as 
an investment entity that does not maintain financial accounts. In 
addition to the standards of knowledge rules indicated in paragraph (e) 
of this section, a withholding agent will have reason to know that the 
payee is not an investment entity that does not maintain financial 
accounts described in Sec.  1.1471-5(f)(2)(v) if its AML due diligence 
documentation indicates that the payee has financial accounts.
    (B) Offshore obligations. A withholding agent that makes a payment 
with respect to an offshore obligation may treat a payee as an 
investment advisor and investment manager described in Sec.  1.1471-
5(f)(2)(v) if it obtains a written statement that indicates

[[Page 418]]

that the payee is an investment advisor and investment manager. In the 
case of a payment of U.S. source FDAP income, the written statement must 
also indicate that the payee is the beneficial owner and must be 
supplemented with documentary evidence supporting the payee's claim of 
foreign status (as described in paragraph (c)(5)(i) of this section).
    (6) Identification of owner-documented FFIs--(i) In general. A 
withholding agent may treat a payee as an owner-documented FFI if all 
the following requirements of paragraphs (d)(6)(i)(A) through (F) of 
this section are met. A withholding agent may not rely upon a 
withholding certificate to treat a payee as an owner-documented FFI, 
either in whole or in part, if the withholding certificate does not 
contain all of the information and associated documentation required by 
paragraphs (d)(6)(i)(A), (C), and (D) of this section.
    (A) The withholding agent has a withholding certificate that 
identifies the payee as an owner-documented FFI that is not acting as an 
intermediary;
    (B) The withholding agent is a U.S. financial institution, 
participating FFI, or reporting Model 1 FFI that agrees pursuant to 
Sec.  1.1471-5(f)(3) to act as a designated withholding agent with 
respect to the payee;
    (C) The payee submits to the withholding agent an FFI owner 
reporting statement that meets the requirements of paragraph (d)(6)(iv) 
of this section;
    (D) The payee submits to the withholding agent valid documentation 
meeting the requirements of paragraph (d)(6)(iii) of this section with 
respect to each person identified on the FFI owner reporting statement;
    (E) The withholding agent does not know or have reason to know that 
the payee (or any other FFI that is an owner of the payee and that the 
designated withholding agent is treating as an owner-documented FFI) 
maintains any financial account for a nonparticipating FFI; and
    (F) The withholding agent does not know or have reason to know that 
the payee is a member of an expanded affiliated group with any FFI that 
is a depository institution, custodial institution, or specified 
insurance company, or that the FFI has any specified U.S. persons that 
own an equity interest in the FFI or a debt interest (other than a debt 
interest that is not a financial account or that has a balance or value 
not exceeding $50,000) in the FFI other than those identified on the FFI 
owner reporting statement described in paragraph (d)(6)(iv) of this 
section.
    (ii) Auditor's letter substitute. A payee may, in lieu of providing 
an FFI owner reporting statement and documentation for each owner of the 
FFI as described in paragraphs (d)(6)(i)(C) and (D) of this section, 
provide a letter from an auditor or an attorney that is licensed in the 
United States or whose firm has a location in the United States, signed 
no more than four years prior to the date of the payment, that certifies 
that the firm or representative has reviewed the payee's documentation 
with respect to all of its owners and debt holders described in 
paragraph (d)(6)(iv) of this section in accordance with Sec.  1.1471-
4(c) and that the payee meets the requirements of Sec.  1.1471-5(f)(3). 
The payee must also provide an FFI owner reporting statement and a Form 
W-9, with any applicable waiver, for each specified U.S. person that 
owns a direct or indirect interest in the payee or that holds debt 
interests described in paragraph (d)(6)(iv) of this section. A 
withholding agent may rely upon the letter described in this paragraph 
(d)(6)(ii) if it does not know or have reason to know that any of the 
information contained in the letter is unreliable or incorrect.
    (iii) Documentation for owners and debt holders of payee. Acceptable 
documentation for an individual owning an equity interest in the payee 
or a debt holder described in paragraph (d)(6)(iv) of this section means 
a valid withholding certificate, valid Form W-9 (including any necessary 
waiver), or documentary evidence establishing the foreign status of the 
individual as set forth in paragraph (d)(3)(ii) of this section 
(regardless of whether the payment is made with respect to an offshore 
obligation). Acceptable documentation for a specified U.S. person means 
a valid Form W-9 (including any necessary waiver). Acceptable 
documentation for all other persons owning an equity or debt interest in 
the payee means documentation described in this

[[Page 419]]

paragraph (d), applicable to the chapter 4 status claimed by the person. 
The rules for reliably associating a payment with a withholding 
certificate or documentary evidence set forth in paragraph (c) of this 
section, the rules for payee documentation provided in this paragraph 
(d), and the standards of knowledge set forth in paragraph (e) of this 
section will apply to documentation submitted by the owners and debt 
holders by substituting the phrase ``owner of the payee'' or ``debt 
holder'' for ``payee.''
    (iv) Content of FFI owner reporting statement. The FFI owner 
reporting statement provided by an owner-documented FFI must contain the 
information required by this paragraph (d)(6)(iv) and is subject to the 
general rules applicable to all withholding statements described in 
paragraph (c)(3)(iii)(B)(1) of this section. An FFI that is a 
partnership, simple trust, or grantor trust may substitute an NWP 
withholding statement described in Sec.  1.1441-5(c)(3)(iv) or a foreign 
simple trust or foreign grantor trust withholding statement described in 
Sec.  1.1441-5(e)(5)(iv) for the FFI owner reporting statement, provided 
that the NWP withholding certificate or foreign simple trust or foreign 
grantor trust withholding certificate contains all of the information 
required in this paragraph (d)(6)(iv). The owner reporting statement 
will expire on the last day of the third calendar year following the 
year in which the statement was provided to the withholding agent unless 
an exception in paragraph (c)(6)(ii) of this section (for example, 
accounts with a balance or value of $1,000,000 or less) or this 
paragraph (d)(6) applies. The owner-documented FFI will also be required 
to provide the withholding agent with an updated owner reporting 
statement if there is a change in circumstances as required under 
paragraph (c)(6)(ii)(E) of this section.
    (A) The FFI owner reporting statement must provide the following 
information:
    (1) The name, address, TIN (if any), and chapter 4 status of every 
individual and specified U.S. person that owns a direct or indirect 
equity interest in the payee (looking through all entities other than 
specified U.S. persons).
    (2) The name, address, TIN (if any), and chapter 4 status of every 
individual and specified U.S. person that owns a debt interest in the 
payee (including any indirect debt interest, which includes debt 
interests in any entity that directly or indirectly owns the payee or 
any direct or indirect equity interest in a debt holder of the payee), 
in either such case if the debt interest constitutes a financial account 
in excess of $50,000 (disregarding all such debt interests owned by 
participating FFIs, registered deemed-compliant FFIs, certified deemed-
compliant FFIs, excepted NFFEs, exempt beneficial owners, or U.S. 
persons other than specified U.S. persons).
    (3) Any other information the withholding agent reasonably requests 
in order to fulfill its obligations under chapter 4.
    (B) The information on the FFI owner reporting statement may contain 
names of equity and debt holders that are prepopulated by the 
withholding agent based on prior information provided to the withholding 
agent by the payee if the prepopulated form instructs the payee to amend 
the statement if the contents are inaccurate, incomplete, or have 
changed, and the payee confirms in writing that the FFI owner reporting 
statement submitted to the withholding agent is accurate and complete.
    (C) The FFI owner reporting statement may be submitted in any form 
that meets the requirements of this paragraph, including a form used for 
purposes of AML due diligence.
    (v) Exception for preexisting obligations (transitional). A 
withholding agent may treat a payment made prior to January 1, 2017, 
with respect to a preexisting obligation as made to an owner-documented 
FFI if the withholding agent has collected, for purposes of satisfying 
its AML due diligence, documentation with respect to each individual and 
specified U.S. person that owns a direct or indirect interest in the 
payee, other than an interest as a creditor, within four years of the 
date of payment, that documentation is sufficient to satisfy the AML due 
diligence requirements of the jurisdiction in which the withholding 
agent maintains the account,

[[Page 420]]

the withholding agent has sufficient information to report all specified 
U.S. persons that own an interest in the payee, and the withholding 
agent does not know, or have reason to know, that any nonparticipating 
FFI owns an equity interest in the FFI or that any nonparticipating FFI 
or specified U.S. person owns a debt interest in the FFI constituting a 
financial account in excess of $50,000.
    (vi) Exception for offshore obligations. A withholding agent that is 
making a payment, other than a payment of U.S. source FDAP income, with 
respect to an offshore obligation may, in lieu of obtaining a 
withholding certificate as otherwise required under paragraph 
(d)(6)(i)(A) of this section, rely upon a written statement that 
indicates the payee meets the requirements to qualify as an owner-
documented FFI under Sec.  1.1471-5(f)(3) and is not acting as an 
intermediary, if the withholding agent provides a written notice to the 
payee indicating that the payee is required to update the written 
statement and all associated documentation (such as the FFI owner 
reporting statement and underlying documentation) within 30 days of a 
change in circumstances.
    (vii) Exception for certain offshore obligations of $1,000,000 or 
less--(A) A withholding agent may treat the payment as being made to an 
owner-documented FFI if--
    (1) The payment is made with respect to an offshore obligation that 
has a balance or value not exceeding $1,000,000 on the later of June 30, 
2014, or the last day of the calendar year in which the account was 
opened, and the last day of each subsequent year preceding the payment, 
applying the aggregation principles of Sec.  1.1471-5(b)(4);
    (2) The withholding agent has collected documentation or a 
certification as to the payee's owners (either for purposes of complying 
with its AML due diligence or for purposes of satisfying the 
requirements of this paragraph (d)(6)(vii)) sufficient to identify every 
individual and specified U.S. person that owns any direct or indirect 
interest in the payee (other than an interest as a creditor) and 
determine the chapter 4 status of such person;
    (3) The documentation described in paragraph (d)(6)(vii)(A)(2) of 
this section is sufficient to satisfy the AML due diligence requirements 
of the jurisdiction in which the withholding agent maintains the account 
(and such jurisdiction is a FATF-compliant jurisdiction);
    (4) The withholding agent has sufficient information to report all 
specified U.S. persons that own an interest in the payee in accordance 
with Sec.  1.1474-1(d); and
    (5) The withholding agent does not know, or have reason to know, 
that the payee has any contingent beneficiaries or designated classes 
with unidentified beneficiaries or owners, that any nonparticipating FFI 
owns a direct or indirect equity interest in the payee, or that any 
specified U.S. persons or nonparticipating FFIs own a debt interest 
constituting a financial account in excess of $50,000 in the payee 
(other than specified U.S. persons that the withholding agent has 
sufficient information to report).
    (B) For example, a withholding agent that is required to obtain a 
certification from the payee identifying all persons owning an interest 
in the payee as part of its AML due diligence will not be required to 
obtain an FFI owner reporting statement, provided the other conditions 
of this paragraph (d)(6)(vii) are met. On the other hand, a withholding 
agent that has only obtained documentation for persons owning a certain 
threshold percentage of the payee will be required to obtain additional 
documentation to satisfy the requirements of this paragraph (d)(6)(vii). 
A withholding agent that treats a payee as an owner-documented FFI 
pursuant to this paragraph (d)(6)(vii) will not be required to obtain 
new documentation, including the FFI owner reporting statement, until 
there is a change in circumstances or until the account balance or value 
exceeds $1,000,000 on the last day of the calendar year.
    (7) Nonreporting IGA FFIs--(i) In general. A withholding agent may 
treat a payee as a nonreporting IGA FFI described in Sec.  1.1471-
1(b)(83)(ii) (unless such FFI is treated as a registered deemed-
compliant FFI under Annex II of the Model 2 IGA) or as a nonreporting 
IGA FFI described in Sec.  1.1471-1(b)(83)(i), (iv), or (v) if the 
withholding

[[Page 421]]

agent has a withholding certificate identifying the payee, or the 
relevant branch of the payee, as a nonreporting IGA FFI. A withholding 
agent may treat a payee as a nonreporting IGA FFI described in Sec.  
1.1471-1(b)(83)(ii) that is treated as a registered deemed-compliant FFI 
under Annex II of the Model 2 IGA or as a nonreporting IGA FFI described 
in Sec.  1.1471-1(b)(83)(iii) if the withholding agent has a withholding 
certificate identifying the payee, or the relevant branch of the payee, 
as a nonreporting IGA FFI, and the withholding certificate contains a 
GIIN for the payee that is verified against the published IRS FFI list 
in the manner described in paragraph (e)(3) of this section.
    (ii) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat a payee 
as a nonreporting IGA FFI if it can reliably associate the payment with 
a written statement identifying the payee (or the relevant branch of the 
payee) as a nonreporting IGA FFI and, with respect to a payment of U.S. 
source FDAP income, the written statement indicates that the payee is 
the beneficial owner of the income and is accompanied by documentary 
evidence supporting a claim of foreign status (as described in paragraph 
(c)(5)(i) of this section). A withholding agent that makes a payment 
with respect to an offshore obligation may also treat a payee as a 
nonreporting IGA FFI if the withholding agent has a permanent residence 
address for the payee, or an address of the relevant branch of the 
payee, and has obtained a notification, either orally or in writing, 
indicating that the payee is not acting as an intermediary and general 
documentary evidence (as described in paragraph (c)(5)(ii)(A) of this 
section) that provides the withholding agent with sufficient information 
to reasonably determine that the payee is an entity listed as a 
nonreporting IGA FFI pursuant to a Model 1 or Model 2 IGA.
    (8) Identification of nonparticipating FFIs--(i) In general. A 
withholding agent is required to treat a payee as a nonparticipating FFI 
if the withholding agent can reliably associate the payment with a 
withholding certificate identifying the payee as a nonparticipating FFI, 
the withholding agent knows or has reason to know that the payee is a 
nonparticipating FFI, or the withholding agent is required to treat the 
payee as a nonparticipating FFI under the presumption rules described in 
paragraph (f) of this section.
    (ii) Special documentation rules for payments made to an exempt 
beneficial owner through a nonparticipating FFI. A withholding agent may 
treat a payment made to a nonparticipating FFI as beneficially owned by 
an exempt beneficial owner if the withholding agent can reliably 
associate the payment with--
    (A) A withholding certificate that identifies the payee as a 
nonparticipating FFI that is either acting as an intermediary or is a 
flow-through entity; and
    (B) An exempt beneficial owner withholding statement that meets the 
requirements of paragraphs (c)(3)(iii)(B)(1) and (4) of this section and 
contains the associated documentation necessary to establish the chapter 
4 status of the exempt beneficial owner in accordance with paragraph 
(d)(9) of this section as if the exempt beneficial owner were the payee.
    (9) Identification of exempt beneficial owners--(i) Identification 
of foreign governments, governments of U.S. territories, international 
organizations, and foreign central banks of issue--(A) In general. A 
withholding agent may treat a payee as a foreign government, government 
of a U.S. territory, international organization, or foreign central bank 
of issue if it has a withholding certificate that identifies the payee 
as such an entity, indicates that the payee is the beneficial owner of 
the payment, and indicates that the payee is not engaged in commercial 
financial activities with respect to the payments or accounts identified 
on the form. A withholding agent may treat a payee as an international 
organization without requiring a withholding certificate if the name of 
the payee is one that is designated as an international organization by 
executive order (pursuant to 22 U.S.C. 288 through 288f) and other facts

[[Page 422]]

surrounding the transaction reasonably indicate that the international 
organization is not receiving the payment as an intermediary on behalf 
of another person. A withholding agent may treat a payee as an exempt 
beneficial owner pursuant to a Model 1 IGA or Model 2 IGA if it has a 
withholding certificate that identifies the payee as such an entity and 
indicates that the payee is the beneficial owner of the payment.
    (B) Exception for offshore obligations. A withholding agent that 
makes a payment, other than a payment of U.S. source FDAP income, with 
respect to an offshore obligation may treat a payee as a foreign 
government, government of a U.S. territory, international organization, 
or foreign central bank of issue if the payee provides a written 
statement that it is such an entity and the written statement indicates 
that the payee receives the payment as a beneficial owner (within the 
meaning provided in Sec.  1.1471-6). A written statement provided by a 
foreign central bank of issue must also state that the foreign central 
bank of issue does not receive the payment in connection with a 
commercial activity as provided in Sec.  1.1471-6(h).
    (C) Exception for preexisting offshore obligations. A withholding 
agent that makes a payment, other than a payment of U.S. source FDAP 
income, with respect to an offshore obligation that is also a 
preexisting obligation may treat the payee as a foreign government, 
government of a U.S. territory, international organization, or foreign 
central bank of issue if--
    (1) The payee is generally known to the withholding agent to be, the 
payee's name and the facts surrounding the payment reasonably indicate, 
or the withholding agent has preexisting account documentary evidence 
(as described in paragraph (c)(5)(ii)(B) of this section) that 
reasonably indicates that the payee is a foreign government or 
government of a U.S territory, a political subdivision of a foreign 
government or government of a U.S. territory, any wholly owned agency or 
instrumentality of any one or more of the foregoing, an international 
organization, a foreign central bank of issue, or the Bank for 
International Settlements; and
    (2) The withholding agent does not know that the payee is not the 
beneficial owner, within the meaning of Sec.  1.1471-6(b) through (e) 
(disregarding any presumption that a financial institution is assumed to 
be an intermediary absent documentation indicating otherwise) or a 
foreign central bank of issue receiving the payment in connection with a 
commercial activity.
    (ii) Identification of retirement funds--(A) In general. A 
withholding agent may treat a payee as a retirement fund described in 
Sec.  1.1471-6(f) if it has a withholding certificate in which the payee 
certifies that it is a retirement fund meeting the requirements of Sec.  
1.1471-6(f).
    (B) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat the 
payment as being made to a retirement fund described in Sec.  1.1471-
6(f) if it obtains a written statement in which the payee certifies that 
it is a retirement fund under the laws of its local jurisdiction meeting 
the requirements of Sec.  1.1471-6(f) and, with respect to a payment of 
U.S. source FDAP income, documentary evidence supporting a claim of 
foreign status (as described in paragraph (c)(5)(i) of this section). A 
withholding agent that makes a payment with respect to an offshore 
obligation may also treat the payment as made to a retirement fund if it 
obtains general documentary evidence (as described in paragraph 
(c)(5)(ii)(A) of this section) that provides the withholding agent with 
sufficient information to establish that the payee is a retirement fund 
meeting the requirements of Sec.  1.1471-6(f).
    (C) Exception for preexisting offshore obligations. A withholding 
agent that makes a payment with respect to an offshore obligation that 
is also a preexisting obligation, may treat the payee as a retirement 
fund described in Sec.  1.1471-6(f) if the withholding agent has general 
documentary evidence or preexisting account documentary evidence (as 
described in paragraphs (c)(5)(ii)(A) or (B)) that establishes that the 
payee is a foreign entity that qualifies as a retirement fund in the 
country in which the payee is organized.

[[Page 423]]

    (iii) Identification of entities wholly owned by exempt beneficial 
owners. A withholding agent may treat a payee as an entity described in 
Sec.  1.1471-6(g) (referring to certain entities wholly owned by exempt 
beneficial owners) if the withholding agent has--
    (A) A withholding certificate or, for a payment made with respect to 
an offshore obligation, a written statement that identifies the payee as 
an investment entity that is the beneficial owner of the payment;
    (B) An owner reporting statement that contains the name, address, 
TIN (if any), chapter 4 status (identifying the type of exempt 
beneficial owner), and a description of the type of documentation (Form 
W-8 or other documentary evidence) provided to the withholding agent for 
every person that owns a direct equity interest, or a debt interest 
constituting a financial account, in the payee, and that is subject to 
the general rules applicable to all withholding statements described in 
paragraph (c)(3)(iii)(B)(1) of this section; and
    (C) Documentation for every person identified on the owner reporting 
statement establishing, pursuant to the documentation requirements 
described in this paragraph (d)(9), that such person is an exempt 
beneficial owner (without regard to whether the person is a beneficial 
owner of the payment).
    (10) Identification of territory financial institutions--(i) 
Identification of territory financial institutions that are beneficial 
owners--(A) In general. A withholding agent may treat a payee as a 
territory financial institution if the withholding agent has a 
withholding certificate identifying the payee as a territory financial 
institution that beneficially owns the payment. See paragraph 
(d)(11)(viii) of this section for rules for documenting territory NFFEs.
    (B) Exception for preexisting offshore obligations. A withholding 
agent that makes a payment with respect to an offshore obligation that 
is also a preexisting obligation may treat the payee as a territory 
financial institution if the withholding agent receives written 
notification, whether signed or not, that the payee is the beneficial 
owner of the payment and the withholding agent has general documentary 
evidence (as described in paragraph (c)(5)(ii)(A) of this section) or 
preexisting account documentary evidence (as described in paragraph 
(c)(5)(ii)(B) of this section) establishing that the payee was organized 
or incorporated under the laws of any U.S. territory and is a depository 
institution, custodial institution, or specified insurance company.
    (ii) Identification of territory financial institutions acting as 
intermediaries or that are flow-through entities. A withholding agent 
may treat a payment as being made to a territory financial institution 
that is acting as an intermediary or that is a flow-through entity if 
the withholding agent has an intermediary withholding certificate or 
flow-through withholding certificate as described in paragraph 
(c)(3)(iii) of this section that identifies the person who receives the 
payment as a territory financial institution. A withholding agent that 
obtains the documentation described in the preceding sentence may treat 
the territory financial institution as the payee if the withholding 
certificate contains a certification that the territory financial 
institution agrees to be treated as a U.S. person with respect to the 
payment. If the withholding certificate does not contain such a 
certification, then the withholding agent must treat the person on whose 
behalf the territory financial institution receives the payment as the 
payee. See paragraph (c)(3)(iii) of this section for additional 
documentation that must accompany the withholding certificate of the 
territory financial institution in this case.
    (iii) Reason to know. In addition to the general standards of 
knowledge described in paragraph (e) of this section, a withholding 
agent will have reason to know that an entity is not a territory 
financial institution if the withholding agent has: a current residence 
or mailing address, either in the entity's account files or on 
documentation provided by the payee, for the entity that is outside the 
U.S. territory in which the entity claims to be organized; a current 
telephone number for the payee that has a country code other than the 
country code for the U.S. territory or has an area code other than the 
area code(s) of the applicable U.S.

[[Page 424]]

territory and no telephone number for the payee in the applicable U.S. 
territory; or standing instructions for the withholding agent to pay 
amounts from its account to an address or account outside the applicable 
U.S. territory. A withholding agent that has knowledge of a current 
address, current telephone number, or standing payment instructions for 
the entity outside of the applicable U.S. territory, may nevertheless 
treat the entity as a territory financial institution if it obtains 
documentary evidence that establishes that the entity was organized in 
the applicable U.S. territory.
    (11) Identification of excepted NFFEs--(i) Identification of 
excepted nonfinancial group entities--(A) In general. A withholding 
agent may treat a payee as an excepted nonfinancial group entity 
described in Sec.  1.1471-5(e)(5)(i) if the withholding agent has a 
withholding certificate identifying the payee as such an entity.
    (B) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat a payee 
as an excepted nonfinancial group entity described in Sec.  1.1471-
5(e)(5)(i) if the withholding agent obtains:
    (1) A written statement in which the payee certifies that it is a 
foreign entity operating primarily as an excepted nonfinancial group 
entity for a group that primarily engages in a business other than a 
financial business described in Sec.  1.1471-5(e)(4) and, with respect 
to a payment of U.S. source FDAP income, documentary evidence supporting 
a claim of foreign status (as described in paragraph (c)(5)(i) of this 
section); or
    (2) General documentary evidence (as described in paragraph 
(c)(5)(ii)(A) of this section) that provides the withholding agent with 
sufficient information to establish that the payee is an excepted 
nonfinancial group entity described in Sec.  1.1471-5(e)(5)(i).
    (ii) Identification of excepted nonfinancial start-up companies--(A) 
In general. A withholding agent may treat a payee as an excepted 
nonfinancial start-up company described in Sec.  1.1471-5(e)(5)(ii) if 
the withholding agent has a withholding certificate that identifies the 
payee as a start-up company that intends to operate as other than a 
financial institution and the withholding certificate provides a 
formation date for the payee that is less than 24 months prior to the 
date of the payment.
    (B) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat a payee 
as an excepted nonfinancial start-up company described in Sec.  1.1471-
5(e)(5)(ii) if it obtains--
    (1) A written statement from the payee in which the payee certifies 
that it is a foreign entity formed for the purpose of operating a 
business other than that of a financial institution and provides the 
entity's formation date which was less than 24 months prior to the date 
of the payment and, with respect to a payment of U.S. source FDAP 
income, documentary evidence supporting a claim of foreign status (as 
described in paragraph (c)(5)(i) of this section); or
    (2) General documentary evidence (as described in paragraph 
(c)(5)(ii)(A) of this section) that provides the withholding agent with 
sufficient information to establish that the payee is a foreign entity 
other than a financial institution and has a formation date which is 
less than 24 months prior to the date of the payment.
    (C) Exception for preexisting offshore obligations. A withholding 
agent may treat a payment made with respect to an offshore obligation 
that is also a preexisting obligation as made to a start-up company 
described in Sec.  1.1471-5(e)(5)(ii) if the withholding agent has 
general documentary evidence (as described in paragraph (c)(5)(ii)(A) of 
this section) or preexisting account documentary evidence (as described 
in paragraph (c)(5)(ii)(B) of this section) that provides the 
withholding agent sufficient information to establish that the payee is, 
or intends to be, engaged in a business other than as a financial 
institution and establishes that the payee is a foreign entity that was 
organized less than 24 months prior to the date of the payment.
    (iii) Identification of excepted nonfinancial entities in 
liquidation or bankruptcy--(A) In general. A withholding agent may treat 
a payee as an excepted

[[Page 425]]

nonfinancial entity in liquidation or bankruptcy, as described in Sec.  
1.1471-5(e)(5)(iii), if the withholding agent has a withholding 
certificate that identifies the payee as such an entity and the 
withholding agent has no knowledge that the payee has claimed to be such 
an entity for more than three years. A withholding agent may continue to 
treat a payee as an entity described in this paragraph for longer than 
three years if it obtains, in addition to a withholding certificate, 
documentary evidence such as a bankruptcy filing or other public 
document that supports the payee's claim that it remains in liquidation 
or bankruptcy.
    (B) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat the 
payee as an excepted nonfinancial entity in liquidation or bankruptcy, 
as described in Sec.  1.1471-5(e)(5)(iii) if the withholding agent has 
general documentary evidence (as described in paragraph (c)(5)(ii)(A) of 
this section) or a copy of a bankruptcy filing, or similar 
documentation, establishing that the payee is a foreign entity in 
liquidation or bankruptcy and establishing that prior to the liquidation 
or bankruptcy filing, the payee was engaged in a business other than 
that of a financial institution. A withholding agent may also treat the 
payee with respect to an offshore obligation as an excepted nonfinancial 
entity in liquidation or bankruptcy, as described in Sec.  1.1471-
5(e)(5)(iii), if the withholding agent obtains a written statement 
stating that the payee is a foreign entity in the process of liquidating 
or reorganizing with the intent to continue or recommence its former 
business as a nonfinancial institution, the withholding agent has no 
knowledge that the payee has claimed to be such an entity for more than 
three years (unless the withholding agent has obtained additional 
documentary evidence to support the claim that the entity remains in 
bankruptcy or liquidation), and, with respect to a payment of U.S. 
source FDAP income, documentary evidence supporting a claim of foreign 
status (as described in paragraph (c)(5)(i) of this section).
    (C) Exception for preexisting offshore obligations. A withholding 
agent that makes a payment with respect to an offshore obligation that 
is also a preexisting obligation may treat a payee as an excepted 
nonfinancial entity in liquidation or bankruptcy, as described in Sec.  
1.1471-5(e)(5)(iii), if the withholding agent has preexisting account 
documentary evidence (as described in paragraph (c)(5)(ii)(B) of this 
section) that unambiguously indicates that the payee is not a financial 
institution and is a foreign entity that entered liquidation or 
bankruptcy within the three years preceding the date of the payment.
    (iv) Identification of section 501(c) organizations--(A) In general. 
A withholding agent may treat a payee as a 501(c) organization described 
in Sec.  1.1471-5(e)(5)(v) if the withholding agent can reliably 
associate the payment with a withholding certificate that identifies the 
payee as a section 501(c) organization and the payee provides either a 
certification that the payee has been issued a determination letter by 
the IRS that is currently in effect concluding that the payee is a 
section 501(c) organization and providing the date of the letter, or a 
copy of an opinion from U.S. counsel certifying that the payee is a 
section 501(c) organization (without regard to whether the payee is a 
foreign private foundation).
    (B) Reason to know. A withholding agent must cease to treat a 
foreign organization's claim that it is a section 501(c) organization as 
valid beginning on the earlier of the date on which such agent knows 
that the IRS has given notice to such foreign organization that it is 
not a section 501(c) organization or 90 days after the date on which the 
IRS gives notice to the public that such foreign organization is not a 
section 501(c) organization. Further, a withholding agent will have 
reason to know that a payee is not a section 501(c) organization if it 
has determined, pursuant to its AML due diligence, that the payee has 
beneficial owners (as defined for purposes of the AML due diligence).
    (v) Identification of non-profit organizations--(A) In general. A 
withholding agent may treat a payee as a non-profit organization 
described in Sec.  1.1471-

[[Page 426]]

5(e)(5)(vi) if the withholding agent has a withholding certificate that 
identifies the payee as a non-profit organization.
    (B) Exception for offshore obligations. A withholding agent may 
treat a payment with respect to an offshore obligation as made to a 
nonprofit organization without obtaining a withholding certificate for 
the payee if the payee--
    (1) Has provided a written statement indicating that the payee is a 
non-profit organization described in Sec.  1.1471-5(e)(5)(vi) and, with 
respect to a payment of U.S. source FDAP income, has provided 
documentary evidence supporting a claim of foreign status (as described 
in paragraph (c)(5)(i) of this section); or
    (2) Is required to be reported by the withholding agent as a tax-
exempt charitable organization under the information reporting laws of 
the country in which the account is maintained or is permitted an 
exemption from withholding due to its status as a tax exempt charitable 
organization under the laws of the country in which the account is 
maintained, and the withholding agent obtains general documentary 
evidence (as described in paragraph (c)(5)(ii)(A) of this section) 
establishing that the payee was organized for charitable purposes in the 
same country in which the account is maintained by the withholding agent 
for the purposes described in Sec.  1.1471-5(e)(5)(vi) and that the 
payee has no beneficial owners (as that term is used for purposes of 
that country's AML due diligence).
    (C) Exception for preexisting offshore obligations. A withholding 
agent that makes a payment with respect to an offshore obligation that 
is also a preexisting obligation may treat the payee as a nonprofit 
organization described in Sec.  1.1471-5(e)(5)(vi) if the payee--
    (1) Provides a letter of local counsel that certifies that the payee 
qualifies as a tax-exempt entity in its local jurisdiction; or
    (2) Provides a letter issued by the tax authority of the country in 
which the payee is organized or a statement provided on the Web site of 
such tax authority indicating that the payee is a tax-exempt entity or 
charitable organization in the payee's country of organization.
    (D) Reason to know. A withholding agent will have reason to know 
that a payee is not a nonprofit organization if it has determined, 
pursuant to its AML due diligence, that the payee has beneficial owners 
(as defined for purposes of the AML due diligence).
    (vi) Identification of NFFEs that are publicly traded corporations. 
A withholding agent may treat a payee as an NFFE described in Sec.  
1.1472-1(c)(1)(i) (applying to an entity the stock of which is regularly 
traded on an established securities market) if it has a withholding 
certificate that certifies that the payee is such an entity and provides 
the name of a securities exchange upon which the payee's stock is 
regularly traded.
    (A) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat a payee 
as an NFFE described in Sec.  1.1472-1(c)(1)(i) if the withholding agent 
obtains--
    (1) A written statement that the payee is a foreign corporation that 
is not a financial institution, that its stock is regularly traded on an 
established securities market, the name of one of the exchanges upon 
which the payee's stock is traded, and, with respect to a payment of 
U.S. source FDAP income, documentary evidence supporting a claim of 
foreign status (as described in paragraph (c)(5)(i) of this section); or
    (2) Any documentation establishing that the payee is listed on a 
public securities exchange or on a stock market index and general 
documentary evidence (as described in paragraph (c)(5)(ii)(A) of this 
section) establishing that the payee is a foreign corporation other than 
a financial institution.
    (B) Exception for preexisting offshore obligations. A withholding 
agent that makes a payment with respect to an offshore obligation that 
is also a preexisting obligation may treat the payee as an entity 
described in Sec.  1.1472-1(c)(1)(i) if the withholding agent has any 
documentation confirming that the payee is listed on a public securities 
exchange or on a stock market

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index and preexisting account documentary evidence (as described in 
paragraph (c)(5)(ii)(B) of this section) establishing that the payee is 
a foreign corporation other than a financial institution.
    (vii) Identification of NFFE affiliates. A withholding agent may 
treat a payee as an NFFE described in Sec.  1.1472-1(c)(1)(ii) (applying 
to an affiliate of an entity the stock of which is regularly traded on 
an established exchange) if it has a beneficial owner withholding 
certificate that identifies the payee as a foreign corporation that is 
an affiliate of an entity, described Sec.  1.1472-1(c)(1)(i), whose 
stock is regularly traded on an established exchange and provides the 
name of the entity that is regularly traded and one of the exchanges 
upon which the entity's stock is listed.
    (A) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat a 
payment as being made to an NFFE described in Sec.  1.1472-1(c)(1)(ii) 
if the withholding agent obtains--
    (1) Documentary evidence or other information confirming that the 
payee is affiliated with an entity listed on a public securities 
exchange or on a stock market index and general documentary evidence (as 
described in paragraph (c)(5)(ii)(A) of this section) that indicates 
that the payee is a foreign corporation other than a financial 
institution; or
    (2) A written statement that the payee is a foreign corporation that 
is not a financial institution, that the payee is an affiliate of 
another nonfinancial entity whose stock is regularly traded on an 
established securities exchange, providing the name of the payee's 
affiliate and one of the exchanges upon which the affiliate's stock is 
traded and, in the case of a payment of U.S. source FDAP income, 
documentary evidence supporting the payee's claim of foreign status (as 
described in paragraph (c)(5)(i) of this section).
    (B) Exception for preexisting offshore obligations. A withholding 
agent that makes a payment with respect to an offshore obligation that 
is also a preexisting obligation may treat the payee as an NFFE 
described in Sec.  1.1472-1(c)(1)(ii) if the withholding agent has--
    (1) Documentation or other information confirming that the payee is 
affiliated with a corporation that is listed on a public securities 
exchange or on a stock market index;
    (2) Preexisting account documentary evidence (as described in 
paragraph (c)(5)(ii)(B) of this section) that unambiguously indicates 
that the payee is a corporation that is not a financial institution; and
    (3) In the case of a payment of U.S. source FDAP income, documentary 
evidence supporting the payee's claim of foreign status (as described in 
paragraph (c)(5)(i) of this section).
    (viii) Identification of excepted territory NFFEs. A withholding 
agent may treat a payee as an excepted territory NFFE described in Sec.  
1.1472-1(c)(1)(iii) if it has a withholding certificate that identifies 
the payee as an NFFE that was organized in a U.S. territory and includes 
a certification for chapter 4 purposes that all of its owners are bona 
fide residents of that U.S. territory.
    (A) Exception for payments made prior to January 1, 2017, with 
respect to preexisting obligations of $1,000,000 or less (transitional). 
A withholding agent that makes a payment prior to January 1, 2017, with 
respect to a preexisting obligation with a balance or value not 
exceeding $1,000,000 on June 30, 2014, and December 31, 2015, applying 
the aggregation principles of Sec.  1.1471-5(b)(4)(iii), may treat a 
payee as an excepted territory NFFE described in Sec.  1.1472-
1(c)(1)(iii) if the withholding agent--
    (1) Has a pre-FATCA Form W-8 identifying the payee as a foreign 
entity with a permanent residence address in a U.S. territory; and
    (2) Has general documentary evidence (as described in paragraph 
(c)(5)(ii)(A) of this section), preexisting account documentary evidence 
(as described in paragraph (c)(5)(ii)(B) of this section), or a 
prospectus establishing that the payee is an entity other than a 
depository institution, custodial institution, or specified insurance 
company; and
    (3) Is subject, with respect to such obligation, to the laws of a 
FATF-compliant jurisdiction and as part of its AML due diligence has not 
identified any owners of the payee that are not

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bona fide residents of the U.S. territory in which the payee is 
organized.
    (B) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat a 
payment as being made to an excepted territory NFFE described in Sec.  
1.1472-1(c)(1)(iii) if it has--
    (1) A written statement providing that the payee is an entity other 
than a depository institution, custodial institution, or specified 
insurance company, was organized in a U.S. territory, and is wholly 
owned by one or more bona fide residents of that U.S. territory, and, 
with respect to a payment of U.S. source FDAP income, the written 
statement must indicate that the payee is the beneficial owner of the 
income and be accompanied by documentary evidence supporting a claim of 
foreign status (as described in paragraph (c)(5)(i) of this section); or
    (2) General documentary evidence (as described in paragraph 
(c)(5)(ii)(A) of this section) or a prospectus establishing that the 
payee is an entity other than a depository institution, custodial 
institution, or specified insurance company, establishing that the payee 
was organized in a U.S. territory, and establishing that the payee is 
wholly owned by one or more bona fide residents of that U.S. territory.
    (C) Exception for preexisting offshore obligations of $1,000,000 or 
less. A withholding agent that makes a payment with respect to an 
offshore obligation that is also a preexisting obligation with a balance 
or value not exceeding $1,000,000 on June 30, 2014 (or the effective 
date of the FFI agreement for a withholding agent that is a 
participating FFI) and the last day of each subsequent calendar year 
preceding the payment, applying the aggregation principles of Sec.  
1.1471-5(b)(4)(iii), may rely upon its review conducted for AML due 
diligence purposes to determine whether the owners of the payee are bona 
fide residents of the U.S. territory in which the payee is organized, in 
lieu of obtaining a written statement or documentary evidence described 
in paragraph (d)(11)(viii)(B) of this section. The preceding sentence 
applies only if the withholding agent is subject, with respect to such 
account, to the laws of a FATF-compliant jurisdiction and has identified 
the residence of the owners. The withholding agent relying upon this 
paragraph (d)(11)(viii)(C) must still obtain a written statement, 
documentary evidence (as provided in paragraph (d)(11)(viii)(B) of this 
section), or preexisting account documentary evidence (as described in 
paragraph (c)(5)(ii)(B) of this section) establishing that the payee is 
an entity other than a depository institution, custodial institution, or 
specified insurance company organized in a U.S. territory.
    (ix) Identification of active NFFEs. A withholding agent may treat a 
payee as an active NFFE described in Sec.  1.1472-1(c)(1)(iv) if it has 
a withholding certificate identifying the payee as an active NFFE.
    (A) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat the 
payee as an active NFFE if the withholding agent has--
    (1) General documentary evidence (as described in paragraph 
(c)(5)(ii)(A) of this section) providing sufficient information to 
determine that the payee is a foreign entity engaged in an active trade 
or business other than that of a financial institution; or
    (2) A written statement stating that the payee is a foreign entity 
engaged in an active business other than that of a financial institution 
and, in the case of a payment of U.S. source FDAP income, documentary 
evidence supporting the payee's claim of foreign status (as described in 
paragraph (c)(5)(i) of this section).
    (B) Exception for preexisting offshore obligations. A withholding 
agent that makes a payment with respect to an offshore obligation that 
is also a preexisting obligation may treat the payee as an active NFFE 
if the withholding agent has preexisting account documentary evidence 
(as described in paragraph (c)(5)(ii)(B) of this section) that 
unambiguously indicates that the payee is a foreign entity engaged in a 
trade or business other than that of a financial institution and, in the 
case of a payment of U.S. source FDAP income, documentary evidence 
supporting the payee's claim of foreign

[[Page 429]]

status (as described in paragraph (c)(5)(i) of this section).
    (C) Limit on reason to know. A withholding agent relying on 
documentary evidence to determine that a payee is an active NFFE will 
not be required to determine that the payee meets the income and asset 
thresholds but rather must determine only that the payee is primarily 
engaged in a business other than that of a financial institution.
    (x) Identifying a direct reporting NFFE (other than a sponsored 
direct reporting NFFE)--(A) In general. A withholding agent may treat a 
payment as having been made to a direct reporting NFFE (other than a 
sponsored direct reporting NFFE) if it has a withholding certificate 
that identifies the payee as a direct reporting NFFE and the withholding 
certificate contains a GIIN for the payee that is verified against the 
published IRS FFI list in the manner described in paragraph (e)(3)(iii) 
of this section (indicating when a withholding agent may rely upon a 
GIIN).
    (B) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat the 
payment as made to a direct reporting NFFE if the withholding agent 
has--
    (1)(i) General documentary evidence (as described in paragraph 
(c)(5)(ii)(A) of this section) for the payee providing sufficient 
information to determine that the payee is a foreign entity that is not 
a financial institution; or
    (ii) A written statement that the payee is a foreign entity that is 
not a financial institution and, for a payment of U.S. source FDAP 
income, documentary evidence supporting the payee's claim of foreign 
status (as described in paragraph (c)(5)(i) of this section), and
    (2) Received (either orally or in writing) a GIIN from the direct 
reporting NFFE and has verified the GIIN in the manner described in 
paragraph (e)(3)(iii) of this section.
    (C) Special rule for preexisting offshore obligations. A withholding 
agent that makes a payment with respect to an offshore obligation that 
is also a preexisting obligation may treat the payee as a direct 
reporting NFFE if the withholding agent has preexisting account 
documentary evidence (as described in paragraph (c)(5)(ii)(B) of this 
section) providing sufficient information to determine that the payee is 
a foreign entity that is not a financial institution and it has received 
(either orally or in writing) a GIIN from the direct reporting NFFE and 
has verified the GIIN in the manner described in paragraph (e)(3)(iii) 
of this section.
    (xi) Identifying a sponsored direct reporting NFFE--(A) In general. 
A withholding agent may treat a payment as having been made to a 
sponsored direct reporting NFFE if it has a withholding certificate that 
identifies the payee as a sponsored direct reporting NFFE and the 
withholding certificate includes the sponsored direct reporting NFFE's 
GIIN, which the withholding agent has verified against the published IRS 
FFI list in the manner described in paragraph (e)(3)(iv) of this section 
(indicating when a withholding agent may rely upon a GIIN).
    (1) Payments made prior to January 1, 2017 (transitional). For 
payments prior to January 1, 2017, a sponsored direct reporting NFFE may 
provide the GIIN of its sponsoring entity on the withholding 
certificate, which the withholding agent must verify against the 
published IRS FFI list in the manner described in paragraph (e)(3)(iv) 
of this section.
    (2) Payments made after December 31, 2016, to payees documented 
prior to January 1, 2017. For a payment made after December 31, 2016, to 
a payee that the withholding agent has documented prior to January 1, 
2017, as a sponsored direct reporting NFFE with a valid withholding 
certificate that includes the GIIN of the sponsoring entity, the 
withholding agent must obtain and verify the GIIN of the sponsored 
direct reporting NFFE against the published IRS FFI list in the manner 
described in paragraph (e)(3)(i) of this section by March 31, 2017. A 
withholding agent required to obtain a GIIN of the sponsored direct 
reporting NFFE in the preceding sentence may obtain such GIIN by oral or 
written confirmation (including by email) rather than obtaining a new 
withholding certificate, provided that the withholding agent retains a 
record of the confirmation, which will become part of the withholding 
certificate.

[[Page 430]]

    (B) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat the 
payment as made to a sponsored direct reporting NFFE if the withholding 
agent has--
    (1) A written statement that the payee is a foreign entity that is a 
sponsored direct reporting NFFE and, for a payment of U.S. source FDAP 
income, documentary evidence supporting the payee's claim of foreign 
status (as described in paragraph (c)(5)(i) of this section), and
    (2) Received (either orally or in writing) the GIIN of the sponsored 
direct reporting NFFE and has verified the GIIN in the manner described 
in paragraph (e)(3)(iv) of this section. For payments prior to January 
1, 2017, such requirement may be fulfilled by receiving (either orally 
or in writing) the GIIN of the sponsoring entity to the extent that the 
sponsored direct reporting NFFE has not obtained a GIIN.
    (xii) Identification of excepted inter-affiliate FFI--(A) In 
general. A withholding agent may treat a payee as an excepted inter-
affiliate FFI described in Sec.  1.1471-5(e)(5)(iv) if it has obtained a 
withholding certificate identifying the payee as such an entity.
    (B) Offshore obligations. A withholding agent that makes a payment 
with respect to an offshore obligation may treat the payment as made to 
an excepted inter-affiliate FFI described in Sec.  1.1471-5(e)(5)(iv) if 
the withholding agent obtains a written statement in which the payee 
certifies that it is a foreign entity operating as an excepted inter-
affiliate FFI and that it is a member of an expanded affiliated group of 
participating FFIs or registered deemed-compliant FFIs. In the case of a 
payment of U.S. source FDAP income, the written statement must also 
indicate that the payee is the beneficial owner and must be supplemented 
with documentary evidence supporting the payee's claim of foreign status 
(as described in paragraph (c)(5)(i) of this section).
    (C) Reason to know. A withholding agent that is not a member of the 
payee's expanded affiliated group has reason to know that an entity is 
not an excepted inter-affiliate FFI if it makes any payments (other than 
a payment of bank deposit interest) to such entity.
    (12) Identification of passive NFFEs. A withholding agent may treat 
a payment as having been made to a passive NFFE if it has a withholding 
certificate that identifies the payee as a passive NFFE.
    (i) Exception for offshore obligations. A withholding agent that 
makes a payment with respect to an offshore obligation may treat the 
payment as made to a passive NFFE if the withholding agent has--
    (A) General documentary evidence (as described in paragraph 
(c)(5)(ii)(A) of this section) for the payee providing sufficient 
information to determine that the payee is a foreign entity that is not 
a financial institution; or
    (B) A written statement that the payee is a foreign entity that is 
not a financial institution and, for a payment of U.S. source FDAP 
income, documentary evidence supporting the payee's claim of foreign 
status (as described in paragraph (c)(5)(i) of this section).
    (ii) Special rule for preexisting offshore obligations. A 
withholding agent that makes a payment with respect to an offshore 
obligation that is also a preexisting obligation may treat the payee as 
a passive NFFE if the withholding agent has preexisting account 
documentary evidence (as described in paragraph (c)(5)(ii)(B) of this 
section) providing sufficient information to determine that the payee is 
a foreign entity that is not a financial institution and, with respect 
to a payment of U.S. source FDAP income, documentary evidence supporting 
the payee's claim of foreign status (as described in paragraph (c)(5)(i) 
of this section).
    (iii) Required owner certification for passive NFFEs--(A) In 
general. A passive NFFE will be required to provide to the withholding 
agent either a written certification (contained on a withholding 
certificate or in a written statement) that it does not have any 
substantial U.S. owners or the name, address, and TIN of each 
substantial U.S. owner of the NFFE, to avoid being withheld upon under 
Sec.  1.1472-1(b).
    (B) Exception for preexisting obligations of $1,000,000 or less 
(transitional). A withholding agent that makes a payment

[[Page 431]]

prior to January 1, 2017, with respect to a preexisting obligation with 
a balance or value not exceeding $1,000,000 on June 30, 2014, and 
December 31, 2015, applying the aggregation principles of Sec.  1.1471-
5(b)(4)(iii), may rely upon its review conducted for AML due diligence 
purposes to identify any substantial U.S. owners of the payee in lieu of 
obtaining the certification or information required in paragraph 
(d)(12)(iii)(A) of this section if the withholding agent is subject, 
with respect to such obligation, to the laws of a FATF-compliant 
jurisdiction and has identified the residence of any controlling persons 
(within the meaning of the withholding agent's AML due diligence rules). 
A withholding agent that makes a payment with respect to an offshore 
obligation that is also a preexisting obligation with a balance or value 
not exceeding $1,000,000 on June 30, 2014, (or the effective date of the 
FFI agreement for a withholding agent that is a participating FFI) and 
the last day of each subsequent calendar year preceding the payment, 
applying the aggregation principles of Sec.  1.1471-5(b)(4)(iii), may 
rely upon its review conducted for AML due diligence purposes to 
identify any substantial U.S. owners of the payee in lieu of obtaining 
the certification or information required in paragraph (d)(12)(iii)(A) 
of this section if the withholding agent is subject, with respect to 
such obligation, to the laws of a FATF-compliant jurisdiction and has 
identified the residence of any controlling persons (within the meaning 
of the withholding agent's AML due diligence rules).
    (e) Standards of knowledge--(1) In general. The standards of 
knowledge discussed in this section apply for purposes of determining 
the chapter 4 status of payees, beneficial owners, intermediaries, flow-
through entities, and persons that own an interest in an owner-
documented FFI. A withholding agent shall be liable for tax, interest, 
and penalties to the extent provided under section 1474 and the 
regulations under that section if it fails to withhold the correct 
amount despite knowing or having reason to know the amount required to 
be withheld. A withholding agent that cannot reliably associate the 
payment with documentation and fails to act in accordance with the 
presumption rules set forth in paragraph (f) of this section may also be 
liable for tax, interest, and penalties. See paragraph (e)(4) in this 
section for the specific standards of knowledge applicable to a person's 
specific claims of chapter 4 status.
    (2) Notification by the IRS. A withholding agent that has received 
notification by the IRS that a claim of status as a U.S. person, a 
participating FFI, a deemed-compliant FFI, or other entity entitled to a 
reduced rate of withholding under section 1471 or 1472 is incorrect 
knows that such a claim is incorrect beginning on the date that is 30 
days after the date the notice is received.
    (3) GIIN verification--(i) In general. A withholding agent that has 
received a payee's claim of status as a participating FFI or registered 
deemed-compliant FFI, and that is required under paragraph (d)(4) of 
this section to confirm that the FFI or branch thereof (including an 
entity that is disregarded as an entity separate from the FFI) claiming 
status as a participating FFI or registered deemed-compliant FFI has a 
GIIN that appears on the published IRS FFI list, has reason to know that 
such payee is not such a financial institution if the payee's name 
(including a name reasonably similar to the name the withholding agent 
has on file for the payee) and GIIN do not appear on the most recently 
published IRS FFI list within 90 days of the date that the claim is 
made. For purposes of this paragraph (e)(3)(i), the GIIN that the 
withholding agent must confirm is, with respect to a payee that is a 
participating FFI or registered deemed-compliant FFI, the GIIN assigned 
to the FFI identifying its country of residence for tax purposes (or 
place of organization if the FFI has no country of residence) or, with 
respect to a payment that is made to a branch (including a disregarded 
entity) of a participating FFI or registered deemed-compliant FFI 
located outside of the FFI's country of residence or organization, the 
GIIN of the branch (or disregarded entity) receiving the payment. The 
withholding agent will have reason to know that a withholdable payment 
is

[[Page 432]]

made to a branch (including a disregarded entity) of a participating or 
registered deemed-compliant FFI that is not itself a participating FFI 
or registered deemed-compliant FFI when the withholding agent is 
directed to make the payment to an address in a jurisdiction other than 
that of the participating FFI or registered deemed-compliant FFI (or 
branch (including a disregarded entity) of such FFI) that is identified 
as the FFI (or branch (including a disregarded entity) of such FFI) that 
is supposed to receive the payment and for which the FFI's GIIN is not 
confirmed as described in the preceding sentence. The preceding sentence 
does not apply to an FFI that is an investment entity. If an FFI (other 
than an investment entity) directs the withholding agent to make the 
payment to an account held by the FFI and maintained by another 
financial institution, the FFI must provide to the withholding agent a 
statement in writing that the FFI is not directing the payment to any 
branch of such FFI that is not a participating FFI or a registered 
deemed-compliant FFI. An FFI whose registration with the IRS as a 
participating FFI or a registered deemed-compliant FFI is in process but 
has not yet received a GIIN may provide a withholding agent with a Form 
W-8 claiming the chapter 4 status it applied for and writing ``applied 
for'' in the box for the GIIN. In such case, the withholding agent will 
have 90 days from the date it receives the Form W-8 to obtain a GIIN and 
to verify the accuracy of the GIIN against the published IRS FFI list 
before it has reason to know that the payee is not a participating FFI 
or registered deemed-compliant FFI. If an FFI is removed from the 
published IRS FFI list, the withholding agent knows that such FFI is not 
a participating FFI or registered deemed-compliant FFI on the earlier of 
the date that the withholding agent discovers that the FFI has been 
removed from the list or the date that is one year from the date the 
FFI's GIIN was actually removed from the list.
    (ii) Special rules for reporting Model 1 FFIs. Prior to January 1, 
2015, a withholding agent that receives an FFI's claim of status as a 
reporting Model 1 FFI will not be required to confirm that the FFI has a 
GIIN that appears on the published IRS FFI list. A withholding agent has 
reason to know that the FFI is not a reporting Model 1 FFI if the 
withholding agent does not have a permanent residence address for the 
FFI, or an address of the relevant branch of the FFI, located in the 
country in which the FFI claims to be a reporting Model 1 FFI, or the 
withholding agent is making a payment to a branch of the FFI at an 
address in a country that does not have in effect a Model 1 IGA.
    (iii) Special rules for direct reporting NFFEs. A withholding agent 
that has received a payee's claim of status as a direct reporting NFFE 
and that is required under paragraph (d)(11)(x) of this section to 
confirm that the entity claiming status as a direct reporting NFFE has a 
GIIN that appears on the published IRS FFI list, has reason to know that 
such payee is not such a NFFE if the payee's name (including a name 
reasonably similar to the name the withholding agent has on file for the 
payee) and GIIN do not appear on the most recently published IRS FFI 
list within 90 days of the date that the claim is made. A payee whose 
registration with the IRS as a direct reporting NFFE is in process but 
has not yet received a GIIN may provide a withholding agent with a Form 
W-8 claiming the chapter 4 status it applied for and writing ``applied 
for'' in the box for the GIIN. In such case, the withholding agent will 
have 90 days from the date it receives the Form W-8 to verify the 
accuracy of the GIIN against the published IRS FFI list before it has 
reason to know that the payee is not a direct reporting NFFE. If a 
direct reporting NFFE is removed from the published IRS FFI list, the 
withholding agent knows that such NFFE is not a direct reporting NFFE on 
the earlier of the date that the withholding agent discovers that the 
NFFE has been removed from the list or the date that is one year from 
the date the NFFE's GIIN was actually removed from the list.
    (iv) Special rules for sponsored direct reporting NFFEs and 
sponsoring entities--(A) Sponsored direct reporting NFFEs. A withholding 
agent that has received a payee's claim of status as a

[[Page 433]]

sponsored direct reporting NFFE and that is required under paragraph 
(d)(11)(xi) of this section to confirm that the entity claiming status 
as a sponsored direct reporting NFFE has a GIIN that appears on the 
published IRS FFI list, has reason to know that such payee is not such a 
NFFE if its name (including a name reasonably similar to the name the 
withholding agent has on file for the payee) and GIIN do not appear on 
the most recently published IRS FFI list within 90 days of the date that 
the claim is made. A sponsored direct reporting NFFE whose registration 
with the IRS as a sponsored direct reporting NFFE is in process but has 
not yet received a GIIN may provide a withholding agent with a Form W-8 
claiming the chapter 4 status it applied for and writing ``applied for'' 
in the box for the GIIN. In such case, the withholding agent will have 
90 days from the date it receives the Form W-8 to verify the accuracy of 
the GIIN against the published IRS FFI list before it has reason to know 
that the payee is not a sponsored direct reporting NFFE. If a sponsored 
direct reporting NFFE is removed from the published IRS FFI list, the 
withholding agent knows that such NFFE is not a sponsored direct 
reporting NFFE on the earlier of the date that the withholding agent 
discovers that the sponsored entity has been removed from the list or 
the date that is one year from the date the sponsored entity's GIIN was 
actually removed from the list.
    (B) Sponsoring entities (transitional). For payments made prior to 
January 1, 2017, a withholding agent that has received a payee's claim 
of status as a sponsored direct reporting NFFE has reason to know that 
such payee is not such a NFFE if the name of its sponsoring entity 
(including a name reasonably similar to the name the withholding agent 
has on file for the sponsoring entity) and the GIIN of its sponsoring 
entity do not appear on the most recently published IRS FFI list within 
90 days of the date that the claim is made. A sponsoring entity whose 
registration with the IRS is in process but has not yet received a GIIN 
may provide a withholding agent with a Form W-8 claiming the chapter 4 
status it applied for and writing ``applied for'' in the box for the 
GIIN. In such case, the withholding agent will have 90 days from the 
date it receives the Form W-8 to verify the accuracy of the GIIN against 
the published IRS FFI list before it has reason to know that the payee 
is not a sponsored direct reporting NFFE. If the sponsoring entity of 
the NFFE is removed from the published IRS FFI list, the withholding 
agent knows that such NFFE is not a sponsored direct reporting NFFE on 
the earlier of the date that the withholding agent discovers that the 
sponsoring entity has been removed from the list or the date that is one 
year from the date the sponsoring entity's GIIN was actually removed 
from the list.
    (4) Reason to know. A withholding agent has reason to know that a 
claim of chapter 4 status is unreliable or incorrect if its knowledge of 
relevant facts or statements contained in the withholding certificate or 
other documentation is such that a reasonably prudent person in the 
position of the withholding agent would question the claim being made. 
For an obligation other than a preexisting obligation, a withholding 
agent has reason to know that a person's claim of chapter 4 status is 
unreliable or incorrect if any information contained in its account 
opening files or other customer account files, including documentation 
collected for AML due diligence purposes, conflicts with the chapter 4 
status being claimed. A withholding agent will not, however, have reason 
to know that a person's claim of chapter 4 status is unreliable or 
incorrect based on documentation collected for AML due diligence 
purposes until the date that is 30 days after the obligation is created. 
In addition to the specific standards of knowledge set forth in this 
paragraph (e) regarding a person's claim of chapter 4 status, a 
withholding agent is also required to apply any specific standards of 
knowledge applicable to the chapter 4 status claimed as set forth in 
paragraph (d) of this section. A withholding agent that has obtained 
documentation to reliably associate a payment to a foreign person under 
paragraph (c) of this section has reason to know that the person's claim

[[Page 434]]

of foreign status is unreliable or incorrect only to the extent provided 
in this paragraph (e)(4). See also Sec.  1.1441-1(e)(4)(ii)(D) for 
requirements that apply when a change in circumstances occurs for 
purposes of chapter 3 and the related grace period allowed under Sec.  
1.1441-1(b)(3)(iv). The limits on reason to know for multiple 
obligations held by the same person set forth in Sec.  1.1441-7(b)(11) 
shall apply by substituting the term chapter 4 status for the term 
foreign status. See Sec.  1.1471-3(e)(4)(vii) for the limits on reason 
to know with respect to a preexisting obligation.
    (i) Reason to know regarding an entity's chapter 4 status. A 
withholding agent has reason to know that a withholding certificate, 
written statement, or documentary evidence provided by or on behalf of 
an entity is unreliable or incorrect if there is information on the face 
of the documentation or in the withholding agent's account files that 
conflicts with the entity's claim regarding its chapter 4 status. For 
example, a withholding agent has reason to know that an entity's claim 
that it is an excepted NFFE is unreliable or incorrect if the 
withholding agent has obtained a financial statement or credit report 
for AML purposes that indicates that the entity is engaged in business 
as a financial institution. See also paragraph (e)(4) of this section 
for the 30-day period before a withholding agent has reason to know a 
claim is unreliable or incorrect based on AML information. Further, a 
withholding agent that has classified an entity as engaged in a 
particular type of business based on its records, such as through the 
use of a standardized industry coding system, AML or other regulatory 
purpose that requires the withholding agent to periodically monitor and 
periodically update the business classification based on the withholding 
agent's records, the withholding agent has reason to know that the 
chapter 4 status claimed by the entity is unreliable or incorrect only 
if the entity's claim conflicts with the withholding agent's 
classification of the entity's business type.
    (ii) Reason to know applicable to withholding certificates--(A) In 
general. A withholding agent has reason to know that a withholding 
certificate provided by a person is unreliable or incorrect if the 
withholding certificate is incomplete with respect to any item on the 
certificate that is relevant to the claims made by the person, the 
withholding certificate contains any information that is inconsistent 
with the person's claim, the withholding agent has other account 
information that is inconsistent with the person's claim, or the 
withholding certificate lacks information necessary to establish 
entitlement to an exemption from withholding for chapter 4 purposes. 
Except as otherwise provided in this paragraph (e)(4)(ii)(A), a 
withholding agent that is a financial institution or other entity 
described in Sec.  1.1441-7(b)(3) and that has obtained a withholding 
certificate to reliably associate a payment to a foreign person under 
paragraph (c) of this section has reason to know that the person's claim 
of foreign status is unreliable or incorrect only if there are U.S. 
indicia, as described in Sec.  1.1441-7(b)(5), associated with the 
person and for which appropriate documentation sufficient to cure the 
U.S. indicia has not been obtained in accordance with Sec.  1.1441-7(b) 
within 90 days of when the U.S. indicia was first identified by the 
withholding agent. See also Sec.  1.1441-1(e)(4)(ii)(D) for requirements 
that apply when a change in circumstances occurs for purposes of chapter 
3 and the related grace period allowed under Sec.  1.1441-1(b)(3)(iv). A 
withholding agent that relies on an agent to review and maintain a 
withholding certificate is considered to know or have reason to know the 
facts within the knowledge of the agent.
    (B) Withholding certificate provided by an FFI. A withholding agent 
that obtains a withholding certificate to reliably associate a payment 
to a participating FFI, a registered deemed-compliant FFI, a sponsoring 
entity, or a sponsored FFI does not need to apply the standards of 
knowledge described in Sec.  1.1441-7(b)(5) if it has confirmed the 
FFI's GIIN on the current published IRS FFI list, in the manner 
described under paragraph (e)(3) of this section, within 90 days of 
receipt of the withholding certificate.
    (iii) Reason to know applicable to written statements. A withholding 
agent must apply the standards of knowledge

[[Page 435]]

applicable to withholding certificates, as set forth in paragraph 
(e)(4)(ii) of this section, to determine whether it has reason to know 
that a written statement is unreliable or incorrect in terms of 
establishing a person's claim of foreign status. The rules under 
paragraph (e)(4)(ii) shall be applied by substituting the term written 
statement for the term withholding certificate.
    (iv) Reason to know applicable to documentary evidence--(A) In 
general. A withholding agent may not treat documentary evidence provided 
by a person as valid if the documentary evidence does not reasonably 
establish the identity of the person presenting the documentary 
evidence. For example, documentary evidence is not valid if it is 
provided in person by an individual and the photograph or signature on 
the documentary evidence does not match the appearance or signature of 
the person presenting the document. A withholding agent may not treat 
documentary evidence as valid if the documentary evidence contains 
information that is inconsistent with the person's claim as to its 
chapter 4 status, the withholding agent has other account information 
that is inconsistent with the person's chapter 4 status, or the 
documentary evidence lacks information necessary to establish the 
person's chapter 4 status. Additionally, a withholding agent that is a 
financial institution under Sec.  1.1471-5(e), or other entity as 
described in Sec.  1.1441-7(b)(3) that has obtained documentary evidence 
to reliably associate a payment to a foreign person under paragraph (c) 
of this section has reason to know that the person's claim of foreign 
status is unreliable or incorrect only if there are U.S. indicia, as 
described in Sec.  1.1441-7(b)(8), associated with the person and 
appropriate documentation sufficient to cure the U.S. indicia has not 
been obtained in accordance with Sec.  1.1441-7(b) within 90 days of 
when the U.S. indicia was first identified by the withholding agent. See 
also Sec.  1.1441-1(e)(4)(ii)(D) for requirements when a change in 
circumstances occurs for purposes of chapter 3 and the related grace 
period allowed under Sec.  1.1441-1(b)(3)(iv).
    (B) Standards of knowledge applicable to certain types of 
documentary evidence--(1) Financial statement. A withholding agent that 
obtains a financial statement for purposes of establishing that a 
foreign payee meets a certain asset threshold has reason to know that 
the chapter 4 status claimed is unreliable or incorrect only if the 
total assets shown on the financial statement for the payee, and if 
relevant the payee's expanded affiliated group, are not within the 
permissible thresholds, or the footnotes to the financial statement 
indicate that the payee is not a foreign entity or is not a type of FFI 
eligible for the chapter 4 status claimed. A withholding agent that 
obtains a financial statement for purposes of establishing that the 
payee is an active NFFE will be required to review the balance sheet and 
income statement to determine whether the payee meets the income and 
asset thresholds set forth in Sec.  1.1472-1(c)(1)(iv) and the footnotes 
of the financial statement for an indication that the payee is not a 
foreign entity or is a financial institution. A withholding agent that 
obtains a financial statement for purposes of establishing a chapter 4 
status for a payee that does not require the payee to meet an asset or 
income threshold will be required to review only the footnotes to the 
financial statement to determine whether the financial statement 
supports the claim of chapter 4 status. A withholding agent that is not 
relying upon a financial statement to establish the chapter 4 status of 
the payee (for example because it has other documentation that 
establishes the payee's chapter 4 status) is not required to 
independently evaluate the financial statement solely because the 
withholding agent also has collected the financial statement in the 
course of its account opening or other procedures.
    (2) Organizational documents. A withholding agent that obtains 
organizational documents for a payee solely for the purpose of 
supporting the chapter 4 status claimed by the entity will only be 
required to review the document sufficiently to establish that the 
entity is a foreign person and that the purposes for which the entity 
was formed and its basic activities appear to be of a type consistent 
with the chapter 4

[[Page 436]]

status claimed, unless otherwise specified in paragraph (d) of this 
section. A withholding agent that obtains organizational documents for 
the purpose of establishing that an entity has a particular chapter 4 
status will only be required to review the document to the extent needed 
to establish that the entity is a foreign person, that the requirements 
applicable to the particular chapter 4 status are met, and that the 
document was executed, but will not be required to review the remainder 
of the document.
    (v) Specific standards of knowledge applicable when only documentary 
evidence is a code or classification described in paragraph 
(c)(5)(ii)(B) of this section. A withholding agent may not rely upon a 
classification described in paragraph (c)(5)(ii)(B) of this section or a 
standardized industry coding system to treat an entity as having a 
foreign status if there are U.S. indicia described in paragraph 
(e)(4)(v)(A) of this section associated with the entity, unless such 
U.S. indicia are cured in the manner set forth in paragraph (e)(4)(v)(B) 
of this section.
    (A) U.S. indicia for entities. The term U.S. indicia when used with 
respect to an entity includes, for purposes of this paragraph (e)(4)(v) 
any of the following--
    (1) Classification of an account holder as a U.S. resident in the 
withholding agent's customer files;
    (2) A current U.S. residence address or U.S. mailing address;
    (3) With respect to an offshore obligation, standing instructions to 
pay amounts to a U.S. address or an account maintained in the United 
States;
    (4) A current telephone number for the entity in the United States 
but no telephone number for the entity outside of the United States;
    (5) A current telephone number for the entity in the United States 
in addition to a telephone number for the entity outside of the United 
States;
    (6) A power of attorney or signatory authority granted to a person 
with a U.S. address; and
    (7) An ``in-care-of'' address or ``hold mail'' address that is the 
sole address provided for the entity.
    (B) Documentation required to cure U.S. indicia. A withholding agent 
may rely upon a code or classification described in paragraph 
(c)(5)(ii)(B) of this section to treat an entity as having a foreign 
chapter 4 status if there are U.S. indicia associated with the entity 
and the withholding agent obtains the relevant documentation described 
in this paragraph (e)(4)(v)(B).
    (1) If there are U.S. indicia described in paragraphs 
(e)(4)(v)(A)(1) through (4) of this section associated with the entity, 
the withholding agent may treat the entity as a foreign person only if 
the withholding agent obtains a withholding certificate for the entity 
and one form of documentary evidence, described in paragraph (c)(5) of 
this section, that establishes the entity's status as a foreign person 
(such as a certificate of incorporation).
    (2) If there are U.S. indicia described in paragraphs 
(e)(4)(v)(A)(1) through (4) of this section associated with the entity 
and the withholding agent is making a payment with respect to an 
offshore obligation, the withholding agent may also treat the entity as 
a foreign person if the withholding agent obtains a withholding 
certificate for the entity and the withholding agent treats the entity 
as foreign for purposes of foreign tax reporting. A withholding agent 
will treat an entity as foreign for purposes of foreign tax reporting 
only if the withholding agent classifies the entity as a resident of the 
country in which the obligation is maintained, the withholding agent is 
required to report a payment made to the entity annually on a tax 
information statement that is filed with the tax authority of the 
country in which the account is maintained as part of that country's 
resident reporting requirements, and that country has a tax information 
exchange agreement or income tax treaty in effect with the United 
States.
    (3) If there are indicia described in paragraphs (e)(4)(v)(A)(5) 
through (7) of this section associated with the entity, the withholding 
agent may treat the entity as a foreign person if the withholding agent 
obtains a withholding certificate or one form of documentary evidence, 
described in paragraph (c)(5) of this section, that establishes the 
entity's status as a foreign person (such as a certificate of 
incorporation).

[[Page 437]]

    (vi) Specific standards of knowledge applicable to documentation 
received from intermediaries and flow-through entities--(A) In general. 
A withholding agent that receives documentation from a payee through an 
intermediary or flow-through entity is required to review all 
documentation obtained with respect to the payee and all intermediaries 
and/or flow-through entities in the chain of payment, applying the 
standards of knowledge set forth in paragraph (e) of this section. This 
standard requires, but is not limited to, a withholding agent's 
compliance with the rules of paragraphs (e)(4)(vi)(A)(1) and (2) of this 
section.
    (1) The withholding agent is required to review the withholding 
statement or owner reporting statement provided and may not rely on 
information in the statement to the extent the information does not 
support the claims made regarding the chapter 4 status of the person. 
For this purpose, a withholding agent may not treat a person as a 
foreign person if an address in the United States is provided for such 
person unless the withholding statement is accompanied by a valid 
withholding certificate and documentary evidence establishing foreign 
status (as described in paragraph (c)(5)(i) of this section).
    (2) The withholding agent must review each withholding certificate 
and written statement in accordance with paragraph (e)(4)(i) through 
(iii) of this section and all documentary evidence in accordance with 
paragraph (e)(4)(i) and (iv) of this section, and must verify that the 
information contained on the withholding certificate, written statement, 
and documentary evidence is consistent with the information on the 
withholding statement or owner reporting statement. If there is a 
discrepancy between the withholding certificate, written statement, or 
documentary evidence and the withholding statement or owner reporting 
statement, the withholding agent may choose to rely on the withholding 
certificate, written statement, or documentary evidence provided such 
documentation is valid and the intermediary or flow-through entity does 
not indicate that the documentation is unreliable or inaccurate, or may 
apply the presumption rules set forth in paragraph (f) of this section. 
If the withholding agent chooses to rely upon the withholding 
certificate, written statement, or documentary evidence, the withholding 
agent is required to instruct the intermediary or flow-through entity to 
correct the withholding statement and confirm that the intermediary or 
flow-through entity does not know or have reason to know that the 
documentation is unreliable or inaccurate.
    (B) Limits on reason to know with respect to documentation received 
from participating FFIs and registered deemed-compliant FFIs that are 
intermediaries or flow-through entities. A withholding agent that 
receives documentation from a participating FFI or registered deemed-
compliant FFI that is not the payee must apply the requirements of 
paragraph (e)(4)(vi)(A) of this section, except that the withholding 
agent may rely upon the chapter 4 status provided by the participating 
FFI or registered deemed-compliant FFI in the withholding statement, 
including a chapter 4 status determined under the requirements of (and 
documentation or information that is publicly available that determines 
the chapter 4 status of the payee permitted under) an applicable IGA for 
an account holder, provided that the withholding agent has the 
information necessary to report on Form 1042-S, unless the withholding 
agent has information that conflicts with the chapter 4 status provided. 
See Sec.  1.1441-1(e)(3)(iv)(C)(2)(iv) (requiring that a nonqualified 
intermediary withholding statement for a reportable amount that is a 
withholdable payment include the recipient code for chapter 4 purposes 
used for filing Form 1042-S for an entity payee). If underlying 
documentation is provided for the payee and information in the 
documentation or in the withholding agent's records conflicts with the 
chapter 4 status claimed by the payee, the withholding agent has reason 
to know that the chapter 4 status claimed is unreliable or incorrect. A 
withholding agent is not, however, required to verify information 
contained in documentation provided by an intermediary or flow-through 
entity that is a participating FFI or registered deemed-compliant FFI 
that is not facially incorrect and is

[[Page 438]]

not required to obtain supporting documentation for the payee in 
addition to a withholding certificate unless the withholding agent 
obtains such documentation for purposes of chapter 3 or 61 or unless the 
withholding agent knows that the review conducted by the participating 
FFI or registered deemed-compliant FFI for purposes of chapter 4 was not 
adequate. For example, a withholding agent that receives a withholding 
statement from a participating FFI that is an intermediary stating that 
the payee is a registered deemed-compliant FFI is only required to 
determine that any withholding certificate provided for the payee 
contains a GIIN and that the GIIN does not appear to be facially invalid 
(for example, because it does not contain the correct amount of digits), 
but is not subject to the requirements set forth in paragraph (e)(3) of 
this section. Similarly, a withholding agent that receives from a 
participating FFI that is a partnership a withholding statement claiming 
that the payee is an active NFFE has reason to know that the claim is 
unreliable or incorrect if it receives a withholding statement that 
contains a U.S. address for the payee unless the partnership also 
provides a copy of documentation sufficient to cure the U.S. indicia in 
the manner set forth in this paragraph (e) or the withholding statement 
indicates that appropriate documentation sufficient to cure the U.S. 
indicia in the manner set forth in this paragraph (e) has been obtained 
and provides details of such documentation, such as the type of 
documentation and an identification number of the person contained in 
the document.
    (vii) Limits on reason to know--(A) Scope of review for preexisting 
obligations of entities. For purposes of determining whether a 
withholding agent that makes a payment with respect to a preexisting 
obligation to an entity has reason to know that the chapter 4 status 
applied to the entity is unreliable or incorrect, the withholding agent 
is only required to review information contradicting the chapter 4 
status claimed if such information is contained in the current customer 
master file, the most recent withholding certificate, written statement, 
and documentary evidence for the person, the most recent account opening 
contract, the most recent documentation obtained by the withholding 
agent for purposes of AML due diligence or for other regulatory 
purposes, any power of attorney or signature authority forms currently 
in effect, and any standing instructions to pay amounts that is 
currently in effect.
    (B) Reason to know there are U.S. indicia associated with 
preexisting obligations. With respect to a preexisting obligation, a 
withholding agent may apply the limits on reason to know described in 
Sec.  1.1441-7(b)(3)(ii) for a person that the withholding agent has 
previously documented for purposes of chapter 3 or 61. A withholding 
agent that applies the limits on reason to know described in Sec.  
1.1441-7(b)(3)(ii) must, however, review for U.S. indicia any additional 
documentation upon which the withholding agent is relying to determine 
the chapter 4 status of the person, if any.
    (C) Reason to know there are U.S. indicia associated with 
preexisting offshore obligations. For payments made outside of the 
United States with respect to an offshore obligation that is also a 
preexisting obligation and with respect to a withholding agent that had 
not already documented the payee for purposes of chapter 3 or 61, the 
withholding agent, in lieu of searching the account files addressed in 
paragraph (e)(4)(vii)(A) of this section to determine whether there are 
U.S. indicia associated with the payee (or other person who receives the 
payment), may instead rely upon a search of its electronically 
searchable information associated with such person. A withholding agent 
that relies upon an electronic search pursuant to this paragraph 
(e)(4)(vii)(C) must also review for U.S. indicia any documentation upon 
which the withholding agent relies to determine the chapter 4 status of 
the person and any documentation that the withholding agent had been 
relying upon to determine the residency or citizenship of the person.
    (D) Limits on reason to know for multiple obligations belonging to a 
single person. A withholding agent that maintains multiple obligations 
for a single person will have reason to know that a chapter 4 status 
assigned to the person

[[Page 439]]

is inaccurate based on information contained in the customer files for 
another obligation held by the person only to the extent that--
    (1) The withholding agent's computerized systems link the 
obligations by reference to a data element such as client number, EIN, 
or foreign tax identifying number and consolidates the customer 
information and payment information for the obligations; or
    (2) The withholding agent has treated the obligations as 
consolidated obligations for purposes of sharing documentation pursuant 
to paragraph (c)(8) of this section or for purposes of treating one or 
more accounts as preexisting obligations.
    (viii) Reasonable explanation supporting claim of foreign status. A 
reasonable explanation supporting a claim of foreign status for an 
individual has the meaning described in Sec.  1.1441-7(b)(12).
    (5) Conduit financing arrangements. The rules set forth in Sec.  
1.1441-7(f), regarding a withholding agent's liability for failing to 
withhold in the case in which the financing arrangement is a conduit 
financing arrangement, apply for purposes determining a withholding 
agent's liability for any withholding required under chapter 4.
    (6) Additional guidance. The IRS may prescribe other circumstances 
for which a withholding certificate or documentary evidence to establish 
a payee's chapter 4 status is unreliable or incorrect in addition to the 
circumstances described in this paragraph (e).
    (f) Presumptions regarding chapter 4 status of the person receiving 
the payment in the absence of documentation--(1) In general. A 
withholding agent that cannot, prior to the payment, reliably associate 
(within the meaning of paragraph (c) of this section) the payment with 
valid documentation may rely on the presumptions of this paragraph (f) 
to determine the status of the payee (or other person receiving the 
payment) as a U.S. or foreign person and such person's other relevant 
characteristics (for example, as a nonparticipating FFI). Paragraph 
(f)(2) of this section provides the presumption rules with respect to 
classification as an individual or entity. Paragraph (f)(3) of this 
section provides the presumption rules to determine a payee's U.S. or 
foreign status. Paragraph (f)(4) of this section provides the 
presumption rules with respect to an entity's chapter 4 status. 
Paragraph (f)(5) of this section provides the presumption rules with 
respect to an intermediary or flow-through entity. Paragraph (f)(6) of 
this section provides the presumption rules with respect to effectively 
connected income paid to a U.S. branch of a payee. Paragraph (f)(7) of 
this section provides the presumption rules that apply to a payment made 
to joint payees. Paragraph (f)(8) of this section provides rules for how 
a payee may rebut the presumptions described in this paragraph (f). 
Paragraph (f)(9) of this section provides the consequences to a 
withholding agent that fails to withhold in accordance with the 
presumptions set forth in this paragraph (f) or that has actual 
knowledge or reason to know facts that are contrary to the presumptions 
set forth in this paragraph (f).
    (2) Presumptions of classification as an individual or entity and 
entity as the beneficial owner. A withholding agent that cannot reliably 
associate a payment with a valid withholding certificate, or that has 
received valid documentary evidence (as described in paragraph (c)(5) of 
this section), but cannot determine a payee's status as an individual or 
an entity from the documentary evidence, must apply the presumption 
rules of Sec.  1.1441-1(b)(3)(ii) to determine the payee's 
classification as an individual, trust, partnership, corporation, 
intermediary, or flow-through entity. Additionally, a withholding agent 
that receives valid documentary evidence with respect to an entity must 
apply the rules under Sec.  1.1441-1(b)(3)(ii) to determine when it may 
treat such entity as a beneficial owner.
    (3) Presumptions of U.S. or foreign status. If a withholding agent 
cannot reliably associate a payment with a valid withholding certificate 
or valid documentary evidence from which it is possible to determine the 
payee's U.S. or foreign status, it must apply the presumption rules of 
Sec.  1.1441-1(b)(3)(iii) to determine the U.S. or foreign status of the 
payee (substituting the term withholdable payment for the term payment). 
In the case of a payment that a

[[Page 440]]

withholding agent can reliably associate with valid documentation that 
indicates the payment is made to a U.S. person but does not indicate 
whether the person is a specified U.S. person, the payment will be 
presumed made to a specified U.S. person unless the withholding agent 
can apply the presumption rules of Sec.  1.6049-4(c)(1)(ii)(B), (C), 
(D), (E), (I), (J), (K), (L), or (N), to presume that the person is 
other than a specified U.S. person, or the person's name reasonably 
indicates that the person is a bank (for example because it contains the 
word Bank or a foreign equivalent).
    (4) Presumption of chapter 4 status for a foreign entity. If a 
withholding agent cannot reliably associate a valid withholding 
certificate or valid documentary evidence sufficient to determine the 
chapter 4 status of the entity receiving payment under paragraph (d) of 
this section (for example, as a participating FFI, nonparticipating FFI, 
or NFFE), it must presume that the entity is a nonparticipating FFI.
    (5) Presumption of chapter 4 status of payee with respect to a 
payment to an intermediary or flow-through entity. If a withholding 
agent makes a payment to a foreign flow-through entity or intermediary, 
including a payment that it is required to treat as made to such an 
entity under paragraphs (f)(2) and (3) of this section, and cannot 
reliably associate such payment with valid documentation under paragraph 
(c) of this section, the withholding agent must presume that the payment 
is made to a nonparticipating FFI.
    (6) Presumption of effectively connected income for payments to 
certain U.S. branches. A withholding agent that makes a payment to a 
U.S. branch described in this paragraph (f)(6) may presume, in the 
absence of documentation indicating otherwise, that the U.S. branch is 
the payee of a payment that is effectively connected with the conduct of 
a trade or business in the United States if the withholding agent has 
obtained an EIN from the U.S. branch (either orally or in writing). A 
U.S. branch is described in this paragraph (f)(6) if it is a U.S. branch 
of a foreign bank subject to regulatory supervision by the Federal 
Reserve Board or a U.S. branch of a foreign insurance company required 
to file an annual statement on a form approved by the National 
Association of Insurance Commissioners with the Insurance Department of 
a State, a Territory, or the District of Columbia. A payment is treated 
as made to a U.S. branch of a foreign bank or foreign insurance company 
if the payment is credited to an account maintained in the United States 
in the name of a U.S. branch of the foreign person, or the payment is 
made to an address in the United States where the U.S. branch is located 
and the name of the U.S. branch appears on documents (in written or 
electronic form) associated with the payment (for example, the check 
mailed or letter addressed to the branch).
    (7) Joint payees--(i) In general. If a withholding agent makes a 
payment to joint payees and cannot reliably associate the payment with 
valid documentation from each payee but all of the joint payees appear 
to be individuals, then the payment is presumed made to an unidentified 
U.S. person. If any joint payee does not appear, by its name and other 
information contained in the account file, to be an individual, then the 
entire payment will be treated as made to a nonparticipating FFI. 
However, if one of the joint payees provides a Form W-9 in accordance 
with the procedures described in Sec. Sec.  31.3406(d)-1 through 
31.3406(d)-5 of this chapter, the payment shall be treated as made to 
that payee.
    (ii) Exception for offshore obligations. If a withholding agent 
makes a payment outside the United States with respect to an offshore 
obligation held by joint payees and cannot reliably associate a payment 
with valid documentation from each payee but all of the joint payees 
appear to be individuals, then the payment is presumed made to an 
unknown foreign individual if the payment with respect to the offshore 
obligation is made outside the United States (as described in Sec.  
1.6049-5(e)).
    (8) Rebuttal of presumptions. A payee may rebut the presumptions 
described in paragraphs (f)(2) through (7) of this section by providing 
reliable documentation to the withholding agent or, if applicable, to 
the IRS.

[[Page 441]]

    (9) Effect of reliance on presumptions and of actual knowledge or 
reason to know otherwise--(i) In general. Except as otherwise provided 
in this paragraph (f)(9), a withholding agent that withholds on a 
payment under section 1471 or 1472 in accordance with the presumptions 
set forth in this paragraph (f) shall not be liable for withholding 
under this section even if it is later established that the payee has a 
chapter 4 status other than the status presumed. A withholding agent 
that fails to report and withhold in accordance with the presumptions 
described in paragraphs (f)(2) through (7) of this section with respect 
to a payment that it cannot reliably associate with valid documentation 
shall be liable for tax, interest, and penalties. See Sec.  1.1474-1(a) 
for the extent of a withholding agent's liability for failing to 
withhold in accordance with the presumptions described in this paragraph 
(f).
    (ii) Actual knowledge or reason to know that amount of withholding 
is greater than is required under the presumptions or that reporting of 
the payment is required. Notwithstanding the provisions of paragraph 
(f)(9)(i) of this section, a withholding agent that knows or has reason 
to know that the status or characteristics of the person are other than 
what is presumed under this paragraph (f) may not rely on the 
presumptions described in this paragraph (f) to the extent that, if it 
determined the status of the person based on such knowledge or reason to 
know, it would be required to withhold (under this section or another 
withholding provision of the Code) an amount greater than would be the 
case if it relied on the presumptions described in this paragraph (f). 
In such a case, the withholding agent must rely on its knowledge or 
reason to know rather than on the presumptions set forth in this 
paragraph (f). Failure to do so shall result in liability for tax, 
interest, and penalties to the extent described in Sec.  1.1474-1(a).
    (g) Effective/applicability date. This section applies on January 6, 
2017. However, taxpayers may apply these provisions as of January 28, 
2013. A taxpayer may apply paragraph (c)(6)(iv) of this section to all 
of its open tax years. (For the rules that apply beginning on January 
28, 2013, and before January 6, 2017, see this section as in effect and 
contained in 26 CFR part 1 revised April 1, 2016.)

[T.D. 9610, 78 FR 5916, Jan. 28, 2013; 78 FR 55204, Sept. 10, 2013, as 
amended by T.D. 9657, 79 FR 12830, Mar. 6, 2014; T.D. 9809, 82 FR 2152, 
Jan. 6, 2017; 82 FR 29729, June 30, 2017; T.D. 9890, 85 FR 204, Jan. 2, 
2020]



Sec.  1.1471-4  FFI agreement.

    (a) In general. An FFI agreement will be in effect in accordance 
with section 1471(b) if an FFI registers with the IRS pursuant to 
procedures prescribed by the IRS and agrees to comply with the terms of 
an FFI agreement. The FFI agreement will incorporate the requirements 
set forth in this section, any modifications set forth in an applicable 
Model 2 IGA, and any provisions applicable to a reporting Model 1 FFI.
    (1) Withholding. A participating FFI is required to deduct and 
withhold tax with respect to payments made to recalcitrant account 
holders and nonparticipating FFIs to the extent required under paragraph 
(b) of this section. A participating FFI that is prohibited by foreign 
law from withholding as required under paragraph (b) of this section 
with respect to an account must close such account within a reasonable 
period of time or must otherwise block or transfer such account as 
described in paragraph (i) of this section.
    (2) Identification and documentation of account holders. A 
participating FFI is required to obtain such information regarding each 
holder of each account maintained by the participating FFI to determine 
whether each account is a U.S. account or an account held by a 
recalcitrant account holder or nonparticipating FFI in accordance with 
the due diligence procedures for identifying and documenting account 
holders described in paragraph (c) of this section.
    (3) Reporting. A participating FFI is required to report the 
information described in paragraph (d) of this section annually with 
respect to U.S. accounts under section 1471(c) and accounts held by 
recalcitrant account holders. A participating FFI must also comply with 
the filing requirements described in Sec.  1.1474-1(c) and (d) to report 
payments that are chapter 4 reportable amounts

[[Page 442]]

paid to recalcitrant account holders and nonparticipating FFIs 
(including the transitional reporting of foreign reportable amounts paid 
to nonparticipating FFIs for calendar years 2015 and 2016 described in 
Sec.  1.1471-4(d)(2)(ii)(F)). A participating FFI that is unable to 
obtain a waiver, if required by foreign law, to report an account as 
required under paragraph (d) of this section must close or transfer such 
account within a reasonable period of time as described in paragraph (i) 
of this section.
    (4) Expanded affiliated group. Except as otherwise provided in Model 
1 IGA or Model 2 IGA, in order for any FFI that is a member of an 
expanded affiliated group to be a participating FFI, each FFI that is a 
member of the expanded affiliated group must be a participating FFI, 
deemed-compliant FFI, or exempt beneficial owner as described in 
paragraph (e) of this section. For a limited period described in 
paragraph (e)(2) or (3) of this section, however, a branch of an FFI or 
an FFI that is a member of an expanded affiliated group and is unable 
under foreign law to satisfy the requirements of this section may 
instead obtain status as a limited branch of a participating FFI or 
limited FFI if the branch or FFI meets the requirements set forth in 
paragraph (e)(2) or (3) of this section (as applicable).
    (5) Verification. A participating FFI is required to adopt a 
compliance program as described in paragraph (f) of this section under 
the authority of the responsible officer, who will be required to 
certify periodically to the IRS on behalf of the FFI regarding the 
participating FFI's compliance with the requirements of the FFI 
agreement. If the IRS identifies concerns about the participating FFI's 
compliance, the IRS may request additional information to verify 
compliance with the requirements of the FFI agreement as described in 
paragraph (f)(4) of this section.
    (6) Event of default. A participating FFI is required to cure an 
event of default with respect to the FFI agreement as defined in 
paragraph (g) of this section. Upon the occurrence of an event of 
default, the IRS will deliver to a participating FFI a notice of default 
and will allow the FFI an opportunity to cure the event of default as 
described in paragraph (g) of this section.
    (7) Refunds. A participating FFI may file a collective refund on 
behalf of certain account holders and payees for amounts withheld by the 
participating FFI or its withholding agent under chapter 4 in excess of 
the account holder or payee's U.S. tax liability to the extent permitted 
in paragraph (h) of this section. A participating FFI may also make an 
adjustment for overwithholding using either the reimbursement procedure 
described in Sec.  1.1474-2(a)(3) or the set-off procedure described in 
Sec.  1.1474-2(a)(4).
    (b) Withholding requirements--(1) In general. Except as otherwise 
provided in a Model 2 IGA, a participating FFI is required to deduct and 
withhold a tax equal to 30 percent of any withholdable payment made by 
such participating FFI to an account held by a recalcitrant account 
holder or to a nonparticipating FFI after June 30, 2014, to the extent 
required under paragraph (b)(3) of this section. See paragraph (b)(2) of 
this section for rules for a participating FFI to identify the payee of 
a payment in order to determine whether withholding is required under 
this paragraph (b). See paragraph (b)(4) of this section for the extent 
of a participating FFI's requirement to deduct and withhold tax on a 
foreign passthru payment made by such participating FFI to an account 
held by a recalcitrant account holder or to a nonparticipating FFI. See 
paragraph (b)(5) of this section for the rules for withholding on 
payments to limited branches and limited FFIs. See paragraph (b)(6) for 
the special allowance to set aside in escrow amounts withheld with 
respect to dormant accounts. See paragraph (b)(7) of this section for 
the withholding requirements of certain U.S. branches of FFIs. See Sec.  
1.1471-2 for the exceptions to and special rules for withholding and the 
exclusion from the definitions of the terms withholdable payment and 
foreign passthru payment that applies to any payment made under a 
grandfathered obligation or the gross proceeds from the disposition of 
such an obligation. See Sec.  1.1474-1(d)(4)(iii) for the requirement of 
participating FFIs to report payments

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that are chapter 4 reportable amounts. See Sec.  1.1474-6 for the 
coordination of withholding on payments under this paragraph (b) with 
the other withholding provisions under the Code.
    (2) Withholding determination. Except as otherwise provided under 
Sec.  1.1471-2 and, with respect to certain preexisting accounts, under 
paragraph (c) of this section, a participating FFI is required to 
determine whether withholding applies at the time a payment is made by 
reliably associating the payment with valid documentation described in 
paragraph (c) of this section for the payee of the payment. For a 
payment made to an account, if the account is held by one or more 
individuals, the payee is each individual account holder. For a payment 
made to an account held by an entity, except as otherwise provided in 
Sec.  1.1471-3(a)(3), the payee is the account holder. If the 
participating FFI makes a withholdable payment to a payee that is an 
entity and the payment is made with respect to an obligation that is not 
an account, except as otherwise provided in Sec.  1.1471-3(a)(3), the 
payee is the person to whom the payment is made. See Sec.  1.1473-1(a) 
to determine when a payment is made in the case of a withholdable 
payment. If a participating FFI cannot reliably associate a payment (or 
any portion of a payment) with valid documentation, the rules described 
in paragraph (c) of this section shall apply to determine the chapter 4 
status of the account holder (and payee if other than the account 
holder). Notwithstanding the foregoing, a participating FFI may 
establish after the date of payment that withholding was not required to 
the extent permitted under Sec.  1.1471-3(c)(7) or may apply the 
procedures provided in Sec.  1.1474-2 when overwithholding occurs.
    (3) Satisfaction of withholding requirements--(i) In general. A 
participating FFI that complies with the withholding obligations of this 
paragraph (b) with respect to accounts held by recalcitrant account 
holders and payees that are nonparticipating FFIs shall be deemed to 
satisfy its withholding obligations under sections 1471(a) and 1472 with 
respect to such account holders and payees.
    (ii) Withholding not required. A participating FFI that is an NQI, 
NWP, NWT, or that is a QI that elects under section 1471(b)(3) not to 
assume withholding responsibility for a payment and that provides its 
withholding agent with the information necessary to allocate all or a 
portion of the payment to each payee as part of a withholding 
certificate described in Sec.  1.1471-3(c)(3)(iii) will generally not be 
required to withhold under paragraph (b)(1) of this section. See Sec.  
1.1471-2(a)(2)(ii), however, for the circumstances under which a 
participating FFI that is an NQI, NWP, or NWT has a residual withholding 
responsibility. See also Sec.  1.1471-3(c)(9)(iii)(B) for the 
circumstances under which a participating FFI that is a broker has a 
residual withholding responsibility as an intermediary of the payment 
and may also be liable for any underwithholding that occurs. See 
Sec. Sec.  1.1471-2(a) and 1.1472-1(a)(2)(i) and the QI, WP, or WT 
agreement for the withholding requirements of a participating FFI that 
is a QI, WP, or WT for purposes of chapter 4.
    (iii) Election to withhold under section 3406. A participating FFI 
may elect to satisfy its withholding obligation under paragraph (b)(1) 
of this section with respect to recalcitrant account holders that are 
also U.S. non-exempt recipients subject to backup withholding under 
section 3406 receiving withholdable payments, to the extent that the 
payments also constitute reportable payments, by applying withholding 
under section 3406 at the backup withholding rate to such withholdable 
payments. A participating FFI may make the election described in this 
paragraph only if it complies with the information reporting rules under 
chapter 61 with respect to payments to which backup withholding applies. 
Nothing in this paragraph relieves a participating FFI of its 
requirement to backup withhold under section 3406 with respect to 
reportable payments that are not also withholdable payments. See Sec.  
1.1474-6(f) for the general rule that satisfying withholding 
requirements under chapter 4 will satisfy backup withholding 
requirements under section 3406 for a payment that is both a 
withholdable payment and a reportable payment.

[[Page 444]]

    (4) Foreign passthru payments. A participating FFI is not required 
to deduct and withhold tax on a foreign passthru payment made by such 
participating FFI to an account held by a recalcitrant account holder or 
to a nonparticipating FFI before the later of January 1, 2019, or the 
date of publication in the Federal Register of final regulations 
defining the term foreign passthru payment.
    (5) Withholding on limited FFIs and limited branches--(i) Limited 
FFIs. A participating FFI is required to withhold on a withholdable 
payment made to a limited FFI identifying itself as a nonparticipating 
FFI. A participating FFI that is a member of an expanded affiliated 
group that includes one or more limited FFIs will also be required to 
treat any such limited FFI as a nonparticipating FFI with respect to 
withholdable payments made to such limited FFI. A participating FFI will 
be considered to have made a withholdable payment to a limited FFI if 
such participating FFI receives a withholdable payment with respect to a 
security or instrument held on behalf of a limited FFI (or an account 
maintained by the limited FFI). A participating FFI will also be 
considered to have made a withholdable payment to a limited FFI when the 
limited FFI receives a payment with respect to a transaction between the 
limited FFI and such participating FFI that is in the same expanded 
affiliated group and such transaction hedges or otherwise provides total 
return exposure to another transaction between such participating FFI 
and a third party that gives rise to a withholdable payment.
    (ii) Limited branches. A participating FFI is required to withhold 
on a withholdable payment made to a limited branch identifying itself as 
a nonparticipating FFI. A branch of the participating FFI other than the 
limited branch is also required to withhold on a withholdable payment 
when it receives the payment on behalf of a limited branch of the 
participating FFI. A branch of the participating FFI other than a 
limited branch will be considered to have received a withholdable 
payment on behalf of a limited branch when such other branch receives a 
withholdable payment with respect to a security or instrument it holds 
on behalf of a limited branch (or an account maintained by the limited 
branch). A branch of a participating FFI other than a limited branch 
will be considered to hold a security or instrument on behalf of a 
limited branch when it executes a transaction with a limited branch that 
hedges or otherwise provides total return exposure to another 
transaction between such other branch and a third party that gives rise 
to a withholdable payment.
    (6) Special rule for dormant accounts. A participating FFI that 
makes a withholdable payment not otherwise subject to withholding under 
chapter 3 or backup withholding under section 3406 to a recalcitrant 
account holder of a dormant account that it maintains must withhold on 
the account for purposes of chapter 4. However, the participating FFI 
may, in lieu of depositing the tax withheld, set aside the amount 
withheld in escrow until the date that the account ceases to be a 
dormant account. In such case, the tax withheld becomes due 90 days 
following the date that the account ceases to be a dormant account if 
the account holder does not provide the documentation required under 
paragraph (c) of this section or becomes refundable to the account 
holder if the account holder provides the documentation required under 
paragraph (c) of this section establishing that withholding does not 
apply. A participating FFI that maintains a dormant account of a 
recalcitrant account holder and that elects to escrow withheld tax 
pursuant to this paragraph (b)(6) may not delegate the responsibility to 
escrow withheld tax to the withholding agent from which it is receiving 
payment. Once a dormant account escheats irrevocably to a foreign 
government under the relevant laws in the jurisdiction in which the 
participating FFI (or branch thereof) operates, the participating FFI is 
no longer required to deposit with the IRS the amount held in escrow 
with respect to the account. See paragraph (d)(6)(ii) of this section 
for the definition of dormant account.
    (7) Withholding requirements for U.S. branches of FFIs treated as 
U.S. persons. A U.S. branch of an FFI treated as a U.S. person must 
satisfy its backup

[[Page 445]]

withholding obligations under section 3406(a) with respect to accounts 
held at the U.S. branch by account holders that are payees treated as 
other than exempt recipients under chapter 61. See Sec. Sec.  1.1441-
1(b)(2)(iv)(C), 1.1471-2(a), and 1.1472-1(a) for additional withholding 
obligations for a U.S. branch of an FFI treated as a U.S. person. See 
paragraph (d)(2)(iii)(B) of this section for the reporting requirements 
applicable to U.S. branches of FFIs that are treated as U.S. persons.
    (c) Due diligence for the identification and documentation of 
account holders and payees--(1) Scope of paragraph. Except to the extent 
that a participating FFI relies on the due diligence procedures set 
forth in an applicable Model 2 IGA, a participating FFI must follow this 
paragraph (c) to identify and document the chapter 4 status of each 
holder of an account maintained by the participating FFI to determine if 
the account is a U.S. account, non-U.S. account, or an account held by a 
recalcitrant account holder or nonparticipating FFI. Paragraph (c)(2) of 
this section provides the general rules for identification and 
documentation of account holders and payees, and paragraph (c)(2)(v) 
provides documentation requirements for certain U.S. branches of FFIs. 
Paragraph (c)(3) of this section provides the rules for documenting 
entity accounts and payees. Paragraph (c)(4) of this section provides 
the general rules for documenting individual accounts other than 
preexisting accounts. Paragraph (c)(5) of this section provides the 
identification and documentation procedure for preexisting individual 
accounts. Paragraph (c)(6) of this section provides examples 
illustrating the application of the documentation exceptions for entity 
accounts and individual accounts. Paragraph (c)(7) of this section 
outlines the certification requirement relating to the due diligence 
procedures of this paragraph (c) with respect to preexisting accounts 
within the specified periods of time.
    (2) General rules for the identification and documentation of 
account holders and payees--(i) Overview. Except as otherwise provided 
in paragraphs (c)(3)(iii) and (c)(5)(iii) of this section (documentation 
exceptions for certain preexisting accounts), a participating FFI is 
required to identify among accounts maintained by the participating FFI 
each account that is a U.S. account or an account held by a recalcitrant 
account holder or nonparticipating FFI, and to report information about 
such accounts in the manner provided in paragraph (d) of this section 
and Sec.  1.1474-1(d)(4)(iii). See Sec.  1.1471-5(a)(3) for rules to 
determine the holder of an account. The participating FFI is also 
required to retain a record of the documentation collected or otherwise 
maintained that meets the requirements described in this paragraph (c) 
when making certain payments to an account holder or payee (if other 
than an account holder) to determine whether withholding applies under 
paragraph (b) of this section or whether reporting applies under Sec.  
1.1474-1(d)(4)(iii)(C) and any payee for which it provides the 
certification described in Sec.  1.1471-3(c)(9)(iii)(A) to another 
withholding agent.
    (ii) Standards of knowledge--(A) In general. A participating FFI may 
rely on valid documentation that is collected pursuant to the due 
diligence procedures set forth in this paragraph (c) or that is 
otherwise maintained in the participating FFI's files, unless the 
participating FFI knows or has reason to know that such documentation is 
unreliable or incorrect. For purposes of a participating FFI documenting 
an account holder under this paragraph (c), the requirements for the 
validity of withholding certificates, written statements, and 
documentary evidence provided in Sec.  1.1471-3(c) shall apply 
regardless of whether the participating FFI makes a payment to the 
account. Except as otherwise provided paragraph (c)(2)(ii)(B) of this 
section (certain mergers or bulk acquisitions) and in paragraph 
(c)(5)(iv) of this section (preexisting individual accounts), to 
determine whether a participating FFI knows or has reason to know that 
the documentation collected or otherwise maintained with respect to the 
account holder is unreliable or incorrect, the standards of knowledge 
provided in Sec.  1.1471-3(e) shall apply regardless of whether the 
participating FFI makes a payment to the account. See Sec.  1.1471-
3(c)(8) and (9) for the requirement to

[[Page 446]]

obtain documentation on an account-by-account basis and the exceptions 
to this requirement.
    (B) Limits on reason to know with respect to certain accounts 
acquired in merger or bulk acquisition. A participating FFI that 
acquires accounts of another financial institution either in a merger or 
bulk acquisition of accounts for value (other than a related party 
transaction described in Sec.  1.1471-3(c)(9)(v)) may apply the 
limitations on reason to know provided in paragraphs (c)(2)(ii)(B)(1) or 
(2) of this section (as applicable and subject to the conditions 
therein), or the rules of Sec.  1.1471-3(c)(9)(v) to rely upon 
documentation collected by another financial institution for an account 
acquired either in a merger or bulk acquisition of accounts for value.
    (1) In general. The participating FFI may treat accounts acquired in 
a transaction described in this paragraph (c)(2)(ii)(B) as preexisting 
accounts for purposes of applying the identification and documentation 
procedures of this paragraph (c) by substituting the date of acquisition 
of such accounts for the effective date of the FFI agreement.
    (2) Participating FFIs and certain deemed-compliant FFIs that apply 
the due diligence rules, and U.S. financial institutions. If a 
participating FFI (transferee FFI) acquires accounts of another 
participating FFI or deemed-compliant FFI (including a U.S. branch of 
either such FFI) that applies the due diligence requirements of this 
paragraph (c) as a condition of its status (as described in Sec.  
1.1471-5(f)), or of a U.S. financial institution (transferor FI), the 
transferee FFI may rely on the chapter 4 status determination made by 
the transferor FI for an account holder and will not be subject to the 
standards of knowledge set forth in paragraph (c)(2)(ii)(A) of this 
section until there is a change in circumstances with respect to the 
account if the following conditions are met--
    (i) The transferee FFI does not have actual knowledge that the 
chapter 4 status determination provided by the transferor FI is 
unreliable or incorrect;
    (ii) For the certification period following the acquisition of such 
accounts (described in paragraph (f)(3)(i) of this section), the 
transferee FFI acquiring the accounts tests a sample of the acquired 
accounts to determine if the chapter 4 status determinations made by the 
transferor FI are reliable;
    (iii) In the case of a transferor FI that is a participating FFI or 
a registered deemed-compliant FFI (or a U.S. branch of either such 
entity that is not treated as a U.S. person) or that is a deemed-
compliant FFI that applies the requisite due diligence rules of this 
paragraph (c) as a condition of its status, the transferor FI provides a 
written representation to the transferee FFI acquiring the accounts that 
the transferor FI has applied the due diligence procedures of this 
paragraph (c) with respect to the transferred accounts and, in the case 
of a transferor FI that is a participating FFI, has complied with the 
requirements of paragraph (f)(2) of this section; and
    (iv) In the case of a transferor FI that is a U.S. financial 
institution or that is a U.S branch of a participating FFI or of a 
registered deemed-compliant FFI that is treated as a U.S. person, the 
transferee FFI may rely on the chapter 4 status determinations for a 
payee that is an entity only if prior to the date of transfer the U.S. 
financial institution or U.S. branch made a withholdable payment to the 
payee or, for a payee that is an individual, only if the U.S. financial 
institution or U.S. branch made a reportable payment (as defined under 
section 3406(b)) to the payee.
    (iii) Change in circumstances--(A) Obligation to identify a change 
in circumstances. A participating FFI is required to institute 
procedures to ensure that any change in circumstances, as described in 
paragraph (c)(2)(iii)(B) of this section, is identified by the 
participating FFI, including procedures to ensure that a relationship 
manager identifies any change in circumstances with respect to an 
account. For example, if a relationship manager is notified that the 
account holder has a mailing address in the United States when there was 
no U.S. address previously associated with the account, the 
participating FFI will be required to treat the new address as a change 
in circumstances and will be required to retain a record of the 
appropriate documentation from the account holder as

[[Page 447]]

described in paragraph (c)(5)(iv)(B)(2)(iii) of this section.
    (B) Definition of change in circumstances. For purposes of this 
section, a change in circumstances (as defined in Sec.  1.1471-
3(c)(6)(ii)(E)) includes any change or addition of information to the 
account holder's account (including the addition, substitution, or other 
change of an account holder) or any change or addition of information to 
any account associated with such account (applying the account 
aggregation rules described in Sec.  1.1471-5(b)(4)(iii) or by treating 
the accounts as consolidated obligations) if such change or addition of 
information affects the chapter 4 status of the account holder. For 
example, if a holder of an account (including a preexisting account) 
opens another account that is linked to such account in the 
participating FFI's computerized system as described under Sec.  1.1471-
5(b)(4)(iii) and as part of the participating FFI's account opening 
procedures the account holder provides a U.S. telephone number for such 
other account, this is a change in circumstances with respect to the 
first mentioned account. With respect to a preexisting account that 
meets a documentation exception described in paragraphs (c)(3)(iii) and 
(c)(5)(iii) of this section, a change in circumstances also includes a 
change in account balance or value as of the end of the first subsequent 
year that causes the account no longer to meet the documentation 
exception.
    (C) Requirements following a change in circumstances. With respect 
to an individual account or an account held by a passive NFFE for which 
there is a change in circumstances with respect to the information 
regarding its owners, following a change in circumstances the 
participating FFI must retain a record of the appropriate documentation 
described in paragraph (c)(3) or (c)(5)(iv)(B)(2) of this section within 
the time period provided by Sec.  1.1471-5(g)(3)(iii) or, if unable to 
do so, must treat such account as held by a recalcitrant account holder. 
With respect to an account held by an entity other than a passive NFFE 
described in the preceding sentence, following a change in 
circumstances, the participating FFI must retain a record of the 
appropriate documentation described in paragraph (c)(3) of this section 
by the date that is 90 days after the change in circumstances or, if 
unable to do so, must treat such account as held by a nonparticipating 
FFI.
    (iv) Record retention. A participating FFI must retain a record of 
the documentation collected (or otherwise maintained) to establish the 
chapter 4 status of an account holder or payee pursuant to the 
requirements of this paragraph (c)(2)(iv). A participating FFI will be 
treated as having retained a record of a withholding certificate, 
written statement, or documentary evidence if the participating FFI 
retains either an original, certified copy, or photocopy (including a 
microfiche, scan, or similar means of record retention) of the 
withholding certificate, written statement, or documentary evidence 
collected to determine the chapter 4 status of the account holder for 
six calendar years following the year in which the due diligence 
procedures of this paragraph (c) were performed for the account. With 
respect to documentary evidence for an offshore obligation, however, a 
participating FFI that is not required to retain copies of documentation 
reviewed pursuant to its AML due diligence will be treated as having 
retained a record of such documentation if the participating FFI retains 
a record in its files noting the date the documentation was reviewed, 
each type of document, the document's identification number (if any) 
(for example, passport number), and whether any U.S. indicia were 
identified. The previous sentence applies with respect to an offshore 
obligation that is also a preexisting obligation, except, in such case, 
the requirement to record whether the documentation contained U.S. 
indicia does not apply. A participating FFI must also retain a record of 
any searches, including search results provided by third-party credit 
agencies as described in paragraph (c)(4)(ii) of this section, results 
from electronic searches, and requests made and responses to 
relationship manager inquiries for six calendar years following the year 
in which the due diligence procedures of this paragraph (c) were 
performed for the account. A participating FFI may be

[[Page 448]]

required to extend the six year retention period if the IRS requests 
such extension prior to the end of the six year retention period. 
Notwithstanding the preceding sentences, a participating FFI must retain 
a record of the chapter 4 status of an account holder or payee for as 
long as the FFI maintains the account or obligation. See Sec.  1.1471-
3(c)(6)(iii)(A) for the record retention period applicable to a 
participating FFI that is a withholding agent with respect to 
documentation collected (or otherwise maintained) for a payee.
    (v) Documentation rules for U.S. branches of FFIs that are treated 
as U.S. persons. A U.S. branch of an FFI that is treated as a U.S. 
person shall apply the due diligence requirements of Sec.  1.1471-3 to 
determine the chapter 4 status of account holders and payees that are 
entities and shall apply the documentation requirements of chapter 3 or 
61 (as applicable) with respect to individual account holders. See 
paragraph (b)(7) of this section for withholding rules and paragraph 
(d)(2)(iii)(B) of this section for reporting rules applicable to such 
U.S. branches.
    (3) Identification and documentation procedure for entity accounts 
and payees--(i) In general. With respect to accounts held by entities, 
unless the documentation exception described in paragraph (c)(3)(iii) of 
this section applies, a participating FFI must determine if the account 
is a U.S. account or an account held by a recalcitrant account holder or 
nonparticipating FFI by applying the principles of Sec.  1.1471-3(b), 
(c), and (d) to establish the chapter 4 status of each account holder 
and each payee regardless of whether the participating FFI makes a 
payment to the account. If an account holder receiving a payment is not 
the payee of the payment under Sec. Sec.  1.1471-3(a) and 1.1472-
1(d)(3), the participating FFI is also required to establish the chapter 
4 status of the payee or payees in order to determine whether 
withholding applies under paragraph (b) of this section.
    (ii) Timeframe for applying identification and documentation 
procedure for entity accounts and payees. For preexisting entity 
accounts (including entity accounts that are opened on or after July 1, 
2014, and before January 1, 2015, that the FFI treats as preexisting 
obligations under Sec.  1.1471-1(b)(104)(i)), a participating FFI must 
perform the requisite identification and documentation procedures within 
six months of the effective date of the FFI agreement for any account 
holder that is a prima facie FFI, as defined in Sec.  1.1471-
2(a)(4)(ii)(B), and within two years of the effective date of the FFI 
agreement for all other entity accounts, except as otherwise provided in 
paragraph (c)(3)(iii) of this section. For accounts that are not 
preexisting accounts, the participating FFI must perform the requisite 
identification and documentation procedures by the earlier of the date a 
withholdable payment or a foreign passthru payment is made with respect 
to the account or within 90 days of the date the participating FFI opens 
the account. Notwithstanding the foregoing sentences of this paragraph 
(c)(3)(ii), with respect to a preexisting obligation issued in 
nonregistered (bearer) form by an investment entity, the investment 
entity is required to perform the requisite identification and 
documentation procedures at the time a payment is collected by the 
beneficial owner of the payment (including a beneficial owner that 
collects the payment through an intermediary or agent). If the 
participating FFI cannot obtain all the documentation described in Sec.  
1.1471-3(d) or if the participating FFI knows or has reason to know that 
the documentation provided for an entity account is unreliable or 
incorrect (by applying the standards of knowledge applicable to entities 
in Sec.  1.1471-3(e) as modified by paragraph (c)(2)(ii)), the 
participating FFI shall apply the presumption rules of Sec.  1.1471-3(f) 
(as applicable to entities) to determine the chapter 4 status of the 
account holder. In the case of an account held by a passive NFFE that 
provides the documentation described in Sec.  1.1471-3(d)(12) to 
establish its status as a passive NFFE but fails to provide the 
information regarding its owners, see Sec.  1.1471-5(g)(2)(iv) for the 
requirement to treat the account as held by a recalcitrant account 
holder.
    (iii) Documentation exception for certain preexisting entity 
accounts--(A) Accounts to which this exception applies. Unless the 
participating FFI elects

[[Page 449]]

otherwise pursuant to paragraph (c)(3)(iii)(C) of this section, a 
participating FFI is not required to perform the identification and 
documentation procedure contained in this paragraph (c)(3) with respect 
to a preexisting entity account the aggregate balance or value of which 
is $250,000 or less if no holder of such account that has previously 
been documented by the FFI as a U.S. person for purposes of chapter 3 or 
61 is a specified U.S. person. For purposes of applying this exception, 
the account balance must be determined as of the effective date of the 
FFI agreement and the aggregation rules of paragraph (c)(3)(iii)(B) of 
this section shall apply. An account that meets this exception will 
cease to meet this exception as of the end of any subsequent calendar 
year in which the account balance or value exceeds $1,000,000, applying 
the aggregation rules of paragraph (c)(3)(iii)(B) of this section, or as 
of the date on which there is another change in circumstances with 
respect to the account or any account aggregated with the account. The 
exception to the identification and documentation procedure described in 
this paragraph (c)(3)(iii)(A) does not apply to an entity account opened 
on or after July 1, 2014, and before January 1, 2015, that the FFI 
treats as a preexisting account under Sec.  1.1471-1(b)(104)(i).
    (B) Aggregation of entity accounts. For purposes of determining the 
aggregate balance or value of accounts held by an entity in applying the 
exception in this paragraph (c)(3)(iii), an FFI is required to aggregate 
the balance or value of all accounts held (in whole or in part) by the 
same account holder to the extent required under Sec.  1.1471-
5(b)(4)(iii)(A) and (B).
    (C) Election to forgo exception. A participating FFI may elect to 
forgo the exception described in this paragraph (c)(3)(iii) by applying 
the identification and documentation procedures provided in this 
paragraph (c)(3) within the time period provided by paragraph (c)(3)(ii) 
of this section or otherwise applying the presumption rules of Sec.  
1.1471-3(f) to determine the chapter 4 status of the account holder.
    (4) Identification and documentation procedure for individual 
accounts other than preexisting accounts--(i) In general. With respect 
to an individual account that is not a preexisting account or an account 
described under paragraph (c)(4)(iii)(B) of this section or Sec.  
1.1471-5(a)(4)(i) (providing an exception to U.S. account status for 
certain depository accounts with an aggregate balance or value of 
$50,000 or less), a participating FFI must determine if the account is a 
U.S. account or non-U.S. account by retaining a record of certain 
documentation to establish the chapter 4 status of each account holder. 
Specifically, a participating FFI must retain a record of documentary 
evidence that meets the requirements of Sec.  1.1471-3(c)(5) (as 
applicable to individuals), the information described in paragraph 
(c)(4)(ii) or (c)(4)(iii)(A) of this section, or a withholding 
certificate to establish an account holder's status as a foreign person. 
Except as otherwise provided in paragraph (c)(4)(iii)(A) of this 
section, the participating FFI must also review all information 
collected in connection with the opening or maintenance of each account, 
including documentation collected as part of the participating FFI's 
account opening procedures and documentation collected for other 
regulatory purposes, and apply the standards of knowledge in paragraph 
(c)(2)(ii) of this section to determine if an account holder's claim of 
foreign status is unreliable or incorrect. If the participating FFI is 
not able to establish an account holder's status as a foreign person, 
the participating FFI must retain a record of either a Form W-9 or U.S. 
TIN (in any manner) and a valid and effective waiver described in 
section 1471(b)(1)(F)(i), if necessary, to establish an account holder's 
status as a U.S. person and to confirm that the account is a U.S. 
account. A participating FFI must complete the requisite identification 
and documentation procedures with respect to each account within the 
time period provided by Sec.  1.1471-5(g)(3)(ii), or, if unable to do 
so, it must treat such account as held by a recalcitrant account holder. 
The presumption rules of Sec.  1.1471-3(f) do not apply to individual 
account holders of a participating FFI.
    (ii) Reliance on third party for identification of individual 
accounts other than preexisting accounts. A participating

[[Page 450]]

FFI may establish an account holder's status as a foreign person based 
on information provided by a third-party credit agency only if the 
following conditions are met--
    (A) As part of the participating FFI's account opening procedures, 
the account holder provides a residence address outside the United 
States and attests in writing that the account holder is not a U.S. 
citizen or resident;
    (B) The third-party credit agency verifies the account holder's 
claimed residence with at least one government data source from the 
jurisdiction in which the participating FFI (or branch thereof) operates 
or the account holder claims residence; and
    (C) The participating FFI (or branch thereof) relies on the 
information provided by the third-party credit agency for purposes of 
satisfying AML due diligence with respect to the account in a FATF-
compliant jurisdiction.
    (iii) Alternative identification and documentation procedure for 
certain cash value insurance or annuity contracts--(A) Group cash value 
insurance contracts or group annuity contracts. A participating FFI may 
treat an account that is a group cash value insurance contract or group 
annuity contract and that meets the requirements of this paragraph 
(c)(4)(iii)(A) as a non-U.S. account until the date on which an amount 
is payable to an employee/certificate holder or beneficiary, if the 
participating FFI obtains a certification from an employer that no 
employee/certificate holder (account holder) is a U.S. person. A 
participating FFI is also not required to review all the account 
information collected by the FFI to determine if an account holder's 
claim of foreign status is unreliable or incorrect. An account that is a 
group cash value insurance contract or group annuity contract meets the 
requirements of this paragraph (c)(4)(iii)(A) if--
    (1) The group life insurance contract or a group annuity contract 
issued to an employer and covers twenty-five or more employee/
certificate holders;
    (2) The employee/certificate holders are entitled to receive any 
contract value and to name beneficiaries for the benefit payable upon 
the employee's death; and
    (3) The aggregate amount payable to any employee/certificate holder 
or beneficiary does not exceed $1,000,000.
    (B) Accounts held by beneficiaries of a cash value insurance 
contract that is a life insurance contract. A participating FFI may 
presume that an individual beneficiary (other than the owner) of a cash 
value insurance contract that is a life insurance contract (account 
holder) receiving a death benefit is a foreign person and treat such 
account as a non-U.S. account unless the participating FFI has actual 
knowledge or reason to know that the beneficiary is a U.S. person. A 
participating FFI has reason to know that a beneficiary of a cash value 
insurance contract is a U.S. person if the information collected by the 
participating FFI and associated with the beneficiary contains U.S. 
indicia as described in paragraph (c)(5)(iv)(B)(1) of this section. If a 
participating FFI has actual knowledge or reason to know that the 
beneficiary is a U.S. person, the participating FFI must retain a record 
of the appropriate documentation described in paragraph (c)(5)(iv)(B)(2) 
of this section.
    (5) Identification and documentation procedure for preexisting 
individual accounts--(i) In general. With respect to a preexisting 
individual account, unless the account is an account described in Sec.  
1.1471-5(a)(4)(i) (providing exception to U.S. account status for 
certain depository accounts with an aggregate balance or value of 
$50,000 or less), a participating FFI may follow the identification and 
documentation procedures described below in paragraph (c)(5)(ii) through 
(iv) of this section (as applicable), in lieu of the identification and 
documentation procedures described in paragraph (c)(4) of this section, 
to determine if an account that is a preexisting account is a U.S. 
account, non-U.S. account, or account held by a recalcitrant account 
holder. A participating FFI must first determine whether there are any 
U.S. indicia associated with the account (as defined in paragraph 
(c)(5)(iv)(B)(1) of this section), and second, if there are U.S. indicia 
associated with the account, retain a record of the documentation 
described in paragraph (c)(5)(iv)(B)(2) of this section to establish the 
account

[[Page 451]]

holder's chapter 4 status. For this purpose, the presumption rules of 
Sec.  1.1471-3(f) do not apply. A participating FFI must complete the 
requisite identification and documentation procedures with respect to 
each account within the time period provided by Sec.  1.1471-5(g)(3)(i) 
or (ii) (as applicable) or, if unable to do so, must treat such account 
as held by a recalcitrant account holder. A participating FFI may 
continue to treat an account with no U.S. indicia or an account that 
meets a documentation exception described in paragraph (c)(5)(iii) of 
this section or Sec.  1.1471-5(a)(4)(i) (providing exception to U.S. 
account status for certain depository accounts with an aggregate balance 
or value of $50,000 or less) as a non-U.S. account, until there is a 
change in circumstances with respect to the account as described in 
paragraph (c)(2)(iii) of this section.
    (ii) Special rule for preexisting individual accounts previously 
documented as U.S. accounts for purposes of chapter 3 or 61. If a 
participating FFI has documented an individual account holder as a U.S. 
person for purposes of chapter 3 or 61 and such account holder is a 
specified U.S. person, the account holder's account will be treated as a 
U.S. account for chapter 4 purposes and the identification and 
documentation procedures in paragraph (c)(5)(i) and (iv) of this section 
will not apply.
    (iii) Exceptions for certain low value preexisting individual 
accounts--(A) Accounts to which an exception applies. Unless the 
participating FFI elects otherwise pursuant to paragraph (c)(5)(iii)(C) 
of this section, a participating FFI is not required to perform 
requisite identification and documentation procedures described in 
paragraph (c)(5)(i) and (iv) of this section with respect to either a 
preexisting individual account, other than a cash value insurance or 
annuity contract, the aggregate balance or value of which is $50,000 or 
less, or a preexisting individual account that is a cash value insurance 
or annuity contract described in Sec.  1.1471-5(b)(1)(iv) the aggregate 
balance or value of which is $250,000 or less. For purposes of applying 
these exceptions, the account balance must be determined as of the 
effective date of the FFI agreement and the aggregation rules of 
paragraph (c)(5)(iii)(B) of this section shall apply. An account that 
meets either of these exceptions will cease to meet these exceptions as 
of the end of any subsequent calendar year in which the account balance 
or value exceeds $1,000,000, applying the aggregation rules of paragraph 
(c)(3)(iii)(B) of this section, or until there is another change in 
circumstances with respect to the account or any account aggregated with 
the account.
    (B) Aggregation of accounts. For purposes of determining the 
aggregate balance or value of a preexisting individual account, other 
than an account that is cash value insurance or annuity contract, an FFI 
is required to aggregate the balance or value of all accounts that are 
not cash value insurance or annuity contracts to the extent required 
under Sec.  1.1471-5(b)(4)(iii)(A) or (B). For purposes of determining 
the aggregate balance or value of preexisting individual account that is 
a cash value insurance or annuity contract, an FFI will be required to 
aggregate the balance or value of all accounts that are cash value 
insurance or annuity contracts to the extent required under Sec.  
1.1471-5(b)(4)(iii)(A) or (B).
    (C) Election to forgo exception. A participating FFI may elect to 
forgo the exceptions described in paragraph (c)(5)(iii) of this section 
by applying the identification and documentation procedures provided in 
this paragraph (c) within the time provided by paragraph (c)(5)(i) of 
this section or otherwise treating the account as held by a recalcitrant 
account holder pursuant to Sec.  1.1471-5(g).
    (iv) Specific identification and documentation procedures for 
preexisting individual accounts--(A) In general. A participating FFI 
applying the identification and documentation procedures of this 
paragraph (c)(5)(iv) must review its preexisting individual accounts 
(applying the electronic search described in paragraph (c)(5)(iv)(C) of 
this section and, if appropriate, the enhanced review for high-value 
accounts described in paragraph (c)(5)(iv)(D) of this section) to 
determine if there are any U.S. indicia (as described in paragraph

[[Page 452]]

(c)(5)(iv)(B)(1) of this section) associated with the account. If no 
U.S. indicia are identified with respect to an account, the 
participating FFI may treat the account as a non-U.S. account. If U.S. 
indicia are identified with respect to an account, the participating FFI 
must retain a record of the appropriate documentation described in 
paragraph (c)(5)(iv)(B)(2) of this section to establish the account 
holder's status as a foreign person. A participating FFI that follows 
the procedures described in this paragraph (c)(5)(iv) (as applicable) 
with respect to its preexisting individual accounts will not be treated 
as having reason to know that the determination made with respect to the 
account was unreliable or incorrect because of information contained in 
any account files that the participating FFI did not review and was not 
required to review under the applicable identification procedure. Thus, 
for example, if a participating FFI was only required to perform an 
electronic search with respect to a preexisting individual account and 
no U.S. indicia were identified in the results of the electronic search, 
the participating FFI would not have reason to know that the individual 
account holder was a U.S. person, even if the participating FFI had on 
file (but was not required to and did not review) a copy of the 
individual's passport that indicates that the individual was born in the 
United States.
    (B) U.S. indicia and relevant documentation rules--(1) U.S. indicia. 
A participating FFI must review an account holder's account information 
to the extent required under paragraphs (c)(5)(iv)(C) and (D) of this 
section for any of the following U.S. indicia:
    (i) Designation of the account holder as a U.S. citizen or resident;
    (ii) A U.S. place of birth;
    (iii) A current U.S. residence address or U.S. mailing address 
(including a U.S. post office box);
    (iv) A current U.S. telephone number (regardless of whether such 
number is the only telephone number associated with the account holder);
    (v) Standing instructions to pay amounts from the account to an 
account maintained in the United States;
    (vi) A current power of attorney or signatory authority granted to a 
person with a U.S. address; or
    (vii) An ``in-care-of'' address or a ``hold mail'' address that is 
the sole address the FFI has identified for the account holder.
    (2) Documentation to be retained upon identifying U.S. indicia. If 
U.S. indicia are identified with respect to an account holder's account 
information, a participating FFI must retain a record of the 
documentation described in paragraphs (c)(5)(iv)(B)(2)(i) through (vii) 
of this section, applicable to the U.S. indicia identified, to establish 
the account holder's status as a foreign person. If the participating 
FFI cannot establish an account holder's status as a foreign person 
based on such documentation, the participating FFI must retain a record 
of a Form W-9 and a valid and effective waiver as described in section 
1471(b)(1)(F)(ii), if necessary, to confirm that the account is a U.S. 
account or, if unable to do so, must treat the account as held by a 
recalcitrant account holder.
    (i) Designation of account holder as a U.S. citizen or resident. If 
the information required to be reviewed with respect to the account 
contains a designation of an account holder as a U.S. citizen or 
resident, the participating FFI must retain a record of a withholding 
certificate and documentary evidence described in Sec.  1.1471-
3(c)(5)(i)(B) evidencing citizenship in a country other than the United 
States in order to establish the account holder's status as a foreign 
person.
    (ii) Unambiguous indication of a U.S. place of birth. If information 
required to be reviewed with respect to the account unambiguously 
indicates a U.S. place of birth for an account holder, the participating 
FFI must retain a record of a form of documentary evidence described in 
Sec.  1.1471-3(c)(5)(i)(B) evidencing citizenship in a country other 
than the United States and a copy of the individual's Certificate of 
Loss of Nationality of the United States, or, alternatively, a 
withholding certificate, a form of documentary evidence described in 
Sec.  1.1471-3(c)(5)(i)(B) evidencing citizenship in a country other 
than the United States, and a reasonable written explanation of the

[[Page 453]]

account holder's renunciation of U.S. citizenship or the reason the 
account holder did not obtain U.S. citizenship at birth in order to 
establish the account holder's status as a foreign person.
    (iii) U.S. address or U.S. mailing address. If information required 
to be reviewed with respect to the account contains a U.S. address or a 
U.S. mailing address for an account holder, the participating FFI must 
retain a record of a withholding certificate and a form of documentary 
evidence described in Sec.  1.1471-3(c)(5)(i)(A) through (C) in order to 
establish the account holder's status as a foreign person.
    (iv) Only U.S. telephone numbers. If information required to be 
reviewed with respect to the account contains one or more telephone 
numbers in the United States and no other telephone numbers for an 
account holder, the participating FFI must retain a record of a 
withholding certificate and a form of documentary evidence described in 
Sec.  1.1471-3(c)(5)(i)(A) through (C) in order to establish the account 
holder's status as a foreign person.
    (v) U.S. telephone numbers and non-U.S. telephone numbers. If 
information required to be reviewed with respect to the account contains 
one or more telephone numbers in the United States and at least one 
telephone number outside the United States for an account holder, the 
participating FFI must retain a record of a withholding certificate or a 
form of documentary evidence described in Sec.  1.1471-3(c)(5)(i)(A) 
through (C) in order to establish the account holder's status as a 
foreign person.
    (vi) Standing instructions to pay amounts. If information required 
to be reviewed with respect to the account contains standing 
instructions to pay amounts from the account to an account maintained in 
the United States for an account holder, the participating FFI must 
retain a record of a withholding certificate and either a form of 
documentary evidence described in Sec.  1.1471-3(c)(5)(i)(A) through (C) 
or a written reasonable explanation (as defined in Sec.  1.1441-
7(b)(12)) establishing the account holder's status as a foreign person.
    (vii) Power of attorney or signatory authority granted to a person 
with a U.S. address or ``in-care-of'' address or ``hold mail'' address. 
If information required to be reviewed with respect to the account 
includes a power of attorney or signatory authority granted to a person 
with a U.S. address or contains an ``in-care-of'' address or ``hold 
mail'' address that is the sole address identified for the account 
holder, the participating FFI must retain a record of either a 
withholding certificate or a form of documentary evidence described in 
Sec.  1.1471-3(c)(5)(i)(A) through (C) in order to establish the account 
holder's status as a foreign person.
    (C) Electronic search for identifying U.S. indicia. Except as 
provided in paragraph (c)(5)(iv)(D) of this section relating to the 
enhanced review for high-value accounts, a participating FFI may rely 
solely on a review of the electronically searchable information 
associated with an account and maintained by the participating FFI to 
determine if there are any of the U.S. indicia described in paragraph 
(c)(5)(iv)(B)(1) of this section associated with the account. For 
purposes of this paragraph (c)(5)(iv)(C), however, an FFI will not be 
required to treat as U.S. indicia an in-care-of address or a hold mail 
address that is the sole address identified for the account holder.
    (D) Enhanced review for identifying U.S. indicia in the case of 
certain high-value accounts--(1) In general. With respect to preexisting 
individual accounts that have a balance or value that exceeds $1,000,000 
as of the effective date of the FFI agreement, or at the end of any 
subsequent calendar year (``high-value accounts''), a participating FFI 
must apply the enhanced review described in this paragraph (c)(5)(iv)(D) 
in addition to the electronic search described in paragraph 
(c)(5)(iv)(C) of this section to identify any U.S. indicia described in 
paragraph (c)(5)(iv)(B)(1) of this section associated with the account. 
For purposes of determining the balance or value of an account, a 
participating FFI must apply the aggregation rules Sec.  1.1471-
5(b)(4)(iii)(A) and (B). If a participating FFI applied the enhanced 
review described in this paragraph (c)(5)(iv)(D) to an account in a 
previous

[[Page 454]]

year, the participating FFI will not be required to reapply such 
procedures to such account in a subsequent year.
    (2) Relationship manager inquiry. With respect to all high-value 
accounts, a participating FFI must identify accounts to which a 
relationship manager is assigned (including any accounts aggregated with 
such account) and for which the relationship manager has actual 
knowledge that the account holder is a U.S. citizen or resident.
    (3) Additional review of non-electronic records. Except as provided 
in paragraph (c)(5)(iv)(E) of this section, and except with respect to 
any account for which the participating FFI has retained a record of a 
withholding certificate and documentary evidence described in Sec.  
1.1471-3(c)(5) establishing the account holder's foreign status, a 
participating FFI must review to identify any U.S. indicia the current 
customer master file of a high-value account and, if not contained in 
the current customer master file, the following documents described in 
paragraphs (c)(5)(iv)(D)(3)(i) through (v) of this section that are 
associated with such an account and were obtained by the participating 
FFI within the five calendar years preceding the later of the effective 
date of the FFI agreement, or the end of the calendar year in which the 
account exceeded the $1,000,000 threshold described in paragraph 
(c)(5)(iv)(D)(1) of this section. The documents to be reviewed by the 
participating FFI if not contained in the current customer master file 
are--
    (i) The most recent withholding certificate, written statement, and 
documentary evidence;
    (ii) The most recent account opening contract or documentation;
    (iii) The most recent documentation obtained by the participating 
FFI for purposes of AML due diligence or for other regulatory purposes;
    (iv) Any power of attorney or signature authority forms currently in 
effect; and
    (v) Any standing instructions to pay amounts to another account.
    (4) Limitations on the enhanced review in the case of comprehensive 
electronically searchable information. A participating FFI is not 
required to apply the enhanced review of paragraph (c)(5)(iv)(D)(3) and 
may instead rely on the electronic search described in paragraph 
(c)(5)(iv)(C) of this section to identify U.S. indicia to the extent the 
following information is available in the FFI's electronically 
searchable information--
    (i) The account holder's nationality and/or residence status;
    (ii) The account holder's current residence address and mailing 
address;
    (iii) The account holder's current telephone number(s);
    (iv) Whether there are standing instructions to pay amounts to 
another account;
    (v) Whether there is a current ``in-care-of'' address or ``hold 
mail'' address for the account holder if no other residence or mailing 
address is found for the account; and
    (vi) Whether there is any power of attorney or signatory authority 
for the account.
    (E) Exception for preexisting individual accounts previously 
documented as held by foreign individuals. A participating FFI that has 
previously obtained documentation from an account holder to establish 
the account holder's status as a foreign individual in order to meet its 
obligations under its QI, WP, or WT agreement with the IRS, or to 
fulfill its reporting obligations as a U.S. payor under chapter 61, is 
not required to perform the electronic search described in paragraph 
(c)(5)(iv)(C) of this section or the enhanced review described in 
paragraph (c)(5)(iv)(D)(3) of this section for such account. 
Additionally, a participating FFI with a U.S. payor as its paying agent 
is not required to perform the electronic search described in paragraph 
(c)(5)(iv)(C) of this section or the enhanced review described in 
paragraph (c)(5)(iv)(D)(3) of this section for an account for which its 
paying agent that is a U.S. payor has previously obtained documentation 
to establish the account holder's status as a foreign individual under 
chapter 61. The participating FFI is required, however, to perform the 
relationship manager inquiry described in paragraph (c)(5)(iv)(D)(2) of 
this section if the account is a high-value account described in 
paragraph (c)(5)(iv)(D)(1) of this section. For purposes of this 
paragraph (c)(5)(iv)(E), a participating FFI

[[Page 455]]

has documented an account holder's foreign status under chapter 61 if 
the participating FFI (or its paying agent that is a U.S. payor) has 
retained a record of the documentation required under chapter 61 to 
establish the foreign status of an individual and the account received a 
reportable payment as defined under section 3406(b) in any prior year 
that was properly reported in that year. In the case of a participating 
FFI that is a QI, WP, or WT, the participating FFI has documented an 
account holder's foreign status under its QI, WP, or WT agreement (as 
applicable) if the participating FFI has met the relevant documentation 
and reporting requirements of its agreement with respect to an account 
holder that received a reportable amount in any year in which its 
agreement was in effect.
    (6) Examples. The following examples illustrate the documentation 
exceptions provided in paragraphs (c)(3)(iii) and (c)(5)(iii) of this 
section:

    Example 1. Aggregation rules applicable to preexisting individual 
accounts. U, a U.S. resident individual, holds 100 shares of common 
stock of FFI1, an investment entity. On the effective date of FFI1's FFI 
agreement, the common stock held by U is worth $45,000. U also holds 
shares of preferred stock of FFI1. On the effective date of FFI1's FFI 
agreement, U's preferred stock in FFI1 is worth $35,000. Neither FFI1's 
common stock nor FFI1's preferred stock is regularly traded on an 
established securities market. U also holds debt instruments issued by 
FFI1 that are not regularly traded on an established securities market. 
On the effective date of FFI1's FFI agreement, U's FFI1 debt instruments 
are worth $15,000. U's common and preferred equity interests are 
associated with U and with one another by reference to U's foreign tax 
identification number in FFI1's computerized information management 
system. However, U's debt instruments are not associated with U's equity 
interests in FFI1's computerized information management system. None of 
these accounts are managed by a relationship manager. Previously, FFI1 
was not required to and did not obtain a Form W-9 from U for purposes of 
chapter 3 or 61. U's FFI1 debt interests are eligible for the paragraph 
(c)(5)(iii)(A) documentation exception because that account does not 
exceed the $50,000 threshold described in paragraph (c)(5)(iii)(A)(1) of 
this section, taking into account the aggregation rule described in 
paragraph (c)(5)(iii)(A)(2) of this section. However, U's common and 
preferred equity interests are not eligible for the paragraph 
(c)(5)(iii)(A) documentation exception because the accounts exceed the 
$50,000 threshold described in paragraph (c)(5)(iii)(A)(1) of this 
section, taking into account the aggregation rules described in Sec.  
1.1471-5(b)(4)(iii) pursuant to the requirements of paragraph 
(c)(5)(iii)(A)(2) of this section.
    Example 2. Aggregation rules for owners of entity accounts. In Year 
1, U, a U.S. resident individual, maintains a depository account that is 
a preexisting account in CB, a commercial bank. The balance in U's 
depository account on the effective date of CB's FFI agreement is 
$20,000. U also owns 100% of Entity X, which maintains a depository 
account that is a preexisting account in CB, and 50% of Entity Y, which 
maintains a depository account that is a preexisting account in CB. The 
balance in Entity X's account on the effective date of CB's FFI 
agreement is $130,000, and the balance in Entity Y's account on the 
effective date of CB's FFI agreement is $110,000. All three accounts are 
associated with one another in CB's computerized information management 
system by reference to U's foreign tax identification number. None of 
the accounts are managed by a relationship manager. Previously, CB was 
not required to and did not obtain a Form W-9 from U for purposes of 
chapter 3 or 61. U's depository account qualifies for the Sec.  1.1471-
5(a)(4)(i) exception to U.S. account status because it does not exceed 
the $50,000 threshold, taking into account the aggregation rule 
described in Sec.  1.1471-5(a)(4)(iii)(A). Entity X's account and Entity 
Y's account both qualify for the paragraph (c)(3)(iii) documentation 
exception because the accounts do not exceed the $250,000 threshold 
described in paragraph (c)(3)(iii)(B)(1) of this section taking into 
account the aggregation rules described in Sec.  1.1471-5(b)(4)(iii) 
pursuant to the requirements of paragraph (c)(3)(iii)(B)(2) of this 
section.

    (7) Certifications of responsible officer. In order for a 
participating FFI to comply with the requirements of an FFI agreement 
with respect to its identification procedures for preexisting accounts, 
a responsible officer of the participating FFI must certify to the IRS 
regarding the participating FFI's compliance with the diligence 
requirements of this paragraph (c). The responsible officer must certify 
that the participating FFI has completed the review of all high-value 
accounts as required under paragraphs (c)(5)(iv)(D) and (E) of this 
section and treats any account holder of an account for which the 
participating FFI has not retained a record of any required 
documentation

[[Page 456]]

as a recalcitrant account holder as required under this section and 
Sec.  1.1471-5(g). The responsible officer must also certify that the 
participating FFI has completed the account identification procedures 
and documentation requirements of this paragraph (c) for all other 
preexisting accounts or, if it has not retained a record of the 
documentation required under this paragraph (c) with respect to an 
account, treats such account in accordance with the requirements of this 
section and Sec.  1.1471-5(g) or Sec.  1.1471-3(f) (as applicable). The 
responsible officer must also certify to the best of the responsible 
officer's knowledge after conducting a reasonable inquiry, that the 
participating FFI did not have any formal or informal practices or 
procedures in place from August 6, 2011, through the date that is two 
years after the effective date of the FFI's FFI agreement to assist 
account holders in the avoidance of chapter 4. A reasonable inquiry for 
purposes of this paragraph (c)(7) is a review of the participating FFI's 
procedures and a written inquiry, such as email requests to relevant 
lines of business, that requires responses from relevant customer on-
boarding and management personnel as to whether they engaged in any such 
practices during that period. Practices or procedures that assist 
account holders in the avoidance of chapter 4 include, for example, 
suggesting that account holders split up accounts to avoid 
classification as a high-value account; suggesting that account holders 
of U.S. accounts close, transfer, or withdraw from their account to 
avoid reporting; intentional failures to disclose a known U.S. account; 
suggesting that an account holder remove U.S. indicia from its account 
information; or facilitating the manipulation of account balances or 
values to avoid thresholds. If the responsible officer is unable to make 
any of the certifications described in this paragraph (c)(7), the 
responsible officer must make a qualified certification to the IRS 
stating that such certification cannot be made and that corrective 
actions will be taken by the responsible officer. The certifications 
described in this paragraph (c)(7) must be submitted to the IRS by the 
due date of the FFI's first certification of compliance required under 
paragraph (f)(3) of this section.
    (d) Account reporting--(1) Scope of paragraph. This paragraph (d) 
provides rules addressing the information reporting requirements 
applicable to participating FFIs with respect to U.S. accounts, accounts 
held by owner-documented FFIs, and recalcitrant account holders. 
Paragraph (d)(2) of this section describes the accounts subject to 
reporting under this paragraph (d), and specifies the participating FFI 
that is responsible for reporting an account or account holder. 
Paragraph (d)(3) of this section describes the information required to 
be reported and the manner of reporting by a participating FFI under 
section 1471(c)(1) with respect to a U.S. account or an account held by 
an owner-documented FFI. Paragraph (d)(4) of this section provides 
definitions of terms applicable to paragraph (d)(3). Paragraph (d)(5) of 
this section describes the conditions for a participating FFI to elect 
to report its U.S. accounts and accounts held by owner-documented FFIs 
under section 1471(c)(2) and the information required to be reported 
under such election. Paragraph (d)(6) of this section provides rules for 
a participating FFI to report its recalcitrant account holders. 
Paragraph (d)(7) of this section provides special transitional reporting 
rules applicable to reports due in 2015 and 2016. Paragraph (d)(8) of 
this section provides the reporting requirements of a participating FFI 
that is a QI, WP, or WT with respect to U.S. accounts. See chapter 61 
for reporting requirements that may apply to a payor that is a 
participating FFI or registered deemed-compliant FFI with respect to 
payees. See Sec.  301.1474-1(a) of this chapter for the requirement for 
a financial institution to file the information required under this 
paragraph (d) on magnetic media.
    (2) Reporting requirements in general--(i)
    (i) Accounts subject to reporting. Subject to the rules of paragraph 
(d)(7) of this section, a participating FFI shall report by the time and 
in the manner prescribed in paragraph (d)(3)(vi) of this section, the 
information described in paragraph (d)(3) of this section with respect 
to accounts maintained at any

[[Page 457]]

time during each calendar year for which the participating FFI is 
responsible for reporting under paragraph (d)(2)(ii) of this section and 
that it is required to treat as U.S. accounts or accounts held by owner-
documented FFIs, including accounts that are identified as U.S. accounts 
by the end of such calendar year pursuant to a change in circumstances 
during such year as described in paragraph (c)(2)(iii) of this section. 
Alternatively, a participating FFI may elect to report under paragraph 
(d)(5) of this section with respect to such accounts for each calendar 
year. With respect to accounts held by recalcitrant account holders, a 
participating FFI is required to report with respect to each calendar 
year under paragraph (d)(6) of this section and not under paragraph 
(d)(3) or (5) of this section. For separate reporting requirements of 
participating FFIs with respect to foreign reportable amounts and for 
transitional rules for participating FFIs to report certain foreign 
reportable amounts paid to accounts held by nonparticipating FFIs, see 
Sec.  1.1471-4(d)(2)(ii)(F).
    (ii) Financial institution required to report an account--(A) In 
general. Except as otherwise provided in paragraphs (d)(2)(ii)(B) 
through (G) of this section, the participating FFI that maintains the 
account is responsible for reporting the account in accordance with the 
requirements of paragraph (d)(2)(iii), (d)(3), or (d)(5) of this section 
(as applicable) for each calendar year. Except as otherwise provided in 
paragraph (d)(2)(ii)(C) of this section, a participating FFI is 
responsible for reporting accounts held by recalcitrant account holders 
that it maintains in accordance with the requirements of paragraph 
(d)(6) of this section. A participating FFI is not required to report 
the information required under paragraph (d)(6) of this section with 
respect to an account held by a recalcitrant account holder of another 
participating FFI even if that other participating FFI holds the account 
as an intermediary on behalf of such account holder and regardless of 
whether the participating FFI is required to report payments made to the 
recalcitrant account holder of such other FFI under Sec.  1.1474-
1(d)(4)(iii).
    (B) Special reporting of account holders of territory financial 
institutions. In the case of an account held by a territory financial 
institution that is a flow-through entity or acting as an intermediary 
with respect to a withholdable payment--
    (1) If the territory financial institution agrees to be treated as a 
U.S. person with respect to the payment under Sec.  1.1471-
3(c)(3)(iii)(F), a participating FFI is not required to report under 
paragraph (d)(2)(i) of this section with respect to the account holders 
of the territory financial institution; or
    (2) If the territory financial institution does not agree to be 
treated as a U.S. person with respect to a withholdable payment, the 
participating FFI must report with respect to each specified U.S. person 
or substantial U.S. owner of an entity that is treated as a passive NFFE 
with respect to which the territory financial institution acts as an 
intermediary or is a flow-through entity and provides the participating 
FFI with the information and documentation required under Sec.  1.1471-
3(c)(3)(iii)(G). The participating FFI shall be treated as having 
satisfied these reporting requirements if it reports with respect to 
each such specified U.S. person or substantial U.S. owner of a passive 
NFFE either--
    (i) The information required by chapter 61 and described in 
paragraph (d)(5)(ii) or (d)(5)(iii) of this section (except account 
number); or
    (ii) The information described in paragraph (d)(3)(ii), (d)(3)(iii), 
or (d)(3)(iv) of this section (except account number and account balance 
or value).
    (C) Special reporting of account holders of a sponsored FFI. A 
sponsoring entity that has agreed to fulfill the reporting 
responsibilities of this paragraph (d) on behalf of a sponsored FFI 
shall report in accordance with the requirements of paragraph 
(d)(2)(iii), (3), or (5) of this section (as applicable) with respect to 
each U.S. account and paragraph (d)(6) of this section with respect to 
each account held by a recalcitrant account holder of the sponsored FFI 
to the extent and in the manner required if such sponsored FFI were a 
participating FFI. The sponsoring entity shall identify each sponsored 
FFI for which it is

[[Page 458]]

reporting to the extent required on the forms for reporting U.S. 
accounts and recalcitrant account holders and the accompanying 
instructions to the forms.
    (D) Special reporting of accounts held by owner-documented FFIs. A 
participating FFI that maintains an account held by an FFI that it has 
agreed to treat as an owner-documented FFI under Sec.  1.1471-3(d)(6) 
shall report the information described in paragraph (d)(3)(iv) or 
(d)(5)(iii) of this section with respect to each specified U.S. person 
identified in Sec.  1.1471-3(d)(6)(iv)(A)(1) and (2). See Sec.  1.1474-
1(i) for the reporting obligations of a participating FFI with respect 
to a payee of an obligation other than an account that it has agreed to 
treat as an owner-documented FFI.
    (E) Requirement to identify the GIIN of a branch that maintains an 
account. A participating FFI may report under paragraph (d)(3) or (d)(5) 
of this section either with respect to all of its U.S. accounts and 
recalcitrant accounts, or separately with respect to any clearly 
identified group of accounts (such as by line of business or the 
location of where the account is maintained). A participating FFI shall 
include the GIIN assigned to the participating FFI or its branches to 
identify the jurisdiction of the FFI or branch that maintains the 
accounts subject to reporting under paragraph (d)(3) or (d)(5) of this 
section. Additionally, a participating FFI shall file with the IRS the 
information required to be reported on accounts that it maintains in 
accordance with the forms and their accompanying instructions provided 
by the IRS. For the definition of a branch that applies for purposes of 
this paragraph (d), see paragraph (e)(2)(ii) of this section.
    (F) Reporting by participating FFIs (including QIs, WPs, WTs, and 
certain U.S. branches not treated as U.S. persons) for accounts of 
nonparticipating FFIs (transitional). Except as otherwise provided in 
the instructions to Form 8966, ``FATCA Report'' or in this paragraph 
(d)(2)(ii)(F), if a participating FFI (including a QI, WP, WT, or U.S. 
branch of a participating FFI that is not treated as a U.S. person) 
maintains an account for a nonparticipating FFI (including a limited 
branch and limited FFI treated as a nonparticipating FFI), the 
participating FFI must report on Form 8966 the name and address of the 
nonparticipating FFI, and the aggregate amount of foreign source 
payments, as described in paragraph (d)(4)(iv) of this section, paid to 
or with respect to each such account (foreign reportable amount) for 
each of the calendar years 2015 and 2016. If, however, the participating 
FFI is prohibited under domestic law from reporting on a specific payee 
basis without consent from the nonparticipating FFI account holder and 
the participating FFI has not been able to obtain such consent, the 
participating FFI may instead report the aggregate number of accounts 
held by such non-consenting nonparticipating FFIs and the aggregate 
amount of foreign reportable amounts paid with respect to such accounts, 
as described in paragraph (d)(4)(iv) of this section, during the 
calendar year. A participating FFI may, in lieu of reporting only 
foreign reportable amounts, report all income, gross proceeds, and 
redemptions (irrespective of the source) paid to the nonparticipating 
FFI's account by the participating FFI during the calendar year. With 
respect to calendar year 2015, however, a participating FFI is not 
required to report gross proceeds described in paragraph 
(d)(4)(iv)(B)(3) of this section paid to an account held by a 
nonparticipating FFI. In addition, the participating FFI must retain the 
account statements related to such nonparticipating FFI accounts. See 
paragraphs (d)(6)(iv), through (vii) of this section for rules relating 
to reporting on recalcitrant account holders. Form 8966 shall be filed 
electronically with the IRS on or before March 31 of the year following 
the end of the calendar year to which the form relates.
    (G) Combined reporting on Form 8966 following merger or bulk 
acquisition. If a participating FFI (successor) acquires accounts of 
another participating FFI (predecessor) in a merger or bulk acquisition 
of accounts, the successor may assume the predecessor's obligations to 
report the acquired accounts under paragraph (d) of this section with 
respect to the calendar year in which the merger or acquisition occurs 
(acquisition year), provided that the

[[Page 459]]

requirements in paragraphs (d)(2)(ii)(G)(1) through (4) of this section 
are satisfied. If the requirements of paragraphs (d)(2)(ii)(G)(1) 
through (4) of this section are not satisfied, both the predecessor and 
the successor are required to report the acquired accounts for the 
portion of the acquisition year that it maintains the account.
    (1) The successor must acquire substantially all of the accounts 
maintained by the predecessor, or substantially all of the accounts 
maintained at a branch of the predecessor, in a merger or bulk 
acquisition of accounts for value.
    (2) The successor must agree to report the acquired accounts for the 
acquisition year on Form 8966 to the extent required in Sec.  1.1471-
4(d)(3) or (d)(5).
    (3) The successor may not elect to report under section 1471(c)(2) 
and Sec.  1.1471-4(d)(5) with respect to any acquired account that is a 
U.S. account for the acquisition year.
    (4) The successor must notify the IRS on the form and in the manner 
prescribed by the IRS that Form 8966 is being filed on a combined basis.
    (iii) Special U.S. account reporting rules for U.S. payors--
    (A) Special reporting rule for U.S. payors other than U.S. branches. 
Participating FFIs that are U.S. payors (other than U.S. branches) shall 
be treated as having satisfied the chapter 4 reporting requirements 
described in paragraph (d)(2)(i) of this section with respect to 
accounts that the participating FFI is required to treat as U.S. 
accounts, or accounts held by owner-documented FFIs, if the 
participating FFI reports with respect to each such account either--
    (1) The information required by chapter 61 and described in 
paragraph (d)(5)(ii) or (d)(5)(iii) of this section; or
    (2) The information described in paragraph (d)(3)(ii), (d)(3)(iii), 
or (d)(3)(iv) of this section. However, such participating FFI that is 
required to report on such accounts under chapter 61 is not relieved of 
that obligation.
    (B) Special reporting rules for U.S. branches treated as U.S. 
persons. A U.S. branch treated as a U.S. person (as defined in Sec.  
1.1471-1(b)(135)) shall be treated as having satisfied the reporting 
requirements described in paragraph (d)(2)(i) of this section if it 
reports under--
    (1) Chapter 61 with respect to account holders that are U.S. non-
exempt recipients;
    (2) Chapter 61 with respect to persons subject to withholding under 
section 3406;
    (3) Section 1.1474-1(i) with respect to substantial U.S. owners of 
NFFEs that are not excepted NFFEs as defined in Sec.  1.1472-1(c) and;
    (4) Section 1.1474-1(i) with respect to specified U.S. persons 
identified in Sec.  1.1471-3(d)(6)(iv)(A)(1) and (2) of owner-documented 
FFIs.
    (C) Rules for U.S. branches of FFIs not treated as U.S. persons. A 
U.S. branch of an FFI that is not treated as a U.S. person shall apply 
the due diligence rules in paragraph (c)(2) of this section to document 
its accounts and payees, and shall report its U.S. accounts and accounts 
held by owner-documented FFIs under paragraph (d)(3), (d)(5), or (d)(6) 
of this section, as if the U.S. branch were a participating FFI. In 
addition, the U.S. branch shall apply the withholding requirements in 
paragraph (b) of this section as if the U.S. branch were a participating 
FFI.
    (3) Reporting of accounts under section 1471(c)(1)--(i) In general. 
The participating FFI (or branch thereof) that is responsible for 
reporting an account that it is required to treat as a U.S. account or 
accounts held by owner-documented FFIs under paragraph (d)(2)(ii) of 
this section shall be required to report such account under this 
paragraph (d)(3) for each calendar year unless it elects to report its 
U.S. accounts or accounts held by owner-documented FFIs under paragraph 
(d)(5) of this section.
    (ii) Accounts held by specified U.S. persons. In the case of an 
account described in paragraph (d)(3)(i) of this section that is held by 
one or more specified U.S. persons, a participating FFI is required to 
report the following information under this paragraph (d)(3)--
    (A) The name, address, and TIN of each account holder that is a 
specified U.S. person;
    (B) The account number;
    (C) The account balance or value of the account;

[[Page 460]]

    (D) The payments made with respect to the account, as described in 
paragraph (d)(4)(iv) of this section, during the calendar year; and
    (E) Such other information as is otherwise required to be reported 
under this paragraph (d)(3) or in the form described in paragraph 
(d)(3)(v) of this section and its accompanying instructions.
    (iii) Accounts held by U.S. owned foreign entities. With respect to 
each U.S. account described in paragraph (d)(3)(i) of this section that 
is held by a passive NFFE that is a U.S. owned foreign entity, a 
participating FFI is required to report under this paragraph 
(d)(3)(iii)--
    (A) The name of the U.S. owned foreign entity that is the account 
holder;
    (B) The name, address, and TIN of each substantial U.S. owner of 
such entity;
    (C) The account number;
    (D) The account balance or value of the account held by the NFFE;
    (E) The payments made with respect to the account, as described in 
paragraph (d)(4)(iv) of this section, during the calendar year; and
    (F) Such other information as is otherwise required to be reported 
under this paragraph (d)(3) or in the form described in paragraph 
(d)(3)(v) of this section and its accompanying instructions.
    (iv) Special reporting of accounts held by owner-documented FFIs. 
With respect to each account held by an owner-documented FFI, a 
participating FFI is required to report under this paragraph 
(d)(3)(iv)--
    (A) The name of the owner-documented FFI;
    (B) The name, address, and TIN of each specified U.S. person 
identified in Sec.  1.1471-3(d)(6)(iv)(A)(1) and (2);
    (C) The account number of the account held by the owner-documented 
FFI;
    (D) The account balance or value of the account held by the owner-
documented FFI;
    (E) The payments made with respect to the account held by the owner-
documented FFI, as described in paragraph (d)(4)(iv) of this section, 
during the calendar year; and
    (F) Such other information as is otherwise required to be reported 
under this paragraph (d)(3) or in the form described in paragraph 
(d)(3)(vi) of this section and its accompanying instructions.
    (v) Form for reporting accounts under section 1471(c)(1). The 
information described in paragraphs (d)(3)(ii) through (iv) of this 
section shall be reported on Form 8966, ``FATCA Report,'' (or such other 
form as the IRS may prescribe) with respect to each account subject to 
reporting under paragraph (d)(3)(i) of this section maintained at any 
time during the calendar year. This form shall be filed in accordance 
with its requirements and its accompanying instructions.
    (vi) Time and manner of filing. Except as provided in paragraph 
(d)(7)(iv)(B) of this section, Form 8966 shall be filed electronically 
with the IRS on or before March 31 of the year following the end of the 
calendar year to which the form relates. See the accompanying 
instructions to this form for electronic filing instructions.
    (vii) Extensions in filing. The IRS shall grant an automatic 90-day 
extension of time in which to file Form 8966. Form 8809-I, ``Application 
for Extension of Time to File FATCA Form 8966,'' (or such other form as 
the IRS may prescribe) must be used to request such extension of time 
and must be filed no later than the due date of Form 8966. Under certain 
hardship conditions, the IRS may grant an additional 90-day extension. A 
request for extension due to hardship must contain a statement of the 
reasons for requesting the extension and such other information as the 
forms or instructions may require.
    (4) Descriptions applicable to reporting requirements of Sec.  
1.1471-4(d)(3)--(i) Address. The address to be reported with respect to 
an account held by a specified U.S. person is the residence address 
recorded by the participating FFI for the account holder or, if no 
residence address is associated with the account holder, the address for 
the account used for mailing or for other purposes by the participating 
FFI. In the case of an account held by a passive NFFE that is a U.S. 
owned foreign entity, the address to be reported is the address of each 
substantial U.S. owner

[[Page 461]]

of such entity. In the case of an account held by an owner-documented 
FFI, the address to be reported is the address of each specified U.S. 
person identified in Sec.  1.1471-3(d)(6)(iv)(A)(1) and (2).
    (ii) Account number. The account number to be reported with respect 
to an account is the identifying number assigned by the participating 
FFI for purposes other than to satisfy the reporting requirements of 
this paragraph (d), or, if no such number is assigned to the account, a 
unique serial number or other number such participating FFI assigns to 
the financial account for purposes of reporting under paragraph (d)(3) 
of this section that distinguishes the account from other accounts 
maintained by such institution.
    (iii) Account balance or value--(A) In general. The participating 
FFI shall report the average balance or value of the account if the FFI 
reports average balance or value to the account holder for a calendar 
year. If the participating FFI does not report the average balance or 
value of the account to the account holder, the participating FFI shall 
report the balance or value of the account as of the end of the calendar 
year as determined in accordance with Sec.  1.1471-5(b)(4). In the case 
of an account that is a cash value insurance or annuity contract, a 
participating FFI shall report the balance or value of the account as 
determined in accordance with Sec.  1.1471-5(b)(4).
    (B) Currency translation of account balance or value. The account 
balance or value of an account may be reported in U.S. dollars or in the 
currency in which the account is denominated. In the case of an account 
denominated in one or more foreign currencies, the participating FFI may 
elect to report the account balance or value in a currency in which the 
account is denominated and is required to identify the currency in which 
the account is reported. If the participating FFI elects to report such 
an account in U.S. dollars, the participating FFI must calculate the 
account balance or value of the account in the manner described in Sec.  
1.1471-5(b)(4).
    (iv) Payments made with respect to an account--(A) Depository 
accounts. The payments made during a calendar year with respect to a 
depository account consist of the aggregate gross amount of interest 
paid or credited to the account during the year.
    (B) Custodial accounts. The payments made during a calendar year 
with respect to a custodial account consist of--
    (1) The aggregate gross amount of dividends paid or credited to the 
account during the calendar year;
    (2) The aggregate gross amount of interest paid or credited to the 
account during the calendar year;
    (3) The gross proceeds from the sale or redemption of property paid 
or credited to the account during the calendar year with respect to 
which the FFI acted as a custodian, broker, nominee, or otherwise as an 
agent for the account holder; and
    (4) The aggregate gross amount of all other income paid or credited 
to the account during the calendar year.
    (C) Other accounts. In the case of an account described in Sec.  
1.1471-5(b)(1)(iii) (relating to a debt or equity interest other than an 
interest as a partner in a partnership) or Sec.  1.1471-5(b)(1)(iv) 
(relating to cash value insurance contracts and annuity contracts), the 
payments made during the calendar year with respect to such account are 
the gross amounts paid or credited to the account holder during the 
calendar year including payments in redemption (in whole or part) of the 
account. In the case of an account that is a partner's interest in a 
partnership, the payments made during the calendar year with respect to 
such account are the amount of the partner's distributive share of the 
partnership's income or loss for the calendar year, without regard to 
whether any such amount is distributed to the partner during the year, 
and any guaranteed payments for the use of capital. The payments 
required to be reported under this paragraph (d)(4)(iv)(C) with respect 
to a partner may be determined based on the partnership's tax returns 
or, if the tax returns are unavailable by the due date for filing Form 
8966, the partnership's financial statements or any other reasonable 
method used by the partnership for calculating the partner's share of 
partnership income by such date.

[[Page 462]]

    (D) Transfers and closings of deposit, custodial, insurance, and 
annuity financial accounts. In the case of an account closed or 
transferred in its entirety during a calendar year that is a depository 
account, custodial account, or a cash value insurance contract or 
annuity contract, the payments made with respect to the account shall 
be--
    (1) The payments and income paid or credited to the account that are 
described in paragraph (d)(4)(iv)(A) or (B) of this section for the 
calendar year until the date of transfer or closure; and
    (2) The amount or value withdrawn or transferred from the account in 
connection with the closure or transfer of the account.
    (E) Amount and character of payments subject to reporting. For 
purposes of reporting under paragraph (d)(3) of this section, the amount 
and character of payments made with respect to an account may be 
determined under the same principles that the participating FFI uses to 
report information on its resident account holders to the tax 
administration of the jurisdiction in which the FFI (or branch thereof) 
is located. Thus, the amount and character of items of income described 
in paragraphs (d)(4)(iv)(A), (B), and (C) need not be determined in 
accordance with U.S. federal income tax principles. If any of the types 
of payments described in paragraph (d)(4)(iv) of this section are not 
reported to the tax administration of the jurisdiction in which the 
participating FFI (or branch thereof) is located, such amounts may be 
determined in the same manner as is used by the participating FFI for 
purposes of reporting to the account holder. If any of the types of 
payments described in this paragraph (d)(4)(iv) is neither reported to 
the tax administration of the jurisdiction in which the FFI (or branch 
thereof) is located nor reported to the account holder for the year for 
which reporting is required under paragraph (d) of this section, such 
item must be determined and reported either in accordance with U.S. 
federal tax principles or in accordance with any reasonable method of 
reporting that is consistent with the accounting principles generally 
applied by the participating FFI. Once a participating FFI (or branch 
thereof) has applied a method to determine such amounts, it must apply 
such method consistently for all account holders and for all subsequent 
years unless the Commissioner consents to a change in such method. 
Consent will be automatically granted for a change to rely on U.S. 
federal income tax principles to determine such amounts.
    (F) Currency translation. A payment described in this paragraph 
(d)(4)(iv) may be reported in the currency in which the payment is 
denominated or in U.S. dollars. In the case of payments denominated in 
one or more foreign currencies, a participating FFI may elect to report 
the payments in a currency in which payments are denominated and is 
required to identify the currency in which the account is reported. If 
such a payment is reported in U.S. dollars, the participating FFI must 
calculate the amount in the manner described in Sec.  1.1471-5(b)(4).
    (v) Record retention requirements. A participating FFI that 
produces, in the ordinary course of its business, account statements 
that summarize the activity (including withdrawals, transfers, and 
closures) of an account for any calendar year in which the account was 
required to be reported under paragraph (d)(3) of this section must 
retain a record of such account statements. The record must be retained 
for the longer of six years or the retention period under the FFI's 
normal business procedures. A participating FFI may be required to 
extend the six year retention period if the IRS requests such an 
extension prior to the expiration of the six year period.
    (5) Election to perform chapter 61 reporting--(i) In general--(A) 
Election under section 1471(c)(2). Except as otherwise provided in this 
paragraph (d)(5), a participating FFI may elect under section 1471(c)(2) 
and this paragraph (d)(5) to report under sections 6041, 6042, 6045, and 
6049, as appropriate, with respect to any account required to be 
reported under this paragraph (d). Such reporting must be done as if 
such participating FFI were a U.S. payor and each holder of an account 
that is a specified U.S. person, passive NFFE that is a U.S. owned 
foreign entity, or owner-documented FFI were a payee who is

[[Page 463]]

an individual and citizen of the United States. If a participating FFI 
makes such an election, the FFI is required to report the information 
required under this paragraph (d)(5) with respect to each such U.S. 
account or account held by an owner-documented FFI, regardless of 
whether the account holder of such account qualifies as a recipient 
exempt from reporting by a payor or middleman under sections 6041, 6042, 
6045, or 6049, including the reporting of payments made to such account 
of amounts that are subject to reporting under any of these sections. A 
participating FFI that elects to report an account under the election 
described in this paragraph (d)(5) is required to report the information 
described in paragraph (d)(5)(ii) or (iii) of this section for a 
calendar year regardless of whether a reportable payment was made to the 
U.S. account during the calendar year. A participating FFI that reports 
an account under the election described in this paragraph (d)(5) is not 
required to report the information described in paragraph (d)(3) of this 
section with respect to the account. The election under section 
1471(c)(2) described in this paragraph (d)(5)(i)(A) does not apply to 
cash value insurance contracts or annuity contracts that are financial 
accounts described in Sec.  1.1471-5(b)(1)(iv). See paragraph 
(d)(5)(i)(B) of this section for an election to report cash value 
insurance contracts or annuity contracts that are U.S. accounts held by 
specified U.S. persons in a manner similar to section 6047(d).
    (B) Election to report in a manner similar to section 6047(d). 
Except as otherwise provided in this paragraph (d)(5), a participating 
FFI may elect to report with respect to any of its cash value insurance 
contracts or annuity contracts that are U.S. accounts held by specified 
U.S. persons under section 6047(d), modified as follows. The amount to 
be reported is any amount paid under the contract during such reporting 
period as if such participating FFI were a U.S. payor. Each holder of a 
U.S. account that is a specified U.S. person is treated for purposes of 
reporting under this paragraph (d)(5)(i)(B) as a contract holder or 
payee who is an individual and citizen of the United States.
    (ii) Additional information to be reported. In addition to the 
information otherwise required to be reported under sections 6041, 6042, 
6045, 6047(d) (in the manner described in paragraph (d)(5)(i)(B) of this 
section with respect to U.S. accounts held by specified U.S. persons), 
and 6049, including the reporting of payments made to such accounts 
subject to reporting under the applicable section, a participating FFI 
that elects to report under this paragraph (d)(5)(ii) must report with 
respect to each account that it is required to treat as a U.S. account--
    (A) In the case of an account holder that is a specified U.S. 
person--
    (1) The name, address, and TIN of the account holder; and
    (2) The account number; and
    (B) In the case of an account holder that is a U.S. owned foreign 
entity that is a passive NFFE--
    (1) The name of such entity;
    (2) The name, address, and TIN of each substantial U.S. owner of 
such entity; and
    (3) The account number.
    (iii) Special reporting of accounts held by owner-documented FFIs. 
With respect to each account held by an owner-documented FFI, a 
participating FFI that elects to report under this paragraph (d)(5) must 
report payments made to the owner-documented FFI under the requirements 
of sections 6041, 6042, 6045, 6047(d), and 6049, the other information 
required under each applicable section, and the following information--
    (A) The name of such FFI;
    (B) The name, address, and TIN of each specified U.S. person 
identified in Sec.  1.1471-3(d)(6)(iv)(A)(1) and (2); and
    (C) The account number for the account held by the owner-documented 
FFI.
    (iv) Branch reporting. A participating FFI that reports the 
information described in paragraphs (d)(5)(ii) and (iii) of this section 
shall also report the jurisdiction of the branch that maintains the 
account being reported.
    (v) Time and manner of making the election. A participating FFI (or 
one or more branches of the participating FFI) may make the election 
described in this paragraph (d)(5) by reporting the information 
described in this paragraph (d)(5) on the form described in

[[Page 464]]

paragraph (d)(5)(vii) of this section on the next reporting date 
following the end of the calendar year for which the election is made. A 
participating FFI may make an election under this paragraph (d)(5) 
either with respect to all of its U.S. accounts and recalcitrant 
accounts or, separately, with respect to any clearly identified group of 
accounts (such as by line of business or the location where the account 
is maintained).
    (vi) Revocation of election. A participating FFI may revoke the 
election described in paragraph (d)(5)(i) of this section (as a whole or 
with regard to any clearly identified group of accounts) by reporting 
the information described in paragraph (d)(3) of this section beginning 
on the first reporting date with respect to the calendar year that 
follows the calendar year for which it last reports an account under 
this paragraph (d)(5).
    (vii) Filing of information under election. In the case of an 
account holder that is a specified U.S. person, the information required 
to be reported under the election described in this paragraph (d)(5) 
shall be filed with the IRS and issued to the account holder in the time 
and manner prescribed in sections 6041, 6042, 6045, 6047(d), and 6049 
and in accordance with the forms referenced therein and their 
accompanying instructions provided by the IRS for reporting under each 
of these sections. If the account holder is a passive NFFE that is a 
U.S. owned foreign entity or owner-documented FFI, however, the 
information required to be reported under the election described in this 
paragraph (d)(5) shall be filed on Form 8966 in accordance with its 
requirements and its accompanying instructions.
    (6) Reporting on recalcitrant account holders--(i) In general. 
Except as otherwise provided in a Model 2 IGA, a participating FFI, as 
part of its reporting responsibilities under this paragraph (d), shall 
report to the IRS for each calendar year the information described for 
each of the classes of account holders described in paragraphs 
(d)(6)(i)(A) through (E) of this section. See Sec.  1.1474-1(d)(4)(ii) 
for a participating FFI or registered deemed-compliant FFI's requirement 
to report chapter 4 reportable amounts paid to such account holders and 
tax withheld.
    (A) The aggregate number and aggregate balance or value of accounts 
held by recalcitrant account holders at the end of the calendar year 
that are described in Sec.  1.1471-5(g)(2)(iv) (referencing passive 
NFFEs that are recalcitrant account holders).
    (B) The aggregate number and aggregate balance or value of accounts 
held by recalcitrant account holders at the end of the calendar year 
that are described in Sec.  1.1471-5(g)(2)(ii) and (iii) (referencing 
U.S. persons that are recalcitrant account holders).
    (C) The aggregate number and aggregate balance or value of accounts 
held by recalcitrant account holders at the end of the calendar year, 
other than accounts described in paragraph (d)(6)(i)(A), (B), or (E) of 
this section, that have U.S. indicia.
    (D) The aggregate number and aggregate balance or value of accounts 
held by recalcitrant account holders at the end of the calendar year, 
other than accounts described in paragraph (d)(6)(i)(A) or (E) of this 
section, that do not have U.S. indicia.
    (E) The aggregate number and aggregate balance or value of accounts 
held by recalcitrant account holders at the end of the calendar year 
that are dormant accounts.
    (ii) Definition of dormant account. A dormant account is an account 
(other than a cash value insurance contract or annuity contract) that is 
a dormant or inactive account under applicable laws or regulations or 
the normal operating procedures of the participating FFI that are 
consistently applied for all accounts maintained by such institution in 
a particular jurisdiction. If neither applicable laws or regulations nor 
the normal operating procedures of the participating FFI maintaining the 
account address dormant or inactive accounts, an account will be a 
dormant account if--
    (A) The account holder has not initiated a transaction with regard 
to the account or any other account held by the account holder with the 
FFI in the past three years; and

[[Page 465]]

    (B) The account holder has not communicated with the FFI that 
maintains such account regarding the account or any other account held 
by the account holder with the FFI in the past six years.
    (iii) End of dormancy. An account that is a dormant account under 
paragraph (d)(6)(ii) of this section ceases to be a dormant account 
when--
    (A) The account holder initiates a transaction with regard to the 
account or any other account held by the account holder with the FFI;
    (B) The account holder communicates with the FFI that maintains such 
account regarding the account or any other account held by the account 
holder with the FFI; or
    (C) The account ceases to be a dormant account under applicable laws 
or regulations or the participating FFI's normal operating procedures.
    (iv) Forms. Reporting under paragraph (d)(6)(i) of this section 
shall be filed on Form 8966 in accordance with its requirements and 
accompanying instructions.
    (v) Time and manner of filing. Except as provided in paragraph 
(d)(7)(iv)(B) of this section, Form 8966 shall be filed electronically 
with the IRS on or before March 31 of the year following the end of the 
calendar year to which the form relates. See the accompanying 
instructions to this form for electronic filing instructions.
    (vi) Extensions in filing. The IRS shall grant an automatic 90-day 
extension of time in which to file Form 8966. Form 8809-I, ``Application 
for Extension of Time to File FATCA Form 8966,'' (or such other form as 
the IRS may prescribe) must be used to request such extension of time 
and must be filed no later than the due date of Form 8966. Under certain 
hardship conditions, the IRS may grant an additional 90-day extension. A 
request for extension due to hardship must contain a statement of the 
reasons for requesting the extension and such other information as the 
forms or instructions may require.
    (vii) Record retention requirements. A participating FFI that 
produces, in the ordinary course of its business, account statements 
that summarize the activity (including withdrawals, transfers, and 
closures) of an account held by a recalcitrant account holder described 
in paragraph (d)(6)(i)(B) of this section for any calendar year in which 
the account was required to be reported under paragraph (d)(6) of this 
section must retain a record of such account statements. Such record 
must be retained for the longer of six years or the retention period 
under the FFI's normal business procedures. A participating FFI may be 
required to extend the six year retention period if the IRS requests 
such an extension prior to the expiration of the six year period.
    (7) Special reporting rules with respect to the 2014 and 2015 
calendar years--
    (i) In general. If the effective date of the FFI agreement of a 
participating FFI is on or before December 31, 2015, the participating 
FFI is required to report U.S. accounts and accounts held by owner-
documented FFIs that it maintained (or that it is otherwise required to 
report under paragraph (d)(2)(ii) of this section) during the 2014 and 
2015 calendar years in accordance with paragraph (d)(7)(ii) or (iii) of 
this section.
    (ii) Participating FFIs that report under Sec.  1.1471-4(d)(3). With 
respect to accounts that a participating FFI is required to report in 
accordance with paragraph (d)(2) of this section, the participating FFI 
may, instead of the information described in paragraphs (d)(3)(ii) and 
(iii) of this section, report only the following information--
    (A) Reporting with respect to the 2014 calendar year. With respect 
to accounts maintained during the 2014 calendar year--
    (1) The name, address, and TIN of each specified U.S. person who is 
an account holder and, in the case of any account holder that is a 
passive NFFE that is a U.S. owned foreign entity or that is an owner-
documented FFI, the name of such entity and the name, address, and TIN 
of each substantial U.S. owner of such NFFE or, in the case of an owner-
documented FFI, of each specified U.S. person identified in Sec.  
1.1471-3(d)(6)(iv)(A)(1) and (2);
    (2) The account balance or value as of the end of the relevant 
calendar year, or if the account was closed after the effective date of 
the FFI agreement, the amount or value withdrawn or

[[Page 466]]

transferred from the account in connection with closure; and
    (3) The account number of the account.
    (B) Reporting with respect to the 2015 calendar year. With respect 
to the 2015 calendar year, the participating FFI may report only--
    (1) The information described in paragraph (d)(7)(ii)(A) of this 
section; and
    (2) The payments made with respect to the account except for those 
payments described in paragraph (d)(4)(iv)(B)(3) of this section 
(certain gross proceeds).
    (iii) Participating FFIs that report under Sec.  1.1471-4(d)(5). A 
participating FFI that elects to report under paragraph (d)(5) of this 
section may report only the information described in paragraphs 
(d)(7)(ii)(A)(1) and (3) of this section for its 2014 calendar year. 
With respect to its 2015 calendar year, a participating FFI is required 
to report all of the information required to be reported under 
paragraphs (d)(5)(i) through (iii) of this section but may exclude from 
such reporting amounts reportable under section 6045.
    (iv) Forms for reporting--(A) In general. Except as provided in 
paragraph (d)(7)(iv)(B) of this section, reporting under paragraph 
(d)(7)(ii) of this section shall be made on Form 8966 (or such other 
form as the IRS may prescribe), in the manner described in paragraph 
(d)(3)(vi) of this section. Reporting under paragraph (d)(7)(iii) of 
this section shall be made in accordance with paragraph (d)(5)(vii) of 
this section.
    (B) Special determination date and timing for reporting with respect 
to the 2014 calendar year. With respect to the 2014 calendar year, a 
participating FFI must report under paragraph (d)(3) or (5) of this 
section on all accounts that are identified and documented under 
paragraph (c) of this section as U.S. accounts or accounts held by 
owner-documented FFIs as of December 31, 2014, (or as of the date an 
account is closed if the account is closed prior to December 31, 2014) 
if such account was outstanding on or after the effective date of the 
participating FFI's FFI agreement. Reporting for the 2014 calendar year 
shall be filed with the IRS on or before March 31, 2015. However, a U.S. 
payor (including a U.S. branch treated as a U.S. person (as defined in 
Sec.  1.1471-1(b)(135))) that reports in accordance with paragraph 
(d)(2)(iii) of this section may report all or a portion of its U.S. 
accounts and accounts held by owner-documented FFIs in accordance with 
the dates otherwise applicable to reporting under chapter 61 with 
respect to the 2014 calendar year.
    (8) Reporting requirements of QIs, WPs, and WTs. In general, the 
reporting requirements with respect to the U.S. accounts maintained by a 
participating FFI that is a QI, WP, or WT will be consistent with the 
reporting requirements with respect to such accounts of a participating 
FFI that is not a QI, WP, or WT. See the QI, WP, or WT agreement for the 
coordination of the chapter 4 reporting obligations of a participating 
FFI that also is a QI, WP, or WT.
    (9) Examples. The following examples illustrate the provisions of 
this paragraph (d):

    Example 1. Financial institution required to report U.S. account. 
PFFI1, a participating FFI, issues shares of stock that are financial 
accounts under Sec.  1.1471-5(b). Such shares are held in custody by 
PFFI2, another participating FFI, on behalf of U, a specified U.S. 
person that holds an account with PFFI2. The shares of PFFI1 held by 
PFFI2 will not be subject to reporting by PFFI1 if PFFI1 may treat PFFI2 
as a participating FFI under Sec.  1.1471-3(d)(4). See paragraph 
(d)(2)(ii)(A) of this section.
    Example 2. Financial institution required to report U.S. account. U, 
a specified U.S. person, holds shares in PFFI1, a participating FFI that 
invests in other financial institutions (a fund of funds). The shares of 
PFFI1 are financial accounts under Sec.  1.1471-5(b)(3)(iii). PFFI1 
holds shares that are also financial accounts under Sec.  1.1471-
5(b)(3)(iii) in PFFI2, another participating FFI. The shares of PFFI2 
held by PFFI1 are not subject to reporting by PFFI2, if PFFI2 may treat 
PFFI1 as a participating FFI under Sec.  1.1471-3(d)(4). See paragraph 
(d)(2)(ii)(A) of this section.
    Example 3. U.S. owned foreign entity. FC, a passive NFFE, holds a 
custodial account with PFFI1, a participating FFI. U, a specified U.S. 
person, owns 3% of the only class of stock of FC. Q, another specified 
U.S. person, owns 12% of the only class of stock of FC. U is not a 
substantial U.S. owner of FC. See Sec.  1.1473-1(b). Q is a substantial 
U.S. owner of FC and FC identifies her as such to PFFI1.

[[Page 467]]

PFFI1 does not elect to report under paragraph (d)(5) of this section. 
PFFI1 must complete and file the reporting form described in paragraph 
(d)(3)(v) of this section and report the information described in 
paragraph (d)(3)(iii) with respect to both FC and Q. See paragraph 
(d)(3)(ii) of this section.
    Example 4. Election to perform Form 1099 reporting with regard to an 
NFFE. Same facts as in Example 3, except that PFFI1 has made the 
election in accordance with paragraph (d)(5) of this section. PFFI1 must 
complete and file the forms described in paragraph (d)(5)(vii) for FC, 
treating FC as if it were an individual and citizen of the United States 
and must identify Q as a substantial U.S. owner of FC on such form. See 
paragraph (d)(5)(ii) of this section. PFFI1 shall not complete the forms 
described in paragraph (d)(5)(vii) with regard to U.
    Example 5. Owner-documented FFI. DC, an owner-documented FFI under 
Sec.  1.1471-3(d)(6), holds a custodial account with PFFI1, a 
participating FFI. U, a specified U.S. person, owns 3% of the only class 
of stock of DC. Q, another specified U.S. person, owns 12% of the only 
class of stock of DC. Both U and Q are persons identified in Sec.  
1.1471-3(d)(6)(iv)(A)(1) and DC identifies U and Q to PFFI1 and 
otherwise provides to PFFI1 all of the information required to be 
reported with respect to DC. PFFI1 must complete and file a form 
described in paragraph (d)(3)(v) of this section with regard to U and Q. 
See paragraph (d)(3)(iii) of this section.
    Example 6. Election to perform Form 1099 reporting with regard to an 
owner-documented FFI. Same facts as in Example 5, except that PFFI1 has 
made the election in accordance with paragraph (d)(5) of this section. 
PFFI1 must complete and file the forms described in paragraph 
(d)(5)(vii) for U and Q.
    Example 7. Sponsored FFI. DC2 is an FFI that has agreed to have a 
sponsoring entity, PFFI1, fulfill DC2's chapter 4 responsibilities under 
Sec.  1.1471-5(f)(2)(iii). U, a specified U.S. person, holds an equity 
interest in DC2 that is a financial account under Sec.  1.1471-
5(b)(3)(iii). PFFI1 must complete and file a form described in paragraph 
(d)(3)(v) of this section with regard to U's account on behalf of DC2. 
See paragraph (d)(2)(ii)(C) of this section.

    (e) Expanded affiliated group requirements--(1) In general. Except 
as otherwise provided in this paragraph (e)(1) or paragraphs (e)(2) and 
(e)(3) of this section, each FFI that is a member of an expanded 
affiliated group must have the chapter 4 status of a participating FFI, 
deemed-compliant FFI, or exempt beneficial owner as a condition for any 
member of such group to obtain the status of a participating FFI or 
registered deemed-compliant FFI. Accordingly, except as otherwise 
provided in paragraph (e)(3)(v) of this section, each FFI other than a 
certified deemed-compliant FFI or exempt beneficial owner in an expanded 
affiliated group must submit a registration form to the IRS in such 
manner as the IRS may prescribe requesting an FFI agreement, registered 
deemed-compliant status, or limited FFI status as a condition for any 
member to become a participating FFI or registered deemed-compliant FFI. 
Except as provided in paragraph (e)(2) of this section, each FFI other 
than a certified deemed-compliant FFI or exempt beneficial owner that is 
a member of such group must also agree to all of the requirements for 
the status for which it applies with respect to all accounts maintained 
at all of its branches, offices, and divisions. For the withholding 
requirements of a participating FFI with respect to its limited branches 
and its affiliates that are limited FFIs, see paragraph (b)(5) of this 
section. Notwithstanding the foregoing, an FFI (or branch thereof) that 
is treated as a participating FFI or a deemed-compliant FFI pursuant to 
a Model 1 IGA or Model 2 IGA will maintain such status provided that it 
meets the terms for such status pursuant to such agreement.
    (2) Limited branches--(i) In general. An FFI that otherwise 
satisfies the requirements for participating FFI status as described in 
this section will be allowed to become a participating FFI 
notwithstanding that one or more of its branches cannot satisfy all of 
the requirements of a participating FFI as described in this section 
if--
    (A) All branches (as defined in paragraph (e)(2)(ii) of this 
section) that cannot satisfy all of the requirements of a participating 
FFI as described in this section are limited branches as described in 
paragraph (e)(2)(iii) of this section;
    (B) The FFI maintains at least one branch that complies with all of 
the requirements of a participating FFI, even if the only branch that 
can comply is a U.S. branch; and
    (C) The FFI agrees to and complies with the conditions in paragraph 
(e)(2)(iv) of this section.

[[Page 468]]

    (ii) Branch defined. The term branch has the meaning set forth in 
Sec.  1.1471-1(b)(10).
    (iii) Limited branch defined. A limited branch is a branch of an FFI 
that, under the laws of the jurisdiction that apply with respect to the 
accounts maintained by the branch, cannot satisfy the conditions of both 
paragraphs (e)(2)(iii)(A) and (B) of this section, but with respect to 
which the FFI will agree to the conditions of paragraph (e)(2)(iv) of 
this section.
    (A) With respect to accounts that pursuant to this section the 
participating FFI is required to treat as U.S. accounts, either report 
such accounts to the IRS as described in paragraph (d) of this section, 
close such accounts within a reasonable period of time, or transfer such 
accounts to a U.S. financial institution, a branch of the FFI that will 
so report, a participating FFI, or a reporting Model 1 FFI.
    (B) With respect to recalcitrant account holders and accounts held 
by nonparticipating FFIs, withhold with respect to each such account as 
required under paragraph (b) of this section, block each such account 
(as defined in this paragraph), close each such account within a 
reasonable period of time, or transfer each such account to a U.S. 
financial institution, a branch of the FFI that will so report, a 
participating FFI, or a reporting Model 1 FFI. For purposes of this 
paragraph (e)(2)(iii)(B), an account is a blocked account if the FFI 
prohibits the account holder from effecting any transactions with 
respect to an account until such time as the account is closed, 
transferred, or the account holder provides the documentation described 
in paragraph (c) of this section for the FFI to determine the U.S. or 
non-U.S. status of the account and report the account if required under 
paragraph (d) of this section.
    (iv) Conditions for limited branch status. An FFI with one or more 
limited branches must satisfy the following requirements when applying 
for participating FFI status with the IRS--
    (A) Identify the relevant jurisdiction of each branch for which it 
seeks limited branch status;
    (B) Agree that each such branch will identify its account holders 
under the due diligence requirements applicable to participating FFIs 
under paragraph (c) of this section, retain a record of account holder 
and payee documentation pertaining to those identification requirements 
for the longer of six years from the effective date of the FFI agreement 
or for as long as the branch maintains the account or obligation, and 
report to the IRS with respect to accounts that it is required to treat 
as U.S. accounts to the extent permitted under the relevant laws 
pertaining to the branch;
    (C) Agree to treat each such branch as an entity separate from its 
other branches for purposes of the withholding requirements described in 
paragraph (b)(5) of this section;
    (D) Except as otherwise provided in paragraph (e)(2)(vi) of this 
section, agree that each such branch will not open accounts that it is 
required to treat as U.S. accounts or accounts held by nonparticipating 
FFIs, including accounts transferred from any branch of the FFI or from 
any member of its expanded affiliated group; and
    (E) Agree that each limited branch will identify itself to 
withholding agents as a nonparticipating FFI (including to affiliates of 
the FFI in the same expanded affiliated group that are withholding 
agents).
    (v) Term of limited branch status (transitional). An FFI that 
becomes a participating FFI with one or more limited branches will cease 
to be a participating FFI after December 31, 2016, unless otherwise 
provided pursuant to Model 1 IGA or Model 2 IGA. A branch will cease to 
be a limited branch as of the beginning of the third calendar quarter 
following the date on which the branch is no longer prohibited from 
complying with the requirements of a participating FFI as described in 
this section. In such case, a participating FFI will retain its status 
as a participating FFI if it notifies the IRS by the date such branch 
ceases to be a limited branch that it will comply with the requirements 
of an FFI agreement with respect to such branch, or if otherwise 
provided pursuant to a Model 1 IGA or Model 2 IGA.
    (vi) Exception from restriction on opening U.S. accounts and 
accounts held by nonparticipating FFIs. Notwithstanding

[[Page 469]]

the requirements of paragraph (e)(2)(iv)(D) of this section, a branch 
may open U.S. accounts for persons resident in the same jurisdiction in 
which such branch is located or operating and accounts for 
nonparticipating FFIs that are resident in the same jurisdiction 
provided that--
    (A) The branch does not solicit U.S. accounts or accounts for 
nonparticipating FFIs from persons not resident in the same jurisdiction 
in which such branch is located or operating; and
    (B) The branch is not used by the FFI or any FFI in its expanded 
affiliated group to circumvent the obligations of such FFI under section 
1471.
    (3) Limited FFI--(i) In general. An FFI will be allowed to become 
either a participating FFI or a registered deemed-compliant FFI 
notwithstanding that one or more of the FFIs in the expanded affiliated 
group of which the FFI is a member cannot comply with all of the 
requirements of a participating FFI as described in this section if each 
such FFI is a limited FFI under paragraph (e)(3)(ii) of this section.
    (ii) Limited FFI defined. A limited FFI is a member of an expanded 
affiliated group that includes one or more participating FFIs that 
agrees to the conditions described in paragraph (e)(3)(iii) of this 
section to become a limited FFI and if under the laws of each 
jurisdiction that apply with respect to the accounts maintained by the 
affiliate, the affiliate cannot satisfy the conditions of both 
paragraphs (e)(3)(ii)(A) and (B) of this section.
    (A) With respect to accounts that are U.S. accounts, report such 
accounts to the IRS as described in paragraph (d) of this section, close 
such accounts within a reasonable period of time, or transfer such 
accounts to a U.S. financial institution, a participating FFI, or a 
reporting Model 1 FFI.
    (B) With respect to recalcitrant account holders and accounts held 
by nonparticipating FFIs, withhold with respect to each such account as 
required under paragraph (b) of this section, block each such account, 
close each such account within a reasonable period of time, or transfer 
each such account to a U.S. financial institution, a participating FFI, 
or a reporting Model 1 FFI. See paragraph (e)(2)(iii)(B) of this section 
for when an account is considered blocked.
    (iii) Conditions for limited FFI status. An FFI that seeks to become 
a limited FFI must--
    (A) Except as otherwise provided in paragraph (e)(3)(v) of this 
section, register as part of its expanded affiliated group's FFI 
agreement process for limited FFI status;
    (B) Agree as part of such registration to identify its account 
holders under the due diligence requirements applicable to participating 
FFIs under paragraph (c) of this section, retain a record of account 
holder and payee documentation pertaining to those identification 
requirements for the longer of six years from the effective date of its 
registration as a limited FFI or for as long as the FFI maintains the 
account or obligation, and report with respect to accounts that it is 
required to treat as U.S. accounts to the extent permitted under the 
relevant laws pertaining to the FFI;
    (C) Except as otherwise provided in paragraph (e)(3)(vi) of this 
section, agree as part of such registration that it will not open 
accounts that it is required to treat as U.S. accounts or accounts held 
by nonparticipating FFIs, including accounts transferred from any member 
of its expanded affiliated group; and
    (D) Agree as part of such registration that it will identify itself 
to withholding agents as a nonparticipating FFI.
    (iv) Period for limited FFI status (transitional). A limited FFI 
will cease to be a limited FFI after December 31, 2016. An FFI will also 
cease to be a limited FFI when it becomes a participating FFI or deemed-
compliant FFI, or as of the beginning of the third calendar quarter 
following the date on which the FFI is no longer prohibited from 
complying with the requirements of a participating FFI as described in 
this section. In such case, participating FFIs and deemed-compliant FFIs 
that are members of the same expanded affiliated group will retain their 
status if, by the date that an FFI ceases to be a limited FFI, such FFI 
enters into an FFI agreement or becomes a registered

[[Page 470]]

deemed-compliant FFI, unless otherwise provided pursuant to an 
applicable Model 1 IGA or Model 2 IGA.
    (v) Exception from registration requirement--(A) Conditions for 
exception. An FFI that seeks to become a limited FFI is excepted from 
the registration requirement of paragraph (e)(3)(iii)(A) of this section 
provided that--
    (1) The FFI is prohibited under local law from registering as a 
limited FFI;
    (2) A member of the FFI's expanded affiliated group that is a U.S. 
financial institution or an FFI seeking status as (or that is) a 
participating FFI or reporting Model 1 FFI registers as a lead FI 
(defined in the Instructions for Form 8957, ``Foreign Account Tax 
Compliance Act (FATCA) Registration'') with respect to the limited FFI; 
and
    (3) The lead FI identifies the limited FFI on the lead FI's FATCA 
registration. However, if the limited FFI is prohibited under applicable 
law from being identified by its legal name on the FATCA registration 
Web site, the lead FI may use the term Limited FFI in place of the 
limited FFI's name and indicate the limited FFI's jurisdiction of 
residence or organization.
    (B) Confirmation requirements of lead FI. By identifying a limited 
FFI on the FATCA registration Web site pursuant to paragraph 
(e)(3)(v)(A)(2) of this section, the lead FI is confirming that--
    (1) The limited FFI has represented to the lead FI that it will meet 
the conditions for limited FFI status described in paragraph (e)(3)(iii) 
of this section;
    (2) The limited FFI has agreed to notify the lead FI within 30 days 
of the date that such FFI ceases to meet the requirements of a limited 
FFI or the date that such FFI can comply with the requirements of a 
participating FFI or deemed-compliant FFI (and will separately register 
for that status); and
    (3) The lead FI, if it receives a notification described in 
paragraph (e)(3)(v)(B)(2) of this section or otherwise knows that the 
limited FFI has not complied with the conditions for limited FFI status 
or can comply with the requirements of a participating FFI or deemed-
compliant FFI, will, within 90 days of such notification or acquiring 
such knowledge, remove the FFI from the lead FI's registration on the 
FATCA registration Web site and maintain a record of the date on which 
the FFI ceased to be a limited FFI and (if applicable) the circumstances 
of the limited FFI's non-compliance, which will be available to the IRS 
upon request.
    (vi) Exception from restriction on opening U.S. accounts and 
accounts held by nonparticipating FFIs. Notwithstanding paragraph 
(e)(3)(iii)(C) of this section, a limited FFI may open U.S. accounts for 
persons resident in the same jurisdiction in which such FFI is resident 
or organized and accounts for nonparticipating FFIs that are resident in 
the same jurisdiction provided that--
    (A) Such FFI does not solicit U.S. accounts or accounts for 
nonparticipating FFIs from persons not resident in the same jurisdiction 
in which the FFI is resident or organized; and
    (B) The FFI is not used by another FFI in the FFI's expanded 
affiliated group to circumvent the obligations of such other FFI under 
section 1471.
    (4) Special rule for QIs. An FFI that has in effect a QI agreement 
with the IRS will be allowed to become a limited FFI notwithstanding 
that none of the FFIs in the expanded affiliated group of which the FFI 
is a member can comply with the requirements of a participating FFI as 
described in this section if the FFI that is a QI meets the conditions 
of a limited FFI under paragraph (e)(3)(iii) of this section.
    (f) Verification--(1) In general. This paragraph (f) describes the 
requirement for a participating FFI to establish and implement a 
compliance program for satisfying its requirements under this section. 
Paragraph (f)(2) of this section provides the requirement for a 
participating FFI to establish a compliance program and the option for a 
group of FFIs to adopt a consolidated compliance program. Paragraph 
(f)(3) of this section describes the periodic certification that the 
participating FFI must make to the IRS regarding the participating FFI's 
compliance with the requirements of an FFI agreement. Paragraph (f)(4) 
describes IRS information requests related to compliance with an FFI 
agreement.
    (2) Compliance program--(i) In general. The participating FFI must 
appoint a

[[Page 471]]

responsible officer to oversee the participating FFI's compliance with 
the requirements of the FFI agreement. The responsible officer must 
(either personally or through designated persons) establish a compliance 
program that includes policies, procedures, and processes sufficient for 
the participating FFI to satisfy the requirements of the FFI agreement. 
The responsible officer (or designee) must periodically review the 
sufficiency of the FFI's compliance program and the FFI's compliance 
with the requirements of an FFI agreement during the certification 
period described in paragraph (f)(3) of this section. The results of the 
periodic review must be considered by the responsible officer in making 
the periodic certifications required under paragraph (f)(3) of this 
section.
    (ii) Consolidated compliance program--(A) In general. A 
participating FFI that is a member of an expanded affiliated group that 
includes one or more FFIs may elect to be part of a consolidated 
compliance program (and perform a consolidated periodic review) under 
the authority of a participating FFI, reporting Model 1 FFI, or U.S. 
financial institution (compliance FI) that is a member of the electing 
FFI's expanded affiliated group, regardless of whether all such members 
so elect. In addition, when an FFI elects to be part of a consolidated 
compliance program, each branch that it maintains (including a limited 
branch or a branch described in Sec.  1.1471-5(f)(1)), other than a 
branch located in a Model 1 IGA jurisdiction, must be subject to 
periodic review as part of such program and included on the periodic 
certification (described in paragraph (f)(2)(ii)(B)(1) of this section). 
To the extent that a compliance FI satisfies the certification 
requirements of paragraph (f)(2)(ii)(B) of this section on behalf of an 
electing FFI, such electing FFI does not have a certification 
requirement under paragraph (f)(3) of this section. See Sec.  1.1471-
5(j) for the requirement of a sponsoring entity to establish and 
implement a compliance program for its sponsored FFIs.
    (B) Requirements of compliance FI. A participating FFI, reporting 
Model 1 FFI, or U.S. financial institution that agrees to establish and 
maintain a consolidated compliance program and perform a consolidated 
periodic review on behalf of one or more FFIs (the compliance group), 
must agree to identify itself as the compliance FI and identify each FFI 
for which it acts (an electing FFI) to the extent required by the IRS as 
part of the FFI registration process or certification procedures. The 
agreement between the compliance FI and each electing FFI must permit 
either the compliance FI or the electing FFI to terminate the agreement 
upon a finding by the IRS or by either party that the other party to the 
agreement is not fulfilling its obligations under the agreement or is no 
longer able to fulfill such obligations.
    (1) Periodic certification--(i) In general. On or before July 1 of 
the calendar year following the end of the certification period, the 
responsible officer of the compliance FI must make the certification 
described in either paragraph (f)(3)(ii) or (iii) of this section with 
respect to all electing FFIs for which it acts during the certification 
period on the form and in the manner prescribed by the IRS. The 
certification must be made on behalf of all electing FFIs in the 
compliance group during the certification period, except as otherwise 
provided in paragraph (f)(2)(ii)(B)(1)(ii) of this section. The first 
certification period for a compliance group begins on the later of the 
date the compliance FI is issued a GIIN or June 30, 2014, and ends at 
the close of the third full calendar year following such date. Each 
subsequent certification period is the three-calendar-year period 
following the previous certification period.
    (ii) Late-joining electing FFIs. In general, with respect to a 
certification period, a compliance FI is not required to make a 
certification for an electing FFI that first elects to be part of the 
consolidated compliance program of the compliance FI during the six-
month period before the end of the certification period, provided that 
the compliance FI makes certifications for such electing FFI for 
subsequent certification periods, and the first such certification 
covers both the subsequent certification period and the portion of the 
prior certification period of the compliance group during which such FFI 
was an electing FFI in the consolidated compliance program of

[[Page 472]]

the compliance FI. However, the preceding sentence does not apply to an 
electing FFI that, immediately before the electing FFI elects to be part 
of the consolidated compliance program, was a participating FFI or 
registered deemed-compliant FFI. The compliance FI may certify for an 
electing FFI described in the preceding sentence for the portion of the 
certification period of the compliance group before the date that the 
electing FFI elects to be part of the consolidated compliance program if 
the compliance FI obtains from the FFI (or the FFI's former compliance 
FI, if applicable) a written certification that the FFI has complied 
with its applicable chapter 4 requirements during such portion of the 
certification period, provided that: The compliance FI does not know 
that such certification is unreliable or incorrect; and the 
certification for the electing FFI for the subsequent certification 
period covers both the subsequent certification period and the portion 
of the prior certification period during which such FFI was an electing 
FFI in the consolidated compliance program of the compliance FI.
    (2) Preexisting account certification. The responsible officer of a 
compliance FI must make the certification described in paragraph (c)(7) 
of this section (preexisting account certification of a participating 
FFI) with respect to each electing FFI that elects to be part of the 
consolidated compliance program under the compliance FI during the 
certification period. However, a preexisting account certification is 
not required for an electing FFI if immediately before electing to be 
part of the consolidated compliance program under the compliance FI the 
FFI was a participating FFI or a registered deemed-compliant FFI that is 
a local FFI or restricted fund, and the FFI (or the FFI's former 
compliance FI, if applicable) provides a written certification to the 
compliance FI that the FFI has made the preexisting account 
certification required under paragraph (c)(7) of this section or Sec.  
1.1471-5(f)(1)(i)(A)(7) or (f)(1)(i)(D)(6) (as applicable), unless the 
compliance FI knows that such written certification is unreliable or 
incorrect. In addition, a preexisting account certification is not 
required for an electing FFI that elects to be part of the consolidated 
compliance program under the compliance FI during the two year period 
before the end of the certification period, provided that the compliance 
FI makes the preexisting account certification for such FFI for the 
subsequent certification period. The certification required under this 
paragraph (f)(2)(ii)(B)(2) for the certification period must be 
submitted by the due date of the FFI's certification of compliance 
required under paragraph (f)(2)(ii)(B)(1)(i) of this section for the 
certification period, on the form and in the manner prescribed by the 
IRS.
    (3) Certification of compliance--(i) In general. In addition to the 
certifications required under paragraph (c)(7) of this section, on or 
before July 1 of the calendar year following the end of each 
certification period, the responsible officer must make the 
certification described in either paragraph (f)(3)(ii) or (iii) of this 
section on the form and in the manner prescribed by the IRS. The first 
certification period begins on the effective date of the FFI agreement 
and ends at the close of the third full calendar year following the 
effective date of the FFI agreement. Each subsequent certification 
period is the three-calendar-year period following the previous 
certification period, unless the FFI agreement provides for a different 
period. The responsible officer must either certify that the 
participating FFI maintains effective internal controls or, if the 
participating FFI has identified an event of default (defined in 
paragraph (g) of this section) or a material failure (defined in 
paragraph (f)(3)(iv) of this section) that it has not corrected as of 
the date of the certification, must make the qualified certification 
described in paragraph (f)(3)(iii) of this section. The certification of 
compliance described in paragraph (f)(3)(ii) or (iii) of this section 
may be modified through an amendment to the FFI agreement to include any 
additional certifications or information (such as quantitative or 
factual information related to the

[[Page 473]]

FFI's compliance with the FFI agreement), provided that any additional 
information or certifications are published at least 90 days before 
being incorporated into the FFI agreement to allow for public comment.
    (ii) Certification of effective internal controls. The responsible 
officer must certify to the following statements--
    (A) The responsible officer (or designee) has established a 
compliance program that is in effect as of the date of the certification 
and that has been subjected to the review as described in paragraph 
(f)(2)(i) of this section;
    (B) With respect to material failures--
    (1) There are no material failures for the certification period; or
    (2) If there are any material failures, appropriate actions were 
taken to remediate such failures and to prevent such failures from 
reoccurring; and
    (C) With respect to any failure to withhold, deposit, or report to 
the extent required under the FFI agreement, the FFI has corrected such 
failure by paying any taxes due (including interest and penalties) and 
filing the appropriate return (or amended return).
    (iii) Qualified certification. If the responsible officer has 
identified an event of default or a material failure that the 
participating FFI has not corrected as of the date of the certification, 
the responsible officer must certify to the following statements--
    (A) With respect to the event of default or material failure--
    (1) The responsible officer (or designee) has identified an event of 
default as defined in paragraph (g)(1) of this section; or
    (2) The responsible officer has determined that as of the date of 
the certification, there are one or more material failures with respect 
to the participating FFI's compliance with the FFI agreement and that 
appropriate actions will be taken to prevent such failures from 
reoccurring;
    (B) With respect to any failure to withhold, deposit, or report to 
the extent required under the FFI agreement, the FFI will correct such 
failure by paying any taxes due (including interest and penalties) and 
filing the appropriate return (or amended return); and
    (C) The responsible officer (or designee) will respond to any notice 
of default (if applicable) or will provide to the IRS, to the extent 
requested, a description of each material failure and a written plan to 
correct each such failure.
    (iv) Material failures defined. A material failure is a failure of 
the participating FFI to fulfill the requirements of the FFI agreement 
if the failure was the result of a deliberate action on the part of one 
or more employees of the participating FFI (its agent, sponsor, or 
compliance FI) to avoid the requirements of the FFI agreement or was an 
error attributable to a failure of the participating FFI to implement 
internal controls sufficient for the participating FFI to meet the 
requirements of this section. A material failure will not constitute an 
event of default unless such material failure occurs in more than 
limited circumstances when a participating FFI has not substantially 
complied with the requirements of an FFI agreement. Material failures 
include the following--
    (A) The deliberate or systemic failure of the participating FFI to 
report accounts that it was required to treat as U.S. accounts, withhold 
on passthru payments to the extent required, deposit taxes withheld, or 
accurately report recalcitrant account holders or payees that are 
nonparticipating FFIs as required;
    (B) A criminal or civil penalty or sanction imposed on the 
participating FFI (or any branch or office thereof) by a regulator or 
other governmental authority or agency with oversight over the 
participating FFI's compliance with the AML due diligence procedures to 
which it (or any branch or office thereof) is subject and that is 
imposed based on a failure to properly identify account holders under 
the requirements of those procedures; and
    (C) A potential future tax liability related to the participating 
FFI's compliance (or lack thereof) with the FFI agreement for which the 
FFI establishes, for financial statement purposes, a tax reserve or 
provision.
    (4) IRS review of compliance--(i) General inquiries. The IRS, based 
upon the information reporting forms described in paragraphs (d)(3)(v), 
(d)(5)(vii), or

[[Page 474]]

(d)(6)(iv) of this section filed with the IRS (or the absence of such 
reporting) for each calendar year, may request additional information 
with respect to the information reported (or required to be reported) on 
the forms or may request the account statements described in paragraph 
(d)(4)(v) of this section, or confirmation that the FFI has no accounts 
that it was required to report. The IRS may also request any additional 
information to determine an FFI's compliance with its FFI agreement and 
to assist the IRS with its review of account holder compliance with tax 
reporting requirements.
    (ii) Inquiries regarding substantial non-compliance. If, based on 
the information reporting forms described in paragraphs (d)(3)(v), 
(d)(5)(vii), or (d)(6)(iv) of this section filed with the IRS for each 
calendar year, the certifications made by the responsible officer 
described in paragraph (f)(3) of this section, or any other information 
related to the participating FFI's compliance with its FFI agreement, 
the IRS determines in its discretion that the participating FFI may not 
have substantially complied with the requirements of its FFI agreement, 
the IRS may request from the responsible officer (or designee) 
information necessary to verify the participating FFI's compliance with 
the FFI agreement. The IRS may request, for example, a description or 
copy of the participating FFI's policies and procedures for fulfilling 
the requirements of the FFI agreement, a description of the 
participating FFI's procedures for conducting its periodic review, or a 
copy of any written reports documenting the findings of such review in 
order to evaluate the sufficiency of the participating FFI's compliance 
program and review of such program. The IRS may also request the 
performance of specified review procedures by a person (including an 
external auditor or third-party consultant) that the IRS identifies as 
competent to perform such procedures given the facts and circumstances 
surrounding the FFI's potential failure to comply with the FFI 
agreement. The IRS may make these requests to a sponsoring entity with 
respect to any sponsored FFI.
    (g) Event of default--(1) Defined. An event of default occurs if a 
participating FFI fails to perform material obligations required with 
respect to the due diligence, verification, withholding, or reporting 
requirements of the FFI agreement or if the IRS determines that the 
participating FFI has failed to substantially comply with the 
requirements of the FFI agreement. An event of default also includes the 
occurrence of the following--
    (i) Failure to obtain, in any case in which foreign law would (but 
for a waiver) prevent the reporting of U.S. accounts required under 
paragraph (d) of this section, valid and effective waivers from holders 
of U.S. accounts or failure to otherwise close or transfer such U.S. 
accounts as required under paragraph (i) of this section;
    (ii) Failure to significantly reduce, over a period of time, the 
number of account holders or payees that the participating FFI is 
required to treat as recalcitrant account holders or nonparticipating 
FFIs, as a result of the participating FFI failing to comply with the 
due diligence procedures for the identification and documentation of 
account holders and payees, as set forth in paragraph (c) of this 
section;
    (iii) Failure, in any case in which foreign law prevents or 
otherwise limits withholding to the extent required under paragraph (b) 
of this section, to fulfill the requirements of paragraph (i) of this 
section;
    (iv) Failure to establish or maintain a compliance program for 
fulfilling the requirements of the FFI agreement or to perform a 
periodic review of the participating FFI's compliance;
    (v) Failure to take timely corrective actions to remedy a material 
failure described in paragraph (f)(3)(iv) of this section after making 
the qualified certification described in paragraph (f)(3)(iii) of this 
section;
    (vi) Failure to make the initial certification required under 
paragraph (c)(7) of this section or to make the periodic certification 
required under paragraph (f)(3) of this section within the specified 
time period;
    (vii) Making incorrect claims for refund under the collective refund 
procedures described in paragraph (h) of this section;

[[Page 475]]

    (viii) Failure to cooperate with an IRS request for additional 
information or making any fraudulent statement or misrepresentation of 
material fact to the IRS; or
    (ix) Any transaction relating to sponsorship, promotion, or 
noncustodial distribution for or on behalf of any Local FFI, as 
described in Sec.  1.1471-5(f)(1)(i)(A), that is an investment entity.
    (2) Notice of event of default. Following an event of default known 
by or disclosed to the IRS, the IRS will deliver to the participating 
FFI a notice of default specifying the event of default. The IRS will 
request that the participating FFI remediate the event of default within 
45 days (unless additional time is requested and agreed to by the IRS). 
The participating FFI must respond to the notice of default and provide 
information responsive to an IRS request for information or state the 
reasons why the participating FFI does not agree that an event of 
default has occurred. Taking into account the terms of any applicable 
Model 2 IGA, if the participating FFI does not provide a response within 
the specified time period, the IRS may, at its sole discretion, deliver 
a notice of termination that terminates the FFI's participating FFI 
status. If the FFI's participating FFI status is terminated, in addition 
to the requirements in Sec.  1.1471-3(c)(6)(ii)(E)(2), the FFI must, 
within 30 days of the termination, send notice of the termination to 
each withholding agent from which it receives payments and each 
financial institution with which it holds an account for which a 
withholding certificate or other documentation was provided. An FFI that 
has had its participating FFI status terminated may not reregister on 
the FATCA registration website as a participating FFI or registered 
deemed-compliant FFI unless it receives written approval from the IRS to 
register. A participating FFI may request, within 90 days of a notice of 
default or notice of termination, reconsideration of a notice of default 
or notice of termination by written request to the IRS.
    (3) Remediation of event of default. A participating FFI will be 
permitted to remediate an event of default to the extent that it agrees 
with the IRS on a remediation plan. Such a plan may, for example, allow 
a participating FFI to remediate an event of default described in 
paragraph (g)(1)(iii) of this section by providing specific information 
regarding its U.S. accounts when the FFI has been unable to report all 
of the information with respect to such accounts as required under 
paragraph (d) of this section and has been unable to close or transfer 
such accounts. The IRS may, as part of a remediation plan, require 
additional information from the FFI or the performance of the specified 
review procedures described in paragraph (f)(4)(ii) of this section.
    (h) Collective credit or refund procedures for overpayments--(1) In 
general. Except as otherwise provided in the FFI agreement, if there has 
been an overpayment of tax with respect to an account holder or payee of 
a participating FFI or reporting Model 1 FFI resulting from tax withheld 
under chapter 4 by either the participating FFI or reporting Model 1 FFI 
or by its withholding agent during a calendar year and the amount 
withheld has not been recovered under the reimbursement or set-off 
procedures described in Sec.  1.1474-2(a) (applied by either the 
withholding agent or the participating FFI or reporting Model 1 FFI), 
the participating FFI or reporting Model 1 FFI may request a credit or 
refund from the IRS of the overpayment to the extent permitted under 
this paragraph (h) on behalf of such account holder or payee. For 
purposes of this paragraph (h), an overpayment means an amount withheld 
in excess of the account holder or payee's U.S. tax liability with 
respect to the payment (including overwithholding as defined Sec.  
1.1474-2(a)(2)). If a participating FFI or reporting Model 1 FFI does 
not elect the procedure provided in this paragraph (h) to request a 
credit or refund, the participating FFI or reporting Model 1 FFI is 
required to (or must request that its withholding agent) file and 
furnish within a reasonable period a Form 1042-S (or such other form as 
the IRS may prescribe) and Form 1042 (or amended forms) to report to any 
account holder or payee that has requested such form with regard to the 
tax withheld by the participating FFI or reporting Model 1 FFI or its 
withholding agent.

[[Page 476]]

    (2) Persons for which a collective refund is not permitted. A 
participating FFI or reporting Model 1 FFI cannot include in its 
collective refund claim any payments made to an account holder or payee 
that is a nonparticipating FFI, a participating FFI or reporting Model 1 
FFI that is a flow-through entity (including a WP or WT) or that is 
acting as an intermediary (including a QI), a U.S. person, or a passive 
NFFE that is a flow-through entity with respect to taxes allocated to 
its substantial U.S. owners. A participating FFI or reporting Model 1 
FFI must follow the procedures set forth under sections 6402 and 6414 
and the regulations thereunder, as modified by this paragraph (h), to 
claim the credit or refund. No credit or refund will be allowed after 
the expiration of the statutory period of limitation for refunds under 
section 6511.
    (3) Payments for which a collective refund is permitted. A 
collective refund is permitted only for payments withheld upon under 
chapter 4.
    (4) Procedural and other requirements for collective refund. A 
participating FFI or reporting Model 1 FFI may use the collective refund 
procedures of this paragraph (h) under the following conditions--
    (i) All account holders and payees for which the participating FFI 
or reporting Model 1 FFI seeks a refund must have been included on a 
Form 1042-S in a reporting pool of nonparticipating FFIs or recalcitrant 
account holders described in Sec.  1.1474-1(d)(4)(iii) with respect to 
the payments for which refund is sought and the participating FFI or 
reporting Model 1 FFI (or the withholding agent) has not filed or 
furnished a Form 1042-S to any such account holder or payee with respect 
to which the refund is sought;
    (ii) If a refund is sought on the grounds that the account holder or 
payee of a payment that is U.S. source FDAP income subject to 
withholding under chapter 3 is entitled to a reduced rate of tax by 
reason of any treaty obligation of the United States, the participating 
FFI or reporting Model 1 FFI has also obtained valid documentation that 
meets the requirements of chapter 3 for a reduced rate of tax and such 
documentation is available to the IRS upon request with respect to each 
such account holder or payee; and
    (iii) In filing a claim for refund with the IRS under this paragraph 
(h), the participating FFI or reporting Model 1 FFI submits the 
following, together with its Form 1042 (or amended Form 1042) on which 
it provides a reconciliation of amounts withheld and claims a credit or 
refund, a schedule identifying the taxes withheld with respect to each 
account holder or payee to which the claim relates, and, if applicable, 
a copy of the Form 1042-S (or such other form as the IRS may prescribe) 
furnished to the participating FFI or reporting Model 1 FFI by its 
withholding agent reporting the taxes withheld to which the claim 
relates, and a statement that includes the following representations and 
explanation--
    (A) The reason(s) for the overpayment;
    (B) A representation that the participating FFI or reporting Model 1 
FFI or its withholding agent deposited the tax for which a refund is 
being sought under section 6302 and has not applied the reimbursement or 
set-off procedure of Sec.  1.1474-2 to adjust the tax withheld to which 
the claim relates;
    (C) A representation that the participating FFI or reporting Model 1 
FFI has repaid or will repay the amount for which refund is sought to 
the appropriate account holders or payees;
    (D) A representation that the participating FFI or reporting Model 1 
FFI retains a record showing the total amount of tax withheld, credits 
from other withholding agents, tax assumed by the participating FFI or 
reporting Model 1 FFI, adjustments for underwithholding, and 
reimbursements for overwithholding as its relates to each account holder 
and payee and also showing the repayment to such account holders or 
payees for the amount of tax for which a refund is being sought;
    (E) A representation that the participating FFI or reporting Model 1 
FFI retains valid documentation that meets the requirements of chapters 
3 (if applicable) and 4 to substantiate the amount of overwithholding 
with respect to each account holder and payee for which a refund is 
being sought and

[[Page 477]]

that such documentation is available to the IRS upon request; and
    (F) A representation that the participating FFI or reporting Model 1 
FFI will not issue a Form 1042-S (or such other form as the IRS may 
prescribe) to any account holder or payee for which a refund is being 
sought.
    (i) Legal prohibitions on reporting U.S. accounts and withholding--
(1) In general. Except to the extent otherwise provided in a Model 2 
IGA, a participating FFI (or branch thereof) that is prohibited by 
foreign law from reporting the information required under paragraph (d) 
of this section with respect to a U.S. account must follow the 
procedures of paragraph (i)(2) of this section to obtain a valid and 
effective waiver of such law and, if such waiver is not obtained within 
a reasonable period of time, to close or transfer such account. A 
participating FFI (or branch thereof) that is prohibited by law from 
withholding with respect to a recalcitrant account holder or 
nonparticipating FFI as required under paragraph (b) of this section is 
required to perform the procedures of paragraph (i)(3) of this section 
to obtain an authorization to withhold on payments made to the account 
holder or payee to the extent required under paragraph (b) of this 
section, close the account or terminate the obligation (as applicable), 
or to sell the assets in the account that produce (or could produce) 
withholdable payments and, if such authorization is not obtained within 
a reasonable period of time, to transfer or block such account or 
obligation. An FFI that cannot comply with any of the requirements of 
this paragraph (i) is not eligible to enter into an FFI agreement with 
the IRS, but may obtain status as a limited FFI if the FFI meets the 
requirements and agrees to the conditions of paragraph (e)(3) of this 
section. If a branch of an FFI cannot comply with the requirements of 
this paragraph (i), then the FFI must agree to the conditions of a 
limited branch as described in paragraph (e)(2) of this section to 
obtain status as a participating FFI.
    (2) Requesting waiver or closure of a U.S. account--(i) In general. 
If a participating FFI (or branch thereof) is prohibited by law from 
reporting the information required under paragraph (d) of this section 
with respect to a U.S. account that it maintains unless a valid and 
effective waiver of such law is obtained, the participating FFI must 
request a valid and effective waiver (including by obtaining waivers 
from all relevant account holders if necessary). For accounts other than 
preexisting accounts, the participating FFI must obtain a valid and 
effective waiver upon opening the account or, if prohibitions on 
disclosure cannot by law be waived, the participating FFI must refrain 
from opening accounts that are U.S. accounts or must transfer such 
accounts as described in paragraph (i)(2)(iii) of this section. 
Beginning on the date provided in Sec.  1.1471-5(g)(3) and until such 
time as the holder of a U.S. account either consents to disclosure or 
closure of the account or until the account is transferred, the 
participating FFI is required to treat the account as held by a 
recalcitrant account holder.
    (ii) Valid and effective waiver for a U.S. account. For purposes of 
this paragraph (i)(2), a valid and effective waiver is a waiver that, 
under the applicable law governing the participating FFI's agreement 
with the account holder, permits the participating FFI (or branch 
thereof) to report to the IRS all of the information specified in 
paragraph (d) of this section with respect to the U.S. account and 
permits the FFI to provide the IRS with additional information 
concerning such account as specified in paragraph (f) or (g) of this 
section.
    (iii) Closure or transfer of U.S. account. If the participating FFI 
(or branch thereof) is prohibited by law from reporting a U.S. account 
to the IRS under paragraph (d) of this section and the participating FFI 
either does not obtain a valid and effective waiver (and Form W-9) or 
prohibitions on disclosure cannot by law be waived, the participating 
FFI (or branch thereof) must close or transfer the account within a 
reasonable time. If the participating FFI cannot close or transfer the 
account absent the account holder consenting to closure, the 
participating FFI must request such a consent from such account holder 
and, if obtained, close or transfer the account within a reasonable 
period of time.

[[Page 478]]

    (3) Legal prohibitions preventing withholding--(i) In general. If 
the participating FFI (or branch thereof) is prohibited by law from 
withholding with respect to payments subject to withholding under 
paragraph (b) of this section, the participating FFI (or a branch 
thereof) must obtain the authorization described in this paragraph 
(i)(3)(i) from each account holder or payee receiving such payments to 
either withhold, close the account or terminate the obligation, or sell 
all of the assets in the account that produce (or could produce) 
withholdable payments. If the participating FFI does not receive such 
authorization from the account holder or payee within a reasonable 
period of time, the participating FFI must block or transfer such 
accounts or obligations as described in paragraph (i)(3)(ii) of this 
section.
    (ii) Block or transfer accounts or obligations. If the participating 
FFI does not receive the authorization described in paragraph (i)(3)(i) 
of this section from the account holder or payee within a reasonable 
period of time and is prohibited by law from closing accounts or 
terminating obligations with account holders or payees as described in 
paragraph (i)(3)(i) of this section, the participating FFI must either 
block or transfer such accounts or obligations prior to the date on 
which the participating FFI would otherwise be required to withhold 
under paragraph (b) of this section. See paragraph (e)(2)(iii)(B) of 
this section for when an account is considered blocked. A transfer of an 
account or obligation must be made to a branch of the FFI that may so 
withhold or to a participating FFI or reporting Model 1 FFI.
    (j) Effective/applicability date--(1) In general. This section 
generally applies beginning on January 6, 2017, except for paragraphs 
(f)(2)(ii)(A), (f)(2)(ii)(B)(1) and (2), (f)(3)(i), and (g)(2) of this 
section, which apply March 25, 2019. However, taxpayers may apply these 
provisions as of January 28, 2013. (For the rules that otherwise apply 
beginning on January 6, 2017, and before March 25, 2019, see this 
section as in effect and contained in 26 CFR part 1 revised April 1, 
2018. For rules that apply beginning on January 23, 2013 and before 
January 6, 2017, see this section as in effect and contained in 26 CFR 
part 1 revised April 1, 2016.)
    (2) Special applicability date. Paragraph (d)(4)(iv)(C) of this 
section applies beginning with reporting with respect to calendar year 
2017. (For rules that apply to reporting under paragraph (d)(4)(iv)(C) 
with respect to calendar years before 2017, see this section as in 
effect and contained in 26 CFR part 1 revised April 1, 2016.)

[T.D. 9610, 78 FR 5942, Jan. 28, 2013; 78 FR 55205, Sept. 10, 2013, as 
amended by T.D. 9657, 79 FR 12843, Mar. 6, 2014; 79 FR 37178, July 1, 
2014; T.D. 9809, 82 FR 2167, Jan. 6, 2017; 82 FR 29729, June 30, 2017; 
T.D. 9852, 84 FR 10980, Mar. 25, 2019; 84 FR 13121, Apr. 4, 2019; T.D. 
9890, 85 FR 205, Jan. 2, 2020]



Sec.  1.1471-5  Definitions applicable to section 1471.

    (a) U.S. accounts--(1) In general. This paragraph (a) defines the 
term U.S. account and describes when a person is treated as the holder 
of a financial account (account holder). This paragraph also provides 
rules for determining when an exception to U.S. account status applies 
for certain depository accounts, including account aggregation 
requirements relevant to applying the exception.
    (2) Definition of U.S. account. Subject to the exception described 
in paragraph (a)(4)(i) of this section, a U.S. account is any financial 
account maintained by an FFI that is held by one or more specified U.S. 
persons or U.S. owned foreign entities. For the definition of the term 
financial account, see paragraph (b) of this section. For the definition 
of the term specified U.S. person, see Sec.  1.1473-1(c). For the 
definition of the term U.S. owned foreign entity, see paragraph (c) of 
this section. For reporting requirements of participating FFIs with 
respect to U.S. accounts, see Sec.  1.1471-4(d).
    (3) Account holder--(i) In general. Except as otherwise provided in 
this paragraph (a)(3), the account holder is the person listed or 
identified as the holder or owner of the account with the FFI that 
maintains the account, regardless of whether such person is a flow-
through entity. Thus, for example, except as otherwise provided in 
paragraph (a)(3)(ii) of this section, if a trust (including a simple or 
grantor trust) or

[[Page 479]]

an estate is listed as the holder or owner of a financial account, the 
trust or estate is the account holder, rather than its owners or 
beneficiaries. Similarly, except as otherwise provided in this paragraph 
(a)(3), if a partnership is listed as the holder or owner of a financial 
account, the partnership is the account holder, rather than the partners 
in the partnership. In the case of an account held by an entity that is 
disregarded for U.S. federal tax purposes under Sec.  301.7701-
2(c)(2)(i) of this chapter, the account shall be treated as held by the 
person owning such entity. With respect to an account held by an exempt 
beneficial owner, such account is treated as held by an exempt 
beneficial owner only when all payments made to such account would be 
treated as made to an exempt beneficial owner. See Sec.  1.1471-6(h) for 
when a payment derived from certain commercial activities is not treated 
as made to an exempt beneficial owner.
    (ii) Financial accounts held by agents that are not financial 
institutions. A person, other than a financial institution, that holds a 
financial account for the benefit or account of another person as an 
agent, custodian, nominee, signatory, investment advisor, or 
intermediary, is not treated as an account holder with respect to such 
account for purposes of this section. Instead, such other person is 
treated as the account holder.
    (iii) Jointly held accounts. With respect to a jointly held account, 
each joint holder is treated as an account holder for purposes of 
determining whether the account is a U.S. account. Thus, an account is a 
U.S. account if any of the account holders is a specified U.S. person or 
a U.S. owned foreign entity and the account is not otherwise excepted 
from U.S. account status under paragraph (a)(4) of this section. When 
more than one U.S. person is a joint holder, each U.S. person will be 
treated as an account holder and will be attributed the entire balance 
of the jointly held account, including for purposes of applying the 
aggregation rules set forth in paragraph (b)(4)(iii) of this section.
    (iv) Account holder for insurance and annuity contracts. An 
insurance or annuity contract is held by each person that is entitled to 
access the contract's value (for example, through a loan, withdrawal, 
surrender, or otherwise) or change a beneficiary under the contract. If 
no person can access the contract's value or change a beneficiary, the 
account holders are any person named in the contract as an owner and any 
person who is entitled to receive a future payment under the terms of 
the contract. When an obligation to pay an amount under the contract 
becomes fixed, each person entitled to receive a payment is an account 
holder.
    (v) Examples. The following examples illustrate the provisions of 
paragraph (a)(3) of this section:

    Example 1. Account held by agent. F, a nonresident alien, holds a 
power of attorney from U, a specified U.S. person, that authorizes F to 
open, hold, and make deposits and withdrawals with respect to a 
depository account on behalf of U. The balance of the account for the 
calendar year is $100,000. F is listed as the holder of the depository 
account at a participating FFI, but because F holds the account as an 
agent for the benefit of U, F is not ultimately entitled to the funds in 
the account. Because the depository account is treated as held by U, a 
specified U.S. person, the account is a U.S. account.
    Example 2. Jointly held accounts. U, a specified U.S. person, holds 
a depository account in a participating FFI. The balance of the account 
for the calendar year is $100,000. The account is jointly held with A, 
an individual who is a nonresident alien. Because one of the joint 
holders is a specified U.S. person, the account is a U.S. account.
    Example 3. Jointly held accounts. U and Q, both specified U.S. 
persons, hold a depository account in a participating FFI. The balance 
of the account for the calendar year is $100,000. The account is a U.S. 
account and both U and Q are treated as holders of the account.

    (4) Exceptions to U.S. account status--(i) Exception for certain 
individual accounts of participating FFIs. Unless a participating FFI 
elects under paragraph (a)(4)(ii) of this section not to apply this 
paragraph (a)(4)(i), the term U.S. account shall not include any 
depository account maintained by such financial institution during a 
calendar year if the account is held solely by one or more individuals 
and, with respect to each holder of such account, the aggregate balance 
or value of all depository accounts held by each such individual does 
not exceed $50,000 as of

[[Page 480]]

the end of the calendar year or on the date the account is closed. For 
rules for determining the account balance or value, see paragraphs 
(a)(3)(iii) and (b)(4) of this section.
    (ii) Election to forgo exception. A participating FFI may elect to 
disregard the exception described in paragraph (a)(4)(i) of this section 
by reporting all U.S. accounts, including those accounts that would 
otherwise meet the conditions of the exception.
    (iii) Example. Aggregation rules for exception to U.S. account 
status for certain depository accounts. In Year 1, a U.S. resident 
individual, U, holds a depository account with CB, a commercial bank 
that is a participating FFI. The balance in U's CB account at the end of 
Year 1 is $35,000. In Year 1, U also holds a custodial account with CB's 
brokerage business. The custodial account has a $45,000 balance as of 
the end of Year 1. CB's retail banking and brokerage businesses share 
computerized information management systems that associate U's 
depository account and U's custodial account with U and with one another 
within the meaning of paragraph (b)(4)(iii)(A) of this section. For 
purposes of applying the $50,000 threshold described in paragraph 
(a)(4)(i) of this section, however, a depository account is aggregated 
only with other depository accounts. Therefore, U's depository account 
is eligible for the paragraph (a)(4)(i) exception to U.S. account status 
because the balance of the depository account does not exceed $50,000.
    (b) Financial accounts--(1) In general. Except as otherwise provided 
in this paragraph (b), the term financial account means--
    (i) Depository account. Any depository account (as defined in 
paragraph (b)(3)(i) of this section) maintained by a financial 
institution;
    (ii) Custodial account. Any custodial account (as defined in 
paragraph (b)(3)(ii) of this section) maintained by a financial 
institution;
    (iii) Equity or debt interest--(A) Equity or debt interests in an 
investment entity. Any equity or debt interest (other than interests 
regularly traded on an established securities market under paragraph 
(b)(3)(iv) of this section) in an investment entity described in 
paragraph (e)(4)(i)(B) or (C) of this section (including an entity that 
is also a depository institution, custodial institution, insurance 
company, or investment entity described in paragraph (e)(4)(i)(A) of 
this section);
    (B) Certain equity or debt interests in a holding company or 
treasury center. Any equity or debt interest (other than interests 
regularly traded on an established securities market under paragraph 
(b)(3)(iv) of this section) in a holding company or treasury center 
described in paragraph (e)(1)(v) of this section if--
    (1) The expanded affiliated group of which the entity is a member 
includes one or more investment entities described in paragraph 
(e)(4)(i)(B) or (C) of this section or passive NFFEs and the income 
derived by such investment entities or passive NFFEs is 50 percent or 
more of the aggregate income earned by the expanded affiliated group;
    (2) The return earned on the interest is determined, directly or 
indirectly, primarily by reference to one or more investment entities 
described in paragraph (e)(4)(i)(B) or (C) of this section or one or 
more passive NFFEs that are members of the entity's expanded affiliated 
group (as determined under paragraph (b)(3)(vi) of this section);
    (3) The value of the interest is determined, directly or indirectly, 
primarily by reference to assets that give rise (or could give rise) to 
withholdable payments (as determined under paragraph (b)(3)(v)) of this 
section); or
    (4) The interest is issued with a principal purpose of avoiding the 
reporting or withholding requirements of chapter 4;
    (C) Equity or debt interests in other financial institutions. Any 
equity or debt interest (other than interests regularly traded on an 
established securities market under paragraph (b)(3)(iv) of this 
section) in an entity that is a depository institution, custodial 
institution, investment entity described in paragraph (e)(4)(i)(A) of 
this section, or insurance company if--
    (1) The value of the interest is determined, directly or indirectly, 
primarily by reference to assets that give rise (or

[[Page 481]]

could give rise) to withholdable payments (as determined under paragraph 
(b)(3)(v) of this section); or
    (2) The interest is issued with a principal purpose of avoiding the 
reporting or withholding requirements of chapter 4.
    (iv) Insurance and annuity contracts. A contract issued or 
maintained by an insurance company, a holding company (as described in 
paragraph (e)(5)(i)(C) of this section) of an insurance company, or a 
financial institution described in paragraphs (e)(1)(i), (ii), (iii), or 
(v) of this section, if the contract is a cash value insurance contract 
(as defined in paragraph (b)(3)(vii) of this section) or an annuity 
contract.
    (2) Exceptions. A financial account does not include an account 
described in this paragraph (b)(2).
    (i) Certain savings accounts--(A) Retirement and pension accounts. A 
retirement or pension account that satisfies the following conditions 
under the laws of the jurisdiction where the account is maintained:
    (1) The account is subject to regulation as a personal retirement 
account or is part of a registered or regulated retirement or pension 
plan for the provision of retirement or pension benefits (including 
disability or death benefits);
    (2) The account is tax-favored (as described in paragraph 
(b)(2)(i)(E) of this section);
    (3) Annual information reporting is required to the relevant tax 
authorities with respect to the account;
    (4) Withdrawals are conditioned on reaching a specified retirement 
age, disability, or death, or penalties apply to withdrawals made before 
such specified events; and
    (5) Either--
    (i) Annual contributions are limited to $50,000 or less, or
    (ii) There is a maximum lifetime contribution limit to the account 
of $1,000,000 or less.
    (B) Non-retirement savings accounts. An account (other than an 
insurance or annuity contract) that satisfies the following conditions 
under the laws of the jurisdiction where the account is maintained:
    (1) The account is subject to regulation as a savings vehicle for 
purposes other than for retirement;
    (2) The account is tax-favored (as described in paragraph 
(b)(2)(i)(E) of this section);
    (3) Withdrawals are conditioned on meeting specific criteria related 
to the purpose of the savings account (for example, the provision of 
educational or medical benefits), or penalties apply to withdrawals made 
before such criteria are met; and
    (4) Annual contributions are limited to $50,000 or less;
    (C) Rollovers. An account that otherwise satisfies the requirements 
of paragraph (b)(2)(i)(A) or (B) of this section will not fail to 
satisfy such requirements solely because such account may receive assets 
or funds transferred from one or more accounts that meet the 
requirements of paragraph (b)(2)(i)(A) or (B) of this section, one or 
more retirement or pension funds that meet the requirements of Sec.  
1.1471-6(f), one or more accounts described in paragraph (b)(2)(vi) of 
this section, or one or more entities identified as nonreporting 
financial institutions under the terms of an applicable Model 1 or Model 
2 IGA because they are retirement or pension funds.
    (D) Coordination with section 6038D. The exclusions provided under 
paragraph (b)(2)(i) of this section shall not apply for purposes of 
determining whether an account or other arrangement is a financial 
account for purposes of section 6038D.
    (E) Account that is tax-favored. For purposes of this paragraph 
(b)(2)(i), an account is tax-favored under the laws of a jurisdiction 
where the account is maintained if--
    (1) Contributions to the account that would otherwise be subject to 
tax under such laws are deductible or excluded from the gross income of 
the account holder or taxed at a reduced rate; or
    (2) Taxation of investment income from the account is deferred or 
taxed at a reduced rate.
    (ii) Certain term life insurance contracts. A life insurance 
contract with a coverage period that will end before the insured 
individual attains age 90, provided that the contract satisfies the 
following conditions--
    (A) Periodic premiums, which do not decrease over time, are payable 
at

[[Page 482]]

least annually during the period the contract is in existence or until 
the insured attains age 90, whichever is shorter;
    (B) The contract has no contract value that any person can access 
(by withdrawal, loan, or otherwise) without terminating the contract;
    (C) The amount (other than a death benefit) payable upon 
cancellation or termination of the contract cannot exceed the aggregate 
premiums paid for the contract, less the sum of mortality, morbidity, 
and expense charges (whether or not actually imposed) for the period or 
periods of the contract's existence and any amounts paid prior to the 
cancellation or termination of the contract; and
    (D) The contract is not held by a transferee for value.
    (iii) Account held by an estate. An account that is held solely by 
an estate if the documentation for such account includes a copy of the 
deceased's will or death certificate.
    (iv) Certain escrow accounts. An escrow account that is established 
in connection with--
    (A) A court order or judgment; or
    (B) A sale, exchange, or lease of real or personal property, 
provided that the account meets the following conditions--
    (1) The account is funded solely with a down payment, earnest money, 
deposit in an amount appropriate to secure an obligation of one of the 
parties directly related to the transaction, or a similar payment, or 
with a financial asset that is deposited in the account in connection 
with the sale, exchange, or lease of the property;
    (2) The account is established and used solely to secure the 
obligation of the purchaser to pay the purchase price for the property, 
the seller to pay any contingent liability, or the lessor or lessee to 
pay for any damages relating to the leased property as agreed under the 
lease;
    (3) The assets of the account, including the income earned thereon, 
will be paid or otherwise distributed for the benefit of the purchaser, 
seller, lessor, or lessee (including to satisfy such person's 
obligation) when the property is sold, exchanged, or surrendered, or the 
lease terminates;
    (4) The account is not a margin or similar account established in 
connection with a sale or exchange of a financial asset; and
    (5) The account is not associated with a credit card account.
    (v) Certain annuity contracts. A non-investment linked, non-
transferable, immediate life annuity contract (including a disability 
annuity) that monetizes a retirement or pension account described in 
paragraph (b)(2)(i)(A) or (b)(2)(vi) of this section.
    (vi) Account or product excluded under an intergovernmental 
agreement. An account or product that is excluded from the definition of 
financial account under the terms of an applicable Model 1 IGA or Model 
2 IGA.
    (3) Definitions. The following definitions apply for purposes of 
chapter 4--
    (i) Depository account--(A) In general. Except as otherwise provided 
in this paragraph (b)(3)(i), the term depository account means any 
account that is--
    (1) A commercial, checking, savings, time, or thrift account, or an 
account that is evidenced by a certificate of deposit, thrift 
certificate, investment certificate, passbook, certificate of 
indebtedness, or any other instrument for placing money in the custody 
of an entity engaged in a banking or similar business for which such 
institution is obligated to give credit (regardless of whether such 
instrument is interest bearing or non-interest bearing), including, for 
example, a credit balance with respect to a credit card account issued 
by a credit card company that is engaged in a banking or similar 
business; or
    (2) Any amount held by an insurance company under a guaranteed 
investment contract or under a similar agreement to pay or credit 
interest thereon or to return the amount held.
    (B) Exceptions. A depository account does not include--
    (1) A negotiable debt instrument that is traded on a regulated 
market or over-the-counter market and distributed and held through 
financial institutions; or
    (2) An advance premium or premium deposit described in paragraph 
(b)(3)(vii)(C)(5) of this section.
    (ii) Custodial account. The term custodial account means an 
arrangement for

[[Page 483]]

holding a financial instrument, contract, or investment (including, but 
not limited to, a share of stock in a corporation, a note, bond, 
debenture, or other evidence of indebtedness, a currency or commodity 
transaction, a credit default swap, a swap based upon a nonfinancial 
index, a notional principal contract as defined in Sec.  1.446-3(c), an 
insurance or annuity contract, and any option or other derivative 
instrument) for the benefit of another person.
    (iii) Equity interest in certain entities--(A) Partnership. In the 
case of a partnership that is a financial institution, the term equity 
interest means either a capital or profits interest in the partnership.
    (B) Trust. In the case of a trust that is a financial institution, 
an equity interest means an interest held by--
    (1) A person who is an owner of all or a portion of the trust under 
sections 671 through 679;
    (2) A beneficiary who is entitled to a mandatory distribution from 
the trust as defined in Sec.  1.1473-1(b)(3); or
    (3) A beneficiary who may receive a discretionary distribution as 
defined in Sec.  1.1473-1(b)(3) from the trust but only if such person 
receives a distribution in the calendar year.
    (iv) Regularly traded on an established securities market. To 
determine if debt or equity interests described in paragraph (b)(1)(iii) 
of this section are regularly traded, the principles of Sec.  1.1472-
1(c)(1)(i)(A)(2)(i) and (ii) shall apply with respect to the interests, 
and the principles of Sec.  1.1472-1(c)(1)(i)(B)(1) shall apply for this 
purpose in the case of an initial public offering of such interests. See 
Sec.  1.1472-1(c)(1)(i)(C) for the definition of an established 
securities market. For purposes of paragraph (b)(1)(iii) of this 
section, an interest is not regularly traded on an established 
securities market if the holder of the interest (excluding a financial 
institution acting as an intermediary) is registered on the books of the 
investment entity. The preceding sentence shall not apply to the extent 
a holder's interest is registered prior to July 1, 2014, on the books of 
the investment entity.
    (v) Value of interest determined, directly or indirectly, primarily 
by reference to assets that give rise (or could give rise) to 
withholdable payments--(A) Equity interest. The value of an equity 
interest is determined, directly or indirectly, primarily by reference 
to assets that give rise (or could give rise) to withholdable payments 
if the return earned on such interest (including upon a sale, exchange, 
or redemption) is determined primarily by reference to profits or assets 
of a U.S. person or equity interests in a U.S. person.
    (B) Debt interest. The value of a debt interest is determined, 
directly or indirectly, primarily by reference to assets that give rise 
(or could give rise) to withholdable payments if--
    (1) Debt is convertible into equity interests in a U.S. person; or
    (2) The return earned on such interest (including upon a sale, 
exchange, or redemption) is determined primarily by reference to profits 
or assets of a U.S. person or equity interests in a U.S. person.
    (vi) Return earned on the interest (including upon a sale, exchange, 
or redemption) determined, directly or indirectly, primarily by 
reference to one or more investment entities or passive NFFEs--(A) 
Equity interest. The return earned on an equity interest is determined, 
directly or indirectly, primarily by reference to one or more investment 
entities described in paragraph (e)(4)(i)(B) or (C) of this section or 
passive NFFEs that are members of the entity's expanded affiliated group 
if the return on such interest (including upon a sale, exchange, or 
redemption) is determined primarily by reference to profits or assets 
of, or equity interests in, one or more investment entities described in 
paragraph (e)(4)(i)(B) or (C) of this section or passive NFFEs that are 
members of the entity's expanded affiliated group.
    (B) Debt interest. The return earned on a debt interest is 
determined, directly or indirectly, primarily by reference to one or 
more investment entities described in paragraph (e)(4)(i)(B) or (C) of 
this section or passive NFFEs that are members of the entity's expanded 
affiliated group if--
    (1) Debt is convertible into equity interests in one or more 
investment entities described in paragraph (e)(4)(i)(B) or (C) of this 
section or passive NFFEs that are members of the entity's expanded 
affiliated group; or

[[Page 484]]

    (2) The return on such interest (including upon a sale, exchange, or 
redemption) is determined primarily by reference to profits or assets 
of, or equity interests in, one or more investment entities described in 
paragraph (e)(4)(i)(B) or (C) of this section or passive NFFEs that are 
members of the entity's expanded affiliated group.
    (vii) Cash value insurance contract--(A) In general. The term cash 
value insurance contract means an insurance contract (other than an 
indemnity reinsurance contract between two insurance companies and a 
term life insurance contract described in paragraph (b)(2)(ii) of this 
section) that has an aggregate cash value greater than $50,000 at any 
time during the calendar year, applying the rules set forth in paragraph 
(b)(4)(iii) of this section. A participating FFI may elect to disregard 
the $50,000 threshold in the preceding sentence by reporting all 
contracts with a cash value greater than zero.
    (B) Cash value. Except as otherwise provided in paragraph 
(b)(3)(vii)(C) of this section, the term cash value means any amount 
(determined without reduction for any charge or policy loan) that--
    (1) Is payable under the contract to any person upon surrender, 
termination, cancellation, or withdrawal; or
    (2) Any person can borrow under or with regard to (for example, by 
pledging as collateral) the contract.
    (C) Amounts excluded from cash value. Cash value does not include an 
amount payable--
    (1) Solely by reason of the death of an individual insured under a 
life insurance contract;
    (2) As a personal injury or sickness benefit or a benefit providing 
indemnification of an economic loss incurred upon the occurrence of the 
event insured against;
    (3) As a refund of a previously paid premium (less cost of insurance 
charges whether or not actually imposed) under an insurance contract 
(other than a life insurance or annuity contract) due to cancellation or 
termination of the contract, decrease in risk exposure during the 
effective period of the contract, or arising from the correction of a 
posting or similar error with regard to the premium for the contract; or
    (4) As a policyholder dividend (other than a termination dividend) 
provided that the dividend relates to an insurance contract under which 
the only benefits payable are described in paragraph (b)(3)(vii)(C)(2) 
of this section.
    (5) As a return of an advance premium or premium deposit for an 
insurance contract for which the premium is payable at least annually if 
the amount of the advance premium or premium deposit does not exceed the 
next annual premium that will be payable under the contract.
    (D) Policyholder dividend--(1) For purposes of paragraph 
(b)(3)(vii)(C)(4) of this section and except as otherwise provided in 
this paragraph, a policyholder dividend means any dividend or similar 
distribution to policyholders in their capacity as such, including--
    (i) An amount paid or credited (including as an increase in 
benefits) if the amount is not fixed in the contract but rather depends 
on the experience of the insurance company or the discretion of 
management;
    (ii) A reduction in the premium that, but for the reduction, would 
have been required to be paid; and
    (iii) An experience rated refund or credit based solely upon the 
claims experience of the contract or group involved.
    (2) A policyholder dividend cannot exceed the premiums previously 
paid for the contract, less the sum of the cost of insurance and expense 
charges (whether or not actually imposed) during the contract's 
existence and the aggregate amount of any prior dividends paid or 
credited with regard to the contract.
    (3) A policyholder dividend does not include any amount that is in 
the nature of interest that is paid or credited to a contract holder to 
the extent that such amount exceeds the minimum rate of interest 
required to be credited with respect to contract values under local law.
    (4) Account balance or value. This paragraph (b)(4) provides rules 
for determining the balance or value of a financial account for purposes 
of chapter

[[Page 485]]

4. For example, the rules of this paragraph apply for purposes of 
determining whether an FFI meets the requirements of paragraph 
(f)(2)(i), (f)(2)(ii) or (f)(3) of this section to certify to a deemed-
compliant FFI status. The rules of this paragraph also apply to a 
participating FFI's due diligence and reporting obligations to the 
extent required under Sec.  1.1471-4(c) or (d) and to a U.S. withholding 
agent's due diligence obligations to the extent required under Sec.  
1.1471-3.
    (i) In general. Except as otherwise provided in paragraph (b)(4)(ii) 
of this section with respect to immediate annuities, the balance or 
value of a financial account is the balance or value calculated by the 
financial institution for purposes of reporting to the account holder. 
In the case of an account described in paragraph (b)(1)(iii) of this 
section, the balance or value of an equity interest is the value 
calculated by the financial institution for the purpose that requires 
the most frequent determination of value, and the balance or value of a 
debt interest is its principal amount. Except as provided in paragraph 
(b)(3)(vii) of this section, the balance or value of an insurance or 
annuity contract is the balance or value as of either the calendar year 
end or the most recent contract anniversary date. The balance or value 
of the account is not to be reduced by any liabilities or obligations 
incurred by an account holder with respect to the account or any of the 
assets held in the account and is not to be reduced by any fees, 
penalties, or other charges for which the account holder may be liable 
upon terminating, transferring, surrendering, liquidating, or 
withdrawing cash from the account. Each holder of a jointly held account 
is attributed the entire balance or value of the joint account. See 
Sec.  1.1473-1(b)(3) for rules regarding the valuation of trust 
interests that also apply under this paragraph (b)(4)(i) to determine 
the value of trust interests that are financial accounts.
    (ii) Special rule for immediate annuity--(A) Immediate annuities 
without minimum benefit guarantees. If the value of an immediate annuity 
contract with no minimum benefit guarantee is not reported to the 
account holder, the account balance or value of the contract is the sum 
of the net present values on the valuation date of the amounts 
reasonably expected to be payable in future periods under the contract.
    (B) Immediate annuities with a minimum benefit guarantee. The 
account balance or value of an annuity contract with a minimum guarantee 
is the sum of the net present values on the valuation date of--
    (1) The non-guaranteed amounts reasonably expected to be payable in 
future periods; and
    (2) The guaranteed amounts payable in future periods.
    (C) Net present value of amounts payable in future periods. The net 
present value of an amount payable in a future period shall be 
determined using--
    (1) A reasonable actuarial valuation method, and
    (2) The mortality tables and interest rate(s)--
    (i) Prescribed pursuant to section 7520 and the regulations 
thereunder; or
    (ii) Used by the issuer of the contract to determine the amounts 
payable under the contract.
    (iii) Account aggregation requirements--(A) In general. To the 
extent a financial institution is required under chapter 4 to determine 
the aggregate balance or value of an account, the financial institution 
is required to aggregate the account balance or value of all accounts 
that are held (in whole or in part) by the same person and that are 
maintained by the financial institution or members of its expanded 
affiliated group, but only to the extent that the financial 
institution's computerized systems link the accounts by reference to a 
data element, such as client number, EIN, or foreign tax identifying 
number, and allow the account balances of such accounts to be 
aggregated. Notwithstanding the rules set forth in this paragraph 
(b)(4)(iii), a financial institution is required to aggregate the 
balance or value of accounts that it treats as consolidated obligations.
    (B) Aggregation rule for relationship managers. To the extent a 
financial institution is required under chapter 4 to apply the 
aggregation rules of this paragraph (b)(4)(iii), the financial 
institution also is required to aggregate all accounts that a 
relationship manager

[[Page 486]]

knows are directly or indirectly owned, controlled, or established 
(other than in a fiduciary capacity) by the same person, as well as all 
accounts that the relationship manager has associated with one another 
through a relationship code, customer identification number, TIN, or 
similar indicator, or that the relationship manager would typically 
associate with each other under the procedures of the financial 
institution (or the department, division, or unit with which the 
relationship manager is associated).
    (C) Examples. The following examples illustrate the account 
aggregation requirements of this paragraph (b)(4)(iii):

    Example 1. FFI not required to aggregate accounts for U.S. account 
exception. A U.S. resident individual, U, holds a depository account 
with Branch 1 of CB, a commercial bank that is a participating FFI. The 
balance in U's Branch 1 account at the end of Year 1 is $35,000. U also 
holds a depository account with Branch 2 of CB, with a $45,000 balance 
at the end of Year 1. CB's retail banking businesses share computerized 
information management systems across its branches, but U's accounts are 
not associated with one another in the shared computerized information 
system. In addition, CB has not assigned a relationship manager to U or 
U's accounts. Because the accounts are not associated in CB's system or 
by a relationship manager, CB is not required to aggregate the accounts 
under paragraph (b)(4)(iii) and both accounts are eligible for the 
exception to U.S. account status described in paragraph (a)(4)(i) of 
this section as neither account exceeds the $50,000 threshold.
    Example 2. FFI required to aggregate accounts for U.S. account 
exception. Same facts as Example 1, except that both of U's depository 
accounts are associated with U and with one another by reference to CB's 
internal identification number. The system shows the account balances 
for both accounts, and such balances may be electronically aggregated, 
though the system does not show a combined balance for the accounts. In 
determining whether such accounts meet the exception to U.S. account 
status described in paragraph (a)(4)(i) of this section for certain 
depository accounts with an aggregate balance or value of $50,000 or 
less, CB is required to aggregate the account balances of all depository 
accounts under the rules of paragraph (b)(4)(iii) of this section. Under 
those rules, U is treated as holding depository accounts with CB with an 
aggregate balance of $80,000. Accordingly, neither account is eligible 
for the exception to U.S. account status, because the accounts, when 
aggregated, exceed the $50,000 threshold.
    Example 3. Aggregation rules for joint accounts maintained by a 
participating FFI. In Year 1, a U.S. resident individual, U, holds a 
custodial account that is a preexisting account at custodial institution 
CI, a participating FFI. The balance in U's CI custodial account at the 
end of Year 1 is $35,000. U also holds a joint custodial account that is 
a preexisting account with her sister, A, a nonresident alien for U.S. 
federal income tax purposes, with another custodial institution, CI2. 
The balance in the joint account at the end of Year 1 is also $35,000. 
CI and CI2 are part of the same expanded affiliated group and share 
computerized information management systems. Both U's custodial account 
at CI and U and A's custodial account at CI2 are associated with U and 
with one another by reference to CI's internal identification number and 
the system allows the balances to be aggregated. In determining whether 
such accounts meet the documentation exception described in Sec.  
1.1471-4(c)(4)(iv) for certain preexisting individual accounts with an 
aggregate balance or value of $50,000 or less, CI is required to 
aggregate the account balances of accounts held in whole or in part by 
the same account holder under the rules of paragraph (b)(4)(iii) of this 
section. Under those rules, U is treated as having financial accounts 
with C1 and CI2, each with an aggregate balance of $70,000. Accordingly, 
neither account is eligible for the documentation exception.
    Example 4. Aggregation for applying indefinite validity periods. In 
Year 1, an owner-documented FFI, O, holds an offshore account with 
Branch 1 of CB, a commercial bank that is a U.S. withholding agent. The 
balance in O's CB account at the end of Year 1 is $600,000. In Year 1, O 
also holds an account in the United States with Branch 2 of CB. The 
Branch 2 account has a $450,000 balance at the end of Year 1. CB's 
banking businesses share computerized information management systems 
across its branches. O's accounts are associated with one another in the 
shared computerized information system and the system allows the 
balances to be aggregated. In determining whether CB is permitted to 
apply an indefinite validity period for the documentation submitted for 
O's account at Branch 1 pursuant to Sec.  1.1471-3(c)(6)(ii)(C)(4) 
(permitting indefinite validity for a withholding statement of an owner-
documented FFI if the balance or value of all accounts held by the 
owner-documented FFI does not exceed $1,000,000), CB is required to 
aggregate the account balance of O's accounts at Branch 1 and Branch 2 
to the extent required under the rules of paragraph (b)(4)(iii) of this 
section. Accordingly, O is treated as holding financial accounts with CB 
with an aggregate balance of $1,050,000

[[Page 487]]

and the documentation submitted for O's account at Branch 1 is not 
eligible for the indefinite validity period described under Sec.  
1.1471-3(c)(6)(ii)(C)(4).

    (iv) Currency translation of balance or value. If the balance or 
value of a financial account, other obligation, or the aggregate amount 
payable under a group life or group annuity contract described in Sec.  
1.1471-4(c)(4) is denominated in a currency other than U.S. dollars, a 
withholding agent must calculate the balance or value by applying a spot 
rate determined under Sec.  1.988-1(d) to translate such balance or 
value into the U.S. dollar equivalent. For the purpose of a 
participating or registered deemed-compliant FFI reporting an account 
under Sec.  1.1471-4(d), the spot rate must be determined as of the last 
day of the calendar year (or, in the case of an insurance contract or 
annuity contract, the most recent contract anniversary date, when 
applicable) for which the account is being reported or, if the account 
was closed during such calendar year, the date the account was closed. 
In the case of an FFI determining whether an account meets (or continues 
to meet) a preexisting account documentation exception described in 
Sec.  1.1471-4(c)(3)(iii) or (c)(5)(iii), or whether the account is an 
account described in paragraph (a)(4)(i) of this section, the spot rate 
must be determined on the date for which the FFI is determining the 
threshold amount as prescribed in those provisions.
    (5) Account maintained by financial institution. A custodial account 
is maintained by the financial institution that holds custody over the 
assets in the account (including a financial institution that holds 
assets in street name for an account holder in such institution). A 
depository account is maintained by the financial institution that is 
obligated to make payments with respect to the account (excluding an 
agent of a financial institution regardless of whether such agent is a 
financial institution under paragraph (e)(1) of this section). Any 
equity or debt interest in a financial institution that constitutes a 
financial account under paragraph (b)(1)(iii) of this section is 
maintained by such financial institution. A cash value insurance 
contract or an annuity contract described in paragraph (b)(1)(iv) of 
this section is maintained by the financial institution that is 
obligated to make payments with respect to the contract.
    (c) U.S. owned foreign entity. The term U.S. owned foreign entity 
means any foreign entity that has one or more substantial U.S. owners 
(as defined in Sec.  1.1473-1(b)). See Sec.  1.1473-1(e) for the 
definition of foreign entity for purposes of chapter 4. For the 
requirements applicable to determining direct and indirect ownership in 
an entity, see Sec.  1.1473-1(b)(2).
    (d) Definition of FFI. The term FFI means, with respect to any 
entity that is not resident in, or organized under the laws of, as 
applicable, a country that has in effect a Model 1 IGA or Model 2 IGA, 
any financial institution (as defined in paragraph (e) of this section) 
that is a foreign entity. The term FFI also means, with respect to any 
entity that is resident in, or organized under the laws of, as 
applicable, a country that has in effect a Model 1 IGA or Model 2 IGA, 
any entity that is treated as a FATCA Partner Financial Institution 
pursuant to such Model 1 IGA or Model 2 IGA. See, however, Sec.  1.1471-
2(a)(2)(v) for when certain branches of U.S. financial institutions may 
be treated as FFIs. A territory financial institution is not an FFI 
under this paragraph (d).
    (e) Definition of financial institution--(1) In general. Except as 
otherwise provided in paragraph (e)(5) of this section, the term 
financial institution means any entity that--
    (i) Accepts deposits in the ordinary course of a banking or similar 
business (as defined in paragraph (e)(2) of this section) (depository 
institution);
    (ii) Holds, as a substantial portion of its business (as defined in 
paragraph (e)(3) of this section), financial assets for the benefit of 
one or more other persons (custodial institution);
    (iii) Is an investment entity (as defined in paragraph (e)(4) of 
this section);
    (iv) Is an insurance company or a holding company (as described in 
paragraph (e)(5)(i)(C) of this section) that is a member of an expanded 
affiliated group that includes an insurance company, and the insurance 
company or

[[Page 488]]

holding company issues, or is obligated to make payments with respect 
to, a cash value insurance or annuity contract described in paragraph 
(b)(1)(iv) of this section (specified insurance company); or
    (v) Is an entity that is a holding company or treasury center (as 
described in paragraphs (e)(5)(i)(C) and (e)(5)(i)(D)(1) of this 
section) that--
    (A) Is part of an expanded affiliated group that includes a 
depository institution, custodial institution, specified insurance 
company, or investment entity described in paragraphs (e)(4)(i)(B) or 
(C) of this section; or
    (B) Is formed in connection with or availed of by a collective 
investment vehicle, mutual fund, exchange traded fund, private equity 
fund, hedge fund, venture capital fund, leveraged buyout fund, or any 
similar investment vehicle established with an investment strategy of 
investing, reinvesting, or trading in financial assets.
    (2) Banking or similar business--(i) In general. Except as otherwise 
provided in paragraph (e)(2)(ii) of this section, an entity is 
considered to be engaged in a banking or similar business if, in the 
ordinary course of its business with customers, the entity accepts 
deposits or other similar investments of funds and regularly engages in 
one or more of the following activities--
    (A) Makes personal, mortgage, industrial, or other loans or provides 
other extensions of credit;
    (B) Purchases, sells, discounts, or negotiates accounts receivable, 
installment obligations, notes, drafts, checks, bills of exchange, 
acceptances, or other evidences of indebtedness;
    (C) Issues letters of credit and negotiates drafts drawn thereunder;
    (D) Provides trust or fiduciary services;
    (E) Finances foreign exchange transactions; or
    (F) Enters into, purchases, or disposes of finance leases or leased 
assets.
    (ii) Exception for certain lessors and lenders. An entity is not 
considered to be engaged in a banking or similar business for purposes 
of this paragraph (e)(2) if the entity solely accepts deposits from 
persons as collateral or security pursuant to a sale or lease of 
property or pursuant to a similar financing arrangement between such 
entity and the person holding the deposit with the entity.
    (iii) Application of section 581. Entities engaged in a banking or 
similar business include, but are not limited to, entities that would 
qualify as banks under section 585(a)(2) (including banks as defined in 
section 581 and any corporation to which section 581 would apply but for 
the fact that it is a foreign corporation).
    (iv) Effect of local regulation. Whether an entity is subject to the 
banking and credit laws of a foreign country, the United States, a 
State, a U.S. territory, or a subdivision thereof, or is subject to 
supervision and examination by agencies having regulatory oversight of 
banking or similar institutions, is relevant to, but not necessarily 
determinative of, whether that entity qualifies as a financial 
institution under section 1471(d)(5)(A). Whether an entity conducts a 
banking or similar business is determined based upon the character of 
the actual activities of such entity.
    (3) Holding financial assets for others as a substantial portion of 
its business--(i) Substantial portion--(A) In general. An entity holds 
financial assets for the account of others as a substantial portion of 
its business if the entity's gross income attributable to holding 
financial assets and related financial services equals or exceeds 20 
percent of the entity's gross income during the shorter of--
    (1) The three-year period ending on December 31 of the year 
preceding the year in which the determination is made; or
    (2) The period during which the entity has been in existence before 
the determination is made.
    (B) Special rule for start-up entities. An entity with no operating 
history as of the date of the determination is considered to hold 
financial assets for the account of others as a substantial portion of 
its business if the entity expects to meet the gross income threshold 
described in paragraph (e)(3)(i)(B) of this section based on its 
anticipated functions, assets, and employees, with due consideration 
given to any purpose or functions for which the entity is licensed or 
regulated (including those of any predecessor).

[[Page 489]]

    (ii) Income attributable to holding financial assets and related 
financial services. For purposes of this paragraph (e)(3), the term 
income attributable to holding financial assets and related financial 
services means custody, account maintenance, and transfer fees; 
commissions and fees earned from executing and pricing securities 
transactions; income earned from extending credit to customers with 
respect to financial assets held in custody by the entity (or acquired 
through such extension of credit); income earned on the bid-ask spread 
of financial assets; fees for providing financial advice with respect to 
financial assets held in (or potentially to be held in) custody by the 
entity; and fees for clearance and settlement services.
    (iii) Effect of local regulation. Whether an entity is subject to 
the banking and credit, broker-dealer, fiduciary, or other similar laws 
and regulations of the United States, a State, a U.S. territory, a 
political subdivision thereof, or a foreign country, or to supervision 
and examination by agencies having regulatory oversight of banks, credit 
issuers, or other financial institutions, is relevant to, but not 
necessarily determinative of, whether that entity holds financial assets 
for the account of others as a substantial portion of its business.
    (4) Investment entity--(i) In general. The term investment entity 
means any entity that is described in paragraph (e)(4)(i)(A), (B), or 
(C) of this section.
    (A) The entity primarily conducts as a business one or more of the 
following activities or operations for or on behalf of a customer--
    (1) Trading in money market instruments (checks, bills, certificates 
of deposit, derivatives, etc.); foreign currency; foreign exchange, 
interest rate, and index instruments; transferable securities; or 
commodity futures;
    (2) Individual or collective portfolio management; or
    (3) Otherwise investing, administering, or managing funds, money, or 
financial assets on behalf of other persons.
    (B) The entity's gross income is primarily attributable to 
investing, reinvesting, or trading in financial assets (as defined in 
paragraph (e)(4)(ii) of this section) and the entity is managed by 
another entity that is described in paragraph (e)(1)(i), (ii), (iv), or 
(e)(4)(i)(A) of this section. For purposes of this paragraph 
(e)(4)(i)(B), an entity is managed by another entity if the managing 
entity performs, either directly or through another third-party service 
provider, any of the activities described in paragraph (e)(4)(i)(A) of 
this section on behalf of the managed entity.
    (C) The entity functions or holds itself out as a collective 
investment vehicle, mutual fund, exchange traded fund, private equity 
fund, hedge fund, venture capital fund, leveraged buyout fund, or any 
similar investment vehicle established with an investment strategy of 
investing, reinvesting, or trading in financial assets.
    (ii) Financial assets. For purposes of this paragraph, the term 
financial asset means a security (as defined in section 475(c)(2) 
without regard to the last sentence thereof), partnership interest, 
commodity (as defined in section 475(e)(2)), notional principal contract 
(as defined in Sec.  1.446-3(c)), insurance contract or annuity 
contract, or any interest (including a futures or forward contract or 
option) in a security, partnership interest, commodity, notional 
principal contract, insurance contract, or annuity contract.
    (iii) Primarily conducts as a business--(A) In general. An entity is 
treated as primarily conducting as a business one or more of the 
activities described in paragraph (e)(4)(i)(A) of this section if the 
entity's gross income attributable to such activities equals or exceeds 
50 percent of the entity's gross income during the shorter of--
    (1) The three-year period ending on December 31 of the year 
preceding the year in which the determination is made; or
    (2) The period during which the entity has been in existence.
    (B) Special rule for start-up entities. An entity with no operating 
history as of the date of the determination is treated as primarily 
conducting as a business one or more of the activities described in 
paragraph (e)(4)(i)(A) of this section if such entity expects to meet 
the gross income threshold described in paragraph (e)(4)(iii)(A) of this 
section

[[Page 490]]

based on its anticipated functions, assets, and employees, with due 
consideration given to any purpose or functions for which the entity is 
licensed or regulated (including those of any predecessor).
    (iv) Primarily attributable to investing, reinvesting, or trading in 
financial assets--(A) In general. An entity's gross income is primarily 
attributable to investing, reinvesting, or trading in financial assets 
for purposes of paragraph (e)(4)(i)(B) of this section if the entity's 
gross income attributable to investing, reinvesting, or trading in 
financial assets equals or exceeds 50 percent of the entity's gross 
income during the shorter of--
    (1) The three-year period ending on December 31 of the year 
preceding the year in which the determination is made; or
    (2) The period during which the entity has been in existence.
    (B) Special rule for start-up entities. An entity with no operating 
history as of the date of the determination will be considered to have 
income that is primarily attributable to investing, reinvesting, or 
trading in financial assets for purposes of paragraph (e)(4)(i)(B) of 
this section if such entity expects to meet the income threshold 
described in paragraph (e)(4)(iv)(A) of this section based on its 
anticipated functions, assets, and employees, with due consideration 
given to any purpose or functions for which the entity is licensed or 
regulated (including those of any predecessor).
    (v) Examples. The following examples illustrate the provisions of 
paragraph (e)(4) of this section:

    Example 1. Investment advisor. Fund Manager is an investment entity 
within the meaning of paragraph (e)(4)(i)(A) of this section. Fund 
Manager, among its various business operations, organizes and manages a 
variety of funds, including Fund A, a fund that invests primarily in 
equities. Fund Manager hires Investment Advisor, a foreign entity, to 
provide advice and discretionary management of a portion of the 
financial assets held by Fund A. Investment Advisor earned more than 50% 
of its gross income for the last three years from providing similar 
services. Because Investment Advisor primarily conducts a business of 
managing financial assets on behalf of clients, Investment Advisor is an 
investment entity under paragraph (e)(4)(i)(A) of this section and an 
FFI under paragraph (e)(1)(iii) of this section.
    Example 2. Entity that is managed by an FFI. The facts are the same 
as in Example 1. In addition, in every year since it was organized, Fund 
A has earned more than 50% of its gross income from investing in 
financial assets. Accordingly, Fund A is an investment entity under 
paragraph (e)(4)(i)(B) of this section because it is managed by Fund 
Manager and Investment Advisor and its gross income is primarily 
attributable to investing, reinvesting, or trading in financial assets.
    Example 3. Investment manager. Investment Manager, a U.S. entity, is 
an investment entity within the meaning of paragraph (e)(4)(i)(A) of 
this section. Investment Manager organizes and registers Fund A in 
Country A. Investment Manager is authorized to facilitate purchases and 
sales of financial assets held by Fund A in accordance with Fund A's 
investment strategy. In every year since it was organized, Fund A has 
earned more than 50% of its gross income from investing, reinvesting, or 
trading in financial assets. Accordingly, Fund A is an investment entity 
under paragraph (e)(4)(i)(B) of this section and an FFI under paragraph 
(e)(1)(iii) of this section.
    Example 4. Foreign real estate investment fund that is managed by an 
FFI. The facts are the same as in Example 3, except that Fund A's assets 
consist solely of non-debt, direct interests in real property located 
within and without the United States. Fund A is not an investment entity 
under paragraph (e)(4)(i)(B) of this section, even though it is managed 
by Investment Manager, because less than 50% of its gross income is 
attributable to investing, reinvesting, or trading in financial assets.
    Example 5. Trust managed by an individual. On January 1, 2013, X, an 
individual, establishes Trust A, a nongrantor foreign trust for the 
benefit of X's children, Y and Z. X appoints Trustee A, an individual, 
to act as the trustee of Trust A. Trust A's assets consists solely of 
financial assets, and its income consists solely of income from those 
financial assets. Pursuant to the terms of the trust instrument, Trustee 
A manages and administers the assets of the trust. Trustee A does not 
hire any entity as a third-party service provider to perform any of the 
activities described in paragraph (e)(4)(i)(A) of this section. Trust A 
is not an investment entity under paragraph (e)(4)(i)(B) of this section 
because it is managed solely by Trustee A, an individual.
    Example 6. Trust managed by a trust company. The facts are the same 
as in Example 5, except that X hires Trust Company, an FFI, to act as 
trustee on behalf of Trust A. As trustee, Trust Company manages and 
administers the assets of Trust A in accordance with the terms of the 
trust instrument for

[[Page 491]]

the benefit of Y and Z. Because Trust A is managed by an FFI, Trust A is 
an investment entity under paragraph (e)(4)(i)(B) of this section and an 
FFI under paragraph (e)(1)(iii) of this section.
    Example 7. Individual introducing broker. IB, an individual 
introducing broker, primarily conducts a business of providing advice to 
clients, has discretionary authority to manage clients' assets, and uses 
the services of a foreign entity to conduct and execute trades on behalf 
of clients. IB provides services as an investment advisor and manager to 
Entity, a foreign corporation. Entity has earned 50% or more of its 
gross income for the past three years from investing, reinvesting, or 
trading in financial assets. Because IB is an individual, 
notwithstanding that IB primarily conducts certain investment-related 
activities, IB is not an investment entity under paragraph (e)(4)(i)(A) 
of this section. Further, Entity is not an investment entity under 
paragraph (e)(4)(i)(B) of this section because Entity is managed by IB, 
an individual.
    Example 8. Entity introducing broker. IB, a foreign entity 
introducing broker, primarily conducts a business of providing advice to 
clients, has discretionary authority to manage clients' assets, and uses 
the services of a foreign entity to conduct and execute trades on behalf 
of clients. IB provides its services as an investment advisor and 
manager to Entity, a foreign corporation. Entity has earned 50% or more 
of its gross income for the past three years from investing, 
reinvesting, or trading in financial assets. Because IB is an entity 
that primarily conducts certain investment-related activities, IB is an 
investment entity under paragraph (e)(4)(i)(A) of this section. Further, 
Entity is an investment entity under paragraph (e)(4)(i)(B) of this 
section because it is managed by IB, an investment entity that performs 
certain of the activities described in paragraph (e)(4)(i)(A) of this 
section on behalf of Entity.

    (5) Exclusions. A financial institution does not include an entity 
described in this paragraph, provided that the entity is not also 
described in paragraph (e)(1)(iv) of this section. For the treatment of 
foreign entities described in this paragraph under section 1472, see 
Sec.  1.1472-1(c)(1)(v).
    (i) Excepted nonfinancial group entities--(A) In general. A foreign 
entity that is a member of a nonfinancial group (as defined in paragraph 
(e)(5)(i)(B) of this section) if--
    (1) The entity is not a depository institution or custodial 
institution (other than for members of its expanded affiliated group);
    (2) The entity is a holding company, treasury center, or captive 
finance company and substantially all the activities of such entity are 
to perform one or more of the functions described in paragraphs 
(e)(5)(i)(C), (D), or (E) of this section; and
    (3) The entity does not hold itself out as, and was not formed in 
connection with or availed of by, an arrangement or investment vehicle 
that is a private equity fund, venture capital fund, leveraged buyout 
fund, or any similar investment vehicle established with an investment 
strategy to acquire or fund companies and to treat the interests in 
those companies as capital assets held for investment purposes. For 
purposes of determining whether an entity was formed in connection with 
or availed of by such an arrangement or investment vehicle, any entity 
that existed at least six months prior to its acquisition by such 
arrangement or investment vehicle and that, prior to the acquisition, 
regularly conducted activities described in paragraph (e)(5)(i)(C), (D), 
or (E) of this section will not be considered to have been formed in 
connection with or availed of by the arrangement or investment vehicle, 
in the absence of other facts suggesting the existence of an investment 
strategy described in the prior sentence.
    (B) Nonfinancial group. An expanded affiliated group defined in 
paragraph (i)(2) of this section is a nonfinancial group if, taking into 
account the application of this section--
    (1) For the three-year period (or the period during which the 
expanded affiliated group has been in existence, if shorter) ending on 
December 31 (or the end of the fiscal year of one or more members of the 
group) of the year preceding the year in which the determination is 
made, no more than 25 percent of the gross income of the expanded 
affiliated group (excluding income derived by any member that is an 
entity described in paragraph (e)(5)(ii) or (iii) of this section, 
income derived from transactions between members of the expanded 
affiliated group, and interest income on notes issued by customers to a 
member of the expanded affiliated group that is a captive finance 
company to finance the customer's purchase of inventory or goods

[[Page 492]]

that are manufactured by a member of the expanded affiliated group) 
consists of passive income (as defined in Sec.  1.1472-1(c)(1)(iv)); no 
more than five percent of the gross income of the expanded affiliated 
group is derived by members of the expanded affiliated group that are 
FFIs (excluding income derived from transactions between members of the 
expanded affiliated group or by any member of the expanded affiliated 
group that is a certified deemed-compliant FFI); and no more than 25 
percent of the value of assets held by the expanded affiliated group 
(excluding assets held by a member that is an entity described in 
paragraph (e)(5)(ii) or (iii) of this section, assets resulting from 
transactions between related members of the expanded affiliated group, 
and receivables that are notes issued by customers to a member of the 
expanded affiliated group that is a captive finance company to finance 
the customer's purchase of inventory or goods that are manufactured by a 
member of the expanded affiliated group) are assets that produce or are 
held for the production of passive income; and
    (2) Any member of the expanded affiliated group that is an FFI is a 
participating FFI, deemed-compliant FFI, or an exempt beneficial owner. 
However, an acquisition by a member of the expanded affiliated group of 
an FFI that is not a participating FFI, deemed-compliant FFI, or an 
exempt beneficial owner, or a change in the chapter 4 status of a member 
of the expanded affiliated group, will not cause a nonfinancial group to 
cease to be a nonfinancial group until 90 days after the acquisition or 
change in chapter 4 status.
    (C) Holding company. For purposes of this paragraph (e)(5)(i), an 
entity is a holding company if its primary activity consists of holding 
(directly or indirectly) all or part of the outstanding stock of one or 
more members of its expanded affiliated group. A partnership or any 
other non-corporate entity shall be treated as a holding company if 
substantially all the activities of such partnership (or other entity) 
consist of holding more than 50 percent of the voting power and value of 
the stock of one or more common parent corporation(s) of one or more 
expanded affiliated group(s). If a partnership or other non-corporate 
entity owns more than 50 percent of the voting power and value of the 
stock of more than one common parent corporation of an expanded 
affiliated group, each common parent corporation's expanded affiliated 
group will be treated as a separate expanded affiliated group for 
purposes of applying the rules of this section unless a non-corporate 
entity is treated as the common parent entity of the expanded affiliated 
group in accordance with Sec.  1.1471-5(i)(10).
    (D) Treasury center--(1) Except as otherwise provided in this 
paragraph, an entity is a treasury center for purposes of this paragraph 
(e)(5)(i) if the primary activity of such entity is to enter into 
investment, hedging, and financing transactions with or for members of 
its expanded affiliated group for purposes of--
    (i) Managing the risk of price changes or currency fluctuations with 
respect to property that is held or to be held by the expanded 
affiliated group (or any member thereof);
    (ii) Managing the risk of interest rate changes, price changes, or 
currency fluctuations with respect to borrowings made or to be made by 
the expanded affiliated group (or any member thereof);
    (iii) Managing the risk of interest rate changes, price changes, or 
currency fluctuations with respect to assets or liabilities to be 
reflected in financial statements of the expanded affiliated group (or 
any member thereof);
    (iv) Managing the working capital of the expanded affiliated group 
(or any member thereof) such as by pooling the cash balances of 
affiliates (including both positive and deficit cash balances) or by 
investing or trading in financial assets solely for the account and risk 
of such entity or any member of its expanded affiliated group; or
    (v) Acting as a financing vehicle for the expanded affiliated group 
(or any member thereof).
    (2) An entity is not a treasury center if any equity or debt 
interest in the entity is held by a person that is not a member of the 
entity's expanded affiliated group and the redemption or retirement 
amount or return earned on

[[Page 493]]

such interest is determined primarily by reference to--
    (i) The investment, hedging, and financing activities of the 
treasury center with members outside of its expanded affiliated group; 
or
    (ii) Any member of the group that is an investment entity described 
in (e)(4)(i)(B) or passive NFFE (as described in paragraph (b)(3)(vi) of 
this section with respect to either such entity).
    (E) Captive finance company. For purposes of this paragraph 
(e)(5)(i), an entity is a captive finance company if the primary 
activity of such entity is to enter into financing (including the 
extension of credit) or leasing transactions with or for suppliers, 
distributors, dealers, franchisees, or customers of such entity or of 
any member of such entity's expanded affiliated group that is an active 
NFFE.
    (ii) Excepted nonfinancial start-up companies or companies entering 
a new line of business--(A) In general. A foreign entity that is 
investing capital in assets with the intent to operate a new business or 
line of business other than that of a financial institution or passive 
NFFE for a period of--
    (1) In the case of an entity intending to operate a new business, 24 
months from the initial organization of such entity; and
    (2) In the case of an entity with the intent to operate a new line 
of business, 24 months from the date of the board resolution (or its 
equivalent) approving the new line of business, provided that such 
entity qualified as an active NFFE for the 24 months preceding the date 
of such approval.
    (B) Exception for investment funds. An entity is not described in 
this paragraph (e)(5)(ii) if the entity functions (or holds itself out) 
as an investment fund, such as a private equity fund, venture capital 
fund, leveraged buyout fund, or any investment vehicle whose purpose is 
to acquire or fund companies and hold interests in those companies as 
capital assets for investment purposes.
    (iii) Excepted nonfinancial entities in liquidation or bankruptcy. A 
foreign entity that was not a financial institution or passive NFFE at 
any time during the past five years and that is in the process of 
liquidating its assets or reorganizing with the intent to continue or 
recommence operations as a nonfinancial entity.
    (iv) Excepted inter-affiliate FFI. A foreign entity that is a member 
of a participating FFI group if--
    (A) The entity does not maintain financial accounts (other than 
accounts maintained for members of its expanded affiliated group);
    (B) The entity does not hold an account (other than depository 
accounts in the country in which the entity is operating to pay for 
expenses in that country) with or receive payments from any withholding 
agent other than a member of its expanded affiliated group;
    (C) The entity does not make withholdable payments to any person 
other than to members of its expanded affiliated group that are not 
limited FFIs or limited branches; and
    (D) The entity has not agreed to report under Sec.  1.1471-
4(d)(2)(ii)(C) or otherwise act as an agent for chapter 4 purposes on 
behalf of any financial institution, including a member of its expanded 
affiliated group.
    (v) Section 501(c) entities. A foreign entity that is described in 
section 501(c) other than an insurance company described in section 
501(c)(15).
    (vi) Non-profit organizations. A foreign entity that is established 
and maintained in its country of residence exclusively for religious, 
charitable, scientific, artistic, cultural or educational purposes if--
    (A) The entity is exempt from income tax in its country of 
residence;
    (B) The entity has no shareholders or members who have a proprietary 
or beneficial interest in its income or assets;
    (C) Neither the laws of the entity's country of residence nor the 
entity's formation documents permit any income or assets of the entity 
to be distributed to, or applied for the benefit of, an individual or 
noncharitable entity other than pursuant to the conduct of the entity's 
charitable activities, or as payment of reasonable compensation for 
services rendered or the use of property, or as payment representing the 
fair market value of property that the entity has purchased; and

[[Page 494]]

    (D) The laws of the entity's country of residence or the entity's 
formation documents require that, upon the entity's liquidation or 
dissolution, all of its assets be distributed to an entity that meets 
the requirements of Sec.  1.1471-6(b) or another organization that meets 
the requirements of this paragraph (e)(5)(vi) or escheat to the 
government of the entity's country of residence or any political 
subdivision thereof.
    (6) Reserving activities of an insurance company. The reserving 
activities of an insurance company will not cause the company to be a 
financial institution described in (e)(1)(i), (ii), or (iii) of this 
section.
    (f) Deemed-compliant FFIs. The term deemed-compliant FFI includes a 
registered deemed-compliant FFI (as defined in paragraph (f)(1) of this 
section), a certified deemed-compliant FFI (as defined in paragraph 
(f)(2) of this section), a nonreporting IGA FFI (as defined in Sec.  
1.1471-1(b)(83)), and, to the extent provided in paragraph (f)(3) of 
this section, an owner-documented FFI. A deemed-compliant FFI will be 
treated pursuant to section 1471(b)(2) as having met the requirements of 
section 1471(b). A deemed-compliant FFI that complies with the due 
diligence and withholding requirements applicable to such entity as 
provided in this paragraph (f) will also be deemed to have met its 
withholding obligations under sections 1471(a) and 1472(a). For this 
purpose, an intermediary or flow-through entity that has a residual 
withholding obligation under Sec.  1.1471-2(a)(2)(ii) must fulfill such 
obligation to be considered a deemed-compliant FFI.
    (1) Registered deemed-compliant FFIs. A registered deemed-compliant 
FFI means an FFI that meets the procedural requirements described in 
paragraph (f)(1)(ii) of this section and that either is described in any 
of paragraphs (f)(1)(i)(A) through (F) of this section or is treated as 
a registered deemed-compliant FFI under a Model 2 IGA. A registered 
deemed-compliant FFI also includes any FFI, or branch of an FFI, that is 
a reporting Model 1 FFI that complies with the registration requirements 
of a Model 1 IGA.
    (i) Registered deemed-compliant FFI categories--(A) Local FFIs. An 
FFI is described in this paragraph (f)(1)(i)(A) if the FFI meets the 
following requirements.
    (1) The FFI is licensed and regulated as a financial institution 
under the laws of its country of incorporation or organization (which 
must be a FATF-compliant jurisdiction at the time the FFI registers for 
deemed-compliant status).
    (2) The FFI does not have a fixed place of business outside its 
country of incorporation or organization. For this purpose, a fixed 
place of business does not include a location that is not advertised to 
the public and from which the FFI performs solely administrative support 
functions.
    (3) The FFI does not solicit customers or account holders outside 
its country of incorporation or organization. For this purpose, an FFI 
will not be considered to have solicited customers or account holders 
outside its country of incorporation or organization merely because it 
operates a Web site, provided that the Web site does not specifically 
indicate that the FFI maintains accounts for or provides services to 
nonresidents, and does not otherwise target or solicit U.S. customers or 
account holders. An FFI will also not be considered to have solicited 
customers or account holders outside its country of incorporation or 
organization merely because it advertises in print media or on a radio 
or television station that is distributed or aired primarily within its 
country of incorporation or organization but is also incidentally 
distributed or aired in other countries, provided that the advertisement 
does not specifically indicate that the FFI maintains accounts for or 
provides services to nonresidents and does not otherwise target or 
solicit U.S. customers or account holders.
    (4) The FFI is required under the laws of its country of 
incorporation or organization to identify resident account holders for 
purposes of either information reporting or withholding of tax with 
respect to accounts held by residents or is required to identify 
resident accounts for purposes of satisfying such country's AML due 
diligence requirements.
    (5) At least 98 percent of the accounts by value maintained by the 
FFI as of

[[Page 495]]

the last day of the preceding calendar year are held by residents 
(including residents that are entities) of the country in which the FFI 
is incorporated or organized. An FFI that is incorporated or organized 
in a member state of the European Union may treat account holders that 
are residents (including residents that are entities) of other member 
states of the European Union as residents of the country in which the 
FFI is incorporated or organized for purposes of this calculation.
    (6) By the later of June 30, 2014, or the date it registers as a 
deemed-compliant FFI, the FFI implements policies and procedures, 
consistent with those set forth for a participating FFI under Sec.  
1.1471-4(c), to monitor whether the FFI opens or maintains an account 
for a specified U.S. person who is not a resident of the country in 
which the FFI is incorporated or organized (including a U.S. person that 
was a resident when the account was opened but subsequently ceases to be 
a resident), an entity controlled or beneficially owned (as determined 
under the FFI's AML due diligence) by one or more specified U.S. persons 
that are not residents of the country in which the FFI is incorporated 
or organized, or a nonparticipating FFI. Such policies and procedures 
must provide that if any such account is discovered, the FFI will close 
such account, transfer such account to a participating FFI, reporting 
Model 1 FFI, or U.S. financial institution, or withhold and report on 
such account as would be required under Sec.  1.1471-4(b) and (d) if the 
FFI were a participating FFI.
    (7) With respect to each preexisting account held by a nonresident 
of the country in which the FFI is organized or held by an entity, the 
FFI reviews those accounts in accordance with the procedures described 
in Sec.  1.1471-4(c) applicable to preexisting accounts to identify any 
U.S. account or account held by a nonparticipating FFI, and certifies to 
the IRS that it did not identify any such account as a result of its 
review, that it has closed any such accounts that were identified or 
transferred them to a participating FFI, reporting Model 1 FFI, or U.S. 
financial institution, or that it agrees to withhold and report on such 
accounts as would be required under Sec.  1.1471-4(b) and (d) if it were 
a participating FFI. Such certification must be submitted by the due 
date of the FFI's first certification of compliance required under 
paragraph (f)(1)(ii)(B) of this section.
    (8) In the case of an FFI that is a member of an expanded affiliated 
group, each FFI in the group is incorporated or organized in the same 
country and, with the exception of any member that is a retirement plan 
described in Sec.  1.1471-6(f), meets the requirements set forth in this 
paragraph (f)(1)(i)(A) and the procedural requirements of paragraph 
(f)(1)(ii) of this section.
    (9) The FFI does not have policies or practices that discriminate 
against opening or maintaining accounts for individuals who are 
specified U.S. persons and who are residents of the FFI's country of 
incorporation or organization.
    (B) Nonreporting members of participating FFI groups. An FFI that is 
a member of a participating FFI group is described in this paragraph 
(f)(1)(i)(B) if it meets the following requirements.
    (1) By the later of June 30, 2014, or the date it registers with the 
IRS pursuant to paragraph (f)(1)(ii) of this section, the FFI implements 
policies and procedures to ensure that within six months of opening a 
U.S. account or an account held by a recalcitrant account holder or a 
nonparticipating FFI, the FFI either transfers such account to an 
affiliate that is a participating FFI, reporting Model 1 FFI, or U.S. 
financial institution, closes the account, or becomes a participating 
FFI.
    (2) The FFI reviews its accounts that were opened prior to the time 
it implements the policies and procedures (including time frames) 
described in paragraph (f)(1)(i)(B)(1) of this section, using the 
procedures described in Sec.  1.1471-4(c) applicable to preexisting 
accounts of participating FFIs, to identify any U.S. account or account 
held by a nonparticipating FFI. Within six months of the identification 
of any account described in this paragraph, the FFI transfers the 
account to an affiliate that is a participating FFI, reporting Model 1 
FFI, or U.S. financial institution, closes the account, or becomes a 
participating FFI.

[[Page 496]]

    (3) By the later of June 30, 2014, or the date it registers with the 
IRS pursuant to paragraph (f)(1)(ii) of this section, the FFI implements 
policies and procedures to ensure that it identifies any account that 
becomes a U.S. account or an account held by a recalcitrant account 
holder or a nonparticipating FFI due to a change in circumstances. 
Within six months of the date on which the FFI first has knowledge or 
reason to know of the change in the account holder's chapter 4 status, 
the FFI transfers any such account to an affiliate that is a 
participating FFI, reporting Model 1 FFI, or U.S. financial institution, 
closes the account, or becomes a participating FFI.
    (C) Qualified collective investment vehicles. An FFI is described in 
this paragraph (f)(1)(i)(C) if it meets the following requirements.
    (1) The FFI is an FFI solely because it is an investment entity, and 
it is regulated as an investment fund either in its country of 
incorporation or organization or in all of the countries in which it is 
registered and all of the countries in which it operates. A fund will be 
considered to be regulated as an investment fund under this paragraph if 
its manager is regulated with respect to the investment fund in all of 
the countries in which the investment fund is registered and in all of 
the countries in which the investment fund operates.
    (2) Each holder of record of direct debt interests in the FFI in 
excess of $50,000, of any direct equity interests in the FFI (for 
example the holders of its units or global certificates), and of any 
other account holder of the FFI is a participating FFI, a registered 
deemed-compliant FFI, a retirement plan described in Sec.  1.1471-6(f), 
a non-profit organization described in paragraph (e)(5)(vi) of this 
section, a U.S. person that is not a specified U.S. person, a 
nonreporting IGA FFI, or an exempt beneficial owner. Notwithstanding the 
prior sentence, an FFI will not be prohibited from qualifying as a 
qualified collective investment vehicle solely because it has issued 
interests in bearer form provided that the FFI ceased issuing interests 
in such form after December 31, 2012, retires all such interests upon 
surrender, and establishes policies and procedures to redeem or 
immobilize all such interests prior to January 1, 2017, and that prior 
to payment the FFI documents the account holder in accordance with the 
procedures set forth in Sec.  1.1471-4(c) applicable to accounts other 
than preexisting accounts and agrees to withhold and report on such 
accounts as would be required under Sec.  1.1471-4(b) and (d) if it were 
a participating FFI. For purposes of this paragraph (f)(1)(i)(C), an FFI 
may disregard equity interests owned by specified U.S. persons acquired 
with seed capital within the meaning of paragraph (i)(4) of this section 
if the specified U.S. person is described in paragraph (i)(3)(i) and 
(ii) of this section (substituting the term U.S. person for the terms 
FFI and member), and the specified U.S. person neither has held, nor 
intends to hold, such interest for more than three years.
    (3) In the case of an FFI that is part of an expanded affiliated 
group, all other FFIs in the expanded affiliated group are participating 
FFIs, registered deemed-compliant FFIs, sponsored FFIs described in 
paragraph (f)(1)(i)(F)(1) or (2) of this section, nonreporting IGA FFIs, 
or exempt beneficial owners.
    (D) Restricted funds. An FFI is described in this paragraph 
(f)(1)(i)(D) if it meets the following requirements.
    (1) The FFI is an FFI solely because it is an investment entity, and 
it is regulated as an investment fund under the laws of its country of 
incorporation or organization (which must be a FATF-compliant 
jurisdiction at the time the FFI registers for deemed-compliant status) 
or in all of the countries in which it is registered and in all of the 
countries in which it operates. A fund will be considered to be 
regulated as an investment fund for purposes of this paragraph if its 
manager is regulated with respect to the fund in all of the countries in 
which the investment fund is registered and in all of the countries in 
which the investment fund operates.
    (2) Interests issued directly by the fund are redeemed by or 
transferred by the fund rather than sold by investors on any secondary 
market. Notwithstanding the prior sentence, an FFI will not be 
prohibited from qualifying as a restricted fund solely because it

[[Page 497]]

issued interests in bearer form provided that the FFI ceased issuing 
interests in bearer form after December 31, 2012, retires all such 
interests upon surrender, and establishes policies and procedures to 
redeem or immobilize all such interests prior to January 1, 2017, and 
that prior to payment the FFI documents the account holder in accordance 
with the procedures set forth in Sec.  1.1471-4(c) applicable to 
accounts other than preexisting accounts and agrees to withhold and 
report on such accounts as would be required under Sec.  1.1471-4(b) and 
(d) if it were a participating FFI. For purposes of this paragraph 
(f)(1)(i)(D), interests in the FFI that are issued by the fund through a 
transfer agent or distributor that does not hold the interests as a 
nominee of the account holder will be considered to have been issued 
directly by the fund.
    (3) Interests that are not issued directly by the fund are sold only 
through distributors that are participating FFIs, registered deemed-
compliant FFIs, nonregistering local banks described in paragraph 
(f)(2)(i) of this section, or restricted distributors described in 
paragraph (f)(4) of this section. For purposes of this paragraph 
(f)(1)(i)(D) and paragraph (f)(4) of this section, a distributor means 
an underwriter, broker, dealer, or other person who participates, 
pursuant to a contractual arrangement with the FFI, in the distribution 
of securities and holds interests in the FFI as a nominee.
    (4) The FFI ensures that by the later of December 31, 2014, or six 
months after the date the FFI registers as a deemed-compliant FFI, each 
agreement that governs the distribution of its debt or equity interests 
prohibits sales and other transfers of debt or equity interests in the 
FFI (other than interests that are both distributed by and held through 
a participating FFI) to specified U.S. persons, nonparticipating FFIs, 
or passive NFFEs with one or more substantial U.S. owners. In addition, 
by that date, the FFI's prospectus and all marketing materials must 
indicate that sales and other transfers of interests in the FFI to 
specified U.S. persons, nonparticipating FFIs, or passive NFFEs with one 
or more substantial U.S. owners are prohibited unless such interests are 
both distributed by and held through a participating FFI.
    (5) The FFI ensures that by the later of December 31, 2014, or six 
months after the date the FFI registers as a deemed-compliant FFI, each 
agreement entered into by the FFI that governs the distribution of its 
debt or equity interests requires the distributor to notify the FFI of a 
change in the distributor's chapter 4 status within 90 days of the 
change. The FFI must, with respect to any distributor that ceases to 
qualify as a distributor identified in paragraph (f)(1)(i)(D)(3) of this 
section, terminate its distribution agreement with the distributor, or 
cause the distribution agreement to be terminated, within 90 days of the 
notification of the distributor's change in status and, with respect to 
all debt and equity interests of the FFI issued through that 
distributor, redeem those interests, convert those interests to direct 
holdings in the fund, or cause those interests to be transferred to 
another distributor identified in paragraph (f)(1)(i)(D)(3) of this 
section within six months of the distributor's change in status.
    (6) With respect to any of the FFI's preexisting direct accounts 
that are held by the beneficial owner of the interest in the FFI, the 
FFI reviews those accounts in accordance with the procedures (and time 
frames) described in Sec.  1.1471-4(c) applicable to preexisting 
accounts to identify any U.S. account or account held by a 
nonparticipating FFI. Notwithstanding the previous sentence, the FFI 
will not be required to review the account of any individual investor 
that purchased its interest at a time when all of the FFI's distribution 
agreements and its prospectus contained an explicit prohibition of the 
issuance and/or sale of shares to U.S. entities and U.S. resident 
individuals. An FFI will not be required to review the account of any 
investor that purchased its interest in bearer form until the time of 
payment, but at such time will be required to document the account in 
accordance with procedures set forth in Sec.  1.1471-4(c) applicable to 
accounts other than preexisting accounts. The FFI is required to certify 
to the IRS either that it did not identify any U.S. account or account 
held

[[Page 498]]

by a nonparticipating FFI as a result of its review or, if any such 
accounts were identified, that the FFI will either redeem such accounts, 
transfer such accounts to an affiliate or other FFI that is a 
participating FFI, reporting Model 1 FFI, or U.S. financial institution, 
or withhold and report on such accounts as would be required under Sec.  
1.1471-4(b) and (d) if it were a participating FFI. Such certification 
must be submitted to the IRS by the due date of the FFI's first 
certification of compliance required under paragraph (f)(1)(ii)(B) of 
this section.
    (7) By the later of June 30, 2014, or the date that it registers as 
a deemed-compliant FFI, the FFI implements the policies and procedures 
described in Sec.  1.1471-4(c) to ensure that it either--
    (i) Does not open or maintain an account for, or make a withholdable 
payment to, any specified U.S. person, nonparticipating FFI, or passive 
NFFE with one or more substantial U.S. owners and, if it discovers any 
such accounts, closes all accounts for any such person within six months 
of the date that the FFI had reason to know the account holder became 
such a person; or
    (ii) Withholds and reports on any account held by, or any 
withholdable payment made to, any specified U.S. person, 
nonparticipating FFI, or passive NFFE with one or more substantial U.S. 
owners to the extent and in the manner that would be required under 
Sec.  1.1471-4(b) and (d) if the FFI were a participating FFI.
    (8) For an FFI that is part of an expanded affiliated group, all 
other FFIs in the expanded affiliated group are participating FFIs, 
registered deemed-compliant FFIs, sponsored FFIs described in paragraph 
(f)(1)(i)(F)(1) or (2) of this section, nonreporting IGA FFIs, or exempt 
beneficial owners.
    (E) Qualified credit card issuers and servicers. An FFI is described 
in this paragraph (f)(1)(i)(E) if the FFI meets the following 
requirements.
    (1) The FFI is an FFI solely because it is an issuer or servicer of 
credit cards that accepts deposits, on its own behalf or, in the case of 
a servicer, on behalf of a credit card issuer, only when a customer 
makes a payment in excess of a balance due with respect to the credit 
card account and the overpayment is not immediately returned to the 
customer.
    (2) By the later of June 30, 2014, or the date it registers as a 
deemed-compliant FFI, the FFI implements policies and procedures to 
either prevent a customer deposit in excess of $50,000 or to ensure that 
any customer deposit in excess of $50,000 is refunded to the customer 
within 60 days. For this purpose, a customer deposit does not refer to 
credit balances to the extent of disputed charges but does include 
credit balances resulting from merchandise returns.
    (F) Sponsored investment entities and controlled foreign 
corporations. An FFI is described in this paragraph (f)(1)(i)(F) if the 
FFI is described in paragraph (f)(1)(i)(F)(1) or (2) of this section and 
the sponsoring entity meets the requirements of paragraph 
(f)(1)(i)(F)(3) of this section.
    (1) An FFI is a sponsored investment entity described in this 
paragraph (f)(1)(i)(F)(1) if--
    (i) It is an investment entity that is not a QI, WP (except to the 
extent permitted in the WP agreement), or WT; and
    (ii) An entity, other than a nonparticipating FFI, has agreed with 
the FFI to act as a sponsoring entity for the FFI.
    (2) An FFI is a sponsored controlled foreign corporation described 
in this paragraph (f)(1)(i)(F)(2) if the FFI meets the following 
requirements--
    (i) The FFI is a controlled foreign corporation as defined in 
section 957(a) that is not a QI, WP, or WT;
    (ii) The FFI is wholly owned, directly or indirectly, by a U.S. 
financial institution that agrees with the FFI to act as a sponsoring 
entity for the FFI; and
    (iii) The FFI shares a common electronic account system with the 
sponsoring entity that enables the sponsoring entity to identify all 
account holders and payees of the FFI and to access all account and 
customer information maintained by the FFI including, but not limited 
to, customer identification information, customer documentation, account 
balance, and all payments made to the account holder or payee.

[[Page 499]]

    (3) A sponsoring entity described in paragraph (f)(1)(i)(F)(1)(ii) 
or (f)(1)(i)(F)(2)(ii) of this section meets the requirements of this 
paragraph (f)(1)(i)(F)(3) if the sponsoring entity--
    (i) Is authorized to act on behalf of the FFI (such as a fund 
manager, trustee, corporate director, or managing partner) to fulfill 
all due diligence, withholding, and reporting responsibilities that the 
FFI would have assumed if it were a participating FFI;
    (ii) Has registered with the IRS as a sponsoring entity;
    (iii) Has registered the FFI with the IRS by the later of January 1, 
2017, or the date that the FFI identifies itself as qualifying under 
this paragraph (f)(1)(i)(F);
    (iv) Agrees to perform, on behalf of the FFI, all due diligence, 
withholding, reporting, and other requirements that the FFI would have 
been required to perform if it were a participating FFI;
    (v) Identifies the FFI in all reporting completed on the FFI's 
behalf to the extent required under Sec. Sec.  1.1471-4(d)(2)(ii)(C) and 
1.1474-1;
    (vi) Complies with the verification procedures described in 
paragraph (j) of this section; and
    (vii) Has not had its status as a sponsoring entity revoked.
    (4) The IRS may revoke a sponsoring entity's status with respect to 
one or more sponsored FFIs based on the provisions of paragraphs (k)(2), 
(3), and (4) of this section (describing notice of event of default, 
remediation, and termination procedures) if there is an event of default 
as defined in paragraph (k)(1) of this section.
    (5) A sponsoring entity is not liable for any failure to comply with 
the obligations contained in paragraph (f)(1)(i)(F)(3) of this section 
unless the sponsoring entity is a withholding agent that is separately 
liable for the failure to withhold on or report with respect to a 
payment made by the sponsoring entity on behalf of the sponsored FFI. A 
sponsored FFI will remain liable for any failure of its sponsoring 
entity to comply with the obligations contained in paragraph 
(f)(1)(i)(F)(3) of this section that the sponsoring entity has agreed to 
undertake on behalf of the FFI, even if the sponsoring entity is also a 
withholding agent and is itself separately liable for the failure to 
withhold on or report with respect to a payment made by the sponsoring 
entity on behalf of the sponsored FFI. The same tax, interest, or 
penalties, however, shall not be collected more than once.
    (ii) Procedural requirements for registered deemed-compliant FFIs. A 
registered deemed-compliant FFI described in paragraph (f)(1)(i)(A) 
through (E) of this section may use one or more agents to perform the 
necessary due diligence to identify its account holders and to take any 
required action associated with obtaining and maintaining its deemed-
compliant status. The FFI, however, remains responsible for ensuring 
that the requirements for its deemed-compliant status are met. Unless 
otherwise provided in this section, a registered deemed-compliant FFI 
described in paragraph (f)(1)(i)(A) through (E) of this section is 
required to--
    (A) Register with the IRS pursuant to procedures prescribed by the 
IRS and agree to comply with the terms of its registered deemed-
compliant status.
    (B) Have its responsible officer certify, on or before July 1 of the 
calendar year following the end of each certification period, that all 
of the requirements for the deemed-compliant status claimed by the FFI 
have been satisfied during the certification period. The responsible 
officer may certify collectively for the FFI's expanded affiliated group 
that all of the requirements for the deemed-compliant status claimed by 
each member of the expanded affiliated group that is a registered 
deemed-compliant FFI (other than a member that is a reporting Model 1 
FFI or deemed-compliant FFI under an applicable Model 1 IGA) have been 
satisfied. The certification must be made on the form and in the manner 
prescribed by the IRS. The first certification period begins on the 
later of the date the FFI registers as a deemed-compliant FFI and is 
issued a GIIN, or June 30, 2014, and ends at the close of the third full 
calendar year following that date. Each subsequent certification period 
is the three calendar year period following the previous certification 
period.

[[Page 500]]

    (C) Maintain in its records the confirmation from the IRS of the 
FFI's registration as a deemed-compliant FFI and GIIN or such other 
information as the IRS specifies in forms or other guidance; and
    (D) Agree to notify the IRS if there is a change in circumstances 
that would make the FFI ineligible for the deemed-compliant status for 
which it has registered, and to do so within six months of the change in 
circumstances unless the FFI is able to resume its eligibility for its 
registered-deemed compliant status within the six month notification 
period.
    (iii) Deemed-compliant FFI that is merged or acquired. A deemed-
compliant FFI that becomes a participating FFI or a member of a 
participating FFI group as a result of a merger or acquisition will not 
be required to redetermine the chapter 4 status of any account 
maintained by the FFI prior to the date of the merger or acquisition 
unless that account has a subsequent change in circumstances.
    (iv) IRS review of compliance by registered deemed-compliant FFIs--
(A) General inquiries. With respect to a registered deemed-compliant FFI 
described in paragraph (f)(1)(i)(A), (C), or (D) of this section, the 
IRS, based upon the information reporting forms described in Sec.  
1.1471-4(d)(3)(v), (d)(5)(vii), or (d)(6)(iv) filed with the IRS for 
each calendar year (if applicable), may request additional information 
with respect to the information reported (or required to be reported) on 
the forms, the account statements described in Sec.  1.1471-4(d)(4)(v), 
or confirmation that the FFI has no reporting requirements for the 
calendar year. The IRS may request additional information from the FFI 
to determine the FFI's compliance with Sec.  1.1471-4 (if applicable) 
and to assist the IRS with its review of account holder compliance with 
tax reporting requirements. For IRS review of compliance with respect to 
a registered deemed-compliant FFI described in paragraph (f)(1)(i)(F) of 
this section (describing sponsored investment entities and controlled 
foreign corporations), see paragraph (j)(4) of this section.
    (B) Inquiries regarding substantial non-compliance. With respect to 
a registered deemed-compliant FFI described in paragraph (f)(1)(i)(A) 
through (E) of this section, the IRS may determine in its discretion 
that the FFI may not have substantially complied with the requirements 
of the deemed-compliant status claimed by the FFI. This determination is 
based on the information reporting forms described in Sec.  1.1471-
4(d)(3)(v), (d)(5)(vii), or (d)(6)(iv) filed with the IRS for each 
calendar year (if applicable), the certifications made by the 
responsible officer described in paragraph (f)(1)(ii)(B) of this section 
(or the absence of such certifications), or any other information 
related to the FFI's compliance with the requirements of the deemed-
compliant status claimed by the FFI. In such a case, the IRS may request 
from the responsible officer (or designee) information necessary to 
verify the FFI's compliance with the requirements for the deemed-
compliant status claimed by the FFI. For example, in the case of a local 
FFI under paragraph (f)(1)(i)(A) of this section, the IRS may request a 
description or copy of the FFI's policies and procedures for identifying 
accounts held by specified U.S. persons not resident in the jurisdiction 
in which the FFI is incorporated or organized, identifying entities 
controlled or beneficially owned by such persons, and identifying 
nonparticipating FFIs. The IRS may also request the performance of 
specified review procedures by a person (including an external auditor 
or third-party consultant) that the IRS identifies as competent to 
perform such procedures given the facts and circumstances surrounding 
the FFI's potential failure to comply with the requirements of the 
deemed-compliant category claimed by the FFI. If the IRS determines that 
the FFI has not complied with the requirements of the deemed-compliant 
status claimed by the FFI, the IRS may terminate the FFI's deemed-
compliant status. If the FFI's deemed-compliant status is terminated, 
the FFI must send notice of the termination to each withholding agent 
from which it receives payments and each financial institution with 
which it holds an account for which a withholding certificate or other 
documentation was provided within 30 days after the termination. An FFI 
that has

[[Page 501]]

had its deemed-compliant status terminated may not reregister on the 
FATCA registration website as a registered deemed-compliant FFI or 
register on the FATCA registration website as a participating FFI unless 
it receives written approval from the IRS. A registered deemed-compliant 
FFI may request, within 90 days of a notice of termination, 
reconsideration of the notice of termination by written request to the 
IRS.
    (2) Certified deemed-compliant FFIs. A certified deemed-compliant 
FFI means an FFI described in any of paragraphs (f)(2)(i) through (v) of 
this section that has certified as to its status as a deemed-compliant 
FFI by providing a withholding agent with the documentation described in 
Sec.  1.1471-3(d)(5) applicable to the relevant deemed-compliant 
category. A certified deemed-compliant FFI is not required to register 
with the IRS.
    (i) Nonregistering local bank. An FFI is described in this paragraph 
(f)(2)(i) if the FFI meets the following requirements.
    (A) The FFI operates solely as (and is licensed and regulated under 
the laws of its country of incorporation or organization as)--
    (1) A bank; or
    (2) A credit union or similar cooperative credit organization that 
is operated without profit.
    (B) The FFI's business consists primarily of receiving deposits from 
and making loans to, with respect to a bank, retail customers that are 
unrelated to such bank and, with respect to a credit union or similar 
cooperative credit organization, members, provided that no such member 
has a greater than 5 percent interest in such credit union or 
cooperative credit organization. For purposes of this paragraph 
(f)(2)(i)(B), a customer is related to a bank if the customer and the 
bank have a relationship described in section 267(b). For purposes of 
determining whether a member has a greater than 5 percent interest in a 
credit union or cooperative credit organization, the member must 
aggregate the ownership or beneficial interests in the credit union or 
cooperative credit organization that are owned or held by a related 
member. A member of a credit union or cooperative credit organization is 
related to another member if the relationship of such members is 
described in section 267(b).
    (C) The FFI does not have a fixed place of business outside its 
country of incorporation or organization. For this purpose, a fixed 
place of business does not include a location that is not advertised to 
the public and from which the FFI performs solely administrative support 
functions.
    (D) The FFI does not solicit customers or account holders outside 
its country of incorporation or organization. For this purpose, an FFI 
will not be considered to have solicited customers or account holders 
outside its country of incorporation or organization merely because it 
operates a Web site, provided that the Web site does not permit account 
opening, does not indicate that the FFI maintains accounts for or 
provides services to nonresidents, and does not otherwise target or 
solicit U.S. customers or account holders. An FFI will also not be 
considered to have solicited customers or account holders outside its 
country of incorporation or organization merely because it advertises in 
print media or on a radio or television station that is distributed or 
aired primarily within its country of incorporation or organization but 
is also incidentally distributed or aired in other countries, provided 
that the advertisement does not indicate that the FFI maintains accounts 
for or provides services to nonresidents and does not otherwise target 
or solicit U.S. customers or account holders.
    (E) The FFI does not have more than $175 million in assets on its 
balance sheet and, if the FFI is a member of an expanded affiliated 
group, the group does not have more than $500 million in total assets on 
its consolidated or combined balance sheets.
    (F) With respect to an FFI that is part of an expanded affiliated 
group, each member of the expanded affiliated group is incorporated or 
organized in the same country and does not have a fixed place of 
business outside of that country. For this purpose, a fixed place of 
business does not include a location that is not advertised to the 
public and

[[Page 502]]

from which the FFI performs solely administrative support functions. 
Further, each FFI in the group, other than an FFI described in paragraph 
(f)(2)(ii) of this section or Sec.  1.1471-6(f), meets the requirements 
set forth in this paragraph (f)(2)(i). For this purpose, a fixed place 
of business does not include a location that is not advertised to the 
public and from which the FFI performs solely administrative support 
functions.
    (ii) FFIs with only low-value accounts. An FFI is described in this 
paragraph (f)(2)(ii) if the FFI meets the following requirements:
    (A) The FFI is not an investment entity.
    (B) No financial account maintained by the FFI (or, in the case of 
an FFI that is a member of an expanded affiliated group, by any member 
of the expanded affiliated group) has a balance or value in excess of 
$50,000. The balance or value of a financial account shall be determined 
by applying the rules described in paragraph (b)(4) of this section, 
substituting the term financial account for the term depository account 
and the term person for the term individual.
    (C) The FFI does not have more than $50 million in assets on its 
balance sheet as of the end of its most recent accounting year. In the 
case of an FFI that is a member of an expanded affiliated group, the 
entire expanded affiliated group does not have more than $50 million in 
assets on its consolidated or combined balance sheet as of the end of 
its most recent accounting year.
    (iii) Sponsored, closely held investment vehicles. Subject to the 
provisions of paragraph (f)(2)(iii)(E) of this section, an FFI is 
described in this paragraph (f)(2)(iii) if it meets the requirements 
described in paragraphs (f)(2)(iii)(A) through (D) of this section.
    (A) The FFI is an FFI solely because it is an investment entity and 
is not a QI, WP, or WT.
    (B) A participating FFI, reporting Model 1 FFI, or U.S. financial 
institution agrees to fulfill all due diligence, withholding, and 
reporting responsibilities that the FFI would have assumed if it were a 
participating FFI.
    (C) Twenty or fewer individuals own all of the debt and equity 
interests in the FFI (disregarding debt interests owned by U.S. 
financial institutions, participating FFIs, registered deemed-compliant 
FFIs, and certified deemed-compliant FFIs and equity interests owned by 
an entity if that entity owns 100 percent of the equity interests in the 
FFI and is itself a sponsored FFI under this paragraph (f)(2)(iii)).
    (D) The sponsoring entity complies with the following requirements--
    (1) The sponsoring entity has registered with the IRS as a 
sponsoring entity;
    (2) The sponsoring entity agrees to perform, on behalf of the FFI, 
all due diligence, withholding, reporting, and other requirements that 
the FFI would have been required to perform if it were a participating 
FFI and retains documentation collected with respect to the FFI for a 
period of six years;
    (3) The sponsoring entity identifies the FFI in all reporting 
completed on the FFI's behalf to the extent required under Sec. Sec.  
1.1471-4(d)(2)(ii)(C) and 1.1474-1;
    (4) Complies with the verification procedures described in paragraph 
(j) of this section; and
    (5) The sponsoring entity has not had its status as a sponsor 
revoked.
    (E) The IRS may revoke a sponsoring entity's status as a sponsoring 
entity with respect to one or more sponsored FFIs based on the 
provisions of paragraphs (k)(2), (3), and (4) of this section 
(describing notice of event of default, remediation, and termination 
procedures) if there is an event of default as defined in paragraph 
(k)(1) of this section. A sponsoring entity is not liable for any 
failure to comply with the obligations contained in paragraph 
(f)(2)(iii)(D) of this section unless the sponsoring entity is a 
withholding agent that is separately liable for the failure to withhold 
on or report with respect to a payment made by the sponsoring entity on 
behalf of the sponsored FFI. A sponsored FFI will remain liable for any 
failure of its sponsoring entity to comply with the obligations 
contained in paragraph (f)(2)(iii)(D) of this section that the 
sponsoring entity has agreed to undertake on behalf of the FFI, even if 
the sponsoring entity is also a withholding agent and is itself 
separately liable for the failure to withhold on or report

[[Page 503]]

with respect to a payment made by the sponsoring entity on behalf of the 
sponsored FFI. The same tax, interest, or penalties, however, shall not 
be collected more than once.
    (iv) Limited life debt investment entities (transitional). An FFI is 
described in this paragraph (f)(2)(iv) if the FFI is the beneficial 
owner of the payment (or of payments made with respect to the account) 
and the FFI meets the following requirements.
    (A) The FFI is an investment entity that issued one or more classes 
of debt or equity interests to investors pursuant to a trust indenture 
or similar agreement and all of such interests were issued on or before 
January 17, 2013.
    (B) The FFI was in existence as of January 17, 2013, and has entered 
into a trust indenture or similar agreement that requires the FFI to pay 
to investors holding substantially all of the interests in the FFI, no 
later than a set date or period following the maturity of the last asset 
held by the FFI, all amounts that such investors are entitled to receive 
from the FFI.
    (C) The FFI was formed and operated for the purpose of purchasing or 
acquiring specific types of debt instruments or interests therein and 
holding those assets subject to reinvestment only under prescribed 
circumstances to maturity.
    (D) Substantially all of the assets of the FFI consist of debt 
instruments or interests therein (including assets acquired pursuant to 
a foreclosure, restructuring, workout, or similar event with respect to 
a debt instrument).
    (E) All payments made to the investors of the FFI (other than 
holders of a de minimis interest) are either cleared through a clearing 
organization or custodial institution that is a participating FFI, 
reporting Model 1 FFI, or U.S. financial institution or made through a 
transfer agent that is a participating FFI, reporting Model 1 FFI, or 
U.S. financial institution.
    (F) The FFI's trustee or fiduciary is not authorized through a 
fiduciary duty or otherwise to fulfill the obligations of a 
participating FFI under Sec.  1.1471-4 and no other person has the 
authority to fulfill the obligations of a participating FFI under Sec.  
1.1471-4 on behalf of the FFI.
    (v) Certain investment entities that do not maintain financial 
accounts. An FFI is described in this paragraph (f)(2)(v) if the FFI 
meets the following requirements.
    (A) The FFI is a financial institution solely because it is 
described in paragraph (e)(4)(i)(A) of this section.
    (B) The FFI does not maintain financial accounts.
    (3) Owner-documented FFIs--(i) In general. An owner-documented FFI 
means an FFI that meets the requirements of paragraph (f)(3)(ii) of this 
section. An FFI may only be treated as an owner-documented FFI with 
respect to payments received from and accounts held with a designated 
withholding agent (or with respect to payments received from and 
accounts held with another FFI that is also treated as an owner-
documented FFI by such designated withholding agent). A designated 
withholding agent is a U.S. financial institution, participating FFI, or 
reporting Model 1 FFI that agrees to undertake the additional due 
diligence and reporting required under paragraphs (f)(3)(ii)(D) and (E) 
of this section in order to treat the FFI as an owner-documented FFI. An 
FFI meeting the requirements of this paragraph (f)(3) will only be 
treated as a deemed-compliant FFI with respect to a payment or account 
for which it does not act as an intermediary.
    (ii) Requirements of owner-documented FFI status. An FFI meets the 
requirements of this paragraph (f)(3)(ii) only if--
    (A) The FFI is an FFI solely because it is an investment entity;
    (B) The FFI is not owned by or in an expanded affiliated group with 
any FFI that is a depository institution, custodial institution, or 
specified insurance company;
    (C) The FFI does not maintain a financial account for any 
nonparticipating FFI;
    (D) The FFI provides the designated withholding agent with all of 
the documentation described in Sec.  1.1471-3(d)(6) and agrees to notify 
the withholding agent if there is a change in circumstances; and

[[Page 504]]

    (E) The designated withholding agent agrees to report to the IRS 
(or, in the case of a reporting Model 1 FFI, to the relevant foreign 
government or agency thereof) all of the information described in Sec.  
1.1471-4(d) or Sec.  1.1474-1(i) (as appropriate) with respect to any 
specified U.S. persons that are identified in Sec.  1.1471-
3(d)(6)(iv)(A)(1) and (2). Notwithstanding the previous sentence, the 
designated withholding agent is not required to report information with 
respect to an indirect owner of the FFI that holds its interest through 
a participating FFI, a deemed-compliant FFI (other than an owner-
documented FFI), an entity that is a U.S. person, an exempt beneficial 
owner, or an excepted NFFE.
    (4) Definition of a restricted distributor. An entity is a 
restricted distributor for purposes of paragraph (f)(1)(i)(D) of this 
section (relating to registered deemed-compliant restricted funds) if it 
operates as a distributor that holds debt or equity interests in a 
restricted fund as a nominee and meets the following requirements.
    (i) The distributor provides investment services to at least 30 
customers unrelated to each other and fewer than half of the 
distributor's customers are related to each other. For purposes of this 
paragraph (f)(4)(i), customers are related to each other if they have a 
relationship with each other described in section 267(b).
    (ii) The distributor is required to perform AML due diligence 
procedures under the anti-money laundering laws of its country of 
incorporation or organization (which must be a FATF-compliant 
jurisdiction).
    (iii) The distributor operates solely in its country of 
incorporation or organization, does not have a fixed place of business 
outside that country, and, if such distributor belongs to an expanded 
affiliated group, has the same country of incorporation or organization 
as all other members of its expanded affiliated group. For this purpose, 
a fixed place of business does not include a location that is not 
advertised to the public and from which the FFI performs solely 
administrative support functions.
    (iv) The distributor does not solicit customers or account holders 
outside its country of incorporation or organization. For this purpose, 
a distributor will not be considered to have solicited customers or 
account holders outside its country of organization merely because it 
operates a Web site, provided that the Web site does not permit account 
opening by persons identified as nonresidents, does not specifically 
state that nonresidents may acquire securities from the distributor, and 
does not otherwise target U.S. customers or account holders. A 
distributor will also not be considered to have solicited customers or 
account holders outside its country of incorporation or organization 
merely because it advertises in print media or on a radio or television 
station that is distributed or aired primarily within its country of 
incorporation or organization but is also incidentally distributed or 
aired in other countries, provided that the advertisement does not 
indicate that the distributor maintains accounts for or provides 
services to nonresidents and does not otherwise target or solicit U.S. 
customers or account holders.
    (v) The distributor does not have more than $175 million in total 
assets under management and has no more than $7 million in gross revenue 
on its income statement for the most recent financial accounting year 
and, if the distributor belongs to an expanded affiliated group, the 
entire group does not have more than $500 million in total assets under 
management or more than $20 million in gross revenue for its most recent 
financial accounting year on a combined or consolidated income 
statement.
    (vi) The distributor provides the restricted fund (or another 
distributor of the restricted fund that is a participating FFI or 
registered deemed-compliant FFI, and with which the distributor has 
entered into its distribution agreement) with a valid Form W-8 
indicating that the distributor satisfies the requirements to be a 
restricted distributor.
    (vii) The agreement governing the distributor's distribution of debt 
or equity interests of the restricted fund--
    (A) Prohibits the distributor from distributing any securities to 
specified U.S. persons, passive NFFEs that have

[[Page 505]]

one or more substantial U.S. owners, and nonparticipating FFIs;
    (B) Requires that if the distributor does distribute securities to 
any of the persons described in this paragraph (f)(4)(vii), it will 
cause the restricted fund to redeem or retire those interests, or it 
will transfer those interests to a distributor that is a participating 
FFI or reporting Model 1 FFI, within six months and the commission paid 
to the distributor will be forfeited to the restricted fund or to the 
participating FFI to which those interests are transferred; and
    (C) Requires the distributor to notify the restricted fund (or 
another distributor of the restricted fund that is a participating FFI, 
reporting Model 1 FFI, or registered deemed-compliant FFI and with which 
the distributor has entered into its distribution agreement) of a change 
in the distributor's chapter 4 status within 90 days of the change in 
status.
    (viii) With respect to sales after December 31, 2011, and prior to 
the time the restrictions described in paragraph (f)(4)(vii) of this 
section were incorporated into the distribution agreement, either the 
agreement governing the distributor's distribution of debt or equity 
interests of the relevant FFI contained a prohibition of the sale of 
such securities to U.S. entities or U.S. resident individuals, or the 
distributor reviews all accounts relating to such sales in accordance 
with the procedures (and time frames) described in Sec.  1.1471-4(c) 
applicable to preexisting accounts and certifies that it has caused the 
restricted fund to redeem or retire, or it has transferred all 
securities sold to any of the persons described in paragraph (f)(4)(vii) 
of this section. If the distribution agreement addressed in the prior 
sentence contained only a prohibition on the sale of securities to U.S. 
resident individuals, the distributor will not be required to review the 
individual accounts relating to such sales but must review and make 
certifications with respect to all entity accounts in the manner 
described in the previous sentence.
    (g) Recalcitrant account holders--(1) Scope. This paragraph (g) 
provides rules for determining when an account holder of a participating 
FFI or registered deemed-compliant FFI is a recalcitrant account holder. 
Paragraph (g)(2) of this section defines the term recalcitrant account 
holder. Paragraphs (g)(3) and (4) of this section provide timing rules 
for when an account holder will begin to be treated as a recalcitrant 
account holder by a participating FFI and when an account holder will 
cease to be treated as a recalcitrant account holder by such 
institution. For rules for determining the holder of an account, see 
paragraph (a)(3) of this section. For the withholding requirements of an 
FFI with respect to its recalcitrant account holders, see paragraph (f) 
of this section and Sec.  1.1471-4(b). For the reporting requirements of 
an FFI with respect to its recalcitrant account holders, see Sec.  
1.1471-4(d)(6), and, for the reporting required with respect to payments 
made to such account holders, see Sec.  1.1474-1(d)(4)(iii). A U.S. 
branch treated as a U.S. person shall apply the presumption rules of 
Sec.  1.1471-3(f) (for foreign entity account holders) and chapter 3 or 
61 (for individual payees) to determine the status of a payee if it 
cannot reliably associate a payment made to the payee with valid 
documentation and does not apply this paragraph (g).
    (2) Recalcitrant account holder. The term recalcitrant account 
holder means any holder of an account maintained by an FFI if such 
account holder is not an FFI (or presumed to be an FFI under Sec.  
1.1471-3(f)), the account does not meet the requirements of the 
exception to U.S. account status described in paragraph (a)(4) of this 
section (for depository accounts with a balance of $50,000 or less) and 
does not qualify for any of the exceptions from the documentation 
requirements described in Sec.  1.1471-4(c)(3)(iii), (c)(4)(iii), 
(c)(5)(iii), (c)(5)(iv)(E) (or the participating FFI elects to forego 
such exceptions) and--
    (i) The account holder fails to comply with requests by the FFI for 
the documentation or information that is required under Sec.  1.1471-
4(c) for determining the status of such account as a U.S. account or 
other than a U.S. account;
    (ii) The account holder fails to provide a valid Form W-9 upon 
request from the FFI or fails to provide a correct name and TIN 
combination upon

[[Page 506]]

request from the FFI when the FFI has received notice from the IRS 
indicating that the name and TIN combination reported by the FFI for the 
account holder is incorrect;
    (iii) If foreign law would (but for a waiver) prevent reporting by 
the FFI (or branch or division thereof) of the information described in 
Sec.  1.1471-4(d)(3) or (5) with respect to such account, the account 
holder (or substantial U.S. owner of an account holder that is a U.S. 
owned foreign entity) fails to provide a valid and effective waiver to 
permit such reporting; or
    (iv) The account holder provides the documentation described in 
Sec.  1.1471-3(d)(12) to establish its status as a passive NFFE (other 
than a WP or WT) but fails to provide the information regarding its 
owners required under Sec.  1.1471-3(d)(12)(iii).
    (3) Start of recalcitrant account holder status--(i) Preexisting 
accounts identified under the procedures described in Sec.  1.1471-4(c) 
for identifying U. S. accounts--(A) In general. An account holder of a 
preexisting account described in paragraph (g)(2) of this section 
maintained by a participating FFI will be treated as a recalcitrant 
account holder beginning on the dates provided in paragraphs (g)(3)(B) 
through (D) of this section. An account holder of a preexisting account 
described in paragraph (g)(2) of this section that is maintained by a 
registered deemed-compliant FFI will be treated as a recalcitrant 
account holder beginning on the dates provided in paragraph (f) of this 
section (setting forth the time by which the FFI must identify its 
accounts in accordance with the requirements of Sec.  1.1471-4(c) in 
order to meet the requirements of its applicable registered deemed-
compliant status).
    (B) Accounts other than high-value accounts. Account holders of 
preexisting accounts maintained by a participating FFI that are not 
high-value accounts (as described in Sec.  1.1471-4(c)(5)(iv)(D)) and 
that are described in paragraph (g)(2) of this section will be treated 
as recalcitrant account holders beginning on the date that is two years 
after the effective date of the FFI agreement.
    (C) High-value accounts. Account holders of preexisting accounts 
maintained by a participating FFI that are high-value accounts (as 
described in Sec.  1.1471-4(c)(5)(iv)(D)) and that are described in 
paragraph (g)(2) of this section will be treated as recalcitrant account 
holders beginning on the date that is one year after the effective date 
of the FFI agreement.
    (D) Preexisting accounts that become high-value accounts. With 
respect to a calendar year beginning after December 31, 2015, an account 
holder that is described in paragraph (g)(2) of this section and that 
holds a preexisting account that a participating FFI identifies as a 
high-value account pursuant to Sec.  1.1471-4(c)(5)(iv)(D) will be 
treated as a recalcitrant account holder beginning on the earlier of the 
date a withholdable payment is made to the account following end of the 
calendar year in which the account is identified as a high-value account 
or the date that is six months after the calendar year end.
    (ii) Accounts that are not preexisting accounts and accounts 
requiring name/TIN correction. An account holder of an account other 
than a preexisting account and that is described in paragraph (g)(2) of 
this section will be treated as a recalcitrant account holder beginning 
on the date that is the earlier of 90 days after the account is opened 
by the participating FFI or the date that a withholdable payment that is 
subject to withholding under Sec.  1.1441-2(a) is made to the account. 
An account holder for which the participating FFI received a notice from 
the IRS indicating that the name and TIN combination provided for the 
account holder is incorrect will be treated as a recalcitrant account 
holder following the date of such notice within the time prescribed in 
Sec.  31.3406(d)-5(a) of this chapter.
    (iii) Accounts with changes in circumstances. An account holder 
holding an account that is described in paragraph (g)(2) of this section 
following a change in circumstances (other than a change in account 
balance or value in a subsequent year that causes an individual account 
to be identified as a high-value account) will be treated as a 
recalcitrant account holder beginning on the date that is 90 days after 
the change in circumstances. For the definition of a change in 
circumstances

[[Page 507]]

with respect to an account, see Sec.  1.1471-4(c)(2)(iii).
    (4) End of recalcitrant account holder status. An account holder 
that is treated as a recalcitrant account holder under paragraphs (g)(2) 
and (3) of this section will cease to be so treated as of the date on 
which the account holder is no longer described in paragraph (g)(2) of 
this section.
    (h) Passthru payment--(1) Defined. The term passthru payment means 
any withholdable payment and any foreign passthru payment.
    (2) Foreign passthru payment. [Reserved]
    (i) Expanded affiliated group--(1) Scope of paragraph. This 
paragraph (i) defines the term expanded affiliated group for purposes of 
chapter 4. For the requirements of a participating FFI with respect to 
members of its expanded affiliated group that are FFIs, see Sec.  
1.1471-4(e).
    (2) Expanded affiliated group defined. Except as otherwise provided 
in this paragraph (i), an expanded affiliated group is defined in 
accordance with the principles of section 1504(a) to mean one or more 
chains of members connected through ownership by a common parent entity 
if the common parent entity directly owns stock or other equity 
interests meeting the requirements of paragraph (i)(4) of this section 
in at least one of the other members (for purposes of this paragraph 
(i), the constructive ownership rules of section 318 do not apply). 
Generally, only a corporation shall be treated as the common parent 
entity of an expanded affiliated group, unless the taxpayer elects to 
follow the approach described in paragraph (i)(10) of this section.
    (3) Member of an expanded affiliated group. The term member of an 
expanded affiliated group means a corporation or any entity other than a 
corporation (such as a partnership or trust) with respect to which the 
ownership requirements of paragraph (i)(4) of this section are met, 
regardless of whether such entity is a U.S. person or a foreign person, 
but excluding corporations described in paragraphs (1), (4), (6), (7), 
or (8) of section 1504(b).
    (4) Ownership test. The ownership requirements of this paragraph 
(i)(4) are met if--
    (i) Corporations. For purposes of paragraph (i)(2) of this section, 
a corporation (except the common parent entity) will be considered owned 
by another member entity or by the common parent entity if more than 50 
percent of the total voting power of the stock of such corporation and 
more than 50 percent of the total value of the stock of such corporation 
is owned directly by one or more other members of the group (including 
the common parent entity).
    (A) Stock not to include certain preferred stock. For purposes of 
this paragraph (i)(4), the term stock does not include any stock which 
is described in section 1504(a)(4).
    (B) Valuation. For purposes of section 1471(e) and this section, all 
shares of stock within a single class are considered to have the same 
value in determining the ownership percentage. Thus, control premiums 
and minority blockage discounts within a single class are not taken into 
account.
    (ii) Partnerships. For purposes of paragraph (i)(2) of this section, 
a partnership will be considered owned by another member entity 
(including the common parent entity) if more than 50 percent (by value) 
of the capital or profits interest in the partnership is owned directly 
by one or more other members of the group (including the common parent 
entity).
    (iii) Trusts. For purposes of paragraph (i)(2) of this section, a 
trust will be considered owned by another member entity or by the common 
parent entity if more than 50 percent (by value) of the beneficial 
interest in such trust is owned directly by one or more other members of 
the group (including the common parent entity). A beneficial interest in 
a trust includes an interest held by an entity treated as a grantor or 
other owner of the trust under sections 671 through 679 and a beneficial 
trust interest.
    (5) Treatment of warrants, options, and obligations convertible into 
equity for determining ownership. For purposes of paragraph (i)(4) of 
this section, ownership of warrants, options, obligations convertible 
into the equity of a corporation or entity other than a corporation, and 
other similar interests is

[[Page 508]]

not considered for purposes of determining whether an entity is a member 
of an expanded affiliated group, except as follows:
    (i) Ownership of a warrant, option, obligation convertible into 
stock, or other similar instrument creating an interest in a corporation 
will be considered for purposes of paragraph (i)(4) of this section to 
the extent that the common parent or member of the expanded affiliated 
group that holds such instrument also maintains voting rights with 
respect to such corporation. However, interests described in Sec.  
1.1504-4(d)(2) will not be treated as options.
    (ii) Ownership of a warrant, option, obligation convertible into an 
equity interest, or other similar instrument creating an interest in a 
corporation or entity other than a corporation will be considered for 
purposes of paragraph (i)(4) of this section to the extent that such 
instrument is reasonably certain to be exercised, based on all of the 
facts and circumstances and in accordance with the principles set forth 
in Sec.  1.1504-4(g).
    (6) Exception for FFIs holding certain capital investments. 
Notwithstanding paragraphs (i)(2) and (i)(4) of this section, an 
investment entity will not be considered a member of an expanded 
affiliated group as a result of a contribution of seed capital by a 
member of such expanded affiliated group if--
    (i) The member that owns the investment entity is an FFI that is in 
the business of providing seed capital to form investment entities, the 
interests in which it intends to sell to investors that do not have a 
relationship with each other described in section 267(b);
    (ii) The investment entity is created in the ordinary course of such 
other FFI's business described in paragraph (i)(6)(i) of this section;
    (iii) As of the date the FFI acquired the equity interest, any 
equity interest in the investment entity in excess of 50 percent of the 
total value of the stock of the investment entity is intended to be held 
by such other FFI (including ownership by other members of such other 
FFI's expanded affiliated group) for no more than three years from the 
date on which such other FFI first acquired an equity interest in the 
investment entity; and
    (iv) In the case of an equity interest that has been held by such 
other FFI for over three years from the date referenced in paragraph 
(i)(6)(iii) of this section, the aggregate value of the equity interest 
held by such other FFI and the equity interests held by other members of 
its expanded affiliated group is 50 percent or less of the total value 
of the stock of the investment entity.
    (7) Seed capital. For purposes of this paragraph (i), the term seed 
capital means an initial capital contribution made to an investment 
entity that is intended as a temporary investment and is deemed by the 
manager of the entity to be necessary or appropriate for the 
establishment of the entity, such as for the purpose of establishing a 
track record of investment performance for such entity, achieving 
economies of scale for diversified investment, avoiding an artificially 
high expense to return ratio, or similar purposes.
    (8) Anti-abuse rule. A change in ownership, voting rights, or the 
form of an entity that results in an entity meeting or not meeting the 
ownership requirements described in paragraph (i)(4) of this section 
will be disregarded for purposes of determining whether an entity is a 
member of an expanded affiliated group if the change is pursuant to a 
plan a principal purpose of which is to avoid reporting or withholding 
that would otherwise be required under any chapter 4 provision. For 
purposes of this paragraph (i)(8), a change in voting rights includes a 
separation of voting rights and value.
    (9) Exception for limited life debt investment entities. 
Notwithstanding paragraphs (i)(2) and (4) of this section, an entity 
that meets the requirements of paragraph (f)(2)(iv) of this section, 
including the requirements to have been in existence as of January 17, 
2013, and to have issued interests in the entity on or before January 
17, 2013, will not be considered a member of an expanded affiliated 
group as a result of any member of such expanded affiliated group owning 
interests in such entity.

[[Page 509]]

    (10) Partnerships, trusts, and other non-corporate entities. For 
purposes of determining the composition of an expanded affiliated group, 
an entity other than a corporation may elect to be treated as the common 
parent entity. Taxpayers following this approach may not, in a later 
year, follow the rule described in paragraph (i)(2) of this section 
without the approval of the Commissioner. See also paragraph 
(e)(5)(i)(C) of this section.
    (j) Sponsoring entity verification--(1) In general. This paragraph 
(j) describes the requirements for a sponsoring entity of a sponsored 
FFI to establish and implement a compliance program for satisfying its 
requirements as a sponsoring entity and to provide a certification of 
compliance with its requirements. This paragraph (j) also describes the 
procedures for the IRS to review the sponsoring entity's compliance with 
respect to each sponsored FFI for purposes of satisfying the 
requirements of paragraph (f)(1)(i)(F) or (f)(2)(iii) of this section or 
an applicable Model 2 IGA. For purposes of a sponsoring entity's 
certification of compliance under this paragraph (j), a sponsoring 
entity must have in place a written sponsorship agreement described in 
paragraph (j)(6) of this section with each sponsored FFI. See paragraph 
(j)(3)(v)(B) of this section for the certification regarding a 
sponsoring entity's sponsorship agreement with each sponsored FFI.
    (2) Compliance program. The sponsoring entity must appoint a 
responsible officer to oversee the compliance of the sponsoring entity 
with respect to each sponsored FFI for purposes of satisfying the 
requirements of paragraph (f)(1)(i)(F) or (f)(2)(iii) of this section or 
an applicable Model 2 IGA. The responsible officer must (either 
personally or through designated persons) establish a compliance program 
that includes policies, procedures, and processes sufficient for the 
sponsoring entity to satisfy the requirements described in the preceding 
sentence. The responsible officer (or designee) must periodically review 
the sufficiency of the sponsoring entity's compliance program, the 
sponsoring entity's compliance with respect to each sponsored FFI for 
purposes of satisfying the requirements of paragraph (f)(1)(i)(F) or 
(f)(2)(iii) of this section or an applicable Model 2 IGA, and the 
compliance of each sponsored FFI with the due diligence, withholding, 
and reporting requirements of Sec.  1.1471-4 or an applicable Model 2 
IGA during the certification period described in paragraph (j)(3)(iii) 
of this section. The results of the periodic review must be considered 
by the responsible officer in making the periodic certifications 
described in paragraph (j)(3) of this section.
    (3) Certification of compliance--(i) Certification requirement--(A) 
In general. In addition to the certification required under paragraph 
(j)(5) of this section (preexisting account certification), and except 
as otherwise provided in paragraph (j)(3)(i)(B) or (j)(3)(ii) of this 
section, on or before July 1 of the calendar year following the 
certification period, the responsible officer of the sponsoring entity 
must make the certification described in paragraph (j)(3)(v) of this 
section and either the certification described in paragraph 
(j)(3)(vi)(A) of this section or the certification described in 
paragraph (j)(3)(vi)(B) of this section with respect to all sponsored 
FFIs for which the sponsoring entity acts during the certification 
period on the form and in the manner prescribed by the IRS. To the 
extent that a sponsoring entity satisfies the certification requirements 
of paragraph (j)(3) of this section on behalf of a sponsored FFI, the 
sponsored FFI does not have a certification requirement under paragraph 
(f)(1)(ii)(B) of this section.
    (B) Extension of time for the certification period ending on 
December 31, 2017. The certifications required for a certification 
period ending on December 31, 2017, must be submitted on or before March 
31, 2019.
    (ii) Late-joining sponsored FFIs. In general, with respect to a 
certification period, a sponsoring entity is not required to make a 
certification for a sponsored FFI that first agrees to be sponsored by 
the sponsoring entity during the six-month period before the end of the 
sponsoring entity's certification period, provided that the sponsoring 
entity makes certifications for such sponsored FFI for subsequent 
certification periods and the first such

[[Page 510]]

certification covers both the subsequent certification period and the 
portion of the prior certification period of the sponsoring entity 
during which such FFI was sponsored by the sponsoring entity. However, 
the preceding sentence does not apply to a sponsored FFI that, 
immediately before the FFI agrees to be sponsored by the sponsoring 
entity, was a participating FFI, registered deemed-compliant FFI, or 
sponsored, closely held investment vehicle of another sponsoring entity. 
The sponsoring entity may certify for a sponsored FFI described in the 
preceding sentence for the portion of the certification period of the 
sponsoring entity before the date that the FFI first agrees to be 
sponsored by the sponsoring entity if the sponsoring entity obtains from 
the FFI (or the FFI's sponsoring entity, if applicable) a written 
certification that the FFI has complied with its applicable chapter 4 
requirements during such portion of the certification period, provided 
that: the sponsoring entity does not know that such certification is 
unreliable or incorrect; and the certification for the sponsored FFI for 
the subsequent certification period covers both the subsequent 
certification period and the portion of the prior certification period 
during which such FFI was sponsored by the sponsoring entity.
    (iii) Certification period. The first certification period of a 
sponsoring entity begins on the later of the date the sponsoring entity 
is issued a GIIN to act as a sponsoring entity or June 30, 2014, and 
ends at the close of the third full calendar year following such date. 
Each subsequent certification period is the three-calendar-year period 
following the previous certification period.
    (iv) Additional certifications or information. The certification of 
compliance described in paragraph (j)(3) of this section may be modified 
to include additional certifications or information (such as 
quantitative or factual information related to the sponsoring entity's 
compliance with respect to each sponsored FFI for purposes of satisfying 
the requirements of paragraph (f)(1)(i)(F) or (f)(2)(iii) of this 
section or an applicable Model 2 IGA), provided that such additional 
information or certifications are published at least 90 days before 
being made effective in order to allow for public comment.
    (v) Certifications regarding sponsoring entity and sponsored FFI 
requirements. The responsible officer of the sponsoring entity must 
certify to the following statements--
    (A) The sponsoring entity meets all of the requirements of a 
sponsoring entity as described in paragraph (f)(1)(i)(F)(3) or 
(f)(2)(iii)(D) of this section or an applicable Model 2 IGA, including 
the chapter 4 status required of such entity;
    (B) The sponsoring entity has a written sponsorship agreement in 
effect with each sponsored FFI authorizing the sponsoring entity to 
fulfill the requirements of paragraph (f)(1)(i)(F) or (f)(2)(iii) of 
this section or an applicable Model 2 IGA with respect to each sponsored 
FFI; and
    (C) Each sponsored FFI treated as a sponsored investment entity, a 
sponsored controlled foreign corporation, or a sponsored, closely held 
investment vehicle by the sponsoring entity meets the requirements of 
its respective status.
    (vi) Certifications regarding internal controls--(A) Certification 
of effective internal controls. The responsible officer of the 
sponsoring entity must certify to the following statements--
    (1) The responsible officer of the sponsoring entity has established 
a compliance program that is in effect as of the date of the 
certification and that has been subject to the review as described in 
paragraph (j)(2) of this section;
    (2) With respect to material failures (defined in paragraph 
(j)(3)(vii) of this section)--
    (i) There are no material failures for the certification period; or
    (ii) If there were any material failures, appropriate actions were 
taken to remediate such failures and to prevent such failures from 
reoccurring; and
    (3) With respect to any failure to withhold, deposit, or report to 
the extent required under Sec.  1.1471-4 or an applicable Model 2 IGA 
with respect to any sponsored FFI for any year during the certification 
period, the sponsored FFI has corrected such failure by paying (or 
directing the sponsoring entity

[[Page 511]]

to pay) any taxes due (including interest and penalties) and filing (or 
directing the sponsoring entity to file) the appropriate return (or 
amended return).
    (B) Qualified certification. If the responsible officer of the 
sponsoring entity has identified an event of default (defined in 
paragraph (k)(1) of this section) or a material failure (defined in 
paragraph (j)(3)(vii) of this section) that the sponsoring entity has 
not corrected as of the date of the certification, the responsible 
officer must certify to the following statements--
    (1) The responsible officer of the sponsoring entity has established 
a compliance program that is in effect as of the date of the 
certification and that has been subjected to the review as described in 
paragraph (j)(2) of this section;
    (2) With respect to the event of default or material failure--
    (i) The responsible officer (or designee) has identified an event of 
default; or
    (ii) The responsible officer has determined that there are one or 
more material failures as defined in paragraph (j)(3)(vii) of this 
section and that appropriate actions will be taken to prevent such 
failures from reoccurring;
    (3) With respect to any failure to withhold, deposit, or report to 
the extent required under Sec.  1.1471-4 or an applicable Model 2 IGA 
with respect to any sponsored FFI for any year during the certification 
period, the sponsored FFI will correct such failure by paying (or 
directing the sponsoring entity to pay) any taxes due (including 
interest and penalties) and filing (or directing the sponsoring entity 
to file) the appropriate return (or amended return); and
    (4) The responsible officer (or designee) will respond to any notice 
of default under paragraph (k)(2) of this section or will provide to the 
IRS a description of each material failure and a written plan to correct 
each such failure when requested under paragraph (j)(4) of this section.
    (vii) Material failures defined. A material failure is a failure of 
the sponsoring entity with respect to each sponsored FFI to satisfy the 
requirements of paragraph (f)(1)(i)(F) or (f)(2)(iii) of this section or 
an applicable Model 2 IGA if the failure was the result of a deliberate 
action on the part of one or more employees of the sponsoring entity or 
was an error attributable to a failure of the sponsoring entity to 
implement internal controls sufficient for the sponsoring entity to meet 
its requirements. A material failure will not constitute an event of 
default unless such material failure occurs in more than limited 
circumstances when a sponsoring entity has not substantially complied 
with the requirements described in the preceding sentence. Material 
failures include the following--
    (A) With respect to any sponsored FFI, the deliberate or systematic 
failure of the sponsoring entity to report accounts that such sponsored 
FFI was required to treat as U.S. accounts, withhold on passthru 
payments to the extent required, deposit taxes withheld to the extent 
required, accurately report recalcitrant account holders (or non-
consenting U.S. accounts under an applicable Model 2 IGA), or accurately 
report with respect to nonparticipating FFIs as required under Sec.  
1.1471-4(d)(2)(ii)(F) or an applicable Model 2 IGA;
    (B) A criminal or civil penalty or sanction imposed on the 
sponsoring entity or any sponsored FFI (or any branch or office of the 
sponsoring entity or any sponsored FFI) by a regulator or other 
governmental authority or agency with oversight over the sponsoring 
entity's or sponsored FFI's compliance with the AML due diligence 
procedures to which it (or any branch or office thereof) is subject and 
that is imposed based on a failure to properly identify account holders 
under the requirements of those procedures;
    (C) A potential future tax liability of any sponsored FFI related to 
its compliance (or lack thereof) with the due diligence, withholding, 
and reporting requirements of Sec.  1.1471-4 or an applicable Model 2 
IGA for which such sponsored FFI has established, for financial 
statement purposes, a tax reserve or provision;
    (D) A potential contractual liability under the agreement described 
in paragraph (j)(3)(v)(B) of this section of the sponsoring entity to 
any sponsored FFI

[[Page 512]]

related to such sponsoring entity's compliance (or lack thereof) with 
paragraph (f)(1)(i)(F) or (f)(2)(iii) of this section or an applicable 
Model 2 IGA for which the sponsoring entity has established, for 
financial statement purposes, a reserve or provision; and
    (E) Failure to register with the IRS as a sponsoring entity or to 
register each sponsored FFI required to be registered under paragraph 
(f)(1)(i)(F)(3)(iii) of this section or an applicable Model 2 IGA.
    (4) IRS review of compliance--(i) General inquiries. The IRS, based 
upon the information reporting forms described in Sec.  1.1471-
4(d)(3)(v), (d)(5)(vii), or (d)(6)(iv) filed with the IRS (or the 
absence of such reporting) by the sponsoring entity for each calendar 
year with respect to any sponsoring FFI, may request additional 
information with respect to the information reported (or required to be 
reported) on the forms, the account statements described in Sec.  
1.1471-4(d)(4)(v) with respect to one or more sponsored FFIs, or 
confirmation that the FFI has no reporting requirements. The IRS may 
also request any additional information from the sponsoring entity 
(including a copy of each sponsorship agreement the sponsoring entity 
has entered into with each sponsored FFI) necessary to determine the 
compliance with the due diligence, withholding, and reporting 
requirements of Sec.  1.1471-4 or an applicable Model 2 IGA with respect 
to each sponsored FFI and to assist the IRS with its review of account 
holder compliance with tax reporting requirements.
    (ii) Inquiries regarding substantial non-compliance. The IRS may 
determine in its discretion that a sponsoring entity may not have 
substantially complied with the requirements of paragraph (f)(1)(i)(F) 
or (f)(2)(iii) of this section or an applicable Model 2 IGA with respect 
to any sponsored FFI. This determination is based on the information 
reporting forms described in Sec.  1.1471-4(d)(3)(v), (d)(5)(vii), or 
(d)(6)(iv) filed with the IRS by the sponsoring entity for each calendar 
year with respect to any sponsored FFI (or the absence of reporting), 
the certifications made by the responsible officer described in 
paragraphs (j)(3) and (5) of this section (or the absence of such 
certifications), or any other information related to the sponsoring 
entity's compliance with respect to any sponsored FFI for purposes of 
satisfying the requirements of paragraph (f)(1)(i)(F) or (f)(2)(iii) of 
this section or an applicable Model 2 IGA. In such a case, the IRS may 
request from the responsible officer (or designee) information necessary 
to verify the sponsoring entity's compliance with such requirements. The 
IRS may request, for example, a description or copy of the sponsoring 
entity's policies and procedures for fulfilling the requirements of 
paragraph (f)(1)(i)(F) or (f)(2)(iii) of this section or an applicable 
Model 2 IGA, a description or copy of the sponsoring entity's procedures 
for conducting its periodic review, or a copy of any written reports 
documenting the findings of such review. The IRS may also request the 
performance of specified review procedures by a person (including an 
external auditor or third-party consultant) that the IRS identifies as 
competent to perform such procedures given the facts and circumstances 
surrounding the sponsoring entity's potential failure to comply with 
respect to each sponsored FFI with the requirements of paragraph 
(f)(1)(i)(F) or (f)(2)(iii) of this section or an applicable Model 2 
IGA.
    (iii) Compliance procedures for a sponsored FFI subject to a Model 2 
IGA. In the case of a sponsored FFI subject to the requirements of an 
applicable Model 2 IGA, the procedures described in paragraph (j)(4) of 
this section apply, except as otherwise provided in the applicable Model 
2 IGA.
    (5) Preexisting account certification. The responsible officer of a 
sponsoring entity must make the certification described in Sec.  1.1471-
4(c)(7) (preexisting account certification of a participating FFI) with 
respect to each sponsored FFI that enters into the sponsorship agreement 
with the sponsoring entity during the certification period (as defined 
in paragraph (j)(3)(iii) of this section). However, the preexisting 
account certification is not required for a sponsored FFI that, 
immediately before the FFI first agrees to be sponsored by the 
sponsoring entity, was a participating FFI, a sponsored FFI of another 
sponsoring entity, or a registered deemed-

[[Page 513]]

compliant FFI that is a local FFI or a restricted fund, if the FFI (or 
the FFI's former sponsoring entity, if applicable) provides a written 
certification to the sponsoring entity that the FFI has made the 
preexisting account certification required under Sec.  1.1471-4(c)(7) or 
paragraph (f)(1)(i)(A)(7) or (f)(1)(i)(D)(6) of this section (as 
applicable), unless the sponsoring entity knows that such written 
certification is unreliable or incorrect. In addition, the preexisting 
account certification is not required for a sponsored FFI that enters 
into the sponsorship agreement with the sponsoring entity during the two 
year period before the end of the sponsoring entity's certification 
period, provided that the sponsoring entity makes the preexisting 
account certification for such FFI for the subsequent certification 
period. The certification described in this paragraph (j)(5) for the 
certification period must be submitted by the due date of the sponsoring 
entity's certification of compliance required under paragraph (j)(3)(i) 
of this section for the certification period (or the extended due date 
described in paragraph (j)(3)(i)(B) of this section for the 
certification period ending on December 31, 2017), on the form and in 
the manner prescribed by the IRS. With respect to a sponsored FFI for 
which the sponsoring entity makes a preexisting account certification, a 
preexisting obligation means any account, instrument, or contract 
(including any debt or equity interest) maintained, executed, or issued 
by the sponsored FFI that is outstanding on the earlier of the date the 
FFI is issued a GIIN as a sponsored FFI or the date the FFI first agrees 
to be sponsored by the sponsoring entity.
    (6) Sponsorship agreement. A sponsoring entity must have a written 
sponsorship agreement (which may be part of another agreement between 
the sponsoring entity and the sponsored FFI) that refers to the 
requirements of a sponsored FFI under FATCA and that must be in place 
with each sponsored FFI for which the sponsoring entity acts by the 
later of March 31, 2019, or the date that the sponsoring entity begins 
acting as a sponsoring entity for the applicable sponsored FFI.
    (k) Sponsoring entity event of default--(1) Defined. An event of 
default with regard to a sponsoring entity occurs if the sponsoring 
entity fails to perform material obligations required with respect to 
the due diligence, withholding, and reporting requirements of Sec.  
1.1471-4 or an applicable Model 2 IGA with respect to any sponsored FFI, 
to establish or maintain a compliance program as described in paragraph 
(j)(2) of this section, or to perform a periodic review described in 
paragraph (j)(2) of this section. An event of default also includes the 
occurrence of any of the following--
    (i) With respect to any sponsored FFI, failure to obtain, in any 
case in which foreign law would (but for a waiver) prevent the reporting 
of U.S. accounts required under Sec.  1.1471-4(d), valid and effective 
waivers from holders of U.S. accounts or failure to otherwise close or 
transfer such U.S. accounts as required under Sec.  1.1471-4(i);
    (ii) With respect to any sponsored FFI, failure to significantly 
reduce, over a period of time, the number of account holders or payees 
that such sponsored FFI is required to treat as recalcitrant account 
holders or nonparticipating FFIs, as a result of the sponsoring entity 
failing to comply with the due diligence procedures set forth in Sec.  
1.1471-4(c);
    (iii) With respect to any sponsored FFI, failure to fulfill the 
requirements of Sec.  1.1471-4(i) in any case in which foreign law 
prevents or otherwise limits withholding under Sec.  1.1471-4(b);
    (iv) Failure to take timely corrective actions to remedy a material 
failure described in paragraph (j)(3)(vii) of this section after making 
a qualified certification described in paragraph (j)(3)(vi)(B) of this 
section;
    (v) Failure to make the preexisting account certification required 
under paragraph (j)(5) of this section or the periodic certification 
required under paragraph (j)(3) of this section with respect to any 
sponsored FFI within the specified time period;
    (vi) Making incorrect claims for refund on behalf of any sponsored 
FFI;
    (vii) Failure to cooperate with an IRS request for additional 
information under paragraph (j)(4) of this section;

[[Page 514]]

    (viii) Making any fraudulent statement or misrepresentation of 
material fact to the IRS or representing to a withholding agent or the 
IRS its status as a sponsoring entity for an entity other than an entity 
for which it acts as a sponsoring entity;
    (ix) The sponsoring entity is no longer authorized to perform the 
requirements of a sponsoring entity with respect to one or more 
sponsored FFIs; or
    (x) Failure to have the written sponsorship agreement described in 
paragraph (j)(3)(v)(B) of this section in effect with each sponsored 
FFI.
    (2) Notice of event of default. Following an event of default known 
by or disclosed by the sponsoring entity to the IRS, the IRS will 
deliver to the sponsoring entity a notice of default specifying the 
event of default and, if applicable, identifying each sponsored FFI to 
which the notice relates. The IRS will request that the sponsoring 
entity remediate the event of default within 45 days (unless additional 
time is requested and agreed to by the IRS). The sponsoring entity must 
respond to the notice of default and provide information responsive to 
an IRS request for information or state the reasons why the sponsoring 
entity does not agree that an event of default has occurred.
    (3) Remediation of event of default. A sponsoring entity will be 
permitted to remediate an event of default to the extent that it agrees 
with the IRS on a remediation plan. Such a plan may, for example, allow 
a sponsoring entity to remediate an event of default described in 
paragraph (k)(1) of this section with respect to a sponsored FFI by 
providing specific information regarding the U.S. accounts maintained by 
such sponsored FFI when the sponsoring entity has been unable to report 
all of the information with respect to such accounts as required under 
Sec.  1.1471-4(d) and has been unable to close or transfer such 
accounts. The IRS may, as part of a remediation plan, require additional 
information from the sponsoring entity or the performance of the 
specified review procedures described in paragraph (j)(4)(ii) of this 
section.
    (4) Termination--(i) In general. If the sponsoring entity does not 
provide a response to a notice of default within the period specified in 
paragraph (k)(2) of this section or does not remediate the event of 
default as described in paragraph (k)(3) of this section, the IRS may 
deliver a notice of termination that terminates the sponsoring entity's 
status, the status of one or more sponsored FFIs as deemed-compliant 
FFIs, or the status of both the sponsoring entity and one or more 
sponsored FFIs.
    (ii) Termination of sponsoring entity. If the IRS terminates the 
status of the sponsoring entity, the sponsoring entity must send notice 
of the termination within 30 days after the date of termination to each 
sponsored FFI for which it acts, as well as to each withholding agent 
from which each sponsored FFI receives payments and each financial 
institution with which each sponsored FFI holds an account for which a 
withholding certificate or other documentation was provided. A 
sponsoring entity that has had its status terminated cannot register on 
the FATCA registration website to act as a sponsoring entity for any 
sponsored FFI or for any entity that is a sponsored entity under a Model 
1 IGA unless it receives written approval from the IRS to register. 
Unless the status of a sponsored FFI has been terminated, the sponsored 
FFI may register on the FATCA registration website as a participating 
FFI or registered deemed-compliant FFI (as applicable). However, a 
sponsored FFI whose sponsoring entity has been terminated may not 
register or represent its status as a sponsored FFI of a sponsoring 
entity that has a relationship described in section 267(b) or 707(b) 
with the sponsoring entity that was terminated without receiving written 
approval from the IRS.
    (iii) Termination of sponsored FFI. If the IRS notifies the 
sponsoring entity that the status of a sponsored FFI is terminated (but 
not the sponsoring entity's status), the sponsoring entity must remove 
the sponsored FFI from the sponsoring entity's registration account on 
the FATCA registration website and send notice of the termination within 
30 days after the date of termination to each withholding agent from 
which the sponsored FFI receives

[[Page 515]]

payments and each financial institution with which it holds an account 
for which a withholding certificate or other documentation was provided 
with respect to such sponsored FFI. A sponsored FFI that has had its 
status as a sponsored FFI terminated (independent from a termination of 
status of its sponsoring entity) may not register on the FATCA 
registration website as a participating FFI or registered deemed-
compliant FFI unless it receives written approval from the IRS.
    (iv) Reconsideration of notice of default or notice of termination. 
A sponsoring entity or sponsored FFI may request, within 90 days of a 
notice of default or notice of termination, reconsideration of the 
notice of default or notice of termination by written request to the 
IRS.
    (v) Sponsoring entity of sponsored FFIs subject to a Model 2 IGA. 
Subject to the provisions of an applicable Model 2 IGA, the IRS may 
revoke the status of a sponsoring entity with respect to one or more 
sponsored FFIs subject to a Model 2 IGA based on the provisions of 
paragraphs (k)(2), (3), and (4) of this section (describing notice of 
event of default and termination procedures) if there is an event of 
default as defined in paragraph (k)(1) of this section.
    (l) Trustee-documented trust verification--(1) Compliance program. A 
trustee of a trust treated as a trustee-documented trust under an 
applicable Model 2 IGA must establish and implement a compliance program 
for purposes of satisfying the requirements of an applicable Model 2 IGA 
with respect to each such trust. The trustee must appoint a responsible 
officer who must (either personally or through designated persons) 
establish policies, procedures, and processes sufficient for the trustee 
to implement the compliance program. The responsible officer (or 
designee) must periodically review the sufficiency of the trustee's 
compliance program and the trustee's compliance with respect to each 
trust for purposes of satisfying the requirements of an applicable Model 
2 IGA for each certification period described in paragraph (l)(2) of 
this section. The results of the periodic review must be considered by 
the responsible officer in making the certification described in 
paragraph (l)(2) of this section.
    (2) Certification of compliance--(i) Certification requirement--(A) 
In general. Except as otherwise provided in paragraph (I)(2)(i)(B) or 
(I)(2)(ii) of this section, on or before July 1 of the calendar year 
following the end of the certification period, the responsible officer 
of the trustee must make a certification for the certification period 
with respect to all trustee-documented trusts described in paragraph 
(l)(1) of this section on the form and in the manner prescribed by the 
IRS.
    (B) Extension of time for the certification period ending on 
December 31, 2017. The certifications required for a certification 
period ending on December 31, 2017, must be submitted on or before March 
31, 2019.
    (ii) Late-joining trustee-documented trusts. In general, with 
respect to a certification period, the responsible officer of a trustee 
is not required to make a certification for a trustee-documented trust 
for which the trustee first agreed to act as the trustee under Annex II 
of an applicable IGA during the six-month period before the end of the 
trustee's certification period, provided that the responsible officer of 
the trustee makes certifications for such trustee-documented trust for 
subsequent certification periods and the first such certification covers 
both the subsequent certification period and the portion of the prior 
certification period of the trustee during which the trustee acted as 
the trustee of the trustee-documented trust. However, the preceding 
sentence does not apply to a trustee-documented trust that, immediately 
before the trustee first agrees to act as the trustee under Annex II of 
an applicable IGA, was a trustee-documented trust of another trustee. 
The trustee of a trustee-documented trust may certify for a trustee-
documented trust described in the preceding sentence for the portion of 
the certification period of the trustee before the date that the trustee 
first agrees to act as the trustee under Annex II of an applicable IGA 
if the trustee obtains from the trustee-documented trust (or the trust's 
former trustee, if applicable) a written

[[Page 516]]

certification that the trust has complied with its applicable chapter 4 
requirements during such portion of the certification period, provided 
that: The trustee does not know that such certification is unreliable or 
incorrect; and the certification for the trustee-documented trust for 
the subsequent certification period covers both the subsequent 
certification period and the portion of the prior certification period 
during which the trustee acts as the trustee under Annex II of an 
applicable IGA.
    (iii) Certification period. The first certification period of the 
trustee begins on the later of the date the trustee is issued a GIIN to 
act as a trustee of a trustee-documented trust or June 30, 2014, and 
ends at the close of the third full calendar year following such date. 
Each subsequent certification period is the three-calendar-year period 
following the previous certification period.
    (iv) Certifications. The responsible officer of the trustee must 
certify to the following statements--
    (A) The responsible officer of the trustee has established a 
compliance program that is in effect as of the date of the certification 
and has performed a periodic review described in paragraph (l)(1) of 
this section for the certification period; and
    (B) The trustee has reported to the IRS on Form 8966, ``FATCA 
Report'' (or such other form as the IRS may prescribe), all of the 
information required to be reported pursuant to the applicable Model 2 
IGA with respect to all U.S. accounts of each trustee-documented trust 
for which the trustee acts during the certification period by the due 
date of Form 8966 (including extensions) for each year.
    (3) IRS review of compliance by trustees of trustee-documented 
trusts--(i) General inquiries. Based upon the information reporting 
forms filed with the IRS (or the absence of such reporting) by a trustee 
with respect to any trustee-documented trust subject to a Model 2 IGA 
for each calendar year, and subject to the requirements of an applicable 
Model 2 IGA, the IRS may request from the trustee additional information 
with respect to the information reported on the forms with respect to 
any trustee-documented trust or a confirmation that the trustee has no 
reporting requirements with respect to any trustee-documented trust. The 
IRS may also request any additional information to determine the 
trustee's compliance for purposes of satisfying the trust's requirements 
as a trustee-documented trust under an applicable Model 2 IGA or to 
assist the IRS with its review of account holder compliance with tax 
reporting requirements.
    (ii) Inquiries regarding substantial non-compliance. The IRS may 
determine in its discretion that the trustee may not have substantially 
complied with the requirements applicable to a trustee of a trustee-
documented trust. This determination is based on the information 
reporting forms filed with the IRS by a trustee with respect to any 
trustee-documented trust subject to a Model 2 IGA for each calendar year 
(or the absence of such reporting), the certification described in 
paragraph (l)(2) of this section (or the absence of such certification), 
or any other information related to the trustee's compliance with 
respect to any trustee-documented trust for purposes of satisfying the 
trust's applicable Model 2 IGA requirements. In such a case, the IRS may 
request from the responsible officer information necessary to verify the 
trustee's compliance with such requirements. The IRS may also request 
the performance of specified review procedures by a person (including an 
external auditor or third-party consultant) that the IRS identifies as 
competent to perform such procedures given the circumstances surrounding 
the trustee's potential failure to comply with the requirements of an 
applicable Model 2 IGA with respect to one or more trustee-documented 
trusts. The IRS may notify the applicable Model 2 IGA jurisdiction that 
the trustee has not complied with its requirements as a trustee of one 
or more trustee-documented trusts.
    (m) Applicability date. This section generally applies beginning on 
January 6, 2017, except for paragraphs (f)(1)(i)(F)(3)(vi), 
(f)(1)(i)(F)(4), (f)(1)(iv), (f)(2)(iii)(D)(4), (f)(2)(iii)(E), (j), 
(k), and (l) of this section, which apply March 25, 2019. However, 
taxpayers may apply these provisions as of January 28, 2013.

[[Page 517]]

(For the rules that otherwise apply beginning on January 6, 2017, and 
before March 25, 2019, see this section as in effect and contained in 26 
CFR part 1 revised April 1, 2018. For the rules that otherwise apply 
beginning on January 28, 2013, and before January 6, 2017, see this 
section as in effect and contained in 26 CFR part 1 revised April 1, 
2016.)

[T.D. 9610, 78 FR 5961, Jan. 28, 2013; 78 FR 55207, Sept. 10, 2013, as 
amended by T.D. 9657, 79 FR 12849, Mar. 6, 2014; T.D. 9809, 82 FR 2177, 
Jan. 6, 2017; 82 FR 29729, June 30, 2017; T.D. 9852, 84 FR 10981, Mar. 
25, 2019; 84 FR 13121, Apr. 4, 2019]



Sec.  1.1471-6  Payments beneficially owned by exempt beneficial owners.

    (a) In general. This section describes classes of beneficial owners 
that are identified in section 1471(f) (exempt beneficial owners). 
Except as otherwise provided in paragraphs (d) (regarding securities 
held by foreign central banks of issue) and (f) (regarding retirement 
funds) of this section, a person must be a beneficial owner of a payment 
to be treated as an exempt beneficial owner with respect to the payment. 
The following classes of persons are exempt beneficial owners: any 
foreign government, any political subdivision of a foreign government, 
or any wholly owned agency or instrumentality of any one or more of the 
foregoing described in paragraph (b) of this section; any international 
organization or any wholly owned agency or instrumentality thereof 
described in paragraph (c) of this section; any foreign central bank of 
issue described in paragraph (d) of this section; any government of a 
U.S. territory described in paragraph (e) of this section; certain 
foreign retirement funds described in paragraph (f) of this section; and 
certain entities described in paragraph (g) of this section that are 
wholly owned by one or more other exempt beneficial owners. In addition, 
an exempt beneficial owner includes any person treated as an exempt 
beneficial owner pursuant to a Model 1 IGA or Model 2 IGA. See 
Sec. Sec.  1.1471-2(a)(4)(v) and 1.1472-1(c)(2) for the exemptions from 
withholding for payments beneficially owned by an exempt beneficial 
owner; Sec.  1.1471-3(d)(9) for the documentation requirements 
applicable to a withholding agent for purposes of determining when a 
withholdable payment is beneficially owned by an exempt beneficial 
owner; and Sec.  1.1471-3(d)(8)(ii) for when a withholding agent may 
treat a payment made to a nonparticipating FFI as beneficially owned by 
an exempt beneficial owner.
    (b) Any foreign government, any political subdivision of a foreign 
government, or any wholly owned agency or instrumentality of any one or 
more of the foregoing. Solely for purposes of this section and except as 
provided in paragraph (h) of this section, the term any foreign 
government, any political subdivision of a foreign government, or any 
wholly owned agency or instrumentality of any one or more of the 
foregoing means only the integral parts, controlled entities, and 
political subdivisions of a foreign sovereign.
    (1) Integral part. Solely for purposes of this paragraph (b), an 
integral part of a foreign sovereign is any person, body of persons, 
organization, agency, bureau, fund, instrumentality, or other body, 
however designated, that constitutes a governing authority of a foreign 
country. The net earnings of the governing authority must be credited to 
its own account or to other accounts of the foreign sovereign, with no 
portion inuring to the benefit of any private person as defined in 
paragraph (b)(3) of this section. An integral part does not include any 
individual who is a sovereign, official, or administrator acting in a 
private or personal capacity. All the facts and circumstances will be 
taken into account in determining whether an individual is acting in a 
private or personal capacity.
    (2) Controlled entity. Solely for purposes of this paragraph (b), a 
controlled entity means an entity that is separate in form from a 
foreign sovereign or that otherwise constitutes a separate juridical 
entity, provided that--
    (i) The entity is wholly owned and controlled by one or more foreign 
sovereigns directly or indirectly through one or more controlled 
entities;
    (ii) The entity's net earnings are credited to its own account or to 
other accounts of one or more foreign

[[Page 518]]

sovereigns, with no portion of its income inuring to the benefit of any 
private person as defined in paragraph (b)(3) of this section; and
    (iii) The entity's assets vest in one or more foreign sovereigns 
upon dissolution.
    (3) Inurement to the benefit of private persons. Solely for purposes 
of this paragraph (b)--
    (i) Income does not inure to the benefit of private persons if such 
persons (within the meaning of section 7701(a)(1)) are the intended 
beneficiaries of a governmental program carried on by a foreign 
sovereign, and the program activities constitute governmental functions 
under the regulations under section 892.
    (ii) Income is considered to inure to the benefit of private persons 
if such income benefits--
    (A) Private persons through the use of a governmental entity as a 
conduit for personal investment;
    (B) Private persons through the use of a governmental entity to 
conduct a commercial business, such as a commercial banking business, 
that provides financial services to private persons; or
    (C) Private persons who divert such income from its intended use by 
exerting influence or control through means explicitly or implicitly 
approved of by the foreign sovereign.
    (c) Any international organization or any wholly owned agency or 
instrumentality thereof. Except as provided in paragraph (h) of this 
section, the term any international organization or any wholly owned 
agency or instrumentality thereof means any entity described in section 
7701(a)(18). The term also includes any intergovernmental or 
supranational organization--
    (1) That is comprised primarily of foreign governments;
    (2) That is recognized as an intergovernmental or supranational 
organization under a foreign law similar to 22 U.S.C. 288-288f or that 
has in effect a headquarters agreement with a foreign government; and
    (3) Whose income does not inure to the benefit of private persons 
under the principles of paragraph (b)(3)(ii) of this section, as applied 
to the intergovernmental or supranational organization in place of the 
government or governmental entity.
    (d) Foreign central bank of issue--(1) In general. Solely for 
purposes of this section and except as provided in paragraph (h) of this 
section, the term foreign central bank of issue means an institution 
that is by law or government sanction the principal authority, other 
than the government itself, issuing instruments intended to circulate as 
currency. Such an institution is generally the custodian of the banking 
reserves of the country under whose law it is organized.
    (2) Separate instrumentality. A foreign central bank of issue may 
include an instrumentality that is separate from a foreign government, 
whether or not owned in whole or in part by a foreign government. For 
example, foreign banks organized along the lines of, and performing 
functions similar to, the Federal Reserve System qualify as foreign 
central banks of issue for purposes of this section.
    (3) Bank for International Settlements. The Bank for International 
Settlements is a foreign central bank of issue for purposes of this 
section.
    (4) Income on certain transactions. Solely for purposes of 
determining whether an entity is an exempt beneficial owner of a payment 
under this paragraph (d), a foreign central bank of issue is a 
beneficial owner with respect to income earned on cash and securities, 
including cash and securities held as collateral or securities held in 
connection with a securities lending transaction, held by the foreign 
central bank of issue in the ordinary course of its operations as a 
central bank of issue.
    (e) Governments of U.S. territories. Except as provided in paragraph 
(h) of this section, whether a person or entity constitutes a government 
of a U.S. territory for purposes of this section is determined by 
applying principles analogous to those set forth in paragraph (b) of 
this section.
    (f) Certain retirement funds. A fund is described in this paragraph 
(f) if it is described in paragraphs (f)(1) through (6) of this section. 
In addition, if a withholding agent may treat a withholdable payment as 
made to a

[[Page 519]]

payee that is a retirement fund in accordance with Sec.  1.1471-3, then 
the withholding agent may also treat such retirement fund as the 
beneficial owner of the payment. See Sec.  1.1471-3(d)(9)(ii).
    (1) Treaty-qualified retirement fund. A fund established in a 
country with which the United States has an income tax treaty in force, 
provided that the fund is entitled to benefits under such treaty on 
income that it derives from sources within the United States (or would 
be entitled to such benefits if it derived any such income) as a 
resident of the other country that satisfies any applicable limitation 
on benefits requirement, and is operated principally to administer or 
provide pension or retirement benefits;
    (2) Broad participation retirement fund. A fund established to 
provide retirement, disability, or death benefits, or any combination 
thereof, to beneficiaries that are current or former employees (or 
persons designated by such employees) of one or more employers in 
consideration for services rendered, provided that the fund--
    (i) Does not have a single beneficiary with a right to more than 
five percent of the fund's assets;
    (ii) Is subject to government regulation and provides annual 
information reporting about its beneficiaries to the relevant tax 
authorities in the country in which the fund is established or operates; 
and
    (iii) Satisfies one or more of the following requirements--
    (A) The fund is generally exempt from tax on investment income under 
the laws of the country in which it is established or operates due to 
its status as a retirement or pension plan;
    (B) The fund receives at least 50 percent of its total contributions 
(other than transfers of assets from accounts described in Sec.  1.1471-
5(b)(2)(i)(A) (referring to retirement and pension accounts), from 
retirement and pension accounts described in an applicable Model 1 or 
Model 2 IGA, or from other retirement funds described in this paragraph 
(f) or in an applicable Model 1 or Model 2 IGA) from the sponsoring 
employers;
    (C) Distributions or withdrawals from the fund are allowed only upon 
the occurrence of specified events related to retirement, disability, or 
death (except rollover distributions to accounts described in Sec.  
1.1471-5(b)(2)(i)(A) (referring to retirement and pension accounts), to 
retirement and pension accounts described in an applicable Model 1 or 
Model 2 IGA, or to other retirement funds described in this paragraph 
(f) or in an applicable Model 1 or Model 2 IGA), or penalties apply to 
distributions or withdrawals made before such specified events; or
    (D) Contributions (other than certain permitted make-up 
contributions) by employees to the fund are limited by reference to 
earned income of the employee or may not exceed $50,000 annually.
    (3) Narrow participation retirement funds. A fund established to 
provide retirement, disability, or death benefits to beneficiaries that 
are current or former employees (or persons designated by such 
employees) of one or more employers in consideration for prior services 
rendered, provided that--
    (i) The fund has fewer than 50 participants;
    (ii) The fund is sponsored by one or more employers and each of 
these employers are not investment entities or passive NFFEs;
    (iii) Employee and employer contributions to the fund (other than 
transfers of assets from other retirement plans described in paragraph 
(f)(1) of this section, from accounts described in Sec.  1.1471-
5(b)(2)(i)(A) (referring to retirement and pension accounts), or 
retirement and pension accounts described in an applicable Model 1 or 
Model 2 IGA) are limited by reference to earned income and compensation 
of the employee, respectively;
    (iv) Participants that are not residents of the country in which the 
fund is established or operated are not entitled to more than 20 percent 
of the fund's assets; and
    (v) The fund is subject to government regulation and provides annual 
information reporting about its beneficiaries to the relevant tax 
authorities in the country in which the fund is established or operates.
    (4) Fund formed pursuant to a plan similar to a section 401(a) plan. 
A fund formed pursuant to a pension plan that would meet the 
requirements of section

[[Page 520]]

401(a), other than the requirement that the plan be funded by a trust 
created or organized in the United States.
    (5) Investment vehicles exclusively for retirement funds. A fund 
established exclusively to earn income for the benefit of one or more 
retirement funds described in paragraphs (f)(1) through (5) of this 
section or in an applicable Model 1 or Model 2 IGA, accounts described 
in Sec.  1.1471-5(b)(2)(i)(A) (referring to retirement and pension 
accounts), or retirement and pension accounts described in an applicable 
Model 1 or Model 2 IGA.
    (6) Pension fund of an exempt beneficial owner. A fund established 
and sponsored by an exempt beneficial owner described in paragraph (b), 
(c), (d), or (e) of this section or an exempt beneficial owner (other 
than a fund that qualifies as an exempt beneficial owner) described in 
an applicable Model 1 or Model 2 IGA to provide retirement, disability, 
or death benefits to beneficiaries or participants that are current or 
former employees of the exempt beneficial owner (or persons designated 
by such employees), or that are not current or former employees, but the 
benefits provided to such beneficiaries or participants are in 
consideration of personal services performed for the exempt beneficial 
owner.
    (7) Example. FP, a foreign pension fund established in Country X, is 
generally exempt from income taxation in Country X, and is operated 
principally to provide retirement benefits in such country. The U.S.-
Country X income tax treaty is identical in all material respects to the 
2006 U.S. model income tax convention. FP is a resident of Country X 
under Article 4(2)(a) and a qualified person under Article 22(2)(d) of 
the U.S.-Country X income tax treaty. Therefore, FP is a pension fund 
described in paragraph (f)(1) of this section.
    (g) Entities wholly owned by exempt beneficial owners. A person is 
described in this paragraph (g) if it is an FFI solely because it is an 
investment entity, each direct holder of an equity interest in the 
investment entity is an exempt beneficial owner described in paragraph 
(b), (c), (d), (e), (f), or (g) of this section or an exempt beneficial 
owner described in an applicable Model 1 or Model 2 IGA, and each direct 
holder of a debt interest in the investment entity is either a 
depository institution (with respect to a loan made to such entity), an 
exempt beneficial owner described in paragraph (b), (c), (d), (e), (f), 
or (g) of this section, or an exempt beneficial owner described in an 
applicable Model 1 or Model 2 IGA.
    (h) Exception for commercial activities--(1) General rule. An exempt 
beneficial owner described in paragraph (b), (c), (d), or (e) of this 
section will not be treated as an exempt beneficial owner with respect 
to a payment that is derived from an obligation held in connection with 
a commercial financial activity of a type engaged in by an insurance 
company, custodial institution, or depository institution (including the 
accepting of deposits). Thus, for example, a central bank of issue that 
conducts a commercial financial activity, such as acting as an 
intermediary on behalf of persons other than in the bank's capacity as a 
central bank of issue, is not an exempt beneficial owner under paragraph 
(d)(1) of this section with respect to payments received in connection 
with an account held in connection with such activity.
    (2) Limitation. Paragraph (h)(1) of this section will not apply to 
treat an exempt beneficial owner as engaged in a commercial financial 
activity if--
    (i) The entity undertakes commercial financial activity described in 
paragraph (h)(1) of this section solely for or at the direction of other 
exempt beneficial owners and such commercial financial activity is 
consistent with the purposes of the entity;
    (ii) The entity has no outstanding debt that would be a financial 
account under Sec.  1.1471-5(b)(1)(iii); and
    (iii) The entity otherwise maintains financial accounts only for 
exempt beneficial owners, or, in the case of a foreign central bank of 
issue as described in paragraph (d), the entity only maintains financial 
accounts that are depository accounts for current or former employees of 
the entity (and the spouses and children of such employees) or financial 
accounts for exempt beneficial owners.

[[Page 521]]

    (i) Effective/applicability date. This section applies on January 6, 
2017. However, taxpayers may apply these provisions as of January 28, 
2013. (For the rules that apply beginning on January 28, 2013, and 
before January 6, 2017, see this section as in effect and contained in 
26 CFR part 1 revised April 1, 2016.)

[T.D. 9610, 78 FR 5976, Jan. 28, 2013; 78 FR 55208, Sept. 10, 2013, as 
amended by T.D. 9657, 79 FR 12857, Mar. 6, 2014; T.D. 9809, 82 FR 2183, 
Jan. 6, 2017]



Sec.  1.1472-1  Withholding on NFFEs.

    (a) In general. This section provides rules that a withholding agent 
must apply to determine its obligations to withhold under section 1472 
on withholdable payments made to a payee that is a NFFE. A participating 
FFI that complies with its withholding obligations under Sec.  1.1471-
4(b) will be deemed to satisfy its obligations under section 1472 with 
respect to withholdable payments made to NFFEs that are account holders. 
The rules of this section will apply, however, in the case of a 
participating FFI acting as a withholding agent with respect to a 
payment made to a NFFE that is not an account holder (for example, a 
payment with respect to a contract that does not constitute a financial 
account). See Sec.  1.1473-1(a)(4)(vi), however, for rules excepting 
from the definition of withholdable payment certain payments of U.S. 
source FDAP income made prior to January 1, 2017, with respect to an 
offshore obligation and Sec.  1.1471-2(b) for rules excepting from the 
definition of withholdable payment a grandfathered obligation. See also 
Sec.  1.1471-2(a)(2)(ii), (iv), (v), and (vi) for special rules of 
withholding that apply for purposes of this section and Sec.  1.1471-
2(a)(5) for withholding requirements if the source or character of a 
payment is unknown. The following entities are deemed to satisfy their 
withholding obligations under section 1472: Exempt beneficial owners; 
section 501(c) entities described in Sec.  1.1471-5(e)(5)(v); and 
nonprofit organizations described in Sec.  1.1471-5(e)(5)(vi). See Sec.  
1.1471-5(f) for when a deemed-compliant FFI is deemed to satisfy its 
withholding obligations with respect to payments made to NFFEs that are 
account holders under section 1472.
    (b) Withholdable payments made to an NFFE--(1) In general. Except as 
otherwise provided in paragraph (b)(2) of this section (providing 
transitional relief) or paragraph (c)(1) or (2) of this section 
(providing exceptions for payments to an excepted NFFE or an exempt 
beneficial owner), Sec.  1.1471-2(a)(4)(i) (providing an exception to 
withholding if the withholding agent lacks control, custody, or 
knowledge), Sec.  1.1471-2(a)(4)(vii) (providing an exception to 
withholding for payments made to an account held with or equity 
interests traded through a clearing organization with FATCA-compliant 
membership), or Sec.  1.1471-2(a)(4)(viii) (providing an exception to 
withholding for payments to certain excepted accounts), a withholding 
agent must withhold 30 percent of any withholdable payment made after 
June 30, 2014, to a payee that is a NFFE unless--
    (i) The beneficial owner of such payment is the NFFE or any other 
NFFE;
    (ii) The withholding agent can, pursuant to paragraph (d) of this 
section, treat the beneficial owner of the payment as an NFFE that does 
not have any substantial U.S. owners, or as an NFFE that has identified 
its substantial U.S. owners; and
    (iii) The withholding agent reports the information described in 
Sec.  1.1474-1(i)(2) relating to any substantial U.S. owners of the 
beneficial owner of such payment.
    (2) Transitional relief. For any withholdable payment made prior to 
July 1, 2016, with respect to a preexisting obligation to a payee that 
is not a prima facie FFI and for which a withholding agent does not have 
documentation indicating the payee's status as a passive NFFE when the 
NFFE has failed to provide the owner certification as required under 
Sec.  1.1471-3(d)(12)(iii), the withholding agent is not required to 
withhold under this section or report under Sec.  1.1474-1(i)(2) 
(describing the reporting obligations of withholding agents with respect 
to NFFEs).
    (c) Exceptions--(1) Payments to an excepted NFFE. A withholding 
agent is not required to withhold under section 1472(a) and paragraph 
(b) of this section on a withholdable payment (or portion thereof) if 
the withholding agent can

[[Page 522]]

treat the payment as made to a payee that is an excepted NFFE. For 
purposes of this paragraph, the term excepted NFFE means a payee that 
the withholding agent may treat as a NFFE that is a QI, WP, or WT. 
Additionally, the term excepted NFFE means, with respect to the payment, 
a NFFE described in paragraphs (c)(1)(i) through (vii) of this section 
to the extent the withholding agent may treat the NFFE as the beneficial 
owner of the payment.
    (i) Publicly traded corporation. A NFFE is described in this 
paragraph (c)(1)(i) if it is a corporation the stock of which is 
regularly traded on one or more established securities markets for the 
calendar year.
    (A) Regularly traded. For purposes of this section, stock of a 
corporation is regularly traded on one or more established securities 
markets for a calendar year if--
    (1) One or more classes of stock of the corporation that, in the 
aggregate, represent more than 50 percent of the total combined voting 
power of all classes of stock of such corporation entitled to vote and 
of the total value of the stock of such corporation are listed on such 
market or markets during the prior calendar year; and
    (2) With respect to each class relied on to meet the more-than-50-
percent listing requirement of paragraph (c)(1)(i)(A)(1) of this 
section--
    (i) Trades in each such class are effected, other than in de minimis 
quantities, on such market or markets on at least 60 days during the 
prior calendar year; and
    (ii) The aggregate number of shares in each such class that are 
traded on such market or markets during the prior year are at least 10 
percent of the average number of shares outstanding in that class during 
the prior calendar year.
    (B) Special rules regarding the regularly traded requirement--(1) 
Year of initial public offering. For the calendar year in which a 
corporation initiates a public offering of a class of stock for trading 
on one or more established securities markets, as defined in paragraph 
(c)(1)(i)(C) of this section, such class of stock meets the requirements 
of this paragraph (c)(1)(i) for such year if the stock is regularly 
traded in more than de minimis quantities on \1/6\ of the days remaining 
after the date of the offering in the quarter during which the offering 
occurs, and on at least 15 days during each remaining quarter of the 
calendar year. If a corporation initiates a public offering of a class 
of stock in the fourth quarter of the calendar year, such class of stock 
meets the requirements of this paragraph (c)(1)(i) in the calendar year 
of the offering if the stock is regularly traded on such established 
securities market, other than in de minimis quantities, on the greater 
of \1/6\ of the days remaining after the date of the offering in the 
quarter during which the offering occurs, or 5 days.
    (2) Classes of stock treated as meeting the regularly traded 
requirement. A class of stock meets the trading requirements of this 
paragraph (c)(1)(i) for a calendar year if the stock is traded during 
such year on an established securities market located in the United 
States and is regularly quoted by dealers making a market in the stock. 
A dealer makes a market in a stock only if the dealer regularly and 
actively offers to, and in fact does, purchase the stock from, and sell 
the stock to, customers who are not related persons (as defined in 
section 954(d)(3)) with respect to the dealer in the ordinary course of 
a trade or business.
    (3) Anti-abuse rule. Any trade conducted with a principal purpose of 
meeting the regularly traded requirements of this paragraph (c)(1)(i) 
shall be disregarded. Further, a class of stock shall not be treated as 
regularly traded if there is a pattern of trades conducted to meet the 
requirements of this paragraph (c)(1)(i). Similarly, paragraph 
(c)(1)(i)(B)(1) of this section shall not apply to a public offering of 
stock that has as one of its principal purposes qualification of the 
class of stock as regularly traded under the reduced regularly traded 
requirements for the calendar year of an initial public offering. For 
purposes of applying the immediately preceding sentence, consideration 
will be given to whether the regularly traded requirements of this 
paragraph (c)(1)(i) are satisfied in the calendar year immediately 
following the initial public offering.

[[Page 523]]

    (C) Established securities market--(1) In general. For purposes of 
this paragraph (c)(1)(i), the term established securities market means, 
for any calendar year--
    (i) A foreign securities exchange that is officially recognized, 
sanctioned, or supervised by a governmental authority of the foreign 
country in which the market is located, and has an annual value of 
shares traded on the exchange (or a predecessor exchange) exceeding $1 
billion during each of the three calendar years immediately preceding 
the calendar year in which the determination is being made;
    (ii) A national securities exchange that is registered under section 
6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) with the 
Securities and Exchange Commission;
    (iii) Any exchange designated under a Limitation on Benefits article 
of an income tax treaty with the United States that is in force; or
    (iv) Any other exchange that the Secretary may designate in 
published guidance.
    (2) Foreign exchange with multiple tiers. If an exchange in a 
foreign country has more than one tier or market level on which stock 
may be separately listed or traded, each such tier shall be treated as a 
separate exchange.
    (3) Computation of dollar value of stock traded. For purposes of 
paragraph (c)(1)(i)(C)(1)(i) of this section, the value in U.S. dollars 
of shares traded during a calendar year shall be determined on the basis 
of the dollar value of such shares traded as reported by the World 
Federation of Exchanges located in Paris (or a successor institution), 
or, if not so reported, by converting into U.S. dollars the aggregate 
value in local currency of the shares traded using an exchange rate 
equal to the average of the spot rates on the last day of each month of 
the calendar year.
    (ii) Certain affiliated entities related to a publicly traded 
corporation. A NFFE is described in this paragraph (c)(1)(ii) if it is a 
corporation that is a member of the same expanded affiliated group (as 
defined in Sec.  1.1471-5(i)) as a corporation described in paragraph 
(c)(1)(i) of this section (without regard to whether such corporation is 
a NFFE).
    (iii) Certain territory entities. A NFFE is described in this 
paragraph (c)(1)(iii) if it is a territory entity that is directly or 
indirectly wholly owned by one or more bona fide residents of the U.S. 
territory under the laws of which the entity is organized. The term bona 
fide resident of a U.S. territory means an individual who qualifies as a 
bona fide resident under section 937(a) and Sec.  1.937-1.
    (iv) Active NFFEs. A NFFE is described in this paragraph (c)(1)(iv) 
(and thus constitutes an active NFFE) if it is an entity and for the 
preceding calendar or fiscal year less than 50 percent of its gross 
income is passive income and the weighted average of the percentage of 
assets held by it that produce or are held for the production of passive 
income (weighted by total assets and measured quarterly) is less than 50 
percent, as determined after the application of paragraph (c)(1)(iv)(B) 
of this section (passive assets). For purposes of the calculations 
described in the preceding sentence, a NFFE may use any accounting 
method permitted under paragraph (c)(1)(iv)(C) of this section but must 
apply a uniform method for measuring assets for the calendar or fiscal 
year.
    (A) Passive income. Except as provided in paragraph (c)(1)(iv)(B) of 
this section, the term passive income means the portion of gross income 
that consists of--
    (1) Dividends, including substitute dividend amounts;
    (2) Interest;
    (3) Income equivalent to interest, including substitute interest and 
amounts received from or with respect to a pool of insurance contracts 
if the amounts received depend in whole or part upon the performance of 
the pool;
    (4) 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 NFFE;
    (5) Annuities;
    (6) The excess of gains over losses from the sale or exchange of 
property that gives rise to passive income described in paragraphs 
(c)(1)(iv)(A)(1) through (5) of this section;
    (7) The excess of gains over losses from transactions (including 
futures,

[[Page 524]]

forwards, and similar transactions) in any commodities, but not 
including--
    (i) Any commodity hedging transaction described in section 
954(c)(5)(A), determined by treating the entity as a controlled foreign 
corporation; or
    (ii) Active business gains or losses from the sale of commodities, 
but only if substantially all the foreign entity's commodities are 
property described in paragraph (1), (2), or (8) of section 1221(a);
    (8) The excess of foreign currency gains over foreign currency 
losses (as defined in section 988(b)) attributable to any section 988 
transaction;
    (9) Net income from notional principal contracts as defined in Sec.  
1.446-3(c)(1);
    (10) Amounts received under cash value insurance contracts; or
    (11) Amounts earned by an insurance company in connection with its 
reserves for insurance and annuity contracts.
    (B) Exceptions from passive income treatment. Notwithstanding 
paragraph (c)(1)(iv)(A) of this section, the term passive income does 
not include--
    (1) Any income from interest, dividends, rents, or royalties that is 
received or accrued from a related person to the extent such amount is 
properly allocable to income of such related person that is not passive 
income. For purposes of this paragraph (c)(1)(iv)(B)(1), the term 
``related person'' has the meaning given such term by section 954(d)(3) 
determined by substituting ``foreign entity'' for ``controlled foreign 
corporation'' each place it appears in section 954(d)(3); or
    (2) In the case of a foreign entity that regularly acts as a dealer 
in property described in paragraph (c)(1)(iv)(A)(6) 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)--
    (i) 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
    (ii) 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.
    (C) Methods of measuring assets. For purposes of this paragraph 
(c)(1)(iv), the value of a NFFE's assets is determined based on the fair 
market value or book value of the assets that is reflected on the NFFE's 
balance sheet (as determined under either a U.S. or an international 
financial accounting standard).
    (v) Excepted nonfinancial entities. A NFFE is described in this 
paragraph (c)(1)(v) if it is an entity described in Sec.  1.1471-5(e)(5) 
(referring to holding companies, treasury centers, and captive finance 
companies that are members of a nonfinancial group; start-up companies; 
entities that are liquidating or emerging from bankruptcy; and non-
profit organizations).
    (vi) Direct reporting NFFEs. A NFFE is described in this paragraph 
(c)(1)(vi) if it meets the requirements described in Sec.  1.1472-
1(c)(3) to be treated as a direct reporting NFFE.
    (vii) Sponsored direct reporting NFFEs. A NFFE is described in this 
paragraph (c)(1)(vii) if it meets the requirements described in Sec.  
1.1472-1(c)(5) to be treated as a sponsored direct reporting NFFE.
    (2) Payments made to an exempt beneficial owner. A withholding agent 
is not required to withhold on a withholdable payment (or portion 
thereof) under section 1472(a) and paragraph (b) of this section if the 
withholding agent may treat the payment as made to an exempt beneficial 
owner.
    (3) Definition of direct reporting NFFE. A direct reporting NFFE 
means a NFFE that elects to report information about its direct or 
indirect substantial U.S. owners to the IRS and meets the following 
requirements--
    (i) The NFFE must register on Form 8957, ``FATCA Registration,'' (or 
such other form as the IRS may prescribe) with the IRS to obtain a GIIN 
pursuant to the procedures prescribed by the IRS;
    (ii) The NFFE must report directly to the IRS on Form 8966, ``FATCA 
Report,'' (or such other form as the IRS

[[Page 525]]

may prescribe) the following information for each calendar year (or, may 
be required by the IRS to certify on Form 8966, or in such other manner 
as the IRS may prescribe, that the NFFE has no substantial U.S. owners):
    (A) The name, address, and TIN of each substantial U.S. owner (as 
defined in Sec.  1.1473-1(b)) of such NFFE;
    (B) The total of all payments made to each substantial U.S. owner 
(including the gross amounts paid or credited to the substantial U.S. 
owner with respect to such owner's equity interest in the NFFE during 
the calendar year, which include payments in redemption or liquidation 
(in whole or part) of the substantial U.S. owner's equity interest in 
the NFFE);
    (C) The value of each substantial U.S. owner's equity interest in 
the NFFE determined by applying the rules described in Sec.  1.1471-
5(b)(4) (substituting the term equity for the terms account and 
financial account);
    (D) The name, address, and GIIN of the NFFE; and
    (E) Any other information as required by Form 8966 (or such other 
form as the IRS may prescribe) and its accompanying instructions;
    (iii) The NFFE must obtain a written certification (contained on a 
withholding certificate or in a written statement) from each person that 
would be treated as a substantial U.S. owner of the NFFE if such person 
were a specified U.S. person. Such written certification must indicate 
whether the person is a substantial U.S. owner of the NFFE, and if so, 
the name, address and TIN of the person. If the NFFE has reason to know 
that such written certification is unreliable or incorrect, it must 
contact the person and request a revised written certification. If no 
revised written certification is received, the NFFE must treat the 
person as a substantial U.S. owner and report on Form 8966 the 
information required under paragraph (c)(3)(ii) of this section. The 
NFFE has reason to know that such a written certification is unreliable 
or incorrect if the certification is inconsistent with information in 
the NFFE's possession, including information that the NFFE provides to a 
financial institution in order for the financial institution to meet its 
AML or other account identification due diligence procedures with 
respect to the NFFE's account, information that is publicly available, 
or U.S. indicia as described in Sec.  1.1441-7(b) for which appropriate 
documentation sufficient to cure the U.S. indicia in the manner set 
forth in Sec.  1.1441-7(b)(8) has not been obtained;
    (iv) The NFFE must keep records that it produces in the ordinary 
course of its business that summarize the activity (including the gross 
amounts described in paragraph (c)(3)(ii)(B) of this section that are 
paid or credited to each of its substantial U.S. owners) relating to its 
transactions with respect to the equity of the NFFE held by each of its 
substantial U.S. owners for any calendar year in which the owner was 
required to be reported under paragraph (c)(3)(ii) of this section. The 
records must be retained for the longer of six years or the retention 
period under the NFFE's normal business procedures. A NFFE may be 
required to extend the six year retention period if the IRS requests 
such an extension prior to the expiration of the six year period;
    (v) The NFFE must respond to requests made by the IRS for additional 
information with respect to any substantial U.S. owner that is subject 
to reporting by the NFFE or with respect to the records described in 
paragraph (c)(3)(iii) or (iv) of this section;
    (vi) The NFFE must make a periodic certification to the IRS on or 
before July 1 of the calendar year following the end of each 
certification period relating to its compliance with respect to the 
election described in paragraphs (c)(3) and (4) of this section on the 
form and in the manner prescribed by the IRS. The first certification 
period begins on the later of the date a GIIN is issued or June 30, 
2014, and ends at the close of the third full calendar year following 
that date. Each subsequent certification period is the three calendar 
year period following the close of the previous certification period. 
The certification will require an officer of the NFFE to certify to the 
following statements--
    (A)(1) The NFFE has not had any events of default described in 
paragraph (c)(4)(v) of this section; or

[[Page 526]]

    (2) If there are any events of default, appropriate measures were 
taken to remediate such failures and to prevent such failures from 
recurring; and
    (B) With respect to any failure to report to the extent required 
under paragraph (c)(3)(ii), the NFFE has corrected such failure by 
filing the appropriate information returns; and
    (vii) The NFFE has not had its status as a direct reporting NFFE 
revoked by the IRS.
    (4) Election to be treated as a direct reporting NFFE--(i) Manner of 
making election. A NFFE may elect to be treated as a direct reporting 
NFFE by registering on Form 8957 (or such other form as the IRS may 
prescribe) with the IRS to obtain a GIIN pursuant to the procedures 
prescribed by the IRS.
    (ii) Effective date of election. The election is effective upon the 
issuance of a GIIN to the NFFE.
    (iii) Revocation of election by NFFE. The election may be revoked by 
the NFFE by canceling its registration account on the FATCA registration 
Web site and notifying the IRS of its revocation in such manner as the 
IRS may prescribe in the Instructions for Form 8966, ``FATCA Report.'' 
The NFFE must also notify within 30 days its sponsoring entity (if 
applicable) and each withholding agent and financial institution from 
which it receives payments or with which it holds an account for which a 
withholding certificate or written statement prescribed in Sec.  1.1471-
3(d)(11)(x)(B) (as applicable) was provided on which the NFFE certified 
its status as a direct reporting NFFE if it revokes its election.
    (iv) Revocation of election by Commissioner. The election may be 
revoked by the Commissioner upon an event of default described in 
paragraph (c)(4)(v) of this section and following the notice and 
remediation procedures described in paragraphs (vi) and (vii) of this 
section. If the Commissioner revokes the NFFE's status as a direct 
reporting NFFE, the NFFE must provide notification within 30 days of the 
revocation to each withholding agent and financial institution from 
which the NFFE receives payments or with which it holds an account for 
which a withholding certificate or written statement (as permitted for 
chapter 4 purposes) was provided by the NFFE to represent its status as 
a direct reporting NFFE.
    (v) Event of default. An event of default occurs if a direct 
reporting NFFE fails to perform any of the obligations described in 
(c)(3)(i) through (vi) of this section. An event of default also 
includes any misrepresentation of a material fact to the IRS.
    (vi) Notice of event of default. Following an event of default known 
by or disclosed to the IRS, the IRS will deliver to the NFFE a notice of 
default specifying the event of default. The IRS will request that the 
NFFE remediate the event of default within a specified time period. The 
NFFE must respond to the notice of default and provide information 
responsive to an IRS request for information or state the reasons why 
the NFFE does not agree that an event of default has occurred. If the 
NFFE does not provide a response within the specified time period, the 
IRS may, at its sole discretion, deliver a notice to the NFFE that its 
election to be treated as a direct reporting NFFE has been revoked. A 
NFFE may request, within 90 days of receipt, reconsideration of a notice 
of default or notice of revocation by written request to the IRS.
    (vii) Remediation of event of default. A NFFE will be permitted to 
remediate an event of default to the extent it agrees with the IRS on a 
remediation plan. The IRS may, as part of a remediation plan, require 
additional information from the NFFE.
    (5) Election by a direct reporting NFFE to be treated as a sponsored 
direct reporting NFFE--(i) Definition of sponsored direct reporting 
NFFE. A NFFE is a sponsored direct reporting NFFE if the NFFE is a 
direct reporting NFFE and if another entity, other than a 
nonparticipating FFI, has agreed with the NFFE to act as its sponsoring 
entity, as described in paragraph (c)(5)(ii) of this section.
    (ii) Requirements for sponsoring entity of a sponsored direct 
reporting NFFE. A sponsoring entity meets the requirements of this 
paragraph (c)(5)(ii) if the sponsoring entity--
    (A) Is authorized to act on behalf of the NFFE;

[[Page 527]]

    (B) Has registered with the IRS as a sponsoring entity;
    (C) Has registered the NFFE with the IRS as a sponsored direct 
reporting NFFE by the later of January 1, 2017, or the date that the 
NFFE identifies itself to a withholding agent or financial institution 
as qualifying as a sponsored direct reporting NFFE under paragraph 
(c)(5) of this section;
    (D) Agrees to perform, on behalf of the NFFE, all due diligence, 
reporting, and other requirements that the NFFE would have been required 
to perform as a direct reporting NFFE;
    (E) Identifies the NFFE in all reporting completed on the NFFE's 
behalf;
    (F) Complies with the certification and other requirements in 
paragraphs (f) and (g) of this section;
    (G) Has not had its status as a sponsoring entity revoked; and
    (H) Agrees to notify all relevant withholding agents and the IRS if 
its status as a sponsoring entity is revoked, if it otherwise ceases to 
be the sponsoring entity of any of its sponsored direct reporting NFFEs 
(for example, if the sponsored direct reporting NFFE changes sponsors), 
or if the status of any of its sponsored direct reporting NFFEs has been 
revoked.
    (iii) Revocation of status as sponsoring entity. The IRS may revoke 
a sponsoring entity's status as a sponsoring entity with respect to all 
sponsored direct reporting NFFEs if there is an event of default as 
defined in paragraph (g) of this section with respect to any sponsored 
direct reporting NFFE.
    (iv) Liability of sponsoring entity. A sponsoring entity is not 
liable for any failure to comply with the obligations contained in 
paragraph (c)(5)(ii) of this section. A sponsored direct reporting NFFE 
will remain liable for all of its chapter 4 obligations without regard 
to any failure of its sponsoring entity to comply with the obligations 
contained in paragraph (c)(5)(ii) of this section that the sponsoring 
entity has agreed to undertake on behalf of the NFFE.
    (d) Rules for determining payee and beneficial owner--(1) In 
general. For purposes of this section, except in the case of a payee 
that is a QI, WP, or WT, a withholding agent may treat a withholdable 
payment as beneficially owned by the payee as determined under Sec.  
1.1471-3. Thus, a withholding agent may treat a withholdable payment as 
beneficially owned by an excepted NFFE (other than a QI, WP, or WT) if 
the withholding agent can reliably associate the payment with valid 
documentation to determine the payee's status as an excepted NFFE under 
the rules of Sec.  1.1471-3(d).
    (2) Payments made to a NFFE that is a QI, WP, or WT. A withholding 
agent may treat the payee of a withholdable payment as a NFFE that is a 
QI, WP, or WT if the withholding agent can reliably associate the 
payment with valid documentation to determine the payee's status as such 
under the rules of Sec.  1.1471-3(b)(3) and (d).
    (3) Payments made to a partner or beneficiary of an NFFE that is an 
NWP or NWT. A withholding agent may treat a partner or beneficiary of an 
NFFE that is an NWP or NWT, respectively, as the payee of a withholdable 
payment under this section if the withholding agent can reliably 
associate the payment with a valid Form W-8 or written notification that 
the NFFE is a flow-through entity as described in Sec.  1.1471-3(c)(2), 
including valid documentation sufficient to establish the chapter 4 
status of each payee of the payment that is a partner or beneficiary, 
respectively, by applying the rules described in Sec.  1.1471-3(d).
    (4) Payments made to a beneficial owner that is an NFFE. A 
withholding agent may treat the beneficial owner of a withholdable 
payment as an NFFE that does not have any substantial U.S. owners or 
that has identified all of its substantial U.S. owners if it can 
reliably associate the payment with valid documentation identifying the 
beneficial owner as an NFFE that does not have any substantial U.S. 
owners or that has identified all of its substantial U.S. owners by 
applying the rules described in Sec.  1.1471-3(d).
    (5) Absence of valid documentation. A withholding agent that cannot 
reliably associate the payment with documentation as described in any of 
paragraphs (d)(2) through (4) of this section must treat the payment as 
made to a payee in accordance with the presumption rules under Sec.  
1.1471-3(f).
    (e) Information reporting requirements--(1) Reporting on 
withholdable

[[Page 528]]

payments. A withholding agent that treats a withholdable payment as made 
to any payee described in paragraph (d) of this section must provide 
information about such payee on Form 1042-S and file a withholding 
income tax return on Form 1042 to the extent required under Sec.  
1.1474-1(d) and (c), respectively.
    (2) Reporting on substantial U.S. owners. A withholding agent that 
receives information about any substantial U.S. owners of an NFFE that 
is not an excepted NFFE must report information about the NFFE's 
substantial U.S. owners in accordance with Sec.  1.1474-1(i)(2). See 
Sec.  1.1471-4(d) for the reporting requirements of a participating FFI 
with respect to the substantial U.S. owners of account holders that are 
NFFEs.
    (f) Sponsoring entity verification--(1) In general. This paragraph 
(f) describes the requirements for a sponsoring entity to provide a 
certification of compliance with respect to each sponsored direct 
reporting NFFE for purposes of satisfying the requirements of paragraph 
(c)(5) of this section and defines the certification period for such 
certifications. This paragraph (f) also describes the procedures for the 
IRS to review the sponsoring entity's compliance with such requirements 
during the certification period. Finally, this paragraph (f) describes 
the requirement that a sponsoring entity have in place a written 
sponsorship agreement with each sponsored direct reporting NFFE for 
which it acts and specifies the terms of such agreement. See paragraph 
(g)(1)(i) of this section, describing an event of default for a 
sponsoring entity that does not have a sponsorship agreement with each 
sponsored direct reporting NFFE for which it acts as a sponsoring 
entity. References in this paragraph (f) or paragraph (g) of this 
section to a sponsored direct reporting NFFE mean a sponsored direct 
reporting NFFE for which the sponsoring entity acts as a sponsoring 
entity under paragraph (c)(5)(ii) of this section.
    (2) Certification of compliance--(i) Certification requirement--(A) 
In general. The sponsoring entity must appoint a responsible officer to 
oversee the sponsoring entity's compliance with respect to each 
sponsored direct reporting NFFE for purposes of satisfying the 
requirements of paragraph (c)(5) of this section. Except as otherwise 
provided in paragraph (f)(2)(i)(B) or (f)(2)(ii) of this section, on or 
before July 1 of the calendar year following the certification period, 
the responsible officer of the sponsoring entity must make a 
certification for the certification period with respect to all sponsored 
direct reporting NFFEs for which the sponsoring entity acts during the 
certification period on the form and in the manner prescribed by the 
IRS. To the extent that a sponsoring entity satisfies the certification 
requirements of paragraph (f)(2) of this section on behalf of a 
sponsored direct reporting NFFE, the NFFE does not have a certification 
requirement under paragraph (c)(3)(vi) of this section.
    (B) Extension of time for the certification period ending on 
December 31, 2017. The certifications required for a certification 
period ending on December 31, 2017, must be submitted on or before March 
31, 2019.
    (ii) Late-joining sponsored direct reporting NFFEs. In general, with 
respect to a certification period, a sponsoring entity is not required 
to make a certification for a sponsored direct reporting NFFE that first 
agrees to be sponsored by the sponsoring entity during the six-month 
period before the end of the sponsoring entity's certification period, 
provided that the sponsoring entity makes certifications for such 
sponsored direct reporting NFFE for subsequent certification periods, 
and the first such certification covers both the subsequent 
certification period and the portion of the prior certification period 
of the sponsoring entity during which the sponsored direct reporting 
NFFE was sponsored by the sponsoring entity. However, the preceding 
sentence does not apply to a sponsored direct reporting NFFE that, 
immediately before the NFFE agrees to be sponsored by the sponsoring 
entity, was a direct reporting NFFE or sponsored direct reporting NFFE 
of another sponsoring entity. The sponsoring entity may certify for a 
sponsored direct reporting NFFE described in the preceding sentence for 
the portion of the certification period of the sponsoring entity before 
the date that the NFFE first

[[Page 529]]

agrees to be sponsored by the sponsoring entity if the sponsoring entity 
obtains from the NFFE (or the NFFE's sponsoring entity, if applicable) a 
written certification that the NFFE has complied with its applicable 
chapter 4 requirements during such portion of the certification period, 
provided that: The sponsoring entity does not know that such 
certification is unreliable or incorrect; and the certification for the 
sponsored direct reporting NFFE for the subsequent certification period 
covers both the subsequent certification period and the portion of the 
prior certification period during which such NFFE was sponsored by the 
sponsoring entity.
    (iii) Certification period. The first certification period of a 
sponsoring entity begins on the later of the date the sponsoring entity 
is issued a GIIN to act as a sponsoring entity or June 30, 2014, and 
ends at the close of the third full calendar year after such date. Each 
subsequent certification period is the three-calendar-year period 
following the close of the previous certification period.
    (iv) Certifications. The certification will require the responsible 
officer of the sponsoring entity to certify to the following 
statements--
    (A) The sponsoring entity meets all of the requirements of a 
sponsoring entity described in paragraph (c)(5)(ii) of this section;
    (B) The sponsoring entity has the written sponsorship agreement 
described in paragraph (f)(4) of this section in effect with each 
sponsored direct reporting NFFE;
    (C) There were no events of default (as defined in paragraph (g) of 
this section) with respect to the sponsoring entity, or, to the extent 
there were any such events of default, appropriate measures were taken 
by the sponsoring entity to remediate and prevent such events from 
reoccurring; and
    (D) With respect to any failure to report to the extent required 
under paragraph (c)(3)(ii) of this section with respect to one or more 
sponsored direct reporting NFFEs, the sponsoring entity has corrected 
such failure by filing the appropriate information returns.
    (3) IRS review of compliance--(i) General inquiries. The IRS, based 
upon the information reporting forms described in paragraph (c)(3)(ii) 
of this section filed with the IRS (or the absence of such reporting) by 
the sponsoring entity for each calendar year with respect to any 
sponsored direct reporting NFFE, may request additional information with 
respect to the information reported (or required to be reported) on the 
forms about any substantial U.S. owner reported on the form or the 
records for each direct reporting NFFE described in paragraph (c)(3)(iv) 
of this section. The IRS may also request any additional information 
from the sponsoring entity (including a copy of each sponsorship 
agreement the sponsoring entity has entered into with each sponsored 
FFI) to determine its compliance with paragraph (f) of this section with 
respect to each sponsored direct reporting NFFE and to assist the IRS 
with its review of any substantial U.S. owners' compliance with tax 
reporting requirements.
    (ii) Inquiries regarding substantial non-compliance. The IRS may 
determine in its discretion that a sponsoring entity may not have 
substantially complied with the requirements of a sponsoring entity with 
respect to each sponsored direct reporting NFFE for purposes of 
satisfying the requirements of paragraph (c)(5) of this section. This 
determination is based on the information reporting forms referenced in 
paragraph (c)(3)(ii) of this section filed with the IRS by the 
sponsoring entity for each calendar year with respect to any sponsored 
direct reporting NFFE (or the absence of such reporting), the 
certification made by the responsible officer described in paragraph 
(f)(2) of this section (or the absence of such certification), or any 
other information related to the sponsoring entity's compliance with the 
requirements of a sponsoring entity with respect to each sponsored 
direct reporting NFFE for purposes of satisfying the requirements of 
paragraph (c)(5) of this section. In such a case, the IRS may request 
from the responsible officer information necessary to verify the 
sponsoring entity's compliance with such requirements. The IRS may also 
request the performance of specified review procedures by a person 
(including an external auditor or third-party consultant) that the IRS

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identifies as competent to perform such procedures given the 
circumstances surrounding the sponsoring entity's potential failure to 
comply with the requirements of a sponsoring entity.
    (4) Sponsorship agreement. The sponsoring entity must have a written 
sponsorship agreement (which may be part of another agreement between 
the sponsoring entity and the sponsored direct reporting NFFE) in place 
with each sponsored direct reporting NFFE for which it acts by the later 
of March 31, 2019, or the date that the sponsoring entity begins acting 
as a sponsoring entity for the applicable sponsored direct reporting 
NFFE, under which--
    (i) The sponsored direct reporting NFFE agrees to provide the 
sponsoring entity access to the sponsored direct reporting NFFE's books 
and records regarding each of its owners (including AML/KYC 
documentation regarding the sponsored direct reporting NFFE's owners 
provided by the sponsored direct reporting NFFE with respect to each 
financial account it holds) and such other information sufficient for 
the sponsoring entity to determine the direct and indirect substantial 
U.S. owners of the sponsored direct reporting NFFE, including the 
information about such owners required under paragraph (c)(3)(ii) of 
this section to be reported on Form 8966, ``FATCA Report'' (or such 
other form as the IRS may prescribe);
    (ii) The sponsored direct reporting NFFE obtains a valid and 
effective waiver of any legal prohibitions on reporting the information 
about its direct and indirect substantial U.S. owners required under 
paragraph (c)(3)(ii) of this section to be reported on Form 8966 (or 
such other form as the IRS may prescribe);
    (iii) The sponsored direct reporting NFFE authorizes the sponsoring 
entity to act on the sponsored direct reporting NFFE's behalf with 
respect to the sponsored direct reporting NFFE's obligations as a 
sponsored direct reporting NFFE (for example, authorizing the sponsoring 
entity to file Form 8966 on the sponsored direct reporting NFFE's 
behalf, responding to the IRS inquiries described in paragraph (f)(3) of 
this section, and providing the certification described in paragraph 
(f)(2) of this section);
    (iv) The sponsored direct reporting NFFE agrees to identify to the 
sponsoring entity on request each withholding agent and financial 
institution to which the sponsored direct reporting NFFE reports its 
status as a sponsored direct reporting NFFE and agrees to provide to the 
sponsoring entity a copy of the withholding certificate or written 
statement prescribed in Sec.  1.1471-3(d)(11)(x)(B) (as applicable) that 
the sponsored direct reporting NFFE provides to each such withholding 
agent or financial institution;
    (v) The sponsored direct reporting NFFE represents that it does not 
have any formal or informal practices or procedures to assist its 
substantial U.S. owners with the avoidance of the requirements of 
chapter 4;
    (vi) The sponsored direct reporting NFFE agrees to cooperate with 
the sponsoring entity in responding to any IRS inquiries under paragraph 
(f)(3) of this section with respect to the sponsored direct reporting 
NFFE; and
    (vii) The sponsoring entity retains the records described in 
paragraphs (c)(3)(iii) and (iv) of this section for the longer of six 
years or the retention period under the sponsoring entity's normal 
business procedures. A sponsoring entity may be required to extend the 
retention period if the IRS requests such an extension before the 
expiration of the period.
    (g) Sponsoring entity event of default--(1) Defined. An event of 
default by the sponsoring entity means the occurrence of any of the 
following--
    (i) Failure to have the written sponsorship agreement described in 
paragraph (f)(4) of this section in effect with each sponsored direct 
reporting NFFE;
    (ii) Failure to satisfy the requirements of paragraph (c)(3)(iii) of 
this section with respect to each sponsored direct reporting NFFE that 
the NFFE would have been required to satisfy as a direct reporting NFFE;
    (iii) Failure to report to the IRS on Form 8966, ``FATCA Report,'' 
(or such other form as the IRS may prescribe) all of the information 
required under paragraph (c)(3)(ii) of this section with

[[Page 531]]

respect to each sponsored direct reporting NFFE and each of its 
substantial U.S. owners (or report to the IRS on Form 8966 that the 
sponsored direct reporting NFFE had no substantial U.S. owners) by the 
due date of the form (including any extensions);
    (iv) Failure to make the certification required under paragraph 
(f)(2) of this section;
    (v) Failure to cooperate with an IRS request for additional 
information described in paragraph (f)(3) of this section, including 
requests for the records described in paragraph (c)(3)(iv) of this 
section and requests to extend the retention period for these records as 
described in (f)(4)(vii) of this section;
    (vi) Making any fraudulent statement or misrepresentation of 
material fact to the IRS or representing to a withholding agent or the 
IRS its status as a sponsoring entity under paragraph (c)(5) of this 
section for an entity other than an entity for which it acts as a 
sponsoring entity; or
    (vii) Failure to obtain from each sponsored direct reporting NFFE 
the information required to report on Form 8966.
    (2) Notice of event of default. Following an event of default known 
by or disclosed to the IRS, the IRS will deliver to the sponsoring 
entity a notice of default specifying the event of default and, if 
applicable, identifying each sponsored direct reporting NFFE to which 
the notice relates. The IRS will request that the sponsoring entity 
remediate the event of default within 45 days (unless additional time is 
requested and agreed to by the IRS). The sponsoring entity must respond 
to the notice of default and provide information responsive to an IRS 
request for information or state the reasons why the sponsoring entity 
does not agree that an event of default has occurred.
    (3) Remediation of event of default. A sponsoring entity will be 
permitted to remediate an event of default to the extent that it agrees 
with the IRS on a remediation plan. The IRS may, as part of a 
remediation plan, require additional information from the sponsoring 
entity, remedial actions, or the performance of the specified review 
procedures described in paragraph (f)(3)(ii) of this section.
    (4) Termination--(i) In general. If the sponsoring entity does not 
provide a response to a notice of default within the period specified in 
paragraph (g)(2) of this section, or if the sponsoring entity does not 
satisfy the conditions of the remediation plan within the time period 
specified by the IRS, the IRS may deliver a notice of termination that 
terminates the sponsoring entity's status, the status of one or more 
sponsored direct reporting NFFEs as a direct reporting NFFE, or the 
status of both the sponsoring entity and one or more sponsored direct 
reporting NFFEs.
    (ii) Termination of sponsoring entity. If the IRS notifies the 
sponsoring entity that its status is terminated, the sponsoring entity 
must send notice of the termination within 30 days after the date of 
termination to each withholding agent from which each sponsored direct 
reporting NFFE receives payments and each financial institution with 
which each sponsored direct reporting NFFE holds an account for which a 
withholding certificate or written statement prescribed in Sec.  1.1471-
3(d)(11)(x)(B) (as applicable) was provided. A sponsoring entity that 
has had its status terminated cannot reregister on the FATCA 
registration website to act as a sponsoring entity for any sponsored 
direct reporting NFFE unless it receives written approval from the IRS. 
Unless the status of the sponsored direct reporting NFFEs has been 
terminated, the sponsored direct reporting NFFEs may register on the 
FATCA registration website as direct reporting NFFEs or as sponsored 
direct reporting NFFEs of another sponsoring entity, other than a 
sponsoring entity that is related to the sponsoring entity that was 
terminated (absent written approval from the IRS allowing the 
registration). An entity is related to the terminated sponsoring entity 
if they have a relationship with each other that is described in section 
267(b) or 707(b).
    (iii) Termination of sponsored direct reporting NFFE. If the IRS 
notifies the sponsoring entity that the status of a sponsored direct 
reporting NFFE is terminated (but not the sponsoring entity's status), 
the sponsoring entity

[[Page 532]]

must remove the sponsored direct reporting NFFE from the sponsoring 
entity's registration account on the FATCA registration website and send 
notice of the termination within 30 days after the date of termination 
to each withholding agent from which the sponsored direct reporting NFFE 
receives payments and each financial institution with which it holds an 
account for which a withholding certificate or written statement 
prescribed in Sec.  1.1471-3(d)(11)(x)(B) (as applicable) was provided 
with respect to such sponsored direct reporting NFFE. A sponsored direct 
reporting NFFE that has had its status as a sponsored direct reporting 
NFFE terminated (independent from a termination of status of its 
sponsoring entity) may not register on the FATCA registration website as 
a direct reporting NFFE or as a sponsored direct reporting NFFE of 
another sponsoring entity unless it receives written approval from the 
IRS.
    (iv) Reconsideration of notice of default or notice of termination. 
A sponsoring entity or sponsored direct reporting NFFE may request, 
within 90 days of a notice of default or notice of termination, 
reconsideration of the notice of default or notice of termination by 
written request to the IRS.
    (h) Applicability date. This section generally applies beginning on 
January 6, 2017, except for paragraphs (c)(5)(iii), (f), and (g) of this 
section, which apply March 25, 2019. However, taxpayers may apply these 
provisions as of January 28, 2013. (For the rules that otherwise apply 
beginning on January 6, 2017, and before March 25, 2019, see this 
section as in effect and contained in 26 CFR part 1 revised April 1, 
2018. For rules that otherwise apply beginning on January 28, 2013, and 
before January 6, 2017, see this section as in effect and contained in 
26 CFR part 1 revised April 1, 2016.)

[T.D. 9610, 78 FR 5978, Jan. 28, 2013; 78 FR 55208, Sept. 10, 2013, as 
amended by T.D. 9657, 79 FR 12858, Mar. 6, 2014; T.D. 9809, 82 FR 2184, 
Jan. 6, 2017; T.D. 9852, 84 FR 10987, Mar. 25, 2019; 84 FR 13121, Apr. 
4, 2019]



Sec.  1.1473-1  Section 1473 definitions.

    (a) Definition of withholdable payment--(1) In general. Except as 
otherwise provided in this paragraph (a) and Sec.  1.1471-2(b) 
(regarding grandfathered obligations), the term withholdable payment 
means--
    (i) Any payment of U.S. source FDAP income (as defined in paragraph 
(a)(2) of this section); and
    (ii) For any sales or other dispositions occurring after December 
31, 2018, any gross proceeds from the sale or other disposition (as 
defined in paragraph (a)(3)(i) of this section) of any property of a 
type that can produce interest or dividends that are U.S. source FDAP 
income.
    (2) U.S. source FDAP income defined--(i) In general--(A) FDAP income 
defined. For purposes of chapter 4, the term FDAP income means fixed or 
determinable annual or periodic income that is described in Sec.  
1.1441-2(b)(1) or Sec.  1.1441-2(c) (excluding income described in 
paragraph (a)(2)(vi) of this section or Sec.  1.1441-2(b)(2) (such as 
gains derived from the sale of certain property)) and including the 
types of income enumerated in paragraphs (a)(2)(iii) through (v) of this 
section.
    (B) U.S. source. The term U.S. source means derived from sources 
within the United States. A payment is derived from sources within the 
United States if it is income treated as derived from sources within the 
United States under sections 861 through 865 and other relevant 
provisions of the Code. In the case of a payment of FDAP income for 
which the source cannot be determined at the time of payment, see Sec.  
1.1471-2(a)(5).
    (C) Exceptions to withholding on U.S. source FDAP income not 
applicable under chapter 4. Except as otherwise provided in paragraph 
(a)(4) of this section, no exception to withholding on U.S. source FDAP 
income for purposes other than chapter 4 applies for purposes of 
determining whether a payment of such income is a withholdable payment 
under chapter 4. Thus, for example, an exclusion from an amount subject 
to withholding under Sec.  1.1441-2(a) or an exclusion from taxation 
under section 881 does not apply for purposes of determining whether 
such income constitutes a withholdable payment.
    (ii) Special rule for certain interest. Interest that is described 
in section 861(a)(1)(A) (relating to interest paid by

[[Page 533]]

foreign branches of domestic corporations and partnerships) is treated 
as U.S. source FDAP income.
    (iii) Original issue discount. The rules described in Sec.  1.1441-
2(b)(3)(ii) for determining when an amount representing original issue 
discount is subject to withholding for chapter 3 purposes apply for 
purposes of determining when original issue discount from sources within 
the United States is U.S. source FDAP income.
    (iv) REMIC residual interests. U.S. source FDAP income includes an 
amount described in Sec.  1.1441-2(b)(5).
    (v) Withholding liability of payee that is satisfied by withholding 
agent. If a withholding agent satisfies a withholding liability arising 
under chapter 4 with respect to a withholdable payment from the 
withholding agent's own funds, the satisfaction of such liability is 
treated as an additional payment of U.S. source FDAP income to the payee 
to the extent that the withholding agent's satisfaction of such 
withholding liability also satisfies a tax liability of the payee under 
section 881 or 871 with respect to the same payment, and the 
satisfaction of the tax liability constitutes additional income to the 
payee under Sec.  1.1441-3(f) that is U.S. source FDAP income. In such 
case, the amount of any additional payment treated as made by the 
withholding agent for purposes of this paragraph (a)(2)(v) and any tax 
liability resulting from such payment shall be determined under Sec.  
1.1441-3(f). See Sec.  1.1474-6 regarding the coordination of the 
withholding requirements under chapters 3 and 4 in the case of a 
withholdable payment that is also subject to withholding under chapter 
3.
    (vi) Special rule for sales of interest bearing debt obligations. 
Income that is otherwise described as U.S. source FDAP income in 
paragraphs (a)(2)(i) through (v) of this section does not include an 
amount of interest accrued on the date of a sale or exchange of an 
interest bearing debt obligation if the sale occurs between two interest 
payment dates and is not part of a plan described in Sec.  1.1441-
3(b)(2)(ii).
    (vii) Payment of U.S. source FDAP income--(A) Amount of payment of 
U.S. source FDAP income. The amount of U.S. source FDAP income is the 
gross amount of the payment of such income, unreduced by any deductions 
or offsets. The rules of Sec.  1.1441-3(b)(1) shall apply to determine 
the amount of an interest payment on an interest-bearing obligation. In 
the case of a corporate distribution, the distributing corporation or 
intermediary shall determine the portion of the distribution that is 
treated as U.S. source FDAP income under this paragraph (a)(2) in the 
same manner as the distributing corporation or intermediary determines 
the portion of the distribution subject to withholding under Sec.  
1.1441-3(c). Any portion of a payment on a debt instrument or a 
corporate distribution that does not constitute U.S. source FDAP income 
under this paragraph (a)(2) solely because of a provision other than the 
source rules of sections 861 through 865 shall be taken into account as 
gross proceeds under paragraph (a)(3) of this section. For rules 
regarding the determination of the amount of a payment of U.S. source 
FDAP income under paragraph (a)(2) of this section made in a medium 
other than U.S. dollars, see Sec.  1.1441-3(e). For determining the 
amount of a payment of a dividend equivalent, see section 871(m) and the 
regulations thereunder.
    (B) When payment of U.S. source FDAP income is made. A payment is 
considered made when the amount would be includible in the income of the 
beneficial owner under the U.S. tax principles governing the cash method 
of accounting. If an FFI acts as an intermediary with respect to a 
payment of U.S. source FDAP income, the FFI will be treated as making a 
payment of such U.S. source FDAP income to the person with respect to 
which the FFI acts as an intermediary when it pays or credits such 
amount to such person. The following rules also apply for purposes of 
this paragraph (a)(2)(vii)(B): Sec. Sec.  1.1441-2(e)(2) (regarding when 
a payment is considered made in the case of income allocated under 
section 482); 1.1441-2(e)(3) (regarding blocked income); 1.1441-2(e)(4) 
(regarding when a dividend is considered paid); and 1.1441-2(e)(5) 
(regarding when interest is considered paid if a foreign person has made 
an election under Sec.  1.884-4(c)(1)).
    (3) Gross proceeds defined--(i) Sale or other disposition--(A) In 
general. Except

[[Page 534]]

as otherwise provided in this paragraph (a)(3)(i), the term sale or 
other disposition means any sale, exchange, or disposition of property 
described in paragraph (a)(3)(ii) of this section that requires 
recognition of gain or loss under section 1001(c), determined without 
regard to whether the owner of such property is subject to U.S. federal 
income tax with respect to such sale, exchange, or disposition. The term 
sale or other disposition includes (but is not limited to) sales of 
securities; redemptions of stock; retirements and redemptions of 
indebtedness; entering into short sales; and a closing transaction under 
a forward contract, option, or other instrument that is otherwise a 
sale. Such term further includes a distribution from a corporation to 
the extent the distribution is a return of capital or a capital gain to 
the beneficial owner of the payment. Such term does not include grants 
or purchases of options, exercises of call options for physical 
delivery, transfers of securities for which gain or loss is excluded 
from recognition under section 1058, or mere executions of contracts 
that require delivery of personal property or an interest therein. For 
purposes of this section only, a constructive sale under section 1259 or 
a mark to fair market value under section 475 or 1296 is not a sale or 
disposition.
    (B) Special rule for sales effected by brokers. In the case of a 
sale effected by a broker (with the term effect defined in Sec.  1.6045-
1(a)(10)), a sale means a sale as defined in Sec.  1.6045-1(a)(9) with 
respect to property described in paragraph (a)(3)(ii) of this section.
    (C) Special rule for gross proceeds from sales settled by a clearing 
organization. In the case of a clearing organization that settles sales 
and purchases of securities between members of such organization on a 
net basis, the gross proceeds from sales or dispositions are limited to 
the net amount paid or credited to a member's account that is associated 
with sales or other dispositions of property described in paragraph 
(a)(3)(ii) of this section by such member as of the time that such 
transactions are settled under the settlement procedures of such 
organization.
    (ii) Property of a type that can produce interest or dividend 
payments that would be U.S. source FDAP income--(A) In general. Property 
is of a type that can produce interest or dividends payments that would 
be U.S. source FDAP income if the property is of a type that ordinarily 
gives rise to the payment of interest or dividends that would constitute 
U.S. source FDAP income, regardless of whether any such payment is made 
during the period such property is held by the person selling or 
disposing of such property. Thus, for example, stock issued by a 
domestic corporation is property of a type that can produce dividends 
from sources within the United States if a dividend from such 
corporation would be from sources within the United States, regardless 
of whether the stock pays dividends at regular intervals and regardless 
of whether the issuer has any plans to pay dividends or has ever paid a 
dividend with respect to the stock.
    (B) Contracts producing dividend equivalent payments. In the case of 
any contract that results in the payment of a dividend equivalent as 
defined in section 871(m) and the regulations thereunder (including as 
part of a termination payment), such contract shall be treated as 
property that is described in paragraph (a)(3)(ii)(A) of this section, 
without regard to whether the taxpayer is a foreign person subject to 
U.S. federal income tax with respect to such transaction. To the extent 
that the proceeds from a termination payment include the payment of a 
dividend equivalent, the gross amount of such proceeds will not include 
the amount of such dividend equivalent.
    (C) Regulated investment company distributions. The amount of a 
distribution that is designated as a capital gain dividend under section 
852(b)(3)(C) or 871(k)(2) is a payment of gross proceeds to the extent 
attributable to property described in paragraph (a)(3)(ii)(A) of this 
section.
    (iii) Payment of gross proceeds--(A) When gross proceeds are paid. 
With respect to a sale that is effected by a broker that results in a 
payment of gross proceeds as defined in this paragraph (a)(3), the date 
the gross proceeds are considered paid is the date that the proceeds of 
such sale are credited to the account of or otherwise

[[Page 535]]

made available to the person entitled to the payment.
    (B) Amount of gross proceeds. Except as otherwise provided in this 
paragraph (a)(3)--
    (1) The amount of gross proceeds from a sale or other disposition 
means the total amount realized as a result of a sale or other 
disposition of property described in paragraph (a)(3)(ii) under section 
1001(b);
    (2) In the case of a sale effected by a broker, the amount of gross 
proceeds from a sale or other disposition means the total amount paid or 
credited to the account of the person entitled to the payment increased 
by any amount not so paid by reason of the repayment of margin loans. 
The broker may (but is not required to) take commissions with respect to 
the sale into account in determining the amount of gross proceeds;
    (3) In the case of a corporate distribution, the amount treated as 
gross proceeds excludes the amount described in paragraph (a)(2)(vii)(A) 
of this section that is treated as U.S. source FDAP income;
    (4) In the case of a sale of an obligation described in paragraph 
(a)(2)(vi), gross proceeds includes any interest accrued between 
interest payment dates other than an amount described in paragraph 
(a)(2)(vi) of this section that is treated as U.S. source FDAP income; 
and
    (5) In the case of a sale, retirement, or redemption of a debt 
obligation, gross proceeds excludes the amount of original issue 
discount treated as U.S. source FDAP income under paragraph (a)(2)(iii) 
of this section.
    (4) Payments not treated as withholdable payments. The following 
payments are not withholdable payments under paragraph (a)(1) of this 
section--
    (i) Certain short-term obligations. A payment of interest or 
original issue discount on short-term obligations described in section 
871(g)(1)(B)(i).
    (ii) Effectively connected income. Any payment to the extent it 
gives rise to an item of income that is taken into account under section 
871(b)(1) or 882(a)(1) for the taxable year. An item of income is taken 
into account under section 871(b)(1) or 882(a)(1) when the income is (or 
is deemed to be) effectively connected with the conduct of a trade or 
business in the United States and is includible in the beneficial 
owner's gross income for the taxable year. An amount of income shall not 
be treated as taken into account under section 871(b)(1) or 882(a)(1) if 
the income is (or is deemed to be) effectively connected with the 
conduct of a trade or business in the United States and the beneficial 
owner claims an exception from tax under an income tax treaty because 
the income is not attributable to a permanent establishment in the 
United States.
    (iii) Excluded nonfinancial payments. Payments for the following: 
services (including wages and other forms of employee compensation (such 
as stock options)), the use of property, office and equipment leases, 
software licenses, transportation, freight, gambling winnings, awards, 
prizes, scholarships, and interest on outstanding accounts payable 
arising from the acquisition of goods or services. Notwithstanding the 
preceding sentence, excluded nonfinancial payments do not include: 
payments in connection with a lending transaction (including loans of 
securities), a forward, futures, option, or notional principal contract, 
or a similar financial instrument; premiums for insurance contracts or 
annuity contracts; amounts paid under cash value insurance or annuity 
contracts; dividends; interest (including substitute interest described 
in Sec.  1.861-2(a)(7)) other than interest described in the preceding 
sentence; gross proceeds other than gross proceeds described in 
paragraph (a)(4)(iv) of this section; investment advisory fees; 
custodial fees; and bank or brokerage fees.
    (iv) Gross proceeds from sales of excluded property. Gross proceeds 
from the sale or other disposition of any property that can produce U.S. 
source FDAP income if all such U.S. source FDAP income would be excluded 
from the definition of withholdable payment under paragraphs (a)(4)(i) 
through (iii) of this section.
    (v) Fractional shares. Payments arising in sales described in Sec.  
1.6045-1(c)(3)(ix).
    (vi) Offshore payments of U.S. source FDAP income prior to 2017 
(transitional).

[[Page 536]]

A payment with respect to an offshore obligation (as defined in Sec.  
1.1471-1(b)(88)) made prior to January 1, 2017, if such payment is U.S. 
source FDAP income and made by a person that is not acting as an 
intermediary or as a WP or WT with respect to the payment. Additionally, 
a payment with respect to an account, obligation, contract, or other 
instrument that is issued or maintained by an entity other than a 
financial institution and that would be treated as an offshore 
obligation under Sec.  1.6049-5(c)(1) (applied by substituting the term 
entity for the term financial institution (as defined in Sec.  1.1471-
5(e)) in each place that it appears), made prior to January 1, 2017, if 
such payment is U.S. source FDAP and made by a person that is not acting 
as an intermediary or as a WP or WT with respect to the payment is not a 
withholdable payment under paragraph (a)(1) of this section. The 
exception for offshore payments of U.S. source FDAP income provided in 
the preceding sentences shall not apply, however, in the case of a flow-
through entity that has a residual withholding requirement with respect 
to its partners, owners, or beneficiaries under Sec.  1.1471-
2(a)(2)(ii), or in the case of payments made with respect to debt or 
equity issued by a U.S. person (excluding interest payments made by a 
foreign branch of a U.S. financial institution with respect to 
depository accounts it maintains). For purposes of this paragraph 
(a)(4)(vi), an intermediary includes a person that acts as a qualified 
securities lender as defined for purposes of chapter 3 and does not 
include a person acting as an insurance broker with respect to premiums.
    (vii) Collateral arrangements prior to 2017 (transitional). A 
payment made prior to January 1, 2017, by a secured party, or to a 
secured party other than a nonparticipating FFI, with respect to 
collateral securing one or more transactions under a collateral 
arrangement, provided that only a commercially reasonable amount of 
collateral is held by the secured party (or by a third party for the 
benefit of the secured party) as part of the collateral arrangement. For 
purposes of this paragraph (a)(4)(vii), the term transaction generally 
includes a debt instrument, a derivative financial instrument (including 
a notional principal contract, future, forward, and option), and any 
securities lending transaction, sale-repurchase transaction, margin 
loan, or substantially similar transaction that is subject to a 
collateral arrangement. Solely for purposes of this paragraph 
(a)(4)(vii), a secured party may provide documentation to the 
withholding agent indicating that it is the beneficial owner of a 
payment described in this paragraph (a)(4)(vii), and a withholding agent 
may rely on such certification for purposes of its requirements under 
Sec.  1.1471-3(d) for determining whether withholding under chapter 4 
applies.
    (viii) Certain dividend equivalents. Amounts paid with respect to a 
notional principal contract described in Sec.  1.871-15(a)(7), an 
equity-linked instrument described in Sec.  1.871-15(a)(4), or a 
securities lending or sale-repurchase transaction described in Sec.  
1.871-15(a)(13) that are exempt from withholding under section 1441(a) 
as dividend equivalents under section 871(m) if the transaction is not a 
section 871(m) transaction within the meaning of Sec.  1.871-15(a)(12), 
if the transaction is subject to the exception described in Sec.  1.871-
15(k), or to the extent the payment is not a dividend equivalent 
pursuant to Sec.  1.871-15(c)(2).
    (5) Special payment rules for flow-through entities, complex trusts, 
and estates--(i) In general. This paragraph (a)(5) provides special 
rules for a flow-through entity, complex trust, or estate to determine 
when such entity must treat a payment of U.S. source FDAP income that is 
also a withholdable payment as having been paid by such entity to its 
partners, owners, or beneficiaries (as applicable depending on the type 
of entity).
    (ii) Partnerships. An amount of U.S. source FDAP income that is also 
a withholdable payment is treated as being paid to a partner under rules 
similar to the rules prescribing when withholding is required for 
chapter 3 purposes as described in Sec.  1.1441-5(b)(2)(i)(A).
    (iii) Simple trusts. An amount of U.S. source FDAP income that is 
also a withholdable payment is treated as being paid to a beneficiary of 
a simple

[[Page 537]]

trust under rules similar to the rules prescribing when withholding is 
required for chapter 3 purposes as described in Sec.  1.1441-
5(b)(2)(ii).
    (iv) Complex trusts and estates. An amount of U.S. source FDAP 
income that is also a withholdable payment is treated as being paid to a 
beneficiary of a complex trust or estate under rules similar to the 
rules prescribing when withholding is required for chapter 3 purposes as 
described in Sec.  1.1441-5(b)(2)(iii).
    (v) Grantor trusts. If an amount of U.S. source FDAP income that is 
also a withholdable payment is paid to a grantor trust, a person treated 
as an owner of all or a portion of such trust is treated as having been 
paid such income by the trust at the time it is received by or credited 
to the trust or portion thereof.
    (vi) Special rule for an NWP or NWT. In the case of a partnership, 
simple trust, or complex trust that is an NWP or NWT, the rules 
described in paragraphs (a)(5)(ii) and (iii) of this section shall not 
apply, and U.S. source FDAP income that is also a withholdable payment 
is treated as being paid to the partner or beneficiary at the time the 
income is paid to the partnership or trust, respectively.
    (vii) Special rules for determining when gross proceeds are treated 
as paid to a partner, owner, or beneficiary of a flow-through entity. 
[Reserved]
    (6) Reporting of withholdable payments. See Sec.  1.1474-1(c) and 
(d) for a description of the income tax return and information reporting 
requirements applicable to a withholding agent that has made a 
withholdable payment.
    (7) Example. Satisfaction of payee's chapter 4 liability by 
withholding agent. Recalcitrant account holder (RA) is entitled to 
receive a payment of $100 of U.S. source interest from withholding 
agent, WA. The payment is subject to withholding under chapter 4, but is 
not subject to withholding under section 1442, and RA has no substantive 
tax liability under section 881 with respect to this payment. WA pays 
the full $100 to RA and, after the date of payment, pays the $30 of tax 
due under chapter 4 to the IRS from its own funds. Because no underlying 
tax liability of RA is satisfied, and further because WA and RA did not 
execute any agreement for WA to pay this tax and WA did not have an 
obligation to pay this tax apart from the requirements of chapter 4, 
WA's payment of the tax does not give rise to a deemed payment of U.S. 
source FDAP income to RA under paragraph (a)(2)(v) of this section. 
Thus, WA is not required to pay any additional tax with respect to this 
payment for purposes of chapter 4.
    (b) Substantial U.S. owner--(1) Definition. Except as otherwise 
provided in paragraph (b)(4) or (5) of this section, the term 
substantial United States owner (or substantial U.S. owner) means:
    (i) With respect to any foreign corporation, any specified U.S. 
person that owns, directly or indirectly, more than 10 percent of the 
stock of such corporation (by vote or value);
    (ii) With respect to any foreign partnership, any specified U.S. 
person that owns, directly or indirectly, more than 10 percent of the 
profits interests or capital interests in such partnership; and
    (iii) In the case of a trust--
    (A) Any specified U.S. person treated as an owner of any portion of 
the trust under sections 671 through 679; and
    (B) Any specified U.S. person that holds, directly or indirectly, 
more than 10 percent of the beneficial interests of the trust.
    (2) Indirect ownership of foreign entities. For purposes of 
determining a person's interest in a foreign entity, the following rules 
shall apply.
    (i) Indirect ownership of stock. Stock of a foreign corporation that 
is owned directly or indirectly by an entity (other than a participating 
FFI, a deemed-compliant FFI (excluding an owner-documented FFI), a U.S. 
financial institution, a U.S. person that is not a specified U.S. 
person, an exempt beneficial owner, or an excepted NFFE) that is a 
corporation, partnership, or trust shall be considered as being owned 
proportionately by such entity's shareholders, partners, or, in the case 
of a trust, persons treated as owners under sections 671 through 679 of 
any portion of the trust that includes the stock, and the beneficiaries 
of the trust. Stock considered to be owned by a person by reason of the 
application of

[[Page 538]]

the preceding sentence shall, for purposes of applying such sentence, be 
treated as actually owned by such person.
    (ii) Indirect ownership in a foreign partnership or ownership of a 
beneficial interest in a foreign trust. A capital or profits interest in 
a foreign partnership or an ownership or beneficial interest (as 
described in paragraph (b)(3) of this section) in a foreign trust that 
is owned or held directly or indirectly by an entity (other than a 
participating FFI, a deemed-compliant FFI (excluding an owner-documented 
FFI), a U.S. financial institution, a U.S. person that is not a 
specified U.S. person, an exempt beneficial owner, or an excepted NFFE) 
that is a corporation, partnership, or trust shall be considered as 
being owned or held proportionately by such entity's shareholders, 
partners, or, in the case of a trust, persons treated as owners under 
sections 671 through 679 of any portion of the trust that includes the 
partnership or beneficial trust interest, and the beneficiaries of the 
trust. Partnership or beneficial trust interests considered to be owned 
or held by a person by reason of the application of the preceding 
sentence shall, for purposes of applying such sentence, be treated as 
actually owned or held by such person.
    (iii) Ownership and holdings through options. If a specified U.S. 
person holds, directly or indirectly (applying the principles of 
paragraphs (b)(2)(i) and (ii) of this section) an option to acquire 
stock in a foreign corporation, a capital or profits interest in a 
foreign partnership, or an ownership or beneficial interest in a foreign 
trust, such person is considered to own the underlying equity or other 
ownership interest in such foreign entity for purposes of this paragraph 
(b). For purposes of the preceding sentence, an option to acquire such 
an option, and each one of a series of such options, shall be considered 
an option to acquire such stock or other ownership interest described in 
this paragraph (b)(2)(iii).
    (iv) Determination of proportionate interest. For purposes of this 
paragraph (b), and except as otherwise provided in paragraph (b)(3) of 
this section, the determination of a person's proportionate interest in 
a foreign corporation, partnership, or trust is based on all of the 
relevant facts and circumstances. In making this determination, any 
arrangement that artificially decreases a specified U.S. person's 
proportionate interest in any such entity will be disregarded in 
determining whether such person is a substantial U.S. owner. In lieu of 
applying the rules of this paragraph (b)(2) to determine whether an 
owner's proportionate interest in a foreign entity meets the 10 percent 
threshold described in paragraph (b)(1) of this section, the entity or 
its withholding agent may opt to treat the owner as a substantial U.S. 
owner.
    (v) Interests owned or held by a related person. For purposes of 
determining whether a specified U.S. person is a substantial U.S. owner 
in a foreign entity described in paragraphs (b)(2)(i) through (iv) of 
this section, if a specified U.S. person owns or holds, directly or 
indirectly, any interest in the foreign entity, that interest must be 
aggregated with any such interest in the foreign entity owned or held, 
directly or indirectly, by a related person. For purposes of the 
preceding sentence, a related person is a person or spouse of a person 
described in Sec.  1.267(c)-1(a)(4), determined by reference to such 
specified U.S. person.
    (3) Beneficial interest in a foreign trust--(i) In general. For 
purposes of paragraph (b)(1)(iii)(B) of this section, a person holds a 
beneficial interest in a foreign trust if such person has the right to 
receive directly or indirectly (for example, through a nominee) a 
mandatory distribution or may receive, directly or indirectly, a 
discretionary distribution from the trust. For purposes of this section, 
a mandatory distribution means a distribution that is required to be 
made pursuant to the terms of the trust document. A discretionary 
distribution means a distribution that is made to a person at the 
discretion of the trustee or a person with a limited power of 
appointment of such trust.
    (ii) Determining the 10 percent threshold in the case of a 
beneficial interest in a foreign trust. A person will be treated as 
holding directly or indirectly more than 10 percent of the beneficial 
interest in a foreign trust if--

[[Page 539]]

    (A) The person receives, directly or indirectly, only discretionary 
distributions from the trust and the fair market value of the currency 
or other property distributed, directly or indirectly, from the trust to 
such person during the prior calendar year exceeds 10 percent of the 
value of either all of the distributions made by the trust during that 
year or all of the assets held by the trust at the end of that year;
    (B) The person is entitled to receive, directly or indirectly, 
mandatory distributions from the trust and the value of the person's 
interest in the trust, as determined under section 7520, exceeds 10 
percent of the value of all the assets held by the trust as of the end 
of the prior calendar year; or
    (C) The person is entitled to receive, directly or indirectly, 
mandatory distributions and may receive, directly or indirectly, 
discretionary distributions from the trust, and the value of the 
person's interest in the trust, determined as the sum of the fair market 
value of all of the currency or other property distributed from the 
trust at the discretion of the trustee during the prior calendar year to 
the person and the value of the person's interest in the trust as 
determined under section 7520 at the end of that year, exceeds either 10 
percent of the value of all distributions made by such trust during the 
prior calendar year or 10 percent of the value of all the assets held by 
the trust at the end of that year.
    (4) Exceptions--(i) De minimis amount or value exception. A 
specified U.S. person is not treated as a substantial U.S. owner if--
    (A) The fair market value of the currency or other property 
distributed, directly or indirectly, from the trust to such specified 
U.S. person during the prior calendar year is $5,000 or less and,
    (B) In the case of a specified U.S. person that is entitled to 
receive mandatory distributions, the value of such person's interest in 
the trust is $50,000 or less.
    (ii) Trusts wholly owned by certain U.S. persons. A trust that is 
treated as owned only by U.S. persons under sections 671 through 679 is 
not required to treat any of its beneficiaries as substantial U.S. 
owners.
    (5) Special rule for certain financial institutions. In the case of 
any financial institution described in Sec.  1.1471-5(e)(1)(iii) or (iv) 
(referring to investment entities and specified insurance companies), 
this section shall be applied by substituting ``0 percent'' for ``10 
percent'' in each place that it appears. Additionally, in the case of a 
financial institution described in Sec.  1471-5(e)(1)(iii) that is a 
trust, the rules of paragraph (b)(3) and (4) of this section (referring 
to beneficial interests in a trust) shall be applied by substituting 
``calendar year'' for ``prior calendar year'' in each place that it 
appears.
    (6) Determination dates for substantial U.S. owners. A foreign 
entity may make the determination of whether it has one or more direct 
or indirect substantial U.S. owners as of the last day of such entity's 
accounting year or as of the date on which such foreign entity provides 
the documentation described in Sec.  1.1471-3(d) to the withholding 
agent for which such determination is required to be made. See Sec.  
1.1471-4(c) for when a participating FFI is required to obtain 
documentation with respect to its account holders.
    (7) Examples. The following examples illustrate the provisions of 
paragraph (b) of this section:

    Example 1. Indirect ownership. U, a specified U.S. person, owns 
directly 100% of the sole class of stock of F1, a foreign corporation. 
F1 owns directly 90% of the sole class of stock of F2, a foreign 
corporation, and U owns directly the remaining 10% of the sole class of 
stock of F2. F2 owns directly 10% of the sole class of stock of F3, a 
foreign corporation, and U owns directly 3% of the sole class of stock 
of F3. U is treated as owning 13% (3% directly and 10% indirectly) of 
the sole class of stock of F3 and 100% (10% directly and 90% indirectly) 
of the sole class of stock of F2 for purposes of this paragraph (b). U 
is a substantial U.S. owner of F1, F2, and F3.
    Example 2. Indirect ownership through entities that are specified 
U.S. persons. U, a specified U.S. person, owns directly 100% of the sole 
class of stock of US1, a U.S. corporation that is a specified U.S. 
person. US1 owns directly 100% of the sole class of stock of US2, a U.S. 
corporation that is a specified U.S. person. US2 owns directly 15% of 
the sole class of stock of FC, a foreign corporation. For purposes of 
this paragraph (b), U, US1, and US2 are all substantial U.S. owners of 
FC.
    Example 3. Determining the 10% threshold in the case of a beneficial 
interest in a foreign

[[Page 540]]

trust. U, a U.S. citizen, holds an interest in FT1, a foreign trust, 
under which U may receive discretionary distributions from FT1. U also 
holds an interest in FT2, a foreign trust, and FT2, in turn, holds an 
interest in FT1 under which FT2 may receive discretionary distributions 
from FT1. U receives $25,000 from FT1 in Year 1. FT2 receives $120,000 
from FT1 in Year 1 and distributes the entire amount to its 
beneficiaries in Year 1. The distribution from FT1 is FT2's only source 
of income and FT2's distributions in Year 1 total $120,000. U receives 
$40,000 from FT2 in Year 1. FT1's distributions in Year 1 total 
$750,000. U's discretionary interest in FT1 is valued at $65,000 at the 
end of Year 1 and therefore does not meet the 10% threshold as 
determined under paragraph (b)(3)(ii)(A). U's discretionary interest in 
FT2, however, is valued at $40,000 at the end of Year 1 and therefore 
meets the 10% threshold as determined under paragraph (b)(3)(ii)(A).
    Example 4. Determining ownership (determination date). F, a foreign 
corporation that is an NFFE, has a calendar year accounting year. On 
December 31 of Year 1, U, a specified U.S. person, owns 12% of the sole 
class of outstanding stock of F. In March of Year 2, F redeems a portion 
of U's stock and reduces U's ownership of F to 9%. In May of Year 2, F 
opens an account with P, a participating FFI, and delivers to P the 
documentation required under Sec.  1.1471-3(d). At the time F opens its 
account with P, U is the only specified U.S. person that directly or 
indirectly owns stock in F. Because of the redemption, U's interest in F 
is 9% on the date F opens its account with P. Pursuant to paragraph 
(b)(6) of this section, F may determine whether it has a substantial 
U.S. owner as of the date it provides the documentation required under 
Sec.  1.1471-3(d) to P, which would be the day it opens the account. As 
a result, F may indicate in its Sec.  1.1471-3(d) documentation that it 
has no substantial U.S. owners.

    (c) Specified U.S. person. The term specified United States person 
(or specified U.S. person) means any U.S. person other than--
    (1) A corporation the stock of which is regularly traded on one or 
more established securities markets, as described in Sec.  1.1472-
1(c)(1)(i);
    (2) Any corporation that is a member of the same expanded affiliated 
group as a corporation described in Sec.  1.1472-1(c)(1)(i);
    (3) Any organization exempt from taxation under section 501(a) or an 
individual retirement plan as defined in section 7701(a)(37);
    (4) The United States or any wholly owned agency or instrumentality 
thereof;
    (5) Any State, the District of Columbia, any U.S. territory, any 
political subdivision of any of the foregoing, or any wholly owned 
agency or instrumentality of any one or more of the foregoing;
    (6) Any bank as defined in section 581;
    (7) Any real estate investment trust as defined in section 856;
    (8) Any regulated investment company as defined in section 851 or 
any entity registered with the Securities Exchange Commission under the 
Investment Company Act of 1940 (15 U.S.C. 80a-64);
    (9) Any common trust fund as defined in section 584(a);
    (10) Any trust that is exempt from tax under section 664(c) or is 
described in section 4947(a)(1);
    (11) A dealer in securities, commodities, or derivative financial 
instruments (including notional principal contracts, futures, forwards, 
and options) that is registered as such under the laws of the United 
States or any State;
    (12) A broker; and
    (13) Any tax exempt trust under a section 403(b) plan or section 
457(g) plan.
    (d) Withholding agent--(1) In general. Except as provided in this 
paragraph (d), the term withholding agent means any person, U.S. or 
foreign, in whatever capacity acting, that has the control, receipt, 
custody, disposal, or payment of a withholdable payment or foreign 
passthru payment.
    (2) Participating FFIs and registered deemed-compliant FFIs as 
withholding agents. The term withholding agent includes a participating 
FFI that has the control, receipt, custody, disposal, or payment of a 
passthru payment (as defined in Sec.  1.1471-5(h)). The term withholding 
agent also includes a registered deemed-compliant FFI to the extent that 
such FFI is required to withhold on a passthru payment as part of the 
conditions for maintaining its status as a deemed-compliant FFI under 
Sec.  1.1471-5(f)(1)(ii). For the withholding requirements of a 
participating FFI, including the requirement to withhold

[[Page 541]]

with respect to limited branches and limited FFIs that are in the same 
expanded affiliated group as the participating FFI, see Sec. Sec.  
1.1471-4(b) and 1.1472-1(a).
    (3) Grantor trusts as withholding agents. The term withholding agent 
includes a grantor trust with respect to a withholdable payment or a 
foreign passthru payment (in the case of a grantor trust that is a 
participating FFI) made to a person treated as an owner of the trust 
under sections 671 through 679. For purposes of determining when a 
payment is treated as made to such a person, see Sec.  1.1473-
1(a)(5)(v).
    (4) Deposit and return requirements. See Sec.  1.1474-1(b) for a 
withholding agent's requirement to deposit any tax withheld, and Sec.  
1.1474-1(c) and (d) for the requirement to file income tax and 
information returns (including the special allowance in Sec.  1.1474-
1(b)(2) for participating FFIs with respect to dormant accounts).
    (5) Multiple withholding agents. When several persons qualify as a 
withholding agent with respect to a single payment, only one tax is 
required to be withheld and deposited. See Sec.  1.1474-1(a). A person 
who, as a nominee described in Sec.  1.6031(c)-1T, has furnished to a 
partnership all of the information required to be furnished under Sec.  
1.6031(c)-1T(a) shall not be treated as a withholding agent if the 
person has notified the partnership that it is treating the provision of 
information to the partnership as a discharge of its obligations as a 
withholding agent.
    (6) Exception for certain individuals. An individual is not a 
withholding agent with respect to a withholdable payment made by the 
individual outside the course of such individual's trade or business 
(including as an agent with respect to making or receiving such 
payment).
    (e) Foreign entity. The term foreign entity means any entity that is 
not a U.S. person and includes a territory entity.
    (f) Effective/applicability date. This section generally applies on 
January 6, 2017. However, taxpayers may apply these provisions as of 
January 28, 2013. Paragraph (a)(4)(viii) of this section applies to 
payments made on or after September 18, 2015. (For the rules that apply 
beginning on January 28, 2013, and before January 6, 2017, see this 
section as in effect and contained in 26 CFR part 1 revised April 1, 
2016.)

[T.D. 9610, 78 FR 5981, Jan. 28, 2013; 78 FR 55208, Sept. 10, 2013, as 
amended by T.D. 9657, 79 FR 12860, Mar. 6, 2014; T.D. 9734, 80 FR 56890, 
Sept. 18, 2015; T.D. 9809, 82 FR 2187, Jan. 6, 2017]



Sec.  1.1474-1  Liability for withheld tax and withholding agent 
reporting.

    (a) Payment and returns of tax withheld--(1) In general. A 
withholding agent is required to deposit any tax withheld pursuant to 
chapter 4 as provided under paragraph (b) of this section and to make 
the returns prescribed by paragraphs (c) and (d) of this section. When 
several persons qualify as withholding agents with respect to a single 
payment, only one tax is required to be withheld and deposited.
    (2) Withholding agent liability. A withholding agent that is 
required to withhold with respect to a payment under Sec.  1.1471-2(a), 
1.1471-4(b) (in the case of a participating FFI), or 1.1472-1(b) but 
fails either to withhold or to deposit any tax withheld as required 
under paragraph (b) of this section is liable for the amount of tax not 
withheld and deposited.
    (3) Use of agents--(i) In general. Except as otherwise provided in 
this paragraph (a)(3), a withholding agent may authorize an agent to 
fulfill its obligations under chapter 4. The acts of an agent of a 
withholding agent (including the receipt of withholding certificates, 
the payment of amounts subject to withholding, the withholding and 
deposit of tax withheld, and the reporting required on the relevant 
form) are imputed to the withholding agent on whose behalf it is acting.
    (ii) Authorized agent. An agent is authorized only if--
    (A) There is a written agreement between the withholding agent and 
the person acting as agent;
    (B) A Form 8655, ``Reporting Agent Authorization,'' is filed with 
the IRS by a withholding agent if its agent (including any sub-agent) 
acts as a reporting agent for filing Form 1042 on behalf of the 
withholding agent and the agent (or sub-agent) identifies itself as the 
filer on the Form 1042;

[[Page 542]]

    (C) Books and records and relevant personnel of the agent (including 
any sub-agent) are available to the withholding agent (on a continuous 
basis, including after termination of the relationship) in order to 
evaluate the withholding agent's compliance with the provisions of 
chapter 4; and
    (D) The withholding agent remains fully liable for the acts of its 
agent (or any sub-agent) and does not assert any of the defenses that 
may otherwise be available, including under common law principles of 
agency, in order to avoid tax liability under the Code.
    (iii) Liability of withholding agent acting through an agent. A 
withholding agent acting through an agent is liable for any failure of 
the agent, such as a failure to withhold an amount or make a payment of 
tax, in the same manner and to the same extent as if the agent's failure 
had been the failure of the withholding agent. For this purpose, the 
agent's actual knowledge or reason to know shall be imputed to the 
withholding agent. Except as otherwise provided in the QI, WP, or WT 
agreement, an agent of a withholding agent is subject to the same 
withholding and reporting obligations that apply to any withholding 
agent under the provisions of chapter 4 and does not benefit from the 
special procedures or exceptions that apply to a QI, WP, or WT. If the 
agent is a foreign person, however, a U.S. withholding agent may treat 
the acts of the foreign agent as its own for purposes of determining 
whether it has complied with the provisions of chapter 4. The 
withholding agent's liability under paragraph (a)(2) of this section 
will exist even if the agent is also a withholding agent and is itself 
separately liable for failure to comply with the provisions of chapter 
4. The same tax, interest, or penalties, however, shall not be collected 
more than once.
    (4) Liability for failure to obtain documentation timely or to act 
in accordance with applicable presumptions--(i) In general. A 
withholding agent that cannot reliably associate a payment with 
documentation on the date of payment and that does not withhold under 
Sec.  1.1471-2(a), 1.1471-4(b), or 1.1472-1(b), or withholds at less 
than the 30 percent rate prescribed, is liable under this section for 
the tax required to be withheld under Sec.  1.1471-2(a), 1.1471-4(b), or 
1.1472-1(b) (including interest, penalties, or additions to tax 
otherwise applicable in respect of the failure to deduct and withhold) 
unless--
    (A) The withholding agent has appropriately relied on the 
presumptions described in Sec.  1.1471-3(f) in order to treat the 
payment as exempt from withholding; or
    (B) The withholding agent obtained after the date of payment valid 
documentation that meets the requirements of Sec.  1.1471-3(c)(7) to 
establish that the payment was, in fact, exempt from withholding.
    (ii) Withholding satisfied by another withholding agent. If a 
withholding agent fails to deduct and withhold any amount required to be 
deducted and withheld under Sec.  1.1471-2(a), 1.1471-4(b), or 1.1472-
1(b), and the tax is satisfied by another withholding agent or is 
otherwise paid, then the amount of tax required to be deducted and 
withheld shall not be collected from the first-mentioned withholding 
agent. However, the withholding agent is not relieved from liability in 
any such case for any interest or penalties or additions to tax 
otherwise applicable in respect of the failure to deduct and withhold.
    (b) Payment of withheld tax--(1) In general. Except as otherwise 
provided in this paragraph (b), every withholding agent who withholds 
tax pursuant to chapter 4 shall deposit such tax within the time 
provided in Sec.  1.6302-2(a) by electronic funds transfer as provided 
under Sec.  31.6302-1(h) of this chapter. If for any reason the total 
amount of tax required to be deposited for any calendar year pursuant to 
the income tax return described in paragraph (c) of this section has not 
been deposited pursuant to Sec.  1.6302-2, the withholding agent shall 
pay the balance of such tax due for such year at such place as the IRS 
shall specify. The tax shall be paid when filing the return described in 
paragraph (c)(1) of this section for such year, unless the IRS specifies 
otherwise. See Sec.  1.1471-4(b)(6) for the special rule allowing 
participating FFIs to set aside in escrow amounts withheld with respect 
to dormant accounts.
    (2) Special rule for foreign passthru payments and payments of gross 
proceeds

[[Page 543]]

that include an undetermined amount of income subject to tax. [Reserved]
    (c) Income tax return--(1) In general. Every withholding agent shall 
file an income tax return on Form 1042, ``Annual Withholding Tax Return 
for U.S. Source Income of Foreign Persons,'' (or such other form as the 
IRS may prescribe) to report chapter 4 reportable amounts (as defined in 
paragraph (d)(2)(i) of this section). This income tax return shall be 
filed on the same income tax return used to report amounts subject to 
reporting for chapter 3 purposes as described in Sec.  1.1461-1(b). The 
return must show the aggregate amount of payments that are chapter 4 
reportable amounts and must report the tax withheld for the preceding 
calendar year by the withholding agent, in addition to any information 
required by the form and its accompanying instructions. Withholding 
certificates and other statements or information provided to a 
withholding agent are not required to be attached to the return. A Form 
1042 must be filed under this paragraph (c)(1) even if no tax was 
required to be withheld for chapter 4 purposes during the preceding 
calendar year. The withholding agent must retain a copy of Form 1042 for 
the applicable period of limitations on assessment and collection with 
respect to the amounts required to be reported on the Form 1042. See 
section 6501 and the regulations thereunder for the applicable period of 
limitations. Adjustments to the total amount of tax withheld described 
in Sec.  1.1474-2 shall be stated on the return as prescribed by the 
form and its accompanying instructions.
    (2) Participating FFIs, registered deemed-compliant FFIs, and U.S. 
branches treated as U.S. persons. A participating FFI or registered 
deemed-compliant FFI shall file Form 1042 in accordance with paragraph 
(c)(1) of this section to report chapter 4 reportable amounts for which 
the participating FFI or registered deemed-compliant FFI is required to 
file Form 1042-S, as described in paragraph (d)(4)(iii) of this section. 
A participating FFI or registered deemed-compliant FFI with a U.S. 
branch that is treated as a U.S. person must exclude from Form 1042 
payments made and taxes withheld by such U.S. branch. A U.S. branch that 
is treated as a U.S. person shall file a separate Form 1042 in 
accordance with paragraph (c)(1) of this section and the instructions on 
the form to report chapter 4 reportable amounts.
    (3) Amended returns. An amended return under this paragraph (c)(3) 
must be filed on Form 1042. An amended return must include such 
information as the form or its accompanying instructions shall require, 
including, with respect to any information that has changed from the 
time of the filing of the return, the information that was shown on the 
original return and the corrected information.
    (d) Information returns for payment reporting--(1) Filing 
requirement--(i) In general. Except as otherwise provided in paragraph 
(d)(4) of this section or in the instructions to Form 1042-S, every 
withholding agent must file an information return on Form 1042-S, 
``Foreign Person's U.S. Source Income Subject to Withholding,'' (or such 
other form as the IRS may prescribe) to report to the IRS chapter 4 
reportable amounts as described in paragraph (d)(2)(i) of this section 
that were paid to a recipient during the preceding calendar year. Except 
as otherwise provided in paragraphs (d)(4)(ii)(B) (certain unknown 
recipients) and (d)(4)(i)(B) and (d)(4)(iii)(A) of this section 
(describing payees includable in reporting pools of a participating FFI 
or registered deemed-compliant FFI), a separate Form 1042-S must be 
filed with the IRS for each recipient of an amount subject to reporting 
under paragraph (d)(2)(i) of this section and for each separate type of 
payment made to a single recipient in accordance with paragraph 
(d)(4)(i) of this section. The Form 1042-S shall be prepared in such 
manner as the form and its accompanying instructions prescribe. One copy 
of the Form 1042-S shall be filed with the IRS on or before March 15 of 
the calendar year following the year in which the amount subject to 
reporting was paid, with a transmittal form as provided in the 
instructions to the form. Withholding certificates, certifications, 
documentary evidence, or other statements or documentation provided to a 
withholding agent are not required to be attached

[[Page 544]]

to the form. A copy of the Form 1042-S must be furnished to the 
recipient for whom the form is prepared (or any other person, as 
required under this paragraph or the instructions to the form) and to 
any intermediary or flow-through entity described in paragraph 
(d)(3)(vii) of this section on or before March 15 of the calendar year 
following the year in which the amount subject to reporting was paid. A 
person required by this paragraph (d)(1)(i) to furnish a copy of Form 
1042-S to the recipient for whom it is prepared may furnish the copy of 
Form 1042-S in an electronic format in lieu of a paper format provided 
it meets the requirements of Sec.  1.1461-1(c)(1)(i)(A). The withholding 
agent must retain a copy of each Form 1042-S for the period of 
limitations on assessment and collection applicable to the tax 
reportable on the Form 1042 to which the Form 1042-S relates (determined 
as set forth in paragraph (c)(1) of this section). See paragraph 
(d)(4)(iii) of this section for the additional reporting requirements of 
participating FFIs and deemed-compliant FFIs.
    (ii) Recipient--(A) Defined. Except as otherwise provided in 
paragraph (d)(1)(ii)(B) of this section, the term recipient under this 
paragraph (d) means a person that is a recipient of a chapter 4 
reportable amount, and includes--
    (1) With respect to a payment of U.S. source FDAP income--
    (i) A QI (including a QI that is a foreign branch of a U.S. person);
    (ii) A WP or WT;
    (iii) A participating FFI or a registered deemed-compliant FFI that 
is an NQI, NWP, NWT, and a U.S. branch of an FFI that is not treated as 
a U.S. person that applies the rules described in Sec.  1.1471-
4(d)(2)(iii)(C) and that provides its withholding agent with sufficient 
information to determine the portion of the payment allocable to its 
reporting pools of recalcitrant account holders, payees that are 
nonparticipating FFIs, and payees that are U.S. persons described in 
paragraph (d)(4)(i)(B) of this section;
    (iv) An account holder or payee to the extent that the withholding 
agent issues a Form 1042-S to such account holder or payee;
    (v) An FFI that is a beneficial owner of the payment (including a 
limited branch of the FFI);
    (vi) A U.S. branch of an FFI treated as a U.S. person;
    (vii) A territory financial institution treated as a U.S. person;
    (viii) An excepted NFFE and passive NFFE that also is not a flow-
through entity and that is not acting as an agent or intermediary with 
respect to the payment;
    (ix) A foreign person that is a partner or beneficiary in a flow-
through entity that is a NFFE (looking through a partner or beneficiary 
that is a foreign intermediary or flow-through entity);
    (x) An exempt beneficial owner of a payment, including when the 
payment is made to such owner through an FFI (including a 
nonparticipating FFI) that provides documentation and information 
sufficient for a withholding agent to determine the portion of the 
payment allocable to such owner; and
    (xi) Any person (including a flow-through entity or U.S. branch) 
receiving such income that is (or is deemed to be) effectively connected 
with the conduct of its trade or business in the United States;
    (2) With respect to a payment other than U.S. source FDAP income. 
[Reserved]; and
    (3) Any other person required to be reported as a recipient by Form 
1042-S, its accompanying instructions, under an FFI agreement, or 
paragraph (d)(4)(iii) of this section with respect to the Form 1042-S 
reporting requirements of a participating FFI.
    (B) Persons that are not recipients. Persons that are not recipients 
include--
    (1) With respect to a payment of U.S. source FDAP income--
    (i) A certified deemed-compliant FFI that is an NQI, NWP, or NWT and 
that fails to provide its withholding agent with sufficient information 
to allocate the payment to its account holders and payees;
    (ii) A financial institution (other than a nonparticipating FFI) to 
the extent that the withholding agent issues a Form 1042-S to the FFI's 
account holder or payee;
    (iii) A participating FFI or a registered deemed-compliant FFI that 
is an NQI, NWP, or NWT, and a U.S.

[[Page 545]]

branch of an FFI that is not treated as a U.S. person that applies the 
rules described in Sec.  1.1471-4(d)(2)(iii)(C) to the extent it 
provides its withholding agent with sufficient information to allocate 
the payment to its account holders and payees that are exempt from 
withholding under chapter 4;
    (iv) An account holder or payee of a participating FFI or registered 
deemed-compliant FFI, and an account holder or payee of a U.S. branch of 
an FFI that is not treated as a U.S. person that applies the rules 
described in Sec.  1.1471-4(d)(2)(iii)(C) that is included in the FFI's 
reporting pools described in paragraph (d)(4)(i)(B) of this section;
    (v) A nonparticipating FFI that acts as an intermediary with respect 
to a payment or that is a flow-through entity (including a limited 
branch);
    (vi) An account holder or payee of a nonparticipating FFI except to 
the extent described in paragraph (d)(1)(ii)(A)(1)(x) of this section 
for an exempt beneficial owner;
    (vii) Except as provided in paragraph (d)(1)(ii)(A)(1) of this 
section, an entity that is disregarded under Sec.  301.7701-2(c)(2) of 
this chapter as an entity separate from its owner;
    (viii) A territory financial institution to the extent provided in 
paragraph (d)(4)(i)(D)(2) and (3) of this section; and
    (ix) A passive NFFE or an excepted NFFE that is a flow-through 
entity or acts as an intermediary;
    (2) With respect to a payment other than U.S. source FDAP income. 
[Reserved]; and
    (3) Any other person not treated as a recipient on Form 1042-S, its 
accompanying instructions, or under an FFI agreement.
    (2) Amounts subject to reporting--(i) In general. Subject to 
paragraph (d)(2)(iii) of this section, the term chapter 4 reportable 
amount means each of the following amounts reportable on a Form 1042-S 
for purposes of chapter 4--
    (A) An amount of a withholdable payment that is subject to 
withholding under chapter 4 paid after June 30, 2014;
    (B) An amount of a withholdable payment of U.S. source FDAP income 
(including an amount that would be a withholdable payment but for the 
fact that it is an amount effectively connected with a U.S. trade or 
business, as described in Sec.  1.1471-3(a)(4)(ii)) that is also 
reportable on Form 1042-S under Sec.  1.1461-1(c)(2)(i); or
    (C) A foreign passthru payment subject to withholding under chapter 
4.
    (ii) Exception to reporting. Except as otherwise provided in this 
paragraph (d)(2)(ii), a chapter 4 reportable amount does not include an 
amount paid to a U.S. person if the withholding agent treats such U.S. 
person as a payee for purposes of determining whether withholding is 
required under Sec. Sec.  1.1471-2 and 1.1472-1. A chapter 4 reportable 
amount does, however, include an amount paid to a participating FFI or 
registered deemed-compliant FFI to the extent allocable to its reporting 
pool of payees that are U.S. persons as described in paragraph 
(d)(4)(i)(B) of this section.
    (iii) Coordination with chapter 3. A payment that is not subject to 
reporting under this paragraph (d)(2) may be subject to chapter 3 
reporting on Form 1042-S to the extent provided on such form and its 
accompanying instructions or under Sec.  1.1461-1(c)(2). The recipient 
information and other information required to be reported on Form 1042-S 
for purposes of chapter 4 shall be in addition to the information 
required to be provided on Form 1042-S for purposes of chapter 3.
    (3) Required information. The information required to be furnished 
under this paragraph (d)(3) shall be based upon the information provided 
by or on behalf of the recipient of an amount subject to reporting (as 
corrected and supplemented based on the withholding agent's actual 
knowledge) or the presumption rules provided under Sec.  1.1471-3(f) for 
a U.S. withholding agent and under Sec.  1.1471-4(c)(3)(ii) and 
(c)(4)(i) for a participating FFI. The Form 1042-S must include the 
following information, if applicable--
    (i) The name, address, and EIN or GIIN (as applicable) of the 
withholding agent (as required on the instructions to the form) and the 
withholding agent's status for chapter 3 and chapter 4 purposes (as 
defined in the instructions to the form);
    (ii) A description of each category of income or payment made based 
on the income and payment codes provided on

[[Page 546]]

the form (for example, interest, dividends, and gross proceeds) and the 
aggregate amount in each category expressed in U.S. dollars;
    (iii) The rate and amount of withholding applied or, in the case of 
a payment of U.S. source FDAP income not subject to withholding and 
reportable under paragraph (d)(2)(i)(A) of this section, the basis for 
exempting the payment from withholding under chapter 4 based on 
exemption codes provided on the form);
    (iv) The name and address of the recipient and its TIN or GIIN (as 
applicable) and foreign taxpayer identification number and date of birth 
(as required on the instructions to the form);
    (v) In the case of a payment to a person (including a flow-through 
entity or U.S. branch) for which the payment is reported as effectively 
connected with its conduct of a trade or business in the United States 
or, in the case of a U.S. branch that is treated as a U.S. person, the 
EIN used by the person or U.S. branch to file its U.S. income tax 
returns;
    (vi) The name, address of any FFI, flow-through entity that is an 
NFFE, or U.S. branch or territory financial institution that is not 
treated as a U.S. person when an account holder or owner of such entity 
(including an unknown recipient or owner) is treated as the recipient of 
the payment;
    (vii) The EIN or GIIN (as applicable), status for chapter 3 and 
chapter 4 purposes (as required on the instructions to the form) of an 
entity reported under paragraph (d)(3)(vi) of this section;
    (viii) The country of incorporation or organization (based on the 
country codes provided on the form) of any entity the name of which 
appears on the form; and
    (ix) Such information as the form or instructions may require in 
addition to, or in lieu of, information required under this paragraph 
(d)(3).
    (4) Method of reporting--(i) Payments by U.S. withholding agent to 
recipients. Except as otherwise provided in this paragraph (d)(4) or on 
the Form 1042-S and its accompanying instructions, a withholding agent 
that is a U.S. person (including a U.S. branch that is treated as a U.S. 
person and excluding a foreign branch of a U.S. person that is a QI) and 
that makes a payment of a chapter 4 reportable amount must file a 
separate form for each recipient that receives such amount. Except as 
otherwise provided on Form 1042-S or its instructions, only payments for 
which the income or payment code, exemption code, withholding rate, and 
recipient code are the same may be reported on a single form filed with 
the IRS. See paragraph (d)(4)(ii) of this section for reporting of 
payments made to a person that is not a recipient and that is otherwise 
required to be reported on Form 1042-S.
    (A) Payments to certain entities that are beneficial owners. If the 
beneficial owner of a payment made by a U.S. withholding agent is an 
exempt beneficial owner, an FFI, an NFFE, or a territory entity, it must 
complete Form 1042-S treating such entity as the recipient of the 
payment.
    (B) Payments to participating FFIs, deemed-compliant FFIs, and 
certain QIs. Except as otherwise provided in this paragraph 
(d)(4)(i)(B), a U.S. withholding agent that makes a payment of a chapter 
4 reportable amount to a participating FFI or deemed-compliant FFI that 
is an NQI, NWP, or NWT must complete a Form 1042-S treating such FFI as 
the recipient. With respect to a payment of U.S. source FDAP income made 
to a participating FFI or registered deemed-compliant FFI that is an 
NQI, NWP, or NWT or QI that elects to be withheld upon under section 
1471(b)(3) and from whom the withholding agent receives an FFI 
withholding statement allocating the payment (or portion of the payment) 
to a chapter 4 withholding rate pool, a U.S. withholding agent must 
complete a separate Form 1042-S issued to the participating FFI, 
registered deemed-compliant FFI, or QI (as applicable) as the recipient 
with respect to each such pool identified on an FFI withholding 
statement, described in Sec.  1.1471-3(c)(3)(iii)(B)(2). If, however, a 
participating FFI, deemed-compliant FFI, or QI (as applicable) has made 
an election under Sec.  1.1471-4(b)(3)(iii), for the portion of the 
payment that the FFI allocates to each recalcitrant account holder that 
is subject to backup withholding under section 3406, the withholding

[[Page 547]]

agent must report on Form 1099 the amount of the payment and tax 
withheld in accordance with the form's requirements and accompanying 
instructions. See Sec.  1.1471-2(a)(2)(i) for the requirement of a 
withholding agent to withhold on payments of U.S. source FDAP income 
made to a participating FFI or registered deemed-compliant FFI that is 
an NQI, NWP, or NWT. See also Sec.  1.1471-2(a)(2)(iii) in the case of 
payments made to a QI. See Sec.  1.1461-1(c)(4)(A) for the extent to 
which reporting is required under that section for U.S. source FDAP 
income that is reportable on Form 1042-S under chapter 3 and not subject 
to withholding under chapter 4, in which case the U.S. withholding agent 
must report in the manner described under Sec.  1.1461-1(c)(4)(ii) and 
paragraph (d)(4)(ii)(A) of this section. See paragraph (d)(4)(ii)(A) of 
this section for reporting rules applicable if participating FFIs or 
deemed-compliant FFIs provide specific payee information for reporting 
to the recipient of the payment for Form 1042-S reporting purposes. See 
paragraph (d)(4)(iii) of this section for the residual reporting 
responsibilities of an NQI, NWP, or NWT that is an FFI.
    (C) Amounts paid to a U.S. branch. A U.S. withholding agent making a 
payment of U.S. source FDAP income to a U.S. branch shall complete Form 
1042-S as follows--
    (1) If the U.S. branch is treated as a U.S. person, if the 
withholding agent treats amounts paid as effectively connected with the 
conduct of the branch's trade or business in the United States, or if 
the U.S. branch is the beneficial owner of the payment, the withholding 
agent must file Form 1042-S reporting the U.S. branch as the recipient;
    (2) If the U.S. branch of an FFI is not treated as a U.S. person and 
applies the rules described in Sec.  1.1471-4(d)(2)(iii)(C) and provides 
the withholding agent with a withholding certificate that transmits 
information regarding its reporting pools referenced in paragraph 
(d)(4)(i)(B) of this section or information regarding each recipient 
that is an account holder or payee of the U.S. branch, the withholding 
agent must complete a separate Form 1042-S issued to the U.S. branch for 
each such pool to the extent required on the form and its accompanying 
instructions or must complete a separate Form 1042-S issued to each 
recipient whose documentation is associated with the U.S. branch's 
withholding certificate as described in paragraph (d)(4)(ii)(A) of this 
section and report the U.S. branch as an entity not treated as a 
recipient; or
    (3) If the U.S. branch of an FFI is not treated as a U.S. person and 
applies the rules described in Sec.  1.1471-4(d)(2)(iii)(C) to the 
extent it fails to provide sufficient information regarding its account 
holders or payees, the withholding agent shall report the recipient of 
the payment as an unknown recipient to the extent recipient information 
is not provided and report the U.S. branch as provided in paragraph 
(d)(4)(ii)(A) of this section for an entity not treated as a recipient.
    (D) Amounts paid to territory financial institutions that are flow-
through entities or acting as intermediaries. A U.S. withholding agent 
making a withholdable payment to a territory financial institution that 
is a flow-through entity or that acts as an intermediary must complete 
Form 1042-S as follows--
    (1) If the territory financial institution is treated as a U.S. 
person or is the beneficial owner of the payment, the withholding agent 
must file Form 1042-S treating the territory financial institution as 
the recipient;
    (2) If the territory financial institution is not treated as a U.S. 
person and provides the withholding agent with a withholding certificate 
that transmits information regarding each recipient that is an partner, 
beneficiary, owner, account holder, or payee, the withholding agent must 
complete a separate Form 1042-S for each recipient whose documentation 
is associated with the territory financial institution's withholding 
certificate as described in paragraph (d)(4)(ii)(A) of this section and 
must report the territory financial institution under that paragraph; or
    (3) If the territory financial institution is not treated as a U.S. 
person, to the extent its fails to provide sufficient information 
regarding its partners, beneficiaries, owners, account holders or 
payees, the withholding agent shall report the recipient of the payment 
as an unknown recipient and report the

[[Page 548]]

territory financial institution as provided in paragraph (d)(4)(ii)(A) 
of this section for an entity not treated as a recipient.
    (E) Amounts paid to NFFEs. A U.S. withholding agent that makes 
payments of chapter 4 reportable amounts to an excepted or passive NFFE 
shall complete Forms 1042-S treating the NFFE as the recipient, except 
when the NFFE is a flow-through entity or acting as an intermediary and 
the partner or beneficiary is treated as the payee. In cases in which 
the chapter 4 reportable amount is also an amount of U.S. source FDAP 
income reportable on Form 1042-S (described in Sec.  1.1441-2(a)), see 
also Sec.  1.1461-1(c)(4)(ii)(A) for the extent to which reporting is 
required with respect to the partners, beneficiaries, or owners of such 
entities.
    (ii) Payments made by withholding agents to certain entities that 
are not recipients--(A) Entities that provide information for a 
withholding agent to perform specific payee reporting. If a U.S. 
withholding agent makes a payment of a chapter 4 reportable amount to a 
flow-through entity that is a passive NFFE, a nonparticipating FFI 
receiving a payment on behalf of an exempt beneficial owner, or a 
participating FFI or deemed-compliant FFI that is an NQI, NWP, or NWT, 
except as otherwise provided in paragraph (d)(4)(i)(B) of this section, 
the withholding agent must complete a separate Form 1042-S for each 
recipient that is a partner, beneficiary, owner, or account holder of 
such entity to the extent the withholding agent can reliably associate 
the payment with valid documentation (under the rules of Sec.  1.1471-
3(c) and (d)) provided by such entity, as applicable, with respect to 
each such recipient. If a payment is made through tiers of such 
entities, the withholding agent must nevertheless complete Form 1042-S 
for the recipient to the extent it can reliably associate the payment 
with documentation provided with respect to that recipient. A 
withholding agent that is completing a Form 1042-S for a recipient 
described in this paragraph (d)(4)(ii)(A) must include on the form the 
information described in paragraph (d)(3)(vii) of this section for the 
entity through which the recipient directly receives the payment.
    (B) Nonparticipating FFI that is a flow-through entity or 
intermediary. If a withholding agent makes a payment of a chapter 4 
reportable amount to a nonparticipating FFI that it is required to treat 
as an intermediary with regard to a payment or as a flow-through entity 
under rules described in Sec.  1.1471-3(c)(3)(iii), and except as 
otherwise provided in paragraph (d)(1)(ii)(A)(1)(x) of this section 
(relating to an exempt beneficial owner), the withholding agent must 
report the recipient of the payment as an unknown recipient and report 
the nonparticipating FFI as provided in paragraph (d)(4)(ii)(A) of this 
section for an entity not treated as a recipient.
    (C) Disregarded entities. If a U.S. withholding agent makes a 
payment to a disregarded entity and receives a valid withholding 
certificate or other documentary evidence from the person that is the 
single owner of such disregarded entity, the withholding agent must file 
a Form 1042-S treating the single owner as the recipient in accordance 
with the instructions to the Form 1042-S.
    (iii) Reporting by participating FFIs and deemed-compliant FFIs 
(including QIs, WPs, and WTs) and U.S. branches of FFIs not treated as 
U.S. persons--(A) In general. Except as otherwise provided in paragraph 
(d)(4)(iii)(B) (relating to NQIs, NWPs, NWTs, and FFIs electing under 
section 1471(b)(3)) and Sec.  1.1471-4(d)(2)(ii)(F) (relating to 
transitional payee-specific reporting for payments to nonparticipating 
FFIs), a participating FFI or deemed-compliant FFI (including a QI, WP, 
or WT), and a U.S. branch of an FFI that is not treated as a U.S. person 
that applies the rules described in Sec.  1.1471-4(d)(2)(iii)(C) that 
makes a payment that is a chapter 4 reportable amount to a recalcitrant 
account holder or nonparticipating FFI must complete a Form 1042-S to 
report such payments. A participating FFI or registered deemed-compliant 
FFI (including a QI, WP, or WT), and a U.S. branch of an FFI that is not 
treated as a U.S. person that applies the rules described in Sec.  
1.1471-4(d)(2)(iii)(C) may report in pools consisting of its 
recalcitrant account holders and payees that are nonparticipating FFIs. 
With respect to recalcitrant account holders,

[[Page 549]]

the FFI may report in pools consisting of recalcitrant account holders 
within a particular status described in Sec.  1.1471-4(d)(6) and within 
a particular income code. Except as otherwise provided in Sec.  1.1471-
4(d)(2)(ii)(F), with respect to payees that are nonparticipating FFIs, 
the FFI may report in pools consisting of one or more nonparticipating 
FFIs that fall within a particular income code and within a particular 
status code described in the instructions to Form 1042-S. Alternatively, 
a participating FFI or registered deemed-compliant FFI (including a QI, 
WP, or WT) and a U.S. branch of an FFI that is not treated as a U.S. 
person that applies the rules described in Sec.  1.1471-4(d)(2)(iii)(C) 
may (and a certified deemed-compliant FFI is required to) perform payee-
specific reporting to report a chapter 4 reportable amount paid to a 
recalcitrant account holder or a nonparticipating FFI when withholding 
was applied (or should have applied) to the payment.
    (B) Special reporting requirements of participating FFIs, deemed-
compliant FFIs, FFIs that make an election under section 1471(b)(3), and 
U.S. branches of FFIs not treated as U.S. persons. Except as otherwise 
provided in Sec.  1.1471-4(d)(2)(ii)(F), a participating FFI or deemed-
compliant FFI that is an NQI, NWP, or NWT, and a U.S. branch of an FFI 
that is not treated as a U.S. person that applies the rules described in 
Sec.  1.1471-4(d)(2)(iii)(C) or an FFI that has made an election under 
section 1471(b)(3) and has provided sufficient information to its 
withholding agent to withhold and report the payment is not required to 
report the payment on Form 1042-S as described in paragraph 
(d)(4)(iii)(A) of this section if the payment is made to a 
nonparticipating FFI or recalcitrant account holder and its withholding 
agent has withheld the correct amount of tax on such payment and 
correctly reported the payment on a Form 1042-S. Such FFI or branch is 
required to report a payment, however, when the FFI knows, or has reason 
to know, that less than the required amount has been withheld by the 
withholding agent on the payment or the withholding agent has not 
correctly reported the payment on Form 1042-S. In such case, the FFI or 
branch must report on Form 1042-S to the extent required under paragraph 
(d)(4)(iii)(A) of this section. See, however, Sec.  1.1471-4(d)(6) for 
the requirement to report certain aggregate information regarding 
accounts held by recalcitrant account holders on Form 8966, ``FATCA 
Report,'' regardless of whether withholdable payments are made to such 
accounts.
    (C) Reporting by a U.S. branch treated as a U.S. person. A U.S. 
branch treated as a U.S. person (as defined in Sec.  1.1471-1(b)(135)) 
must report amounts paid to recipients on Forms 1042-S in the same 
manner as a U.S. withholding agent under paragraph (d)(4)(i) of this 
section.
    (iv) Reporting by territory financial institutions. A territory 
financial institution that is not treated as a U.S. person will not be 
required to report on Form 1042-S if another withholding agent has 
reported the same amount with regard to the same recipient for which 
such entity would otherwise be required to file a return under this 
paragraph (d)(4)(iv) and such withholding agent has withheld the entire 
amount required to be withheld from such payment. A territory financial 
institution must, however, report payments made to recipients for whom 
it has failed to provide the appropriate documentation to another 
withholding agent or to the extent it knows, or has reason to know, that 
less than the required amount has been withheld. A territory financial 
institution that is treated as a U.S. person or is otherwise required 
under this paragraph (d)(4)(iv) to report amounts paid to recipients on 
Forms 1042-S must report in the same manner as a U.S. withholding agent.
    (v) Nonparticipating FFIs. A nonparticipating FFI that is a flow-
through entity or that acts as an intermediary with respect to a payment 
may file Forms 1042 and 1042-S only to report and allocate tax withheld 
to the account holders, partners, owners, or beneficiaries of the 
nonparticipating FFI.
    (vi) Other withholding agents. Any person that is a withholding 
agent that is not described in any of paragraphs (d)(4)(i) through (v) 
of this section shall file Forms 1042-S in the same manner

[[Page 550]]

as a U.S. withholding agent and in accordance with the instructions to 
the form.
    (vii) Combined Form 1042-S reporting. A withholding agent required 
to report on Form 1042-S under paragraph (d)(4) of this section (other 
than a nonparticipating FFI reporting under paragraph (d)(4)(v) of this 
section) may rely on the procedures used for chapter 3 purposes 
(provided in published guidance) for reporting on Form 1042-S (even if 
the withholding agent is not required to report under chapter 3) for 
combined reporting following a merger or acquisition, provided that all 
of the requirements for such reporting provided in the Instructions for 
Form 1042-S are satisfied.
    (e) Reporting in electronic form. See Sec. Sec.  301.6011-2(b) and 
301.6011-15 of this chapter, which apply for purposes of this section, 
for the requirements of a withholding agent that is not a financial 
institution with respect to the filing of Forms 1042-S and Form 1042 in 
electronic form. See Sec.  301.1474-1(a) of this chapter for the 
requirements applicable to a withholding agent that is a financial 
institution with respect to the filing of Forms 1042 and 1042-S in 
electronic form.
    (f) Indemnification of withholding agent. A withholding agent is 
indemnified against the claims and demands of any person for the amount 
of any tax it deducts and withholds in accordance with the provisions of 
chapter 4 and the regulations thereunder. A withholding agent that 
withholds based on a reasonable belief that such withholding is required 
under chapter 4 and the regulations thereunder is treated for purposes 
of section 1474 and this paragraph (f) as having withheld tax in 
accordance with the provisions of chapter 4 and the regulations 
thereunder. This paragraph (f) does not relieve a withholding agent from 
tax liability under chapter 3 or chapter 4 or the regulations under 
those chapters.
    (g) Extensions of time to file Forms 1042 and 1042-S. The IRS may 
grant an extension of time to file Form 1042 or 1042-S as described in 
Sec.  1.1461-1(g).
    (h) Penalties. For penalties and additions to tax for failure to 
file returns or file and furnish statements in accordance with this 
section, see sections 6651, 6662, 6663, 6721, 6722, 6723, 6724(c), 7201, 
7203, and the regulations under those sections. For penalties and 
additions to tax for failure to timely pay the tax required to be 
withheld under chapter 4, see sections 6656, 6672, 7202, and the 
regulations under those sections.
    (i) Additional reporting requirements with respect to U.S. owned 
foreign entities and owner-documented FFIs--(1) Reporting by certain 
withholding agents with respect to owner-documented FFIs--(i) Beginning 
on July 1, 2014, if a withholding agent (other than an FFI reporting 
accounts held by owner-documented FFIs under Sec.  1.1471-4(d)) makes a 
withholdable payment to an entity account holder or payee of an 
obligation and the withholding agent treats the entity as an owner-
documented FFI under Sec.  1.1471-3(d)(6), the withholding agent is 
required to report for July 1 through December 31, 2014, with respect to 
each specified U.S. person identified in Sec.  1.1471-3(d)(6)(iv)(A)(1) 
and (2) the information described in paragraph (i)(1)(iii) of this 
section.
    (ii) Beginning in calendar year 2015, if a withholding agent (other 
than an FFI reporting accounts held by owner-documented FFIs under Sec.  
1.1471-4(d)) makes during a calendar year a withholdable payment to an 
entity account holder or payee of an obligation and the withholding 
agent treats the entity as an owner-documented FFI under Sec.  1.1471-
3(d)(6), the withholding agent is required to report for such calendar 
year with respect to each specified U.S. person identified in Sec.  
1.1471-3(d)(6)(iv)(A)(1) and (2) the information described in paragraph 
(i)(1)(iii) of this section.
    (iii) The information that a withholding agent (other than an FFI 
reporting accounts held by owner-documented FFIs under Sec.  1.1471-
4(d)) is required to report under paragraphs (i)(1)(i) and (ii) of this 
section must be made on Form 8966 (or such other form as the IRS may 
prescribe) and filed on or before March 31 of the calendar year 
following the year in which the withholdable payment was made. A 
withholding agent is not required to report under paragraph (i)(1)(i) or 
(ii) of this section on a withholdable payment made to a participating 
FFI or reporting Model 1 FFI that is allocated to a

[[Page 551]]

payee that is an owner-documented FFI on an FFI withholding statement 
when the participating FFI or reporting Model 1 FFI includes on the 
statement the certification described in Sec.  1.1471-
3(c)(3)(iii)(B)(2)(v), provided that the withholding agent does not know 
or have reason to know that the certification is incorrect or 
unreliable. The report must contain the following information--
    (A) The name of the owner-documented FFI;
    (B) The name, address, and TIN of each specified U.S. person 
identified in Sec.  1.1471-3(d)(6)(iv)(A)(1) and (2);
    (C) For the period from July 1 through December 31, 2014, the total 
of all withholdable payments made to the owner-documented FFI, and with 
respect to payments made after the 2014 calendar year, the total of all 
withholdable payments made to the owner-documented FFI during the 
calendar year;
    (D) The account balance or value of the account held by the owner-
documented FFI; and
    (E) Any other information required on Form 8966 and its accompanying 
instructions provided for purposes of such reporting. iii) through 
(i)(1)(iii)(E).
    (2) Reporting by certain withholding agents with respect to U.S. 
owned foreign entities that are passive NFFEs. Beginning on July 1, 
2014, in addition to the reporting on Form 1042-S required under 
paragraph (d)(4)(i)(E) of this section, a withholding agent (other than 
an FFI reporting accounts held by NFFEs under Sec.  1.1471-4(d)) that 
makes a withholdable payment to, and receives information about any 
substantial U.S. owners of, a passive NFFE that is not an excepted NFFE 
as defined in Sec.  1.1472-1(c) shall file a report with the IRS for the 
period from July 1 through December 31, 2014, and in each subsequent 
calendar year in which a withholdable payment is made with respect to 
any substantial U.S. owners of such NFFE. Such report must be made on 
Form 8966 (or such other form as the IRS may prescribe) and filed on or 
before March 31 of the calendar year following the year in which the 
withholdable payment was made. A withholding agent is not required to 
report under this paragraph (i)(2) on a withholdable payment made to a 
participating FFI or a registered deemed-compliant FFI that is allocated 
to a payee that is a passive NFFE with one or more substantial U.S. 
owners on an FFI withholding statement when the participating FFI or 
registered deemed-compliant FFI includes on the statement the 
certification described in Sec.  1.1471-3(c)(3)(iii)(B)(2)(iv), provided 
that the withholding agent does not know or have reason to know that the 
certification is incorrect or unreliable. In the case of an entity to 
which the preceding sentence does not apply that is a flow-through 
entity or is acting as an intermediary receiving a withholdable payment 
allocable to a passive NFFE with one or more substantial U.S. owners, 
the entity is not required to report with respect to the passive NFFE 
under this paragraph (i)(2) if it provides to the withholding agent from 
which it receives the payment documentation sufficient for the 
withholding agent to report information with respect to the passive NFFE 
under this paragraph (i)(2), provided that the intermediary or flow-
through entity does not know or have reason to know that the withholding 
agent does not report with respect to the passive NFFE under this 
paragraph (i)(2). The report must contain the following information--
    (i) Name of the NFFE that is owned by a substantial U.S. owner;
    (ii) The name, address, and TIN of each substantial U.S. owner of 
such NFFE;
    (iii) For the period from July 1, 2014 through December 31, 2014, 
the total of all withholdable payments made to the NFFE and, with 
respect to payments made after the 2014 calendar year, the total of all 
withholdable payments made to the NFFE during the calendar year; and
    (iv) Any other information as required by the form and its 
accompanying instructions.
    (3) Cross reference to reporting by participating FFIs. For the 
reporting requirements of a participating FFI with respect to an account 
holder that is a U.S. owned foreign entity or that it treats as an 
owner-documented FFI, see Sec.  1.1471-4(d).

[[Page 552]]

    (4) Extensions of time to file. The IRS shall grant an automatic 90-
day extension of time in which to file Form 8966 as required under 
paragraph (i)(1) or (i)(2) of this section. Form 8809-I, ``Application 
of Extension of Time to File FATCA Form 8966,'' (or such other form as 
the IRS may prescribe) must be used to request such extension of time 
and must be filed no later than the due date of Form 8966. Under certain 
hardship conditions, the IRS may grant an additional 90-day extension. A 
request for extension due to hardship must contain a statement of the 
reasons for requesting the extension and such other information as the 
form or instructions may require.
    (j) Applicability date. The rules of this section apply to returns 
required to be filed for taxable years ending on or after December 31, 
2023. (For returns required to be filed for taxable years ending before 
December 31, 2023, see this section as in effect and contained in 26 CFR 
part 1, as revised April 1, 2022.)

[T.D. 9610, 78 FR 5985, Jan. 28, 2013; 78 FR 55208, Sept. 10, 2013, as 
amended by T.D. 9657, 79 FR 12862, Mar. 6, 2014; T.D. 9809, 82 FR 2188, 
Jan. 6, 2017; 82 FR 29729, June 30, 2017; T.D. 9890, 85 FR 206, Jan. 2, 
2020; T.D. 9972, 88 FR 11763, Feb. 23, 2023]



Sec.  1.1474-2  Adjustments for overwithholding or underwithholding 
of tax.

    (a) Adjustments of overwithheld tax--(1) In general. Except as 
otherwise provided by this section, a withholding agent that has 
overwithheld tax under chapter 4 and made a deposit of the tax as 
provided in Sec.  1.6302-2(a) may adjust the amount of overwithheld tax 
either pursuant to the reimbursement procedure described in paragraph 
(a)(3) of this section or pursuant to the set-off procedure described in 
paragraph (a)(4) of this section. Adjustments under this paragraph (a) 
may only be made within the time prescribed under paragraph (a)(3) or 
(a)(4) of this section. After such time, a refund of the amount of 
overwithheld tax can only be claimed pursuant to the procedures 
described in Sec.  1.1474-5 and chapter 65 of the Code and the 
regulations thereunder.
    (2) Overwithholding. For purposes of this section, the term 
overwithholding means an amount actually withheld (determined before 
application of the adjustment procedures under this section and 
regardless of whether such overwithholding was in error or appeared 
correct at the time it occurred) from an item of income or other payment 
pursuant to chapter 4 that is in excess of the greater of--
    (i) The amount required to be withheld with respect to such item of 
income or other payment under chapter 4; and
    (ii) The actual tax liability of the beneficial owner that is 
attributable to the income or payment from which the amount was 
withheld.
    (3) Reimbursement of tax--(i) General rule. Under the reimbursement 
procedure, the withholding agent may repay the beneficial owner or payee 
for an amount of overwithheld tax. In such case, the withholding agent 
may reimburse itself by reducing, by the amount actually repaid to the 
beneficial owner or payee, the amount of any deposit of tax made by the 
withholding agent under Sec.  1.6302-2(a)(1)(iii) for any subsequent 
payment period occurring before the end of the calendar year following 
the calendar year of overwithholding. A withholding agent must obtain 
valid documentation as described under Sec.  1.1471-3(c)(6) with respect 
to the beneficial owner or payee supporting a reduced rate of 
withholding before reducing the amount of any deposit of tax under this 
paragraph (a)(3)(i). Any such reduction that occurs for a payment period 
in the calendar year following the calendar year of overwithholding 
shall be allowed only if--
    (A) The repayment of the beneficial owner or payee occurs before the 
earlier of the due date (without regard to extensions) for filing the 
Form 1042-S for the calendar year of overwithholding or the date that 
the Form 1042-S is actually filed with the IRS;
    (B) The withholding agent states on a timely filed (not including 
extensions) Form 1042-S the amount of tax withheld and the amount of any 
actual repayment; and
    (C) The withholding agent states on a timely filed (not including 
extensions) Form 1042 for the calendar year of overwithholding that the 
filing of the Form 1042 constitutes a claim for credit in accordance 
with Sec.  1.6414-1.

[[Page 553]]

    (ii) Record maintenance. If the beneficial owner or payee is repaid 
an amount of overwithheld tax under the provisions of this paragraph 
(a)(3), the withholding agent shall keep as part of its records a 
receipt showing the date and amount of repayment, and the withholding 
agent must provide a copy of such receipt to the beneficial owner or 
payee. For this purpose, a canceled check or an entry in a statement is 
sufficient, provided that the check or statement contains a specific 
notation that it is a refund of tax overwithheld.
    (4) Set-offs. Under the set-off procedure, the withholding agent may 
repay the beneficial owner or payee for an amount of overwithheld tax by 
applying the amount overwithheld against any amount which otherwise 
would be required under chapter 3 or 4 to be withheld from the amount 
paid by the withholding agent to such person before the earlier of the 
due date (without regard to extensions) for filing the Form 1042-S for 
the calendar year of overwithholding or the date that the Form 1042-S is 
actually filed with the IRS. For purposes of making a return on Form 
1042 or 1042-S (or an amended form) for the calendar year of 
overwithholding and for purposes of making a deposit of the amount 
withheld, the reduced amount shall be considered the amount required to 
be withheld from such payment under chapter 3 or 4, respectively.
    (5) Examples. The principles of this paragraph (a) are illustrated 
by the following examples:

    Example 1. (i) Fund A is a unit investment trust that is an FFI and 
a resident of Country X. Fund A also qualifies for the benefits of the 
income tax treaty between the United States and Country X. On December 
1, 2016, domestic corporation C pays a dividend of $100 to Fund A, at 
which time C withholds $30 of tax pursuant to Sec.  1.1471-2(a) and 
remits the balance of $70 to Fund A, because it does not hold valid 
documentation that Fund A is a participating FFI or deemed-compliant 
FFI. On February 10, 2017, prior to the time that C is obligated to file 
its Form 1042, Fund A furnishes a valid Form W-8BEN described in 
Sec. Sec.  1.1441-1(e)(2)(i) and 1.1471-3(c)(3)(ii) upon which C may 
rely to treat Fund A as the beneficial owner of the income and as a 
participating FFI so that C may reduce the rate of withholding to 15% 
under the provisions of the United States-Country X income tax treaty 
with respect to the payment. C repays the excess tax withheld of $15 to 
Fund A.
    (ii) During the 2016 calendar year, C makes no other payments upon 
which tax is required to be withheld under chapter 3 or 4; accordingly, 
its Form 1042 for such year, filed on March 15, 2017, shows total tax 
withheld of $30, an adjusted total tax withheld of $15, and tax 
deposited of $30 for such year. Pursuant to Sec.  1.6414-1, C claims a 
credit for the overpayment of $15 shown on the Form 1042 for 2016. 
Accordingly, C is permitted to reduce by $15 any deposit required by 
Sec.  1.6302-2 to be made of tax withheld during the 2017 calendar year 
with respect to taxes due under chapter 3 or 4. The Form 1042-S required 
to be filed by C with respect to the dividend of $100 paid to Fund A in 
2016 is required to show tax withheld of $30 and tax repaid of $15 to 
Fund A.
    Example 2. (i) In November 2016, Bank A, a foreign bank organized in 
Country X that is an NQI, receives on behalf of one of its account 
holders, Z, an individual, a $100 dividend payment from C, a domestic 
corporation. At the time of payment, C withholds $30 pursuant to Sec.  
1.1471-2(a) and remits the balance of $70 to Bank A, because it does not 
hold valid documentation that it may rely on to treat Bank A as a 
participating FFI or deemed-compliant FFI. In December 2016, prior to 
the time that C files its Forms 1042 and 1042-S, Bank A furnishes a 
valid Form W-8IMY and FFI withholding statement described in Sec.  
1.1471-3(c)(3)(iii) that establishes Bank A's status as a participating 
FFI that is an NQI, as well as a valid Form W-8BEN that has been 
completed by Z as described in Sec.  1.1471-3(c)(3)(ii) and Sec.  
1.1441-1(e)(2)(i) upon which C may rely to treat the payment as made to 
Z, a nonresident alien individual who is a resident of Country X 
eligible for a reduced rate of withholding of 15% under the income tax 
treaty between the United States and Country X. Although C has already 
deposited the $30 that was withheld, as required by Sec.  1.6302-
2(a)(1)(iv), C remits the amount of $15 to Bank A for the benefit of Z.
    (ii) During the 2016 calendar year, C makes no other payments upon 
which tax is required to be withheld under chapter 3 or 4; accordingly, 
its return on Form 1042 for such year, which is filed on March 15, 2017, 
shows total tax withheld of $30, an adjusted total tax withheld of $15, 
and tax deposited of $30. Pursuant to Sec.  1.6414-1(b), C claims a 
credit for the overpayment of $15 shown on the Form 1042 for 2014. 
Accordingly, it is permitted to reduce by $15 any deposit required by 
Sec.  1.6302-2 to be made of tax withheld during the 2017 calendar year. 
The Form 1042-S required to be filed by C for 2016 with respect to the 
dividend of $100 beneficially owned by Z is required to show tax 
withheld of $30 and tax repaid of $15 to Z.


[[Page 554]]


    (b) Withholding of additional tax when underwithholding occurs. A 
withholding agent that has underwithheld under chapter 4 may apply the 
procedures described in Sec.  1.1461-2(b) (by substituting the term 
``chapter 4'' for ``chapter 3'') to satisfy its withholding obligations 
under chapter 4 with respect to a payee or beneficial owner.
    (c) Effective/applicability date. This section applies January 28, 
2013.

[T.D. 9610, 78 FR 5991, Jan. 28, 2013]



Sec.  1.1474-3  Withheld tax as credit to beneficial owner of income.

    (a) Creditable tax. The entire amount of the income, if any, 
attributable to a payment from which tax is required to be withheld 
under chapter 4 (including income deemed paid by a withholding agent 
under Sec.  1.1473-1(a)(2)(v)) shall be included in gross income in a 
return required to be made by the beneficial owner of the income, 
without deduction for the amount required to be or actually withheld, 
but the amount of tax actually withheld shall be allowed as a credit 
against the total income tax computed in the beneficial owner's return.
    (b) Amounts paid to persons that are not the beneficial owners. 
Amounts actually deducted and withheld under chapter 4 on payments made 
to a fiduciary, agent, partnership, trust, or intermediary are deemed to 
have been paid by the beneficial owner of the item of income or other 
payment subject to withholding under chapter 4, except when the 
fiduciary, agent, partnership, trust, or intermediary pays the tax from 
its own funds and does not in turn withhold with respect to the payment 
made to such person. Thus, for example, if a beneficiary of a trust is 
subject to the taxes imposed by section 1, 2, 3, or 11 upon any amount 
of distributable net income or other taxable distribution received from 
a foreign trust, the part of any amount withheld at source under chapter 
4 that is properly allocable to the income so taxed to such beneficiary 
shall be credited against the amount of the income tax computed upon the 
beneficiary's return, and any excess shall be refunded to the 
beneficiary in accordance with Sec.  1.1474-5 and chapter 65 of the 
Code.
    (c) Effective/applicability date. This section applies January 28, 
2013.

[T.D. 9610, 78 FR 5992, Jan. 28, 2013]



Sec.  1.1474-4  Tax paid only once.

    (a) Tax paid. If the tax required to be withheld under chapter 4 on 
a payment is paid by the payee, beneficial owner, or the withholding 
agent, it shall not be re-collected from any other, regardless of the 
original liability therefor. However, this section does not relieve a 
person that was required to, but did not, withhold tax from liability 
for interest or any penalties or additions to tax otherwise applicable.
    (b) Effective/applicability date. This section applies January 28, 
2013.

[T.D. 9610, 78 FR 5992, Jan. 28, 2013]



Sec.  1.1474-5  Refunds or credits.

    (a) Refund and credit--(1) In general. Except to the extent 
otherwise provided in this section, a refund or credit of tax which has 
actually been withheld at the source at the time of payment under 
chapter 4 shall be made to the beneficial owner of the payment to which 
the amount of withheld tax is attributable if the beneficial owner or 
payee meets the requirements of this paragraph (a) and any other 
requirements that may be required under chapter 65. To the extent that 
the amount withheld under chapter 4 is not actually withheld at source, 
but is later paid by the withholding agent to the IRS, the refund or 
credit under chapter 65 of the Code shall be made to the withholding 
agent to the extent the withholding agent provides documentation with 
respect to the beneficial owner or payee described in paragraphs (a)(2) 
and (3) of this section sufficient for the beneficial owner or payee to 
have obtained a refund of the tax and sufficient for the withholding 
agent to have applied a reduced rate or exemption from withholding under 
chapter 4. The preceding sentence shall not, however, apply to a 
nonparticipating FFI that is acting as a withholding agent with respect 
to one or more of its account holders. In such a case, only the account 
holders of the nonparticipating FFI will be entitled to a credit or 
refund of an amount withheld under chapter 4, to the extent

[[Page 555]]

otherwise allowable under this section. Additionally, there are 
collective refund procedures for a participating FFI or reporting Model 
1 FFI to claim a refund or credit on behalf of certain direct account 
holders that are beneficial owners of the payment under Sec.  1.1471-
4(h) (in lieu of such account holders claiming refund or credit under 
this paragraph (a)(1)).
    (2) Limitation to refund and credit for a nonparticipating FFI. 
Notwithstanding paragraph (a)(1) of this section, a nonparticipating FFI 
(determined as of the time of payment) that is the beneficial owner of 
an item of income or other payment that is subject to withholding under 
chapter 4 shall not be entitled to any credit or refund pursuant to 
section 1474(b)(2) and this section unless it is entitled to a reduced 
rate of tax with respect to the income or other payment by reason of any 
treaty obligation of the United States. If the nonparticipating FFI is 
entitled to a reduced rate of tax with respect to an item of income or 
other payment by reason of any treaty obligation of the United States, 
the amount of any credit or refund with respect to such tax shall not 
exceed the amount of credit or refund attributable to such reduction in 
rate on the item of income or other payment, and no interest otherwise 
allowable under section 6611 shall be allowed or paid with respect to 
such credit or refund.
    (3) Requirement to provide additional documentation for certain 
beneficial owners--(i) In general. Except as provided in paragraph 
(a)(3)(ii) of this section, no refund or credit shall be allowed under 
paragraph (a)(1) of this section to the beneficial owner of the income 
or other payment to which the amount of such withheld tax was 
attributable if such beneficial owner is an NFFE, unless the NFFE 
attaches to its income tax return the information described in paragraph 
(a)(3)(iii) of this section.
    (ii) Claim of reduced withholding under an income tax treaty. 
Paragraph (a)(3)(i) of this section does not apply to the extent that 
the beneficial owner is entitled to a reduced rate of tax with respect 
to the income or other payment by reason of any treaty obligation of the 
United States.
    (iii) Additional documentation to be furnished to the IRS for 
certain NFFEs. The information described in this paragraph (a)(3)(iii) 
is--
    (A) A certification that the beneficial owner does not have any 
substantial U.S. owners;
    (B) The form described in Sec.  1.1474-1(i)(2) relating to each 
substantial U.S. owner of such entity; or
    (C) Other appropriate documentation to establish withholding was not 
required under chapter 4.
    (b) Tax repaid to payee. For purposes of this section and Sec.  
1.6414-1, any amount of tax withheld under chapter 4, which, pursuant to 
Sec.  1.1474-2(a)(1), is repaid by the withholding agent to the 
beneficial owner of the income or payment to which the withheld amount 
is attributable shall be considered as tax which, within the meaning of 
sections 1474 and 6414, was not actually withheld by the withholding 
agent.
    (c) Effective/applicability date. This section applies January 28, 
2013.

[T.D. 9610, 78 FR 5992, Jan. 28, 2013]



Sec.  1.1474-6  Coordination of chapter 4 with other withholding provisions.

    (a) In general. This section coordinates the withholding 
requirements of a withholding agent when a withholdable payment or 
foreign passthru payment is subject to withholding under both chapter 4 
and another Code provision. See Sec.  1.1473-1(a) for the definition of 
withholdable payment and see Sec.  1.1471-5(h)(2) for the definition of 
foreign passthru payment.
    (b) Coordination of withholding for amounts subject to withholding 
under sections 1441, 1442, and 1443--(1) In general. In the case of a 
withholdable payment that is both subject to withholding under chapter 4 
and is an amount subject to withholding under Sec.  1.1441-2(a), a 
withholding agent may credit the withholding applied under chapter 4 
against its liability for any tax due under sections 1441, 1442, or 
1443. See Sec.  1.1474-1(c) and (d) for the income tax return and 
information return reporting requirements that apply in the case of a 
payment that is a withholdable payment subject to withholding under 
chapter 4 that is also an amount subject to withholding under Sec.  
1.1441-2(a).

[[Page 556]]

    (2) When withholding is applied. For purposes of paragraph (b)(1) of 
this section, withholding is applied by a withholding agent under 
section 1441 (or section 1442 or 1443) or chapter 4 (as applicable) when 
the withholding agent has withheld on the payment and has designated the 
withholding as having been made under section 1441 (or section 1442 or 
1443) or chapter 4 to the extent required in the reporting described in 
Sec.  1.1474-1(c) and (d). For purposes of allowing an offset of 
withholding and allowing a credit to a withholding agent against its 
liability for such tax as described in paragraph (b)(1) of this section, 
withholding is treated as applied for purposes of paragraph (a) of this 
section only when the withholding agent has actually withheld on a 
payment and has not made any adjustment for overwithheld tax applicable 
to the amount withheld that would otherwise be permitted with respect to 
the payment.
    (3) Special rule for certain substitute dividend payments. In the 
case of a dividend equivalent under section 871(m) paid pursuant to a 
securities lending transaction described in section 1058 (or a 
substantially similar transaction), or pursuant to a sale-repurchase 
transaction, a withholding agent may offset its obligation to withhold 
under chapter 4 for amounts withheld by another withholding agent under 
chapters 3 and 4 with respect to the same underlying security in such a 
transaction, but only to the extent that there is sufficient evidence as 
required under chapter 3 that tax was actually withheld on a prior 
dividend equivalent paid to the withholding agent or a prior withholding 
agent with respect to the same underlying security in such transaction.
    (c) Coordination with amounts subject to withholding under section 
1445--(1) In general. An amount subject to withholding under section 
1445 is not subject to withholding under chapter 4 as described in 
paragraphs (c)(2)(i) and (ii) of this section.
    (2) Determining the amount of the distribution from certain domestic 
corporations subject to section 1445 or chapter 4 withholding--(i) 
Distribution from qualified investment entity. In the case of a passthru 
payment (including a withholdable payment) subject to withholding under 
chapter 4 that is a distribution with respect to the stock of a 
qualified investment entity as described in section 897(h)(4)(A), 
withholding under chapter 4 does not apply when withholding under 
section 1445 applies to such amounts. With respect to the portion of 
such distribution that is not subject to withholding under section 1445 
but is subject to withholding under section 1441 (or section 1442 or 
1443) and chapter 4, the coordination rule described in paragraph (b)(1) 
of this section shall apply.
    (ii) Distribution from a United States real property holding 
corporation. A distribution (or portion of a distribution) from a United 
States real property holding corporation (or from a corporation that was 
a United States real property holding corporation at any time during the 
five-year period ending on the date of the distribution) with respect to 
its stock that is a United States real property interest under section 
897(c) is subject to withholding under chapter 4 and is also subject to 
the withholding provisions of section 1441 (or section 1442 or 1443) and 
section 1445. In such case, to the extent that the United States real 
property holding corporation chooses to withhold on a distribution only 
under section 1441 (or section 1442 or 1443) pursuant to Sec.  1.1441-
3(c)(4)(i)(A), the coordination rule described in paragraph (b)(1) of 
this section shall apply to such distribution. Alternatively, to the 
extent that the United States real property holding corporation chooses 
to withhold under both section 1441 (or section 1442 or 1443) and 
section 1445 pursuant to Sec.  1.1441-3(c)(4)(i)(B), the coordination 
rule described in paragraph (b)(1) of this section shall apply to the 
portion of such distribution described in Sec.  1.1441-3(c)(4)(i)(B)(1), 
and withholding under section 1445 shall apply to the amount of such 
distribution described in Sec.  1.1441-3(c)(4)(i)(B)(2). A withholding 
agent other than a United States real property holding corporation may 
rely, absent actual knowledge or reason to know otherwise, on the 
representations of the United States real property holding corporation 
making the distribution regarding the portion of the distribution that 
is estimated to be a

[[Page 557]]

dividend under Sec.  1.1441-3(c)(2)(ii)(A), and in the case of a failure 
by the withholding agent to withhold under chapter 4 due to this 
reliance, the required amount shall be imputed to the United States real 
property holding corporation.
    (d) Coordination with section 1446--(1) In general. Except as 
otherwise provided in paragraph (d)(2) of this section, a withholdable 
payment or a foreign passthru payment subject to withholding under 
section 1446 shall not be subject to withholding under chapter 4. See 
Sec.  1.1473-1(a)(4)(ii) for the exclusion from withholdable payment and 
the requirements for such exclusion for any item of income that is taken 
into account under section 871(b)(1) or 882(a)(1) for the taxable year.
    (2) Determining the amount of distribution subject to section 1446. 
[Reserved]
    (e) Example. Chapter 4 withholding satisfies chapter 3 withholding 
obligation. WA, a U.S. withholding agent, makes a payment consisting of 
a dividend from sources within the United States to NPFFI. NPFFI is a 
nonparticipating FFI that is a resident of Country X, a country that has 
an income tax treaty in force with the United States that would allow WA 
to reduce the rate of withholding for section 1442 purposes on a payment 
of U.S. source dividends paid to NPFFI to 15%. Because the payment is a 
withholdable payment and NPFFI is a nonparticipating FFI, WA withholds 
on the payment at the rate of 30% under chapter 4. WA does not make any 
adjustment for overwithholding that is otherwise permitted with respect 
to this payment. Although the payment is also an amount subject to 
withholding under section 1442, WA is not required to withhold any tax 
on this payment under section 1442. WA may credit its withholding 
applied under chapter 4 against the amount of tax otherwise required to 
be withheld on this payment under section 1442. See Sec.  1.1474-5(a)(2) 
for the credit and refund procedures for nonparticipating FFIs that are 
entitled to a reduced rate of tax with respect to an amount subject to 
withholding under chapter 4 by reason of any treaty obligation of the 
United States.
    (f) Coordination with section 3406. A participating FFI that makes a 
withholdable payment that is also a reportable payment (as defined in 
the relevant sections of chapter 61) to a recalcitrant account holder 
that is a U.S. non-exempt recipient is not required to withhold under 
section 3406 if it withholds on the payment at a 30-percent rate in 
accordance with its withholding obligations under chapter 4. See, 
however, Sec.  1.1471-4(b)(3)(iii) for the election to withhold on 
recalcitrant account holders that are non-exempt U.S. recipients under 
section 3406 instead of withholding under chapter 4.
    (g) Effective/applicability date. This section applies on January 6, 
2017. However, taxpayers may apply these provisions as of January 28, 
2013. (For the rules that apply beginning on January 28, 2013, and 
before January 6, 2017, see this section as in effect and contained in 
26 CFR part 1 revised April 1, 2016.)

[T.D. 9610, 78 FR 5993, Jan. 28, 2013, as amended by T.D. 9657, 79 FR 
12865, Mar. 6, 2014; T.D. 9809, 82 FR 2191, Jan. 6, 2017]



Sec.  1.1474-7  Confidentiality of information.

    (a) Confidentiality of information. Pursuant to section 1474(c)(1), 
the provisions of Sec.  31.3406(f)-1(a) of this chapter shall apply 
(substituting ``sections 1471 through 1474'' for ``section 3406'') to 
information obtained or used in connection with the requirements of 
chapter 4.
    (b) Exception for disclosure of participating FFIs. Pursuant to 
section 1474(c)(2), the identity of a participating FFI or deemed-
compliant FFI shall not be treated as return information for purposes of 
section 6103.
    (c) Effective/applicability date. This section applies January 28, 
2013.

[T.D. 9610, 78 FR 5994, Jan. 28, 2013]

[[Page 558]]

      Mitigation of Effect of Renegotiation of Government Contracts



Sec.  1.1481-1  [Reserved]

                          Consolidated Returns

                       RETURNS AND PAYMENT OF TAX

                     Consolidated Return Regulations



Sec.  1.1502-0  Effective dates.

    (a) The regulations under section 1502 are applicable to taxable 
years beginning after December 31, 1965, except as otherwise provided 
therein.
    (b) The provisions of Sec. Sec.  1.1502-0A through 1.1502-3A, 
1.1502-10A through 1.1502-19A, and 1.1502-30A through 1.1502-51A (as 
contained in the 26 CFR part 1 edition revised April 1, 1996) are 
applicable to taxable years beginning before January 1, 1966.

[T.D. 8677, 61 FR 33325, June 27, 1996]



Sec.  1.1502-1  Definitions.

    (a) Group. The term group means an affiliated group of corporations 
as defined in section 1504. See Sec.  1.1502-75(d) as to when a group 
remains in existence. Except as the context otherwise requires, 
references to a group are references to a consolidated group (as defined 
in paragraph (h) of this section).
    (b) Member. The term member means a corporation (including the 
common parent) that is included in the group, or as the context may 
require, a corporation that is included in a subgroup.
    (c) Subsidiary. The term subsidiary means a corporation other than 
the common parent which is a member of such group.
    (d) Consolidated return year. The term consolidated return year 
means a taxable year for which a consolidated return is filed or 
required to be filed by such group.
    (e) Separate return year. The term separate return year means a 
taxable year of a corporation for which it files a separate return or 
for which it joins in the filing of a consolidated return by another 
group.
    (f) Separate return limitation year--(1) In general. Except as 
provided in paragraphs (f)(2) and (3) of this section, the term separate 
return limitation year (or SRLY) means any separate return year of a 
member or of a predecessor of a member.
    (2) Exceptions. The term separate return limitation year (or SRLY) 
does not include:
    (i) A separate return year of the corporation which is the common 
parent for the consolidated return year to which the tax attribute is to 
be carried (except as provided in Sec.  1.1502-75(d)(2)(ii) and 
subparagraph (3) of this paragraph),
    (ii) A separate return year of any corporation which was a member of 
the group for each day of such year, or
    (iii) A separate return year of a predecessor of any member if such 
predecessor was a member of the group for each day of such year,

Provided that an election under section 1562(a) (relating to the 
privilege to elect multiple surtax exemptions) was never effective (or 
is no longer effective as a result of a termination of such election) 
for such year. An election under section 1562(a) which is effective for 
a taxable year beginning in 1963 and ending in 1964 shall be 
disregarded.
    (3) Reverse acquisitions. In the event of an acquisition to which 
Sec.  1.1502-75(d)(3) applies, all taxable years of the first 
corporation and of each of its subsidiaries ending on or before the date 
of the acquisition shall be treated as separate return limitation years, 
and the separate return years (if any) of the second corporation and 
each of its subsidiaries shall not be treated as separate return 
limitation years (unless they were so treated immediately before the 
acquisition). For example, if corporation P merges into corporation T, 
and the persons who were stockholders of P immediately before the 
merger, as a result of owning the stock of P, own more than 50 percent 
of the fair market value of the outstanding stock of T, then a loss 
incurred before the merger by T (even though it is the common parent), 
or by a subsidiary of T, is treated as having been incurred in a 
separate return limitation year. Conversely, a loss incurred before the 
merger by P, or by a subsidiary of P in a separate return year during 
all of which such subsidiary was a member of the group of which P was 
the common parent and for which section 1562 was

[[Page 559]]

not effective, is treated as having been incurred in a year which is not 
a separate return limitation year.
    (4) Predecessor and successors. The term predecessor means a 
transferor or distributor of assets to a member (the successor) in a 
transaction--
    (i) To which section 381(a) applies; or
    (ii) That occurs on or after January 1, 1997, in which the 
successor's basis for the assets is determined, directly or indirectly, 
in whole or in part, by reference to the basis of the assets of the 
transferor or distributor, but in the case of a transaction that occurs 
before June 25, 1999, only if the amount by which basis differs from 
value, in the aggregate, is material. For a transaction that occurs 
before June 25, 1999, only one member may be considered a predecessor to 
or a successor of one other member.
    (g) Consolidated return change of ownership--(1) In general. A 
consolidated return change of ownership occurs during any taxable year 
(referred to in this subparagraph as the ``year of change'') of the 
corporation which is the common parent for the taxable year to which the 
tax attribute is to be carried, if, at the end of the year of change:
    (i) Any one or more of the persons described in section 382(a)(2) 
own a percentage of the fair market value of the outstanding stock of 
such corporation which is more than 50 percentage points greater than 
such person or persons owned at:
    (a) The beginning of such taxable year, or
    (b) The beginning of the preceding taxable year, and
    (ii) The increase in percentage points at the end of such year is 
attributable to:
    (a) A purchase (within the meaning of section 382(a)(4)) by such 
person or persons of such stock, the stock of another corporation owning 
stock in such corporation, or an interest in a partnership or trust 
owning stock in such corporation, or
    (b) A decrease in the amount of such stock outstanding or the amount 
of stock outstanding of another corporation owning stock in such 
corporation, except a decrease resulting from a redemption to pay death 
taxes to which section 303 applies.


For purposes of subdivision (i) (a) and (b) of this subparagraph, the 
beginning of the taxable years specified therein shall be the beginning 
of such taxable years or October 1, 1965, whichever occurs later.
    (2) Operating rules. For purposes of this paragraph:
    (i) The term stock means all shares except nonvoting stock which is 
limited and preferred as to dividends, and
    (ii) Section 318 (relating to constructive ownership of stock) shall 
apply in determining the ownership of stock, except that section 318(a) 
(2)(C) and (3)(C) shall be applied without regard to the 50-percent 
limitation contained therein.
    (3) Old members. The term old members of a group means:
    (i) Those corporations which were members of such group immediately 
preceding the first day of the taxable year in which the consolidated 
return change of ownership occurs, or
    (ii) If the group was not in existence prior to the taxable year in 
which the consolidated return change of ownership occurs, the 
corporation which is the common parent for the taxable year to which the 
tax attribute is to be carried.
    (4) Reverse acquisitions. If there has been a consolidated return 
change of ownership of a corporation under subparagraph (1) of this 
paragraph and the stock or assets of such corporation are subsequently 
acquired by another corporation in an acquisition to which Sec.  1.1502-
75(d)(3) applies so that the group of which the former corporation is 
the common parent is treated as continuing in existence, then the ``old 
members'', as defined in subparagraph (3) of this paragraph, of such 
group immediately before the acquisition shall continue to be treated as 
``old members'' immediately after the acquisition. For example, assume 
that corporations P and S comprise group PS, and PS undergoes a 
consolidated return change of ownership. Subsequently, the stock of P, 
the common parent, is acquired by corporation T, the common parent of 
group TU, in an acquisition to which section 368(a)(1)(B) and Sec.  
1.1502-75(d)(3) apply.

[[Page 560]]

The PS group is treated as continuing in existence with T as the common 
parent. P and S continue to be treated as old members, as defined in 
subparagraph (3) of this paragraph.
    (h) Consolidated group. The term ``consolidated group'' means a 
group filing (or required to file) consolidated returns for the tax 
year.
    (i) [Reserved]
    (j) Affiliated. Corporations are affiliated if they are members of a 
group with each other.
    (k) Nonlife insurance company. The term nonlife insurance company 
means a member that is an insurance company other than a life insurance 
company, each as defined in section 816(a).
    (l) Applicability date. Paragraph (k) of this section applies to 
taxable years beginning after December 31, 2020. However, a taxpayer may 
choose to apply paragraph (k) of this section to taxable years beginning 
on or before December 31, 2020.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7246, 38 FR 
758, Jan. 4, 1973; T.D. 8294, 55 FR 9434, Mar. 14, 1990; T.D. 8319, 55 
FR 49038, Nov. 26, 1990; T.D. 8560, 59 FR 41675, Aug. 15, 1994; T.D. 
8677, 61 FR 33325, June 27, 1996; T.D. 8823, 64 FR 36101, July 2, 1999; 
T.D. 9927, 85 FR 67974, Oct. 27, 2020]

                       Consolidated Tax Liability



Sec.  1.1502-2  Computation of tax liability.

    (a) Taxes imposed. The tax liability of a group for a consolidated 
return year is determined by adding together--
    (1) The tax imposed by section 11(a) in the amount described in 
section 11(b) on the consolidated taxable income for the year (reduced 
by the taxable income of a member described in paragraphs (a)(5) through 
(8) of this section);
    (2) The tax imposed by section 541 on the consolidated undistributed 
personal holding company income;
    (3) If paragraph (a)(2) of this section does not apply, the 
aggregate of the taxes imposed by section 541 on the separate 
undistributed personal holding company income of the members which are 
personal holding companies;
    (4) If neither paragraph (a)(2) nor (3) of this section apply, the 
tax imposed by section 531 on the consolidated accumulated taxable 
income (see Sec.  1.1502-43);
    (5) The tax imposed by section 594(a) in lieu of the taxes imposed 
by section 11 on the taxable income of a life insurance department of 
the common parent of a group which is a mutual savings bank;
    (6) The tax imposed by section 801 on consolidated life insurance 
company taxable income;
    (7) The tax imposed by section 831(a) on consolidated insurance 
company taxable income of the members which are subject to such tax;
    (8) Any increase in tax described in section 1351(d)(1) (relating to 
recoveries of foreign expropriation losses); and
    (9) The tax imposed by section 59A on base erosion payments of 
taxpayers with substantial gross receipts.
    (b) Credits. A group is allowed as a credit against the taxes 
described in paragraph (a) of this section (except for paragraph (a)(9) 
of this section) of this section: The general business credit under 
section 38 (see Sec.  1.1502-3), the foreign tax credit under section 27 
(see Sec.  1.1502-4), and any other applicable credits provided under 
the Internal Revenue Code. Any increase in tax due to the recapture of a 
tax credit will be taken into account. See section 59A and the 
regulations thereunder for credits allowed against the tax described in 
paragraph (a)(9) of this section.
    (c) Allocation of dollar amounts. For purposes of this section, if a 
member or members of the consolidated group are also members of a 
controlled group that includes corporations that are not members of the 
consolidated group, any dollar amount described in any section of the 
Internal Revenue Code is apportioned among all members of the controlled 
group in accordance with the provisions of the applicable section and 
the regulations thereunder.
    (d) Applicability date--This section applies to taxable years for 
which the original consolidated Federal income tax return is due 
(without extension) after December 6, 2019.

[T.D. 9885, 84 FR 67038, Dec. 6, 2019]



Sec.  1.1502-3  Consolidated tax credits.

    (a) Determination of amount of consolidated credit--(1) In general. 
The credit allowed by section 38 for a consolidated return year of a 
group shall be equal to

[[Page 561]]

the consolidated credit earned. The consolidated credit earned is equal 
to the aggregate of the credit earned (as determined under subparagraph 
(2) of this paragraph) by all members of the group for the consolidated 
return year.
    (2) Determination of credit earned. The credit earned of a member is 
an amount equal to 7 percent of such member's qualified investment 
(determined under section 46(c)). For purposes of computing a member's 
qualified investment, the basis of property shall not include any gain 
or loss realized with respect to such property by another member in an 
intercompany transaction (as defined in Sec.  1.1502-13(b)), whether or 
not such gain or loss is deferred. Thus, if section 38 property acquired 
in an intercompany transaction has a basis of $100 to the purchasing 
member, and if the selling member has a $20 gain with respect to such 
property, the basis of such property for purposes of computing the 
purchaser's qualified investment is only $80. Such $80 basis shall also 
be used for purposes of applying section 47 to such property. See 
paragraph (f) of this section.
    (3) Consolidated limitation based on amount of tax. (i) 
Notwithstanding the amount of the consolidated credit earned for the 
taxable year, the consolidated credit allowed by section 38 to the group 
for the consolidated return year is limited to:
    (a) So much of the consolidated liability for tax as does not exceed 
$25,000, plus
    (b) For taxable years ending on or before March 9, 1967, 25 percent 
of the consolidated liability for tax in excess of $25,000, or
    (c) For taxable years ending after March 9, 1967, 50 percent of the 
consolidated liability for tax in excess of $25,000.


The $25,000 amount referred to in the preceding sentence shall be 
reduced by any part of such $25,000 amount apportioned under Sec.  1.46-
1 to component members of the controlled group (as defined in section 
46(a)(5)) which do not join in the filing of the consolidated return. 
For further rules for computing the limitation based on amount of tax 
with respect to the suspension period (as defined in section 48(j)), see 
section 46(a)(2). The amount determined under this subparagraph is 
referred to in this section as the ``consolidated limitation based on 
amount of tax.''
    (ii) If an organization to which section 593 applies or a 
cooperative organization described in section 1381(a) joins in the 
filing of the consolidated return, the $25,000 amount referred to in 
subdivision (i) of this subparagraph (reduced as provided in such 
subdivision) shall be apportioned equally among the members of the group 
filing the consolidated return. The amount so apportioned equally to any 
such organization shall then be decreased in accordance with the 
provisions of section 46(d). Finally, the sum of all such equal portions 
(as decreased under section 46(d)) of each member of the group shall be 
substituted for the $25,000 amount referred to in subdivision (i) of 
this subparagraph.
    (4) Consolidated liability for tax. For purposes of subparagraph (3) 
of this paragraph, the consolidated liability for tax shall be the 
income tax imposed for the taxable year upon the group by chapter 1 of 
the Code, reduced by the consolidated foreign tax credit allowable under 
Sec.  1.1502-4. The tax imposed by section 56 (relating to minimum tax 
for tax preferences), section 531 (relating to accumulated earnings 
tax), section 541 (relating to personal holding company tax), and any 
additional tax imposed by section 1351(d)(1) (relating to recoveries of 
foreign expropriation losses), shall not be considered tax imposed by 
chapter 1 of the Code. In addition, any increase in tax resulting from 
the application of section 47 (relating to certain dispositions, etc., 
of section 38 property) shall not be treated as tax imposed by chapter 1 
for purposes of computing the consolidated liability for tax.
    (b) Carryback and carryover of unused credits--(1) Allowance of 
unused credit as consolidated carryback or carryover. A group shall be 
allowed to add to the amount allowable as a credit under paragraph 
(a)(1) of this section for any consolidated return year an amount equal 
to the aggregate of the consolidated investment credit carryovers and 
carrybacks to such year. The consolidated investment credit carryovers 
and carrybacks to the taxable year shall consist of any consolidated 
unused

[[Page 562]]

credits of the group, plus any unused credits of members of the group 
arising in separate return years of such members, which may be carried 
over or back to the taxable year under the principles of section 46(b). 
However, such consolidated carryovers and carrybacks shall not include 
any consolidated unused credits apportioned to a corporation for a 
separate return year pursuant to paragraph (c) of Sec.  1.1502-79 and 
shall be subject to the limitations contained in paragraphs (c) and (e) 
of this section. A consolidated unused credit for any consolidated 
return year is the excess of the consolidated credit earned over the 
consolidated limitation based on amount of tax for such year.
    (2) Absorption rules. For purposes of determining the amount, if 
any, of an unused credit (whether consolidated or separate) which can be 
carried to a taxable year (consolidated or separate), the amount of such 
unused credit which is absorbed in a prior consolidated return year 
under section 46(b) shall be determined by:
    (i) Applying all unused credits which can be carried to such prior 
year in the order of the taxable years in which such unused credits 
arose, beginning with the taxable year which ends earliest, and
    (ii) Applying all such unused credits which can be carried to such 
prior year from taxable years ending on the same date on a pro rata 
basis.
    (3) Example. The provisions of paragraphs (a) and (b) of this 
section may be illustrated by the following example:

    Example. (i) Corporation P is incorporated on January 1, 1966. On 
that same day P incorporates corporation S, a wholly owned subsidiary. P 
and S file consolidated returns for calendar years 1966 and 1967. P's 
and S's credit earned, the consolidated credit earned, and the 
consolidated limitation based on amount of tax for 1966 and 1967 are as 
follows:

------------------------------------------------------------------------
                                         Consolidated     Consolidated
                                Credit      credit      limitation based
                                earned      earned      on amount of tax
------------------------------------------------------------------------
1966:
  P.........................    $60,000
  S.........................    $30,000       $90,000           $100,000
1967:
  P.........................    $40,000
  S.........................    $25,000       $65,000            $50,000
------------------------------------------------------------------------

    (ii) P's and S's credit earned for 1966 are aggregated, and the 
group's consolidated credit earned, $90,000, is allowable in full to the 
group as a credit under section 38 for 1966 since such amount is less 
than the consolidated limitation based on amount of tax for 1966, 
$100,000.
    (iii) Since the consolidated limitation based on amount of tax for 
1967 is $50,000, only $50,000 of the $65,000 consolidated credit earned 
for such year is allowable to the group under section 38 as a credit for 
1967. The consolidated unused credit for 1967 of $15,000 ($65,000 less 
$50,000) is a consolidated investment credit carryback and carryover to 
the years prescribed in section 46(b). In this case the consolidated 
unused credit is a consolidated investment credit carryback to 1966 
(since P and S were not in existence in 1964 and 1965) and a 
consolidated investment credit carryover to 1968 and subsequent years. 
The portion of the consolidated unused credit for 1967 which is 
allowable as a credit for 1966 is $10,000. This amount shall be added to 
the amount allowable as a credit to the group for 1966. The balance of 
the consolidated unused credit for 1967 to be carried to 1968 is $5,000. 
These amounts are computed as follows:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Consolidated carryback to 1966...........  ........  .........   $15,000
  1966 consolidated limitation based on    ........   $100,000  ........
   tax...................................
Less: Consolidated credit earned for 1966   $90,000
  Consolidated unused credits                     0    $90,000
   attributable to years preceding 1967..
                                          ------------------------------
Limit on amount of 1967 consolidated       ........  .........   $10,000
 unused credit which may be added as a
 credit for 1966.........................
                                          ------------------------------
Balance of 1967 consolidated unused        ........  .........    $5,000
 credit to be carried to 1968............
------------------------------------------------------------------------

    (c) Limitation on investment credit carryovers and carrybacks from 
separate return limitation years applicable for consolidated return 
years for which the due date of the return is on or before March 13, 
1998--(1) General rule. In the case of an unused credit of a member of 
the group arising in a separate return limitation year (as defined in 
Sec.  1.1502-1(f)) of such member (and in a separate return limitation 
year of any predecessor of such member), the amount which may be 
included under paragraph (b) of this section (computed without regard

[[Page 563]]

to the limitation contained in paragraph (e) of this section) shall not 
exceed the amount determined under paragraph (c)(2) of this section.
    (2) Computation of limitation. The amount referred to in paragraph 
(c)(1) of this section with respect to a member of the group is the 
excess, if any, of--
    (i) The limitation based on amount of tax of the group, minus such 
limitation recomputed by excluding the items of income, deduction, and 
foreign tax credit of such member; over
    (ii) The sum of the investment credit earned by such member for such 
consolidated return year, and the unused credits attributable to such 
member which may be carried to such consolidated return year arising in 
unused credit years ending prior to the particular separate return 
limitation year.
    (3) Special effective date. This paragraph (c) applies to 
consolidated return years for which the due date of the income tax 
return (without extensions) is on or before March 13, 1998. See 
paragraph (d) of this section for the rule that limits the group's use 
of a section 38 credit carryover or carryback from a SRLY for a 
consolidated return year for which the due date of the income tax return 
(without extensions) is after March 13, 1998. See also paragraph (d)(4) 
of this section for an optional effective date rule (generally making 
the rules of this paragraph (c) inapplicable to a consolidated return 
year beginning after December 31, 1996, if the due date of the income 
tax return (without extensions) for such year is on or before March 13, 
1998).
    (4) Examples. The provisions of this paragraph (c) may be 
illustrated by the following examples:

    Example 1. (i) Assume the same facts as in the example contained in 
paragraph (b)(3) of this section, except that all the stock of 
corporation T, also a calendar year taxpayer, is acquired by P on 
January 1, 1968, and that P, S, and T file a consolidated return for 
1968. In 1966, T had an unused credit of $10,000 which has not been 
absorbed and is available as an investment credit carryover to 1968. 
Such carryover is from a separate return limitation year. P's and S's 
credit earned for 1968 is $10,000 each, and T's credit earned is $8,000; 
the consolidated credit earned is therefore $28,000. The group's 
consolidated limitation based on amount of tax for 1968 is $50,000. Such 
limitation recomputed by excluding the items of income, deduction, and 
foreign tax credit of T is $30,000. Thus, the amount determined under 
paragraph (c)(2)(i) of this section is $20,000 ($50,000 minus $30,000). 
Accordingly, the limitation on the carryover of T's unused credit is 
$12,000, the excess of $20,000 over $8,000 (the sum of T's credit earned 
for the taxable year and any carryovers from prior unused credit years 
(none in this case)). Therefore T's $10,000 unused credit from 1966 may 
be carried over to the consolidated return year without limitation.
    (ii) The group's consolidated credit earned for 1968, $28,000, is 
allowable in full as a credit under section 38 since such amount is less 
than the consolidated limitation based on amount of tax, $50,000.
    (iii) The group's consolidated investment credit carryover to 1968 
is $15,000, consisting of the consolidated unused credits of the group 
($5,000) plus T's separate return year unused credit ($10,000). The 
entire $15,000 consolidated carryover shall be added to the amount 
allowable to the group as a credit under section 38 for 1968, since such 
amount is less than $22,000 (the excess of the consolidated limitation 
based on tax, $50,000, over the sum of the consolidated credit earned 
for 1968, $28,000, and unused credits arising in prior unused credit 
years, zero).
    Example 2. Assume the same facts as in Example 1, except that the 
amount determined under paragraph (c)(2)(i) of this section is $12,000. 
Therefore, the limitation on the carryover of T's unused credit is 
$4,000. Accordingly, the consolidated investment credit carryover is 
only $9,000 since the amount of T's separate return year unused credit 
which may be added to the group's $ 5,000 consolidated unused credit is 
$4,000. These amounts are computed as follows:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
T's carryover to 1968....................  ........  .........   $10,000
  Consolidated limitation based on amount  ........    $12,000  ........
   of tax minus recomputed limitation....
Less: T's credit earned for 1968.........    $8,000  .........  ........
  Unused credits attributable to T                0     $8,000  ........
   arising in unused credit years
   preceding 1966........................
                                          ------------------------------
Limit on amount of 1966 unused credit of   ........  .........    $4,000
 T which may be added to consolidated
 investment credit carryover.............
                                          ------------------------------
Balance of 1966 unused credit of T to be   ........  .........    $6,000
 carried to 1969 (subject to the
 limitation contained in paragraph (c) of
 this section)...........................
------------------------------------------------------------------------


[[Page 564]]

    (d) Limitation on tax credit carryovers and carrybacks from separate 
return limitation years applicable for consolidated return years for 
which the due date of the return is after March 13, 1998--(1) General 
rule. The aggregate of a member's unused section 38 credits arising in 
SRLYs that are included in the consolidated section 38 credits for all 
consolidated return years of the group may not exceed--
    (i) The aggregate for all consolidated return years of the member's 
contributions to the consolidated section 38(c) limitation for each 
consolidated return year; reduced by
    (ii) The aggregate of the member's section 38 credits arising and 
absorbed in all consolidated return years (whether or not absorbed by 
the member).
    (2) Computational rules--(i) Member's contribution to the 
consolidated section 38(c) limitation. If the consolidated section 38(c) 
limitation for a consolidated return year is determined by reference to 
the consolidated tentative minimum tax (see section 38(c)(1)(A)), then a 
member's contribution to the consolidated section 38(c) limitation for 
such year equals the member's share of the consolidated net income tax 
minus the member's share of the consolidated tentative minimum tax. If 
the consolidated section 38(c) limitation for a consolidated return year 
is determined by reference to the consolidated net regular tax liability 
(see section 38(c)(1)(B)), then a member's contribution to the 
consolidated section 38(c) limitation for such year equals the member's 
share of the consolidated net income tax minus 25 percent of the 
quantity which is equal to so much of the member's share of the 
consolidated net regular tax liability less its portion of the $25,000 
amount specified in section 38(c)(1)(B). The group computes the member's 
shares by applying to the respective consolidated amounts the principles 
of section 1552 and the percentage method under Sec.  1.1502-33(d)(3), 
assuming a 100% allocation of any decreased tax liability. The group 
must make proper adjustments so that taxes and credits not taken into 
account in computing the limitation under section 38(c) are not taken 
into account in computing the member's share of the consolidated net 
income tax, etc. (See, for example, the taxes described in section 26(b) 
that are disregarded in computing regular tax liability.) Also, the 
group may apportion all or a part of the $25,000 amount (or lesser 
amount if reduced by section 38(c)(3)) for any year to one or more 
members.
    (ii) Years included in computation. For purposes of computing the 
limitation under this paragraph (d), the consolidated return years of 
the group include only those years, including the year to which a credit 
is carried, that the member has been continuously included in the 
group's consolidated return, but exclude--
    (A) For carryovers, any years ending after the year to which the 
credit is carried; and
    (B) For carrybacks, any years ending after the year in which the 
credit arose.
    (iii) Subgroups and successors. The SRLY subgroup principles under 
Sec.  1.1502-21(c)(2) apply for purposes of this paragraph (d). The 
predecessor and successor principles under Sec.  1.1502-21(f) also apply 
for purposes of this paragraph (d).
    (iv) Overlap with section 383. The principles under Sec.  1.1502-
21(g) apply for purposes of this paragraph (d). For example, an overlap 
of paragraph (d) of this section and the application of section 383 with 
respect to a credit carryover occurs if a corporation becomes a member 
of a consolidated group (the SRLY event) within six months of the change 
date of an ownership change giving rise to a section 383 credit 
limitation with respect to that carryover (the section 383 event), with 
the result that the limitation of this paragraph (d) does not apply. See 
Sec. Sec.  1.1502-21(g)(2)(ii)(A) and 1.383-1; see also Sec.  1.1502-
21(g)(4) (subgroup rules).
    (3) Effective date--(i) In general. This paragraph (d) generally 
applies to consolidated return years for which the due date of the 
income tax return (without extensions) is after March 13, 1998.
    (A) Contribution years. Except as provided in paragraph (d)(4)(ii) 
of this section, a group does not take into account a consolidated 
taxable year for which the due date of the income tax

[[Page 565]]

return (without extensions) is on or before March 13, 1998, in 
determining a member's (or subgroup's) contributions to the consolidated 
section 38(c) limitation under this paragraph (d).
    (B) Special subgroup rule. In the event that the principles of Sec.  
1.1502-21(g)(1) do not apply to a particular credit carryover in the 
current group, then solely for purposes of applying paragraph (d) of 
this section to determine the limitation with respect to that carryover 
and with respect to which the SRLY register (the aggregate of the 
member's or subgroup's contribution to consolidated section 38(c) 
limitation reduced by the aggregate of the member's or subgroup's 
section 38 credits arising and absorbed in all consolidated return 
years) began in a taxable year for which the due date of the return is 
on or before May 25, 2000, the principles of Sec.  1.1502-21(c)(2) shall 
be applied without regard to the phrase ``or for a carryover that was 
subject to the overlap rule described in paragraph (g) of this section 
or Sec.  1.1502-15(g) with respect to another group (the former 
group).''
    (ii) Overlap rule. Paragraph (d)(2)(iv) of this section (relating to 
overlap with section 383) applies to taxable years for which the due 
date (without extensions) of the consolidated return is after May 25, 
2000. For purposes of paragraph (d)(2)(iv) of this section, only an 
ownership change to which section 383, as amended by the Tax Reform Act 
of 1986 (100 Stat. 2085), applies and which results in a section 383 
credit limitation shall constitute a section 383 event.
    (4) Optional effective date of January 1, 1997. (i) For consolidated 
taxable years beginning on or after January 1, 1997, for which the due 
date of the income tax return (without extensions) is on or before March 
13, 1998, in lieu of paragraphs (c) and (e)(3) of this section (relating 
to the general business credit), Sec.  1.1502-4(f)(3) and (g)(3) 
(relating to the foreign tax credit), the next to last sentence of Sec.  
1.1502-9A(a)(2), Sec.  1.1502-9A(b)(1)(v) (relating to overall foreign 
losses), and Sec.  1.1502-55(h)(4)(iii) (relating to the alternative 
minimum tax credit), a consolidated group may apply the corresponding 
provisions as they appear in 1998-1 C.B. 655 through 661 (see Sec.  
601.601(d)(2) of this chapter) (treating references in such 
corresponding provisions to Sec. Sec.  1.1502-9(b)(1)(ii), (iii), and 
(iv) as references to Sec. Sec.  1.1502-9A(b)(1)(ii), (iii), and (iv)). 
Also, in the case of a consolidated return change of ownership that 
occurs on or after January 1, 1997, in a taxable year for which the due 
date of the income tax return (without extensions) is on or before March 
13, 1998, a consolidated group may choose not to apply paragraph (e) of 
this section and Sec.  1.1502-4(g) to taxable years ending after 
December 31, 1996. A consolidated group making the choices described in 
the two preceding sentences generally must apply all such corresponding 
provisions (including not applying paragraph (e) of this section and 
Sec.  1.1502-4(g)) for all relevant years. However, a consolidated group 
making the election provided in Sec.  1.1502-9A(b)(1)(vi) (electing not 
to apply Sec.  1.1502-9A(b)(1)(v) to years beginning before January 1, 
1998) may nevertheless choose to apply all such corresponding provisions 
referred to in this paragraph (d)(4)(i) other than the provision 
corresponding to Sec.  1.1502-9A(b)(1)(v) for all relevant years.
    (ii) If a consolidated group chooses to apply the corresponding 
provisions referred to in paragraph (d)(4)(i) of this section, the 
consolidated group shall not take into account a consolidated taxable 
year beginning before January 1, 1997, in determining a member's (or 
subgroup's) contributions to the consolidated section 38(c) limitation 
under this paragraph (d).
    (5) Example. The following example illustrates the provisions of 
this paragraph (d):

    Example. (i) Individual A owns all of the stock of P and T. P is the 
common parent of the P group. P acquires all the stock of T at the 
beginning of Year 2. T carries over an unused section 38 general 
business credit from Year 1 of $100,000. The table in paragraph (i) of 
this Example shows the group's net consolidated income tax, consolidated 
tentative minimum tax, and consolidated net regular tax liabilities, and 
T's share of such taxes computed under the principles of section 1552 
and the percentage method under Sec.  1.1502-33(d)(3), assuming a 100% 
allocation of any decreased tax liability, for Year 2. (The effects of 
the lower section 11 brackets are ignored, there are no other tax 
credits affecting a group amount or member's share, and $1,000s are 
omitted.)

[[Page 566]]

[GRAPHIC] [TIFF OMITTED] TR25MY00.002

    (ii) T's Year 1 is a SRLY with respect to the P group. See Sec.  
1.1502-1(f)(2)(ii). T did not undergo an ownership change giving rise to 
a section 383 credit limitation within 6 months of joining the P group. 
Thus, T's $100,000 general business credit arising in Year 1 is subject 
to a SRLY limitation in the P group. The amount of T's unused section 38 
credits from Year 1 that are included in the consolidated section 38 
credits for Year 2 may not exceed T's contribution to the consolidated 
section 38(c) limitation. For Year 2, the group determines the 
consolidated section 38(c) limitation by reference to consolidated 
tentative minimum tax for Year 2. Therefore, T's contribution to the 
consolidated section 38(c) limitation for Year 2 equals its share of 
consolidated net income tax minus its share of consolidated tentative 
minimum tax. T's contribution is $280,000 minus $160,000, or $120,000. 
However, because the

[[Page 567]]

group has a consolidated section 38 limitation of zero, it may not 
include any of T's unused section 38 credits in the consolidated section 
38 credits for Year 2.
    (iii) The following table shows similar information for the group 
for Year 3:
[GRAPHIC] [TIFF OMITTED] TR25MY00.003

    (iv) The amount of T's unused section 38 credits from Year 1 that 
are included in the consolidated section 38 credits for Year 3 may not 
exceed T's aggregate contribution to the consolidated section 38(c) 
limitation

[[Page 568]]

for Years 2 and 3. For Year 3, the group determines the consolidated 
section 38(c) limitation by reference to the consolidated tentative 
minimum tax for Year 3. Therefore, T's contribution to the consolidated 
section 38(c) limitation for Year 3 equals its share of consolidated net 
income tax minus its share of consolidated tentative minimum tax. 
Applying the principles of section 1552 and Sec.  1.1502-33(d) (taking 
into account, for example, that T's positive earnings and profits 
adjustment under Sec.  1.1502-33(d) reflects its losses actually 
absorbed by the group), T's contribution is $(105,000) minus $(40,000), 
or $(65,000). T's aggregate contribution to the consolidated section 
38(c) limitation for Years 2 and 3 is $120,000 + $(65,000), or $55,000. 
The group may include $55,000 of T's Year 1 unused section 38 credits in 
its consolidated section 38 tax credit in Year 3.

    (e) Limitation on investment credit carryovers where there has been 
a consolidated return change of ownership--(1) General rule. If a 
consolidated return change of ownership (as defined in paragraph (g) of 
Sec.  1.1502-1) occurs during the taxable year or an earlier taxable 
year, the amount which may be included under paragraph (b) of this 
section in the consolidated investment credit carryovers to the taxable 
year with respect to the aggregate unused credits attributable to old 
members of the group (as defined in paragraph (g)(3) of Sec.  1.1502-1) 
arising in taxable years (consolidated or separate) ending on the same 
day and before the taxable year in which the consolidated return change 
of ownership occurred shall not exceed the amount determined under 
subparagraph (2) of this paragraph.
    (2) Computation of limitation. The amount referred to in 
subparagraph (1) of this paragraph shall be the excess of the 
consolidated limitation based on the amount of tax for the taxable year, 
recomputed by including only the items of income, deduction, and foreign 
tax credit of the old members, over the sum of:
    (i) The aggregate investment credits earned by the old members for 
the taxable year, and
    (ii) The aggregate unused investment credits attributable to the old 
members which may be carried to the taxable year arising in unused 
credit years ending prior to the particular unused credit year or years.
    (3) Special effective date. This paragraph (e) applies only to a 
consolidated return change of ownership that occurred during a 
consolidated return year for which the due date of the income tax return 
(without extensions) is on or before March 13, 1998. See paragraph 
(d)(4) of this section for an optional effective date rule (generally 
making the rules of this paragraph (e) also inapplicable if the 
consolidated return change of ownership occurred on or after January 1, 
1997, and during a consolidated return year for which the due date of 
the income tax return (without extensions) is on or before March 13, 
1998).
    (f) Early dispositions, etc., of section 38 property--(1) 
Dispositions of section 38 property during and after consolidated return 
year. If property is subject to section 47(a) (1) or (2) with respect to 
a member during a consolidated return year, any increase in tax shall be 
added to the tax liability of the group under Sec.  1.1502-2 (regardless 
of whether the property was placed in service in a consolidated or 
separate return year). Also, if property is subject to section 47(a) (1) 
or (2) with respect to a corporation during a taxable year for which 
such corporation files on a separate return basis, any increase in tax 
shall be added to the tax liability of such corporation (regardless of 
whether such property was placed in service in a consolidated or 
separate return year).
    (2) Exception for transfer to another member. (i) Except as provided 
in subdivisions (ii) and (iii) of this subparagraph, a transfer of 
section 38 property from one member of the group to another member of 
such group during a consolidated return year shall not be treated as a 
disposition or cessation within the meaning of section 47(a)(1). If such 
section 38 property is disposed of, or otherwise ceases to be section 38 
property or becomes public utility property with respect to the 
transferee, before the close of the estimated useful life which was 
taken into account in computing qualified investment, then section 47(a) 
(1) or (2) shall apply to the transferee with respect to such property 
(determined by taking into account the period of use, qualified 
investment, other dispositions, etc., of the transferor). Any increase 
in tax due to the application of section 47(a) (1) or (2) shall be added 
to the tax liability of

[[Page 569]]

such transferee (or the tax liability of a group, if the transferee 
joins in the filing of a consolidated return).
    (ii) Except as provided in subdivision (iii) of this subparagraph, 
if section 38 property is disposed of during a consolidated return year 
by one member of the group to another member of such group which is an 
organization to which section 593 applies or a cooperative organization 
described in section 1381(a), the tax under chapter 1 of the Code for 
such consolidated return year shall be increased by an amount equal to 
the aggregate decrease in the credits allowed under section 38 for all 
prior taxable years which would result solely from treating such 
property, for purposes of determining qualified investment, as placed in 
service by such organization to which section 593 applies or such 
cooperative organization described in section 1381(a), as the case may 
be, but with due regard to the use of the property before such transfer.
    (iii) Section 47(a)(1) shall apply to a transfer of section 38 
property by a corporation during a consolidated return year if such 
corporation is liquidated in a transaction to which section 334(b)(2) 
applies.
    (3) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example 1. P, S, and T file a consolidated return for calendar year 
1967. In such year S places in service section 38 property having an 
estimated useful life of more than 8 years. In 1968, P, S, and T file a 
consolidated return and in such year S sells such property to T. Such 
sale will not cause section 47(a)(1) to apply.
    Example 2. Assume the same facts as in example (1), except that P, 
S, and T filed separate returns for 1967. The sale from S to T will not 
cause section 47(a)(1) to apply.
    Example 3. Assume the same facts as in example (1), except that P, 
S, and T continue to file consolidated returns through 1971 and in such 
year T disposes of the property to individual A. Section 47(a)(1) will 
apply to the group and any increase in tax shall be added to the tax 
liability of the group. For the purposes of determining the actual 
period of use by T, such period shall include S's period of use.
    Example 4. Assume the same facts as in example (3), except that T 
files a separate return in 1971. Again, the actual periods of use by S 
and T will be combined in applying section 47. If the disposition 
results in an increase in tax under section 47(a)(1), such additional 
tax shall be added to the separate tax liability of T.
    Example 5. Assume the same facts as in example (1), except that in 
1969, P sells all the stock of T to a third party. Such sale will not 
cause section 47(a)(1) to apply.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7246, 38 FR 
758, Jan. 4, 1973; T.D. 8597, 60 FR 36679, July 18, 1995; T.D. 8751, 63 
FR 1742, Jan. 12, 1998; T.D. 8766, 63 FR 12642, Mar. 16, 1998; T.D. 
8884, 65 FR 33754, May 25, 2000; 65 FR 48379, Aug. 8, 2000; 65 FR 50281, 
Aug. 17, 2000]



Sec.  1.1502-4  Consolidated foreign tax credit.

    (a) In general. The foreign tax credit under section 901 is allowed 
to the group only if the agent for the group (as defined in Sec.  
1.1502-77(a)) chooses to use the credit in the computation of the 
consolidated tax liability of the group for the consolidated return 
year. If that choice is made, section 275(a)(4) provides that no 
deduction against taxable income may be taken on the consolidated return 
for foreign taxes paid or accrued by any member. However, if section 
275(a)(4) does not apply, a deduction against consolidated taxable 
income may be allowed for certain taxes for which a credit is not 
allowed, even though the choice is made to claim a credit for other 
taxes. See, for example, sections 901(j)(3), 901(k)(7), 901(l)(4), 
901(m)(6), and 908(b).
    (b) Computation of foreign tax credit. The foreign tax credit for 
the consolidated return year is determined on a consolidated basis under 
the principles of sections 901 through 909 and 960. All foreign income 
taxes paid or accrued by members of the group for the year (including 
those deemed paid under section 960 and paragraph (d) of this section) 
must be aggregated.
    (c) Computation of limitation on credit. For purposes of computing 
the group's limiting fraction under section 904, the following rules 
apply:
    (1) Computation of taxable income from foreign sources--(i) Separate 
categories. The group must compute a separate foreign tax credit 
limitation for income in each separate category (as defined in Sec.  
1.904-5(a)(4)(v)) for purposes of this section. The numerator of the 
limiting fraction in any separate category is the consolidated taxable 
income of the group determined in accordance

[[Page 570]]

with Sec.  1.1502-11, taking into account adjustments required under 
section 904(b), if any, from sources without the United States in that 
category, determined in accordance with the rules of Sec. Sec.  1.904-4 
and 1.904-5 and the section 861 regulations (as defined in Sec.  1.861-
8(a)(1)).
    (ii) Adjustments under sections 904(f) and (g). The rules for 
allocation and recapture of separate limitation losses and overall 
foreign losses under section 904(f) and Sec.  1.1502-9 apply to 
determine the foreign source and U.S. source taxable income in each 
separate category of the consolidated group. Similarly, the rules for 
allocation and recapture of overall domestic losses under section 904(g) 
and Sec.  1.1502-9 apply to determine the foreign source and U.S. source 
taxable income in each separate category of the consolidated group. See 
Sec.  1.904(g)-3 for allocation rules under sections 904(f) and 904(g). 
The rules of sections 904(f) and 904(g) do not operate to recharacterize 
foreign income tax attributable to any separate category.
    (iii) Computation of consolidated net operating loss. The source and 
separate category of the group's consolidated net operating loss 
(``CNOL''), as that term is defined in Sec.  1.1502-21(e), for the 
taxable year, if any, is determined based on the amounts of any separate 
limitation losses and U.S. source loss that are not allocated to reduce 
U.S. source income or income in other separate categories under the 
rules of sections 904(f) and 904(g) in computing the group's 
consolidated foreign tax credit limitations for the taxable year under 
paragraphs (c)(1)(i) and (ii) of this section.
    (iv) Characterization of CNOL carried to a separate return year--(A) 
In general. The total amount of CNOL attributable to a member that is 
carried to a separate return year is determined under the rules of Sec.  
1.1502-21(b)(2). The source and separate category of the portion of the 
CNOL that is attributable to a member is determined under this paragraph 
(c)(1)(iv).
    (B) Tentative apportionment. For the portion of the CNOL that is 
attributable to the member described in paragraph (c)(1)(iv) of this 
section, the consolidated group determines a tentative allocation and 
apportionment to each statutory and residual grouping (as described in 
Sec.  1.861-8(a)(4) with respect to section 904 as the operative 
section) under the principles of Sec.  1.1502-9(c)(2)(i), (ii), (iv), 
and (v) by treating the portion of the group's CNOL in each statutory 
and residual grouping as if it were a CSLL account, as that term is 
described in Sec.  1.1502-9(b)(4). This determination is made as of the 
end of the taxable year of the consolidated group in which the CNOL 
arose or, if earlier and applicable, when the member leaves the 
consolidated group.
    (C) Adjustments. (1) If the total tentative apportionment for all 
statutory and residual groupings exceeds the portion of the CNOL 
attributable to the member described in paragraph (c)(1)(iv)(A) of this 
section (the ``excess amount''), then the tentative apportionment in 
each grouping is reduced by an amount equal to the excess amount 
multiplied by a fraction, the numerator of which is the tentative 
apportionment in that grouping, and the denominator of which is the 
total tentative apportionments in all groupings.
    (2) If the total tentative apportionment for all statutory and 
residual groupings is less than the total CNOL attributable to the 
member described in paragraph (c)(1)(iv)(A) (the ``deficiency''), then 
the tentative apportionment in each grouping is increased by an amount 
equal to the deficiency multiplied by a fraction, the numerator of which 
is the CNOL in that grouping that was not tentatively apportioned, and 
the denominator of which is the total CNOL in all groupings that was not 
tentatively apportioned.
    (v) Consolidated net capital losses. The principles of the rules in 
paragraphs (c)(1)(i) through (iv) of this section apply for purposes of 
determining the source and separate category of consolidated net capital 
losses described in Sec.  1.1502-22(e).
    (2) Computation of consolidated taxable income. The denominator of 
the limiting fraction in any separate category is the consolidated 
taxable income of the group determined in accordance with Sec.  1.1502-
11, taking into account adjustments required under section 904(b), if 
any.
    (3) Computation of tax against which credit is taken. The tax 
against which

[[Page 571]]

the limiting fraction under section 904(a) is applied will be the 
consolidated tax liability of the group determined under Sec.  1.1502-2, 
but without regard to Sec.  1.1502-2(a)(2) through (4) and (8) and (9), 
and without regard to any credit against such liability. See sections 
26(b) and 901(a).
    (d) Carryover and carryback of unused foreign tax--(1) Allowance of 
unused foreign tax as consolidated carryover or carryback. The 
consolidated group's carryovers and carrybacks of unused foreign tax (as 
defined in Sec.  1.904-2(c)(1)) to the taxable year is determined on a 
consolidated basis under the principles of section 904(c) and Sec.  
1.904-2 and is deemed to be paid or accrued to a foreign country or 
possession for that year. The consolidated group's unused foreign tax 
carryovers and carrybacks to the taxable year consist of any unused 
foreign tax of the consolidated group, plus any unused foreign tax of 
members for separate return years, which may be carried over or back to 
the taxable year under the principles of section 904(c) and Sec.  1.904-
2. The consolidated group's unused foreign tax carryovers and carrybacks 
do not include any unused foreign taxes apportioned to a corporation for 
a separate return year pursuant to Sec.  1.1502-79(d). A consolidated 
group's unused foreign tax in each separate category is the excess of 
the foreign taxes paid, accrued or deemed paid under section 960 by the 
consolidated group over the limitation in the applicable separate 
category for the consolidated return year. See paragraph (c) of this 
section.
    (2) Absorption rules. For purposes of determining the amount, if 
any, of an unused foreign tax which can be carried to a taxable year 
(whether a consolidated or separate return year), the amount of the 
unused foreign tax that is absorbed in a prior consolidated return year 
under section 904(c) shall be determined by--
    (i) Applying all unused foreign taxes which can be carried to a 
prior year in the order of the taxable years in which those unused 
foreign taxes arose, beginning with the taxable year that ends earliest; 
and
    (ii) Applying all unused foreign taxes which can be carried to such 
prior year from taxable years ending on the same date on a pro rata 
basis.
    (e) Example. The following example illustrates the application of 
this section:
    (1) Facts. (i) Domestic corporation P is incorporated on January 1, 
Year 1. On that same day, P incorporates domestic corporations S and T 
as wholly owned subsidiaries. P, S, and T file consolidated returns for 
Years 1 and 2 on the basis of a calendar year. T engages in business 
solely through a qualified business unit in Country A. S engages in 
business solely through qualified business units in Countries A and B. P 
does business solely in the United States. During Year 1, T sold an item 
of inventory to P at a gain of $2,000. Under Sec.  1.1502-13 the 
intercompany gain has not been taken into account as of the close of 
Year 1. The taxable income of each member for Year 1 from foreign and 
U.S. sources, and the foreign taxes paid on such foreign income, are as 
follows:

                                         Table 1 to Paragraph (e)(1)(i)
----------------------------------------------------------------------------------------------------------------
                                                           Foreign branch
                                         U.S. source      category foreign    Foreign branch     Total taxable
             Corporation                taxable income     source taxable    category foreign        income
                                                               income            tax paid
----------------------------------------------------------------------------------------------------------------
P...................................            $40,000  .................  .................            $40,000
T...................................  .................            $20,000            $12,000             20,000
S...................................  .................             20,000              9,000             20,000
Group...............................             40,000             40,000             21,000             80,000
----------------------------------------------------------------------------------------------------------------

    (ii) The separate taxable income of each member was computed by 
taking into account the rules under Sec.  1.1502-12. Accordingly, T's 
intercompany gain of $2,000 is not included in T's taxable income for 
Year 1. The group's consolidated taxable income (computed in accordance 
with Sec.  1.1502-11) is $80,000. The consolidated tax liability against

[[Page 572]]

which the credit may be taken (computed in accordance with paragraph 
(c)(3) of this section) is $16,800.
    (2) Analysis. Under section 904(d) and paragraph (c)(1)(i) of this 
section, the aggregate amount of foreign income taxes paid to all 
foreign countries with respect to the foreign branch category income of 
$21,000 ($12,000 + $9,000) that may be claimed as a credit in Year 1 is 
limited to $8,400 ($16,800 x $40,000/$80,000). Assuming P, as the agent 
for the group, chooses to use the foreign taxes paid as a credit, the 
group may claim a $8,400 foreign tax credit.
    (f) Applicability date. This section applies to taxable years for 
which the original consolidated Federal income tax return is due 
(without extensions) after January 11, 2021.

[T.D. 9922, 85 FR 72072, Nov. 12, 2020]



Sec.  1.1502-5  Estimated tax.

    (a) General rule--(1) Consolidated estimated tax. If a group files a 
consolidated return for two consecutive taxable years, it must make 
payments of estimated tax on a consolidated basis for each subsequent 
taxable year, until such time as separate returns are properly filed. 
Until such time, the group is treated as a single corporation for 
purposes of section 6154 (relating to payment of estimated tax by 
corporations). If separate returns are filed by the members for a 
taxable year, the amount of any estimated tax payments made with respect 
to a consolidated payment of estimated tax for such year shall be 
credited against the separate tax liabilities of the members in any 
manner designated by the common parent which is satisfactory to the 
Commissioner. The consolidated payments of estimated tax shall be 
deposited with the authorized financial institution with which the 
common parent deposits its estimated tax payments. A statement should be 
attached to the payment setting forth the name, address, employer 
identification number, and internal revenue service center of each 
member.
    (2) First two consolidated return years. For the first 2 years for 
which a group files a consolidated return, it may make payments of 
estimated tax on either a consolidated or separate basis. If a 
consolidated return is filed for such year, the amount of any estimated 
tax payments made for such year by any member shall be credited against 
the tax liability of the group.
    (3) Effective date. This section applies to taxable years for which 
the due date (without extensions) for filing returns is after August 6, 
1979. For prior taxable years see 26 CFR 1.1502-5 (Revised as of April 
1, 1978).
    (b) Addition to tax for failure to pay estimated tax under section 
6655--(1) Consolidated return filed. For the first two taxable years for 
which a group files a consolidated return, the group may compute the 
amount of the penalty (if any) under section 6655 on a consolidated 
basis or separate member basis, regardless of the method of payment. 
Thereafter, for a taxable year for which the group files a consolidated 
return, the group must compute the penalty on a consolidated basis.
    (2) Computation of penalty on consolidated basis. (i) This paragraph 
(b)(2) gives the rules for computing the penalty under section 6655 on a 
consolidated basis.
    (ii) The tax and facts shown on the return for the preceding taxable 
year referred to in section 6655(d) (1) and (2) are, if a consolidated 
return was filed for that preceding year, such items shown on the 
consolidated return for that preceding year or, if one was not filed for 
that preceding year, the aggregate taxes and the facts shown on the 
separate returns of the common parent and any other corporation that was 
a member of the same affiliated group as the common parent for that 
preceding year.
    (iii) If estimated tax was not paid on a consolidated basis, then 
the amount of the group's payments of estimated tax for the taxable year 
is the aggregate of the payments made by all members for the year.
    (iv) Section 6655(d)(1) applies only if the common parent's 
consolidated return, or each member's separate return, for the preceding 
taxable year (as the case may be) was a taxable year of 12 months.
    (3) Computation of penalty on separate member basis. To compute any 
penalty under section 6655 on a separate member basis, for purposes of 
section 6655(b)(1), the ``tax shown on the return

[[Page 573]]

for the taxable year'' is the portion of the tax shown on the 
consolidated return allocable to the member under paragraph (b)(5) of 
this section. If the member was included in the consolidated return 
filed by the group for the preceding taxable year then:
    (i) For purposes of section 6655(d)(1), the ``tax shown on the 
return'' for any member shall be the portion of the tax shown on the 
consolidated return for the preceding year allocable to the member under 
paragraph (b)(5) of this section.
    (ii) For purposes of section 6655(d)(2), the ``facts shown on the 
return'' shall be the facts shown on the consolidated return for the 
preceding year and the tax computed under that section shall be 
allocated under the rules of paragraph (b)(5) of this section.
    (4) Consolidated payments if separate returns filed. If the group 
does not file a consolidated return for the taxable year, but makes 
payments of estimated tax on a consolidated basis, for purposes of 
section 6655(b)(2), the ``amount, if any of the installment paid'' by 
any member is an amount apportioned to the member in a manner designated 
by the common parent that is satisfactory to the Commissioner. If the 
member was included in the consolidated return filed by the group for 
the preceding taxable year, the amount of a member's penalty under 
section 6655 is computed on the separate member basis described in 
paragraph (b)(3) (i) and (ii) of this section.
    (5) Rules for allocation of consolidated tax liability. For purposes 
of subparagraphs (1) and (2) of this paragraph, the tax shown on a 
consolidated return shall be allocated to the members of the group under 
the method which the group has elected pursuant to section 1552 and 
1.1502-33(d)(2).
    (c) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example 1. Corporations P and S-1 file a consolidated return for the 
first time for calendar year 1978. P and S-1 also file consolidated 
returns for 1979 and 1980. For 1978 and 1979, P and S-1 may make 
payments of estimated tax on either a separate or consolidated basis. 
For 1980, however, the group must pay its estimated tax on a 
consolidated basis. In determining whether P and S-1 come within the 
exception provided in section 6655(d)(1) for 1980, the ``tax shown on 
the return'' is the tax shown on the consolidated return for 1979.
    Example 2. Assume the same facts as in example (1). Assume further 
that corporation S-2 was a member of the group during 1979, and joins in 
the filing of the consolidated return for such year but ceases to be a 
member of the group on September 15, 1980. In determining whether the 
group (which no longer includes S-2) comes within the exception provided 
in section 6655(d)(1) for 1980, the ``tax shown on the return'' is the 
tax shown on the consolidated return for 1979.
    Example 3. Assume the same facts as in example (1). Assume further 
that corporation S-2 becomes a member of the group on July 1, 1980, and 
joins in the filing of the consolidated return for 1968. In determining 
whether the group (which now includes S-2) comes within the exception 
provided in section 6655(d)(1) for 1980, the ``tax shown on the return'' 
is the tax shown on the consolidated return for 1979. Any tax of S-2 for 
any separate return year is not included as a part of the ``tax shown on 
the return'' for purposes of applying section 6655(d)(1).
    Example 4. Corporations X and Y filed consolidated returns for the 
calendar years 1977 and 1978 and separate returns for 1979. In 
determining whether X and Y comes within the exception provided in 
section 6655(d)(1) for 1979, the ``tax shown on the return'' is the 
amount of tax shown on the consolidated return for 1978 allocable to X 
and Y in accordance with paragraph (b)(5) of this section.

    (d) Cross reference. For provisions relating to quick refunds of 
corporate estimated tax payments, see Sec.  1.1502-78, and Sec. Sec.  
1.6425-1 through 1.6425-3.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7059, 35 FR 
14549, Sept. 17, 1970; T.D. 7637, 44 FR 46840, Aug. 9, 1979; 62 FR 
23657, May 1, 1997; T.D. 8952, 66 FR 33831, June 26, 2001]



Sec.  1.1502-6  Liability for tax.

    (a) Several liability of members of group. Except as provided in 
paragraph (b) of this section, the common parent corporation and each 
subsidiary which was a member of the group during any part of the 
consolidated return year shall be severally liable for the tax for such 
year computed in accordance with the regulations under section 1502 
prescribed on or before the due date (not including extensions of time) 
for the filing of the consolidated return for such year.
    (b) Liability of subsidiary after withdrawal. If a subsidiary has 
ceased to be

[[Page 574]]

a member of the group and in such cessation resulted from a bona fide 
sale or exchange of its stock for fair value and occurred prior to the 
date upon which any deficiency is assessed, the Commissioner may, if he 
believes that the assessment or collection of the balance of the 
deficiency will not be jeopardized, make assessment and collection of 
such deficiency from such former subsidiary in an amount not exceeding 
the portion of such deficiency which the Commissioner may determine to 
be allocable to it. If the Commissioner makes assessment and collection 
of any part of a deficiency from such former subsidiary, then for 
purposes of any credit or refund of the amount collected from such 
former subsidiary the agency of the common parent under the provisions 
of Sec.  1.1502-77 shall not apply.
    (c) Effect of intercompany agreements. No agreement entered into by 
one or more members of the group with any other member of such group or 
with any other person shall in any case have the effect of reducing the 
liability prescribed under this section.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 9002, 67 FR 
43540, June 28, 2002]



Sec.  1.1502-9  Consolidated overall foreign losses, separate 
limitation losses, and overall domestic losses.

    (a) In general. This section provides rules for applying section 
904(f) and (g) (including its definitions and nomenclature) to a group 
and its members. Generally, section 904(f) concerns rules relating to 
overall foreign losses (OFLs) and separate limitation losses (SLLs) and 
the consequences of such losses. Under section 904(f)(5), losses are 
computed separately in each category of income described in section 
904(d)(1) or Sec.  1.904-4(m) (separate category). Section 904(g) 
concerns rules relating to overall domestic losses (ODLs) and the 
consequences of such losses. Paragraph (b) of this section defines terms 
and provides computational and accounting rules, including rules 
regarding recapture. Paragraph (c) of this section provides rules that 
apply to OFLs, SLLs, and ODLs when a member becomes or ceases to be a 
member of a group. Paragraph (d) of this section provides a predecessor 
and successor rule. Paragraph (e) of this section provides effective 
dates.
    (b) Consolidated application of section 904(f) and (g). A group 
applies section 904(f) and (g) for a consolidated return year in 
accordance with that section, subject to the following rules:
    (1) Computation of CSLI or CSLL and consolidated U.S.-source taxable 
income or CDL. The group computes its consolidated separate limitation 
income (CSLI) or consolidated separate limitation loss (CSLL) for each 
separate category under the principles of Sec.  1.1502-11 by aggregating 
each member's foreign-source taxable income or loss in such separate 
category computed under the principles of Sec.  1.1502-12, and taking 
into account the foreign portion of the consolidated items described in 
Sec.  1.1502-11(a)(2) through (a)(8) for such separate category. The 
group computes its consolidated U.S.-source taxable income or 
consolidated domestic loss (CDL) under similar principles.
    (2) Netting CSLLs, CSLIs, and consolidated U.S.-source taxable 
income. The group applies section 904(f)(5) to determine the extent to 
which a CSLL for a separate category reduces CSLI for another separate 
category or consolidated U.S.-source taxable income.
    (3) Netting CDL and CSLI. The group applies section 904(g)(2) to 
determine the extent to which a CDL reduces CSLI.
    (4) CSLL, COFL, and CODL accounts. To the extent provided in section 
904(f), the amount by which a CSLL for a separate category (the loss 
category) reduces CSLI for another separate category (the income 
category) will result in the creation of (or addition to) a CSLL account 
for the loss category with respect to the income category. Likewise, the 
amount by which a CSLL for a loss category reduces consolidated U.S.-
source taxable income will create (or add to) a consolidated overall 
foreign loss account (a COFL account). To the extent provided in section 
904(g), the amount by which a CDL reduces CSLI will result in the 
creation of (or addition to) a consolidated overall domestic loss (CODL) 
account for the income category reduced by the CDL.

[[Page 575]]

    (5) Recapture of COFL, CSLL, and CODL accounts. In the case of a 
COFL account for a loss category, section 904(f)(1) and section 
904(f)(3) recharacterize some or all of the foreign-source income in the 
loss category as U.S.-source income. In the case of a CSLL account for a 
loss category with respect to an income category, section 904(f)(5)(C) 
and section 904(f)(5)(F) recharacterize some or all of the foreign-
source income in the loss category as foreign-source income in the 
income category. In the case of a CODL account, section 904(g)(3) 
recharacterizes some of the U.S.-source income as foreign-source income 
in the separate category that was offset by the CDL. The COFL account, 
CSLL account, or CODL account is reduced to the extent income is 
recharacterized with respect to such account.
    (6) Intercompany transactions--(i) Nonapplication of section 904(f) 
disposition rules. Neither section 904(f)(3) (in the case of a COFL 
account) nor section 904(f)(5)(F) (in the case of a CSLL account) 
applies at the time of a disposition that is an intercompany transaction 
to which Sec.  1.1502-13 applies. Instead, section 904(f)(3) and section 
904(f)(5)(F) apply only at such time and only to the extent that the 
group is required under Sec.  1.1502-13 (without regard to section 
904(f)(3) and section 904(f)(5)(F)) to take into account any 
intercompany items resulting from the disposition, based on the COFL or 
CSLL account existing at the end of the consolidated return year during 
which the group takes the intercompany items into account.
    (ii) Examples. Paragraph (b)(6)(i) of this section is illustrated by 
the following examples. The identity of the parties and the basic 
assumptions set forth in Sec.  1.1502-13(c)(7)(i) apply to the examples. 
Except as otherwise stated, assume further that the consolidated group 
recognizes no foreign source income other than as a result of the 
transactions described. The examples are as follows:

    Example 1. (i) On June 10, year 1, S transfers nondepreciable 
property with a basis of $100 and a fair market value of $250 to B in a 
transaction to which section 351 applies. The property was predominantly 
used without the United States in a trade or business within the meaning 
of section 904(f)(3). B continues to use the property without the United 
States. The group has a COFL account in the relevant loss category of 
$120 as of December 31, year 1.
    (ii) Because the contribution from S to B is an intercompany 
transaction, section 904(f)(3) does not apply to result in any gain 
recognition in year 1. See paragraph (b)(5)(i) of this section.
    (iii) On January 10, year 4, B ceases to be a member of the group. 
Because S did not recognize gain in year 1 under section 351, no gain is 
taken into account in year 4 under Sec.  1.1502-13. Thus, no portion of 
the group's COFL account is recaptured in year 4. For rules requiring 
apportionment of a portion of the COFL account to B, see paragraph 
(c)(2) of this section.
    Example 2. (i) The facts are the same as in paragraph (i) of Example 
1. On January 10, year 4, B sells the property to X for $300. As of 
December 31, year 4, the group's COFL account is $40. (The COFL account 
was reduced between year 1 and year 4 due to unrelated foreign-source 
income taken into account by the group.)
    (ii) B takes into account gain of $200 in year 4. The $40 COFL 
account in year 4 recharacterizes $40 of the gain as U.S. source. See 
section 904(f)(3).
    Example 3. (i) On June 10, year 1, S sells nondepreciable property 
with a basis of $100 and a fair market value of $250 to B for $250 cash. 
The property was predominantly used without the United States in a trade 
or business within the meaning of section 904(f)(3). The group has a 
COFL account in the relevant loss category of $120 as of December 31, 
year 1. B predominantly uses the property in a trade or business without 
the United States.
    (ii) Because the sale is an intercompany transaction, section 
904(f)(3) does not require the group to take into account any gain in 
year 1. Thus, under paragraph (b)(5)(i) of this section, the COFL 
account is not reduced in year 1.
    (iii) On January 10, year 4, B sells the property to X for $300. As 
of December 31, year 4, the group's COFL account is $60. (The COFL 
account was reduced between year 1 and year 4 due to unrelated foreign-
source income taken into account by the group.)
    (iv) In year 4, S's $150 intercompany gain and B's $50 corresponding 
gain are taken into account to produce the same effect on consolidated 
taxable income as if S and B were divisions of a single corporation. See 
Sec.  1.1502-13(c). All of B's $50 corresponding gain is recharacterized 
under section 904(f)(3). If S and B were divisions of a single 
corporation and the intercompany sale were a transfer between the 
divisions, B would succeed to S's $100 basis in the property and would 
have $200 of gain ($60 of which would be recharacterized under section 
904(f)(3)), instead

[[Page 576]]

of a $50 gain. Consequently, S's $150 intercompany gain and B's $50 
corresponding gain are taken into account, and $10 of S's gain is 
recharacterized under section 904(f)(3) as U.S. source income to reflect 
the $10 difference between B's $50 recharacterized gain and the $60 
recomputed gain that would have been recharacterized.

    (c) Becoming or ceasing to be a member of a group--(1) Adding 
separate accounts on becoming a member. At the time that a corporation 
becomes a member of a group (a new member), the group adds to the 
balance of its COFL, CSLL or CODL account the balance of the new 
member's corresponding OFL account, SLL account or ODL account. A new 
member's OFL account corresponds to a COFL account if the account is for 
the same loss category. A new member's SLL account corresponds to a CSLL 
account if the account is for the same loss category and with respect to 
the same income category. A new member's ODL account corresponds to a 
CODL account if the account is with respect to the same income category. 
If the group does not have a COFL, CSLL or CODL account corresponding to 
the new member's account, it creates a COFL, CSLL or CODL account with a 
balance equal to the balance of the member's account.
    (2) Apportionment of consolidated account to departing member--(i) 
In general. A group apportions to a member that ceases to be a member (a 
departing member) a portion of each COFL, CSLL and CODL account as of 
the end of the year during which the member ceases to be a member and 
after the group makes the additions or reductions to such account 
required under paragraphs (b)(4), (b)(5), and (c)(1) of this section 
(other than an addition under paragraph (c)(1) of this section 
attributable to a member becoming a member after the departing member 
ceases to be a member). The group computes such portion under paragraph 
(c)(2)(ii) of this section, as limited by paragraph (c)(2)(iii) of this 
section. The departing member carries such portion to its first separate 
return year after it ceases to be a member. Also, the group reduces each 
account by such portion and carries such reduced amount to its first 
consolidated return year beginning after the year in which the member 
ceases to be a member. If two or more members cease to be members in the 
same year, the group computes the portion allocable to each such member 
(and reduces its accounts by such portion) in the order that the members 
cease to be members.
    (ii) Departing member's portion of group's account. A departing 
member's portion of a group's COFL, CSLL or CODL account for a loss 
category is computed based upon the member's share of the group's assets 
that generate income subject to recapture at the time that the member 
ceases to be a member. Under the characterization principles of 
Sec. Sec.  1.861-9T(g)(3) and 1.861-12T, the group identifies the assets 
of the departing member and the remaining members that generate U.S.-
source income (domestic assets) and foreign-source income (foreign 
assets) in each separate category. The assets are characterized based 
upon the income that the assets are reasonably expected to generate 
after the member ceases to be a member. The member's portion of a 
group's COFL or CSLL account for a loss category is the group's COFL or 
CSLL account, respectively, multiplied by a fraction, the numerator of 
which is the value of the member's foreign assets for the loss category 
and the denominator of which is the value of the foreign assets of the 
group (including the departing member) for the loss category. The 
member's portion of a group's CODL account for each income category is 
the group's CODL account multiplied by a fraction, the numerator of 
which is the value of the member's domestic assets and the denominator 
of which is the value of the domestic assets of the group (including the 
departing member). The value of the domestic and foreign assets is 
determined under the asset valuation rules of Sec.  1.861-9T(g)(1) and 
(2) using either tax book value, fair market value, or alternative tax 
book value under the method chosen by the group for purposes of interest 
apportionment as provided in Sec.  1.861-9T(g)(1)(ii). For purposes of 
this paragraph (c)(2)(ii), Sec.  1.861-9T(g)(2)(iv) (assets in 
intercompany transactions) shall apply, but Sec.  1.861-9T(g)(2)(iii) 
(adjustments for directly allocated interest) shall not apply. If the 
group uses the tax book value method, the member's portions of

[[Page 577]]

COFL, CSLL, and CODL accounts are limited by paragraph (c)(2)(iii) of 
this section. In addition, for purposes of this paragraph (c)(2)(ii), 
the tax book value of assets transferred in intercompany transactions 
shall be determined without regard to previously deferred gain or loss 
that is taken into account by the group as a result of the transaction 
in which the member ceases to be a member. The assets should be valued 
at the time the member ceases to be a member, but values on other dates 
may be used unless this creates substantial distortions. For example, if 
a member ceases to be a member in the middle of the group's consolidated 
return year, an average of the values of assets at the beginning and end 
of the year (as provided in Sec.  1.861-9T(g)(2)) may be used or, if a 
member ceases to be a member in the early part of the group's 
consolidated return year, values at the beginning of the year may be 
used, unless this creates substantial distortions.
    (iii) Limitation on member's portion for groups using tax book value 
method. If a group uses the tax book value method of valuing assets for 
purposes of paragraph (c)(2)(ii) of this section and the aggregate of a 
member's portions of COFL and CSLL accounts for a loss category (with 
respect to one or more income categories) determined under paragraph 
(c)(2)(ii) of this section exceeds 150 percent of the actual fair market 
value of the member's foreign assets in the loss category, the member's 
portion of the COFL or CSLL accounts for the loss category shall be 
reduced (proportionately, in the case of multiple accounts) by such 
excess. In addition, if the aggregate of a member's portions of CODL 
accounts (with respect to one or more income categories) determined 
under paragraph (c)(2)(ii) of this section exceeds 150 percent of the 
actual fair market value of the member's domestic assets, the member's 
portion of the CODL accounts shall be reduced (proportionately, in the 
case of multiple accounts) by such excess. This rule does not apply in 
the case of COFL or CSLL accounts if the departing member and all other 
members that cease to be members as part of the same transaction own all 
(or substantially all) the foreign assets in the loss category. In the 
case of CODL accounts, this rule does not apply if the departing member 
and all other members that cease to be members as part of the same 
transaction own all (or substantially all) the domestic assets.
    (iv) Determination of values of domestic and foreign assets binding 
on departing member. The group's determination of the value of the 
member's and the group's domestic and foreign assets for a loss category 
is binding on the member, unless the Commissioner concludes that the 
determination is not appropriate. The common parent of the group must 
attach a statement to the return for the taxable year that the departing 
member ceases to be a member of the group that sets forth the name and 
taxpayer identification number of the departing member, the amount of 
each COFL and CSLL for each loss category and each CODL that is 
apportioned to the departing member under this paragraph (c)(2), the 
method used to determine the value of the member's and the group's 
domestic and foreign assets in each such loss category, and the value of 
the member's and the group's domestic and foreign assets in each such 
loss category. The common parent must also furnish a copy of the 
statement to the departing member.
    (v) Anti-abuse rule. If a corporation becomes a member and ceases to 
be a member, and a principal purpose of the corporation becoming and 
ceasing to be a member is to transfer the corporation's OFL account, SLL 
account or ODL account to the group or to transfer the group's COFL, 
CSLL or CODL account to the corporation, appropriate adjustments will be 
made to eliminate the benefit of such a transfer of accounts. Similarly, 
if any member acquires assets or disposes of assets (including a 
transfer of assets between members of the group and the departing 
member) with a principal purpose of affecting the apportionment of 
accounts under paragraph (c)(2)(i) of this section, appropriate 
adjustments will be made to eliminate the benefit of such acquisition or 
disposition.
    (vi) Examples. The following examples illustrate the rules of this 
paragraph (c):


[[Page 578]]


    Example 1. (i) On November 6, year 1, S, a member of the P group, a 
consolidated group with a calendar consolidated return year, ceases to 
be a member of the group. On December 31, year 1, the P group has a $40 
COFL account for the general category, a $20 CSLL account for the 
general category (that is, the loss category) with respect to the 
passive category (that is, the income category), and a $10 CODL account 
with respect to the passive category (that is, the income category). No 
member of the group has foreign-source income or loss in year 1. The 
group apportions its interest expense according to the tax book value 
method.
    (ii) On November 6, year 1, the group identifies S's assets and the 
group's assets (including S's assets) expected to produce foreign-source 
general category income. Use of end-of-the-year values will not create 
substantial distortions in determining the relative values of S's and 
the group's relevant assets on November 6, year 1. The group determines 
that S's relevant assets have a tax book value of $2,000 and a fair 
market value of $2,200. Also, the group's relevant assets (including S's 
assets) have a tax book value of $8,000. On November 6, year 1, S has no 
assets expected to produce U.S. source income.
    (iii) Under paragraph (c)(2)(ii) of this section, S takes a $10 COFL 
account for the general category ($40 x $2,000/$8,000) and a $5 CSLL 
account for the general category with respect to the passive category 
($20 x $2,000/$8,000). S does not take any portion of the CODL account. 
The limitation described in paragraph (c)(2)(iii) of this section does 
not apply because the aggregate of the COFL and CSLL accounts for the 
general category that are apportioned to S ($15) is less than 150% of 
the actual fair market value of S's general category foreign assets 
($2,200 x 150%).
    Example 2. (i) Assume the same facts as in Example 1, except that 
the fair market value of S's general category foreign assets is $4 as of 
November 6, year 1.
    (ii) Under paragraph (c)(2)(iii) of this section, S's COFL and CSLL 
accounts for the general category must be reduced by $9, which is the 
excess of $15 (the aggregate amount of the accounts apportioned under 
paragraph (c)(2)(ii) of this section) over $6 (150% of the $4 actual 
fair market value of S's general category foreign assets). S thus takes 
a $4 COFL account for the general category ($10 - ($9 x $10/$15)) and a 
$2 CSLL account for the general category with respect to the passive 
category ($5 - ($9 x $5/$15)).
    Example 3. (i) Assume the same facts as in Example 1, except that S 
also has assets that are expected to produce U.S. source income.
    (ii) On November 6, year 1, the group identifies S's assets and the 
group's assets (including S's assets) expected to produce U.S. source 
income. Use of end-of-the-year values will not create substantial 
distortions in determining the relative values of S's and the group's 
relevant assets on November 6, year 1. The group determines that S's 
relevant assets have a tax book value of $3,000 and a fair market value 
of $2,500. Also, the group's relevant assets (including S's assets) have 
a tax book value of $6,000.
    (iii) Under paragraph (c)(2)(ii) of this section, S takes a $5 CODL 
account ($10 x $3,000/$6,000), in addition to the COFL and CSLL accounts 
determined in Example 1. The limitation described in paragraph 
(c)(2)(iii) of this section does not apply because the CODL account that 
is apportioned to S ($5) is less than 150% of the actual fair market 
value of S's U.S. assets ($2,500 x 150%).

    (d) Predecessor and successor. A reference to a member includes, as 
the context may require, a reference to a predecessor or successor of 
the member. See Sec.  1.1502-1(f).
    (e) Effective/applicability date. This section applies to 
consolidated return years beginning on or after January 1, 2012, for 
which the return is due (without extensions) after June 22, 2012. 
Taxpayers may choose to apply the provisions of this section to other 
consolidated return years beginning after December 31, 2006, including 
periods covered by 26 CFR 1.1502-9T (revised as of April 1, 2010). For 
rules relating to overall foreign losses and separate limitation losses 
in consolidated return years beginning on or before December 21, 2007, 
see 26 CFR 1.1502-9 (revised as of April 1, 2007).

[T.D. 9595, 77 FR 37585, June 22, 2012]

               Computation of Consolidated Taxable Income



Sec.  1.1502-11  Consolidated taxable income.

    (a) In general. The consolidated taxable income for a consolidated 
return year shall be determined by taking into account:
    (1) The separate taxable income of each member of the group (see 
Sec.  1.1502-12 for the computation of separate taxable income);
    (2) Any consolidated net operating loss deduction (see Sec. Sec.  
1.1502-21 (or 1.1502-21A, as appropriate) for the computation of the 
consolidated net operating loss deduction);
    (3) Any consolidated capital gain net income (net capital gain for 
taxable years beginning before January 1, 1977)

[[Page 579]]

(see Sec. Sec.  1.1502-22 (or 1.1502-22A, as appropriate) for the 
computation of the consolidated capital gain net income (net capital 
gain for taxable years beginning before January 1, 1977));
    (4) Any consolidated section 1231 net loss (see Sec. Sec.  1.1502-23 
(or 1.1502-23A, as appropriate) for the computation of the consolidated 
section 1231 net loss);
    (5) Any consolidated charitable contributions deduction (see Sec.  
1.1502-24 for the computation of the consolidated charitable 
contributions deduction);
    (6) Any consolidated section 922 deduction (see Sec.  1.1502-25 for 
the computation of the consolidated section 922 deduction);
    (7) Any consolidated dividends received deduction (see Sec.  1.1502-
26 for the computation of the consolidated dividends received 
deduction); and
    (8) Any consolidated section 247 deduction (see Sec.  1.1502-27 for 
the computation of the consolidated section 247 deduction).
    (b) Elimination of circular stock basis adjustments when there is no 
excluded COD income--(1) In general. If one member (P) disposes of the 
stock of another member (S), this paragraph (b) limits the use of S's 
deductions and losses in the year of disposition and the carryback of 
items to prior years. The purpose of the limitation is to prevent P's 
income or gain from the disposition of S's stock from increasing the 
absorption of S's deductions and losses, because the increased 
absorption would reduce P's basis (or increase its excess loss account) 
in S's stock under Sec.  1.1502-32 and, in turn, increase P's income or 
gain. See paragraph (b)(3) of this section for the application of these 
principles to P's deduction or loss from the disposition of S's stock, 
and paragraph (b)(4) of this section for the application of these 
principles to multiple stock dispositions. This paragraph (b) applies 
only when no member realizes discharge of indebtedness income that is 
excluded from gross income under section 108(a) (excluded COD income) 
during the taxable year of the disposition. See paragraph (c) of this 
section for rules that apply when a member realizes excluded COD income 
during the taxable year of the disposition. See Sec.  1.1502-19(c) for 
the definition of disposition.
    (2) Limitation on deductions and losses--(i) Determination of amount 
of limitation. If P disposes of one or more shares of S's stock, the 
extent to which S's deductions and losses for the tax year of the 
disposition (and its deductions and losses carried over from prior 
years) may offset income and gain is subject to limitation. The amount 
of S's deductions and losses that may offset income and gain is 
determined by tentatively computing taxable income (or loss) for the 
year of disposition (and any prior years to which the deductions or 
losses may be carried) without taking into account P's income and gain 
from the disposition.
    (ii) Application of limitation. S's deductions and losses offset 
income and gain only to the extent of the amount determined under 
paragraph (b)(2)(i) of this section. To the extent S's deductions and 
losses in the year of disposition cannot offset income or gain because 
of the limitation under this paragraph (b), the items are carried to 
other years under the applicable provisions of the Internal Revenue Code 
and regulations as if they were the only items incurred by S in the year 
of disposition. For example, to the extent S incurs an operating loss in 
the year of disposition that is limited, the loss is treated as a 
separate net operating loss attributable to S arising in that year. The 
tentative computation does not affect the manner in which S's unlimited 
deductions and losses are absorbed or the manner in which deductions and 
losses of other members are absorbed. (If the amount of S's unlimited 
deductions and losses actually absorbed is less than the amount absorbed 
in the tentative computation, P's stock basis adjustments under Sec.  
1.1502-32 reflect only the amounts actually absorbed.)
    (iii) Examples. For purposes of the examples in this paragraph (b), 
unless otherwise stated, P owns all of the only class of S's stock for 
the entire year, S owns no stock of lower-tier members, the tax year of 
all persons is the calendar year, all persons use the accrual method of 
accounting, the facts set forth the only corporate activity, all 
transactions are between unrelated

[[Page 580]]

persons, and tax liabilities are disregarded. The principles of this 
paragraph (b)(2) are illustrated by the following examples.

    Example 1. Limitation on losses with respect to stock gain. (a) P 
has a $500 basis in S's stock. For Year 1, P has ordinary income of $30 
(determined without taking P's gain or loss from the disposition of S's 
stock into account) and S has an $80 ordinary loss. P sells S's stock 
for $520 at the close of Year 1.
    (b) To determine the amount of the limitation on S's loss under 
paragraph (b)(2)(i) of this section, and the effect under Sec.  1.1502-
32(b) of the absorption of S's loss on P's basis in S's stock, P's gain 
or loss from the disposition of S's stock is not taken into account. The 
group is tentatively treated as having a consolidated net operating loss 
of $50 (P's $30 of income minus S's $80 loss). Thus, $50 of S's loss is 
limited under this paragraph (b).
    (c) Because $30 of S's loss is absorbed in the determination of 
consolidated taxable income under paragraph (b)(2)(ii) of this section, 
P's basis in S's stock is reduced under Sec.  1.1502-32(b) from $500 to 
$470 immediately before the disposition. Consequently, P recognizes a 
$50 gain from the sale of S's stock and the group has consolidated 
taxable income of $50 for Year 1 (P's $30 of ordinary income and $50 
gain from the sale of S's stock, less the $30 of S's loss). In addition, 
S's limited loss of $50 is treated as a separate net operating loss 
attributable to S and, because S ceases to be a member, the loss is 
apportioned to S under Sec.  1.1502-21 (or Sec.  1.1502-79A, as 
appropriate) and carried to its first separate return year.
    Example 2. Carrybacks and carryovers. (a) For Year 1, the P group 
has consolidated taxable income of $30, and a consolidated net capital 
loss of $100 ($50 attributable to P and $50 to S). At the beginning of 
Year 2, P has a $300 basis in S's stock. For Year 2, P has ordinary 
income of $30, and a $20 capital gain (determined without taking the 
$100 consolidated net capital loss carryover or P's gain or loss from 
the disposition of S's stock into account), and S has a $100 ordinary 
loss. P sells S's stock for $280 at the close of Year 2.
    (b) To determine the amount of the limitation under paragraph 
(b)(2)(i) of this section on S's losses, and the effect of the 
absorption of S's losses on P's basis in S's stock under Sec.  1.1502-
32(b), P's gain or loss from the disposition of S's stock is not taken 
into account. For Year 2, the P group is tentatively treated as having a 
$70 consolidated net operating loss (S's $100 ordinary loss, less P's 
$30 of ordinary income). The P group is also treated as having no 
consolidated net capital gain in Year 2, because P's $20 capital gain is 
reduced by $20 of the consolidated net capital loss carryover from Year 
1 under section 1212(a) (the absorption of which is attributed equally 
to P and S). In addition, of the $70 consolidated net operating loss, 
$30 is carried back to Year 1 and offsets P's ordinary income in that 
year, and $40 is carried forward. Consequently, $40 of S's operating 
loss from Year 2, and $40 of the consolidated net capital loss carryover 
from Year 1 attributable to S, are limited under this paragraph (b).
    (c) Under paragraph (b)(2)(ii) of this section, the limitation under 
this paragraph (b) does not affect the absorption of any deductions and 
losses attributable to P, $60 of S's operating loss from Year 2, and $10 
of the consolidated net capital loss from Year 1 attributable to S. 
Consequently, P's basis in S's stock is reduced under Sec.  1.1502-32(b) 
by $70, from $300 to $230, and P recognizes a $50 gain from the sale of 
S's stock in Year 2. Thus, the P group is treated as having a $20 
unlimited net operating loss that is carried back to Year 1:

Ordinary income:
  P...........................................................      $30
  S (excluding the $40 limited loss)..........................      (60)
                                                               ---------
    Sub Total.................................................     $(30)
Consolidated net capital gain:
  P ($20 + $50 from S stock - $50 from Year 1)................      $20
  S (-$10 from Year 1)........................................      (10)
                                                               ---------
    Sub Total.................................................      $10
Consolidated taxable income...................................     $(20)
 

    (d) Under paragraph (b)(2)(ii) of this section, S's $40 ordinary 
loss from Year 2 that is limited under this paragraph (b) is treated as 
a separate net operating loss arising in Year 2. Similarly, $40 of the 
consolidated net capital loss from Year 1 attributable to S is treated 
as a separate net capital loss carried over from Year 1. Because S 
ceases to be a member, the $40 net operating loss from Year 2 and the 
$40 consolidated net capital loss from Year 1 are allocated to S under 
Sec. Sec.  1.1502-21 and 1.1502-22, respectively (or Sec.  1.1502-79A, 
as appropriate) and are carried to S's first separate return year.
    Example 3. Allocation of basis adjustments. (a) For Year 1, the P 
group has consolidated taxable income of $100. At the beginning of Year 
2, P has a $40 basis in each of the 10 shares of S's stock. For Year 2, 
P has an $80 ordinary loss (determined without taking into account P's 
gain or loss from the disposition of S's stock) and S has an $80 
ordinary loss. P sells 2 shares of S's stock for $85 each at the close 
of Year 2.
    (b) Under paragraph (b)(2)(i) of this section, the amount of the 
limitation on S's loss is determined by tentatively treating the P group 
as having a $160 consolidated net operating loss for Year 2. Of this 
amount, $100 is carried back under section 172 and absorbed in Year 1 
($50 attributable to S and $50 attributable to P). Consequently, $30 of 
S's loss is limited under this paragraph (b).

[[Page 581]]

    (c) Under paragraph (b)(2)(ii) of this section, the limitation under 
this paragraph (b) does not affect the absorption of P's $80 ordinary 
loss or $50 of S's ordinary loss. Consequently, P's basis in each share 
of S's stock is reduced from $40 to $35 under Sec.  1.1502-32(b), and P 
recognizes a $100 gain from the sale of the 2 shares. Thus, the P group 
is treated as having a $30 unlimited net operating loss:

Ordinary loss:
  P...........................................................     $(80)
  S (excluding the $30 limited loss)..........................      (50)
                                                               ---------
    Sub Total.................................................    $(130)
Consolidated net capital gain:
  P...........................................................     $100
  S...........................................................        0
                                                               ---------
    Sub Total.................................................     $100
Unlimited consolidated net operating loss.....................     $(30)
 

    (d) A portion of the $130 of unlimited operating losses for Year 2 
is fully absorbed in that year, and a portion is carried back to Year 1. 
Thus, $61.50 of P's $80 loss ($100 multiplied by $80/$130) and $38.50 of 
S's $50 unlimited loss ($100 multiplied by $50/$130) are absorbed in 
Year 2. P's remaining $18.50 of loss and S's remaining $11.50 of loss 
are not subject to limitation and are carried back and absorbed in Year 
1.
    (e) Under paragraph (b)(2)(ii) of this section, S's $30 of loss 
limited under this paragraph (b) is treated as a separate net operating 
loss.

    (3) Loss dispositions--(i) General rule. The principles of paragraph 
(b)(2) of this section apply to the extent necessary to carry out the 
purposes of paragraph (b)(1) of this section if P recognizes a deduction 
or loss from the disposition of S's stock.
    (ii) Example. The principles of this paragraph (b)(3) are 
illustrated by the following example.

    Example. (a) P has a $400 basis in S's stock. For Year 1, P has a 
capital gain of $100 (determined without taking P's gain or loss from 
the disposition of S's stock into account) and S has both a $60 capital 
loss and a $200 ordinary loss. P sells S's stock for $140 at the close 
of Year 1.
    (b) Under paragraph (b)(3) of this section, the amount of S's 
ordinary and capital losses that may offset income and gain is 
determined by tentatively computing the group's consolidated net 
operating loss and consolidated net capital loss without taking into 
account P's loss from the disposition of S's stock. The limitation is 
necessary to prevent P's loss from the disposition of S's stock from 
affecting the absorption of S's losses and thereby the adjustments to 
P's basis in S's stock under Sec.  1.1502-32(b) (which would, in turn, 
affect P's loss).
    (c) Under the principles of paragraph (b)(2)(i) of this section, the 
amount of the limitation on S's loss is determined by tentatively 
treating the P group as having a $40 consolidated net capital gain and a 
$200 ordinary loss, which results in a $160 consolidated net operating 
loss for Year 1, all of which is attributable to S. Thus, $160 of S's 
ordinary loss is limited under this paragraph (b). See also Sec. Sec.  
1.337(d)-2, 1.1502-35, and 1.1502-36 for rules relating to basis 
adjustments and allowance of stock loss on dispositions of stock of a 
subsidiary member.

    (4) Multiple dispositions--(i) Stock of a member. To the extent 
income, gain, deduction, or loss from a prior disposition of S's stock 
is deferred under any rule of law, the limitation under paragraph (b)(2) 
of this section is determined by treating the year the deferred amount 
is taken into account as the year of the disposition.
    (ii) Stock of different members. If S is a higher-tier corporation 
with respect to another member (T), and all of T's items of income, 
gain, deduction, and loss (including the absorption of T's deduction or 
loss) would be fully reflected in P's basis in S's stock under Sec.  
1.1502-32, the limitation under paragraph (b)(2)(i) of this section with 
respect to T's deductions and losses is determined without taking into 
account any income, gain, deduction, or loss from the disposition of the 
stock of S or T (or of the stock of members owned in the chain 
connecting S and T). However, this paragraph (b) does not otherwise 
limit the absorption of one member's deduction or loss with respect to 
the disposition of another member's stock.
    (iii) Examples. The principles of this paragraph (b)(4) are 
illustrated by the following examples.

    Example 1. Chain of subsidiaries. (a) P owns all of S's stock with a 
$500 basis, and S owns all of T's stock with a $500 basis. For Year 1, P 
has ordinary income of $30, S has no income or loss, and T has an $80 
ordinary loss. P sells S's stock for $520 at the close of Year 1.
    (b) Under paragraph (b)(4) of this section, to determine the amount 
of the limitation under paragraph (b) of this section on T's loss, and 
the effect of the absorption of T's loss on P's basis in S's stock under 
Sec.  1.1502-32(b), P's gain or loss from the disposition of S's stock 
is not taken into account. The

[[Page 582]]

group is tentatively treated as having a consolidated net operating loss 
of $50 (P's $30 of income minus T's $80 loss). Because only $30 of T's 
loss offsets income or gain, P's basis in S's stock is reduced under 
Sec.  1.1502-32(b) from $500 to $470 immediately before the disposition 
of S's stock. Thus, P takes into account a $50 gain from the sale of S's 
stock.
    (c) The facts are the same as in paragraph (a) of this Example 1, 
except that S has a $10 excess loss account in T's stock (rather than a 
$500 basis). Under paragraph (b)(4) of this section, neither P's gain or 
loss from the disposition of S's stock nor S's gain or loss from the 
disposition of T's stock (under Sec.  1.1502-19) are taken into account 
for purposes of the tentative computations and the effect of any 
absorption under Sec.  1.1502-32(b) on P's basis in S's stock and S's 
excess loss account in T's stock. The group is tentatively treated as 
having a consolidated net operating loss of $50 (P's $30 of income minus 
T's $80 loss), and only $30 of T's loss may offset the group's income or 
gain. Under Sec.  1.1502-32(b), the absorption of $30 of T's loss 
increases S's excess loss account in T's stock to $40 and, under Sec.  
1.1502-19, the excess loss account is taken into account. Moreover, 
under Sec.  1.1502-32(b), P's basis in S's stock is increased 
immediately before the sale by $10 (S's $40 gain under Sec.  1.1502-
19(b) minus T's $30 loss absorbed and tiered up under Sec.  1.1502-
32(b)), from $500 to $510. Thus, P takes into account a $10 gain from 
the sale of S's stock, and S takes into account a $40 gain from its 
excess loss account in T's stock.
    Example 2. Brother-sister subsidiaries. (a) P owns all of the stock 
of S1 and S2, each with a $50 basis. For Year 1, the group has a $100 
consolidated net operating loss ($50 of which is attributable to S1, and 
$50 to S2) determined without taking gain or loss from the disposition 
of member stock into account. At the close of Year 1, P sells the stock 
of S1 and S2 for $100 each.
    (b) Paragraph (b)(4) of this section does not limit the loss of S1 
or S2 with respect to the disposition of stock of the other. 
Consequently, each subsidiary's loss may offset P's gain from the 
disposition of the stock of the other subsidiary. Because this 
absorption results in a $50 reduction in P's basis in the stock of each 
subsidiary under Sec.  1.1502-32(b), P's aggregate gain from the stock 
dispositions is increased from $100 to $200, $100 of which is offset by 
the losses of the subsidiaries.

    (5) Effective date. This paragraph (b) applies to stock dispositions 
occurring in consolidated return years beginning on or after January 1, 
1995. For prior years, see Sec.  1.1502-11(b) as contained in the 26 CFR 
part 1 edition revised as of April 1, 1994.
    (c) Elimination of circular stock basis adjustments when there is 
excluded COD income--(1) In general. If one member (P) disposes of the 
stock of another member (S) in a year during which any member realizes 
excluded COD income, this paragraph (c) limits the use of S's deductions 
and losses in the year of disposition and the carryback of items to 
prior years, the amount of the attributes of certain members that can be 
reduced in respect of excluded COD income of certain other members, and 
the attributes that can be used to offset an excess loss account taken 
into account by reason of the application of Sec.  1.1502-
19(c)(1)(iii)(B). In addition to the purpose set forth in paragraph 
(b)(1) of this section, the purpose of these limitations is to prevent 
the reduction of tax attributes in respect of excluded COD income from 
affecting P's income, gain, or loss on the disposition of S stock 
(including a disposition of S stock that results from the application of 
Sec.  1.1502-19(c)(1)(iii)(B)) and, in turn, affecting the attributes 
available for reduction pursuant to sections 108 and 1017 and Sec.  
1.1502-28. See Sec.  1.1502-19(c) for the definition of disposition.
    (2) Computation of tax liability, reduction of attributes, and 
computation of limits on absorption and reduction of attributes. If a 
member realizes excluded COD income in the taxable year during which P 
disposes of S stock, the steps used to compute tax liability, to effect 
the reduction of attributes, and to compute the limitations on the 
absorption and reduction of attributes are as follows. These steps also 
apply to determine whether and to what extent an excess loss account 
must be taken into account as a result of the application of Sec.  
1.1502-19(b)(1) and (c)(1)(iii)(B).
    (i) Limitation on deductions and losses to offset income or gain. 
First, the determination of the extent to which S's deductions and 
losses for the tax year of the disposition (and its deductions and 
losses carried over from prior years) may offset income and gain is made 
pursuant to paragraphs (b)(2) and (3) of this section.
    (ii) Tentative adjustment of stock basis. Second, Sec.  1.1502-32 is 
tentatively applied to adjust the basis of the S stock to reflect the 
amount of S's income and

[[Page 583]]

gain included, and unlimited deductions and losses that are absorbed, in 
the tentative computation of taxable income or loss for the year of the 
disposition (and any prior years) that is made pursuant to paragraph 
(b)(2) of this section, but not to reflect the realization of excluded 
COD income and the reduction of attributes in respect thereof.
    (iii) Tentative computation of stock gain or loss. Third, in the 
case of a disposition of S stock that does not result from the 
application of Sec.  1.1502-19(c)(1)(iii)(B), P's income, gain, or loss 
from the disposition of S stock is computed. For this purpose, the 
result of the computation pursuant to paragraph (c)(2)(ii) of this 
section is treated as the basis of such stock.
    (iv) Tentative computation of tax imposed. Fourth, the tax imposed 
by chapter 1 of the Internal Revenue Code for the year of disposition 
(and any prior years) is tentatively computed. For this purpose, in the 
case of a disposition of S stock that does not result from the 
application of Sec.  1.1502-19(c)(1)(iii)(B), the tentative computation 
of tax imposed takes into account P's income, gain, or loss from the 
disposition of S stock computed pursuant to paragraph (c)(2)(iii) of 
this section. The tentative computation of tax imposed is made without 
regard to whether all or a portion of an excess loss account in a share 
of S stock is required to be taken into account pursuant to Sec.  
1.1502-19(b)(1) and (c)(1)(iii)(B).
    (v) Tentative reduction of attributes. Fifth, the rules of sections 
108 and 1017 and Sec.  1.1502-28 are tentatively applied to reduce the 
attributes remaining after the tentative computation of tax imposed 
pursuant to paragraph (c)(2)(iv) of this section.
    (vi) Actual adjustment of stock basis. Sixth, Sec.  1.1502-32 is 
applied to reflect the amount of S's income and gain included, and 
unlimited deductions and losses that are absorbed, in the tentative 
computation of tax imposed for the year of the disposition (and any 
prior years) made pursuant to paragraph (c)(2)(iv) of this section, and 
the excluded COD income applied to reduce attributes and the attributes 
tentatively reduced in respect of the excluded COD income pursuant to 
paragraph (c)(2)(v) of this section.
    (vii) Actual computation of stock gain or loss. Seventh, the group's 
actual gain or loss on the disposition of S stock (including a 
disposition that results from the application of Sec.  1.1502-
19(c)(1)(iii)(B)) is computed. The result of the computation pursuant to 
paragraph (c)(2)(vi) of this section is treated as the basis of such 
stock.
    (viii) Actual computation of tax imposed. Eighth, the tax imposed by 
chapter 1 of the Internal Revenue Code for the year of the disposition 
(and any prior years) is computed. The actual tax imposed on the group 
for the year of the disposition is computed by applying the limitation 
computed pursuant to paragraph (c)(2)(i) of this section, and by 
including the gain or loss recognized on the disposition of S stock 
computed pursuant to paragraph (c)(2)(vii) of this section. However, 
attributes that were tentatively used in the computation of tax imposed 
pursuant to paragraph (c)(2)(iv) of this section and attributes that 
were tentatively reduced pursuant to paragraph (c)(2)(v) of this section 
cannot offset any excess loss account taken into account as a result of 
the application of Sec.  1.1502-19(b)(1) and (c)(1)(iii)(B).
    (ix) Actual reduction of attributes. Ninth, the rules of sections 
108 and 1017 and Sec.  1.1502-28 are actually applied to reduce the 
attributes remaining after the actual computation of tax imposed 
pursuant to paragraph (c)(2)(viii) of this section.
    (A) S or a lower-tier corporation realizes excluded COD income. If S 
or a lower-tier corporation of S realizes excluded COD income, the 
aggregate amount of excluded COD income that is applied to reduce 
attributes attributable to members other than S and any lower-tier 
corporation of S pursuant to this paragraph (c)(2)(ix) shall not exceed 
the aggregate amount of excluded COD income that was tentatively applied 
to reduce attributes attributable to members other than S and any lower-
tier corporation of S pursuant to paragraph (c)(2)(v) of this section. 
The amount of the actual reduction of attributes attributable to S and 
any lower-tier corporation of S that may be reduced in respect of the 
excluded COD income of

[[Page 584]]

S or a lower-tier corporation of S shall not be so limited.
    (B) A member other than S or a lower-tier corporation realizes 
excluded COD income. If a member other than S or a lower-tier 
corporation of S realizes excluded COD income, the aggregate amount of 
excluded COD income that is applied to reduce attributes (other than 
credits) attributable to S and any lower-tier corporation of S pursuant 
to this paragraph (c)(2)(ix) shall not exceed the aggregate amount of 
excluded COD income that was tentatively applied to reduce attributes 
(other than credits) attributable to S and any lower-tier corporation of 
S pursuant to paragraph (c)(2)(v) of this section. The amount of the 
actual reduction of attributes attributable to any member other than S 
and any lower-tier corporation of S that may be reduced in respect of 
the excluded COD income of S or a lower-tier corporation of S shall not 
be so limited.
    (3) Special rules. (i) If the reduction of attributes attributable 
to a member is prevented as a result of a limitation described in 
paragraph (c)(2)(ix)(B) of this section, the excluded COD income that 
would have otherwise been applied to reduce such attributes is applied 
to reduce the remaining attributes of the same type that are available 
for reduction under Sec.  1.1502-28(a)(4), on a pro rata basis, prior to 
reducing attributes of a different type. The reduction of such remaining 
attributes, however, is subject to any applicable limitation described 
in paragraph (c)(2)(ix)(B) of this section.
    (ii) To the extent S's deductions and losses in the year of 
disposition (or those of a lower-tier corporation of S) cannot offset 
income or gain because of the limitation under paragraph (b) of this 
section or this paragraph (c) and are not reduced pursuant to sections 
108 and 1017 and Sec.  1.1502-28, such items are carried to other years 
under the applicable provisions of the Internal Revenue Code and 
regulations as if they were the only items incurred by S (or a lower-
tier corporation of S) in the year of disposition. For example, to the 
extent S incurs an operating loss in the year of disposition that is 
limited and is not reduced pursuant to section 108 and Sec.  1.1502-28, 
the loss is treated as a separate net operating loss attributable to S 
arising in that year.
    (4) Definition of lower-tier corporation. A corporation is a lower-
tier corporation of S if all of its items of income, gain, deduction, 
and loss (including the absorption of deduction or loss and the 
reduction of attributes other than credits) would be fully reflected in 
P's basis in S's stock under Sec.  1.1502-32.
    (5) Examples. For purposes of the examples in this paragraph (c), 
unless otherwise stated, the tax year of all persons is the calendar 
year, all persons use the accrual method of accounting, the facts set 
forth the only corporate activity, all transactions are between 
unrelated persons, tax liabilities are disregarded, and no election 
under section 108(b)(5) is made. The principles of this paragraph (c) 
are illustrated by the following examples:

    Example 1. Departing member realizes excluded COD income. (i) Facts. 
P owns all of S's stock with a $90 basis. For Year 1, P has ordinary 
income of $30, and S has an $80 ordinary loss and $100 of excluded COD 
income from the discharge of non-intercompany indebtedness. P sells the 
S stock for $20 at the close of Year 1. As of the beginning of Year 2, S 
has Asset A with a basis of $0 and a fair market value of $20.
    (ii) Analysis. The steps used to compute the tax imposed on the 
group, to effect the reduction of attributes, and to compute the 
limitations on the use and reduction of attributes are as follows:
    (A) Computation of limitation on deductions and losses to offset 
income or gain. To determine the amount of the limitation under 
paragraph (c)(2)(i) of this section on S's loss and the effect of the 
absorption of S's loss on P's basis in S's stock under Sec.  1.1502-
32(b), P's gain or loss from the disposition of S's stock is not taken 
into account. The group is tentatively treated as having a consolidated 
net operating loss of $50 (P's $30 of income minus S's $80 loss). Thus, 
$30 of S's loss is unlimited and $50 of S's loss is limited under 
paragraph (c)(2)(i) of this section. Under the principles of Sec.  
1.1502-21(b)(2)(iv), all of the consolidated net operating loss is 
attributable to S.
    (B) Tentative adjustment of stock basis. Then, pursuant to paragraph 
(c)(2)(ii) of this section, Sec.  1.1502-32 is tentatively applied to 
adjust the basis of S stock. For this purpose, however, adjustments 
attributable to the excluded COD income and the reduction of attributes 
in respect thereof are not taken into account. Under Sec.  1.1502-32(b), 
the absorption of $30 of S's loss decreases P's basis in S's stock by 
$30 to $60.

[[Page 585]]

    (C) Tentative computation of stock gain or loss. Then, P's income, 
gain, or loss from the sale of S stock is computed pursuant to paragraph 
(c)(2)(iii) of this section using the basis computed in the previous 
step. Thus, P is treated as recognizing a $40 loss from the sale of S 
stock.
    (D) Tentative computation of tax imposed. Pursuant to paragraph 
(c)(2)(iv) of this section, the tax imposed for the year of disposition 
is then tentatively computed, taking into account P's $40 loss on the 
sale of the S stock computed pursuant to paragraph (c)(2)(iii) of this 
section. The group has a $50 consolidated net operating loss for Year 1 
that, under the principles of Sec.  1.1502-21(b)(2)(iv), is wholly 
attributable to S and a consolidated capital loss of $40 that, under the 
principles of Sec.  1.1502-21(b)(2)(iv), is wholly attributable to P.
    (E) Tentative reduction of attributes. Next, pursuant to paragraph 
(c)(2)(v) of this section, the rules of sections 108 and 1017 and Sec.  
1.1502-28 are tentatively applied to reduce attributes remaining after 
the tentative computation of the tax imposed. Pursuant to Sec.  1.1502-
28(a)(2), the tax attributes attributable to S would first be reduced to 
take into account its $100 of excluded COD income. Accordingly, the 
consolidated net operating loss for Year 1 would be reduced by $50, the 
portion of that consolidated net operating loss attributable to S under 
the principles of Sec.  1.1502-21(b)(2)(iv), to $0. Then, pursuant to 
Sec.  1.1502-28(a)(4), S's remaining $50 of excluded COD income would 
reduce the consolidated capital loss attributable to P of $40 by $40 to 
$0. The remaining $10 of excluded COD income would have no effect.
    (F) Actual adjustment of stock basis. Pursuant to paragraph 
(c)(2)(vi) of this section, Sec.  1.1502-32 is applied to reflect the 
amount of S's income and gain included, and unlimited deductions and 
losses that are absorbed, in the tentative computation of the tax 
imposed for the year of the disposition and the excluded COD income 
tentatively applied to reduce attributes and the attributes reduced in 
respect of the excluded COD income pursuant to the previous step. Under 
Sec.  1.1502-32(b), the absorption of $30 of S's loss, the application 
of $90 of S's excluded COD income to reduce attributes of P and S, and 
the reduction of the $50 loss attributable to S in respect of the 
excluded COD income results in a positive adjustment of $10 to P's basis 
in the S stock. P's basis in the S stock, therefore, is $100.
    (G) Actual computation of stock gain or loss. Pursuant to paragraph 
(c)(2)(vii) of this section, P's actual gain or loss on the sale of the 
S stock is computed using the basis computed in the previous step. 
Accordingly, P recognizes an $80 loss on the disposition of the S stock.
    (H) Actual computation of tax imposed. Pursuant to paragraph 
(c)(2)(viii) of this section, the tax imposed is computed by taking into 
account P's $80 loss from the sale of S stock. Before the application of 
Sec.  1.1502-28, therefore, the group has a consolidated net operating 
loss of $50 that is wholly attributable to S under the principles of 
Sec.  1.1502-21(b)(2)(iv), and a consolidated capital loss of $80 that 
is wholly attributable to P under the principles of Sec.  1.1502-
21(b)(2)(iv).
    (I) Actual reduction of attributes. Pursuant to paragraph (c)(2)(ix) 
of this section, sections 108 and 1017 and Sec.  1.1502-28 are then 
actually applied to reduce attributes remaining after the actual 
computation of the tax imposed. Pursuant to Sec.  1.1502-28(a)(2), the 
tax attributes attributable to S must first be reduced to take into 
account its $100 of excluded COD income. Accordingly, the consolidated 
net operating loss for Year 1 is reduced by $50, the portion of that 
consolidated net operating loss attributable to S under the principles 
of Sec.  1.1502-21(b)(2)(iv), to $0. Then, pursuant to Sec.  1.1502-
28(a)(4), S's remaining $50 of excluded COD income reduces consolidated 
tax attributes. In particular, without regard to the limitation imposed 
by paragraph (c)(2)(ix)(A) of this section, the $80 consolidated capital 
loss, which under the principles of Sec.  1.1502-21(b)(2)(iv) is 
attributable to P, would be reduced by $50 from $80 to $30. However, the 
limitation imposed by paragraph (c)(2)(ix)(A) of this section prevents 
the reduction of the consolidated capital loss attributable to P by more 
than $40. Therefore, the consolidated capital loss attributable to P is 
reduced by only $40 in respect of S's excluded COD income. The remaining 
$10 of excluded COD income has no effect.
    Example 2. Member other than departing member realizes excluded COD 
income. (i) Facts. P owns all of S1's and S2's stock. P's basis in S2's 
stock is $600. For Year 1, P has ordinary income of $30, S1 has a $100 
ordinary loss and $100 of excluded COD income from the discharge of non-
intercompany indebtedness, and S2 has $200 of ordinary loss. P sells the 
S2 stock for $600 at the close of Year 1. As of the beginning of Year 2, 
S1 has Asset A with a basis of $0 and a fair market value of $10.
    (ii) Analysis. The steps used to compute the tax imposed on the 
group, to effect the reduction of attributes, and to compute the 
limitations on the use and reduction of attributes are as follows:
    (A) Computation of limitation on deductions and losses to offset 
income or gain. To determine the amount of the limitation under 
paragraph (c)(2)(i) of this section on S2's loss and the effect of the 
absorption of S2's loss on P's basis in S2's stock under Sec.  1.1502-
32(b), P's gain or loss from the sale of S2's stock is not taken into 
account. The group is tentatively treated as having a consolidated net 
operating loss of $270 (P's $30 of income

[[Page 586]]

minus S1's $100 loss and S2's $200 loss). Consequently, $20 of S2's loss 
from Year 1 is unlimited and $180 of S2's loss from Year 1 is limited 
under paragraph (c)(2)(i) of this section. Under the principles of Sec.  
1.1502-21(b)(2)(iv), $90 of the consolidated net operating loss is 
attributable to S1 and $180 of the consolidated net operating loss is 
attributable to S2.
    (B) Tentative adjustment of stock basis. Then, pursuant to paragraph 
(c)(2)(ii) of this section, Sec.  1.1502-32 is tentatively applied to 
adjust the basis of S2's stock. For this purpose, however, adjustments 
to the basis of S2's stock attributable to the reduction of attributes 
in respect of S1's excluded COD income are not taken into account. Under 
Sec.  1.1502-32(b), the absorption of $20 of S2's loss decreases P's 
basis in S2's stock by $20 to $580.
    (C) Tentative computation of stock gain or loss. Then, P's income, 
gain, or loss from the disposition of S2 stock is computed pursuant to 
paragraph (c)(2)(iii) of this section using the basis computed in the 
previous step. Thus, P is treated as recognizing a $20 gain from the 
sale of the S2 stock.
    (D) Tentative computation of tax imposed. Pursuant to paragraph 
(c)(2)(iv) of this section, the tax imposed for the year of disposition 
is then tentatively computed, taking into account P's $20 gain from the 
sale of S2 stock computed pursuant to paragraph (c)(2)(iii) of this 
section. Although S2's limited loss cannot be used to offset P's $20 
gain from the sale of S2's stock under the rules of this section, S1's 
loss will offset that gain. Therefore, the group is tentatively treated 
as having a consolidated net operating loss of $250, $70 of which is 
attributable to S1 and $180 of which is attributable to S2 under the 
principles of Sec.  1.1502-21(b)(2)(iv).
    (E) Tentative reduction of attributes. Next, pursuant to paragraph 
(c)(2)(v) of this section, the rules of sections 108 and 1017 and Sec.  
1.1502-28 are tentatively applied to reduce attributes remaining after 
the tentative computation of the tax imposed. Pursuant to Sec.  1.1502-
28(a)(2), the tax attributes attributable to S1 would first be reduced 
to take into account its $100 of excluded COD income. Accordingly, the 
consolidated net operating loss for Year 1 would be reduced by $70, the 
portion of that consolidated net operating loss attributable to S1 under 
the principles of Sec.  1.1502-21(b)(2)(iv), to $0. Then, pursuant to 
Sec.  1.1502-28(a)(4), S1's remaining $30 of excluded COD income would 
reduce the consolidated net operating loss for Year 1 attributable to S2 
of $180 by $30 to $150.
    (F) Actual adjustment of stock basis. Pursuant to paragraph 
(c)(2)(vi) of this section, Sec.  1.1502-32 is applied to reflect the 
amount of S2's income and gain included, and unlimited deductions and 
losses that are absorbed, in the tentative computation of the tax 
imposed for the year of the disposition and the excluded COD income 
tentatively applied to reduce attributes and the attributes reduced in 
respect of the excluded COD income pursuant to the previous step. Under 
Sec.  1.1502-32(b), the absorption of $20 of S2's loss to offset a 
portion of P's income and the application of $30 of S1's excluded COD 
income to reduce attributes attributable to S2 results in a negative 
adjustment of $50 to P's basis in the S2 stock. P's basis in the S2 
stock, therefore, is $550.
    (G) Actual computation of stock gain or loss. Pursuant to paragraph 
(c)(2)(vii) of this section, P's actual gain or loss on the sale of the 
S2 stock is computed using the basis computed in the previous step. 
Therefore, P recognizes a $50 gain on the disposition of the S2 stock.
    (H) Actual computation of tax imposed. Pursuant to paragraph 
(c)(2)(viii) of this section, the tax imposed is computed by taking into 
account P's $50 gain from the disposition of the S2 stock. Before the 
application of Sec.  1.1502-28, therefore, the group has a consolidated 
net operating loss of $220, $40 of which is attributable to S1 and $180 
of which is attributable to S2 under the principles of Sec.  1.1502-
21(b)(2)(iv).
    (I) Actual reduction of attributes. Pursuant to paragraph (c)(2)(ix) 
of this section, sections 108 and 1017 and Sec.  1.1502-28 are then 
actually applied to reduce attributes remaining after the actual 
computation of the tax imposed. Pursuant to Sec.  1.1502-28(a)(2), the 
tax attributes attributable to S1 must first be reduced to take into 
account its $100 of excluded COD income. Accordingly, the consolidated 
net operating loss for Year 1 is reduced by $40, the portion of that 
consolidated net operating loss attributable to S1 under the principles 
of Sec.  1.1502-21(b)(2)(iv), to $0. Then, pursuant to Sec.  1.1502-
28(a)(4), without regard to the limitation imposed by paragraph 
(c)(2)(ix)(B) of this section, S1's remaining $60 of excluded COD income 
would reduce S2's net operating loss of $180 to $120. However, the 
limitation imposed by paragraph (c)(2)(ix)(B) of this section prevents 
the reduction of S2's loss by more than $30. Therefore, S2's loss of 
$180 is reduced by $30 to $150 in respect of S1's excluded COD income. 
The remaining $30 of excluded COD income has no effect.
    Example 3. Lower-tier corporation of departing member realizes 
excluded COD income. (i) Facts. P owns all of S1's stock, S2's stock, 
and S3's stock. S1 owns all of S4's stock. P's basis in S1's stock is 
$50 and S1's basis in S4's stock is $50. For Year 1, P has $50 of 
ordinary loss, S1 has $100 of ordinary loss, S2 has $150 of ordinary 
loss, S3 has $50 of ordinary loss, and S4 has $50 of ordinary loss and 
$80 of excluded COD income from the discharge of non-intercompany 
indebtedness. P sells the S1 stock for $100 at the close of Year 1. As 
of the beginning of Year 2, S4 has Asset A with a fair market value of 
$10. After

[[Page 587]]

the computation of tax imposed for Year 1 and before the application of 
sections 108 and 1017 and Sec.  1.1502-28, Asset A has a basis of $0.
    (ii) Analysis. The steps used to compute the tax imposed on the 
group, to effect the reduction of attributes, and to compute the 
limitations on the use and reduction of attributes are as follows:
    (A) Computation of limitation on deductions and losses to offset 
income or gain. To determine the amount of the limitation under 
paragraph (c)(2)(i) of this section on S1's and S4's losses and the 
effect of the absorption of S1's and S4's losses on P's basis in S1's 
stock under Sec.  1.1502-32(b), P's gain or loss from the sale of S1's 
stock is not taken into account. The group is tentatively treated as 
having a consolidated net operating loss of $400. Consequently, $100 of 
S1's loss and $50 of S4's loss is limited under paragraph (c)(2)(i) of 
this section.
    (B) Tentative adjustment of stock basis. Then, pursuant to paragraph 
(c)(2)(ii) of this section, Sec.  1.1502-32 is tentatively applied to 
adjust the basis of S1's stock. For this purpose, adjustments to the 
basis of S1's stock attributable to S4's realization of excluded COD 
income and the reduction of attributes in respect of such excluded COD 
income are not taken into account. There is no adjustment under Sec.  
1.1502-32 to the basis of the S1 stock. Therefore, P's basis in the S1 
stock for this purpose is $50.
    (C) Tentative computation of stock gain or loss. Then, P's income, 
gain, or loss from the sale of S1 stock is computed pursuant to 
paragraph (c)(2)(iii) of this section using the basis computed in the 
previous step. Thus, P is treated as recognizing a $50 gain from the 
sale of the S1 stock.
    (D) Tentative computation of tax imposed. Pursuant to paragraph 
(c)(2)(iv) of this section, the tax imposed for the year of disposition 
is then tentatively computed, taking into account P's $50 gain from the 
sale of the S1 stock computed pursuant to paragraph (c)(2)(iii) of this 
section. Although S1's and S4's limited losses cannot be used to offset 
P's $50 gain from the sale of S1's stock under the rules of this 
section, $10 of P's loss, $30 of S2's loss, and $10 of S3's loss will 
offset that gain. Therefore, the group is tentatively treated as having 
a consolidated net operating loss of $350, $40 of which is attributable 
to P, $100 of which is attributable to S1, $120 of which is attributable 
to S2, $40 of which is attributable to S3, and $50 of which is 
attributable to S4 under the principles of Sec.  1.1502-21(b)(2)(iv).
    (E) Tentative reduction of attributes. Next, pursuant to paragraph 
(c)(2)(v) of this section, the rules of sections 108 and 1017 and Sec.  
1.1502-28 are tentatively applied to reduce attributes remaining after 
the tentative computation of the tax imposed. Pursuant to Sec.  1.1502-
28(a)(2), the tax attributes attributable to S4 would first be reduced 
to take into account its $80 of excluded COD income. Accordingly, the 
consolidated net operating loss for Year 1 would be reduced by $50, the 
portion of the consolidated net operating loss attributable to S4 under 
the principles of Sec.  1.1502-21(b)(2)(iv), to $300. Then, pursuant to 
Sec.  1.1502-28(a)(4), S4's remaining $30 of excluded COD income would 
reduce the consolidated net operating loss for Year 1 that is 
attributable to other members. Therefore, the consolidated net operating 
loss for Year 1 would be reduced by $30. Of that amount, $4 is 
attributable to P, $10 is attributable to S1, $12 is attributable to S2, 
and $4 is attributable to S3.
    (F) Actual adjustment of stock basis. Pursuant to paragraph 
(c)(2)(vi) of this section, Sec.  1.1502-32 is applied to reflect the 
amount of S1's and S4's income and gain included, and unlimited 
deductions and losses that are absorbed, in the tentative computation of 
tax imposed for the year of the disposition and the excluded COD income 
tentatively applied to reduce attributes and the attributes reduced in 
respect of the excluded COD income pursuant to the previous step. Under 
Sec.  1.1502-32(b), the application of $80 of S4's excluded COD income 
to reduce attributes, and the reduction of S4's loss in the amount of 
$50 and S1's loss in the amount of $10 in respect of the excluded COD 
income results in a positive adjustment of $20 to P's basis in the S1 
stock. Accordingly, P's basis in S1 stock is $70.
    (G) Actual computation of stock gain or loss. Pursuant to paragraph 
(c)(2)(vii) of this section, P's actual gain or loss on the sale of the 
S1 stock is computed using the basis computed in the previous step. 
Accordingly, P recognizes a $30 gain on the disposition of the S1 stock.
    (H) Actual computation of tax imposed. Pursuant to paragraph 
(c)(2)(viii) of this section, the tax imposed is computed by taking into 
account P's $30 gain from the sale of S1 stock. Before the application 
of Sec.  1.1502-28, therefore, the group has a consolidated net 
operating loss of $370, $44 of which is attributable to P, $100 of which 
is attributable to S1, $132 of which is attributable to S2, $44 of which 
is attributable to S3, and $50 of which is attributable to S4.
    (I) Actual reduction of attributes. Pursuant to paragraph (c)(2)(ix) 
of this section, sections 108 and 1017 and Sec.  1.1502-28 are then 
actually applied to reduce attributes remaining after the actual 
computation of the tax imposed. Pursuant to Sec.  1.1502-28(a)(2), the 
tax attributes attributable to S4 must first be reduced to take into 
account its $80 of excluded COD income. Accordingly, the consolidated 
net operating loss for Year 1 is reduced by $50, the portion of that 
consolidated net operating loss attributable to S4 under the principles 
of Sec.  1.1502-21(b)(2)(iv), to $320. Then, pursuant to Sec.  1.1502-
28(a)(4), without regard to the limitation imposed by

[[Page 588]]

paragraph (c)(2)(ix)(A) of this section, S4's remaining $30 of excluded 
COD income would reduce the consolidated net operating loss for Year 1 
by $30 ($4.12 of the consolidated net operating loss attributable to P, 
$9.38 of the consolidated net operating loss attributable to S1, $12.38 
of the consolidated net operating loss attributable to S2, and $4.12 of 
the consolidated net operating loss attributable to S3) to $290. 
However, the limitation imposed by paragraph (c)(2)(ix)(A) of this 
section prevents the reduction of the consolidated net operating loss 
attributable to P, S2, and S3 by more than $4, $12, and $4 respectively. 
The $.62 of excluded COD income that would have otherwise reduced the 
consolidated net operating loss attributable to P, S2, and S3 is applied 
to reduce the consolidated net operating loss attributable to S1. 
Therefore, S1 carries forward $90 of loss.
    Example 4. Excess loss account taken into account. (i) Facts. P is 
the common parent of a consolidated group. On Day 1 of Year 2, P 
acquired all of the stock of S1. As of the beginning of Year 2, S1 had a 
$30 net operating loss carryover from Year 1, a separate return 
limitation year. A limitation under Sec.  1.1502-21(c) applies to the 
use of that loss by the P group. For Years 1 and 2, the P group had no 
consolidated taxable income or loss. On Day 1 of Year 3, S1 acquired all 
of the stock of S2 for $10. In Year 3, P had ordinary income of $10, S1 
had ordinary income of $25, and S2 had an ordinary loss of $50. In 
addition, in Year 3, S2 realized $20 of excluded COD income from the 
discharge of non-intercompany indebtedness. After the discharge of this 
indebtedness, S2 had no liabilities. As of the beginning of Year 4, S2 
had Asset A with a fair market value of $10. After the computation of 
tax imposed for Year 3 and before the application of sections 108 and 
1017 and Sec.  1.1502-28, Asset A has a basis of $0. S2 had no taxable 
income (or loss) for Year 1 and Year 2.
    (ii) Analysis. The steps used to compute the tax imposed on the 
group, to effect the reduction of attributes, and to compute the 
limitations on the use and reduction of attributes are as follows:
    (A) Computation of limitation on deductions and losses to offset 
income or gain, tentative basis adjustments, tentative computation of 
stock gain or loss. Because it is not initially apparent that there has 
been a disposition of stock, paragraph (c)(2)(i) of this section does 
not limit the use of deductions to offset income or gain, no adjustments 
to the basis are required pursuant to paragraph (c)(2)(ii) of this 
section, and no stock gain or loss is computed pursuant to paragraph 
(c)(2)(iii) of this section or taken into account in the tentative 
computation of tax imposed pursuant to paragraph (c)(2)(iv) of this 
section.
    (B) Tentative computation of tax imposed. Pursuant to paragraph 
(c)(2)(iv) of this section, the tax imposed for Year 3 is tentatively 
computed. For Year 3, the P group has a consolidated taxable loss of 
$15, all of which is attributable to S2 under the principles of Sec.  
1.1502-21(b)(2)(iv).
    (C) Tentative reduction of attributes. Next, pursuant to paragraph 
(c)(2)(v) of this section, the rules of sections 108 and 1017 and Sec.  
1.1502-28 are tentatively applied to reduce attributes remaining after 
the tentative computation of tax imposed. Pursuant to Sec.  1.1502-
28(a)(2), the tax attributes attributable to S2 would first be reduced 
to take into account its $20 of excluded COD income. Accordingly, the 
consolidated net operating loss for Year 3 is reduced by $15, the 
portion of that consolidated net operating loss attributable to S2 under 
the principles of Sec.  1.1502-21(b)(2)(iv), to $0. The remaining $5 of 
excluded COD income is not applied to reduce attributes as there are no 
remaining attributes that are subject to reduction.
    (D) Actual adjustment of stock basis. Pursuant to paragraph 
(c)(2)(vi) of this section, Sec.  1.1502-32 is applied to reflect the 
amount of S2's income and gain included, and unlimited deductions and 
losses that are absorbed, in the tentative computation of tax imposed 
for the year of the disposition and the excluded COD income tentatively 
applied to reduce attributes and the attributes reduced in respect of 
the excluded COD income pursuant to the previous step. Under Sec.  
1.1502-32, the absorption of $35 of S2's loss, the application of $15 in 
respect of S2's excluded COD income to reduce attributes, and the 
reduction of $15 in respect of the loss attributable to S2 reduced in 
respect of the excluded COD income results in a negative adjustment of 
$35 to the basis of the S2 stock. Therefore, S1 has an excess loss 
account of $25 in the S2 stock.
    (E) Actual computation of stock gain or loss. Pursuant to paragraph 
(c)(2)(vii) of this section, S1's actual gain or loss, if any, on the S2 
stock is computed. Because S2 realized $5 of excluded COD income that 
was not applied to reduce attributes, pursuant to Sec.  1.1502-19(b)(1) 
and (c)(1)(iii)(B), S1 is required to take into account $5 of its excess 
loss account in the S2 stock.
    (F) Actual computation of tax imposed. Pursuant to paragraph 
(c)(2)(viii) of this section, the tax imposed is computed by taking into 
account the $5 of the excess loss account in the S2 stock required to be 
taken into account. See Sec.  1.1502-28(b)(6) (requiring an excess loss 
account that is required to be taken into account as a result of the 
application of Sec.  1.1502-19(c)(1)(iii)(B) to be included in the 
group's tax return for the year that includes the date of the debt 
discharge). However, pursuant to paragraph (c)(2)(viii) of this section, 
such amount may not be offset by any of the consolidated net operating 
loss attributable to S2. It may, however, subject to applicable 
limitations, be offset by the separate net operating loss of S1 from 
Year 1.

[[Page 589]]

    (G) Actual reduction of attributes. Pursuant to paragraph (c)(2)(ix) 
of this section, sections 108 and 1017 and Sec.  1.1502-28 are then 
actually applied to reduce attributes remaining after the actual 
computation of the tax imposed. Attributes will be actually reduced in 
the same way that they were tentatively reduced.

    (6) Additional rules for multiple dispositions. [Reserved]
    (7) Effective date. This paragraph (c) applies to dispositions of 
subsidiary stock that occur after March 22, 2005. Taxpayers may apply 
Sec.  1.1502-11(c) of REG-167265-03 (2004-15 IRB 730) (see Sec.  
601.601(d)(2) of this chapter) in whole, but not in part, to any 
disposition of subsidiary stock that occurs on or before March 22, 2005, 
if a member of the group realized excluded COD income after August 29, 
2003, in the taxable year that includes the date of the disposition of 
such subsidiary stock.
    (d) Disallowance of loss attributable to pre-1966 distributions. No 
loss shall be allowed upon the sale or other disposition of stock, 
bonds, or other obligations of a member or former member to the extent 
that such loss is attributable to a distribution made in an affiliated 
year beginning before January 1, 1966, out of earnings and profits 
accumulated before the distributing corporation became a member.

[T.D. 7246, 38 FR 759, Jan. 4, 1973]

    Editorial Note: For Federal Register citations affecting Sec.  
1.1502-11, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.

                 Computation of Separate Taxable Income



Sec.  1.1502-12  Separate taxable income.

    The separate taxable income of a member (including a case in which 
deductions exceed gross income) is computed in accordance with the 
provisions of the Code covering the determination of taxable income of 
separate corporations, subject to the following modifications:
    (a) Transactions between members and transactions with respect to 
stock, bonds, or other obligations of members shall be reflected 
according to the provisions of Sec.  1.1502-13;
    (b) Any deduction which is disallowed under Sec. Sec.  1.1502-15A or 
1.1502-15 shall be taken into account as provided in those sections;
    (c) The limitation on deductions provided in section 615(c) or 
section 617(h) shall be taken into account as provided in Sec.  1.1502-
16;
    (d) The method of accounting under which such computation is made 
and the adjustments to be made because of any change in method of 
accounting shall be determined under Sec.  1.1502-17;
    (e) Inventory adjustments shall be made as provided in Sec.  1.1502-
18;
    (f) Any amount included in income under Sec.  1.1502-19 shall be 
taken into account;
    (g) 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 a consolidated return year if:
    (1) The transfer occurs on or before January 4, 1973, or
    (2) The transfer occurs after January 4, 1973, and the transfer is 
an intercompany transaction as defined in Sec.  1.1502-13 or the basis 
of the property in the hands of the transferee is determined (in whole 
or in part) by reference to its basis in the hands of the transferor;
    (h) No net operating loss deduction shall be taken into account;
    (i) [Reserved]
    (j) No capital gains or losses shall be taken into account;
    (k) No gains and losses subject to section 1231 shall be taken into 
account;
    (l) No deduction under section 170 with respect to charitable 
contributions shall be taken into account;
    (m) No deduction under section 922 (relating to the deduction for 
Western Hemisphere trade corporations) shall be taken into account;
    (n) No deductions under section 243(a)(1), 244(a), 245, or 247 
(relating to deductions with respect to dividends received and dividends 
paid) shall be taken into account;
    (o) 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; 
and
    (p) The limitation on deductions provided in section 613A shall be 
taken

[[Page 590]]

into account for each member's oil and gas properties as provided in 
Sec.  1.1502-44.
    (q) A thrift institution's deduction under section 593(b)(2) 
(relating to the addition to the reserve for bad debts of a thrift 
institution under the percentage of taxable income method) shall be 
determined under Sec.  1.1502-42.
    (r) See Sec. Sec.  1.337(d)-2, 1.1502-35, and 1.1502-36 for rules 
relating to basis adjustments and allowance of stock loss on 
dispositions or transfers of subsidiary stock.
    (s) See Sec.  1.1502-51 for rules relating to the computation of a 
member's GILTI inclusion amount under section 951A and related basis 
adjustments.
    (t) See Sec.  1.1502-50 for rules relating to the computation of a 
member's deduction under section 250.

(Secs. 1502 and 7805 of the Internal Revenue Code of 1954 (68A Stat. 
637; 917; 26 U.S.C. 1502, 7805))

[T.D. 6894, 31 FR 11794, Sept. 8, 1966]

    Editorial Note: For Federal Register citations affecting Sec.  
1.1502-12, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec.  1.1502-13  Intercompany transactions.

    (a) In general--(1) Purpose. This section provides rules for taking 
into account items of income, gain, deduction, and loss of members from 
intercompany transactions. The purpose of this section is to provide 
rules to clearly reflect the taxable income (and tax liability) of the 
group as a whole by preventing intercompany transactions from creating, 
accelerating, avoiding, or deferring consolidated taxable income (or 
consolidated tax liability).
    (2) Separate entity and single entity treatment. Under this section, 
the selling member (S) and the buying member (B) are treated as separate 
entities for some purposes but as divisions of a single corporation for 
other purposes. The amount and location of S's intercompany items and 
B's corresponding items are determined on a separate entity basis 
(separate entity treatment). For example, S determines its gain or loss 
from a sale of property to B on a separate entity basis, and B has a 
cost basis in the property. The timing, and the character, source, and 
other attributes of the intercompany items and corresponding items, 
although initially determined on a separate entity basis, are 
redetermined under this section to produce the effect of transactions 
between divisions of a single corporation (single entity treatment). For 
example, if S sells land to B at a gain and B sells the land to a 
nonmember, S does not take its gain into account until B's sale to the 
nonmember.
    (3) Timing rules as a method of accounting--(i) In general. The 
timing rules of this section are a method of accounting for intercompany 
transactions, to be applied by each member in addition to the member's 
other methods of accounting. See Sec.  1.1502-17 and, with regard to 
consolidated return years beginning on or after November 7, 2001, Sec.  
1.446-1(c)(2)(iii). To the extent the timing rules of this section are 
inconsistent with a member's otherwise applicable methods of accounting, 
the timing rules of this section control. For example, if S sells 
property to B in exchange for B's note, the timing rules of this section 
apply instead of the installment sale rules of section 453. S's or B's 
application of the timing rules of this section to an intercompany 
transaction clearly reflects income only if the effect of that 
transaction as a whole (including, for example, related costs and 
expenses) on consolidated taxable income is clearly reflected.
    (ii) Automatic consent for joining and departing members--(A) 
Consent granted. Section 446(e) consent is granted under this section to 
the extent a change in method of accounting is necessary solely by 
reason of the timing rules of this section--
    (1) For each member, with respect to its intercompany transactions, 
in the first consolidated return year which follows a separate return 
year and in which the member engages in an intercompany transaction; and
    (2) For each former member, with respect to its transactions with 
members that would otherwise be intercompany transactions if the former 
member were still a member, in the first separate return year in which 
the former member engages in such a transaction.
    (B) Cut-off basis. Any change in method of accounting described in 
paragraph (a)(3)(ii)(A) of this section is to

[[Page 591]]

be effected on a cut-off basis for transactions entered into on or after 
the first day of the year for which consent is granted under paragraph 
(a)(3)(ii)(A) of this section.
    (4) Application of other rules of law. See Sec.  1.1502-80(a) 
regarding the general applicability of other rules of law and a 
limitation on duplicative adjustments. The rules of this section apply 
in addition to other applicable law (including nonstatutory 
authorities). For example, this section applies in addition to sections 
267(f) (additional rules for certain losses), 269 (acquisitions to evade 
or avoid income tax), and 482 (allocations among commonly controlled 
taxpayers). Thus, an item taken into account under this section can be 
deferred, disallowed, or eliminated under other applicable law, for 
example, section 1091 (losses from wash sales).
    (5) References. References in other sections to this section 
include, as appropriate, references to prior law. For effective dates 
and prior law see paragraph (l) of this section.
    (6) Overview--(i) In general. The principal rules of this section 
that implement single entity treatment are the matching rule and the 
acceleration rule of paragraphs (c) and (d) of this section. Under the 
matching rule, S and B are generally treated as divisions of a single 
corporation for purposes of taking into account their items from 
intercompany transactions. The acceleration rule provides additional 
rules for taking the items into account if the effect of treating S and 
B as divisions cannot be achieved (for example, if S or B becomes a 
nonmember). Paragraph (b) of this section provides definitions. 
Paragraph (e) of this section provides simplifying rules for certain 
transactions. Paragraphs (f) and (g) of this section provide additional 
rules for stock and obligations of members. Paragraphs (h) and (j) of 
this section provide anti-avoidance rules and miscellaneous operating 
rules.
    (ii) Table of examples. Set forth below is a table of the examples 
contained in this section.

               Matching rule. (Sec.  1.1502-13(c)(7)(ii))

    (A) Example 1. Intercompany sale of land.
    (B) Example 2. Dealer activities.
    (C) Example 3. Intercompany section 351 transfer.
    (D) Example 4. Depreciable property.
    (E) Example 5. Intercompany sale followed by installment sale.
    (F) Example 6. Intercompany sale of installment obligation.
    (G) Example 7. Performance of services.
    (H) Example 8. Rental of property.
    (I) Example 9. Intercompany sale of a partnership interest.
    (J) Example 10. Net operating losses subject to section 382 or the 
SRLY rules.
    (K) Example 11. Section 475.
    (L) Example 12. Section 1092.
    (M) Example 13. [Reserved]
    (N) Example 14. Source of income under section 863.
    (O) Example 15. Section 1248.
    (P) Example 16. Intercompany stock distribution followed by section 
332 liquidation.
    (Q) Example 17. Intercompany stock sale followed by section 355 
distribution.
    (R) Example 18. Redetermination of attributes for section 250 
purposes.

               Acceleration rule. (Sec.  1.1502-13(d)(3))

    Example 1. Becoming a nonmember--timing.
    Example 2. Becoming a nonmember--attributes.
    Example 3. Selling member's disposition of installment note.
    Example 4. Cancellation of debt and attribute reduction under 
section 108(b).
    Example 5. Section 481.

        Simplifying rules--inventory. (Sec.  1.1502-13(e)(1)(v))

    Example 1. Increment averaging method.
    Example 2. Increment valuation method.
    Example 3. Other reasonable inventory methods.

                Stock of members. (Sec.  1.1502-13(f)(7))

    Example 1. Dividend exclusion and property distribution.
    Example 2. Excess loss accounts.
    Example 3. Intercompany reorganizations.
    Example 4. All cash intercompany reorganization under section 
368(a)(1)(D).
    Example 5. Stock redemptions and distributions.
    Example 6. Intercompany stock sale followed by section 332 
liquidation.
    Example 7. Intercompany stock sale followed by section 355 
distribution.

           Obligations of members. (Sec.  1.1502-13(g)(7)(ii))

    Example 1. Interest on intercompany obligation.
    Example 2. Intercompany obligation becomes nonintercompany 
obligation.
    Example 3. Loss or bad debt deduction with respect to intercompany 
obligation.
    Example 4. Intercompany nonrecognition transactions.

[[Page 592]]

    Example 5. Assumption of intercompany obligation.
    Example 6. Extinguishment of intercompany obligation.
    Example 7. Exchange of intercompany obligations.
    Example 8. Tax benefit rule.
    Example 9. Issuance at off-market rate of interest.
    Example 10. Nonintercompany obligation becomes intercompany 
obligation.
    Example 11. Notional principal contracts.

              Anti-avoidance rules. (Sec.  1.1502-13(h)(2))

    (i) Example 1. Sale of a partnership interest.
    (ii) Example 2. Transitory status as an intercompany obligation.
    (iii) Example 3. Corporate mixing bowl.
    (iv) Example 4. Partnership mixing bowl.
    (v) Example 5. Sale and leaseback.
    (vi) Example 6. Section 163(j) interest limitation.

         Miscellaneous operating rules. (Sec.  1.1502-13(j)(9))

    Example 1. Intercompany sale followed by section 351 transfer to 
member.
    Example 2. Intercompany sale of member stock followed by 
recapitalization.
    Example 3. Back-to-back intercompany transactions--matching.
    Example 4. Back-to-back intercompany transactions--acceleration.
    Example 5. Successor group.
    Example 6. Liquidation--80% distributee.
    Example 7. Liquidation--no 80% distributee.

    (b) Definitions. For purposes of this section--
    (1) Intercompany transactions--(i) In general. An intercompany 
transaction is a transaction between corporations that are members of 
the same consolidated group immediately after the transaction. S is the 
member transferring property or providing services, and B is the member 
receiving the property or services. Intercompany transactions include--
    (A) S's sale of property (or other transfer, such as an exchange or 
contribution) to B, whether or not gain or loss is recognized;
    (B) S's performance of services for B, and B's payment or accrual of 
its expenditure for S's performance;
    (C) S's licensing of technology, rental of property, or loan of 
money to B, and B's payment or accrual of its expenditure; and
    (D) S's distribution to B with respect to S stock.
    (ii) Time of transaction. If a transaction occurs in part while S 
and B are members and in part while they are not members, the 
transaction is treated as occurring when performance by either S or B 
takes place, or when payment for performance would be taken into account 
under the rules of this section if it were an intercompany transaction, 
whichever is earliest. Appropriate adjustments must be made in such 
cases by, for example, dividing the transaction into two separate 
transactions reflecting the extent to which S or B has performed.
    (iii) Separate transactions. Except as otherwise provided in this 
section, each transaction is analyzed separately. For example, if S 
simultaneously sells two properties to B, one at a gain and the other at 
a loss, each property is treated as sold in a separate transaction. 
Thus, the gain and loss cannot be offset or netted against each other 
for purposes of this section. Similarly, each payment or accrual of 
interest on a loan is a separate transaction. In addition, an accrual of 
premium is treated as a separate transaction, or as an offset to 
interest that is not a separate transaction, to the extent required 
under separate entity treatment. If two members exchange property, each 
member is S with respect to the property it transfers and B with respect 
to the property it receives. If two members enter into a notional 
principal contract, each payment under the contract is a separate 
transaction and the member making the payment is B with respect to that 
payment and the member receiving the payment is S. See paragraph (j)(4) 
of this section for rules aggregating certain transactions.
    (2) Intercompany items--(i) In general. S's income, gain, deduction, 
and loss from an intercompany transaction are its intercompany items. 
For example, S's gain from the sale of property to B is intercompany 
gain. An item is an intercompany item whether it is directly or 
indirectly from an intercompany transaction.
    (ii) Related costs or expenses. S's costs or expenses related to an 
intercompany

[[Page 593]]

transaction are included in determining its intercompany items. For 
example, if S sells inventory to B, S's direct and indirect costs 
properly includible under section 263A are included in determining its 
intercompany income. Similarly, related costs or expenses that are not 
capitalized under S's separate entity method of accounting are included 
in determining its intercompany items. For example, deductions for 
employee wages, in addition to other related costs, are included in 
determining S's intercompany items from performing services for B, and 
depreciation deductions are included in determining S's intercompany 
items from renting property to B.
    (iii) Amounts not yet recognized or incurred. S's intercompany items 
include amounts from an intercompany transaction that are not yet taken 
into account under its separate entity method of accounting. For 
example, if S is a cash method taxpayer, S's intercompany income might 
be taken into account under this section even if the cash is not yet 
received. Similarly, an amount reflected in basis (or an amount 
equivalent to basis) under S's separate entity method of accounting that 
is a substitute for income, gain, deduction or loss from an intercompany 
transaction is an intercompany item.
    (3) Corresponding items--(i) In general. B's income, gain, 
deduction, and loss from an intercompany transaction, or from property 
acquired in an intercompany transaction, are its corresponding items. 
For example, if B pays rent to S, B's deduction for the rent is a 
corresponding deduction. If B buys property from S and sells it to a 
nonmember, B's gain or loss from the sale to the nonmember is a 
corresponding gain or loss; alternatively, if B recovers the cost of the 
property through depreciation, B's depreciation deductions are 
corresponding deductions. An item is a corresponding item whether it is 
directly or indirectly from an intercompany transaction (or from 
property acquired in an intercompany transaction).
    (ii) Disallowed or eliminated amounts. B's corresponding items 
include amounts that are permanently disallowed or permanently 
eliminated, whether directly or indirectly. Thus, corresponding items 
include amounts disallowed under section 265 (expenses relating to tax-
exempt income), and amounts not recognized under section 311(a) 
(nonrecognition of loss on distributions), section 332 (nonrecognition 
on liquidating distributions), or section 355(c) (certain distributions 
of stock of a subsidiary). On the other hand, an amount is not 
permanently disallowed or permanently eliminated (and therefore is not a 
corresponding item) to the extent it is not recognized in a transaction 
in which B receives a successor asset within the meaning of paragraph 
(j)(1) of this section. For example, B's corresponding items do not 
include amounts not recognized from a transaction with a nonmember to 
which section 1031 applies or from another transaction in which B 
receives exchanged basis property.
    (4) Recomputed corresponding items. The recomputed corresponding 
item is the corresponding item that B would take into account if S and B 
were divisions of a single corporation and the intercompany transaction 
were between those divisions. For example, if S sells property with a 
$70 basis to B for $100, and B later sells the property to a nonmember 
for $90, B's corresponding item is its $10 loss, and the recomputed 
corresponding item is $20 of gain (determined by comparing the $90 sales 
price with the $70 basis the property would have if S and B were 
divisions of a single corporation). Although neither S nor B actually 
takes the recomputed corresponding item into account, it is computed as 
if B did take it into account (based on reasonable and consistently 
applied assumptions, including any provision of the Internal Revenue 
Code or regulations that would affect its timing or attributes).
    (5) Treatment as a separate entity. Treatment as a separate entity 
means treatment without application of the rules of this section, but 
with the application of the other consolidated return regulations. For 
example, if S sells the stock of another member to B, S's gain or loss 
on a separate entity basis is determined with the application of Sec.  
1.1502-80(b) (non-applicability

[[Page 594]]

of section 304), but without redetermination under paragraph (c) or (d) 
of this section.
    (6) Attributes. The attributes of an intercompany item or 
corresponding item are all of the item's characteristics, except amount, 
location, and timing, necessary to determine the item's effect on 
taxable income (and tax liability). For example, attributes include 
character, source, treatment as excluded from gross income or as a 
noncapital, nondeductible amount, and treatment as built-in gain or loss 
under section 382(h) or 384. In contrast, the characteristics of 
property, such as a member's holding period, or the fact that property 
is included in inventory, are not attributes of an item, but these 
characteristics might affect the determination of the attributes of 
items from the property.
    (c) Matching rule. For each consolidated return year, B's 
corresponding items and S's intercompany items are taken into account 
under the following rules:
    (1) Attributes and holding periods--(i) Attributes. The separate 
entity attributes of S's intercompany items and B's corresponding items 
are redetermined to the extent necessary to produce the same effect on 
consolidated taxable income (and consolidated tax liability) as if S and 
B were divisions of a single corporation, and the intercompany 
transaction were a transaction between divisions. Thus, the activities 
of both S and B might affect the attributes of both intercompany items 
and corresponding items. For example, if S holds property for sale to 
unrelated customers in the ordinary course of its trade or business, S 
sells the property to B at a gain and B sells the property to an 
unrelated person at a further gain, S's intercompany gain and B's 
corresponding gain might be ordinary because of S's activities with 
respect to the property. Similar principles apply if S performs 
services, rents property, or engages in any other intercompany 
transaction.
    (ii) Holding periods. The holding period of property transferred in 
an intercompany transaction is the aggregate of the holding periods of S 
and B. However, if the basis of the property is determined by reference 
to the basis of other property, the property's holding period is 
determined by reference to the holding period of the other property. For 
example, if S distributes stock to B in a transaction to which section 
355 applies, B's holding period in the distributed stock is determined 
by reference to B's holding period in the stock of S.
    (2) Timing--(i) B's items. B takes its corresponding items into 
account under its accounting method, but the redetermination of the 
attributes of a corresponding item might affect its timing. For example, 
if B's sale of property acquired from S is treated as a dealer 
disposition because of S's activities, section 453(b) prevents any 
corresponding income of B from being taken into account under the 
installment method.
    (ii) S's items. S takes its intercompany item into account to 
reflect the difference for the year between B's corresponding item taken 
into account and the recomputed corresponding item.
    (3) Divisions of a single corporation. As divisions of a single 
corporation, S and B are treated as engaging in their actual transaction 
and owning any actual property involved in the transaction (rather than 
treating the transaction as not occurring). For example, S's sale of 
land held for investment to B for cash is not disregarded, but is 
treated as an exchange of land for cash between divisions (and B 
therefore succeeds to S's basis in the property). Similarly, S's 
issuance of its own stock to B in exchange for property is not 
disregarded, B is treated as owning the stock it receives in the 
exchange, and section 1032 does not apply to B on its subsequent sale of 
the S stock. Although treated as divisions, S and B nevertheless are 
treated as:
    (i) Operating separate trades or businesses. See, e.g., Sec.  1.446-
1(d) (accounting methods for a taxpayer engaged in more than one 
business).
    (ii) Having any special status that they have under the Internal 
Revenue Code or regulations. For example, a bank defined in section 581, 
a domestic building and loan association defined in section 7701(a)(19), 
and an insurance company to which section 801 or 831 applies are treated 
as divisions having

[[Page 595]]

separate special status. On the other hand, the fact that a member holds 
property for sale to customers in the ordinary course of its trade or 
business is not a special status.
    (4) Conflict or allocation of attributes. This paragraph (c)(4) 
provides special rules for redetermining and allocating attributes under 
paragraph (c)(1)(i) of this section.
    (i) Offsetting amounts--(A) In general. To the extent B's 
corresponding item offsets S's intercompany item in amount, the 
attributes of B's corresponding item, determined based on both S's and 
B's activities, control the attributes of S's offsetting intercompany 
item. For example, if S sells depreciable property to B at a gain and B 
depreciates the property, the attributes of B's depreciation deduction 
(ordinary deduction) control the attributes of S's offsetting 
intercompany gain. Accordingly, S's gain is ordinary.
    (B) B controls unreasonable. To the extent the results under 
paragraph (c)(4)(i)(A) are inconsistent with treating S and B as 
divisions of a single corporation, the attributes of the offsetting 
items must be redetermined in a manner consistent with treating S and B 
as divisions of a single corporation. To the extent, however, that B's 
corresponding item on a separate entity basis is excluded from gross 
income, is a noncapital, nondeductible amount, or is otherwise 
permanently disallowed or eliminated, the attributes of B's 
corresponding item always control the attributes of S's offsetting 
intercompany item.
    (ii) Allocation. To the extent S's intercompany item and B's 
corresponding item do not offset in amount, the attributes redetermined 
under paragraph (c)(1)(i) of this section must be allocated to S's 
intercompany item and B's corresponding item by using a method that is 
reasonable in light of all the facts and circumstances, including the 
purposes of this section and any other rule affected by the attributes 
of S's intercompany item and B's corresponding item. A method of 
allocation or redetermination is unreasonable if it is not used 
consistently by all members of the group from year to year.
    (5) Special status. Notwithstanding the general rule of paragraph 
(c)(1)(i) of this section, to the extent an item's attributes determined 
under this section are permitted or not permitted to a member under the 
Internal Revenue Code or regulations by reason of the member's special 
status, the attributes required under the Internal Revenue Code or 
regulations apply to that member's items (but not the other member). For 
example, if S is a bank to which section 582(c) applies, and sells debt 
securities at a gain to B, a nonbank, the character of S's intercompany 
gain is ordinary as required under section 582(c), but the character of 
B's corresponding item as capital or ordinary is determined under 
paragraph (c)(1)(i) of this section without the application of section 
582(c). For other special status issues, see, for example, sections 
595(b) (foreclosure on property securing loans), 818(b) (life insurance 
company treatment of capital gains and losses), and 1503(c) (limitation 
on absorption of certain losses).
    (6) Treatment of intercompany items if corresponding items are 
excluded or nondeductible--(i) In general. Under paragraph (c)(1)(i) of 
this section, S's intercompany item might be redetermined to be excluded 
from gross income or treated as a noncapital, nondeductible amount. For 
example, S's intercompany loss from the sale of property to B is treated 
as a noncapital, nondeductible amount if B distributes the property to a 
nonmember shareholder at no further gain or loss (because, if S and B 
were divisions of a single corporation, the loss would not have been 
recognized under section 311(a)). Paragraph (c)(6)(ii) of this section, 
however, provides limitations on the application of this rule to 
intercompany income or gain. See also Sec. Sec.  1.1502-32 and 1.1502-33 
(adjustments to S's stock basis and earnings and profits to reflect 
amounts so treated).
    (ii) Limitation on treatment of intercompany items as excluded from 
gross income. Notwithstanding the general rule of paragraph (c)(1)(i) of 
this section, S's intercompany income or gain is redetermined to be 
excluded from gross income only to the extent one of the following 
applies:

[[Page 596]]

    (A) Disallowed amounts. B's corresponding item is a deduction or 
loss and, in the taxable year the item is taken into account under this 
section, it is permanently and explicitly disallowed under another 
provision of the Internal Revenue Code or regulations. For example, 
deductions that are disallowed under section 265 are permanently and 
explicitly disallowed. An amount is not permanently and explicitly 
disallowed, for example, to the extent that--
    (1) The Internal Revenue Code or regulations provide that the amount 
is not recognized (for example, a loss that is realized but not 
recognized under section 332 or section 355(c) is not permanently and 
explicitly disallowed, notwithstanding that it is a corresponding item 
within the meaning of paragraph (b)(3)(ii) of this section (certain 
disallowed or eliminated amounts));
    (2) A related amount might be taken into account by B with respect 
to successor property, such as under section 280B (demolition costs 
recoverable as capitalized amounts);
    (3) A related amount might be taken into account by another 
taxpayer, such as under section 267(d) (disallowed loss under section 
267(a) might result in nonrecognition of gain for a related person);
    (4) A related amount might be taken into account as a deduction or 
loss, including as a carryforward to a later year, under any provision 
of the Internal Revenue Code or regulations (whether or not the 
carryforward expires in a later year); or
    (5) The amount is reflected in the computation of any credit against 
(or other reduction of) Federal income tax (whether allowed for the 
taxable year or carried forward to a later year).
    (B) Section 311. The corresponding item is a loss that is realized, 
but not recognized under section 311(a) on a distribution to a nonmember 
(even though the loss is not a permanently and explicitly disallowed 
amount within the meaning of paragraph (c)(6)(ii)(A) of this section).
    (C) Certain intercompany gains on stock--(1) In general. 
Notwithstanding paragraph (c)(6)(ii)(A)(1) of this section, intercompany 
gain with respect to a member's stock that was created by reason of an 
intercompany transfer of the stock, and that would not otherwise be 
taken into account upon a subsequent elimination of the stock's basis 
but for the transfer, is redetermined to be excluded from gross income 
if--
    (i) B or S becomes a successor (as defined in paragraph (j)(2) of 
this section) to the other party (either B or S), or a third member 
becomes a successor to both B and S;
    (ii) Immediately before the intercompany gain would be taken into 
account, the successor member holds the member's stock with respect to 
which the intercompany gain was realized;
    (iii) The successor member's basis in the member's stock that 
reflects the intercompany gain that is taken into account is eliminated 
without the recognition of gain or loss (and such eliminated basis is 
not further reflected in the basis of any successor asset);
    (iv) The effects of the intercompany transaction have not previously 
been reflected, directly or indirectly, on the group's consolidated 
return; and
    (v) The group has not derived, and no taxpayer will derive, any 
Federal income tax benefit from the intercompany transaction that gave 
rise to the intercompany gain or the redetermination of the intercompany 
gain (including any adjustment to basis in member stock under Sec.  
1.1502-32). For this purpose, the redetermination of the intercompany 
gain is not itself considered a Federal income tax benefit.
    (2) Effect on earnings and profits and investment adjustments. Any 
amount excluded from gross income under paragraph (c)(6)(ii)(C)(1) of 
this section shall not be taken into account as earnings and profits of 
any member and shall not be treated as tax-exempt income under Sec.  
1.1502-32(b)(2)(ii).
    (D) Other amounts. (1) The Commissioner may determine that treating 
S's intercompany item as excluded from gross income is consistent with 
the purposes of this section and other applicable provisions of the 
Internal Revenue Code, regulations, and published guidance, if the 
following conditions are met, depending on whether the

[[Page 597]]

intercompany item is an item of income or an item of gain:
    (2) A determination by the Commissioner may be obtained only through 
a letter ruling request.
    (7) Examples--(i) In general. For purposes of the examples in this 
section, unless otherwise stated, P is the common parent of the P 
consolidated group, P owns all of the only class of stock of 
subsidiaries S and B, X is a person unrelated to any member of the P 
group, the taxable year of all persons is the calendar year, all persons 
use the accrual method of accounting, tax liabilities are disregarded, 
the facts set forth the only corporate activity, no member has any 
special status, and the transaction is not otherwise subject to 
recharacterization. If a member acts as both a selling member and a 
buying member (e.g., with respect to different aspects of a single 
transaction, or with respect to related transactions), the member is 
referred to as M, M1, or M2 (rather than as S or B).
    (ii) Matching rule. The matching rule of this paragraph (c) is 
illustrated by the following examples.
    (A) Example 1. Intercompany sale of land followed by sale to a 
nonmember--(1) Facts. S holds land for investment with a basis of $70. S 
has held the land for more than one year. On January 1 of Year 1, S 
sells the land to B for $100. B also holds the land for investment. On 
July 1 of Year 3, B sells the land to X for $110.
    (2) Definitions. Under paragraph (b)(1) of this section, S's sale of 
the land to B is an intercompany transaction, S is the selling member, 
and B is the buying member. Under paragraphs (b)(2) and (3) of this 
section, S's $30 gain from the sale to B is its intercompany item, and 
B's $10 gain from the sale to X is its corresponding item.
    (3) Attributes. Under the matching rule of paragraph (c) of this 
section, S's $30 intercompany gain and B's $10 corresponding gain are 
taken into account to produce the same effect on consolidated taxable 
income (and consolidated tax liability) as if S and B were divisions of 
a single corporation. In addition, the holding periods of S and B for 
the land are aggregated. Thus, the group's entire $40 of gain is long-
term capital gain. Because both S's intercompany item and B's 
corresponding item on a separate entity basis are long-term capital 
gain, the attributes are not redetermined under paragraph (c)(1)(i) of 
this section.
    (4) Timing. For each consolidated return year, S takes its 
intercompany item into account under the matching rule to reflect the 
difference for the year between B's corresponding item taken into 
account and the recomputed corresponding item. If S and B were divisions 
of a single corporation and the intercompany sale were a transfer 
between the divisions, B would succeed to S's $70 basis in the land and 
would have a $40 gain from the sale to X in Year 3, instead of a $10 
gain. Consequently, S takes no gain into account in Years 1 and 2, and 
takes the entire $30 gain into account in Year 3, to reflect the $30 
difference in that year between the $10 gain B takes into account and 
the $40 recomputed gain (the recomputed corresponding item). Under 
Sec. Sec.  1.1502-32 and 1.1502-33, P's basis in its S stock and the 
earnings and profits of S and P do not reflect S's $30 gain until the 
gain is taken into account in Year 3. (Under paragraph (a)(3) of this 
section, the results would be the same if S sold the land to B in an 
installment sale to which section 453 would otherwise apply, because S 
must take its intercompany gain into account under this section.)
    (5) Intercompany loss followed by sale to a nonmember at a gain. The 
facts are the same as in Example 1 in paragraph (c)(7)(ii)(A)(1) of this 
section, except that S's basis in the land is $130 (rather than $70). 
The attributes and timing of S's intercompany loss and B's corresponding 
gain are determined under the matching rule in the manner provided in 
Example 1 in paragraphs (c)(7)(ii)(A)(3) and (4) of this section. If S 
and B were divisions of a single corporation and the intercompany sale 
were a transfer between the divisions, B would succeed to S's $130 basis 
in the land and would have a $20 loss from the sale to X instead of a 
$10 gain. Thus, S takes its entire $30 loss into account in Year 3 to 
reflect the $30 difference between B's $10 gain taken into account and 
the $20 recomputed loss. (The results are the same under section 
267(f).) S's $30 loss is long-term capital loss,

[[Page 598]]

and B's $10 gain is long-term capital gain.
    (6) Intercompany gain followed by sale to a nonmember at a loss. The 
facts are the same as in Example 1 in paragraph (c)(7)(ii)(A)(1) of this 
section, except that B sells the land to X for $90 (rather than $110). 
The attributes and timing of S's intercompany gain and B's corresponding 
loss are determined under the matching rule. If S and B were divisions 
of a single corporation and the intercompany sale were a transfer 
between the divisions, B would succeed to S's $70 basis in the land and 
would have a $20 gain from the sale to X instead of a $10 loss. Thus, S 
takes its entire $30 gain into account in Year 3 to reflect the $30 
difference between B's $10 loss taken into account and the $20 
recomputed gain. S's $30 gain is long-term capital gain, and B's $10 
loss is long-term capital loss.
    (7) Intercompany gain followed by distribution to a nonmember at a 
loss. The facts are the same as in Example 1 in paragraph 
(c)(7)(ii)(A)(1) of this section, except that B distributes the land to 
X, a minority shareholder of B, and at the time of the distribution the 
land has a fair market value of $90. The attributes and timing of S's 
intercompany gain and B's corresponding loss are determined under the 
matching rule. Under section 311(a), B does not recognize its $10 loss 
on the distribution to X. If S and B were divisions of a single 
corporation and the intercompany sale were a transfer between divisions, 
B would succeed to S's $70 basis in the land and would have a $20 gain 
from the distribution to X instead of an unrecognized $10 loss. Under 
paragraph (b)(3)(ii) of this section, B's loss that is not recognized 
under section 311(a) is a corresponding item. Thus, S takes its $30 gain 
into account under the matching rule in Year 3 to reflect the difference 
between B's $10 corresponding unrecognized loss and the $20 recomputed 
gain. B's $10 corresponding loss offsets $10 of S's intercompany gain 
and, under paragraph (c)(4)(i) of this section, the attributes of B's 
corresponding item control the attributes of S's intercompany item. 
Paragraph (c)(6) of this section does not prevent the redetermination of 
S's intercompany item as excluded from gross income. (See paragraph 
(c)(6)(ii)(B) of this section). Thus, $10 of S's $30 gain is 
redetermined to be excluded from gross income.
    (8) Intercompany sale followed by section 1031 exchange with 
nonmember. The facts are the same as in Example 1 in paragraph 
(c)(7)(ii)(A)(1) of this section, except that, instead of selling the 
land to X, B exchanges the land for land owned by X in a transaction to 
which section 1031 applies. There is no difference in Year 3 between B's 
$0 corresponding item taken into account and the $0 recomputed 
corresponding item. Thus, none of S's intercompany gain is taken into 
account under the matching rule as a result of the section 1031 
exchange. Instead, B's gain is preserved in the land received from X 
and, under the successor asset rule of paragraph (j)(1) of this section, 
S's intercompany gain is taken into account by reference to the 
replacement property. (If B takes gain into account as a result of boot 
received in the exchange, S's intercompany gain is taken into account 
under the matching rule to the extent the boot causes a difference 
between B's gain taken into account and the recomputed gain.)
    (9) Intercompany sale followed by section 351 transfer to nonmember. 
The facts are the same as in Example 1 in paragraph (c)(7)(ii)(A)(1) of 
this section, except that, instead of selling the land to X, B transfers 
the land to X in a transaction to which section 351(a) applies and X 
remains a nonmember. There is no difference in Year 3 between B's $0 
corresponding item taken into account and the $0 recomputed 
corresponding item. Thus, none of S's intercompany gain is taken into 
account under the matching rule as a result of the section 351(a) 
transfer. However, S's entire gain is taken into account in Year 3 under 
the acceleration rule of paragraph (d) of this section (because X, a 
nonmember, reflects B's $100 cost basis in the land under section 362).
    (B) Example 2. Dealer activities--(1) Facts. S holds land for 
investment with a basis of $70. On January 1 of Year 1, S sells the land 
to B for $100. B develops the land as residential real estate, and sells 
developed lots to customers during Year 3 for an aggregate amount of 
$110.

[[Page 599]]

    (2) Attributes. S and B are treated under the matching rule as 
divisions of a single corporation for purposes of determining the 
attributes of S's intercompany item and B's corresponding item. Thus, 
although S held the land for investment, whether the gain is treated as 
from the sale of property described in section 1221(1) is based on the 
activities of both S and B. If, based on both S's and B's activities, 
the land is described in section 1221(1), both S's gain and B's gain are 
ordinary income.
    (C) Example 3. Intercompany section 351 transfer--(1) Facts. S holds 
land with a $70 basis and a $100 fair market value for sale to customers 
in the ordinary course of business. On January 1 of Year 1, S transfers 
the land to B in exchange for all of the stock of B in a transaction to 
which section 351 applies. S has no gain or loss under section 351(a), 
and its basis in the B stock is $70 under section 358. Under section 
362, B's basis in the land is $70. B holds the land for investment. On 
July 1 of Year 3, B sells the land to X for $100. Assume that if S and B 
were divisions of a single corporation, B's gain from the sale would be 
ordinary income because of S's activities.
    (2) Timing and attributes. Under paragraph (b)(1) of this section, 
S's transfer to B is an intercompany transaction. Under paragraph (c)(3) 
of this section, S is treated as transferring the land in exchange for 
B's stock even though, as divisions, S could not own stock of B. S has 
no intercompany item, but B's $30 gain from its sale of the land to X is 
a corresponding item because the land was acquired in an intercompany 
transaction. B's $30 gain is ordinary income that is taken into account 
under B's method of accounting.
    (3) Intercompany section 351 transfer with boot. The facts are the 
same as in Example 3 in paragraph (c)(7)(ii)(C)(1) of this section, 
except that S receives $10 cash in addition to the B stock in the 
transfer. S recognizes $10 of gain under section 351(b), and its basis 
in the B stock is $70 under section 358. Under section 362, B's basis in 
the land is $80. S takes its $10 intercompany gain into account in Year 
3 to reflect the $10 difference between B's $20 corresponding gain taken 
into account and the $30 recomputed gain. Both S's $10 gain and B's $20 
gain are ordinary income.
    (4) Partial disposition. The facts are the same as in Example 3 in 
paragraph (c)(7)(ii)(C)(3) of this section, except B sells only a one- 
half, undivided interest in the land to X for $50. The timing and 
attributes are determined in the manner provided in Example 3 in 
paragraph (c)(7)(ii)(C)(2) of this section, except that S takes only $5 
of its gain into account in Year 3 to reflect the $5 difference between 
B's $10 gain taken into account and the $15 recomputed gain.
    (D) Example 4. Depreciable property--(1) Facts. On January 1 of Year 
1, S buys 10-year recovery property for $100 and depreciates it under 
the straight-line method. On January 1 of Year 3, S sells the property 
to B for $130. Under section 168(i)(7), B is treated as S for purposes 
of section 168 to the extent B's $130 basis does not exceed S's adjusted 
basis at the time of the sale. B's additional basis is treated as new 
10-year recovery property for which B elects the straight-line method of 
recovery. (To simplify the example, the half-year convention is 
disregarded.)
    (2) Depreciation through Year 3; intercompany gain. S claims $10 of 
depreciation for each of Years 1 and 2 and has an $80 basis at the time 
of the sale to B. Thus, S has a $50 intercompany gain from its sale to 
B. For Year 3, B has $10 of depreciation with respect to $80 of its 
basis (the portion of its $130 basis not exceeding S's adjusted basis). 
In addition, B has $5 of depreciation with respect to the $50 of its 
additional basis that exceeds S's adjusted basis.
    (3) Timing. S's $50 gain is taken into account to reflect the 
difference for each consolidated return year between B's depreciation 
taken into account with respect to the property and the recomputed 
depreciation. For Year 3, B takes $15 of depreciation into account. If 
the intercompany transaction were a transfer between divisions of a 
single corporation, B would succeed to S's adjusted basis in the 
property and take into account only $10 of depreciation for Year 3. 
Thus, S takes $5 of gain into account in Year 3. In each subsequent year 
that B takes into account $15 of depreciation with respect to the 
property, S takes into account $5 of gain.

[[Page 600]]

    (4) Attributes. Under paragraph (c)(1)(i) of this section, the 
attributes of S's gain and B's depreciation must be redetermined to the 
extent necessary to produce the same effect on consolidated taxable 
income as if the intercompany transaction were between divisions of a 
single corporation (the group must have a net depreciation deduction of 
$10). In each year, $5 of B's corresponding depreciation deduction 
offsets S's $5 intercompany gain taken into account and, under paragraph 
(c)(4)(i) of this section, the attributes of B's corresponding item 
control the attributes of S's intercompany item. Accordingly, S's 
intercompany gain that is taken into account as a result of B's 
depreciation deduction is ordinary income.
    (5) Sale of property to a nonmember. The facts are the same as in 
Example 4 in paragraph (c)(7)(ii)(D)(1) of this section, except that B 
sells the property to X on January 1 of Year 5 for $110. As set forth in 
Example 4 in paragraphs (c)(7)(ii)(D)(3) and (4) of this section, B has 
$15 of depreciation with respect to the property in each of Years 3 and 
4, causing S to take $5 of intercompany gain into account in each year 
as ordinary income. The $40 balance of S's intercompany gain is taken 
into account in Year 5 as a result of B's sale to X, to reflect the $40 
difference between B's $10 gain taken into account and the $50 of 
recomputed gain ($110 of sale proceeds minus the $60 basis B would have 
if the intercompany sale were a transfer between divisions of a single 
corporation). Treating S and B as divisions of a single corporation, $40 
of the gain is section 1245 gain and $10 is section 1231 gain. On a 
separate entity basis, S would have more than $10 treated as section 
1231 gain, and B would have no amount treated as section 1231 gain. 
Under paragraph (c)(4)(ii) of this section, all $10 of the section 1231 
gain is allocated to S. S's remaining $30 of gain, and all of B's $10 
gain, is treated as section 1245 gain.
    (E) Example 5. Intercompany sale followed by installment sale--(1) 
Facts. S holds land for investment with a basis of $70x. On January 1 of 
Year 1, S sells the land to B for $100x. B also holds the land for 
investment. On July 1 of Year 3, B sells the land to X in exchange for 
X's $110x note. The note bears a market rate of interest in excess of 
the applicable Federal rate, and provides for principal payments of $55x 
in Year 4 and $55x in Year 5. The interest charge under section 453A(c) 
applies to X's note.
    (2) Timing and attributes. S takes its $30x gain into account to 
reflect the difference in each consolidated return year between B's gain 
taken into account for the year and the recomputed gain. Under section 
453, B takes into account $5x of gain in Year 4 and $5x of gain in Year 
5. Thus, S takes into account $15x of gain in Year 4 and $15x of gain in 
Year 5 to reflect the $15x difference in each of those years between B's 
$5x gain taken into account and the $20x recomputed gain. Both S's $30x 
gain and B's $10x gain are subject to the section 453A(c) interest 
charge beginning in Year 3.
    (3) Election out under section 453(d). If, under the facts in 
Example 5 in paragraph (c)(7)(ii)(E)(1) of this section, the P group 
wishes to elect not to apply section 453 with respect to S's gain, an 
election under section 453(d) must be made for Year 3 with respect to 
B's gain. This election will cause B's $10x gain to be taken into 
account in Year 3. Under the matching rule, this will result in S's $30x 
gain being taken into account in Year 3. (An election by the P group 
solely with respect to S's gain has no effect because the gain from S's 
sale to B is taken into account under the matching rule, and therefore 
must reflect the difference between B's gain taken into account and the 
recomputed gain.)
    (4) Sale to a nonmember at a loss, but overall gain. The facts are 
the same as in Example 5 in paragraph (c)(7)(ii)(E)(1) of this section, 
except that B sells the land to X in exchange for X's $90x note (rather 
than $110x note). If S and B were divisions of a single corporation, B 
would succeed to S's basis in the land, and the sale to X would be 
eligible for installment reporting under section 453, because it 
resulted in an overall gain. However, because only gains may be reported 
on the installment method, B's $10x corresponding loss is taken into 
account in Year 3. Under paragraph (b)(4) of this section the recomputed 
corresponding item is $20x

[[Page 601]]

gain that would be taken into account under the installment method, $0 
in Year 3 and $10x in each of Years 4 and 5. Thus, in Year 3 S takes 
$10x of gain into account to reflect the difference between B's $10x 
loss taken into account and the $0 recomputed gain for Year 3. Under 
paragraph (c)(4)(i) of this section, B's $10x corresponding loss offsets 
$10x of S's intercompany gain, and B's attributes control. S takes $10x 
of gain into account in each of Years 4 and 5 to reflect the difference 
in those years between B's $0 gain taken into account and the $10x 
recomputed gain that would be taken into account under the installment 
method. Only the $20x of S's gain taken into account in Years 4 and 5 is 
subject to the interest charge under section 453A(c) beginning in Year 
3. (If P elects under section 453(d) for Year 3 not to apply section 453 
with respect to the gain, all of S's $30x gain will be taken into 
account in Year 3 to reflect the difference between B's $10x loss taken 
into account and the $20x recomputed gain.)
    (5) Intercompany loss, installment gain. The facts are the same as 
in Example 5 in paragraph (c)(7)(ii)(E)(1) of this section, except that 
S has a $130x (rather than $70x) basis in the land. Under paragraph 
(c)(1)(i) of this section, the separate entity attributes of S's and B's 
items from the intercompany transaction must be redetermined to produce 
the same effect on consolidated taxable income (and tax liability) as if 
the transaction had been a transfer between divisions. If S and B were 
divisions of a single corporation, B would succeed to S's basis in the 
land and the group would have $20x loss from the sale to X, installment 
reporting would be unavailable, and the interest charge under section 
453A(c) would not apply. Accordingly, B's gain from the transaction is 
not eligible for installment treatment under section 453. B takes its 
$10x gain into account in Year 3, and S takes its $30x of loss into 
account in Year 3 to reflect the difference between B's $10x gain and 
the $20x recomputed loss.
    (6) Recapture income. The facts are the same as in Example 5 in 
paragraph (c)(7)(ii)(E)(1) of this section, except that S bought 
depreciable property (rather than land) for $100x, claimed depreciation 
deductions, and reduced the property's basis to $70x before Year 1. (To 
simplify the example, B's depreciation is disregarded.) If the 
intercompany sale of property had been a transfer between divisions of a 
single corporation, $30x of the $40x gain from the sale to X would be 
section 1245 gain (which is ineligible for installment reporting) and 
$10x would be section 1231 gain (which is eligible for installment 
reporting). On a separate entity basis, S would have $30x of section 
1245 gain and B would have $10x of section 1231 gain. Accordingly, the 
attributes are not redetermined under paragraph (c)(1)(i) of this 
section. All of B's $10x gain is eligible for installment reporting and 
is taken into account $5x each in Years 4 and 5 (and is subject to the 
interest charge under section 453A(c)). S's $30x gain is taken into 
account in Year 3 to reflect the difference between B's $0 gain taken 
into account and the $30x of recomputed gain. (If S had bought the 
depreciable property for $110x and its recomputed basis under section 
1245 had been $110x (rather than $100x), B's $10x gain and S's $30x gain 
would both be recapture income ineligible for installment reporting.)
    (F) Example 6. Intercompany sale of installment obligation--(1) 
Facts. S holds land for investment with a basis of $70x. On January 1 of 
Year 1, S sells the land to X in exchange for X's $100x note, and S 
reports its gain on the installment method under section 453. X's note 
bears interest at a market rate of interest in excess of the applicable 
Federal rate, and provides for principal payments of $50x in Year 5 and 
$50x in Year 6. Section 453A applies to X's note. On July 1 of Year 3, S 
sells X's note to B for $100x, resulting in $30x gain from S's prior 
sale of the land to X under section 453B(a).
    (2) Timing and attributes. S's sale of X's note to B is an 
intercompany transaction, and S's $30x gain is intercompany gain. S 
takes $15x of the gain into account in each of Years 5 and 6 to reflect 
the $15x difference in each year between B's $0 gain taken into account 
and the $15x recomputed gain. S's gain continues to be treated as its 
gain from the sale to X, and the deferred tax liability remains subject 
to the interest charge under section 453A(c).

[[Page 602]]

    (3) Worthlessness. The facts are the same as in Example 6 in 
paragraph (c)(7)(ii)(F)(1) of this section, except that X's note becomes 
worthless on December 1 of Year 3 and B has a $100x short-term capital 
loss under section 165(g) on a separate entity basis. Under paragraph 
(c)(1)(ii) of this section, B's holding period for X's note is 
aggregated with S's holding period. Thus, B's loss is a long- term 
capital loss. S takes its $30x gain into account in Year 3 to reflect 
the $30x difference between B's $100x loss taken into account and the 
$70x recomputed loss. Under paragraph (c)(1)(i) of this section, S's 
gain is long-term capital gain.
    (4) Pledge. The facts are the same as in Example 6 in paragraph 
(c)(7)(ii)(F)(1) of this section, except that, on December 1 of Year 3, 
B borrows $100x from an unrelated bank and secures the indebtedness with 
X's note. X's note remains subject to section 453A(d) following the sale 
to B. Under section 453A(d), B's $100x of proceeds from the secured 
indebtedness is treated as an amount received on December 1 of Year 3 by 
B on X's note. Thus, S takes its entire $30x gain into account in Year 
3.
    (G) Example 7. Performance of services--(1) Facts. S is a driller of 
water wells. B operates a ranch in a remote location, and B's taxable 
income from the ranch is not subject to section 447. B's ranch requires 
water to maintain its cattle. During Year 1, S drills an artesian well 
on B's ranch in exchange for $100 from B, and S incurs $80 of expenses 
(e.g., for employees and equipment). B capitalizes its $100 cost for the 
well under section 263, and takes into account $10 of cost recovery 
deductions in each of Years 2 through 11. Under its separate entity 
method of accounting, S would take its income and expenses into account 
in Year 1. If S and B were divisions of a single corporation, the costs 
incurred in drilling the well would be capitalized.
    (2) Definitions. Under paragraph (b)(1) of this section, the service 
transaction is an intercompany transaction, S is the selling member, and 
B is the buying member. Under paragraph (b)(2)(ii) of this section, S's 
$100 of income and $80 of related expenses are both included in 
determining its intercompany income of $20.
    (3) Timing and attributes. S's $20 of intercompany income is taken 
into account under the matching rule to reflect the $20 difference 
between B's corresponding items taken into account (based on its $100 
cost basis in the well) and the recomputed corresponding items (based on 
the $80 basis that B would have if S and B were divisions of a single 
corporation and B's basis were determined by reference to S's $80 of 
expenses). In Year 1, S takes into account $80 of its income and the $80 
of expenses. In each of Years 2 through 11, S takes $2 of its $20 
intercompany income into account to reflect the annual $2 difference 
between B's $10 of cost recovery deductions taken into account and the 
$8 of recomputed cost recovery deductions. S's $100 income and $80 
expenses, and B's cost recovery deductions, are ordinary items (because 
S's and B's items would be ordinary on a separate entity basis, the 
attributes are not redetermined under paragraph (c)(1)(i) of this 
section). If S's offsetting $80 of income and expense would not be taken 
into account in the same year under its separate entity method of 
accounting, they nevertheless must be taken into account under this 
section in a manner that clearly reflects consolidated taxable income. 
See paragraph (a)(3)(i) of this section.
    (4) Sale of capitalized services. The facts are the same as in 
Example 7 in paragraph (c)(7)(ii)(G)(1) of this section, except that B 
sells the ranch before Year 11 and recognizes gain attributable to the 
well. To the extent of S's income taken into account as a result of B's 
cost recovery deductions, as well as S's offsetting $80 of income and 
expense, the timing and attributes are determined in the manner provided 
in Example 7 in paragraph (c)(7)(ii)(G)(3) of this section. The 
attributes of the remainder of S's $20 of income and B's gain from the 
sale are redetermined to produce the same effect on consolidated taxable 
income as if S and B were divisions of a single corporation. 
Accordingly, S's remaining intercompany income is treated as recapture 
income or section 1231 gain, even though it is from S's performance of 
services.
    (H) Example 8. Rental of property. B operates a ranch that requires 
grazing land for its cattle. S owns undeveloped

[[Page 603]]

land adjoining B's ranch. On January 1 of Year 1, S leases grazing 
rights to B for Year 1. B's $100 rent expense is deductible for Year 1 
under its separate entity accounting method. Under paragraph (b)(1) of 
this section, the rental transaction is an intercompany transaction, S 
is the selling member, and B is the buying member. S takes its $100 of 
income into account in Year 1 to reflect the $100 difference between B's 
rental deduction taken into account and the $0 recomputed rental 
deduction. S's income and B's deduction are ordinary items (because S's 
intercompany item and B's corresponding item would both be ordinary on a 
separate entity basis, the attributes are not redetermined under 
paragraph (c)(1)(i) of this section).
    (I) Example 9. Intercompany sale of a partnership interest--(1) 
Facts. S owns a 20% interest in the capital and profits of a general 
partnership. The partnership holds land for investment with a basis 
equal to its value, and operates depreciable assets which have value in 
excess of basis. S's basis in its partnership interest equals its share 
of the adjusted basis of the partnership's land and depreciable assets. 
The partnership has an election under section 754 in effect. On January 
1 of Year 1, S sells its partnership interest to B at a gain. During 
Years 1 through 10, the partnership depreciates the operating assets, 
and B's depreciation deductions from the partnership reflect the 
increase in the basis of the depreciable assets under section 743(b).
    (2) Timing and attributes. S's gain is taken into account during 
Years 1 through 10 to reflect the difference in each year between B's 
depreciation deductions from the partnership taken into account and the 
recomputed depreciation deductions from the partnership. Under 
paragraphs (c)(1)(i) and (c)(4)(i) of this section, S's gain taken into 
account is ordinary income. (The acceleration rule does not apply to S's 
gain as a result of the section 743(b) adjustment, because the 
adjustment is solely with respect to B and therefore no nonmember 
reflects any part of the intercompany transaction.)
    (3) Partnership sale of assets. The facts are the same as in Example 
9 in paragraph (c)(7)(ii)(I)(1) of this section, and the partnership 
sells some of its depreciable assets to X at a gain on December 31 of 
Year 4. In addition to the intercompany gain taken into account as a 
result of the partnership's depreciation, S takes intercompany gain into 
account in Year 4 to reflect the difference between B's partnership 
items taken into account from the sale (which reflect the basis increase 
under section 743(b)) and the recomputed partnership items. The 
attributes of S's additional gain are redetermined to produce the same 
effect on consolidated taxable income as if S and B were divisions of a 
single corporation (recapture income or section 1231 gain).
    (4) B's sale of partnership interest. The facts are the same as in 
Example 9 in paragraph (c)(7)(ii)(I)(1) of this section, and on December 
31 of Year 4, B sells its partnership interest to X at no gain or loss. 
In addition to the intercompany gain taken into account as a result of 
the partnership's depreciation, the remaining balance of S's 
intercompany gain is taken into account in Year 4 to reflect the 
difference between B's $0 gain taken into account from the sale of the 
partnership interest and the recomputed gain. The character of S's 
remaining intercompany item and B's corresponding item are determined on 
a separate entity basis under section 751, and then redetermined to the 
extent necessary to produce the same effect as treating the intercompany 
transaction as occurring between divisions of a single corporation.
    (5) No section 754 election. The facts are the same as in Example 9 
in paragraph (c)(7)(ii)(I)(4) of this section, except that the 
partnership does not have a section 754 election in effect, and B 
recognizes a capital loss from its sale of the partnership interest to X 
on December 31 of Year 4. Because there is no difference between B's 
depreciation deductions from the partnership taken into account and the 
recomputed depreciation deductions, S does not take any of its gain into 
account during Years 1 through 4 as a result of B's partnership's items. 
Instead, S's entire intercompany gain is taken into account in Year 4 to 
reflect the difference between B's loss taken into account from the sale 
to X and the recomputed gain or loss.

[[Page 604]]

    (J) Example 10. Net operating losses subject to section 382 or the 
SRLY rules--(1) Facts. On January 1 of Year 1, P buys all of S's stock. 
S has net operating loss carryovers from prior years. P's acquisition 
results in an ownership change under section 382 with respect to S's 
loss carryovers, and S has a net unrealized built-in gain (within the 
meaning of section 382(h)(3)). S owns nondepreciable property with a $70 
basis and $100 value. On July 1 of Year 3, S sells the property to B for 
$100, and its $30 gain is recognized built-in gain (within the meaning 
of section 382(h)(2)) on a separate entity basis. On December 1 of Year 
5, B sells the property to X for $90.
    (2) Timing and attributes. S's $30 gain is taken into account in 
Year 5 to reflect the $30 difference between B's $10 loss taken into 
account and the recomputed $20 gain. S and B are treated as divisions of 
a single corporation for purposes of applying section 382 in connection 
with the intercompany transaction. Under a single entity analysis, the 
single corporation has losses subject to limitation under section 382, 
and this limitation may be increased under section 382(h) if the single 
corporation has recognized built-in gain with respect to those losses. 
B's $10 corresponding loss offsets $10 of S's intercompany gain, and 
thus, under paragraph (c)(4)(i) of this section, $10 of S's intercompany 
gain is redetermined not to be recognized built-in gain. S's remaining 
$20 intercompany gain continues to be treated as recognized built-in 
gain.
    (3) B's recognized built-in gain. The facts are the same as in 
Example 10 in paragraph (c)(7)(ii)(J)(1) of this section, except that 
the property declines in value after S becomes a member of the P group, 
S sells the property to B for its $70 basis, and B sells the property to 
X for $90 during Year 5. Treating S and B as divisions of a single 
corporation, S's sale to B does not cause the property to cease to be 
built-in gain property. Thus, B's $20 gain from its sale to X is 
recognized built-in gain that increases the section 382 limitation 
applicable to S's losses.
    (4) SRLY limitation. The facts are the same as in Example 10 in 
paragraph (c)(7)(ii)(J)(1) of this section, except that P's acquisition 
of S is not subject to the overlap rule of Sec.  1.1502-21(g), and S's 
net operating loss carryovers are subject to the separate return 
limitation year (SRLY) rules. See Sec.  1.1502-21(c). The application of 
the SRLY rules depends on S's status as a separate corporation having 
losses from separate return limitation years. Under paragraph (c)(5), 
the attribute of S's intercompany item as it relates to S's SRLY 
limitation is not redetermined, because the SRLY limitation depends on 
S's special status. Accordingly, S's $30 intercompany gain is included 
in determining its SRLY limitation for Year 5.
    (K) Example 11. Section 475--(1) Facts. S, a dealer in securities 
within the meaning of section 475(c), owns a security with a basis of 
$70. The security is held for sale to customers and is not identified 
under section 475(b) as within an exception to marking to market. On 
July 1 of Year 1, S sells the security to B for $100. B is not a dealer 
and holds the security for investment. On December 31 of Year 1, the 
fair market value of the security is $100. On July 1 of Year 2, B sells 
the security to X for $110.
    (2) Attributes. Under section 475, a dealer in securities can treat 
a security as within an exception to marking to market under section 
475(b) only if it timely identifies the security as so described. Under 
the matching rule, attributes must be redetermined by treating S and B 
as divisions of a single corporation. As a result of S's activities, the 
single corporation is treated as a dealer with respect to securities, 
and B must continue to mark to market the security acquired from S. 
Thus, B's corresponding items and the recomputed corresponding items are 
determined by continuing to treat the security as not within an 
exception to marking to market. Under section 475(d)(3), it is possible 
for the character of S's intercompany items to differ from the character 
of B's corresponding items.
    (3) Timing and character. S has a $30 gain when it disposes of the 
security by selling it to B. This gain is intercompany gain that is 
taken into account in Year 1 to reflect the $30 difference between B's 
$0 gain taken into account

[[Page 605]]

from marking the security to market under section 475 and the recomputed 
$30 gain that would be taken into account. The character of S's gain and 
B's gain are redetermined as if the security were transferred between 
divisions. Accordingly, S's gain is ordinary income under section 
475(d)(3)(A)(i), but under section 475(d)(3)(B)(ii) B's $10 gain from 
its sale to X is capital gain that is taken into account in Year 2.
    (4) Nondealer to dealer. The facts are the same as in Example 11 in 
paragraph (c)(7)(ii)(K)(1) of this section, except that S is not a 
dealer and holds the security for investment with a $70 basis, B is a 
dealer to which section 475 applies and, immediately after acquiring the 
security from S for $100, B holds the security for sale to customers in 
the ordinary course of its trade or business. Because S is not a dealer 
and held the security for investment, the security is treated as 
properly identified as held for investment under section 475(b)(1) until 
it is sold to B. Under section 475(b)(3), the security thereafter ceases 
to be described in section 475(b)(1) because B holds the security for 
sale to customers. The mark-to-market requirement applies only to 
changes in the value of the security after B's acquisition. B's mark-to-
market gain taken into account and the recomputed mark-to-market gain 
are both determined based on changes from the $100 value of the security 
at the time of B's acquisition. There is no difference between B's $0 
mark-to-market gain taken into account in Year 1 and the $0 recomputed 
mark-to-market gain. Therefore, none of S's gain is taken into account 
in Year 1 as a result of B's marking the security to market in Year 1. 
In Year 2, B has a $10 gain when it disposes of the security by selling 
it to X, but would have had a $40 gain if S and B were divisions of a 
single corporation. Thus, S takes its $30 gain into account in Year 2 
under the matching rule. Under section 475(d)(3), S's gain is capital 
gain even though B's subsequent gain or loss from marking to market or 
disposing of the security is ordinary gain or loss. If B disposes of the 
security at a $10 loss in Year 2, S's gain taken into account in Year 2 
is still capital because on a single entity basis section 475(d)(3) 
would provide for $30 of capital gain and $10 of ordinary loss. Because 
the attributes are not redetermined under paragraph (c)(1)(i) of this 
section, paragraph (c)(4)(i) of this section does not apply. 
Furthermore, if B held the security for investment, and so identified 
the security under section 475(b)(1), the security would continue to be 
excepted from marking to market.
    (L) Example 12. Section 1092--(1) Facts. On July 1 of Year 1, S 
enters into offsetting long and short positions with respect to actively 
traded personal property. The positions are not section 1256 contracts, 
and they are the only positions taken into account for purposes of 
applying section 1092. On August 1 of Year 1, S sells the long position 
to B at an $11 loss, and there is $11 of unrealized gain in the 
offsetting short position. On December 1 of Year 1, B sells the long 
position to X at no gain or loss. On December 31 of Year 1, there is 
still $11 of unrealized gain in the short position. On February 1 of 
Year 2, S closes the short position at an $11 gain.
    (2) Timing and attributes. If the sale from S to B were a transfer 
between divisions of a single corporation, the $11 loss on the sale to X 
would have been deferred under section 1092(a)(1)(A). Accordingly, there 
is no difference in Year 1 between B's corresponding item of $0 and the 
recomputed corresponding item of $0. S takes its $11 loss into account 
in Year 2 to reflect the difference between B's corresponding item of $0 
taken into account in Year 2 and the recomputed loss of $11 that would 
have been taken into account in Year 2 under section 1092(a)(1)(B) if S 
and B had been divisions of a single corporation. (The results are the 
same under section 267(f)).
    (M) Example 13. [Reserved]
    (N) Example (14): Source of income under section 863--(1) 
Intercompany sale--(i) Facts. S manufactures inventory property solely 
in the United States and recognizes $75x of income on sales to B in Year 
1. B conducts further production activity on the inventory property 
solely in Country Y and then sells the inventory property to X in 
Country Y and recognizes $25x of income on the sale to X, also in Year 
1. Title passes from S to B, and from B to

[[Page 606]]

X, in Country Y. Assume that applying Sec.  1.863-3 on a single entity 
basis, including the formula for apportionment of multi-country 
production activities by reference to the basis of production assets, 
$10x would be treated as foreign source income and $90x would be treated 
as U.S. source income (that is, 10 percent of the production occurred 
outside the United States and 90 percent occurred within the United 
States, as measured by the basis of assets used in production activities 
with respect to the property). Assume further that, on a separate entity 
basis, S would have $0x of foreign source income and $75x of U.S. source 
income and all of B's $25x of income would be foreign source income.
    (ii) Analysis. Under the matching rule, both S's $75x intercompany 
item and B's $25x corresponding item are taken into account in Year 1. 
In determining the source of S and B's income from the inventory 
property sales, the attributes of S's intercompany item and B's 
corresponding item are redetermined to the extent necessary to produce 
the same effect on consolidated taxable income (and consolidated tax 
liability) as if S and B were divisions of a single corporation. See 
paragraph (c)(1)(i) of this section. On a single entity basis, S and B 
would have $10x that would be treated as foreign source income and $90x 
that would be treated as U.S. source income, but without application of 
this section (that is, on a separate entity basis), S would have $75x of 
U.S. source income and B would have $25x of foreign source income. Under 
paragraph (c)(4)(ii) of this section, a redetermined attribute must be 
allocated between S and B using a reasonable method. On a separate 
entity basis B would have only foreign source income and S would have 
only U.S. source income. Accordingly, under paragraph (c)(1)(i) of this 
section, $15x of B's $25x sales income that would be treated as foreign 
source income on a separate entity basis is redetermined to be U.S. 
source income.
    (2) Sale of property reflecting intercompany services or 
intangibles--(i) Facts. S earns $10x of income performing services in 
the United States for B. B capitalizes S's fees into the basis of 
inventory property that it manufactures in the United States and sells 
to an unrelated person in Year 1 at a $90x profit, with title passing in 
Country Y. Assume that on a single entity basis, $100x is treated as 
U.S. source income and $0x is treated as foreign source income. Further 
assume that on a separate entity basis, S would have $10x of U.S. source 
income, and B would have $90x of U.S. source income, with neither having 
any foreign source income.
    (ii) Analysis. Under the matching rule, S's $10x income and B's $90x 
income are taken into account in Year 1. In determining the source of S 
and B's income, the attributes of S's intercompany item and B's 
corresponding item are redetermined to the extent necessary to produce 
the same effect on consolidated taxable income (and consolidated tax 
liability) as if S and B were divisions of a single corporation. Because 
the results are the same on a single entity basis and a separate entity 
basis ($100x of U.S. source income and $0x of foreign source income), 
the attributes are not redetermined under paragraph (c)(1)(i) of this 
section.
    (O) Example 15. Section 1248--(1) Facts. On January 1 of Year 1, S 
forms FT, a wholly owned foreign subsidiary, with a $10 contribution. 
During Years 1 through 3, FT has earnings and profits of $40. None of 
the earnings and profits is taxed as subpart F income under section 951, 
and FT distributes no dividends to S during this period. On January 1 of 
Year 4, S sells its FT stock to B for $50. While B owns FT, FT has a 
deficit in earnings and profits of $10. On July 1 of Year 6, B sells its 
FT stock for $70 to X, an unrelated foreign corporation.
    (2) Timing. S's $40 of intercompany gain is taken into account in 
Year 6 to reflect the difference between B's $20 of gain taken into 
account and the $60 recomputed gain.
    (3) Attributes. Under the matching rule, the attributes of S's 
intercompany gain and B's corresponding gain are redetermined to have 
the same effect on consolidated taxable income (and consolidated tax 
liability) as if S and B were divisions of a single corporation. On a 
single entity basis, there is $60 of gain and the portion which is 
characterized as a dividend under section 1248 is determined on the

[[Page 607]]

basis of FT's $30 of earnings and profits at the time of the sale of FT 
to X (the sum of FT's $40 of earnings and profits while held by S and 
FT's $10 deficit in earnings and profits while held by B). Therefore, 
$30 of the $60 gain is treated as a dividend under section 1248. The 
remaining $30 is treated as capital gain. On a separate entity basis, 
all of S's $40 gain would be treated as a dividend under section 1248 
and all of B's $20 gain would be treated as capital gain. Thus, as a 
result of the single entity determination, $10 that would be treated as 
a dividend under section 1248 on a separate entity basis is redetermined 
to be capital gain. Under paragraph (c)(4)(ii) of this section, this 
redetermined attribute must be allocated between S's intercompany item 
and B's corresponding item by using a reasonable method. On a separate 
entity basis, only S would have any amount treated as a dividend under 
section 1248 available for redetermination. Accordingly, $10 of S's 
income is redetermined to be not subject to section 1248, with the 
result that $30 of S's intercompany gain is treated as a dividend and 
the remaining $10 is treated as capital gain. All of B's corresponding 
gain is treated as capital gain, as it would be on a separate entity 
basis.
    (4) B has loss. The facts are the same as in Example 15 in paragraph 
(c)(7)(ii)(O)(1) of this section, except that FT has no earnings and 
profits or deficit in earnings and profits while B owns FT, and B sells 
the FT stock to X for $40. On a single entity basis, there is $30 of 
gain, and section 1248 is applied on the basis of FT's $40 earnings and 
profits at the time of the sale of FT to X. Under section 1248, the 
amount treated as a dividend is limited to $30 (the amount of the gain). 
On a separate entity basis, S's entire $40 gain would be treated as a 
dividend under section 1248, and B's $10 loss would be a capital loss. 
B's $10 corresponding loss offsets $10 of S's intercompany gain and, 
under paragraph (c)(4)(i) of this section, the attributes of B's 
corresponding item control. Accordingly, $10 of S's gain must be 
redetermined to be capital gain. B's $10 loss remains a capital loss. 
(If, however, S sold FT to B at a loss and B sold FT to X at a gain, it 
may be unreasonable for the attributes of B's corresponding gain to 
control S's offsetting intercompany loss. If B's attributes were to 
control, for example, the group could possibly claim a larger foreign 
tax credit than would be available if S and B were divisions of a single 
corporation.)
    (P) Example 16. Intercompany stock distribution followed by section 
332 liquidation--(1) Facts. P owns all of the stock of S, S owns all the 
stock of T, a member of the P group, and T owns all of the stock of T1, 
also a member of the P group. On January 1 of Year 1, S distributes all 
of the T stock to P in a distribution to which section 301 applies. At 
the time of this distribution, the value of the T stock is $100 and S 
has a $40 basis in the T stock. Under section 311(b), the distribution 
creates $60 of intercompany gain to S. Under section 301(d), P's basis 
in the T stock is $100. S will take its $60 intercompany gain into 
account under the matching rule. On January 1 of Year 4, in an 
independent transaction, S distributes all of its assets to P in a 
complete liquidation to which section 332 applies, and, under paragraph 
(j)(2) of this section, P succeeds to S's $60 gain. On January 1 of Year 
7, T distributes all of its T1 stock to P in a transaction to which 
section 355 applies. At the time of this distribution, P has a basis in 
the T stock of $100, the value of the T stock (without regard to T1) is 
$75, and the value of the T1 stock is $25. Under section 358, P 
allocates $25 of its $100 basis in the T stock to the T1 stock, and, 
under paragraph (j)(1) of this section, the T1 stock becomes a successor 
asset to the T stock. On January 1 of Year 9, in an independent 
transaction, T distributes all of its assets to P in a complete 
liquidation to which section 332 applies.
    (2) Analysis. Under paragraphs (b)(1) and (f)(2) of this section, 
S's distribution in Year 1 of the T stock to P is an intercompany 
transaction, S is the selling member, and P is the buying member. In 
Year 9 when T liquidates, P has no gain or loss under section 332. Under 
paragraph (b)(3)(ii) of this section, P's $0 gain or loss with respect 
to the T stock under section 332 is a corresponding item. P takes $45 
(75/100 x $60) of its intercompany gain into account under the matching 
rule in Year

[[Page 608]]

9 to reflect the difference between P's $0 of unrecognized gain and P's 
$45 of recomputed unrecognized gain. (If P and S were divisions of a 
single corporation, P would have had a $40 basis in the T stock, and, 
after the Year 7 distribution of the T1 stock, would have held the T 
stock with a $30 basis.) However, paragraph (c)(6) of this section does 
not prevent the redetermination of P's intercompany gain as excluded 
from gross income provided P succeeds to S's intercompany item; P and S 
are a single entity; P's basis in the T stock that reflects the $45 
intercompany gain taken into account is eliminated without the 
recognition of gain or loss (and this eliminated basis is not further 
reflected in the basis of any successor asset); the group has not 
derived and no taxpayer will derive any Federal income tax benefit from 
the basis in the T stock and will not derive any Federal income tax 
benefit from a redetermination of this portion of the gain; and the 
effects of the intercompany transaction have not previously been 
reflected, directly or indirectly, on the P group's consolidated return. 
(See paragraph (c)(6)(ii)(C) of this section.) Accordingly, under 
paragraph (c)(6)(ii)(C) of this section, the $45 intercompany gain that 
P takes into account is redetermined to be excluded from gross income. 
P's basis in its T1 stock continues to reflect $15 of intercompany gain.
    (Q) Example 17. Intercompany stock sale followed by section 355 
distribution--(1) Facts. The facts are the same as Example 16 in 
paragraph (c)(7)(ii)(P) of this section, except that T does not 
distribute the stock of T1, instead, in Year 7, T makes a distribution 
of $50 to P in a transaction to which section 301 applies. Under Sec.  
1.1502-32, P's basis in its T stock is reduced by $50 and, under 
paragraph (f)(2)(ii) of this section, the intercompany distribution is 
excluded from P's gross income. Further, in Year 9, instead of 
liquidating T, P distributes the T stock to its shareholders in a 
transaction to which section 355 applies.
    (2) Analysis. On the distribution of the T stock in Year 9, P has $0 
of unrecognized gain under section 355(c). Under paragraph (b)(3)(ii) of 
this section, P's $0 of unrecognized gain or loss with respect to the T 
stock under section 355(c) is a corresponding item. P takes its $60 
intercompany gain into account under the matching rule in Year 9 to 
reflect the difference between P's $0 of unrecognized gain and P's $60 
of recomputed gain ($50 unrecognized gain and $10 recognized gain). (If 
P and S were divisions of a single corporation, P would have had a $40 
basis in the T stock, and, after the Year 7 distribution, would have 
held the T stock with a $10 excess loss account.) See Example 2 in 
paragraph (f)(7) of this section. Paragraph (c)(6) of this section does 
not prevent the redetermination of P's intercompany gain as excluded 
from gross income provided P succeeds to S's intercompany item; P and S 
are a single entity; P's basis in the T stock that reflects the $60 
intercompany gain taken into account is eliminated without the 
recognition of gain or loss (and this eliminated basis is not further 
reflected in any successor asset); the group has not derived any Federal 
income tax benefit from the basis in the T stock and will not derive any 
Federal income tax benefit from a redetermination of this portion of the 
gain; and the effects of the intercompany transaction have not 
previously been reflected, directly or indirectly, on the P group's 
consolidated return. (See paragraph (c)(6)(ii)(C) of this section.) The 
intercompany transaction with respect to the T stock resulted in an 
increase in the basis of the T stock, and this increase in the basis of 
the T stock prevented P from holding the T stock with a $10 excess loss 
account (as a result of the Year 7 distribution) at the time of the 
section 355 distribution. Accordingly, the group derived a Federal 
income tax benefit from the intercompany transaction to the extent of 
$10 and, under paragraph (c)(6)(ii)(C) of this section, only $50 of the 
$60 intercompany gain that P takes into account is redetermined to be 
excluded from gross income.
    (3) Application of section 355(e). If it were determined that 
section 355(e) applied to P's distribution of the T stock, P would 
recognize $0 of gain and derive a Federal income tax benefit to the 
extent of the full $60 increase in the basis of the T stock. Therefore, 
no portion of

[[Page 609]]

P's intercompany gain would be redetermined to be excluded from gross 
income under paragraph (c)(6)(ii)(C) of this section.
    (R) Example 18: Redetermination of attributes for section 250 
purposes--(1) Facts. S manufactures equipment in the United States and 
recognizes $75 of gross income included in gross DEI (as defined in 
Sec.  1.250(b)-1(c)(15)) on the sale of Asset, which is not depreciable 
property, to B in Year 1 for $100. In Year 2, B sells Asset to X for 
$125 and recognizes $25 of gross income. The sale is a FDDEI sale (as 
defined in Sec.  1.250(b)-1(c)(8)), and thus the $25 of income is 
included in B's gross FDDEI (as defined in Sec.  1.250(b)-1(c)(16)) for 
Year 2.
    (2) Timing and attributes. S's $75 of intercompany income is taken 
into account in Year 2 under the matching rule to reflect the $75 
difference between B's $25 corresponding item taken into account (based 
on B's $100 cost basis in Asset) and the recomputed corresponding item 
(based on the $25 basis that B would have if S and B were divisions of a 
single corporation and B's basis were determined by reference to S's 
basis). In determining whether S's gross income included in gross DEI 
from the sale of Asset is included in gross FDDEI, S and B are treated 
as divisions of a single corporation. See paragraph (a)(6) of this 
section. In determining the amount of income included in gross DEI that 
is included in gross FDDEI, the attributes of S's intercompany item and 
B's corresponding item may be redetermined to the extent necessary to 
produce the same effect on consolidated taxable income (and consolidated 
tax liability) as if S and B were divisions of a single corporation. See 
paragraph (c)(1)(i) of this section. Applying section 250 and Sec.  
1.1502-50 on a single entity basis, all $100 of income included in gross 
DEI would be gross FDDEI. On a separate entity basis, S would have $75 
of gross income included in gross DEI that is included in gross RDEI (as 
defined in Sec.  1.250(b)-1(c)(14)) and B would have $25 of gross income 
included in gross DEI that is included in gross FDDEI. Thus, on a 
separate entity basis, S and B would have, in the aggregate, $100 of 
gross income included in gross DEI, of which only $25 is included gross 
FDDEI. Accordingly, under single entity treatment, $75 that would be 
treated as gross income included in gross DEI that is included in gross 
RDEI on a separate entity basis is redetermined to be included in gross 
FDDEI.
    (3) Intercompany sale for loss. The facts are the same as in 
paragraph (c)(7)(ii)(R)(1) of this section (the facts in Example 18), 
except that S recognizes $25 of loss on the sale of Asset. S's $25 of 
intercompany loss is taken into account under the matching rule to 
reflect the $25 difference between B's $25 corresponding item taken into 
account (based on B's $100 cost basis in Asset) and the recomputed 
corresponding item (based on the $125 basis that B would have if S and B 
were divisions of a single corporation and B's basis were determined by 
reference to S's $125 of costs). Applying section 250 and Sec.  1.1502-
50 on a single entity basis, $0 of income would be included in gross 
DEI. In order to reflect this result, under the matching rule, S's $25 
loss is allocated and apportioned solely to B's $25 of gross income from 
the sale of Asset for purposes of determining B's DEI and FDDEI. 
Furthermore, B's $25 of gross income is not taken into account for 
purposes of apportioning any other deductions under section 861 and the 
regulations under that section for purposes of determining any member's 
DEI or FDDEI.
    (iii) Effective/applicability date--(A) In general. Paragraphs 
(c)(6)(ii)(C) and (D) of this section, Example 16 in paragraph 
(c)(7)(ii)(P) of this section, and Example 17 in paragraph (c)(7)(ii)(Q) 
of this section apply with respect to items taken into account on or 
after March 4, 2011.
    (B) Prior periods. For items taken into account on or after March 7, 
2008, and before March 4, 2011, see Sec.  1.1502-13T(c)(6)(ii)(C) and 
(f)(7), Examples 7 and 8 as contained in 26 CFR part 1 in effect on 
April 1, 2009. For items taken into account before March 7, 2008, see 
Sec.  1.1502-13 as contained in 26 CFR part 1 in effect on April 1, 
2007.
    (d) Acceleration rule. S's intercompany items and B's corresponding 
items are taken into account under this paragraph (d) to the extent they 
cannot be taken into account to produce the effect of treating S and B

[[Page 610]]

as divisions of a single corporation. For this purpose, the following 
rules apply:
    (1) S's items--(i) Timing. S takes its intercompany items into 
account to the extent they cannot be taken into account to produce the 
effect of treating S and B as divisions of a single corporation. The 
items are taken into account immediately before it first becomes 
impossible to achieve this effect. For this purpose, the effect cannot 
be achieved--
    (A) To the extent an intercompany item or corresponding item will 
not be taken into account in determining the group's consolidated 
taxable income (or consolidated tax liability) under the matching rule 
(for example, if S or B becomes a nonmember, or if S's intercompany item 
is no longer reflected in the difference between B's basis (or an amount 
equivalent to basis) in property and the basis (or equivalent amount) 
the property would have if S and B were divisions of a single 
corporation); or
    (B) To the extent a nonmember reflects, directly or indirectly, any 
aspect of the intercompany transaction (e.g., if B's cost basis in 
property purchased from S is reflected by a nonmember under section 362 
following a section 351 transaction).
    (ii) Attributes. The attributes of S's intercompany items taken into 
account under this paragraph (d)(1) are determined as follows:
    (A) Sale, exchange, or distribution. If the item is from an 
intercompany sale, exchange, or distribution of property, its attributes 
are determined under the principles of the matching rule as if B sold 
the property, at the time the item is taken into account under paragraph 
(d)(1)(i) of this section, for a cash payment equal to B's adjusted 
basis in the property (i.e., at no net gain or loss), to the following 
person:
    (1) Property leaves the group. If the property is owned by a 
nonmember immediately after S's item is taken into account, B is treated 
as selling the property to that nonmember. If the nonmember is related 
for purposes of any provision of the Internal Revenue Code or 
regulations to any party to the intercompany transaction (or any related 
transaction) or to the common parent, the nonmember is treated as 
related to B for purposes of that provision. For example, if the 
nonmember is related to P within the meaning of section 1239(b), the 
deemed sale is treated as being described in section 1239(a). See 
paragraph (j)(6) of this section, under which property is not treated as 
being owned by a nonmember if it is owned by the common parent after the 
common parent becomes the only remaining member.
    (2) Property does not leave the group. If the property is not owned 
by a nonmember immediately after S's item is taken into account, B is 
treated as selling the property to an affiliated corporation that is not 
a member of the group.
    (B) Other transactions. If the item is from an intercompany 
transaction other than a sale, exchange, or distribution of property 
(e.g., income from S's services capitalized by B), its attributes are 
determined on a separate entity basis.
    (2) B's items--(i) Attributes. The attributes of B's corresponding 
items continue to be redetermined under the principles of the matching 
rule, with the following adjustments:
    (A) If S and B continue to join with each other in the filing of 
consolidated returns, the attributes of B's corresponding items (and any 
applicable holding periods) are determined by continuing to treat S and 
B as divisions of a single corporation.
    (B) Once S and B no longer join with each other in the filing of 
consolidated returns, the attributes of B's corresponding items are 
determined as if the S division (but not the B division) were 
transferred by the single corporation to an unrelated person. Thus, S's 
activities (and any applicable holding period) before the intercompany 
transaction continue to affect the attributes of the corresponding items 
(and any applicable holding period).
    (ii) Timing. If paragraph (d)(1) of this section applies to S, B 
nevertheless continues to take its corresponding items into account 
under its accounting method. However, the redetermination of the 
attributes of a corresponding item under this paragraph (d)(2) might 
affect its timing.

[[Page 611]]

    (3) Examples. The acceleration rule of this paragraph (d) is 
illustrated by the following examples.

    Example 1. Becoming a nonmember--timing. (a) Facts. S owns land with 
a basis of $70. On January 1 of Year 1, S sells the land to B for $100. 
On July 1 of Year 3, P sells 60% of S's stock to X for $60 and, as a 
result, S becomes a nonmember.
    (b) Matching rule. Under the matching rule, none of S's $30 gain is 
taken into account in Years 1 through 3 because there is no difference 
between B's $0 gain or loss taken into account and the recomputed gain 
or loss.
    (c) Acceleration of S's intercompany items. Under the acceleration 
rule of paragraph (d) of this section, S's $30 gain is taken into 
account in computing consolidated taxable income (and consolidated tax 
liability) immediately before the effect of treating S and B as 
divisions of a single corporation cannot be produced. Because the effect 
cannot be produced once S becomes a nonmember, S takes its $30 gain into 
account in Year 3 immediately before becoming a nonmember. S's gain is 
reflected under Sec.  1.1502-32 in P's basis in the S stock immediately 
before P's sale of the stock. Under Sec.  1.1502-32, P's basis in the S 
stock is increased by $30, and therefore P's gain is reduced (or loss is 
increased) by $18 (60% of $30). See also Sec. Sec.  1.1502-33 and 
1.1502-76(b). (The results would be the same if S sold the land to B in 
an installment sale to which section 453 would otherwise apply, because 
S must take its intercompany gain into account under this section.)
    (d) B's corresponding items. Notwithstanding the acceleration of S's 
gain, B continues to take its corresponding items into account under its 
accounting method. Thus, B's items from the land are taken into account 
based on subsequent events (e.g., its sale of the land).
    (e) Sale of B's stock. The facts are the same as in paragraph (a) of 
this Example 1, except that P sells 60% of B's stock (rather than S 
stock) to X for $60 and, as a result, B becomes a nonmember. Because the 
effect of treating S and B as divisions of a single corporation cannot 
be produced once B becomes a nonmember, S takes its $30 gain into 
account under the acceleration rule immediately before B becomes a 
nonmember. (The results would be the same if S sold the land to B in an 
installment sale to which section 453 would otherwise apply, because S 
must take its intercompany gain into account under this section.)
    (f) Discontinue filing consolidated returns. The facts are the same 
as in paragraph (a) of this Example 1, except that the P group receives 
permission under Sec.  1.1502-75(c) to discontinue filing consolidated 
returns beginning in Year 3. Under the acceleration rule, S takes its 
$30 gain into account on December 31 of Year 2.
    (g) No subgroups. The facts are the same as in paragraph (a) of this 
Example 1, except that P simultaneously sells all of the stock of both S 
and B to X (rather than 60% of S's stock), and S and B become members of 
the X consolidated group. Because the effect of treating S and B as 
divisions of a single corporation in the P group cannot be produced once 
S and B become nonmembers, S takes its $30 gain into account under the 
acceleration rule immediately before S and B become nonmembers. 
(Paragraph (j)(5) of this section does not apply to treat the X 
consolidated group as succeeding to the P group because the X group 
acquired only the stock of S and B.) However, so long as S and B 
continue to join with each other in the filing of consolidated returns, 
B continues to treat S and B as divisions of a single corporation for 
purposes of determining the attributes of B's corresponding items from 
the land.
    Example 2. Becoming a nonmember--attributes. (a) Facts. S holds land 
for investment with a basis of $70. On January 1 of Year 1, S sells the 
land to B for $100. B holds the land for sale to customers in the 
ordinary course of business, and expends substantial resources over a 
two-year period subdividing, developing, and marketing the land. On July 
1 of Year 3, before B has sold any of the land, P sells 60% of S's stock 
to X for $60 and, as a result, S becomes a nonmember.
    (b) Attributes. Under the acceleration rule, the attributes of S's 
gain are redetermined under the principles of the matching rule as if B 
sold the land to an affiliated corporation that is not a member of the 
group for a cash payment equal to B's adjusted basis in the land 
(because the land continues to be held within the group). Thus, whether 
S's gain is capital gain or ordinary income depends on the activities of 
both S and B. Because S and B no longer join with each other in the 
filing of consolidated returns, the attributes of B's corresponding 
items (e.g., from its subsequent sale of the land) are redetermined 
under the principles of the matching rule as if the S division (but not 
the B division) were transferred by the single corporation to an 
unrelated person at the time of P's sale of the S stock. Thus, B 
continues to take into account the activities of S with respect to the 
land before the intercompany transaction.
    (c) Depreciable property. The facts are the same as in paragraph (a) 
of this Example 2, except that the property sold by S to B is 
depreciable property. Section 1239 applies to treat all of S's gain as 
ordinary income because it is taken into account as a result of B's 
deemed sale of the property to an affiliated corporation that is not a 
member of the group (a related person within the meaning of section 
1239(b)).

[[Page 612]]

    Example 3. Selling member's disposition of installment note. (a) 
Facts. S owns land with a basis of $70. On January 1 of Year 1, S sells 
the land to B in exchange for B's $110 note. The note bears a market 
rate of interest in excess of the applicable Federal rate, and provides 
for principal payments of $55 in Year 4 and $55 in Year 5. On July 1 of 
Year 3, S sells B's note to X for $110.
    (b) Timing. S's intercompany gain is taken into account under this 
section, and not under the rules of section 453. Consequently, S's sale 
of B's note does not result in its intercompany gain from the land being 
taken into account (e.g., under section 453B). The sale does not prevent 
S's intercompany items and B's corresponding items from being taken into 
account in determining the group's consolidated taxable income under the 
matching rule, and X does not reflect any aspect of the intercompany 
transaction (X has its own cost basis in the note). S will take the 
intercompany gain into account under the matching rule or acceleration 
rule based on subsequent events (e.g., B's sale of the land). See also 
paragraph (g) of this section for additional rules applicable to B's 
note as an intercompany obligation.
    Example 4. Cancellation of debt and attribute reduction under 
section 108(b). (a) Facts. S holds land for investment with a basis of 
$0. On January 1 of Year 1, S sells the land to B for $100. B also holds 
the land for investment. During Year 3, B is insolvent and B's nonmember 
creditors discharge $60 of B's indebtedness. Because of insolvency, B's 
$60 discharge is excluded from B's gross income under section 108(a), 
and B reduces the basis of the land by $60 under sections 108(b) and 
1017.
    (b) Acceleration rule. As a result of B's basis reduction under 
section 1017, $60 of S's intercompany gain will not be taken into 
account under the matching rule (because there is only a $40 difference 
between B's $40 basis in the land and the $0 basis the land would have 
if S and B were divisions of a single corporation). Accordingly, S takes 
$60 of its gain into account under the acceleration rule in Year 3. S's 
gain is long-term capital gain, determined under paragraph (d)(1)(ii) of 
this section as if B sold the land to an affiliated corporation that is 
not a member of the group for $100 immediately before the basis 
reduction.
    (c) Purchase price adjustment. Assume instead that S sells the land 
to B in exchange for B's $100 purchase money note, B remains solvent, 
and S subsequently agrees to discharge $60 of the note as a purchase 
price adjustment to which section 108(e)(5) applies. Under applicable 
principles of tax law, $60 of S's gain and $60 of B's basis in the land 
are eliminated and never taken into account. Similarly, the note is not 
treated as satisfied and reissued under paragraph (g) of this section.
    Example 5. Section 481. (a) Facts. S operates several trades or 
businesses, including a manufacturing business. S receives permission to 
change its method of accounting for valuing inventory for its 
manufacturing business. S increases the basis of its ending inventory by 
$100, and the related $100 positive section 481(a) adjustment is to be 
taken into account ratably over six taxable years, beginning in Year 1. 
During Year 3, S sells all of the assets used in its manufacturing 
business to B at a gain. Immediately after the transfer, B does not use 
the same inventory valuation method as S. On a separate entity basis, 
S's sale results in an acceleration of the balance of the section 481(a) 
adjustment to Year 3.
    (b) Timing and attributes. Under paragraph (b)(2) of this section, 
the balance of S's section 481(a) adjustment accelerated to Year 3 is 
intercompany income. However, S's $100 basis increase before the 
intercompany transaction eliminates the related difference for this 
amount between B's corresponding items taken into account and the 
recomputed corresponding items in subsequent periods. Because the 
accelerated section 481(a) adjustment will not be taken into account in 
determining the group's consolidated taxable income (and consolidated 
tax liability) under the matching rule, the balance of S's section 481 
adjustment is taken into account under the acceleration rule as ordinary 
income at the time of the intercompany transaction. (If S's sale had not 
resulted in accelerating S's section 481(a) adjustment on a separate 
entity basis, S would have no intercompany income to be taken into 
account under this section.)

    (e) Simplifying rules--(1) Dollar-value LIFO inventory methods--(i) 
In general. This paragraph (e)(1) applies if either S or B uses a 
dollar-value LIFO inventory method to account for intercompany 
transactions. Rather than applying the matching rule separately to each 
intercompany inventory transaction, this paragraph (e)(1) provides 
methods to apply an aggregate approach that is based on dollar-value 
LIFO inventory accounting. Any method selected under this paragraph 
(e)(1) must be applied consistently.
    (ii) B uses dollar-value LIFO--(A) In general. If B uses a dollar-
value LIFO inventory method to account for its intercompany inventory 
purchases, and includes all of its inventory costs incurred for a year 
in its cost of goods sold for the year (that is, B has no inventory 
increment for the year), S takes into account all of its intercompany 
inventory items for the year. If B

[[Page 613]]

does not include all of its inventory costs incurred for the year in its 
cost of goods sold for the year (that is, B has an inventory increment 
for the year), S does not take all of its intercompany inventory income 
or loss into account. The amount not taken into account is determined 
under either the increment averaging method of paragraph (e)(1)(ii)(B) 
of this section or the increment valuation method of paragraph 
(e)(1)(ii)(C) of this section. Separate computations are made for each 
pool of B that receives intercompany purchases from S, and S's amount 
not taken into account is layered based on B's LIFO inventory layers.
    (B) Increment averaging method. Under this paragraph (e)(1)(ii)(B), 
the amount not taken into account is the amount of S's intercompany 
inventory income or loss multiplied by the ratio of the LIFO value of 
B's current-year costs of its layer of increment to B's total inventory 
costs incurred for the year under its LIFO inventory method. If B 
includes more than its inventory costs incurred during any subsequent 
year in its cost of goods sold (a decrement), S takes into account the 
intercompany inventory income or loss layers in the same manner and 
proportion as B takes into account its inventory decrements.
    (C) Increment valuation method. Under this paragraph (e)(1)(ii)(C), 
the amount not taken into account is the amount of S's intercompany 
inventory income or loss for the appropriate period multiplied by the 
ratio of the LIFO value of B's current-year costs of its layer of 
increment to B's total inventory costs incurred in the appropriate 
period under its LIFO inventory method. The principles of paragraph 
(e)(1)(ii)(B) of this section otherwise apply. The appropriate period is 
the period of B's year used to determine its current-year costs.
    (iii) S uses dollar-value LIFO. If S uses a dollar-value LIFO 
inventory method to account for its intercompany inventory sales, S may 
use any reasonable method of allocating its LIFO inventory costs to 
intercompany transactions. LIFO inventory costs include costs of prior 
layers if a decrement occurs. For example, a reasonable allocation of 
the most recent costs incurred during the consolidated return year can 
be used to compute S's intercompany inventory income or loss for the 
year if S has an inventory increment and uses the earliest acquisitions 
costs method, but S must apportion costs from the most recent 
appropriate layers of increment if an inventory decrement occurs for the 
year.
    (iv) Other reasonable methods. S or B may use a method not 
specifically provided in this paragraph (e)(1) that is expected to 
reasonably take into account intercompany items and corresponding items 
from intercompany inventory transactions. However, if the method used 
results, for any year, in a cumulative amount of intercompany inventory 
items not taken into account by S that significantly exceeds the 
cumulative amount that would not be taken into account under paragraph 
(e)(1)(ii) or (iii) of this section, S must take into account for that 
year the amount necessary to eliminate the excess. The method is 
thereafter applied with appropriate adjustments to reflect the amount 
taken into account.
    (v) Examples. The inventory rules of this paragraph (e)(1) are 
illustrated by the following examples.

    Example 1. Increment averaging method. (a) Facts. Both S and B use a 
double-extension, dollar-value LIFO inventory method, and both value 
inventory increments using the earliest acquisitions cost valuation 
method. During Year 2, S sells 25 units of product Q to B on January 15 
at $10/unit. S sells another 25 units on April 15, on July 15, and on 
September 15, at $12/unit. S's earliest cost of product Q is $7.50/unit 
and S's most recent cost of product Q is $8.00/unit. Both S and B have 
an inventory increment for the year. B's total inventory costs incurred 
during Year 2 are $6,000 and the LIFO value of B's Year 2 layer of 
increment is $600.
    (b) Intercompany inventory income. Under paragraph (e)(1)(iii) of 
this section, S must use a reasonable method of allocating its LIFO 
inventory costs to intercompany transactions. Because S has an inventory 
increment for Year 2 and uses the earliest acquisitions cost method, a 
reasonable method of determining its intercompany cost of goods sold for 
product Q is to use its most recent costs. Thus, its intercompany cost 
of goods sold is $800 ($8.00 most recent cost, multiplied by 100 units 
sold to B), and its intercompany inventory income is $350 ($1,150 sales 
proceeds from B minus $800 cost).
    (c) Timing. (i) Under the increment averaging method of paragraph 
(e)(1)(ii)(B) of

[[Page 614]]

this section, $35 of S's $350 of intercompany inventory income is not 
taken into account in Year 2, computed as follows:
[GRAPHIC] [TIFF OMITTED] TR18JY95.002

    (ii) Thus, $315 of S's intercompany inventory income is taken into 
account in Year 2 ($350 of total intercompany inventory income minus $35 
not taken into account).
    (d) S incurs a decrement. The facts are the same as in paragraph (a) 
of this Example 1, except that in Year 2, S incurs a decrement equal to 
50% of its Year 1 layer. Under paragraph (e)(1)(iii) of this section, S 
must reasonably allocate the LIFO cost of the decrement to the cost of 
goods sold to B to determine S's intercompany inventory income.
    (e) B incurs a decrement. The facts are the same as in paragraph (a) 
of this Example 1, except that B incurs a decrement in Year 2. S must 
take into account the entire $350 of Year 2 intercompany inventory 
income because all 100 units of product Q are deemed sold by B in Year 
2.
    Example 2. Increment valuation method. (a) The facts are the same as 
in Example 1. In addition, B's use of the earliest acquisition's cost 
method of valuing its increments results in B valuing its year-end 
inventory using costs incurred from January through March. B's costs 
incurred during the year are: $1,428 in the period January through 
March; $1,498 in the period April through June; $1,524 in the period 
July through September; and $1,550 in the period October through 
December. S's intercompany inventory income for these periods is: $50 in 
the period January through March ((25 x $10)-(25 x $8)); $100 in the 
period April through June ((25 x $12)-(25 x $8)); $100 in the period 
July through September ((25 x $12)-(25 x $8)); and $100 in the period 
October through December ((25 x $12)-(25 x $8)).
    (b) Timing. (i) Under the increment valuation method of paragraph 
(e)(1)(ii)(C) of this section, $21 of S's $350 of intercompany inventory 
income is not taken into account in Year 2, computed as follows:
[GRAPHIC] [TIFF OMITTED] TR18JY95.003

    (ii) Thus, $329 of S's intercompany inventory income is taken into 
account in Year 2 ($350 of total intercompany inventory income minus $21 
not taken into account).
    (c) B incurs a subsequent decrement. The facts are the same as in 
paragraph (a) of this Example 2. In addition, assume that in Year 3, B 
experiences a decrement in its pool that receives intercompany purchases 
from S. B's decrement equals 20% of the base-year costs for its Year 2 
layer. The fact that B has incurred a decrement means that all of its 
inventory costs incurred for Year 3 are included in cost of goods sold. 
As a result, S takes into account its entire amount of intercompany 
inventory income from its Year 3 sales. In addition, S takes into 
account $4.20 of its Year 2 layer of intercompany inventory income not 
already taken into account (20% of $21).
    Example 3. Other reasonable inventory methods. (a) Facts. Both S and 
B use a dollar-value LIFO inventory method for their inventory 
transactions. During Year 1, S sells inventory to B and to X. Under 
paragraph (e)(1)(iv) of this section, to compute its intercompany 
inventory income and the amount of this income not taken into account, S 
computes its intercompany inventory income using the transfer price of 
the inventory items less a FIFO cost for the goods, takes into account 
these items based on a FIFO cost flow assumption for B's corresponding 
items, and the LIFO methods used by S and B are ignored for these 
computations. These computations are comparable to the methods used by S 
and B for

[[Page 615]]

financial reporting purposes, and the book methods and results are used 
for tax purposes. S adjusts the amount of intercompany inventory items 
not taken into account as required by section 263A.
    (b) Reasonable method. The method used by S is a reasonable method 
under paragraph (e)(1)(iv) of this section if the cumulative amount of 
intercompany inventory items not taken into account by S is not 
significantly greater than the cumulative amount that would not be taken 
into account under the methods specifically described in paragraph 
(e)(1) of this section. If, for any year, the method results in a 
cumulative amount of intercompany inventory items not taken into account 
by S that significantly exceeds the cumulative amount that would not be 
taken into account under the methods specifically provided, S must take 
into account for that year the amount necessary to eliminate the excess. 
The method is thereafter applied with appropriate adjustments to reflect 
the amount taken into account (e.g., to prevent the amount from being 
taken into account more than once).

    (2) Reserve accounting--(i) Banks and thrifts. Except as provided in 
paragraph (g)(4)(v) of this section (deferral of items from an 
intercompany obligation), a member's addition to, or reduction of, a 
reserve for bad debts that is maintained under section 585 is taken into 
account on a separate entity basis. For example, if S makes a loan to a 
nonmember and subsequently sells the loan to B, any deduction for an 
addition to a bad debt reserve under section 585 and any recapture 
income (or reduced bad debt deductions) are taken into account on a 
separate entity basis rather than as intercompany items or corresponding 
items taken into account under this section. Any gain or loss of S from 
its sale of the loan to B is taken into account under this section, 
however, to the extent it is not attributable to recapture of the 
reserve.
    (ii) Insurance companies--(A) Direct insurance. If a member provides 
insurance to another member in an intercompany transaction, the 
transaction is taken into account by both members on a separate entity 
basis. For example, if one member provides life insurance coverage for 
another member with respect to its employees, the premiums, reserve 
increases and decreases, and death benefit payments are determined and 
taken into account by both members on a separate entity basis rather 
than taken into account under this section as intercompany items and 
corresponding items.
    (B) Reinsurance--(1) In general. Paragraph (e)(2)(ii)(A) of this 
section does not apply to a reinsurance transaction that is an 
intercompany transaction. For example, if a member assumes all or a 
portion of the risk on an insurance contract written by another member, 
the amounts transferred as reinsurance premiums, expense allowances, 
benefit reimbursements, reimbursed policyholder dividends, experience 
rating adjustments, and other similar items are taken into account under 
the matching rule and the acceleration rule. For purposes of this 
section, the assuming company is treated as B and the ceding company is 
treated as S.
    (2) Reserves determined on a separate entity basis. For purposes of 
determining the amount of a member's increase or decrease in reserves, 
the amount of any reserve item listed in section 807(c) or 832(b)(5) 
resulting from a reinsurance transaction that is an intercompany 
transaction is determined on a separate entity basis. But see section 
845, under which the Commissioner may allocate between or among the 
members any items, recharacterize any such items, or make any other 
adjustments necessary to reflect the proper source and character of the 
separate taxable income of a member.
    (3) Consent to treat intercompany transactions on a separate entity 
basis--(i) General rule. The common parent may request consent to take 
into account on a separate entity basis items from intercompany 
transactions other than intercompany transactions with respect to stock 
or obligations of members. Consent may be granted for all items, or for 
items from a class or classes of transactions. The consent is effective 
only if granted in writing by the Internal Revenue Service. Unless 
revoked with the written consent of the Internal Revenue Service, the 
separate entity treatment applies to all affected intercompany 
transactions in the consolidated return year for which consent is 
granted and in all subsequent consolidated return years. Consent under 
this paragraph (e)(3) does not apply for purposes of taking into

[[Page 616]]

account losses and deductions deferred under section 267(f).
    (ii) Time and manner for requesting consent. The request for consent 
described in paragraph (e)(3)(i) of this section must be made in the 
form of a ruling request. The request must be signed by the common 
parent, include any information required by the Internal Revenue 
Service, and be filed on or before the due date of the consolidated 
return (not including extensions of time) for the first consolidated 
return year to which the consent is to apply. The Internal Revenue 
Service may impose terms and conditions for granting consent. A copy of 
the consent must be attached to the group's consolidated returns (or 
amended returns) as required by the terms of the consent.
    (iii) Effect of consent on methods of accounting. A consent for 
separate entity accounting under this paragraph (e)(3), and a revocation 
of that consent, may require changes in members' methods of accounting 
for intercompany transactions. Because the consent, or a revocation of 
the consent, is effective for all intercompany transactions occurring in 
the consolidated return year for which the consent or revocation is 
first effective, any change in method is effected on a cut-off basis. 
Section 446(e) consent is granted for any changes in methods of 
accounting for intercompany transactions that are necessary solely to 
conform a member's methods to a binding consent with respect to the 
group under this paragraph (e)(3) or the revocation of that consent, 
provided the changes are made in the first consolidated return year for 
which the consent or revocation under this paragraph (e)(3) is 
effective. Therefore, section 446(e) consent must be separately 
requested under applicable administrative procedures if a member has 
failed to conform its practices to the separate entity accounting 
provided under this paragraph (e)(3) or the revocation of that treatment 
in the first consolidated return year for which the consent to use 
separate entity accounting or revocation of that consent is effective.
    (iv) Consent to treat intercompany transactions on a separate entity 
basis under prior law. A group that has received consent that is in 
effect as of the first day of the first consolidated return year 
beginning on or after July 12, 1995 to treat certain intercompany 
transactions as provided in Sec.  1.1502-13(c)(3) of the regulations (as 
contained in the 26 CFR part 1 edition revised as of April 1, 1995) will 
be considered to have obtained the consent of the Commissioner to take 
items from intercompany transactions into account on a separate entity 
basis as provided in paragraph (e)(3)(i) of this section. This treatment 
is applicable only to the items, class or classes of transactions for 
which consent was granted under prior law.
    (f) Stock of members--(1) In general. In addition to the general 
rules of this section, the rules of this paragraph (f) apply to stock of 
members.
    (2) Intercompany distributions to which section 301 applies--(i) In 
general. This paragraph (f)(2) provides rules for intercompany 
transactions to which section 301 applies (intercompany distributions). 
For purposes of determining whether a distribution is an intercompany 
distribution, it is treated as occurring under the principles of the 
entitlement rule of paragraph (f)(2)(iv) of this section. A distribution 
is not an intercompany distribution to the extent it is deducted by the 
distributing member. See, for example, section 1382(c)(1).
    (ii) Distributee member. An intercompany distribution is not 
included in the gross income of the distributee member (B). However, 
this exclusion applies to a distribution only to the extent there is a 
corresponding negative adjustment reflected under Sec.  1.1502-32 in B's 
basis in the stock of the distributing member (S). For example, no 
amount is included in B's gross income under section 301(c)(3) from a 
distribution in excess of the basis of the stock of a subsidiary that 
results in an excess loss account under Sec.  1.1502-32(a) which is 
treated as negative basis under Sec.  1.1502-19. B's dividend received 
deduction under section 243(a)(3) is determined without regard to any 
intercompany distributions under this paragraph (f)(2) to the extent 
they are not included in gross income. See Sec.  1.1502-26(b) 
(applicability of the dividends received deduction to distributions not 
excluded from gross income, such as a

[[Page 617]]

distribution from the common parent to a subsidiary owning stock of the 
common parent).
    (iii) Distributing member. The principles of section 311(b) apply to 
S's loss, as well as gain, from an intercompany distribution of 
property. Thus, S's loss is taken into account under the matching rule 
if the property is subsequently sold to a nonmember. However, section 
311(a) continues to apply to distributions to nonmembers (for example, 
loss is not recognized).
    (iv) Entitlement rule--(A) In general. For all Federal income tax 
purposes, an intercompany distribution is treated as taken into account 
when the shareholding member becomes entitled to it (generally on the 
record date). For example, if B becomes entitled to a cash distribution 
before it is made, the distribution is treated as made when B becomes 
entitled to it. For this purpose, B is treated as entitled to a 
distribution no later than the time the distribution is taken into 
account under the Internal Revenue Code (e.g., under section 305(c)). To 
the extent a distribution is not made, appropriate adjustments must be 
made as of the date it was taken into account.
    (B) Nonmember shareholders. If nonmembers own stock of the 
distributing corporation at the time the distribution is treated as 
occurring under this paragraph (f)(2)(iv), appropriate adjustments must 
be made to prevent the acceleration of the distribution to members from 
affecting distributions to nonmembers.
    (3) Boot in an intercompany reorganization--(i) Scope. This 
paragraph (f)(3) provides additional rules for an intercompany 
transaction in which the receipt of money or other property 
(nonqualifying property) results in the application of section 356. For 
example, the distribution of stock of a lower-tier member to a higher-
tier member in an intercompany transaction to which section 355 would 
apply but for the receipt of nonqualifying property is a transaction to 
which this paragraph (f)(3) applies. This paragraph (f)(3) does not 
apply if a party to the transaction becomes a member or nonmember as 
part of the same plan or arrangement. For example, if S merges into a 
nonmember in a transaction described in section 368(a)(1)(A), this 
paragraph (f)(3) does not apply.
    (ii) Treatment. Nonqualifying property received as part of a 
transaction described in this paragraph (f)(3) is treated as received by 
the member shareholder in a separate transaction. See, for example, 
sections 302 and 311 (rather than sections 356 and 361). The 
nonqualifying property is treated as taken into account immediately 
after the transaction if section 354 would apply but for the fact that 
nonqualifying property is received. It is treated as taken into account 
immediately before the transaction if section 355 would apply but for 
the fact that nonqualifying property is received. The treatment under 
this paragraph (f)(3)(ii) applies for all Federal income tax purposes.
    (4) Acquisition by issuer of its own stock. If a member acquires its 
own stock, or an option to buy or sell its own stock, in an intercompany 
transaction, the member's basis in that stock or option is treated as 
eliminated for all purposes. Accordingly, S's intercompany items from 
the stock or options of B are taken into account under this section if B 
acquires the stock or options in an intercompany transaction (unless, 
for example, B acquires the stock in exchange for successor property 
within the meaning of paragraph (j)(1) of this section in a 
nonrecognition transaction). For example, if B redeems its stock from S 
in a transaction to which section 302(a) applies, S's gain from the 
transaction is taken into account immediately under the acceleration 
rule.
    (5) Certain liquidations and distributions--(i) Netting allowed. S's 
intercompany item from a transfer to B of the stock of another 
corporation (T) is taken into account under this section in certain 
circumstances even though the T stock is never held by a nonmember after 
the intercompany transaction. For example, if S sells all of T's stock 
to B at a gain, and T subsequently liquidates into B in a separate 
transaction to which section 332 applies, S's gain is taken into account 
under the matching rule. Under paragraph (c)(6)(ii) of this section, S's 
intercompany gain taken into account

[[Page 618]]

as a result of a liquidation under section 332 or a comparable 
nonrecognition transaction is not redetermined to be excluded from gross 
income. Under this paragraph (f)(5)(i), if S has both intercompany 
income or gain and intercompany deduction or loss attributable to stock 
of the same corporation having the same material terms, only the income 
or gain in excess of the deduction or loss is subject to paragraph 
(c)(6)(ii) of this section. This paragraph (f)(5)(i) applies only to a 
transaction in which B's basis in its T stock is permanently eliminated 
in a liquidation under section 332 or any comparable nonrecognition 
transaction, including--
    (A) A merger of B into T under section 368(a);
    (B) A distribution by B of its T stock in a transaction described in 
section 355; or
    (C) A deemed liquidation of T resulting from an election under 
section 338(h)(10).
    (ii) Elective relief--(A) In general. If an election is made 
pursuant to this paragraph (f)(5)(ii), certain transactions are 
recharacterized to prevent S's items from being taken into account or to 
provide offsets to those items. This paragraph (f)(5)(ii) applies only 
if T is a member throughout the period beginning with S's transfer and 
ending with the completion of the nonrecognition transaction.
    (B) Section 332--(1) In general. If section 332 would otherwise 
apply to T's (old T's) liquidation into B, and B transfers substantially 
all of old T's assets to a new member (new T), and if a direct transfer 
of substantially all of old T's assets to new T would qualify as a 
reorganization described in section 368(a), then, for all Federal income 
tax purposes, T's liquidation into B and B's transfer of substantially 
all of old T's assets to new T will be disregarded and instead, the 
transaction will be treated as if old T transferred substantially all of 
its assets to new T in exchange for new T stock and the assumption of 
T's liabilities in a reorganization described in section 368(a). (Under 
paragraph (j)(1) of this section, B's stock in new T would be a 
successor asset to B's stock in old T, and S's gain would be taken into 
account based on the new T stock.)
    (2) Time limitation and adjustments. The transfer of old T's assets 
to new T qualifies under paragraph (f)(5)(ii)(B)(1) of this section only 
if B has entered into a written plan, on or before the due date of the 
group's consolidated income tax return (including extensions) for the 
tax year that includes the date of old T's liquidation, to transfer the 
old T assets to new T, and the statement described in paragraph 
(f)(5)(ii)(E) of this section is included on or with a timely filed 
consolidated income tax return (including extensions) for the tax year 
that includes the date of the liquidation. However, in the case of a 
liquidation of old T on or after October 25, 2007, by a taxpayer whose 
original tax return for the year of liquidation was filed on or before 
November 3, 2009, see Sec.  1.1502-13T(f)(5)(ii)(F)(3) as contained in 
26 CFR part 1, revised April 1, 2012. In either case, the transfer of 
substantially all of T's assets to new T must be completed within 12 
months of the filing of the return. Appropriate adjustments are made to 
reflect any events occurring before the formation of new T and to 
reflect any assets not transferred to new T, or liabilities not assumed 
by new T. For example, if B retains an asset of old T, the asset is 
treated under paragraph (f)(3) of this section as acquired by new T but 
distributed to B immediately after the reorganization.
    (C) Sections 338(h)(10) and 336(e).-- (1) In general. This paragraph 
(f)(5)(ii)(C) applies to a deemed liquidation of T under section 332 as 
the result of an election under section 338(h)(10) or section 336(e). 
This paragraph (f)(5)(ii)(C) does not apply if paragraph (f)(5)(ii)(B) 
of this section is applied to the deemed liquidation. Under this 
paragraph, B is treated with respect to each share of its T stock as 
recognizing as a corresponding item any loss or deduction it would 
recognize (determined after adjusting stock basis under Sec.  1.1502-32) 
if section 331 applied to the deemed liquidation. For all other Federal 
income tax purposes, the deemed liquidation remains subject to section 
332.
    (2) Limitation on amount of loss. The amount of B's loss or 
deduction under

[[Page 619]]

this paragraph (f)(5)(ii)(C) is limited as follows--
    (i) The aggregate amount of loss recognized with respect to T stock 
cannot exceed the amount of S's intercompany income or gain that is in 
excess of S's intercompany deduction or loss with respect to shares of T 
stock having the same material terms as the shares giving rise to S's 
intercompany income or gain; and
    (ii) The aggregate amount of loss recognized under this paragraph 
(f)(5)(ii)(C) from T's deemed liquidation cannot exceed the net amount 
of deduction or loss (if any) that would be taken into account from the 
deemed liquidation if section 331 applied with respect to all T shares.
    (3) Asset sale, etc. The principles of this paragraph (f)(5)(ii)(C) 
apply, with appropriate adjustments, if T transfers all of its assets to 
a nonmember and completely liquidates in a transaction comparable to the 
section 338(h)(10) transaction described in paragraph (f)(5)(ii)(C)(1) 
of this section. For example, if S sells all of T's stock to B at a gain 
followed by T's merger into a nonmember in exchange for a cash payment 
to B in a transaction treated for Federal income tax purposes as T's 
sale of its assets to the nonmember and complete liquidation, the merger 
is ordinarily treated as a comparable transaction.
    (D) Section 355. If B distributes the T stock in an intercompany 
transaction to which section 355 applies (including an intercompany 
transaction to which 355 applies because of the application of paragraph 
(f)(3) of this section), the redetermination of the basis of the T stock 
under section 358 could cause S's gain or loss to be taken into account 
under this section. This paragraph (f)(5)(ii)(D) applies to treat B's 
distribution as subject to sections 301 and 311 (as modified by this 
paragraph (f)), rather than section 355. The election will prevent S's 
gain or loss from being taken into account immediately to the extent 
matching remains possible, but B's gain or loss from the distribution 
will also be taken into account under this section.
    (E) Election. An election to apply paragraph (f)(5)(ii) of this 
section is made in a separate statement entitled, ``[INSERT NAME AND 
EMPLOYER IDENTIFICATION NUMBER OF COMMON PARENT] HEREBY ELECTS THE 
APPLICATION OF Sec.  1.1502-13(f)(5)(ii) FOR AN INTERCOMPANY TRANSACTION 
INVOLVING [INSERT NAME AND EMPLOYER IDENTIFICATION NUMBER OF S] AND 
[INSERT NAME AND EMPLOYER IDENTIFICATION NUMBER OF T].'' A separate 
election must be made for each such application. The election must be 
filed by including the statement on or with the consolidated group's 
income tax return for the year of T's liquidation (or other 
transaction). The Commissioner may impose reasonable terms and 
conditions to the application of paragraph (f)(5)(ii) of this section 
that are consistent with the purposes of such section. The statement 
must--
    (1) Identify S's intercompany transaction and T's liquidation (or 
other transaction); and
    (2) Specify which provision of paragraph (f)(5)(ii) of this section 
applies and how it alters the otherwise applicable results under this 
section (including, for example, the amount of S's intercompany items 
and the amount deferred or offset as a result of paragraph (f)(5)(ii) of 
this section).
    (F) Effective/applicability date--(1) General rule. Paragraphs 
(f)(5)(ii)(B)(1) and (2) of this section apply to transactions in which 
old T's liquidation into B occurs on or after October 25, 2007.
    (2) Prior periods. For transactions in which old T's liquidation 
into B occurs before October 25, 2007, see paragraphs (f)(5)(ii)(B)(1) 
and (2) of this section in effect prior to October 25, 2007, as 
contained in 26 CFR part 1, revised April 1, 2009.
    (6) Stock of common parent. In addition to the general rules of this 
section, this paragraph (f)(6) applies to parent stock (P stock) and 
positions in P stock held or entered into by another member. For this 
purpose, P stock is any stock of the common parent held (directly or 
indirectly) by another member or any stock of a member (the issuer) that 
was the common parent if the stock was held (directly or indirectly) by 
another member while the issuer was the common parent.

[[Page 620]]

    (i) Loss stock--(A) Recognized loss. Any loss recognized, directly 
or indirectly, by a member with respect to P stock is permanently 
disallowed and does not reduce earnings and profits. See Sec.  1.1502-
32(b)(3)(iii)(A) for a corresponding reduction in the basis of the 
member's stock.
    (B) Other cases. If a member, M, owns P stock, the stock is 
subsequently owned by a nonmember, and, immediately before the stock is 
owned by the nonmember, M's basis in the share exceeds its fair market 
value, then, to the extent paragraph (f)(6)(i)(A) of this section does 
not apply, M's basis in the share is reduced to the share's fair market 
value immediately before the share is held by the nonmember. For 
example, if M owns shares of P stock with a $100x basis and M becomes a 
nonmember at a time when the P shares have a value of $60x, M's basis in 
the P shares is reduced to $60x immediately before M becomes a 
nonmember. Similarly, if M contributes the P stock to a nonmember in a 
transaction subject to section 351, M's basis in the shares is reduced 
to $60x immediately before the contribution. See Sec.  1.1502-
32(b)(3)(iii)(B) for a corresponding reduction in the basis of M's 
stock.
    (C) Waiver of built-in loss on P stock--(1) In general. If a 
nonmember that owns P stock with a basis in excess of its fair market 
value becomes a member of the P consolidated group in a qualifying cost 
basis transaction, the group may make an irrevocable election to reduce 
the basis of the P stock to its fair market value immediately before the 
nonmember becomes a member of the P group. If the nonmember was a member 
of another consolidated group immediately before becoming a member of 
the P group, the reduction in basis is treated as occurring immediately 
after it ceases to be a member of the prior group. A qualifying cost 
basis transaction is the purchase (i.e., a transaction in which basis is 
determined under section 1012) by members of the P consolidated group 
(while they are members) in a 12-month period of an amount of the 
nonmember's stock satisfying the requirements of section 1504(a)(2).
    (2) Election. The election described in paragraph (f)(6)(i)(C)(1) of 
this section must be made in a separate statement entitled, ``ELECTION 
TO REDUCE BASIS OF P STOCK UNDER Sec.  1.1502-13(f)(6) HELD BY [INSERT 
NAME AND EMPLOYER IDENTIFICATION NUMBER OF MEMBER WHOSE BASIS IN P STOCK 
IS REDUCED].'' The election must be filed by including the statement on 
or with the consolidated group's income tax return for the year in which 
the nonmember becomes a member. The statement must identify the member's 
basis in the P stock (taking into account the effect of this election) 
and the number of shares of P stock held by the member.
    (ii) Gain stock. For dispositions of P stock occurring before May 
16, 2000, see Sec.  1.1502-13(f)(6)(ii) as contained in 26 CFR part 1 in 
effect on April 1, 2000. For dispositions of P stock occurring on or 
after May 16, 2000, see Sec.  1.1032-3.
    (iii) Mark-to-market of P stock. Paragraphs (f)(6)(i) and (ii) of 
this section shall not apply to any gain or loss from a share of P stock 
held by a member, M, if--
    (A) M regularly trades in P stock (of the same class) with customers 
in the ordinary course of its business as a dealer;
    (B) The gain or loss on the share is taken into account by M 
pursuant to section 475(a);
    (C) M's basis in the share is not adjusted by reference to the basis 
of any other property or by reference to income, gain, deduction, or 
loss from other property; and
    (D) Neither M nor any other member of the group has structured or 
engaged in any transaction while a member (or in anticipation of 
becoming a member), during the taxable year or in any year within the 
preceding five taxable years that is open for assessment under section 
6501, with a principal purpose of avoiding gain or creating loss on P 
stock subject to section 475(a).
    (iv) Options, warrants, and other positions--(A) In general. This 
paragraph (f)(6) applies with appropriate adjustments to positions in P 
stock to the extent that P's gain or loss from an equivalent position 
would not be recognized under section 1032. Thus, if M purchases an 
option to buy or sell P

[[Page 621]]

stock and sells the option at a loss, the loss is permanently disallowed 
under paragraph (f)(6)(i)(A) of this section. Similarly, if M is the 
grantor of such an option and becomes a nonmember, then the principles 
of paragraph (f)(6)(i)(B) of this section apply to the extent that M 
would recognize loss from cash settlement of the option at its fair 
market value immediately before M becomes a nonmember, and proper 
adjustments must be made in the amount of any gain or loss subsequently 
realized from the position by M. If P grants M an option to acquire P 
stock in a transaction meeting the requirements of Sec.  1.1032-3, M is 
treated as having purchased the option from P for fair market value with 
cash contributed to M by P.
    (B) Mark-to-market of positions in P stock. For purposes of 
paragraph (f)(6)(iii) of this section, gain or loss with respect to a 
position taken into account under section 1256(a) is treated as taken 
into account under section 475(a) to the extent that the gain or loss 
would be taken into account under the principles of section 475.
    (v) Effective date. This paragraph (f)(6) applies to gain or loss 
taken into account on or after July 12, 1995, and to transactions 
occurring on or after July 12, 1995. For example, if S sells P stock to 
B at a loss prior to July 12, 1995, and B sells the P stock to a 
nonmember after July 12, 1995, S's loss is disallowed because it is 
taken into account after July 12, 1995. If a taxpayer takes a gain or 
loss into account or engages in a transaction on or after July 12, 1995, 
during a tax year ending prior to December 31, 1995, the taxpayer may 
treat the gain or loss or the transaction under the rules published in 
1995-32 I.R.B. 47, instead of under the rules of this paragraph (f)(6).
    (7) Examples-- In general. The application of this section to 
intercompany transactions with respect to stock of members is 
illustrated by the following examples.

    Example 1. Dividend exclusion and property distribution. (a) Facts. 
S owns land with a $70 basis and $100 value. On January 1 of Year 1, P's 
basis in S's stock is $100. During Year 1, S declares and makes a 
dividend distribution of the land to P. Under section 311(b), S has a 
$30 gain. Under section 301(d), P's basis in the land is $100. On July 1 
of Year 3, P sells the land to X for $110.
    (b) Dividend elimination and stock basis adjustments. Under 
paragraph (b)(1) of this section, S's distribution to P is an 
intercompany distribution. Under paragraph (f)(2)(ii) of this section, 
P's $100 of dividend income is not included in gross income. Under Sec.  
1.1502-32, P's basis in S's stock is reduced from $100 to $0 in Year 1.
    (c) Matching rule and stock basis adjustments. Under the matching 
rule (treating P as the buying member and S as the selling member), S 
takes its $30 gain into account in Year 3 to reflect the $30 difference 
between P's $10 gain taken into account and the $40 recomputed gain. 
Under Sec.  1.1502-32, P's basis in S's stock is increased from $0 to 
$30 in Year 3.
    (d) Loss property. The facts are the same as in paragraph (a) of 
this Example 1, except that S has a $130 (rather than $70) basis in the 
land. Under paragraph (f)(2)(iii) of this section, the principles of 
section 311(b) apply to S's loss from the intercompany distribution. 
Thus, S has a $30 loss that is taken into account under the matching 
rule in Year 3 to reflect the $30 difference between P's $10 gain taken 
into account and the $20 recomputed loss. (The results are the same 
under section 267(f).) Under Sec.  1.1502-32, P's basis in S's stock is 
reduced from $100 to $0 in Year 1, and from $0 to a $30 excess loss 
account in Year 3. (If P had distributed the land to its shareholders, 
rather than selling the land to X, P would take its $10 gain under 
section 311(b) into account, and S would take its $30 loss into account 
under the matching rule with $10 offset by P's gain and $20 
recharacterized as a noncapital, nondeductible amount.)
    (e) Entitlement rule. The facts are the same as in paragraph (a) of 
this Example 1, except that, after P becomes entitled to the 
distribution but before the distribution is made, S issues additional 
stock to the public and becomes a nonmember. Under paragraph (f)(2)(i) 
of this section, the determination of whether a distribution is an 
intercompany distribution is made under the entitlement rule of 
paragraph (f)(2)(iv) of this section. Treating S's distribution as made 
when P becomes entitled to it results in the distribution being an 
intercompany distribution. Under paragraph (f)(2)(ii) of this section, 
the distribution is not included in P's gross income. S's $30 gain from 
the distribution is intercompany gain that is taken into account under 
the acceleration rule immediately before S becomes a nonmember. Thus, 
there is a net $70 decrease in P's basis in its S stock under Sec.  
1.1502-32 ($100 decrease for the distribution and a $30 increase for S's 
$30 gain). Under paragraph (f)(2)(iv) of this section, P does not take 
the distribution into account again under separate return rules when 
received, and P is not entitled to a dividends received deduction.

[[Page 622]]

    Example 2. Excess loss accounts. (a) Facts. S owns all of T's only 
class of stock with a $10 basis and $100 value. S has substantial 
earnings and profits, and T has $10 of earnings and profits. On January 
1 of Year 1, S declares and distributes a dividend of all of the T stock 
to P. Under section 311(b), S has a $90 gain. Under section 301(d), P's 
basis in the T stock is $100. During Year 3, T borrows $90 and declares 
and makes a $90 distribution to P to which section 301 applies, and P's 
basis in the T stock is reduced under Sec.  1.1502-32 from $100 to $10. 
During Year 6, T has $5 of earnings that increase P's basis in the T 
stock under Sec.  1.1502-32 from $10 to $15. On December 1 of Year 9, T 
issues additional stock to X and, as a result, T becomes a nonmember.
    (b) Dividend exclusion. Under paragraph (f)(2)(ii) of this section, 
P's $100 of dividend income from S's distribution of the T stock, and 
its $10 of dividend income from T's $90 distribution, are not included 
in gross income.
    (c) Matching and acceleration rules. Under Sec.  1.1502-19(b)(1), 
when T becomes a nonmember P must include in income the amount of its 
excess loss account (if any) in T stock. P has no excess loss account in 
the T stock. Therefore P's corresponding item from the deconsolidation 
of T is $0. Treating S and P as divisions of a single corporation, the T 
stock would continue to have a $10 basis after the distribution, and the 
adjustments under Sec.  1.1502-32 for T's $90 distribution and $5 of 
earnings would result in a $75 excess loss account. Thus, the recomputed 
corresponding item from the deconsolidation is $75. Under the matching 
rule, S takes $75 of its $90 gain into account in Year 9 as a result of 
T becoming a nonmember, to reflect the difference between P's $0 gain 
taken into account and the $75 recomputed gain. S's remaining $15 of 
gain is taken into account under the matching and acceleration rules 
based on subsequent events (for example, under the matching rule if P 
subsequently sells its T stock, or under the acceleration rule if S 
becomes a nonmember).
    (d) Reverse sequence. The facts are the same as in paragraph (a) of 
this Example 2, except that T borrows $90 and makes its $90 distribution 
to S before S distributes T's stock to P. Under paragraph (f)(2)(ii) of 
this section, T's $90 distribution to S ($10 of which is a dividend) is 
not included in S's gross income. The corresponding negative adjustment 
under Sec.  1.1502-32 reduces S's basis in the T stock from $10 to an 
$80 excess loss account. Under section 311(b), S has a $90 gain from the 
distribution of T stock to P. Under section 301(d) P's initial basis in 
the T stock is $10 (the stock's fair market value), and the basis 
increases to $15 under Sec.  1.1502-32 as a result of T's earnings in 
Year 6. The timing and attributes of S's gain are determined in the 
manner provided in paragraph (c) of this Example 2. Thus, $75 of S's 
gain is taken into account under the matching rule in Year 9 as a result 
of T becoming a nonmember, and the remaining $15 is taken into account 
under the matching and acceleration rules based on subsequent events.
    (e) Partial stock sale. The facts are the same as in paragraph (a) 
of this Example 2, except that P sells 10% of T's stock to X on December 
1 of Year 9 for $1.50 (rather than T's issuing additional stock and 
becoming a nonmember). Under the matching rule, S takes $9 of its gain 
into account to reflect the difference between P's $0 gain taken into 
account ($1.50 sale proceeds minus $1.50 basis) and the $9 recomputed 
gain ($1.50 sale proceeds plus $7.50 excess loss account).
    (f) Loss, rather than cash distribution. The facts are the same as 
in paragraph (a) of this Example 2, except that T retains the loan 
proceeds and incurs a $90 loss in Year 3 that is absorbed by the group. 
The timing and attributes of S's gain are determined in the same manner 
provided in paragraph (c) of this Example 2. Under Sec.  1.1502-32, the 
loss in Year 3 reduces P's basis in the T stock from $100 to $10, and 
T's $5 of earnings in Year 6 increase the basis to $15. Thus, $75 of S's 
gain is taken into account under the matching rule in Year 9 as a result 
of T becoming a nonmember, and the remaining $15 is taken into account 
under the matching and acceleration rules based on subsequent events. 
(The timing and attributes of S's gain would be determined in the same 
manner provided in paragraph (d) of this Example 2 if T incurred the $90 
loss before S's distribution of the T stock to P.)
    (g) Stock sale, rather than stock distribution. The facts are the 
same as in paragraph (a) of this Example 2, except that S sells the T 
stock to P for $100 (rather than distributing the stock). The timing and 
attributes of S's gain are determined in the same manner provided in 
paragraph (c) of this Example 2. Thus, $75 of S's gain is taken into 
account under the matching rule in Year 9 as a result of T becoming a 
nonmember, and the remaining $15 is taken into account under the 
matching and acceleration rules based on subsequent events.
    Example 3. Intercompany reorganization. (a) Facts. P forms S and B 
by contributing $200 to the capital of each. During Years 1 through 4, S 
and B each earn $50, and under Sec.  1.1502-32 P adjusts its basis in 
the stock of each to $250. (See Sec.  1.1502-33 for adjustments to 
earnings and profits.) On January 1 of Year 5, the fair market value of 
S's assets and its stock is $500, and S merges into B in a tax-free 
reorganization. Pursuant to the plan of reorganization, P receives B 
stock with a fair market value of $350 and $150 of cash.
    (b) Treatment as a section 301 distribution. The merger of S into B 
is a transaction to which paragraph (f)(3) of this section applies.

[[Page 623]]

P is treated as receiving additional B stock with a fair market value of 
$500 and, under section 358, a basis of $250. Immediately after the 
merger, $150 of the stock received is treated as redeemed, and the 
redemption is treated under section 302(d) as a distribution to which 
section 301 applies. Because the $150 distribution is treated as not 
received as part of the merger, section 356 does not apply and no basis 
adjustments are required under section 358(a)(1)(A) and (B). Because B 
is treated under section 381(c)(2) as receiving S's earnings and profits 
and the redemption is treated as occurring after the merger, $100 of the 
distribution is treated as a dividend under section 301 and P's basis in 
the B stock is reduced correspondingly under Sec.  1.1502-32. The 
remaining $50 of the distribution reduces P's basis in the B stock. 
Section 301(c)(2) and Sec.  1.1502-32. Under paragraph (f)(2)(ii) of 
this section, P's $100 of dividend income is not included in gross 
income. Under Sec.  1.302-2(c), proper adjustments are made to P's basis 
in its B stock to reflect its basis in the B stock redeemed, with the 
result that P's basis in the B stock is reduced by the entire $150 
distribution.
    (c) Depreciated property. The facts are the same as in paragraph (a) 
of this Example 3, except that property of S with a $200 basis and $150 
fair market value is distributed to P (rather than cash of B). As in 
paragraph (b) of this Example 3, P is treated as receiving additional B 
stock in the merger and a $150 distribution to which section 301 applies 
immediately after the merger. Under paragraph (f)(2)(iii) of this 
section, the principles of section 311(b) apply to B's $50 loss and the 
loss is taken into account under the matching and acceleration rules 
based on subsequent events (e.g., under the matching rule if P 
subsequently sells the property, or under the acceleration rule if B 
becomes a nonmember). The results are the same under section 267(f).
    (d) Divisive transaction. Assume instead that, pursuant to a plan, S 
distributes the stock of a lower-tier subsidiary in a spin-off 
transaction to which section 355 applies together with $150 of cash. The 
distribution of stock is a transaction to which paragraph (f)(3) of this 
section applies. P is treated as receiving the $150 of cash immediately 
before the section 355 distribution, as a distribution to which section 
301 applies. Section 356(b) does not apply and no basis adjustments are 
required under section 358(a)(1) (A) and (B). Because the $150 
distribution is treated as made before the section 355 distribution, the 
distribution reduces P's basis in the S stock under Sec.  1.1502-32, and 
the basis allocated under section 358(c) between the S stock and the 
lower-tier subsidiary stock received reflects this basis reduction.
    Example 4. All cash intercompany reorganization under section 
368(a)(1)(D). (a) Facts. P owns all of the stock of M and B. M owns all 
of the stock of S with a basis of $25. On January 1 of Year 2, the fair 
market value of S's assets and its stock is $100, and S sells all of its 
assets to B for $100 cash and liquidates. The transaction qualifies as a 
reorganization described in section 368(a)(1)(D). Pursuant to Sec.  
1.368-2(l), B will be deemed to issue a nominal share of B stock to S in 
addition to the $100 of cash actually exchanged for the S assets, and S 
will be deemed to distribute all of the consideration to M. M will be 
deemed to distribute the nominal share of B stock to P.
    (b) Treatment as a section 301 distribution. The sale of S's assets 
to B is a transaction to which paragraph (f)(3) of this section applies. 
In addition to the nominal share issued by B to S under Sec.  1.368-
2(l), S is treated as receiving additional B stock with a fair market 
value of $100 (in lieu of the $100) and, under section 358, a basis of 
$25 which S distributes to M in liquidation. Immediately after the sale, 
the B stock (with the exception of the nominal share which is still held 
by M) received by M is treated as redeemed for $100, and the redemption 
is treated under section 302(d) as a distribution to which section 301 
applies. M's basis of $25 in the B stock is reduced under Sec.  1.1502-
32(b)(3)(v), resulting in an excess loss account of $75 in the nominal 
share. (See Sec.  1.302-2(c)). M's deemed distribution of the nominal 
share of B stock to P under Sec.  1.368-2(l) will result in M generating 
an intercompany gain under section 311(b) of $75, to be subsequently 
taken into account under the matching and acceleration rules.
    Example 5. Stock redemptions and distributions. (a)Facts. Before 
becoming a member of the P group, S owns P stock with a $30 basis. On 
January 1 of Year 1, P buys all of S's stock. On July 1 of Year 3, P 
redeems the P stock held by S for $100 in a transaction to which section 
302(a) applies.
    (b) Gain under section 302. Under paragraph (f)(4) of this section, 
P's basis in the P stock acquired from S is treated as eliminated. As a 
result of this elimination, S's intercompany item will never be taken 
into account under the matching rule because P's basis in the stock does 
not reflect S's intercompany item. Therefore, S's $70 gain is taken into 
account under the acceleration rule in Year 3. The attributes of S's 
item are determined under paragraph (d)(1)(ii) of this section by 
applying the matching rule as if P had sold the stock to an affiliated 
corporation that is not a member of the group at no gain or loss. 
Although P's corresponding item from a sale of its stock would have been 
excluded from gross income under section 1032, paragraph (c)(6)(ii) of 
this section prevents S's gain from being treated as excluded from gross 
income; instead S's gain is capital gain.
    (c) Gain under section 311. The facts are the same as in paragraph 
(a) of this Example 4, except that S distributes the P stock to P in a 
transaction to which section 301 applies (rather than the stock being 
redeemed), and

[[Page 624]]

S has a $70 gain under section 311(b). The timing and attributes of S's 
gain are determined in the manner provided in paragraph (b) of this 
Example 4.
    (d) Loss stock. The facts are the same as in paragraph (a) of this 
Example 4, except that S has a $130 (rather than $30) basis in the P 
stock and has a $30 loss under section 302(a). The limitation under 
paragraph (c)(6)(ii) of this section does not apply to intercompany 
losses. Thus, S's loss is taken into account in Year 3 as a noncapital, 
nondeductible amount.
    Example 6. Intercompany stock sale followed by section 332 
liquidation. (a) Facts. S owns all of the stock of T, with a $70 basis 
and $100 value, and T's assets have a $10 basis and $100 value. On 
January 1 of Year 1, S sells all of T's stock to B for $100. On July 1 
of Year 3, when T's assets are still worth $100, T distributes all of 
its assets to B in an unrelated complete liquidation to which section 
332 applies.
    (b) Timing and attributes. Under paragraph (b)(3)(ii) of this 
section, B's unrecognized gain or loss under section 332 is a 
corresponding item for purposes of applying the matching rule. In Year 3 
when T liquidates, B has $0 of unrecognized gain or loss under section 
332 because B has a $100 basis in the T stock and receives a $100 
distribution with respect to its T stock. Treating S and B as divisions 
of a single corporation, the recomputed corresponding item would have 
been $30 of unrecognized gain under section 332 because B would have 
succeeded to S's $70 basis in the T stock. Thus, under the matching 
rule, S's $30 intercompany gain is taken into account in Year 3 as a 
result of T's liquidation. Under paragraph (c)(1)(i) of this section, 
the attributes of S's gain and B's corresponding item are redetermined 
as if S and B were divisions of a single corporation. Although S's gain 
ordinarily would be redetermined to be treated as excluded from gross 
income to reflect the nonrecognition of B's gain under section 332, S's 
gain remains capital gain because B's unrecognized gain under section 
332 is not permanently and explicitly disallowed under the Code. See 
paragraph (c)(6)(ii) of this section. However, relief may be elected 
under paragraph (f)(5)(ii) of this section.
    (c) Intercompany sale at a loss. The facts are the same as in 
paragraph (a) of this Example 5, except that S has a $130 (rather than 
$70) basis in the T stock. The limitation under paragraph (c)(6)(ii) of 
this section does not apply to intercompany losses. Thus, S's 
intercompany loss is taken into account in Year 3 as a noncapital, 
nondeductible amount. However, relief may be elected under paragraph 
(f)(5)(ii) of this section.
    Example 7. Intercompany stock sale followed by section 355 
distribution. (a) Facts. S owns all of the stock of T with a $70 basis 
and a $100 value. On January 1 of Year 1, S sells all of T's stock to M 
for $100. On June 1 of Year 6, M distributes all of its T stock to its 
nonmember shareholders in a transaction to which section 355 applies. At 
the time of the distribution, M has a basis in T stock of $100 and T has 
a value of $150.
    (b) Timing and attributes. Under paragraph (b)(3)(ii) of this 
section, M's $50 gain not recognized on the distribution under section 
355 is a corresponding item. Treating S and M as divisions of a single 
corporation, the recomputed corresponding item would be $80 of 
unrecognized gain under section 355 because M would have succeeded to 
S's $70 basis in the T stock. Thus, under the matching rule, S's $30 
intercompany gain is taken into account in Year 6 as a result of the 
distribution. Under paragraph (c)(1)(i) of this section, the attributes 
of S's intercompany item and M's corresponding item are redetermined to 
produce the same effect on consolidated taxable income as if S and M 
were divisions of a single corporation. Although S's gain ordinarily 
would be redetermined to be treated as excluded from gross income to 
reflect the nonrecognition of M's gain under section 355(c), S's gain 
remains capital gain because M's unrecognized gain under section 355(c) 
is not permanently and explicitly disallowed under the Code. See 
paragraph (c)(6)(ii) of this section. Because M's distribution of the T 
stock is not an intercompany transaction, relief is not available under 
paragraph (f)(5)(ii) of this section.
    (c) Section 355 distribution within the group. The facts are the 
same as under paragraph (a) of this Example 6, except that M distributes 
the T stock to B (another member of the group), and B takes a $75 basis 
in the T stock under section 358. Under paragraph (j)(2) of this 
section, B is a successor to M for purposes of taking S's intercompany 
gain into account, and therefore both M and B might have corresponding 
items with respect to S's intercompany gain. To the extent it is 
possible, matching with respect to B's corresponding items produces the 
result most consistent with treating S, M, and B as divisions of a 
single corporation. See paragraphs (j)(3) and (j)(4) of this section. 
However, because there is only $5 difference between B's $75 basis in 
the T stock and the $70 basis the stock would have if S, M, and B were 
divisions of a single corporation, only $5 can be taken into account 
under the matching rule with respect to B's corresponding items. (This 
$5 is taken into account with respect to B's corresponding items based 
on subsequent events.) The remaining $25 of S's $30 intercompany gain is 
taken into account in Year 6 under the matching rule with respect to M's 
corresponding item from its distribution of the T stock. The attributes 
of S's remaining $25 of gain are determined in the same manner as in 
paragraph (b) of this Example 6.

[[Page 625]]

    (d) Relief elected. The facts are the same as in paragraph (c) of 
this Example 6 except that P elects relief pursuant to paragraph 
(f)(5)(ii)(D) of this section. As a result of the election, M's 
distribution of the T stock is treated as subject to sections 301 and 
311 instead of section 355. Accordingly, M recognizes $50 of 
intercompany gain from the distribution, B takes a basis in the stock 
equal to its fair market value of $150, and S and M take their 
intercompany gains into account with respect to B's corresponding items 
based on subsequent events. (None of S's gain is taken into account in 
Year 6 as a result of M's distribution of the T stock.)
    (g) Obligations of members--(1) In general. In addition to the 
general rules of this section, the rules of this paragraph (g) apply to 
intercompany obligations.
    (2) Definitions. For purposes of this section, the following 
definitions apply--
    (i) Obligation of a member is a debt or security of a member.
    (A) Debt of a member is any obligation of the member constituting 
indebtedness under general principles of Federal income tax law (for 
example, under nonstatutory authorities, or under section 108, section 
163, or Sec.  1.1275-1(d)), but not an executory obligation to purchase 
or provide goods or services.
    (B) Security of a member is any security of the member described in 
section 475(c)(2)(D) or (E), and any commodity of the member described 
in section 475(e)(2)(A), (B), or (C), but not if the security or 
commodity is a position with respect to the member's stock. See 
paragraphs (f)(4) and (f)(6) of this section for special rules 
applicable to positions with respect to a member's stock.
    (ii) Intercompany obligation is an obligation between members, but 
only for the period during which both parties are members.
    (iii) Intercompany obligation subgroup is comprised of two or more 
members that include the creditor and debtor on an intercompany 
obligation if the creditor and debtor bear the relationship described in 
section 1504(a)(1) to each other through an intercompany obligation 
subgroup parent.
    (iv) Intercompany obligation subgroup parent is the corporation 
(including either the creditor or debtor) that bears the same 
relationship to the other members of the intercompany obligation 
subgroup as a common parent bears to the members of a consolidated 
group. Any reference to an intercompany obligation subgroup parent 
includes, as the context may require, a reference to a predecessor or 
successor. For this purpose, a predecessor is a transferor of assets to 
a transferee (the successor) in a transaction to which section 381(a) 
applies.
    (v) Tax benefit is the benefit of, for Federal tax purposes, a net 
reduction in income or gain, or a net increase in loss, deduction, 
credit, or allowance. A tax benefit includes, but is not limited to, the 
use of a built-in item or items from an intercompany obligation to 
reduce gain or increase loss on the sale of member stock, or to create 
or absorb a tax attribute of a member or subgroup.
    (vi) Eighty-percent chain is a chain of two or more corporations in 
which stock meeting the requirements of section 1504(a)(2) of each 
lower-tier member is held directly by a higher-tier member of such 
chain.
    (3) Deemed satisfaction and reissuance of intercompany obligations 
in triggering transactions--(i) Scope--(A) Triggering transactions. For 
purposes of this paragraph (g)(3), a triggering transaction includes the 
following:
    (1) Assignment and extinguishment transactions. Any intercompany 
transaction in which a member realizes an amount, directly or 
indirectly, from the assignment or extinguishment of all or part of its 
remaining rights or obligations under an intercompany obligation or any 
comparable transaction in which a member realizes any such amount, 
directly or indirectly, from an intercompany obligation (for example, a 
mark to fair market value of an obligation or a bad debt deduction). 
However, a reduction of the basis of an intercompany obligation pursuant 
to Sec.  1.1502-36(d) (attribute reduction to prevent duplication of 
loss), or pursuant to sections 108 and 1017 and Sec.  1.1502-28 (basis 
reductions upon the exclusion from gross income of discharge of 
indebtedness) or any other provision that adjusts the basis of an 
intercompany obligation as a substitute for income, gain, deduction, or 
loss, is not a comparable transaction.

[[Page 626]]

    (2) Outbound transactions. Any transaction in which an intercompany 
obligation becomes an obligation that is not an intercompany obligation.
    (B) Exceptions. Except as provided in paragraph (g)(3)(i)(C) of this 
section, a transaction is not a triggering transaction as described in 
paragraph (g)(3)(i)(A) of this section if any of the exceptions in this 
paragraph (g)(3)(i)(B) apply. In making this determination, if a 
creditor or debtor realizes an amount in a transaction in which a 
creditor assigns all or part of its rights under an intercompany 
obligation to the debtor, or a debtor assigns all or part of its 
obligations under an intercompany obligation to the creditor, the 
transaction will be treated as an extinguishment and will be excepted 
from the definition of ``triggering transaction'' only if either of the 
exceptions in paragraphs (g)(3)(i)(B)(5) or (6) of this section apply. 
The exceptions are as follows.
    (1) Intercompany section 361, 332, or 351 exchange. The transaction 
is an intercompany exchange to which section 361(a), sections 332 and 
337(a), or (except as provided in the following sentence) section 351 
applies in which no amount of income, gain, deduction or loss is 
recognized by the creditor or debtor. The assignment of an intercompany 
obligation by a creditor member in an intercompany exchange to which 
section 351 applies is a triggering transaction, notwithstanding the 
preceding sentence, if a member of the group is described in, or engages 
in a transaction that is described in, any of the following paragraphs.
    (i) The transferor or transferee member has a loss subject to a 
limitation (for example, a loss from a separate return limitation year 
that is subject to limitation under Sec.  1.1502-21(c), or a dual 
consolidated loss that is subject to limitation under Sec.  1.1503(d)-
4), but only if the other member is not subject to a comparable 
limitation;
    (ii) The transferor or transferee member has a special status within 
the meaning of Sec.  1.1502-13(c)(5) (for example, a bank defined in 
section 581, or a life insurance company subject to tax under section 
801) that the other member does not also possess;
    (iii) A member of the group realizes discharge of indebtedness 
income that is excluded from gross income under section 108(a) within 
the same taxable year as that of the exchange, and the tax attributes 
attributable to either the transferor or the transferee member are 
reduced under sections 108, 1017, and Sec.  1.1502-28 (except if the 
attribute reduction results solely from the application of Sec.  1.1502-
28(a)(4) (reduction of certain tax attributes attributable to other 
members));
    (iv) The transferee member has a nonmember shareholder;
    (v) The transferee member issues preferred stock to the transferor 
member in exchange for the assignment of the intercompany obligation; or
    (vi) The stock of the transferee member (or a higher-tier member 
other than a higher-tier member of an 80-percent chain that includes the 
transferor and transferee) is disposed of within 12 months from the 
assignment of the intercompany obligation, unless at the time of the 
assignment, the transferor member, transferee member (or in the case of 
successive section 351 exchanges, each transferor and transferee member) 
and the debtor member are all in the same 80-percent chain; and all of 
the stock of the transferee (or in the case of successive section 351 
exchanges, the lowest-tier transferee) held by members of the group is 
disposed of as part of the same plan or arrangement, either directly or 
indirectly, to persons that are not members of the group.
    (2) Intercompany assumption transaction. All of the debtor's 
obligations under an intercompany obligation are assumed in connection 
with the debtor's sale or other disposition of property (other than 
solely money) in an intercompany transaction in which gain or loss is 
recognized under section 1001.
    (3) Exception to the application of section 108(e)(4). The 
obligation became an intercompany obligation by reason of an event 
described in Sec.  1.108-2(e)(2) (exception to the application of 
section 108(e)(4) in the case of acquisitions by securities dealers).
    (4) Reserve accounting. The amount realized is from reserve 
accounting under section 585 (see paragraph (g)(4)(v) of this section 
for special rules).

[[Page 627]]

    (5) Intercompany extinguishment transaction. All or part of the 
rights and obligations under the intercompany obligation are 
extinguished in an intercompany transaction (other than an exchange or 
deemed exchange of an intercompany obligation for a newly issued 
intercompany obligation), the adjusted issue price of the obligation is 
equal to the creditor's basis in the obligation, and the debtor's 
corresponding item and the creditor's intercompany item (after taking 
into account the special rules of paragraph (g)(4)(i)(C) of this 
section) with respect to the obligation offset in amount.
    (6) Routine modification of intercompany obligation. All of the 
rights and obligations under the intercompany obligation are 
extinguished in an intercompany transaction that is an exchange (or 
deemed exchange) for a newly issued intercompany obligation, and the 
issue price of the newly issued obligation equals both the adjusted 
issue price of the extinguished obligation and the creditor's basis in 
the extinguished obligation. Solely for purposes of the preceding 
sentence, a newly issued intercompany obligation includes an obligation 
that is issued (or deemed issued) by a member other than the original 
debtor if such other member assumes the original debtor's obligations 
under the original obligation in a transaction that is described in 
either paragraph (g)(3)(i)(B)(1) or (g)(3)(i)(B)(2) of this section and 
the assumption results in a significant modification of the original 
obligation under Sec.  1.1001-3(e)(4) and a deemed exchange under Sec.  
1.1001-3(b).
    (7) Outbound distribution of newly issued intercompany obligation. 
The intercompany obligation becomes an obligation that is not an 
intercompany obligation in a transaction in which a member that is a 
party to the reorganization exchanges property in pursuance of the plan 
of reorganization for a newly issued intercompany obligation of another 
member that is a party to the reorganization and distributes such 
intercompany obligation to a nonmember shareholder or nonmember creditor 
in a transaction to which section 361(c) applies.
    (8) Outbound subgroup exception. The intercompany obligation becomes 
an obligation that is not an intercompany obligation in a transaction in 
which the members of an intercompany obligation subgroup cease to be 
members of a consolidated group, neither the creditor nor the debtor 
recognize any income, gain, deduction, or loss with respect to the 
intercompany obligation, and such members constitute an intercompany 
obligation subgroup of another consolidated group immediately after the 
transaction.
    (C) Tax benefit rule. If an assignment or extinguishment of an 
intercompany obligation in an intercompany transaction is otherwise 
excepted from the definition of triggering transaction under paragraph 
(g)(3)(i)(B)(1), (2), (5), or (6) of this section (and not also under 
paragraph (g)(3)(i)(B)(3) or (4) of this section), and the assignment or 
extinguishment is engaged in with a view to shift items of built-in 
gain, loss, income, or deduction from the obligation from one member to 
another member in order to secure a tax benefit (as defined in paragraph 
(g)(2)(v) of this section) that the group or its members would not 
otherwise enjoy in a consolidated or separate return year, then the 
assignment or extinguishment will be a triggering transaction to which 
paragraph (g)(3)(ii) of this section applies.
    (ii) Application of deemed satisfaction and reissuance. This 
paragraph (g)(3)(ii) applies if a triggering transaction occurs.
    (A) General rule. If the intercompany obligation is debt of a 
member, then (except as provided in the following sentence) the debt is 
treated for all Federal income tax purposes as having been satisfied by 
the debtor for cash in an amount equal to its fair market value, and 
then as having been reissued as a new obligation (with a new holding 
period but otherwise identical terms) for the same amount of cash, 
immediately before the triggering transaction. However, if the creditor 
realizes an amount with respect to the debt in the triggering 
transaction that differs from the debt's fair market value, and the 
triggering transaction is not an exchange (or deemed exchange) of debt 
of a member for newly issued debt of a member, then the debt is treated 
for all Federal income tax purposes as having been satisfied by the 
debtor for cash in

[[Page 628]]

an amount equal to such amount realized, and reissued as a new 
obligation (with a new holding period but otherwise identical terms) for 
the same amount of cash, immediately before the triggering transaction. 
If the triggering transaction is a mark to fair market value under 
section 475, then the intercompany obligation will be deemed satisfied 
and reissued for its fair market value (as determined under section 475 
and applicable regulations) and section 475 will not otherwise apply 
with respect to that triggering transaction. If the intercompany 
obligation is a security of a member, similar principles apply (with 
appropriate adjustments) to treat the security as having been satisfied 
and reissued immediately before the triggering transaction.
    (B) Treatment as separate transaction. The deemed satisfaction and 
deemed reissuance are treated as transactions separate and apart from 
the triggering transaction. The deemed satisfaction and reissuance of a 
member's debt will not cause the debt to be recharacterized as other 
than debt for Federal income tax purposes.
    (4) Special rules--(i) Timing and attributes. For purposes of 
applying the matching rule and the acceleration rule to a transaction 
involving an intercompany obligation (other than a transaction to which 
paragraph (g)(5) of this section applies)--
    (A) Paragraph (c)(6)(i) of this section (treatment of intercompany 
items if corresponding items are excluded or nondeductible) will not 
apply to exclude any amount of income or gain attributable to a 
reduction of the basis of the intercompany obligation pursuant to Sec.  
1.1502-36(d), or pursuant to sections 108 and 1017 and Sec.  1.1502-28 
or any other provision that adjusts the basis of an intercompany 
obligation as a substitute for income or gain;
    (B) Paragraph (c)(6)(ii) of this section (limitation on treatment of 
intercompany income or gain as excluded from gross income) does not 
apply to prevent any intercompany income or gain from the intercompany 
obligation from being excluded from gross income;
    (C) Any income, gain, deduction, or loss from the intercompany 
obligation is not subject to section 108(a), section 354, section 
355(a)(1), section 1091, or, in the case of an extinguishment of an 
intercompany obligation in a transaction in which the creditor transfers 
the obligation to the debtor in exchange for stock in such debtor, 
section 351(a); and
    (D) Section 108(e)(7) does not apply upon the extinguishment of an 
intercompany obligation.
    (ii) Newly issued obligation in intercompany exchange. If an 
intercompany obligation is exchanged (or is deemed exchanged) for a 
newly issued intercompany obligation and the exchange (or deemed 
exchange) is not a routine modification of an intercompany obligation 
(as described in paragraph (g)(3)(i)(B)(6) of this section), then the 
newly issued obligation will be treated for all Federal income tax 
purposes as having an issue price equal to its fair market value.
    (iii) Off-market issuance. If an intercompany obligation is issued 
at a rate of interest that is materially off-market (off-market 
obligation) with a view to shift items of built-in gain, loss, income, 
or deduction from the obligation from one member to another member in 
order to secure a tax benefit (as defined in paragraph (g)(2)(v) of this 
section), then the intercompany obligation will be treated, for all 
Federal income tax purposes, as originally issued for its fair market 
value, and any difference between the amount loaned and the fair market 
value of the obligation will be treated as transferred between the 
creditor and the debtor at the time the obligation is issued. For 
example, if S lends $100 to B in return for an off-market B note valued 
at $130, and the note is issued with a view to shift items from the note 
to secure a tax benefit, then the B note will be treated as issued for 
$130. The $30 difference will be treated as a distribution or capital 
contribution between S and B (as appropriate) at the time of issuance, 
and this amount will be reflected in future payments on the note as bond 
issuance premium. An adjustment to an off-market obligation under this 
paragraph (g)(4)(iii) will be made without regard to the application of, 
and in lieu of any adjustment under, section 467 (certain payments for 
the use of property or services), 482 (allocations

[[Page 629]]

among commonly controlled taxpayers), 483 (interest on certain deferred 
payments), 1274 (determination of issue price for certain debt 
instruments issued for property), or 7872 (treatment of loans with 
below-market interest rates).
    (iv) Deferral of loss or deduction with respect to nonmember 
indebtedness acquired in certain debt exchanges. If a creditor transfers 
an intercompany obligation to a nonmember (former intercompany 
obligation) in exchange for newly issued debt of a nonmember (nonmember 
debt), and the issue price of the nonmember debt is not determined by 
reference to its fair market value (for example, the issue price is 
determined under section 1273(b)(4) or 1274(a) or any other provision of 
applicable law), then any loss of the creditor otherwise allowable on 
the subsequent disposition of the nonmember debt, or any comparable tax 
benefit that would otherwise be available in any other transaction that 
directly or indirectly results from the disposition of the nonmember 
debt, is deferred until the date the debtor retires the former 
intercompany obligation.
    (v) Bad debt reserve. A member's deduction under section 585 for an 
addition to its reserve for bad debts with respect to an intercompany 
obligation is not taken into account, and is not treated as realized for 
purposes of paragraph (g)(3)(i)(A)(1) of this section, until the 
intercompany obligation is extinguished or becomes an obligation that is 
not an intercompany obligation.
    (5) Deemed satisfaction and reissuance of obligations becoming 
intercompany obligations--(i) Application of deemed satisfaction and 
reissuance--(A) In general. This paragraph (g)(5) applies if an 
obligation that is not an intercompany obligation becomes an 
intercompany obligation.
    (B) Exceptions. This paragraph (g)(5) does not apply to an 
intercompany obligation if either of the following exceptions apply.
    (1) Exception to the application of section 108(e)(4). The 
obligation becomes an intercompany obligation by reason of an event 
described in Sec.  1.108-2(e)(2) (exception to the application of 
section 108(e)(4) in the case of acquisitions by securities dealers); or
    (2) Inbound subgroup exception. The obligation becomes an 
intercompany obligation in a transaction in which the members of an 
intercompany obligation subgroup cease to be members of a consolidated 
group, neither the creditor nor the debtor recognize any income, gain, 
deduction, or loss with respect to the intercompany obligation, and such 
members constitute an intercompany obligation subgroup of another 
consolidated group immediately after the transaction.
    (ii) Deemed satisfaction and reissuance--(A) General rule. If the 
intercompany obligation is debt of a member, then the debt is treated 
for all Federal income tax purposes, immediately after it becomes an 
intercompany obligation, as having been satisfied by the debtor for cash 
in an amount determined under the principles of Sec.  1.108-2(f), and 
then as having been reissued as a new obligation (with a new holding 
period but otherwise identical terms) for the same amount of cash. If 
the intercompany obligation is a security of a member, similar 
principles apply (with appropriate adjustments) to treat the security, 
immediately after it becomes an intercompany obligation, as satisfied 
and reissued by the debtor for cash in an amount equal to its fair 
market value.
    (B) Treatment as separate transaction. The deemed satisfaction and 
deemed reissuance are treated as transactions separate and apart from 
the transaction in which the debt becomes an intercompany obligation, 
and the tax consequences of the transaction in which the debt becomes an 
intercompany obligation must be determined before the deemed 
satisfaction and reissuance occurs. (For example, if the debt becomes an 
intercompany obligation in a transaction to which section 351 applies, 
any limitation imposed by section 362(e) on the basis of the 
intercompany obligation in the hands of the transferee member is 
determined before the deemed satisfaction and reissuance.) The deemed 
satisfaction and reissuance of a member's debt will not cause the debt 
to be recharacterized as other than debt for Federal income tax 
purposes.

[[Page 630]]

    (6) Special rules--(i) Timing and attributes. If paragraph (g)(5) of 
this section applies to an intercompany obligation--
    (A) Section 108(e)(4) does not apply;
    (B) The attributes of all items taken into account from the 
satisfaction of the intercompany obligation are determined on a separate 
entity basis, rather than by treating S and B as divisions of a single 
corporation; and
    (C) Any intercompany gain or loss realized by the creditor is not 
subject to section 354 or section 1091.
    (ii) Waiver of loss carryovers from separate return limitation 
years. Solely for purposes of Sec.  1.1502-32(b)(4) and the effect of 
any election under that provision, any loss taken into account under 
paragraph (g)(5) of this section by a corporation that becomes a member 
as a result of the transaction in which the obligation becomes an 
intercompany obligation is treated as a loss carryover from a separate 
return limitation year.
    (iii) Deduction of repurchase premium in certain debt exchanges. If 
an obligation to which paragraph (g)(5) of this section applies is 
acquired in exchange for the issuance of an obligation to a nonmember 
and the issue price of this newly issued obligation is not determined by 
reference to its fair market value (for example, the issue price is 
determined under section 1273(b)(4) or 1274(a) or any other provision of 
applicable law), then, under the principles of Sec.  1.163-7(c), any 
repurchase premium from the deemed satisfaction of the intercompany 
obligation under paragraph (g)(5)(ii) of this section will be amortized 
by the debtor over the term of the obligation issued to the nonmember in 
the same manner as if it were original issue discount and the obligation 
to the nonmember had been issued directly by the debtor.
    (7) Examples--(i) In general. For purposes of the examples in this 
paragraph (g), unless otherwise stated, interest is qualified stated 
interest under Sec.  1.1273-1(c), and the intercompany obligations are 
capital assets and are not subject to section 475.
    (ii) The application of this section to obligations of members is 
illustrated by the following examples:

    Example 1. Interest on intercompany obligation. (i) Facts. On 
January 1 of year 1, B borrows $100 from S in return for B's note 
providing for $10 of interest annually at the end of each year, and 
repayment of $100 at the end of year 5. B fully performs its 
obligations. Under their separate entity methods of accounting, B 
accrues a $10 interest deduction annually under section 163, and S 
accrues $10 of interest income annually under section 61(a)(4) and Sec.  
1.446-2.
    (ii) Matching rule. Under paragraph (b)(1) of this section, the 
accrual of interest on B's note is an intercompany transaction. Under 
the matching rule, S takes its $10 of income into account in each of 
years 1 through 5 to reflect the $10 difference between B's $10 of 
interest expense taken into account and the $0 recomputed expense. S's 
income and B's deduction are ordinary items. (Because S's intercompany 
item and B's corresponding item would both be ordinary on a separate 
entity basis, the attributes are not redetermined under paragraph 
(c)(1)(i) of this section.)
    (iii) Original issue discount. The facts are the same as in 
paragraph (i) of this Example 1, except that B borrows $90 (rather than 
$100) from S in return for B's note providing for $10 of interest 
annually and repayment of $100 at the end of year 5. The principles 
described in paragraph (ii) of this Example 1 for stated interest also 
apply to the $10 of original issue discount. Thus, as B takes into 
account its corresponding expense under section 163(e), S takes into 
account its intercompany income under section 1272. S's income and B's 
deduction are ordinary items.
    (iv) Tax-exempt income. The facts are the same as in paragraph (i) 
of this Example 1, except that B's borrowing from S is allocable under 
section 265 to B's purchase of state and local bonds to which section 
103 applies. The timing of S's income is the same as in paragraph (ii) 
of this Example 1. Under paragraph (c)(4)(i) of this section, the 
attributes of B's corresponding item of disallowed interest expense 
control the attributes of S's offsetting intercompany interest income. 
Paragraph (c)(6) of this section does not prevent the redetermination of 
S's intercompany item as excluded from gross income because section 
265(a)(2) permanently and explicitly disallows B's corresponding 
deduction and because, under paragraph (g)(4)(i)(B) of this section, 
paragraph (c)(6)(ii) of this section does not apply to prevent any 
intercompany income from the B note from being excluded from gross 
income. Accordingly, S's intercompany income is treated as excluded from 
gross income.
    Example 2. Intercompany obligation becomes nonintercompany 
obligation. (i) Facts. On January 1 of year 1, B borrows $100 from S in 
return for B's note providing for $10 of interest

[[Page 631]]

annually at the end of each year, and repayment of $100 at the end of 
year 5. As of January 1 of year 3, B has paid the interest accruing 
under the note and S sells B's note to X for $70, reflecting an increase 
in prevailing market interest rates. B is never insolvent within the 
meaning of section 108(d)(3).
    (ii) Deemed satisfaction and reissuance. Because the B note becomes 
an obligation that is not an intercompany obligation, the transaction is 
a triggering transaction under paragraph (g)(3)(i)(A)(2) of this 
section. Under paragraph (g)(3)(ii) of this section, B's note is treated 
as satisfied and reissued for its fair market value of $70 immediately 
before S's sale to X. As a result of the deemed satisfaction of the note 
for less than its adjusted issue price, B takes into account $30 of 
discharge of indebtedness income under Sec.  1.61-12. On a separate 
entity basis, S's $30 loss would be a capital loss under section 
1271(a)(1). Under the matching rule, however, the attributes of S's 
intercompany item and B's corresponding item must be redetermined to 
produce the same effect as if the transaction had occurred between 
divisions of a single corporation. Under paragraph (c)(4)(i) of this 
section, the attributes of B's $30 of discharge of indebtedness income 
control the attributes of S's loss. Thus, S's loss is treated as 
ordinary loss. B is also treated as reissuing, immediately after the 
satisfaction, a new note to S with a $70 issue price, a $100 stated 
redemption price at maturity, and a $70 basis in the hands of S. S is 
then treated as selling the new note to X for the $70 received by S in 
the actual transaction. Because S has a basis of $70 in the new note, S 
recognizes no gain or loss from the sale to X. After the sale, the new 
note held by X is not an intercompany obligation, it has a $70 issue 
price, a $100 stated redemption price at maturity, and a $70 basis. The 
$30 of original issue discount will be taken into account by B and X 
under sections 163(e) and 1272.
    (iii) Creditor deconsolidation. The facts are the same as in 
paragraph (i) of this Example 2, except that P sells S's stock to X 
(rather than S selling B's note to X). Because the B note becomes an 
obligation that is not an intercompany obligation, the transaction is a 
triggering transaction under paragraph (g)(3)(i)(A)(2) of this section. 
Under paragraph (g)(3)(ii) of this section, B's note is treated as 
satisfied and reissued for its $70 fair market value immediately before 
S becomes a nonmember. The treatment of S's $30 of loss and B's $30 of 
discharge of indebtedness income is the same as in paragraph (ii) of 
this Example 2. The new note held by S upon deconsolidation is not an 
intercompany obligation, it has a $70 issue price, a $100 stated 
redemption price at maturity, and a $70 basis. The $30 of original issue 
discount will be taken into account by B and S under sections 163(e) and 
1272.
    (iv) Debtor deconsolidation. The facts are the same as in paragraph 
(i) of this Example 2, except that P sells B's stock to X (rather than S 
selling B's note to X). The results to S and B are the same as in 
paragraph (iii) of this Example 2.
    (v) Subgroup exception. The facts are the same as in paragraph (i) 
of this Example 2, except that P owns all of the stock of S, S owns all 
of the stock of B, and P sells all of the S stock to X, the parent of 
another consolidated group. Because B and S, members of an intercompany 
obligation subgroup, cease to be members of the P group in a transaction 
that does not cause either member to recognize an item with respect to 
the B note, and such members constitute an intercompany obligation 
subgroup in the X group, P's sale of S stock is not a triggering 
transaction under paragraph (g)(3)(i)(B)(8) of this section, and the 
note is not treated as satisfied and reissued under paragraph (g)(3)(ii) 
of this section. After the sale, the note held by S has a $100 issue 
price, a $100 stated redemption price at maturity, and a $100 basis. The 
results are the same if the S stock is sold to an individual and the S-B 
affiliated group elects to file a consolidated return for the period 
beginning on the day after S and B cease to be members of the P group.
    (vi) Section 338 election. The facts are the same as paragraph (i) 
of this Example 2, except that P sells S's stock to X and a section 338 
election is made with respect to the stock sale. Under section 338, S is 
treated as selling all of its assets to new S, including the B note, at 
the close of the acquisition date. The aggregate deemed sales price 
(within the meaning of Sec.  1.338-4) allocated to the B note is $70. 
Because the B note becomes an obligation that is not an intercompany 
obligation, the transaction is a triggering transaction under paragraph 
(g)(3)(i)(A)(2) of this section. Under paragraph (g)(3)(ii) of this 
section, B's note is treated as satisfied and reissued immediately 
before S's deemed sale to new S for $70, the amount realized with 
respect to the note (the aggregate deemed sales price allocated to the 
note under Sec.  1.338-6). The results to S and B are the same as in 
paragraph (ii) of this Example 2.
    (vii) Appreciated note. The facts are the same as in paragraph (i) 
of this Example 2, except that S sells B's note to X for $130 (rather 
than $70), reflecting a decline in prevailing market interest rates. 
Because the B note becomes an obligation that is not an intercompany 
obligation, the transaction is a triggering transaction under paragraph 
(g)(3)(i)(A)(2) of this section. Under paragraph (g)(3)(ii) of this 
section, B's note is treated as satisfied and reissued for its fair 
market value of $130 immediately before S's sale to X. As a result of 
the deemed satisfaction of the note for more than its adjusted

[[Page 632]]

issue price, B takes into account $30 of repurchase premium under Sec.  
1.163-7(c). On a separate entity basis, S's $30 gain would be a capital 
gain under section 1271(a)(1). Under the matching rule, however, the 
attributes of S's intercompany item and B's corresponding item must be 
redetermined to produce the same effect as if the transaction had 
occurred between divisions of a single corporation. Under paragraph 
(c)(4)(i) of this section, the attributes of B's premium deduction 
control the attributes of S's gain. Accordingly, S's gain is treated as 
ordinary income. B is also treated as reissuing, immediately after the 
satisfaction, a new note to S with a $130 issue price, $100 stated 
redemption price at maturity, and $130 basis in the hands of S. S is 
then treated as selling the new note to X for the $130 received by S in 
the actual transaction. Because S has a basis of $130 in the new note, S 
recognizes no gain or loss from the sale to X. After the sale, the new 
note held by X is not an intercompany obligation, it has a $130 issue 
price, a $100 stated redemption price at maturity, and a $130 basis. The 
treatment of B's $30 of bond issuance premium under the new note is 
determined under Sec.  1.163-13.
    (viii) Deferral of loss or deduction with respect to nonmember 
indebtedness acquired in debt exchange. The facts are the same as in 
paragraph (i) of this Example 2, except that S sells B's note to X for a 
non-publicly traded X note with an issue price and face amount of $100 
and a fair market value of $70, and that, subsequently, S sells the X 
note for $70. Because the B note becomes an obligation that is not an 
intercompany obligation, the transaction is a triggering transaction 
under paragraph (g)(3)(i)(A)(2) of this section. Under paragraph 
(g)(3)(ii) of this section, B's note is treated as satisfied and 
reissued immediately before S's sale to X for $100, the amount realized 
with respect to the note (determined under section 1274). As a result of 
the deemed satisfaction, neither S nor B take into account any items of 
income, gain, deduction, or loss. S is then treated as selling the new B 
note to X for the X note received by S in the actual transaction. 
Because S has a basis of $100 in the new note, S recognizes no gain or 
loss from the sale to X. After the sale, the new B note held by X is not 
an intercompany obligation, it has a $100 issue price, a $100 stated 
redemption price at maturity, and a $100 basis. S also holds an X note 
with a basis of $100 but a fair market value of $70. When S disposes of 
the X note, S's loss on the disposition is deferred under paragraph 
(g)(4)(iv) of this section, until B retires its note (the former 
intercompany obligation in the hands of X).
    Example 3. Loss or bad debt deduction with respect to intercompany 
obligation. (i) Facts. On January 1 of year 1, B borrows $100 from S in 
return for B's note providing for $10 of interest annually at the end of 
each year, and repayment of $100 at the end of year 5. On January 1 of 
year 3, the fair market value of the B note has declined to $60 and S 
sells the B note to P for property with a fair market value of $60. B is 
never insolvent within the meaning of section 108(d)(3). The B note is 
not a security within the meaning of section 165(g)(2).
    (ii) Deemed satisfaction and reissuance. Because S realizes an 
amount of loss from the assignment of the B note, the transaction is a 
triggering transaction under paragraph (g)(3)(i)(A)(1) of this section. 
Under paragraph (g)(3)(ii) of this section, B's note is treated as 
satisfied and reissued for its fair market value of $60 immediately 
before S's sale to P. As a result of the deemed satisfaction of the note 
for less than its adjusted issue price ($100), B takes into account $40 
of discharge of indebtedness income under Sec.  1.61-12. On a separate 
entity basis, S's $40 loss would be a capital loss under section 
1271(a)(1). Under the matching rule, however, the attributes of S's 
intercompany item and B's corresponding item must be redetermined to 
produce the same effect as if the transaction had occurred between 
divisions of a single corporation. Under paragraph (c)(4)(i) of this 
section, the attributes of B's $40 of discharge of indebtedness income 
control the attributes of S's loss. Thus, S's loss is treated as 
ordinary loss. B is also treated as reissuing, immediately after the 
satisfaction, a new note to S with a $60 issue price, $100 stated 
redemption price at maturity, and $60 basis in the hands of S. S is then 
treated as selling the new note to P for the $60 of property received by 
S in the actual transaction. Because S has a basis of $60 in the new 
note, S recognizes no gain or loss from the sale to P. After the sale, 
the note is an intercompany obligation, it has a $60 issue price and a 
$100 stated redemption price at maturity, and the $40 of original issue 
discount will be taken into account by B and P under sections 163(e) and 
1272.
    (iii) Partial bad debt deduction. The facts are the same as in 
paragraph (i) of this Example 3, except that S claims a $40 partial bad 
debt deduction under section 166(a)(2) (rather than selling the note to 
P). Because S realizes a deduction from a transaction comparable to an 
assignment of the B note, the transaction is a triggering transaction 
under paragraph (g)(3)(i)(A)(1) of this section. Under paragraph 
(g)(3)(ii) of this section, B's note is treated as satisfied and 
reissued for its fair market value of $60 immediately before section 
166(a)(2) applies. The treatment of S's $40 loss and B's $40 of 
discharge of indebtedness income are the same as in paragraph (ii) of 
this Example 3. After the reissuance, S has a basis of $60 in the new 
note. Accordingly, the application of section

[[Page 633]]

166(a)(2) does not result in any additional deduction for S. The $40 of 
original issue discount on the new note will be taken into account by B 
and S under sections 163(e) and 1272.
    (iv) Insolvent debtor. The facts are the same as in paragraph (i) of 
this Example 3, except that B is insolvent within the meaning of section 
108(d)(3) at the time that S sells the note to P. As explained in 
paragraph (ii) of this Example 3, the transaction is a triggering 
transaction and the B note is treated as satisfied and reissued for its 
fair market value of $60 immediately before S's sale to P. On a separate 
entity basis, S's $40 loss would be capital, B's $40 income would be 
excluded from gross income under section 108(a), and B would reduce 
attributes under section 108(b) or section 1017 (see also Sec.  1.1502-
28). However, under paragraph (g)(4)(i)(C) of this section, section 
108(a) does not apply to characterize B's income as excluded from gross 
income. Accordingly, the attributes of S's loss and B's income are 
redetermined in the same manner as in paragraph (ii) of this Example 3.
    Example 4. Intercompany nonrecognition transactions. (i) Facts. On 
January 1 of year 1, B borrows $100 from S in return for B's note 
providing for $10 of interest annually at the end of each year, and 
repayment of $100 at the end of year 5. As of January 1 of year 3, B has 
fully performed its obligations, but the note's fair market value is 
$130, reflecting a decline in prevailing market interest rates. On 
January 1 of year 3, S transfers the note and other assets to a newly 
formed corporation, Newco, for all of Newco's common stock in an 
exchange to which section 351 applies.
    (ii) No deemed satisfaction and reissuance. Because the assignment 
of the B note is an exchange to which section 351 applies and neither S 
nor B recognize gain or loss, the transaction is not a triggering 
transaction under paragraph (g)(3)(i)(B)(1) of this section, and the 
note is not treated as satisfied and reissued under paragraph (g)(3)(ii) 
of this section.
    (iii) Receipt of other property. The facts are the same as in 
paragraph (i) of this Example 4, except that the other assets 
transferred to Newco have a basis of $100 and a fair market value of 
$260, and S receives, in addition to Newco common stock, $15 of cash. 
Because S would recognize $15 of gain under section 351(b), the 
assignment of the B note is a triggering transaction under paragraph 
(g)(3)(i)(A)(1) of this section. Under paragraph (g)(3)(ii) of this 
section, B's note is treated as satisfied and reissued for its fair 
market value of $130 immediately before the transfer to Newco. As a 
result of the deemed satisfaction of the note for more than its adjusted 
issue price, B takes into account $30 of repurchase premium under Sec.  
1.163-7(c). On a separate entity basis, S's $30 gain would be a capital 
gain under section 1271(a)(1). Under the matching rule, however, the 
attributes of S's intercompany item and B's corresponding item must be 
redetermined to produce the same effect as if the transaction had 
occurred between divisions of a single corporation. Under paragraph 
(c)(4)(i) of this section, the attributes of B's premium deduction 
control the attributes of S's gain. Accordingly, S's gain is treated as 
ordinary income. B is also treated as reissuing, immediately after the 
satisfaction, a new note to S with a $130 issue price, $100 stated 
redemption price at maturity, and $130 basis in the hands of S. S is 
then treated as transferring the new note to Newco for the Newco stock 
and cash received by S in the actual transaction. Because S has a basis 
of $130 in the new B note, S recognizes no gain or loss with respect to 
the transfer of the note in the section 351 exchange, and S recognizes 
$10 of gain with respect to the transfer of the other assets under 
section 351(b). After the transfer, the note has a $130 issue price and 
a $100 stated redemption price at maturity. The treatment of B's $30 of 
bond issuance premium under the new note is determined under Sec.  
1.163-13.
    (iv) Transferee loss subject to limitation. The facts are the same 
as in paragraph (i) of this Example 4, except that T is a member with a 
loss from a separate return limitation year that is subject to 
limitation under Sec.  1.1502-21(c) (a SRLY loss), and on January 1 of 
year 3, S transfers the assets and the B note to T in an exchange to 
which section 351 applies. Because the transferee, T, has a loss that is 
subject to a limitation, the assignment of the B note is a triggering 
transaction under paragraph (g)(3)(i)(A)(1) of this section (the 
exception in paragraph (g)(3)(i)(B)(1) of this section does not apply). 
Under paragraph (g)(3)(ii) of this section, B's note is treated as 
satisfied and reissued for its fair market value, immediately before S's 
transfer to T. As a result of the deemed satisfaction of the note for 
more than its adjusted issue price, B takes into account $30 of 
repurchase premium under Sec.  1.163-7(c). On a separate entity basis, 
S's $30 gain would be a capital gain under section 1271(a)(1). Under the 
matching rule, however, the attributes of S's intercompany item and B's 
corresponding item must be redetermined to produce the same effect as if 
the transaction had occurred between divisions of a single corporation. 
Under paragraph (c)(4)(i) of this section, the attributes of B's premium 
deduction control the attributes of S's gain. Accordingly, S's gain is 
treated as ordinary income. B is also treated as reissuing, immediately 
after the satisfaction, a new note to S with a $130 issue price, $100 
stated redemption price at maturity, and $130 basis in the hands of S. 
The treatment of B's $30 of bond issuance premium under the new note is 
determined under Sec.  1.163-13. S is then treated as transferring

[[Page 634]]

the new note to T as part of the section 351 exchange. Because T will 
have a fair market value basis in the reissued B note immediately after 
the exchange, T's intercompany item from the subsequent retirement of 
the B note will not reflect any of S's built-in gain (and the amount of 
T's SRLY loss that may be absorbed by such item will be limited to any 
appreciation in the B note accruing after the exchange).
    (v) Intercompany obligation transferred in section 332 transaction. 
The facts are the same as in paragraph (i) of this Example 4, except 
that S transfers the B note to P in complete liquidation under section 
332. Because the transaction is an exchange to which section 332 and 
section 337(a) applies, and neither S nor B recognize gain or loss, the 
transaction is not a triggering transaction under paragraph 
(g)(3)(i)(B)(1) of this section, and the note is not treated as 
satisfied and reissued under paragraph (g)(3)(ii) of this section.
    Example 5. Assumption of intercompany obligation. (i) Facts. On 
January 1 of year 1, B borrows $100 from S in return for B's note 
providing for $10 of interest annually at the end of each year, and 
repayment of $100 at the end of year 5. The note is fully recourse and 
is incurred for use in Business Z. As of January 1 of year 3, B has 
fully performed its obligations, but the note's fair market value is 
$110 reflecting a decline in prevailing market interest rates. Business 
Z has a fair market value of $95. On January 1 of year 3, B transfers 
all of the assets of Business Z and $15 of cash (substantially all of 
B's assets) to member T in exchange for the assumption by T of all of 
B's obligations under the note in a transaction in which gain or loss is 
recognized under section 1001. The terms and conditions of the note are 
not modified in connection with the sales transaction, the transaction 
does not result in a change in payment expectations, and no amount of 
income, gain, deduction, or loss is recognized by S, B, or T with 
respect to the note.
    (ii) No deemed satisfaction and reissuance. Because all of B's 
obligations under the B note are assumed by T in connection with the 
sale of the Business Z assets, the assignment of B's obligations under 
the note is not a triggering transaction under paragraph (g)(3)(i)(B)(2) 
of this section, and the note is not treated as satisfied and reissued 
under paragraph (g)(3)(ii) of this section.
    Example 6. Extinguishment of intercompany obligation. (i) Facts. On 
January 1 of year 1, B borrows $100 from S in return for B's note 
providing for $10 of interest annually at the end of each year, and 
repayment of $100 at the end of year 20. The note is a security within 
the meaning of section 351(d)(2). As of January 1 of year 3, B has fully 
performed its obligations, but the fair market value of the B note is 
$130, reflecting a decline in prevailing market interest rates, and S 
transfers the note to B in exchange for $130 of B stock in a transaction 
to which both section 351 and section 354 applies.
    (ii) No deemed satisfaction and reissuance. As a result of the 
satisfaction of the note for more than its adjusted issue price, B takes 
into account $30 of repurchase premium under Sec.  1.163-7(c). Although 
the transfer of the B note is a transaction to which both section 351 
and section 354 applies, under paragraph (g)(4)(i)(C) of this section, 
any gain or loss from the intercompany obligation is not subject to 
either section 351(a) or section 354, and therefore, S has a $30 gain 
under section 1001. Because the note is extinguished in a transaction in 
which the adjusted issue price of the note is equal to the creditor's 
basis in the note, and the debtor's and creditor's items offset in 
amount, the transaction is not a triggering transaction under paragraph 
(g)(3)(i)(B)(5) of this section, and the note is not treated as 
satisfied and reissued under paragraph (g)(3)(ii) of this section. On a 
separate entity basis, S's $30 gain would be a capital gain under 
section 1271(a)(1). Under the matching rule, however, the attributes of 
S's intercompany item and B's corresponding item must be redetermined to 
produce the same effect as if the transaction had occurred between 
divisions of a single corporation. Under paragraph (c)(4)(i) of this 
section, the attributes of B's premium deduction control the attributes 
of S's gain. Accordingly, S's gain is treated as ordinary income. Under 
paragraph (g)(4)(i)(D) of this section, section 108(e)(7) does not apply 
upon the extinguishment of the B note, and therefore, the B stock 
received by S in the exchange will not be treated as section 1245 
property.
    Example 7. Exchange of intercompany obligations. (i) Facts. On 
January 1 of year 1, B borrows $100 from S in return for B's note 
providing for $10 of interest annually at the end of each year, and 
repayment of $100 at the end of year 20. As of January 1 of year 3, B 
has fully performed its obligations and, pursuant to a recapitalization 
to which section 368(a)(1)(E) applies, B issues a new note to S in 
exchange for the original B note. The new B note has an issue price, 
stated redemption price at maturity, and stated principal amount of 
$100, but contains terms that differ sufficiently from the terms of the 
original B note to cause a realization event under Sec.  1.1001-3. The 
original B note and the new B note are both securities (within the 
meaning of section 354(a)(1)).
    (ii) No deemed satisfaction and reissuance. Because the original B 
note is extinguished in exchange for a newly issued B note and the issue 
price of the new B note is equal to both the adjusted issue price of the 
original B note and S's basis in the original B note, the transaction is 
not a triggering transaction under paragraph (g)(3)(i)(B)(6) of this 
section, and the note is not treated as satisfied and reissued under 
paragraph (g)(3)(ii) of

[[Page 635]]

this section. B has neither income from discharge of indebtedness under 
section 108(e)(10) nor a deduction for repurchase premium under Sec.  
1.163-7(c). Although the exchange of the original B note for the new B 
note is a transaction to which section 354 applies, under paragraph 
(g)(4)(i)(C) of this section, any gain or loss from the intercompany 
obligation is not subject to section 354. Under section 1001, S has no 
gain or loss from the exchange of notes.
    Example 8. Tax benefit rule. (i) Facts. On January 1 of year 1, B 
borrows $100 from S in return for B's note providing for $10 of interest 
annually at the end of each year, and repayment of $100 at the end of 
year 5. As of January 1 of year 3, B has fully performed its 
obligations, but the note's fair market value has depreciated, 
reflecting an increase in prevailing market interest rates. On that 
date, S transfers the B note to member T as part of an exchange for T 
common stock which is intended to qualify for nonrecognition treatment 
under section 351 but with a view to sell the T stock at a reduced gain. 
On February 1 of year 4, all of the stock of T is sold at a reduced 
gain.
    (ii) Deemed satisfaction and reissuance. Because the assignment of 
the B note does not occur within 12 months of the sale of T stock, 
paragraph (g)(3)(i)(B)(1)(vi) of this section does not apply to treat 
the assignment as a triggering transaction. However, because the 
assignment of the B note was engaged in with a view to shift built-in 
loss from the obligation in order to secure a tax benefit that the group 
or its members would not otherwise enjoy, under paragraph (g)(3)(i)(C) 
of this section, the assignment of the B note is a triggering 
transaction to which paragraph (g)(3)(ii) of this section applies. Under 
paragraph (g)(3)(ii) of this section, B's note is treated as satisfied 
and reissued for its fair market value, immediately before S's transfer 
to T. As a result of the deemed satisfaction of the note for less than 
its adjusted issue price, B takes into account discharge of indebtedness 
income and S has a corresponding loss which is treated as ordinary loss. 
B is also treated as reissuing, immediately after the deemed 
satisfaction, a new note to S with an issue price and basis equal to its 
fair market value. S is then treated as transferring the new note to T 
as part of the section 351 exchange. Because S's basis in the T stock 
received with respect to the transferred B note is equal to its fair 
market value, S's gain with respect to the T stock will not reflect any 
of the built-in loss attributable to the B note. (This example does not 
address common law doctrines or other authorities that might apply to 
recharacterize the transaction or to otherwise affect the tax treatment 
of the transaction.)
    Example 9. Issuance at off-market rate of interest. (i) Facts. T is 
a member with a SRLY loss. T's sole shareholder, P, borrows an amount of 
cash from T in return for a P note that provides for a materially above 
market rate of interest. The P note is issued with a view to generate 
additional interest income to T over the term of the note to facilitate 
the absorption of T's SRLY loss.
    (ii) With a view. Because the P note is issued with a view to shift 
interest income from the off-market obligation in order to secure a tax 
benefit that the group or its members would not otherwise enjoy, under 
paragraph (g)(4)(iii) of this section, the intercompany obligation is 
treated, for all Federal income tax purposes, as originally issued for 
its fair market value so T is treated as purchasing the note at a 
premium. The difference between the amount loaned and the fair market 
value of the obligation is treated as transferred from P to T as a 
capital contribution at the time the note is issued. Throughout the term 
of the note, T takes into account interest income and bond premium and P 
takes into account interest deduction and bond issuance premium under 
generally applicable Internal Revenue Code sections. The adjustment 
under paragraph (g)(4)(iii) of this section is made without regard to 
the application of, and in lieu of any adjustment under, section 482 or 
1274.
    Example 10. Nonintercompany obligation becomes intercompany 
obligation. (i) Facts. On January 1 of year 1, B borrows $100 from X in 
return for B's note providing for $10 of interest annually at the end of 
each year, and repayment of $100 at the end of year 5. As of January 1 
of year 3, B has fully performed its obligations, but the note's fair 
market value is $70, reflecting an increase in prevailing market 
interest rates. On January 1 of year 3, P buys all of X's stock. B is 
solvent within the meaning of section 108(d)(3).
    (ii) Deemed satisfaction and reissuance. Under paragraph (g)(5)(ii) 
of this section, B's note is treated as satisfied for $70 (determined 
under the principles of Sec.  1.108-2(f)(2)) immediately after it 
becomes an intercompany obligation. Both X's $30 capital loss (under 
section 1271(a)(1)) and B's $30 of discharge of indebtedness income 
(under Sec.  1.61-12) are taken into account in determining consolidated 
taxable income for year 3. Under paragraph (g)(6)(i)(B) of this section, 
the attributes of items resulting from the satisfaction are determined 
on a separate entity basis. But see section 382 and Sec.  1.1502-15 (as 
appropriate). B is also treated as reissuing a new note to X. The new 
note is an intercompany obligation, it has a $70 issue price and $100 
stated redemption price at maturity, and the $30 of original issue 
discount will be taken into account by B and X in the same manner as 
provided in paragraph (iii) of Example 1 of this paragraph (g)(7).
    (iii) Amortization of repurchase premium. The facts are the same as 
in paragraph (i) of this Example 10, except that on January 1 of year 3, 
the B note has a fair market value of $130

[[Page 636]]

and rather than P purchasing the X stock, P purchases the B note from X 
by issuing its own note. The P note has an issue price, stated 
redemption price at maturity, stated principal amount, and fair market 
value of $130. Under paragraph (g)(5)(ii) of this section, B's note is 
treated as satisfied for $130 (determined under the principles of Sec.  
1.108-2(f)(1)) immediately after it becomes an intercompany obligation. 
As a result of the deemed satisfaction of the note, P has no gain or 
loss and B has $30 of repurchase premium. Under paragraph (g)(6)(iii) of 
this section, B's $30 of repurchase premium from the deemed satisfaction 
is amortized by B over the term of the newly issued P note in the same 
manner as if it were original issue discount and the newly issued P note 
had been issued directly by B. B is also treated as reissuing a new note 
to P. The new note is an intercompany obligation, it has a $130 issue 
price and $100 stated redemption price at maturity, and the treatment of 
B's $30 of bond issuance premium under the new B note is determined 
under Sec.  1.163-13.
    (iv) Election to file consolidated returns. Assume instead that B 
borrows $100 from S during year 1, but the P group does not file 
consolidated returns until year 3. Under paragraph (g)(5)(ii) of this 
section, B's note is treated as satisfied and reissued as a new note 
immediately after the note becomes an intercompany obligation. The 
satisfaction and reissuance are deemed to occur on January 1 of year 3, 
for the fair market value of the obligation (determined under the 
principles of Sec.  1.108-2(f)(2)) at that time.
    Example 11. Notional principal contracts. (i) Facts. On April 1 of 
year 1, M1 enters into a contract with counterparty M2 under which, for 
a term of five years, M1 is obligated to make a payment to M2 each April 
1, beginning in year 2, in an amount equal to the London Interbank 
Offered Rate (LIBOR), as determined by reference to LIBOR on the day 
each payment is due, multiplied by a $1,000 notional principal amount. 
M2 is obligated to make a payment to M1 each April 1, beginning in year 
2, in an amount equal to 8 percent multiplied by the same notional 
principal amount. LIBOR is 7.80 percent on April 1 of year 2, and 
therefore, M2 owes $2 to M1.
    (ii) Matching rule. Under Sec.  1.446-3(d), the net income (or net 
deduction) from a notional principal contract for a taxable year is 
included in (or deducted from) gross income. Under Sec.  1.446-3(e), the 
ratable daily portion of M2's obligation to M1 as of December 31 of year 
1 is $1.50 ($2 multiplied by 275/365). Under the matching rule, M1's net 
income for year 1 of $1.50 is taken into account to reflect the 
difference between M2's net deduction of $1.50 taken into account and 
the $0 recomputed net deduction. Similarly, the $.50 balance of the $2 
of net periodic payments made on April 1 of year 2 is taken into account 
for year 2 in M1's and M2's net income and net deduction from the 
contract. In addition, the attributes of M1's intercompany income and 
M2's corresponding deduction are redetermined to produce the same effect 
as if the transaction had occurred between divisions of a single 
corporation. Under paragraph (c)(4)(i) of this section, the attributes 
of M2's corresponding deduction control the attributes of M1's 
intercompany income. (Although M1 is the selling member with respect to 
the payment on April 1 of year 2, it might be the buying member in a 
subsequent period if it owes the net payment.)
    (iii) Dealer. The facts are the same as in paragraph (i) of this 
Example 11, except that M2 is a dealer in securities, and the contract 
with M1 is not inventory in the hands of M2. Under section 475, M2 must 
mark its securities to fair market value at year-end. Assume that under 
section 475, M2's loss from marking to fair market value the contract 
with M1 is $10. Because M2 realizes an amount of loss from the mark to 
fair market value of the contract, the transaction is a triggering 
transaction under paragraph (g)(3)(i)(A)(1) of this section. Under 
paragraph (g)(3)(ii) of this section, M2 is treated as making a $10 
payment to M1 to terminate the contract immediately before a new 
contract is treated as reissued with an up-front payment by M1 to M2 of 
$10. M1's $10 of income from the termination payment is taken into 
account under the matching rule to reflect M2's deduction under Sec.  
1.446-3(h). The attributes of M1's intercompany income and M2's 
corresponding deduction are redetermined to produce the same effect as 
if the transaction had occurred between divisions of a single 
corporation. Under paragraph (c)(4)(i) of this section, the attributes 
of M2's corresponding deduction control the attributes of M1's 
intercompany income. Accordingly, M1's income is treated as ordinary 
income. Under Sec.  1.446-3(f), the deemed $10 up-front payment by M1 to 
M2 in connection with the issuance of a new contract is taken into 
account over the term of the new contract in a manner reflecting the 
economic substance of the contract (for example, allocating the payment 
in accordance with the forward rates of a series of cash-settled forward 
contracts that reflect the specified index and the $1,000 notional 
principal amount). (The timing of taking items into account is the same 
if M1, rather than M2, is the dealer subject to the mark-to-market 
requirement of section 475 at year-end. However in this case, because 
the attributes of the corresponding deduction control the attributes of 
the intercompany income, M1's income from the deemed termination payment 
from M2 might be ordinary or capital). Under paragraph (g)(3)(ii)(A) of 
this section, section 475 does not apply to mark the notional principal 
contract to fair market

[[Page 637]]

value after its deemed satisfaction and reissuance.

    (8) Effective/applicability date. The rules of this paragraph (g) 
apply to transactions involving intercompany obligations occurring in 
consolidated return years beginning on or after December 24, 2008.

    (h) Anti-avoidance rules--(1) In general. If a transaction is 
engaged in or structured with a principal purpose to avoid the purposes 
of this section (including, for example, by avoiding treatment as an 
intercompany transaction), adjustments must be made to carry out the 
purposes of this section.
    (2) Examples. The anti-avoidance rules of this paragraph (h) are 
illustrated by the following examples. The examples set forth below do 
not address common law doctrines or other authorities that might apply 
to recast a transaction or to otherwise affect the tax treatment of a 
transaction. Thus, in addition to adjustments under this paragraph (h), 
the Commissioner can, for example, apply the rules of section 269 or 
Sec.  1.701-2 to disallow a deduction or to recast a transaction.
    (i) Example 1: Sale of a partnership interest--(A) Facts. S owns 
land with a $10 basis and $100 value. B has net operating losses from 
separate return limitation years (SRLYs) subject to limitation under 
Sec.  1.1502-21(c). Pursuant to a plan to absorb the losses without 
limitation by the SRLY rules, S transfers the land to an unrelated, 
calendar-year partnership in exchange for a 10% interest in the capital 
and profits of the partnership in a transaction to which section 721 
applies. The partnership does not have a section 754 election in effect. 
S later sells its partnership interest to B for $100. In the following 
year, the partnership sells the land to X for $100. Because the 
partnership does not have a section 754 election in effect, its $10 
basis in the land does not reflect B's $100 basis in the partnership 
interest. Under section 704(c), the partnership's $90 built-in gain is 
allocated to B, and B's basis in the partnership interest increases to 
$190 under section 705. In a later year, B sells the partnership 
interest to a nonmember for $100.
    (B) Adjustments. Under Sec.  1.1502-21(c), the partnership's $90 
built-in gain allocated to B ordinarily increases the amount of B's SRLY 
limitation, and B's $90 loss from its sale of the partnership interest 
ordinarily is not subject to limitation under the SRLY rules. Because 
the contribution of property to the partnership and the sale of the 
partnership interest were part of a plan a principal purpose of which 
was to achieve a reduction in consolidated tax liability by creating 
offsetting gain and loss for B while deferring S's intercompany gain, 
B's allocable share of the partnership's gain from its sale of the land 
is treated under paragraph (h)(1) of this section as not increasing the 
amount of B's SRLY limitation.
    (ii) Example 2: Transitory status as an intercompany obligation--(A) 
Facts. P historically has owned 70% of X's stock and the remaining 30% 
is owned by unrelated shareholders. On January 1 of Year 1, S borrows 
$100 from X in return for S's note requiring $10 of interest annually at 
the end of each year, and repayment of $100 at the end of Year 20. As of 
January 1 of Year 3, the P group has substantial net operating loss 
carryovers, and the fair market value of S's note falls to $70 due to an 
increase in prevailing market interest rates. X is not permitted under 
section 166(a)(2) to take into account a $30 loss with respect to the 
note. Pursuant to a plan to permit X to take into account its $30 loss 
without disposing of the note, P acquires an additional 10% of X's 
stock, causing X to become a member, and P subsequently resells the 10% 
interest. X's $30 loss with respect to the note is a net unrealized 
built-in loss within the meaning of Sec.  1.1502-15.
    (B) Adjustments. Under paragraph (g)(4) of this section, X 
ordinarily would take into account its $30 loss as a result of the note 
becoming an intercompany obligation, and S would take into account $30 
of discharge of indebtedness income. Under Sec.  1.1502-22, X's loss is 
not combined with items of the other members and the loss would be 
carried to X's separate return years as a result of X becoming a 
nonmember. However, the transitory status of S's indebtedness to X as an 
intercompany

[[Page 638]]

obligation is structured with a principal purpose to accelerate the 
recognition of X's loss. Thus, S's note is treated under paragraph 
(h)(1) of this section as not becoming an intercompany obligation.
    (iii) Example 3: Corporate mixing bowl--(A) Facts. M1 and M2 are 
subsidiaries of P. M1 operates a manufacturing business on land it 
leases from M2. The land is the only asset held by M2. P intends to 
dispose of the M1 business, including the land owned by M2; P's basis in 
the M1 stock is equal to the stock's fair market value. M2's land has a 
value of $20 and a basis of $0 and P has a $0 basis in the stock of M2. 
In Year 1, with a principal purpose of avoiding gain from the sale of 
the land (by transferring the land to M1 with a carry-over basis without 
affecting P's basis in the stock of M1 or M2), M1 and M2 form 
corporation T; M1 contributes cash in exchange for 80% of the T stock 
and M2 contributes the land in exchange for 20% of the stock. In Year 3, 
T liquidates, distributing $20 cash to M2 and the land (plus $60 cash) 
to M1. Under Sec.  1.1502-34, section 332 applies to both M1 and M2. 
Under section 337, T recognizes no gain or loss from its liquidating 
distribution of the land to M1. T has neither gain nor loss on its 
distribution of cash to M2. In Year 4, P sells all of the stock of M1 to 
X and liquidates M2.
    (B) Adjustments. A principal purpose for the formation and 
liquidation of T was to avoid gain from the sale of M2's land. Thus, 
under paragraph (h)(1) of this section, M2 must take $20 of gain into 
account when the stock of M1 is sold to X.
    (iv) Example 4: Partnership mixing bowl--(A) Facts. M1 owns a self-
created intangible asset with a $0 basis and a fair market value of 
$100. M2 owns land with a basis of $100 and a fair market value of $100. 
In Year 1, with a principal purpose of creating basis in the intangible 
asset (which would be eligible for amortization under section 197), M1 
and M2 form partnership PRS; M1 contributes the intangible asset and M2 
contributes the land. X, an unrelated person, contributes cash to PRS in 
exchange for a substantial interest in the partnership. PRS uses the 
contributed assets in legitimate business activities. Five years and six 
months later, PRS liquidates, distributing the land to M1, the 
intangible to M2, and cash to X. The group reports no gain under 
sections 707(a)(2)(B) and 737(a) and claims that M2's basis in the 
intangible asset is $100 under section 732 and that the asset is 
eligible for amortization under section 197.
    (B) Adjustments. A principal purpose of the formation and 
liquidation of PRS was to create additional amortization without an 
offsetting increase in consolidated taxable income by avoiding treatment 
as an intercompany transaction. Thus, under paragraph (h)(1) of this 
section, appropriate adjustments must be made.
    (v) Example 5: Sale and leaseback--(a) Facts. S operates a factory 
with a $70 basis and $100 value, and has loss carryovers from SRLYs. 
Pursuant to a plan to take into account the $30 unrealized gain while 
continuing to operate the factory, S sells the factory to X for $100 and 
leases it back on a long-term basis. In the transaction, a substantial 
interest in the factory is transferred to X. The sale and leaseback are 
not recharacterized under general principles of Federal income tax law. 
As a result of S's sale to X, the $30 gain is taken into account and 
increases S's SRLY limitation.
    (b) No adjustments. Although S's sale was pursuant to a plan to 
accelerate the $30 gain, it is not subject to adjustment under paragraph 
(h)(1) of this section. The sale is not treated as engaged in or 
structured with a principal purpose to avoid the purposes of this 
section.
    (vi) Example 6: Section 163(j) interest limitation--(A) Facts. S1 
and S2 are members of a consolidated group of which P is the common 
parent. S1 is engaged in an excepted trade or business, and S2 is 
engaged in a non-excepted trade or business. If S1 were to lend funds 
directly to S2 in an intercompany transaction, under Sec.  1.163(j)-
10(a)(4)(i), the intercompany obligation of S2 would not be considered 
an asset of S1 for purposes of Sec.  1.163(j)-10 (concerning allocations 
of interest and other taxable items between excepted and non-excepted 
trades or businesses for purposes of section 163(j)). With a

[[Page 639]]

principal purpose of avoiding treatment of a lending transaction between 
S1 and S2 as an intercompany transaction (and increasing the P group's 
basis in its assets allocable to excepted trades or businesses), S1 
lends funds to X (an unrelated third party). X then on-lends funds to S2 
on substantially similar terms.
    (B) Analysis. A principal purpose of the steps undertaken was to 
avoid treatment of a lending transaction between S1 and S2 as an 
intercompany transaction. Therefore, under paragraph (h)(1) of this 
section, appropriate adjustments are made, and the X obligation in the 
hands of S1 is not treated as an asset of S1 for purposes of Sec.  
1.163(j)-10, to the extent of the loan from X to S2.
    (i) [Reserved]
    (j) Miscellaneous operating rules. For purposes of this section--
    (1) Successor assets. Any reference to an asset includes, as the 
context may require, a reference to any other asset the basis of which 
is determined, directly or indirectly, in whole or in part, by reference 
to the basis of the first asset.
    (2) Successor persons--(i) In general. Any reference to a person 
includes, as the context may require, a reference to a predecessor or 
successor. For this purpose, a predecessor is a transferor of assets to 
a transferee (the successor) in a transaction--
    (A) To which section 381(a) applies;
    (B) In which substantially all of the assets of the transferor are 
transferred to members in a complete liquidation;
    (C) In which the successor's basis in assets is determined (directly 
or indirectly, in whole or in part) by reference to the basis of the 
transferor, but the transferee is a successor only with respect to the 
assets the basis of which is so determined; or
    (D) Which is an intercompany transaction, but only with respect to 
assets that are being accounted for by the transferor in a prior 
intercompany transaction.
    (ii) Intercompany items. If the assets of a predecessor are acquired 
by a successor member, the successor succeeds to, and takes into account 
(under the rules of this section), the predecessor's intercompany items. 
If two or more successor members acquire assets of the predecessor, the 
successors take into account the predecessor's intercompany items in a 
manner that is consistently applied and reasonably carries out the 
purposes of this section and applicable provisions of law.
    (3) Multiple triggers. If more than one corresponding item can cause 
an intercompany item to be taken into account under the matching rule, 
the intercompany item is taken into account in connection with the 
corresponding item most consistent with the treatment of members as 
divisions of a single corporation. For example, if S sells a truck to B, 
its intercompany gain from the sale is not taken into account by 
reference to B's depreciation if the depreciation is capitalized under 
section 263A as part of B's cost for a building; instead, S's gain 
relating to the capitalized depreciation is taken into account when the 
building is sold or as it is depreciated. Similarly, if B purchases 
appreciated land from S and transfers the land to a lower-tier member in 
exchange for stock, thereby duplicating the basis of the land in the 
basis of the stock, items with respect to both the stock and the land 
can cause S's intercompany gain to be taken into account; if the lower-
tier member becomes a nonmember as a result of the sale of its stock, 
the attributes of S's intercompany gain are determined with respect to 
the land rather than the stock.
    (4) Multiple or successive intercompany transactions. If a member's 
intercompany item or corresponding item affects the accounting for more 
than one intercompany transaction, appropriate adjustments are made to 
treat all of the intercompany transactions as transactions between 
divisions of a single corporation. For example, if S sells property to 
M, and M sells the property to B, then S, M, and B are treated as 
divisions of a single corporation for purposes of applying the rules of 
this section. Similar principles apply with respect to intercompany 
transactions that are part of the same plan or arrangement. For example, 
if S sells separate properties to different members as part of the same 
plan or arrangement, all of the participating members

[[Page 640]]

are treated as divisions of a single corporation for purposes of 
determining the attributes (which might also affect timing) of the 
intercompany items and corresponding items from each of the properties.
    (5) Acquisition of group--(i) Scope. This paragraph (j)(5) applies 
only if a consolidated group (the terminating group) ceases to exist as 
a result of--
    (A) The acquisition of either the assets of the common parent of the 
terminating group in a reorganization described in section 381(a)(2), or 
the stock of the common parent of the terminating group; or
    (B) The application of the principles of Sec.  1.1502-75(d)(2) or 
(d)(3).
    (ii) Application. If the terminating group ceases to exist under 
circumstances described in paragraph (j)(5)(i) of this section, the 
surviving group is treated as the terminating group for purposes of 
applying this section to the intercompany transactions of the 
terminating group. For example, intercompany items and corresponding 
items from intercompany transactions between members of the terminating 
group are taken into account under the rules of this section by the 
surviving group. This treatment does not apply, however, to members of 
the terminating group that are not members of the surviving group 
immediately after the terminating group ceases to exist (for example, 
under section 1504(a)(3) relating to reconsolidation, or section 1504(c) 
relating to includible insurance companies).
    (6) Former common parent treated as continuation of group. If a 
group terminates because the common parent is the only remaining member, 
the common parent succeeds to the treatment of the terminating group for 
purposes of applying this section so long as it neither becomes a member 
of an affiliated group filing separate returns nor becomes a corporation 
described in section 1504(b). For example, if the only subsidiary of the 
group liquidates into the common parent in a complete liquidation to 
which section 332 applies, or the common parent merges into the 
subsidiary and the subsidiary is treated as the common parent's 
successor under paragraph (j)(2)(i) of this section, the taxable income 
of the surviving corporation is treated as the group's consolidated 
taxable income in which the intercompany and corresponding items must be 
included. See Sec.  1.267(f)-1 for additional rules applicable to 
intercompany losses or deductions.
    (7) Becoming a nonmember. For purposes of this section, a member is 
treated as becoming a nonmember if it has a separate return year 
(including another group's consolidated return year). A member is not 
treated as having a separate return year if its items are treated as 
taken into account in computing the group's consolidated taxable income 
under paragraph (j)(5) or (6) of this section.
    (8) Recordkeeping. Intercompany and corresponding items must be 
reflected on permanent records (including work papers). See also section 
6001, requiring records to be maintained. The group must be able to 
identify from these permanent records the amount, location, timing, and 
attributes of the items, so as to permit the application of the rules of 
this section for each year.
    (9) Examples. The operating rules of this paragraph (j) are 
illustrated generally throughout this section, and by the following 
examples.

    Example 1. Intercompany sale followed by section 351 transfer to 
member. (a) Facts. S holds land for investment with a basis of $70. On 
January 1 of Year 1, S sells the land to M for $100. M also holds the 
land for investment. On July 1 of Year 3, M transfers the land to B in 
exchange for all of B's stock in a transaction to which section 351 
applies. Under section 358, M's basis in the B stock is $100. B holds 
the land for sale to customers in the ordinary course of business and, 
under section 362(b), B's basis in the land is $100. On December 1 of 
Year 5, M sells 20% of the B stock to X for $22. In an unrelated 
transaction on July 1 of Year 8, B sells 20% of the land for $22.
    (b) Definitions. Under paragraph (b)(1) of this section, S's sale of 
the land to M and M's transfer of the land to B are both intercompany 
transactions. S is the selling member and M is the buying member in the 
first intercompany transaction, and M is the selling member and B is the 
buying member in the second intercompany transaction. M has no 
intercompany items under paragraph (b)(2) of this section. Because B 
acquired the land in an intercompany transaction, B's items from the 
land are corresponding items to be taken into account under this 
section. Under the successor asset rule of paragraph

[[Page 641]]

(j)(1) of this section, references to the land include references to M's 
B stock. Under the successor person rule of paragraph (j)(2) of this 
section, references to M include references to B with respect to the 
land.
    (c) Timing and attributes resulting from the stock sale. Under 
paragraph (c)(3) of this section, M is treated as owning and selling B's 
stock for purposes of the matching rule even though, as divisions, M 
could not own and sell stock in B. Under paragraph (j)(3) of this 
section, both M's B stock and B's land can cause S's intercompany gain 
to be taken into account under the matching rule. Thus, S takes $6 of 
its gain into account in Year 5 to reflect the $6 difference between M's 
$2 gain taken into account from its sale of B stock and the $8 
recomputed gain. Under paragraph (j)(4) of this section, the attributes 
of this gain are determined by treating S, M, and B as divisions of a 
single corporation. Under paragraph (c)(1) of this section, S's $6 gain 
and M's $2 gain are treated as long-term capital gain. The gain would be 
capital on a separate entity basis (assuming that section 341 does not 
apply), and this treatment is not inconsistent with treating S, M, and B 
as divisions of a single corporation because the stock sale and 
subsequent land sale are unrelated transactions and B remains a member 
following the sale.
    (d) Timing and attributes resulting from the land sale. Under 
paragraph (j)(3) of this section, S takes $6 of its gain into account in 
Year 8 under the matching rule to reflect the $6 difference between B's 
$2 gain taken into account from its sale of an interest in the land and 
the $8 recomputed gain. Under paragraph (j)(4) of this section, the 
attributes of this gain are determined by treating S, M, and B as 
divisions of a single corporation and taking into account the activities 
of S, M, and B with respect to the land. Thus, both S's gain and B's 
gain might be ordinary income as a result of B's activities. (If B 
subsequently sells the balance of the land, S's gain taken into account 
is limited to its remaining $18 of intercompany gain.)
    (e) Sale of successor stock resulting in deconsolidation. The facts 
are the same as in paragraph (a) of this Example 1, except that M sells 
60% of the B stock to X for $66 on December 1 of Year 5 and B becomes a 
nonmember. Under the matching rule, M's sale of B stock results in $18 
of S's gain being taken into account (to reflect the difference between 
M's $6 gain taken into account and the $24 recomputed gain). Under the 
acceleration rule, however, the entire $30 gain is taken into account 
(to reflect B becoming a nonmember, because its basis in the land 
reflects M's $100 cost basis from the prior intercompany transaction). 
Under paragraph (j)(4) of this section, the attributes of S's gain are 
determined by treating S, M, and B as divisions of a single corporation. 
Because M's cost basis in the land will be reflected by B as a 
nonmember, all of S's gain is treated as from the land (rather than a 
portion being from B's stock), and B's activities with respect to the 
land might therefore result in S's gain being ordinary income.
    Example 2. Intercompany sale of member stock followed by 
recapitalization. (a) Facts. Before becoming a member of the P group, S 
owns P stock with a basis of $70. On January 1 of Year 1, P buys all of 
S's stock. On July 1 of Year 3, S sells the P stock to M for $100. On 
December 1 of Year 5, P acquires M's original P stock in exchange for 
new P stock in a recapitalization described in section 368(a)(1)(E).
    (b) Timing and attributes. Although P's basis in the stock acquired 
from M is eliminated under paragraph (f)(4) of this section, the new P 
stock received by M is exchanged basis property (within the meaning of 
section 7701(a)(44)) having a basis under section 358 equal to M's basis 
in the original P stock. Under the successor asset rule of paragraph 
(j)(1) of this section, references to M's original P stock include 
references to M's new P stock. Because it is still possible to take S's 
intercompany item into account under the matching rule with respect to 
the successor asset, S's gain is not taken into account under the 
acceleration rule as a result of the basis elimination under paragraph 
(f)(4) of this section. Instead, the gain is taken into account based on 
subsequent events with respect to M's new P stock (for example, a 
subsequent distribution or redemption of the new stock).
    Example 3. Back-to-back intercompany transactions--matching. (a) 
Facts. S holds land for investment with a basis of $70. On January 1 of 
Year 1, S sells the land to M for $90. M also holds the land for 
investment. On July 1 of Year 3, M sells the land for $100 to B, and B 
holds the land for sale to customers in the ordinary course of business. 
During Year 5, B sells all of the land to customers for $105.
    (b) Timing. Under paragraph (b)(1) of this section, S's sale of the 
land to M and M's sale of the land to B are both intercompany 
transactions. S is the selling member and M is the buying member in the 
first intercompany transaction, and M is the selling member and B is the 
buying member in the second intercompany transaction. Under paragraph 
(j)(4) of this section, S, M and B are treated as divisions of a single 
corporation for purposes of determining the timing of their items from 
the intercompany transactions. See also paragraph (j)(2) of this section 
(B is treated as a successor to M for purposes of taking S's 
intercompany gain into account). Thus, S's $20 gain and M's $10 gain are 
both taken into account in Year 5 to reflect the difference between B's 
$5 gain taken into account with respect to the land and the $35 
recomputed gain (the gain that B would have taken into account if the 
intercompany sales had been transfers between divisions of

[[Page 642]]

a single corporation, and B succeeded to S's $70 basis).
    (c) Attributes. Under paragraphs (j)(4) of this section, the 
attributes of the intercompany items and corresponding items of S, M, 
and B are also determined by treating S, M, and B as divisions of a 
single corporation. For example, the attributes of S's and M's 
intercompany items are determined by taking B's activities into account.
    Example 4. Back-to-back intercompany transactions--acceleration. (a) 
Facts. During Year 1, S performs services for M in exchange for $10 from 
M. S incurs $8 of employee expenses. M capitalizes the $10 cost of S's 
services under section 263 as part of M's cost to acquire real property 
from X. Under its separate entity method of accounting, S would take its 
income and expenses into account in Year 1. M holds the real property 
for investment and, on July 1 of Year 5, M sells it to B at a gain. B 
also holds the real property for investment. On December 1 of Year 8, 
while B still owns the real property, P sells all of M's stock to X and 
M becomes a nonmember.
    (b) M's items. M takes its gain into account immediately before it 
becomes a nonmember. Because the real property stays in the group, the 
acceleration rule redetermines the attributes of M's gain under the 
principles of the matching rule as if B sold the real property to an 
affiliated corporation that is not a member of the group for a cash 
payment equal to B's adjusted basis in the real property, and S, M, and 
B were divisions of a single corporation. Thus, M's gain is capital 
gain.
    (c) S's items. Under paragraph (b)(2)(ii) of this section, S 
includes the $8 of expenses in determining its $2 intercompany income. 
In Year 1, S takes into account $8 of income and $8 of expenses. Under 
paragraph (j)(4) of this section, appropriate adjustments must be made 
to treat both S's performance of services for M and M's sale to B as 
occurring between divisions of a single corporation. Thus, S's $2 of 
intercompany income is not taken into account as a result of M becoming 
a nonmember, but instead will be taken into account based on subsequent 
events (e.g., under the matching rule based on B's sale of the real 
property to a nonmember, or under the acceleration rule based on P's 
sale of the stock of S or B to a nonmember). See the successor person 
rules of paragraph (j)(2) of this section (B is treated as a successor 
to M for purposes of taking S's intercompany income into account).
    (d) Sale of S's stock. The facts are the same as in paragraph (a) of 
this Example 4, except that P sells all of S's stock (rather than M's 
stock) and S becomes a nonmember on July 1 of Year 5. S's remaining $2 
of intercompany income is taken into account immediately before S 
becomes a nonmember. Because S's intercompany income is not from an 
intercompany sale, exchange, or distribution of property, the attributes 
of the intercompany income are determined on a separate entity basis. 
Thus, S's $2 of intercompany income is ordinary income. M does not take 
any of its intercompany gain into account as a result of S becoming a 
nonmember.
    (e) Intercompany income followed by intercompany loss. The facts are 
the same as in paragraph (a) of this Example 4, except that M sells the 
real property to B at a $1 loss (rather than a gain). M takes its $1 
loss into account under the acceleration rule immediately before M 
becomes a nonmember. But see Sec.  1.267(f)-1 (which might further defer 
M's loss if M and B remain in a controlled group relationship after M 
becomes a nonmember). Under paragraph (j)(4) of this section appropriate 
adjustments must be made to treat the group as if both intercompany 
transactions occurred between divisions of a single corporation. 
Accordingly, P's sale of M stock also results in S taking into account 
$1 of intercompany income as capital gain to offset M's $1 of 
corresponding capital loss. The remaining $1 of S's intercompany income 
is taken into account based on subsequent events.
    Example 5. Successor group. (a) Facts. On January 1 of Year 1, B 
borrows $100 from S in return for B's note providing for $10 of interest 
annually at the end of each year, and repayment of $100 at the end of 
Year 20. As of January 1 of Year 3, B has paid the interest accruing 
under the note. On that date, X acquires all of P's stock and the former 
P group members become members of the X consolidated group.
    (b) Successor. Under paragraph (j)(5) of this section, although B's 
note ceases to be an intercompany obligation of the P group, the note is 
not treated as satisfied and reissued under paragraph (g) of this 
section as a result of X's acquisition of P stock. Instead, the X 
consolidated group succeeds to the treatment of the P group for purposes 
of paragraph (g) of this section, and B's note is treated as an 
intercompany obligation of the X consolidated group.
    Example 6. Liquidation--80% distributee. (a) Facts. X has had 
preferred stock described in section 1504(a)(4) outstanding for several 
years. On January 1 of Year 1, S buys all of X's common stock for $60, 
and B buys all of X's preferred stock for $40. X's assets have a $0 
basis and $100 value. On July 1 of Year 3, X distributes all of its 
assets to S and B in a complete liquidation. Under Sec.  1.1502-34, 
section 332 applies to both S and B. Under section 337, X has no gain or 
loss from its liquidating distribution to S. Under sections 336 and 
337(c), X has a $40 gain from its liquidating distribution to B. B has a 
$40 basis under section 334(a) in the assets received from X, and S has 
a $0 basis under section 334(b) in the assets received from X.
    (b) Intercompany items from the liquidation. Under the matching 
rule, X's $40 gain from

[[Page 643]]

its liquidating distribution to B is not taken into account under this 
section as a result of the liquidation (and therefore is not yet 
reflected under Sec. Sec.  1.1502-32 and 1.1502-33). Under the successor 
person rule of paragraph (j)(2)(i) of this section, S and B are both 
successors to X. Under section 337(c), X recognizes gain or loss only 
with respect to the assets distributed to B. Under paragraph (j)(2)(ii) 
of this section, to be consistent with the purposes of this section, S 
succeeds to X's $40 intercompany gain. The gain will be taken into 
account by S under the matching and acceleration rules of this section 
based on subsequent events. (The allocation of the intercompany gain to 
S does not govern the allocation of any other attributes.)
    Example 7. Liquidation--no 80% distributee. (a) Facts. X has only 
common stock outstanding. On January 1 of Year 1, S buys 60% of X's 
stock for $60, and B buys 40% of X's stock for $40. X's assets have a $0 
basis and $100 value. On July 1 of Year 3, X distributes all of its 
assets to S and B in a complete liquidation. Under Sec.  1.1502-34, 
section 332 applies to both S and B. Under sections 336 and 337(c), X 
has a $100 gain from its liquidating distributions to S and B. Under 
section 334(b), S has a $60 basis in the assets received from X and B 
has a $40 basis in the assets received from X.
    (b) Intercompany items from the liquidation. Under the matching 
rule, X's $100 intercompany gain from its liquidating distributions to S 
and B is not taken into account under this section as a result of the 
liquidation (and therefore is not yet reflected under Sec. Sec.  1.1502-
32 and 1.1502-33). Under the successor person rule of paragraph 
(j)(2)(i) of this section, S and B are both successors to X. Under 
paragraph (j)(2)(ii) of this section, to be consistent with the purposes 
of this section, S succeeds to X's $40 intercompany gain with respect to 
the assets distributed to B, and B succeeds to X's $60 intercompany gain 
with respect to the assets distributed to S. The gain will be taken into 
account by S and B under the matching and acceleration rules of this 
section based on subsequent events. (The allocation of the intercompany 
gain does not govern the allocation of any other attributes.)

    (k) Cross references--(1) Section 108. See Sec.  1.108-3 for the 
treatment of intercompany deductions and losses as subject to attribute 
reduction under section 108(b).
    (2) Section 263A(f). See section 263A(f) and Sec.  1.263A-9(g)(5) 
for special rules regarding interest from intercompany transactions.
    (3) Section 267(f). See section 267(f) and Sec.  1.267(f)-1 for 
special rules applicable to certain losses and deductions from 
transactions between members of a controlled group.
    (4) Section 460. See Sec.  1.460-4(j) for special rules regarding 
the application of section 460 to intercompany transactions.
    (5) Section 469. See Sec.  1.469-1(h) for special rules regarding 
the application of section 469 to intercompany transactions.
    (6) Sec.  1.1502-80. See Sec.  1.1502-80 for the non-application of 
certain Internal Revenue Code rules.
    (l) Effective/applicability dates--(1) In general. This section 
applies with respect to transactions occurring in years beginning on or 
after July 12, 1995. If both this section and prior law apply to a 
transaction, or neither applies, with the result that items may be 
duplicated, omitted, or eliminated in determining taxable income (or tax 
liability), or items may be treated inconsistently, prior law (and not 
this section) applies to the transaction. For example, S's and B's items 
from S's sale of property to B which occurs in a consolidated return 
year beginning before July 12, 1995, are taken into account under prior 
law, even though B may dispose of the property in a consolidated return 
year beginning on or after July 12, 1995. Similarly, an intercompany 
distribution to which a shareholder becomes entitled in a consolidated 
return year beginning before July 12, 1995, but which is distributed in 
a consolidated return year beginning on or after that date is taken into 
account under prior law (generally when distributed), because this 
section generally takes dividends into account when the shareholder 
becomes entitled to them but this section does not apply at that time. 
If application of prior law to S's deferred gain or loss from a deferred 
intercompany transaction (as defined under prior law) occurring in a 
consolidated return year beginning prior to July 12, 1995, would be 
affected by an intercompany transaction (as defined under this section) 
occurring in a consolidated return year beginning on or after July 12, 
1995, S's deferred gain or loss continues to be taken into account as 
provided under prior law, and the items from the subsequent intercompany 
transaction are taken into

[[Page 644]]

account under this section. Appropriate adjustments must be made to 
prevent items from being duplicated,omitted, or eliminated in 
determining taxable income as a result of the application of both this 
section and prior law to the successive transactions, and to ensure the 
proper application of prior law. Paragraphs (a)(4), (f)(6)(ii), 
(f)(6)(iv)(A), (g)(3)(ii)(B)(2), and (j)(5)(i)(A) of this section apply 
with respect to transactions occurring on or after September 17, 2008. 
However, taxpayers may apply paragraph (j)(5)(i)(A) of this section to 
transactions that occurred prior to September 17, 2008.
    (2) Avoidance transactions. This paragraph (l)(2) applies if a 
transaction is engaged in or structured on or after April 8, 1994, with 
a principal purpose to avoid the rules of this section (and instead to 
apply prior law). If this paragraph (l)(2) applies, appropriate 
adjustments must be made in years beginning on or after July 12, 1995, 
to prevent the avoidance, duplication, omission, or elimination of any 
item (or tax liability), or any other inconsistency with the rules of 
this section. For example, if S is a dealer in real property and sells 
land to B on March 16, 1995 with a principal purpose of converting any 
future appreciation in the land to capital gain, B's gain from the sale 
of the land on May 11, 1997 might be characterized as ordinary income 
under this paragraph (l)(2).
    (3) Election for certain stock elimination transactions--(i) In 
general. A group may elect pursuant to this paragraph (l)(3) to apply 
this section (including the elections available under paragraph 
(f)(5)(ii) of this section) to stock elimination transactions to which 
prior law would otherwise apply. If an election is made, this section, 
and not prior law, applies to determine the timing and attributes of S's 
and B's gain or loss from stock with respect to all stock elimination 
transactions.
    (ii) Stock elimination transactions. For purposes of this paragraph 
(l)(3), a stock elimination transaction is a transaction in which stock 
transferred from S to B--
    (A) Is cancelled or redeemed on or after July 12, 1995;
    (B) Is treated as cancelled in a liquidation pursuant to an election 
under section 338(h)(10) with respect to a qualified stock purchase with 
an acquisition date on or after July 12, 1995;
    (C) Is distributed on or after July 12, 1995; or
    (D) Is exchanged on or after July 12, 1995 for stock of a member 
(determined immediately after the exchange) in a transaction that would 
cause S's gain or loss from the transfer to be taken into account under 
prior law.
    (iii) Time and manner of making election. An election under this 
paragraph (l)(3) is made by attaching to a timely filed original return 
(including extensions) for the consolidated return year including July 
12, 1995 a statement entitled ``[Insert Name and Employer Identification 
Number of Common Parent] HEREBY ELECTS THE APPLICATION OF Sec.  1.1502-
13(l)(3).'' See paragraph (f)(5)(ii)(E) of this section for the manner 
of electing the relief provisions of paragraph (f)(5)(ii) of this 
section.
    (4) Prior law. For transactions occurring in S's years beginning 
before July 12, 1995, see the applicable regulations issued under 
section 1502. See Sec. Sec.  1.1502-13, 1.1502-13T, 1.1502-14, 1.1502-
14T, 1.1502-31, and 1.1502-32 (as contained in the 26 CFR part 1 edition 
revised as of April 1, 1995).
    (5) Consent to adopt method of accounting. For intercompany 
transactions occurring in a consolidated group's first taxable year 
beginning on or after July 12, 1995, the Commissioner's consent under 
section 446(e) is hereby granted for any changes in methods of 
accounting that are necessary solely by reason of the timing rules of 
this section. Changes in method of accounting for these transactions are 
to be effected on a cut-off basis.
    (6) Effective/applicability date. (i) In general. Paragraph 
(f)(7)(i) Example 4. applies to transactions occurring on or after 
December 18, 2009.
    (ii) [Reserved]
    (m) Effective/applicability date. Paragraphs (f)(5)(ii)(E) and 
(f)(6)(i)(C)(2) of this section apply to any original consolidated 
Federal income tax return due (without extensions) after June 14, 2007. 
For original consolidated Federal income tax returns due (without 
extensions) after May 30, 2006, and on or before June 14, 2007, see 
Sec.  1.1502-13T as contained in 26 CFR part 1 in effect on

[[Page 645]]

April 1, 2007. For original consolidated Federal income tax returns due 
(without extensions) on or before May 30, 2006, see Sec.  1.1502-13 as 
contained in 26 CFR part 1 in effect on April 1, 2006. Paragraph 
(f)(5)(ii)(C) of this section is applicable to any qualified stock 
disposition (as defined in Sec.  1.336-1(b)(6)) for which the 
disposition date (as defined in Sec.  1.336-1(b)(8)) is on or after May 
15, 2013.

[T.D. 8597, 60 FR 36685, July 18, 1995]

    Editorial Note: For Federal Register citations affecting Sec.  
1.1502-13, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.

    Editorial Note: By T.D. 9905, 85 FR 56843, Sept. 14, 2020, Sec.  
1.1502-13 was amended in part by redesignating paragraphs (h)(2)(v)(a) 
and (b) as paragraphs (h)(2)(iv)(A) and (B); however, the amendment 
could not be incorporated due to inaccurate amendatory instruction.



Sec.  1.1502-14Z  Application of opportunity zone rules to members of 
a consolidated group.

    (a) Scope and definitions--(1) Scope. This section provides rules 
regarding the Federal income tax treatment of QOFs owned by members of a 
consolidated group (as defined in Sec.  1.1502-1(b) and (h), 
respectively). Rules in the section 1400Z-2 regulations (as defined in 
Sec.  1.1400Z2(a)-1(b)(41)) apply to consolidated groups except as 
modified in this section. Paragraph (b) of this section generally 
provides rules regarding the effects of an election under Sec.  1.1504-
3(b)(2) to treat a subsidiary QOF C corporation as a member of a 
consolidated group. Paragraph (c) of this section provides rules 
regarding qualifying investments made by members of a consolidated group 
(including an election to treat the investment by one member as a 
qualifying investment by another member) and the application of Sec.  
1.1502-13 to intercompany transfers of a qualifying investment. 
Paragraph (d) of this section provides coordinating rules for basis 
adjustments within a consolidated group. Paragraph (e) of this section 
provides coordinating rules for Sec.  1.1502-36(d). Paragraph (f) of 
this section provides elective transition relief to taxpayers that 
consolidated a subsidiary QOF C corporation prior to May 1, 2019. 
Paragraph (g) of this section provides rules regarding the consequences 
of a deconsolidation of a QOF C corporation. Paragraph (h) of this 
section provides instructions for making the elections provided by 
paragraphs (c) and (f) of this section. Paragraph (i) of this section is 
reserved. Paragraph (j) of this section provides examples. Paragraph (k) 
of this section provides the applicability dates.
    (2) Definitions--(i) In general. The definitions provided in 
Sec. Sec.  1.1400Z2(a)-1(b) and 1.1400Z2(d)-1 apply for purposes of this 
section.
    (ii) Definitions for consolidated groups--(A) Day one. The term day 
one means the date members of the consolidated group formed or acquired 
section 1504 control of the pre-existing QOF sub. If a pre-existing QOF 
sub was a member of the consolidated group prior to becoming a QOF C 
corporation, day one is the first day of the first month in which the 
member self-certified as, or is treated as, a QOF C corporation, 
whichever is earlier.
    (B) Election date. The term election date means the date on which an 
election under paragraph (c) or (f) of this section is made.
    (C) Pre-existing QOF sub. The term pre-existing QOF sub means a 
subsidiary QOF C corporation that meets the affiliation requirements in 
section 1504 (without regard to Sec.  1.1504-3(b)(1)) as of May 1, 2019.
    (D) QOF investor member. The term QOF investor member means any 
member holding a qualifying investment in the QOF member.
    (E) QOF member. The term QOF member means a subsidiary QOF C 
corporation that is treated as a member of a consolidated group pursuant 
to an election in Sec.  1.1504-3(b)(2).
    (F) QOF member stock. The term QOF member stock means the QOF stock 
of a QOF member.
    (G) QOF SAG. The term QOF SAG means, with respect to a QOF member, 
the affiliated group that would be determined under section 1504(a) if 
the QOF member were the common parent.
    (H) Subsidiary QOF C corporation. The term subsidiary QOF C 
corporation means a QOF C corporation that meets the requirements to be 
a member of an affiliated group (as defined in section

[[Page 646]]

1504(a)(1), and without regard to Sec.  1.1504-3(b)(1)) other than the 
common parent of such consolidated group.
    (b) Subsidiary QOF C corporation treated as member of the 
consolidated group--(1) Effects of election to treat a subsidiary QOF C 
corporation as a member--(i) Determining whether a distribution is an 
inclusion event. A distribution of property with respect to qualifying 
QOF stock by a QOF member to a QOF investor member is an inclusion event 
to the extent the distribution would create or increase an excess loss 
account (ELA) in the qualifying QOF stock, without regard to any 
inclusion resulting from application of this paragraph (b)(1)(i). Solely 
for purposes of determining whether a distribution creates or increases 
an ELA during a taxable year, investment adjustments pertaining to a 
distribution on qualifying QOF stock by a QOF member are made after all 
other investment adjustments under Sec.  1.1502-32 for that year.
    (ii) Determining the amount of deferred gain includible by the QOF 
investor member. The amount of gain included in gross income of a QOF 
investor member under section 1400Z-2(a)(1)(B) on a date described in 
Sec.  1.1400Z2(b)-1(b) (modified by paragraph (c)(3) of this section, as 
applicable) is determined under this paragraph (b)(1)(ii). The amount of 
gain included in gross income of the QOF investor member is the lesser 
of:
    (A) The product of:
    (1) The percentage of the qualifying investment that gave rise to 
the inclusion event; and
    (2) The remaining deferred gain (see Sec.  1.1400Z2(a)-1(b)(40)), 
less any basis adjustments pursuant to section 1400Z-2(b)(2)(B)(iii) and 
(iv); or
    (B) The gain that would be recognized on a fully taxable disposition 
of the qualifying investment that gave rise to the inclusion event.
    (iii) Application of ELA rules on the disposition of QOF member 
stock. When a QOF investor member disposes of a share of qualifying QOF 
member stock, any ELA in the share is taken into account as income or 
gain from the disposition under Sec.  1.1502-19(b)(1) before the basis 
of the share is increased under section 1400Z-2(c), if applicable. See 
paragraph (g)(3)(i) of this section for the general rule regarding the 
treatment of an ELA upon the deconsolidation of a QOF member.
    (iv) Transactions between the QOF member and other members of the 
consolidated group--(A) In general. This paragraph (b)(1)(iv) governs 
transactions between a member of a QOF SAG and other members of the 
consolidated group.
    (B) Sale or exchange of property. A sale or exchange of property 
between a member of a QOF SAG and a member of the consolidated group 
that is not a member of a single QOF SAG is not treated as an 
intercompany transaction (as defined in Sec.  1.1502-13(b)(1)) and is 
not subject to the rules in Sec.  1.1502-13. In contrast, a sale or 
exchange of property between members of the QOF SAG is an intercompany 
transaction that is subject to the rules in Sec.  1.1502-13.
    (C) Other transactions. Any transaction between a member of a QOF 
SAG and a member of the consolidated group that is not a member of that 
QOF SAG that is not a sale or exchange of property is an intercompany 
transaction subject to the rules in Sec.  1.1502-13.
    (v) Separate-entity application of QOF qualifying rules to QOF 
member. A consolidated group is not treated as a single entity for 
purposes of determining whether a QOF member or a qualified opportunity 
zone business that is a consolidated group member satisfies the 
investment standard rules in section 1400Z-2(d) and (f) and Sec. Sec.  
1.1400Z2(d)-1 and 1.1400Z2(f)-1. Instead, those investment standard 
rules apply on a separate-entity basis. Therefore, for example, the QOF 
member's satisfaction of the requirements under section 1400Z-2(d) is 
determined by taking into account only property (including qualified 
opportunity zone stock or qualified opportunity zone partnership 
interests) held by the QOF member, without regard to property 
transferred by the QOF member to other members of the consolidated 
group.
    (2) Anti-avoidance rule. The purposes of section 1400Z-2 and the 
section 1400Z-2 regulations are to provide specified tax benefits to 
owners of QOFs to encourage the making of longer-term investments, 
through QOFs and qualified opportunity zone businesses, of

[[Page 647]]

new capital in one or more qualified opportunity zones and to increase 
the economic growth of such qualified opportunity zones. If a 
transaction is engaged in or structured with a view to avoid the 
application of the rules of section 1400Z-2, the section 1400Z-2 
regulations, or the regulations in this part under section 1502 of the 
Code (including this section), appropriate adjustments will be made to 
carry out the purposes of section 1400Z-2 and the section 1400Z-2 
regulations. For example, if a consolidated group engages in a 
restructuring (such as a distribution described in section 355) with a 
view to using stock basis adjustments under Sec.  1.1502-32 resulting 
from increases in the basis of stock under section 1400Z-2(b) in a sale 
or exchange transaction without disposing of any part of the 
consolidated group's direct ownership of the relevant qualifying 
investment, the transaction will be treated as an inclusion event with 
regard to an appropriate amount of deferred gain.
    (c) Qualifying investments by members of a consolidated group--(1) 
In general. Except as otherwise provided in this section or in Sec.  
1.1400Z2(b)-1 (see, for example, Sec.  1.1400Z2(b)-1(c)(9)(i)(B)(1)), 
section 1400Z-2 applies separately to each member of a consolidated 
group. Therefore, for example, the same member of the consolidated group 
generally must both engage in the sale of a capital asset giving rise to 
eligible gain and timely invest an amount equal to some or all of such 
gain in a QOF (as provided in section 1400Z-2(a)(1)) in order to qualify 
for deferral of such gain under section 1400Z-2.
    (2) Election to treat investment of one member as a qualifying 
investment by another member--(i) Availability of election. If members 
of a consolidated group satisfy the requirements of this paragraph 
(c)(2), the consolidated group may elect to treat an investment by one 
member as a qualifying investment by another member. The election 
provided by this paragraph (c)(2) is available when a member of a 
consolidated group (M1) has eligible gain and a second member (M2) makes 
an investment in a QOF that would be a qualifying investment if M1, 
rather than M2, had made the investment. For example, if M1 has $100x of 
eligible gain but M2 has none, and M2 makes a $120x investment in a QOF 
C corporation, only $100x of M2's investment in the QOF C corporation is 
eligible for the election under this paragraph (c)(2). See paragraph 
(h)(2) of this section for the form and manner of making this election. 
If M2 has its own eligible gain, M2 may make a qualifying investment on 
its own behalf and defer such eligible gain under section 1400Z-
2(a)(1)(A) and Sec.  1.1400Z2(a)-1.
    (ii) Effect of election. If a consolidated group makes an election 
under this paragraph (c)(2), then M1 is treated as having made the 
investment in the QOF that is actually made by M2. M1 is then treated as 
having immediately sold such investment to M2 for fair market value. The 
deemed sale by M1 is subject to the rules in paragraph (c)(3) of this 
section. The consolidated group must treat the deemed investment by M1 
and the deemed sale by M1 to M2 as having occurred for all Federal 
income tax purposes.
    (3) Intercompany transfers of a qualifying investment--(i) In 
general. Except as otherwise provided in this paragraph (c)(3), when one 
member (S) transfers its qualifying investment to another member (B), 
the transaction is not treated as an intercompany transaction within the 
meaning of Sec.  1.1502-13(b)(1) for purposes of applying the rules of 
section 1400Z-2 and the section 1400Z-2 regulations. Therefore, Sec.  
1.1502-13(c) does not apply to treat S and B as divisions of a single 
entity for purposes of section 1400Z-2. For example, if S transfers its 
qualifying investment to B in a section 351 transaction, the transfer is 
an inclusion event for S under Sec.  1.1400Z2(b)-1(c). In addition, 
because the transfer is not an intercompany transaction for purposes of 
section 1400Z-2, Sec.  1.1502-13 does not apply to continue S's deferral 
under Sec.  1.1400Z2(a)-1(a)(1).
    (ii) Application of Sec.  1.1502-13 to fully taxable intercompany 
transfers of a qualifying investment--(A) Applicable transactions. 
Notwithstanding paragraph (c)(3)(i) of this section, if S transfers its 
qualifying investment to B in a fully taxable transaction, the 
transaction is treated as an intercompany transaction, and Sec.  1.1502-
13(c) applies to treat S and B as divisions of a single

[[Page 648]]

entity for purposes of applying section 1400Z-2.
    (B) Treatment of S's intercompany gain on its qualifying investment. 
If a transaction is described in paragraph (c)(3)(ii)(A) of this 
section, Sec.  1.1502-13(c)(6)(ii) is inapplicable in determining the 
excludability of S's gain (or the treatment of such gain as tax-exempt 
income) on the application of section 1400Z-2(b) and (c) to S and B as a 
single entity. Thus, S's gain on the qualifying investment (including 
the amount includible under Sec.  1.1400Z2(b)-1(e)) may be redetermined 
to be excluded from gross income (or treated as tax-exempt income), as 
appropriate, to achieve single-entity treatment between S and B with 
regard to the ownership and disposal of the qualifying investment. To 
qualify for benefits under section 1400Z-2, S and B must otherwise 
satisfy the requirements of section 1400Z-2. See also Sec.  1.1502-
13(j)(4) (concerning multiple or successive intercompany transactions).
    (C) Investment adjustments and adjustments to earnings and profits. 
Income of S excluded under section 1400Z-2 by application of paragraphs 
(c)(3)(ii)(A) and (B) of this section and Sec.  1.1502-13 results in 
adjustments to S's earnings and profits and is treated as tax-exempt 
income to S for purposes of Sec.  1.1502-32(b)(2)(ii).
    (D) Election under section 1400Z-2(c). To the extent paragraph 
(c)(3)(ii)(A) of this section applies to S's transfer of its qualifying 
investment to B, B (and not S) is entitled to make the election under 
section 1400Z-2(c) at the time when, treating S and B as divisions of a 
single entity, the single entity would be entitled to make such an 
election. For example, pursuant to Sec.  1.1502-13(c)(1)(ii), B takes 
S's holding period into account in determining whether B is treated as 
holding the transferred qualifying investment for 10 years. In addition, 
the attributes of S's intercompany item on the transfer of the 
qualifying investment may be redetermined based on B's election.
    (4) Intercompany transfer as qualifying investment in a QOF member. 
A transfer by a consolidated group member with an eligible gain to a QOF 
member before January 1, 2027, is not treated as an intercompany 
transaction within the meaning of Sec.  1.1502-13 and may constitute a 
qualifying investment. But see Sec.  1.1504-3(b)(2) regarding conditions 
for consolidating a QOF C corporation.
    (5) Intercompany gain as eligible gain. When S sells property to B, 
Sec.  1.1502-13 applies to determine if, and when, S's intercompany gain 
and B's corresponding gain constitute eligible gain. S's gain and B's 
gain are treated as eligible gain only to the extent such gain would be 
eligible gain if S and B were divisions of a single entity. For example, 
if S sells a piece of property to B at a gain, B subsequently sells that 
property to an unrelated party at a further gain, and the gains are 
treated as capital gain under Sec.  1.1502-13(c)(1) and (4), then both 
S's gain and B's gain are eligible gains at the time B sells the 
property to the unrelated party. In contrast, if S sells a piece of 
property to B at a loss, and B subsequently sells that property to an 
unrelated party at a gain, then B's corresponding gain on the property 
is eligible gain only to the extent that S and B, if treated as 
divisions of a single entity, would have eligible gain on the sale of 
property to the unrelated party. See Sec.  1.1502-13(a)(1).
    (d) Tiering-up of investment adjustments provided by section 1400Z-
2. Basis increases in a qualifying investment in a QOF under sections 
1400Z-2(b)(2)(B)(iii), 1400Z-2(b)(2)(B)(iv), and 1400Z-2(c) are treated 
as satisfying the requirements of Sec.  1.1502-32(b)(3)(ii)(A) and thus 
qualify as tax-exempt income to the QOF owner. Therefore, if the QOF 
owner is a member of a consolidated group and is owned by other members 
of the same consolidated group (upper-tier members), the upper-tier 
members increase their bases in the shares of the QOF owner under Sec.  
1.1502-32(b)(2)(ii). However, there is no basis adjustment under Sec.  
1.1502-32(b)(2)(ii) or (iii) in shares of upper-tier members with regard 
to a basis adjustment under section 1400Z-2(c) and Sec.  1.1400Z2(c)-1 
unless and until the basis of the qualifying investment is adjusted to 
its fair market value, as provided in section 1400Z-2(c) and Sec.  
1.1400Z2(c)-1.
    (e) Application of Sec.  1.1502-36(d). This paragraph (e) clarifies 
how Sec.  1.1502-36(d) applies if a member (M) transfers a loss

[[Page 649]]

share of another member (S) that is a QOF owner that owns a qualifying 
investment. To determine S's attribute reduction amount under Sec.  
1.1502-36(d)(3), S's basis in its qualifying investment is included in 
S's net inside attribute amount to compute S's aggregate inside loss 
under Sec.  1.1502-36(d)(3)(iii)(A). However, S's basis in the 
qualifying investment is not included in S's Category D attributes 
available for attribute reduction under Sec.  1.1502-36(d)(4). Thus, S's 
basis in the qualifying investment cannot be reduced under Sec.  1.1502-
36(d). If S's attribute reduction amount exceeds S's attributes 
available for reduction, then to the extent of the lesser of S's basis 
in the qualifying investment or the remaining attribute reduction 
amount, the common parent is treated as making the election under Sec.  
1.1502-36(d)(6) to reduce M's basis in the transferred loss S shares.
    (f) Transition relief--(1) Overview. This paragraph (f) provides 
options for elective relief to pre-existing QOF subs. An election under 
this paragraph (f) is made in the manner provided in paragraph (h)(3) of 
this section. If a timely election under this paragraph (f) is not made, 
the pre-existing QOF sub is treated as deconsolidating on March 13, 
2020.
    (2) Reclassification election--(i) In general. For each pre-existing 
QOF sub of a consolidated group, the consolidated group may make one of 
the alternative, irrevocable elections provided in paragraphs (f)(2)(ii) 
through (iv) of this section. All elective relief provided in this 
paragraph (f)(2) is effective on day one.
    (ii) Treatment as a QOF partnership--(A) Election. A consolidated 
group may elect to treat a pre-existing QOF sub as a QOF partnership 
(electing QOF partnership). To be eligible for the election in this 
paragraph (f)(2)(ii)(A), a pre-existing QOF sub must have converted to 
an entity treated as a partnership for Federal income tax purposes as of 
the election date.
    (B) Effect of the QOF partnership election. As a result of making 
the election under this paragraph (f)(2)(ii), the pre-existing QOF sub 
is treated as a QOF partnership from day one. Consequently, the 
consolidated group must file amended or superseding returns, as 
applicable, to account for the electing QOF partnership's income, gain, 
deduction, and loss; the electing QOF partnership also must file its own 
partnership returns for taxable periods beginning on day one, as 
applicable. The electing QOF partnership must include its self-
certification under Sec.  1.1400Z2(d)-1(a) with its own returns, and the 
self-certification will be treated as timely so long as the consolidated 
group filed a timely self-certification under Sec.  1.1400Z2(d)-1(a) for 
the pre-existing QOF sub. In addition, appropriate adjustments must be 
made to account for the change in status of the electing QOF partnership 
from day one, including modifications to investment adjustments to the 
basis in members' stock made under Sec.  1.1502-32 and adjustments to 
members' earnings and profits made under Sec.  1.1502-33.
    (C) Pre-existing QOF sub with single owner. If a pre-existing QOF 
sub is wholly owned by one member of a consolidated group, then for 
purposes of making the election under this paragraph (f)(2)(ii), the 
electing QOF partnership is deemed to have had a nominal partner from 
day one until the date the electing QOF partnership is treated as a 
partnership for Federal income tax purposes without regard to this 
paragraph (f)(2)(ii).
    (D) Example. The following example illustrates the election under 
this paragraph (f)(2)(ii).
    (1) Facts. P, the common parent of a consolidated group (P group), 
wholly owns M1 and M2. On July 1, 2018, M1 and M2 each sell an asset to 
an unrelated party and realize $70x and $30x of eligible gain, 
respectively. On August 13, 2018, M1 and M2 form Q12 (a QOF C 
corporation that was formed as a corporation under state law). Also on 
August 13, 2018, M1 and M2 contribute $70x and $30x, respectively, to 
Q12 in exchange for stock of Q12 and properly elect to defer their 
respective eligible gains under section 1400Z-2(a) and Sec.  
1.1400Z2(a)-1. The P group also makes a timely self-certification under 
Sec.  1.1400Z2(d)-(1)(a) for Q12. Following March 13, 2020, the P group 
intends to timely elect under this paragraph (f)(2)(ii) to treat Q12 as 
a QOF partnership.

[[Page 650]]

    (2) Analysis--(i) Eligibility to elect. For the P group to elect to 
treat Q12 as a QOF partnership under this paragraph (f)(2)(ii), by the 
date of the election, Q12 must either convert to a state law partnership 
or another entity treated as a partnership for Federal income tax 
purposes.
    (ii) Consequences of the election. As a result of making the 
election under this paragraph (f)(2)(ii), Q12 is treated as a QOF 
partnership from August 13, 2018 (day one). The P group must file 
amended or superseding returns, as applicable and as necessary, to 
account for Q12's income, gain, deduction, and loss. In addition, Q12 
must file its own returns for the taxable period beginning on August 13, 
2018, as applicable. The returns must be filed within the time frame 
provided in paragraph (h)(3)(iii) of this section. Finally, because the 
P group filed a timely self-certification under Sec.  1.1400Z2(d)-(1)(a) 
for Q12 as a QOF C corporation, Q12's self-certification as a QOF 
partnership would be is considered timely filed.
    (3) Deemed nominal partner--(i) Facts. The facts are the same as in 
paragraph (f)(2)(iii)(D)(1) of this section, except that on July 1, 
2018, only M1 sells an asset to an unrelated party and realizes $70x of 
eligible gain. On August 13, 2018, M1 contributes cash of $70x to Q12 in 
exchange for stock of Q12 and properly elects to defer the eligible gain 
under section 1400Z-2(a) and Sec.  1.1400Z2(a)-1. As of the date the 
election is made to treat Q12 as a partnership from day one, a second 
party invests in Q12, and Q12 is an entity treated as a partnership for 
Federal income tax purposes.
    (ii) Analysis. The analysis is generally the same as in paragraph 
(f)(2)(iii)(D)(2) of this section. In addition, because Q12 is wholly 
owned by M1, solely for purposes of treating Q12 as a QOF partnership 
from August 13, 2018, Q12 is deemed to have a nominal partner from 
August 13, 2018 until the election date or the date Q12 qualifies as a 
partnership, if earlier.
    (iii) Treatment as a non-member QOF C corporation--(A) Election. A 
consolidated group may elect to treat a pre-existing QOF sub as a QOF C 
corporation that is not a member of the consolidated group.
    (B) Effect of the non-member QOF C corporation election. As a result 
of making the election under this paragraph (f)(2)(iii), the pre-
existing QOF sub is treated as not being a member of the consolidated 
group from day one. Consequently, the consolidated group must file 
amended or superseding returns, as applicable, to exclude all of the 
pre-existing QOF sub's income, gain, deduction, and loss from the 
consolidated returns; the pre-existing QOF sub also must file its own 
returns for taxable periods beginning on day one, as applicable. In 
addition, all adjustments resulting from the pre-existing QOF sub's 
operations must be eliminated from the consolidated group, including 
investment adjustments made under Sec.  1.1502-32 to basis in members' 
stock (as well as stock in the pre-existing QOF sub) and adjustments 
made under Sec.  1.1502-33 to members' earnings and profits.
    (iv) Treatment as a non-QOF C corporation--(A) Election. A 
consolidated group may elect to treat a pre-existing QOF sub as if it 
never self-certified to be a QOF pursuant to Sec.  1.1400Z2(d)-1.
    (B) Effect of the non-QOF C corporation election. As a result of 
making the election under this paragraph (f)(2)(iv), the pre-existing 
QOF sub is treated from day one as a member of the consolidated group 
and not as a QOF. Therefore, section 1400Z-2 is not applicable, and 
amended returns or superseding returns must be filed, as applicable, to 
account for the eligible gain that was invested in the pre-existing QOF 
sub. In addition, appropriate adjustments must be made to account for 
the non-applicability of section 1400Z-2, including adjustments to 
members' stock basis and earnings and profits under Sec. Sec.  1.1502-32 
and 1.1502-33, respectively.
    (3) Election to continue treating pre-existing QOF sub as a member 
of the consolidated group--(i) Election. A consolidated group may elect 
to have a pre-existing QOF sub retain its QOF status and remain a member 
of the consolidated group.
    (ii) Effects of electing to remain a QOF and a member of the 
consolidated group. As a result of making the election under this 
paragraph (f)(3), the conditions and effects provided in Sec.  1.1504-

[[Page 651]]

3(b)(2) and paragraph (b)(1) of this section will apply to the pre-
existing QOF sub and the consolidated group as of the effective date of 
this election. See paragraph (h)(1) of this section for the effective 
date of this election, and see paragraph (h)(3)(iii) of this section 
regarding the timing for meeting the requirements in Sec.  1.1504-
3(b)(2)(ii).
    (g) Deconsolidation rules--(1) In general. This paragraph (g) 
provides rules applicable on any deconsolidation of a QOF C corporation 
(deconsolidating QOF).
    (2) Deconsolidation and inclusion event. A deconsolidation event is 
not an inclusion event unless the deconsolidation is the result of an 
actual transfer of the QOF member stock or a worthlessness event within 
the meaning of Sec.  1.1502-80(c). For example, when a consolidated 
group fails to meet the conditions in Sec.  1.1504-3(b)(2) of this 
section and causes a QOF member to deconsolidate, the deconsolidation 
event is not an inclusion event solely as a result of the consolidated 
group's failure to meet the requirements in Sec.  1.1504-3(b)(2) of this 
section.
    (3) Basis in the deconsolidating QOF at time of deconsolidation--(i) 
ELA in a deconsolidating QOF. Any ELA in stock of the deconsolidating 
QOF at the time of the deconsolidation is taken into account under the 
rules of Sec.  1.1502-19. See paragraph (b)(1)(iii) of this section for 
rules coordinating the application of section 1400Z-2(c) with Sec.  
1.1502-19.
    (ii) Positive basis in the deconsolidating QOF resulting from Sec.  
1.1502-32. Consolidated group members retain any positive basis in the 
deconsolidating QOF resulting from investment adjustments under Sec.  
1.1502-32 following its deconsolidation. However, following the 
deconsolidation, for purposes of determining the amount includible under 
Sec.  1.1400Z2(b)-1(e), the amount of basis referred to in section 
1400Z-2(b)(2)(A)(ii) is computed by applying only those rules applicable 
to corporations that do not file a consolidated return (that is, the 
basis rules under subchapter C and section 1400Z-2). Therefore, any 
positive basis resulting from Sec.  1.1502-32 adjustments is not taken 
into account in computing the amount includable under Sec.  1.1400Z2(b)-
1(e).
    (4) Deconsolidating QOF's earnings and profits--(i) Deconsolidation 
on or before December 31, 2026. Notwithstanding Sec.  1.1502-33(e)(1), 
if a deconsolidating QOF deconsolidates before December 31, 2026, the 
deconsolidating QOF retains its earnings and profits under this 
paragraph (g)(4)(i). Any earnings and profits of the deconsolidating QOF 
that were taken into account by any other members under Sec.  1.1502-33 
are eliminated from those members as of the end of the day on which the 
deconsolidating QOF deconsolidates.
    (ii) Deconsolidation after December 31, 2026. If the deconsolidating 
QOF deconsolidates after December 31, 2026, the rules under Sec.  
1.1502-33(e) apply.
    (5) Consequences under Sec.  1.1502-36. See Sec.  1.1502-
36(f)(10)(i)(B) for the treatment of a deconsolidation as a transfer of 
all of the stock in the deconsolidating member held by other members of 
the consolidated group.
    (h) Form and manner of making an election under this section--(1) In 
general. The elections provided in this section are irrevocable. The 
information required for each election is provided in this paragraph 
(h). A reclassification election under paragraph (f)(2) of this section 
is effective as of day one. All other elections are effective on the 
election date.
    (2) Election under paragraph (c)(2) of this section to treat 
investment by M2 as qualifying investment by M1--(i) Form of election. 
The election under paragraph (c)(2) of this section must be made in the 
form of a statement titled ``THIS IS AN ELECTION UNDER Sec.  1.1502-
14Z(c)(2) TO TREAT AN INVESTMENT BY [insert name and employer 
identification number (E.I.N.) of M2] AS A QUALIFYING INVESTMENT BY 
[insert name and E.I.N. of M1].'' The statement must be included with 
the consolidated group's timely filed return (original, superseding, or 
amended return, as applicable, including extensions). In addition, the 
statement must include the information required under paragraph 
(h)(2)(ii) of this section.
    (ii) Required information. (A) The amount of M1's eligible gain;
    (B) The amount of the investment M2 has made in a QOF, including 
identification of the amount of the investment that is eligible for 
treatment as a

[[Page 652]]

qualifying investment under paragraph (c)(2) of this section and the 
amount (if any) that is not eligible for such treatment; and
    (C) The date on which M1 recognized its eligible gain, and the date 
on which M2 made the investment in the QOF.
    (3) Elections under paragraph (f) of this section for transition 
relief--(i) Form of election. The elections under paragraph (f) of this 
section must be made in the form of a statement titled ``THIS IS AN 
ELECTION UNDER Sec.  1.1502-14Z(f) FOR [insert name and E.I.N. of pre-
existing QOF sub].'' All actions necessary to make these elections, 
including the filing of an amended return (or superseding return, as 
applicable), or filing an original return, as applicable, must be 
completed within the time designated in paragraph (h)(3)(iii) of this 
section. The statement must be included on or with any amended prior-
year consolidated return (or superseding or original return, as 
applicable) and on or with the consolidated group's timely filed return 
(original or amended if filed by the due date for the return, including 
extensions) for the election year. In addition, the statement must 
include the information required in paragraph (h)(3)(ii) of this 
section.
    (ii) Required information--(A) Reclassification election under 
paragraph (f)(2)(ii) of this section. (1) A statement that the pre-
existing QOF sub is electing to be a QOF partnership;
    (2) The election date;
    (3) The effective date of the election;
    (4) Specification of the appropriate adjustments required under 
paragraph (f)(2)(ii) of this section made by the pre-existing QOF sub 
and the consolidated group; and
    (5) Certification that the appropriate change under state law or the 
entity classification election under Sec.  301.7701-3 of this chapter 
(as applicable) has been made, and the date of the change or entity 
classification election.
    (B) Reclassification election under paragraph (f)(2)(iii) or (iv) of 
this section. (1) A statement that the pre-existing QOF sub is changing 
its status;
    (2) The pre-existing QOF sub's new status (either a non-member QOF C 
corporation, under paragraph (f)(2)(iii) of this section, or a non-QOF C 
corporation, under paragraph (f)(2)(iv) of this section);
    (3) The election date;
    (4) The effective date of the election; and
    (5) Specification of the appropriate adjustments made the by pre-
existing QOF sub and the consolidated group pursuant to paragraph 
(f)(2)(iii) or (iv) of this section, as applicable.
    (C) Election to continue treating the pre-existing QOF sub as a 
subsidiary member of the consolidated group under paragraph (f)(3) of 
this section. (1) A statement that the pre-existing QOF sub is electing 
to retain its status as a QOF C corporation and remain a member of the 
consolidated group;
    (2) The election date; and
    (3) Certification that the pre-existing QOF sub and the consolidated 
group are in compliance with the conditions under Sec.  1.1504-
3(b)(2)(ii) as of the date that the pre-existing QOF sub and the 
consolidated group are in compliance with the conditions under Sec.  
1.1504-3(b)(2)(ii).
    (iii) Time for completing the elections under paragraph (f) of this 
section. (A) If the pre-existing QOF sub is making an election under 
paragraph (f)(2)(ii) or (f)(3) of this section, all actions necessary to 
make such election must be completed by April 13, 2020. Specifically, if 
the pre-existing QOF sub is making the election under paragraph (f)(3) 
of this section, the conditions in Sec.  1.1504-3(b)(2)(ii) must be met 
by April 13, 2020. In addition, the consolidated group's amended return 
(or superseding return, as applicable), taking into account the relevant 
changes, if applicable, must be filed by May 12, 2020. Moreover, if the 
electing QOF partnership had been a QOF partnership on day one and the 
electing QOF partnership's return would have been due, then such return 
also must be filed by May 12, 2020.
    (B) If the pre-existing QOF sub is making a reclassification 
election under paragraph (f)(2)(iii) or (iv) of this section, all 
actions necessary to make such election, including the filing of the 
pre-existing QOF sub's own return (if the return would have been due had 
the pre-existing QOF sub not been included in the consolidated group on 
day one), and the consolidated group's

[[Page 653]]

amended return (or superseding return, as applicable), if applicable, 
must be completed by April 13, 2020.
    (iv) Extension of statute of limitations. If, as a result of making 
a reclassification election in paragraph (f)(2) of this section, the 
consolidated group is required to file an amended return, and the 
electing QOF partnership is required to file a return by May 12, 2020 or 
the pre-existing QOF sub is required to file a return by April 13, 2020 
(collectively, the related returns), then the consolidated group (and 
the pre-existing QOF sub, if an election under paragraph (f)(2)(iii) of 
this section is made) also must consent to extend the period of 
limitations on assessment with respect to any issues arising under 
section 1400Z-2 in the related returns of the consolidated group (and 
the pre-existing QOF sub, if applicable). This consent must be effected 
at such time and in such form and manner as may be prescribed by the 
Commissioner of Internal Revenue in Internal Revenue Service forms or 
instructions or in publications or guidance published in the Internal 
Revenue Bulletin (see Sec. Sec.  601.601(d)(2) and 601.602 of this 
chapter).
    (i) [Reserved]
    (j) Examples. The following examples illustrate the rules of this 
section. For purposes of these examples, and unless otherwise stated: P 
is the common parent of the P consolidated group (P group); S, B, and M 
are members of the P group; Q is a QOF C corporation that is not a 
member of the P group; and X is an unrelated party.
    (1) Example 1: Distribution by a QOF member and inclusion events--
(i) Facts. P wholly owns S. In 2018, S sells an asset to an unrelated 
party and realizes $500x of eligible gain. S forms a new QOF C 
corporation Q2, contributes $500x to Q2 in exchange for stock of Q2, and 
properly elects to defer the eligible gain under section 1400Z-2(a) and 
Sec.  1.1400Z2(a)-1. The P group elects under Sec.  1.1504-3(b)(2) to 
consolidate Q2. In 2024, Q2 distributes $20x to S when S's basis in Q2 
is $50x, the value of Q2 exceeds $500x, and Q2 has no earnings and 
profits. There are no other events in 2024 that result in investment 
adjustments to Q2 stock.
    (ii) Analysis. Under Sec. Sec.  1.1502-13(f)(2) and 1.1502-32, the 
intercompany distribution from Q2 to S of $20x reduces S's basis in Q2 
to $30x ($50x-$20x). Under paragraph (b)(1)(i) of this section, because 
the distribution does not create or increase an ELA in Q2 stock, the 
distribution is not an inclusion event.
    (iii) Distribution that creates an ELA. The facts are the same as in 
paragraph (j)(1)(i) of this section except that in 2024 Q2 distributes 
$70x to S. Under Sec. Sec.  1.1502-13(f)(2) and 1.1502-32, the 
intercompany distribution from Q2 to S of $70x reduces S's basis in Q2 
to $0 and creates an ELA of $20x ($50x-$70x). Under paragraph (b)(1)(i) 
of this section, because an ELA is created in Q2's stock, the 
distribution is an inclusion event to the extent of the increase in the 
ELA. S therefore includes $20x of its deferred gain into income in 2024. 
See Sec.  1.1400Z2(b)-1(e)(2). In addition, under Sec.  1.1400Z2(b)-
1(g)(1)(ii), the adjustment to S's basis in Q2 under section 1400Z-
2(b)(2)(B)(ii) is applied before determining the other Federal income 
tax consequences of the distribution. Therefore, as a result of the 
inclusion event, S's basis in Q2 is first increased to $70x ($50x + 
$20x), and then S's basis in Q2 is reduced by $70x (the amount of the 
distribution) to $0 under Sec.  1.1502-32.
    (2) Example 2: Basis adjustment when member owns qualifying QOF 
stock--(i) Facts. P wholly owns S. In 2018, S sells an asset to an 
unrelated party and realizes $500x of eligible gain. S contributes $500x 
to Q in exchange for stock of Q and properly elects to defer the 
eligible gain under section 1400Z-2(a) and Sec.  1.1400Z2(a)-1. S does 
not otherwise own stock in Q. In 2026, the fair market value of S's 
qualifying investment in Q exceeds $500x. In 2029, when S still owns its 
qualifying investment in Q, P sells all of the stock of S to X. S 
retains its stock in Q.
    (ii) Analysis--(A) Five-year and seven-year basis increase and Sec.  
1.1502-32 tier-up. In 2023, when S has held the stock of Q for five 
years, under section 1400Z-2(b)(2)(B)(iii), S increases its basis in its 
Q stock by $50x (10 percent of $500x, the amount of gain deferred by 
reason

[[Page 654]]

of section 1400Z-2(a)(1)(A)). The 10-percent basis increase qualifies as 
tax-exempt income to S under paragraph (d) of this section. Thus, P (an 
upper-tier member) increases its basis in S's stock by $50x under Sec.  
1.1502-32(b)(2)(ii). Similarly, in 2025, when S has held the stock of Q 
for seven years, under section 1400Z-2(b)(2)(B)(iv), S increases its 
basis in its Q stock by an additional $25x (5 percent of $500x). The 5-
percent basis increase also qualifies as tax-exempt income to S under 
paragraph (d) of this section, and P increases its basis in S's stock by 
an additional $25x under Sec.  1.1502-32(b)(2)(ii).
    (B) S's recognition of deferred capital gain in 2026. S did not 
dispose of its Q stock prior to December 31, 2026. Therefore, under 
section 1400Z-2(b)(1)(B) and Sec.  1.1400Z2(b)-1(b)(2), S's remaining 
deferred gain is included in S's income on December 31, 2026. The amount 
of gain included under section 1400Z-2(b)(2)(A) and Sec.  1.1400Z2(b)-
1(e)(3) is $425x ($500x of remaining deferred gain less S's $75x basis 
in Q). S's basis in Q is increased by $425x to $500x, and P's basis in S 
also is increased by $425x under Sec.  1.1502-32(b)(2)(i).
    (C) P's disposition of S. P's sale of S stock in 2029 results in the 
deconsolidation of S. S retains its Q stock, and S is not treated as 
selling or exchanging its Q stock for purposes of section 1400Z-2(c). 
Therefore, no basis adjustments under section 1400Z-2 are made as a 
result of P's sale of S stock.
    (iii) S sells the stock of Q after 10 years. The facts are the same 
as in paragraph (j)(2)(i) of this section, except that in 2029, instead 
of P selling all of the stock of S, S sells all of the stock of Q to X 
for its fair market value of $800x. At the time of the sale, S has owned 
the Q stock for over 10 years, and S elects under section 1400Z-2(c) to 
adjust its stock basis in Q from $500x (see the analysis in paragraph 
(j)(2)(ii)(B) of this section) to $800x, the fair market value of Q on 
the date of the sale. As a result of the election, S has no gain on the 
sale of Q stock. Additionally, the $300x basis increase in Q is treated 
as tax-exempt income to S pursuant to paragraph (d) of this section. 
Thus, P increases its basis in P's S stock by $300x under Sec.  1.1502-
32(b)(2)(ii).
    (3) Example 3: Intercompany sale of qualifying investment--(i) 
Facts. In 2018, S sells an asset to an unrelated party and realizes 
$100x of eligible gain. Also in 2018, S contributes $100x to Q in 
exchange for Q stock and properly elects to defer the eligible gain 
under section 1400Z-2(a) and Sec.  1.1400Z2(a)-1. S does not otherwise 
own stock in Q. In 2021, S sells all of its Q stock to B for $250x in a 
fully taxable transaction. In 2026, the fair market value of Q is $300x. 
In 2030, B sells the Q stock to X for $800x.
    (ii) Analysis--(A) Intercompany sale treated as an inclusion event. 
In 2021, S's sale of its Q stock to B is an inclusion event under 
section 1400Z-2(b)(1) and Sec.  1.1400Z2(b)-1(c). The amount includible 
pursuant to Sec.  1.1400Z2(b)-1(e)(1) is $100x (the lesser of the 
remaining deferred gain of $100x and the fair market value of the 
qualifying investment of $250x, over S's basis in Q, $0). As a result of 
the inclusion, S's basis in Q increases from $0 to $100x and S also 
realizes a capital gain of $150x ($250x of amount realized less its 
$100x basis in the Q stock) from the intercompany sale of Q to B. 
Because S's sale of its Q stock to B is a fully taxable transaction, 
paragraph (c)(3)(ii) of this section applies to treat the sale as an 
intercompany transaction and S's intercompany gains are taken into 
account under Sec.  1.1502-13(c)(2)(ii). Thus, S defers the inclusion of 
its $100x of remaining deferred gain and its $150x of capital gain in 
2021. B has a $250x basis in its Q stock.
    (B) Five-year basis increase in 2023. Pursuant to paragraph 
(c)(3)(ii) of this section, S and B are treated as divisions of a single 
entity for purposes of applying section 1400Z-2. In 2023, the single 
entity would have held the QOF investment for five years and its basis 
in Q would be increased to $10x ($100x x 10%) under section 1400Z-
2(b)(2)(B)(iii). To achieve this single entity result, $10x of S's $100x 
of remaining deferred gain is redetermined to be tax-exempt income. See 
Sec.  1.1502-13(c)(1); see also paragraph (c)(3)(ii)(B) of this section 
making Sec.  1.1502-13(c)(6)(ii) inapplicable in determining the 
excludability of S's intercompany gain. Therefore, in 2023, S is treated 
as having $10x of tax-exempt income, S's remaining deferred

[[Page 655]]

gain is $90x ($100x-$10x), while B's basis in Q remains $250x.
    (C) Seven-year basis increase in 2025. The same analysis in 
paragraph (j)(3)(ii)(B) of this section applies for the year 2025. 
Therefore, in 2025, S is treated as having $5x ($100x x 5%) of tax-
exempt income, S's remaining deferred gain is $85x ($90x-$5x), and B's 
basis in Q remains $250x.
    (D) Inclusion of S's remaining deferred gain in 2026. B continues to 
own the Q stock through 2026, and, treating S and B as divisions of a 
single entity for purposes of section 1400Z-2, the single entity would 
include its remaining deferred gain in income on December 31, 2026. See 
section 1400Z-2(b)(1), Sec.  1.1400Z2(b)-1(b). On a single-entity basis, 
the amount includible pursuant to Sec.  1.1400Z2(b)-1(e) is $85x (the 
lesser of the remaining deferred gain of $100x and the fair market value 
of the qualifying investment of $300x, over the single entity's basis in 
Q, $15x). B does not otherwise have an income event with respect to its 
Q stock in 2026. Therefore, under Sec.  1.1502-13(c), all $85x of S's 
remaining deferred gain is taken into account in 2026. In addition, S's 
$150x of capital gain on its Q stock sale continues to be deferred, and 
B's basis in Q remains $250x.
    (E) B sells the Q stock in 2030. In 2030, B sells all its Q stock to 
X for $800x. Under paragraph (c)(3)(ii)(D) of this section, B is 
entitled to make the election under section 1400Z-2(c) if, treating S 
and B as a single entity, the single entity would be eligible to make 
the election. Taking into account S's holding period, B has held Q for 
over 10 years, and B is eligible for the election when it sells Q to X 
in 2030. B makes the section 1400Z-2(c) election at the time of sale. 
Following the election, if S and B were divisions of a single entity, 
the single entity's basis in Q would increase from $100x to its fair 
market value of $800x, causing to be excluded the $700x of gain on the 
sale of Q stock. To achieve this single entity result, Sec.  1.1502-
13(c)(1) redetermines B's $550x ($800x-$250x) of gain and S's deferred 
$150x of capital gain to be tax-exempt income. See paragraph 
(c)(3)(ii)(B) of this section making Sec.  1.1502-13(c)(6)(ii) 
inapplicable in determining the excludability of S's intercompany gain. 
Therefore, as a result of the sale of the Q stock and B making the 
section 1400Z-2(c) election, S has $150x of tax-exempt income, and B has 
$550x of tax-exempt income.
    (4) Example 4: Intercompany sale of qualifying investment followed 
by sale of QOF at a loss outside of the consolidated group--(i) Facts. 
The facts are the same as in paragraph (j)(3)(i) of this section, except 
that in 2030, B sells the stock of Q for $225x to X.
    (ii) Analysis. The analysis for tax years prior to 2030 is the same 
as in paragraphs (j)(3)(ii)(A) through (D) of this section. In addition, 
applying the analysis in paragraph (j)(3)(ii)(E) of this section, B is 
entitled to make the election under section 1400Z-2(c) and B makes the 
election. Following the election, if S and B were divisions of a single 
entity, the single entity's basis in Q would increase from $100x to 
$225x, causing to be excluded the $125x of gain on the sale of Q stock. 
To achieve this single entity result, Sec.  1.1502-13(c)(1) redetermines 
B's $25x ($225x-$250x) of loss to be a noncapital, nondeductible expense 
and S's deferred $150x of capital gain to be tax-exempt income. 
Therefore, as a result of the sale of Q stock and B making the section 
1400Z-2 election, S has $150x of tax-exempt income, and B has $25x of 
noncapital, nondeductible expense.
    (5) Example 5: Intercompany section 351 transfer of qualifying 
investment--(i) Facts. In 2018, M sells an asset to an unrelated party 
and realizes $100x of eligible gain. Also in 2018, M contributes $100x 
to Q in exchange for Q stock and properly elects to defer the eligible 
gain under section 1400Z-2(a) and Sec.  1.1400Z2(a)-1. M does not 
otherwise own stock in Q. In 2021, when the value of Q is $200x, M 
contributes all of its Q stock to S in exchange for S stock in a 
transaction that qualifies under section 351.
    (ii) Analysis. In 2021, M's contribution of its Q stock to S is an 
inclusion event under section 1400Z-2(b)(1) and Sec.  1.1400Z2(b)-1(c). 
The amount includible pursuant to Sec.  1.1400Z2(b)-1(e) is $100x (the 
lesser of the remaining deferred gain of $100x and the fair market value 
of the qualifying investment of $200x, over S's basis in Q, $0). Because 
M's contribution of its Q stock to S is

[[Page 656]]

not a fully taxable transaction, the general rule in paragraph (c)(3)(i) 
of this section applies to treat the contribution as not an intercompany 
transaction for purposes of applying section 1400Z-2, and Sec.  1.1502-
13 does not apply to treat M and S as a single entity for purposes of 
section 1400Z-2. Thus, as a result of the transfer, M takes its $100x of 
remaining deferred gain into account, M's basis in S is $100x, and S's 
basis in Q is $100x.
    (6) Example 6: Intercompany sale of qualifying investment followed 
by a tax-free transfer of the qualifying investment--(i) Section 351 
transfer to another member of the consolidated group--(A) Facts. In 
2018, S sells an asset to an unrelated party and realizes $100x of 
eligible gain. Also in 2018, S contributes $100x to Q in exchange for Q 
stock and properly elects to defer the eligible gain under section 
1400Z-2(a) and Sec.  1.1400Z2(a)-1. S does not otherwise own stock in Q. 
In 2021, when the fair market value of the Q stock is $250, S sells all 
of its Q stock to B for $250x in a fully taxable transaction. In 2024, B 
transfers all its Q stock to another member of the P group, B2, in a 
section 351 transaction. At such time, the fair market value of the Q 
stock is $300x.
    (B) Analysis--(1) Intercompany sale in 2021. In 2021, S's sale of 
its Q stock to B is an inclusion event under section 1400Z-2(b)(1) and 
Sec.  1.1400Z2(b)-1(c). The amount includible pursuant to Sec.  
1.1400Z2(b)-1(e) is $100x (the lesser of the remaining deferred gain of 
$100x and the fair market value of the qualifying investment of $250x, 
over S's basis in Q, $0). As a result of the inclusion, S's basis in its 
Q stock increases from $0 to $100x and S also realizes a capital gain of 
$150x ($250x of amount realized less its $100x basis in the Q stock) 
from the intercompany sale of the Q stock to B. Because S's sale of its 
Q stock to B is a fully taxable transaction, paragraph (c)(3)(ii) of 
this section applies to treat the sale as an intercompany transaction. 
Therefore, S's intercompany gains are taken into account under Sec.  
1.1502-13(c) and (d). Thus, S defers the inclusion of its $100x of 
remaining deferred gain and its $150x of capital gain in 2021. B has a 
$250x basis in its Q stock.
    (2) Five-year basis increase in 2023. Pursuant to paragraph 
(c)(3)(ii) of this section, S and B are treated as divisions of a single 
entity for purposes of applying section 1400Z-2. In 2023, the single 
entity has held the QOF investment for five years and its basis in the Q 
stock would be increased to $10x ($100x x 10%) under section 1400Z-
2(b)(2)(B)(iii). To achieve this single entity result, $10x of S's $100x 
of remaining deferred gain is redetermined to be tax-exempt income. See 
Sec.  1.1502-13(c)(1); see also paragraph (c)(3)(ii)(B) of this section 
making Sec.  1.1502-13(c)(6)(ii) inapplicable in determining the 
excludability of S's intercompany gain. Therefore, in 2023, S is treated 
as having $10x of tax-exempt income, S's remaining deferred gain is $90x 
($100x-$10x), and B's basis in the Q stock remains $250x.
    (3) Intercompany transfer in a section 351 transaction. In 2024, B's 
contribution of its Q stock to B2, a member of the P group, is an 
inclusion event under section 1400Z-2(b)(1) and Sec.  1.1400Z2(b)-1(c). 
The amount includible pursuant to Sec.  1.1400Z2(b)-1(e) is $90x (the 
remaining deferred gain as determined in paragraph (j)(6)(i)(B) of this 
section). Because B's contribution of its Q stock to B2 is not a fully 
taxable transaction, the general rule in paragraph (c)(3)(i) of this 
section applies to prevent the contribution from being treated as an 
intercompany transaction for purposes of section 1400Z-2. As a result, 
for purposes of section 1400Z-2, Sec.  1.1502-13 does not apply to treat 
B and B2 as a single entity, and the application of Sec.  1.1502-13(j) 
is adjusted accordingly. As a result of the section 351 transfer, S 
takes its $90x of remaining deferred gain into account. B's basis in its 
B2 stock is $250x, and B's basis in its Q stock is $250x. However, 
because S's $150x of capital gain from the intercompany sale of its Q 
stock to B in 2021 is not an item related to section 1400Z-2, it 
continues to be deferred under Sec.  1.1502-13 because B2 is a member of 
the P group. See Sec.  1.1502-13(j)(4) regarding successive intercompany 
transactions.
    (ii) Section 351 transfer to a non-member--(A) Facts. The facts are 
the same as in paragraph (j)(6)(i)(A) of this section, except that B2 is 
not a member of the P group, and B contributes all its Q

[[Page 657]]

stock to B2 in a transaction that qualifies under section 351.
    (B) Analysis--(1) Intercompany sale in 2021 and five-year basis 
increase in 2023. The analysis for the 2021 and 2023 tax years are the 
same as in paragraphs (j)(6)(i)(B)(1) and (2) of this section.
    (2) Transfer of Q to a non-member in a section 351 transaction. In 
2024, B's contribution of its Q stock to B2, a non-member of the P 
group, is an inclusion event under section 1400Z-2(b)(1) and Sec.  
1.1400Z2(b)-1(c). The amount includible pursuant to Sec.  1.1400Z2(b)-
1(e) is $90x (the remaining deferred gain as determined in paragraph 
(j)(6)(ii)(B)(1) of this section). S's deferred capital gain of $150x is 
taken into account in 2024 under the acceleration rule of Sec.  1.1502-
13(d) because the Q stock has left the P group. B2's holding period for 
the qualifying investment does not include the time during which B and S 
held the qualifying investment.
    (iii) Section 721(a) transfer to a partnership--(A) Facts. The facts 
are the same as in paragraph (j)(6)(i)(A) of this section, except that 
B2 is a partnership, and an unrelated party is the other partner in B2. 
B's transfer of all of its Q stock to B2 qualifies for non-recognition 
treatment under section 721(a). In 2026, the fair market value of Q is 
$330x.
    (B) Analysis--(1) Intercompany sale in 2021 and five-year basis 
increase in 2023. The analysis for the 2021 and 2023 tax years are the 
same as in paragraphs (j)(6)(i)(B)(1) and (2) of this section.
    (2) Transfer of Q stock to a partnership in a section 721(a) 
transaction. In 2024, B transfers its Q stock to B2, a partnership, in a 
section 721(a) transaction. Although a section 721(a) transaction is not 
an inclusion event under Sec.  1.1400Z2(b)-1(c)(7), under the 
acceleration rule of Sec.  1.1502-13(d), S must take into account its 
$90x of remaining deferred gain because B2 has benefited from an 
increased basis in the Q stock as a result of the intercompany sale 
between S and B such that this is the appropriate time to take the 
remaining deferred gain into account. S's deferred capital gain of $150x 
is taken into account in 2024 for the same reason.
    (7) Example 7: Computation and application of the attribute 
reduction amount under Sec.  1.1502-36(d) when S owns a QOF--(i) Facts. 
In 2018, S sells an asset to an unrelated party and realizes $5,000x of 
eligible gain. S contributes $5,000x to Q in exchange for stock of Q and 
properly elects to defer the eligible gain under section 1400Z-2(a) and 
Sec.  1.1400Z2(a)-1. In 2024, M sells all of its S stock to X for its 
fair market value of $100x, and M's basis in the stock of S is $300x. At 
the time of sale, S owns the Q stock with a basis of $500x (S's basis in 
its Q stock was increased under section 1400Z-2(b)(2)(B)(iii) to $500x 
in 2023), and S has a net operating loss carryover of $50x. M's transfer 
of the S shares is a transfer of loss shares under Sec.  1.1502-36. 
Assume that no basis redetermination is required under Sec.  1.1502-
36(b) and no basis reduction is required under Sec.  1.1502-36(c).
    (ii) Attribute reduction under Sec.  1.1502-36(d). Under Sec.  
1.1502-36(d), S's attributes are reduced by S's attribute reduction 
amount. Section 1.1502-36(d)(3) provides that S's attribute reduction 
amount is the lesser of the net stock loss and S's aggregate inside 
loss. The net stock loss is the excess of the $300x aggregate basis of 
the transferred S shares over the $100x aggregate value of those shares, 
or $200x. S's aggregate inside loss, which includes the basis of the 
stock of Q as provided by paragraph (e) of this section, is the excess 
of S's net inside attribute amount over the value of the S share. S's 
net inside attribute amount is $550x, computed as the sum of S's $50x 
loss carryover and its $500x basis in Q. S's aggregate inside loss is 
therefore $450x ($550x net inside attribute amount over the $100x value 
of the S share). Accordingly, S's attribute reduction amount is the 
lesser of the $200x net stock loss and the $450x aggregate inside loss, 
or $200x. Under Sec.  1.1502-36(d)(4), S's $200x attribute reduction is 
first allocated and applied to reduce S's $50x loss carryover to $0. 
Under Sec.  1.1502-36(d)(4)(i)(D), S generally would be able to reduce 
the basis of its category D assets (including stock in other 
corporations) by the remaining attribute reduction amount ($150x). 
However, paragraph (e) of this section provides that S's basis in the 
stock of Q is not included in S's Category D attributes that are 
available for reduction under Sec.  1.1502-36(d)(4), and the remaining 
$150x of attribute reduction

[[Page 658]]

amount cannot be used to reduce the basis of Q shares under Sec.  
1.1502-36(d). Rather, under paragraph (e) of this section, P is treated 
as making the election under Sec.  1.1502-36(d)(6) to reduce M's basis 
in the transferred loss S shares by $150x. As a result, P's basis in its 
M stock is also reduced by $150x.
    (k) Applicability dates--(1) In general. This section applies for 
taxable years beginning after March 13, 2020.
    (2) Prior periods. With respect to the portion of a consolidated 
group's first taxable year ending after December 21, 2017, and for 
taxable years beginning after December 21, 2017, and on or before March 
13, 2020, a consolidated group may choose either--
    (i) To apply the section 1400Z-2 regulations, if applied in a 
consistent manner for all such taxable years; or
    (ii) To rely on the rules in proposed Sec.  1.1400Z2(g)-1 contained 
in the notice of proposed rulemaking (REG-120186-18) published on May 1, 
2019, but only if applied in a consistent manner for all such taxable 
years.

[T.D. 9889, 85 FR 1993, Jan. 13, 2020; 85 FR 19086, Apr. 6, 2020]



Sec.  1.1502-15  SRLY limitation on built-in losses.

    (a) SRLY limitation. Except as provided in paragraph (f) of this 
section (relating to built-in losses of the common parent) and paragraph 
(g) of this section (relating to an overlap with section 382), built-in 
losses are subject to the SRLY limitation under Sec. Sec.  1.1502-21(c) 
and 1.1502-22(c) (including applicable subgroup principles). Built-in 
losses are treated as deductions or losses in the year recognized, 
except for the purpose of determining the amount of, and the extent to 
which the built-in loss is limited by, the SRLY limitation for the year 
in which it is recognized. Solely for such purpose, a built-in loss is 
treated as a hypothetical net operating loss carryover or net capital 
loss carryover arising in a SRLY, instead of as a deduction or loss in 
the year recognized. To the extent that a built-in loss is allowed as a 
deduction under this section in the year it is recognized, it offsets 
any consolidated taxable income for the year before any loss carryovers 
or carrybacks are allowed as a deduction. To the extent not so allowed, 
it is treated as a separate net operating loss or net capital loss 
carryover or carryback arising in the year of recognition and, under 
Sec.  1.1502-21(c) or 1.1502-22(c), the year of recognition is treated 
as a SRLY.
    (b) Built-in losses--(1) Defined. If a corporation has a net 
unrealized built-in loss under section 382(h)(3) (as modified by this 
section) on the day it becomes a member of the group (whether or not the 
group is a consolidated group), its deductions and losses are built-in 
losses under this section to the extent they are treated as recognized 
built-in losses under section 382(h)(2)(B) (as modified by this 
section). This paragraph (b) generally applies separately with respect 
to each member, but see paragraph (c) of this section for circumstances 
in which it is applied on a subgroup basis.
    (2) Operating rules. Solely for purposes of applying paragraph 
(b)(1) of this section, the principles of Sec.  1.1502-94(c) apply with 
appropriate adjustments, including the following:
    (i) Stock acquisition. A corporation is treated as having an 
ownership change under section 382(g) on the day the corporation becomes 
a member of a group, and no other events (e.g., a subsequent ownership 
change under section 382(g) while it is a member) are treated as causing 
an ownership change.
    (ii) Asset acquisition. In the case of an asset acquisition by a 
group, the assets and liabilities acquired directly from the same 
transferor (whether corporate or non-corporate, foreign or domestic) 
pursuant to the same plan are treated as the assets and liabilities of a 
corporation that becomes a member of the group (and has an ownership 
change) on the date of the acquisition.
    (iii) Recognized built-in gain or loss. A loss that is included in 
the determination of net unrealized built-in gain or loss and that is 
recognized but disallowed or deferred (e.g., under Sec.  1.337(d)-2, 
Sec.  1.1502-35, Sec.  1.1502-36, or section 267) is not treated as a 
built-in loss unless and until the loss would be allowed during the 
recognition period without regard to the application of this section. 
Section 382(h)(1)(B)(ii) does not apply to the extent it limits the 
amount of recognized built-in loss that may be treated as a pre-change

[[Page 659]]

loss to the amount of the net unrealized built-in loss.
    (c) Built-in losses of subgroups--(1) In general. In the case of a 
subgroup, the principles of paragraph (b) of this section apply to the 
subgroup, and not separately to its members. Thus, the net unrealized 
built-in loss and recognized built-in loss for purposes of paragraph (b) 
of this section are based on the aggregate amounts for each member of 
the subgroup.
    (2) Members of subgroups. A subgroup is composed of those members 
that have been continuously affiliated with each other for the 60 
consecutive month period ending immediately before they become members 
of the group in which the loss is recognized. A member remains a member 
of the subgroup until it ceases to be affiliated with the loss member. 
For this purpose, the principles of Sec.  1.1502-21(c)(2)(iv) through 
(vi) apply with appropriate adjustments.
    (3) Coordination of 60 month affiliation requirement with the 
overlap rule. If one or more corporations become members of a group and 
are included in the determination of a net unrealized built-in loss that 
is subject to the overlap rule described in paragraph (g)(1) of this 
section, then for purposes of paragraph (c)(2) of this section, such 
corporations that become members of the group are treated as having been 
affiliated for 60 consecutive months with the common parent of the group 
and are also treated as having been affiliated with any other members 
who have been affiliated or are treated as having been affiliated with 
the common parent at such time. The corporations are treated as having 
been affiliated with such other members for the same period of time that 
those members have been affiliated or are treated as having been 
affiliated with the common parent. If two or more corporations become 
members of the group at the same time, but this paragraph (c)(3) does 
not apply to every such corporation, then immediately after the 
corporations become members of the group, and solely for purposes of 
paragraph (c)(2) of this section, the corporations to which this 
paragraph (c)(3) applies are treated as having not been previously 
affiliated with the corporations to which this paragraph (c)(3) does not 
apply. If the common parent has become the common parent of an existing 
group within the previous five year period in a transaction described in 
Sec.  1.1502-75(d)(2)(ii) or (3), the principles of Sec. Sec.  1.1502-
91(g)(6) and 1.1502-96(a)(2)(iii) shall apply.
    (4) Built-in amounts. Solely for purposes of determining whether the 
subgroup has a net unrealized built-in loss or whether it has a 
recognized built-in loss, the principles of Sec.  1.1502-91(g) and (h) 
apply with appropriate adjustments.
    (d) Examples. For purposes of the examples in this section, unless 
otherwise stated, all groups file consolidated returns, all corporations 
have calendar taxable years, the facts set forth the only corporate 
activity, value means fair market value and the adjusted basis of each 
asset equals its value, all transactions are with unrelated persons, and 
the application of any limitation or threshold under section 382 is 
disregarded. The principles of this section are illustrated by the 
following examples:

    Example 1. Determination of recognized built-in loss. (i) Individual 
A owns all of the stock of P and T. T has two depreciable assets. Asset 
1 has an unrealized loss of $55 (basis $75, value $20), and asset 2 has 
an unrealized gain of $20 (basis $30, value $50). P acquires all the 
stock of T from Individual A during Year 1, and T becomes a member of 
the P group. P's acquisition of T is not an ownership change as defined 
by section 382(g). Paragraph (g) of this section does not apply because 
there is not an overlap of the application of the rules contained in 
paragraph (a) of this section and section 382.
    (ii) Under paragraph (b)(2)(i) of this section, and solely for 
purposes of applying paragraph (b)(1) of this section, T is treated as 
having an ownership change under section 382(g) on becoming a member of 
the P group. Under paragraph (b)(1) of this section, none of T's $55 of 
unrealized loss is treated as a built-in loss unless T has a net 
unrealized built-in loss under section 382(h)(3) on becoming a member of 
the P group.
    (iii) Under section 382(h)(3)(A), T has a $35 net unrealized built-
in loss on becoming a member of the P group (($55) + $20 = ($35)). 
Assume that this amount exceeds the threshold requirement in section 
382(h)(3)(B). Under section 382(h)(2)(B), the entire amount of T's $55 
unrealized loss is treated as a built-in loss to the extent it is 
recognized during the 5-year recognition period described in section 
382(h)(7). Under paragraph (b)(2)(iii) of this section, the restriction

[[Page 660]]

under section 382(h)(1)(B)(ii), which limits the amount of recognized 
built-in loss that is treated as pre-change loss to the amount of the 
net unrealized built-in loss, is inapplicable for this purpose. 
Consequently, the entire $55 of unrealized loss (not just the $35 net 
unrealized loss) is treated under paragraph (b)(1) of this section as a 
built-in loss to the extent it is recognized within 5 years of T's 
becoming a member of the P group. Under paragraph (a) of this section, a 
built-in loss is subject to the SRLY limitation under Sec.  1.1502-
21(c)(1).
    (iv) Under paragraph (b)(2)(ii) of this section, the built-in loss 
would similarly be subject to a SRLY limitation under Sec.  1.1502-
21(c)(1) if T transferred all of its assets and liabilities to a 
subsidiary of the P group in a single transaction described in section 
351. To the extent the built-in loss is recognized within 5 years of T's 
transfer, all of the items contributed by the acquiring subsidiary to 
consolidated taxable income (and not just the items attributable to the 
assets and liabilities transferred by T) are included for purposes of 
determining the SRLY limitation under Sec.  1.1502-21(c)(1).
    Example 2. Actual application of section 382 not relevant. (i) 
Individual A owns all of the stock of P, and Individual B owns all of 
the stock of T. T has two depreciable assets. Asset 1 has an unrealized 
loss of $25 (basis $75, value $50), and asset 2 has an unrealized gain 
of $20 (basis $30, value $50). P buys 55 percent of the stock of T in 
January of Year 1, resulting in an ownership change of T under section 
382(g). During March of Year 2, P buys the 45 percent balance of the T 
stock, and T becomes a member of the P group.
    (ii) Although T has an ownership change for purposes of section 382 
in Year 1 and not Year 2, T's joining the P group in Year 2 is treated 
as an ownership change under section 382(g) solely for purposes of this 
section. Consequently, for purposes of this section, whether T has a net 
unrealized built-in loss under section 382(h)(3) is determined as if the 
day T joined the P group were a change date.
    Example 3. Determination of a recognized built-in loss of a 
subgroup. (i) Individual A owns all of the stock of P, S, and M. P and M 
are each the common parent of a consolidated group. During Year 1, P 
acquires all of the stock of S from Individual A, and S becomes a member 
of the P group. P's acquisition of S is not an ownership change as 
defined by section 382(g). At the beginning of Year 7, M acquires all of 
the stock of P from Individual A, and P and S become members of the M 
group. M's acquisitions of P and S are also not ownership changes as 
defined by section 382(g). At the time of M's acquisition of the P 
stock, P has (disregarding the stock of S) a $10 net unrealized built-in 
gain (two depreciable assets, asset 1 with a basis of $35 and a value of 
$55, and asset 2 with a basis of $55 and a value of $45), and S has a 
$75 net unrealized built-in loss (two depreciable assets, asset 3 with a 
basis of $95 and a value of $10, and asset 4 with a basis of $10 and a 
value of $20).
    (ii) Under paragraph (c) of this section, P and S compose a subgroup 
on becoming members of the M group because P and S were continuously 
affiliated for the 60 month period ending immediately before they became 
members of the M group. Consequently, paragraph (b) of this section does 
not apply to P and S separately. Instead, their separately computed 
unrealized gains and losses are aggregated for purposes of determining 
whether, and the extent to which, any unrealized loss is treated as 
built-in loss under this section and is subject to the SRLY limitation 
under Sec.  1.1502-21(c).
    (iii) Under paragraph (c) of this section, the P subgroup has a net 
unrealized built-in loss on the day P and S become members of the M 
group, determined by treating the day they become members as a change 
date. The net unrealized built-in loss is the aggregate of P's net 
unrealized built-in gain of $10 and S's net unrealized built-in loss of 
$75, or an aggregate net unrealized built-in loss of $65. (The stock of 
S owned by P is disregarded for purposes of determining the net 
unrealized built-in loss. However, any loss allowed on the sale of the 
stock within the recognition period is taken into account in determining 
recognized loss.) Assume that the $65 net unrealized built-in loss 
exceeds the threshold requirement under section 382(h)(3)(B).
    (iv) Under paragraphs (b)(1), (b)(2)(iii), and (c) of this section, 
a loss recognized during the 5-year recognition period on an asset of P 
or S held on the day that P and S became members of the M group is a 
built-in loss except to the extent the group establishes that such loss 
exceeds the amount by which the adjusted basis of such asset on the day 
the member became a member exceeded the fair market value of such asset 
on that same day. If P sells asset 2 for $45 in Year 7 and recognizes a 
$10 loss, the entire $10 loss is treated as a built-in loss under 
paragraphs (b)(2)(iii) and (c) of this section. If S sells asset 3 for 
$10 in Year 7 and recognizes an $85 loss, the entire $85 loss is treated 
as a built-in loss under paragraphs (b)(2)(iii) and (c) of this section 
(not just the $55 balance of the P subgroup's $65 net unrealized built-
in loss).
    (v) The determination of whether P and S constitute a SRLY subgroup 
for purposes of loss carryovers and carrybacks, and the extent to which 
built-in losses are not allowed under the SRLY limitation, is made under 
Sec.  1.1502-21(c).
    Example 4. Computation of SRLY limitation. (i) Individual A owns all 
of the stock of P, the common parent of a consolidated group. During 
Year 1, Individual A forms T by contributing $300, and T sustains a $100 
net operating loss. During Year 2, T's assets decline in value to $100. 
At the beginning of Year 3,

[[Page 661]]

P acquires all the stock of T from Individual A, and T becomes a member 
of the P group with a net unrealized built-in loss of $100. P's 
acquisition of T is not an ownership change as defined by section 
382(g). Assume that $100 exceeds the threshold requirements of section 
382(h)(3)(B). During Year 3, T recognizes its unrealized built-in loss 
as a $100 ordinary loss. The members of the P group contribute the 
following net income to the consolidated taxable income of the P group 
(disregarding T's recognized built-in loss and any consolidated net 
operating loss deduction under Sec.  1.1502-21) for Years 3 and 4:

------------------------------------------------------------------------
                                                Year 3   Year 4   Total
------------------------------------------------------------------------
P group (without T)                               $100     $100     $200
T............................................       60       40      100
CTI..........................................      160      140      300
------------------------------------------------------------------------

    (ii) Under paragraph (b) of this section, T's $100 ordinary loss in 
Year 3 (not taken into account in the consolidated taxable income 
computations above) is a built-in loss. Under paragraph (a) of this 
section, the built-in loss is treated as a net operating loss carryover 
for purposes of determining the SRLY limitation under Sec.  1.1502-
21(c).
    (iii) For Year 3, Sec.  1.1502-21(c) limits T's $100 built-in loss 
and $100 net operating loss carryover from Year 1 to the aggregate of 
the P group's consolidated taxable income through Year 3, determined by 
reference to only T's items. For this purpose, consolidated taxable 
income is determined without regard to any consolidated net operating 
loss deductions under Sec.  1.1502-21(a).
    (iv) The P group's consolidated taxable income through Year 3 is $60 
when determined by reference to only T's items. Under Sec.  1.1502-
21(c), the SRLY limitation for Year 3 is therefore $60.
    (v) Under paragraph (a) of this section, the $100 built-in loss is 
treated as a current deduction for all purposes other than determination 
of the SRLY limitation under Sec.  1.1502-21(c). Consequently, a 
deduction for the built-in loss is allowed in Year 3 before T's loss 
carryover from Year 1 is allowed, but only to the extent of the $60 SRLY 
limitation. None of T's Year 1 loss carryover is allowed because the 
built-in loss ($100) exceeds the SRLY limitation for Year 3.
    (vi) The $40 balance of the built-in loss that is not allowed in 
Year 3 because of the SRLY limitation is treated as a $40 net operating 
loss arising in Year 3 that is carried to other years in accordance with 
the rules of Sec.  1.1502-21(b). The $40 net operating loss is treated 
under paragraph (a) of this section and Sec.  1.1502-21(c)(1)(ii) as a 
loss carryover or carryback from Year 3 that arises in a SRLY, and is 
subject to the rules of Sec.  1.1502-21 (including Sec.  1.1502-21(c)) 
rather than this section. See also Sec.  1.1502-21(c)(1)(iii) Example 4.
    (vii) The facts are the same as in paragraphs (i) through (vi) of 
this Example 4, except that T has an additional built-in loss when it 
joins the P group which is recognized in Year 4. For purposes of 
determining the SRLY limitation for this additional loss in Year 4 (or 
any subsequent year), the $60 of built-in loss allowed as a deduction in 
Year 3 is treated under paragraph (a) of this section as a deduction in 
Year 3 that reduces the P group's consolidated taxable income when 
determined by reference to only T's items.
    Example 5. Built-in loss exceeding consolidated taxable income in 
the year recognized. (i) Individual A owns all of the stock of P and T. 
During Year 1, P acquires all the stock of T from Individual A, and T 
becomes a member of the P group. P's acquisition of T was not an 
ownership change as defined by section 382(g). At the time of 
acquisition, T has a noncapital asset with an unrealized loss of $45 
(basis $100, value $55), which exceeds the threshold requirements of 
section 382(h)(3)(B). During Year 2, T sells its asset for $55 and 
recognizes the unrealized built-in loss. The P group has $10 of 
consolidated taxable income in Year 2, computed by disregarding T's 
recognition of the $45 built-in loss and the consolidated net operating 
loss deduction, while the consolidated taxable income would be $25 if 
determined by reference to only T's items (other than the $45 loss).
    (ii) T's $45 loss is recognized in Year 2 and, under paragraph (b) 
of this section, constitutes a built-in loss. Under paragraph (a) of 
this section and Sec.  1.1502-21(c)(1)(ii), the loss is treated as a net 
operating loss carryover to Year 2 for purposes of applying the SRLY 
limitation under Sec.  1.1502-21(c).
    (iii) For Year 2, T's SRLY limitation is the aggregate of the P 
group's consolidated taxable income through Year 2 determined by 
reference to only T's items. For this purpose, consolidated taxable 
income is determined by disregarding any built-in loss that is treated 
as a net operating loss carryover, and any consolidated net operating 
loss deductions under Sec.  1.1502-21(a). Consolidated taxable income so 
determined is $25.
    (iv) Under Sec.  1.1502-21(c), $25 of the $45 built-in loss could be 
deducted in Year 2. Because the P group has only $10 of consolidated 
taxable income (determined without regard to the $45), the $25 loss 
creates a consolidated net operating loss of $15. This loss is carried 
back or forward under the rules of Sec.  1.1502-21(b) and absorbed under 
the rules of Sec.  1.1502-21(a). This loss is not treated as arising in 
a SRLY (see Sec.  1.1502-21(c)(1)(ii)) and therefore is not subject to 
the SRLY limitation under Sec.  1.1502-21(c) in any consolidated return 
year of the group to which it is carried. The remaining $20 is treated 
as a loss carryover arising in a SRLY and is subject to the limitation 
of Sec.  1.1502-21(c) in the year to which it is carried.


[[Page 662]]


    (e) Predecessors and successors. For purposes of this section, any 
reference to a corporation or member includes, as the context may 
require, a reference to a successor or predecessor, as defined in Sec.  
1.1502-1(f)(4).
    (f) Built-in losses recognized by common parent of group--(1) 
General rule. Paragraph (a) of this section does not apply to any loss 
recognized by the group on an asset held by the common parent on the 
date the group is formed. Following an acquisition described in Sec.  
1.1502-75(d)(2) or (3), references to the common parent are to the 
corporation that was the common parent immediately before the 
acquisition.
    (2) Anti-avoidance rule. If a corporation that becomes a common 
parent of a group acquires assets with a net unrealized built-in loss in 
excess of the threshold requirement of section 382(h)(3)(B) (and thereby 
increases its net unrealized built-in loss or decreases its net 
unrealized built-in gain) prior to, and in anticipation of, the 
formation of the group, paragraph (f)(1) of this section does not apply.
    (g) Overlap with section 382--(1) General rule. The limitations 
provided in Sec. Sec.  1.1502-21(c) and 1.1502-22(c) do not apply to 
recognized built-in losses or to loss carryovers or carrybacks 
attributable to recognized built-in losses when the application of 
paragraph (a) of this section results in an overlap with the application 
of section 382.
    (2) Definitions--(i) Generally. For purposes of this paragraph (g), 
the definitions and nomenclature contained in section 382, the 
regulations thereunder, and Sec. Sec.  1.1502-90 through 1.1502-99 
apply.
    (ii) Overlap--(A) An overlap of the application of paragraph (a) of 
this section and the application of section 382 with respect to built-in 
losses occurs if a corporation becomes a member of a consolidated group 
(the SRLY event) within six months of the change date of an ownership 
change giving rise to a section 382(a) limitation that would apply with 
respect to the corporation's recognized built-in losses (the section 382 
event). Except as provided in paragraph (g)(3) of this section, 
application of the overlap rule does not require that the size and 
composition of the corporation's net unrealized built-in loss is the 
same on the date of the section 382 event and the SRLY event.
    (B) For special rules in the event that there is a SRLY subgroup 
and/or a loss subgroup as defined in Sec.  1.1502-91(d)(2) with respect 
to built-in losses, see paragraph (g)(4) of this section.
    (3) Operating rules--(i) Section 382 event before SRLY event. If a 
SRLY event occurs on the same date as a section 382 event or within the 
six month period beginning on the date of the section 382 event, 
paragraph (g)(1) of this section applies beginning with the tax year 
that includes the SRLY event. Paragraph (g)(1) of this section does not 
apply, however, if a corporation that would otherwise be subject to the 
overlap rule acquires assets from a person other than a member of the 
group with a net unrealized built-in loss in excess of the threshold 
requirement of section 382(h)(3)(B) (and thereby increases its net 
unrealized built-in loss) after the section 382 event, and before the 
SRLY event.
    (ii) SRLY event before section 382 event. If a section 382 event 
occurs within the period beginning the day after the SRLY event and 
ending six months after the SRLY event, paragraph (g)(1) of this section 
applies starting with the first tax year that begins after the section 
382 event. However, paragraph (g)(1) of this section does not apply at 
any time if a corporation that otherwise would be subject to paragraph 
(g)(1) of this section transfers assets with an unrealized built-in loss 
to another member of the group after the SRLY event, but before the 
section 382 event, unless the corporation recognizes the built-in loss 
upon the transfer.
    (4) Subgroup rules. In general, in the case of built-in losses for 
which there is a SRLY subgroup and the corporations joining the group at 
the time of the SRLY event also constitute a loss subgroup (as defined 
in Sec.  1.1502-91(d)(2)), the principles of this paragraph (g) apply to 
the SRLY subgroup, and not separately to its members. However, paragraph 
(g)(1) of this section applies with respect to built-in losses only if--
    (i) All members of the SRLY subgroup with respect to those built-in

[[Page 663]]

losses are also included in a loss subgroup (as defined in Sec.  1.1502-
91(d)(2)); and
    (ii) All members of a loss subgroup (as defined in Sec.  1.1502-
91(d)(2)) are also members of a SRLY subgroup with respect to those 
built-in losses.
    (5) Asset acquisitions. Notwithstanding the application of this 
paragraph (g), paragraph (a) of this section applies to asset 
acquisitions by the corporation that occurs after the latter of the SRLY 
event and the section 382 event. See, paragraph (b)(2)(ii) of this 
section.
    (6) Examples. The principles of this paragraph (g) are illustrated 
by the following examples:

    Example 1. Determination of subgroup. (i) Individual A owns all of 
the stock of P, P1, and S. In Year 1, P acquires all of the stock of P1, 
and they file a consolidated return. In Year 3, P acquires all of the 
stock of S, and S joins the P group. Individual B, unrelated to 
Individual A, owns all of the stock of M and K, each the common parent 
of a consolidated group. Individual C, unrelated to either Individual A 
or Individual B, owns all of the stock of T.
    (ii) At the beginning of Year 7, M acquires all of the stock of P 
from Individual A, and, as a result, P, P1, and S become members of the 
M group. At the time of M's acquisition of the P stock, P has a $15 net 
unrealized built-in loss (disregarding the stock of P1), P1 has a net 
unrealized built-in gain of $10, and S has a net unrealized built-in 
gain of $5.
    (iii) During Year 8, M acquires all of the stock of T, and T joins 
the M group. At the time of M's acquisition of the T stock, T had an 
unrealized built-in loss of $15. At the beginning of Year 9, K acquires 
all of the stock of M from Individual B, and the members of the M 
consolidated group including P, P1, S, and T become members of the K 
group. At the time of K's acquisition of the M stock, M has 
(disregarding the stock of P and T) a $15 net unrealized built-in loss, 
P has a $20 net unrealized built-in loss (disregarding the stock of P1), 
P1 has a net unrealized built-in gain of $5, S has a net unrealized 
built-in loss of $35, and T has a $15 net unrealized built-in loss.
    (iv) M's acquisition of P in Year 7 results in P, P1, and S becoming 
members of the M group (the SRLY event). Under paragraph (c) of this 
section, P and P1 compose a SRLY built-in loss subgroup because they 
have been affiliated for the 60 consecutive month period immediately 
preceding joining the M group. S is not a member of the subgroup because 
on becoming a member of the M group it had not been continuously 
affiliated with P and P1 for the 60 month period ending immediately 
before it became a member of the M group. Consequently, Sec.  1.1502-15 
applies to S separately from the P and P1 subgroup.
    (v) Assuming that the $5 net unrealized built-in loss of the P/P1 
subgroup exceeds the threshold requirement under section 382(h)(3)(B), 
M's acquisition of P resulted in an ownership change of P and P1 within 
the meaning of section 382(g) that subjects P and P1 to a limitation 
under section 382(a) (the section 382 event). Because, with respect to P 
and P1, the SRLY event and the change date of the section 382 event 
occur on the same date and because the loss subgroup and SRLY subgroup 
are coextensive, there is an overlap of the application of the SRLY 
rules and the application of section 382.
    (vi) S was not a loss corporation because it did not have a net 
operating loss carryover, or a net unrealized built-in loss, and 
therefore, M's acquisition of P did not result in an ownership change of 
S within the meaning of section 382(g). S, therefore is not subject to 
the overlap rule of paragraph (g) of this section.
    (vii) M's acquisition of T resulted in T becoming a member of the M 
group (the SRLY event). Assuming that T's $15 net unrealized built-in 
loss exceeds the threshold requirement under section 382(h)(3)(B), M's 
acquisition of T also resulted in an ownership change of T within the 
meaning of section 382(g) that subjects T to a limitation under section 
382(a) (the section 382 event). Because, with respect to T, the SRLY 
event and the change date of the section 382 event occur on the same 
date, there is an overlap of the application of the SRLY rules and the 
application of section 382 within the meaning of paragraph (g) of this 
section.
    (viii) K's acquisition of M results in the members of the M 
consolidated group, including T, P, P1, and S, becoming members of the K 
group (the SRLY event). Because T, P, and P1 were each included in the 
determination of a net unrealized built-in loss that was subject to the 
overlap rule described in paragraph (g)(1) of this section when they 
each became members of the M group, they are deemed under paragraph 
(c)(3) of this section to have been continuously affiliated with M for 
the 60 month period ending immediately before becoming a member of the M 
group, notwithstanding their actual affiliation history. As a result, M, 
T, P, and P1 compose a SRLY built-in loss subgroup under paragraph 
(c)(2) of this section. K's acquisition of M is not subject to paragraph 
(g) of this section because it does not result in a section 382 event.
    (ix) S, however, is not a member of the subgroup under paragraph 
(c)(2) of this section. Because S was not included in the determination 
of a net unrealized built-in loss that was subject to the overlap rule 
described in paragraph (g)(1) of this section when it joined the M 
group, S is treated as becoming an affiliate of M on the date it

[[Page 664]]

joined the M group. Furthermore, under paragraph (c)(3) of this section, 
S is deemed to have begun its affiliation with P and P1 on the date it 
joined the M group. Consequently, Sec.  1.1502-15 applies to S 
separately to the extent its built-in loss is recognized within the 
recognition period.
    Example 2. Post-overlap acquisition of assets. (i) Individual A owns 
all of the stock of P, the common parent of a consolidated group. B, an 
individual unrelated to Individual A, owns all of the stock of T. T has 
two depreciable assets. Asset 1 has an unrealized built-in loss of $25 
(basis $75, value $50), and asset 2 has an unrealized built-in gain of 
$20 (basis $30, value $50). During Year 3, P buys all of the stock of T 
from Individual B. On January 1, Year 4, P contributes $80 cash and 
Individual A contributes asset 3, a depreciable asset, with a net 
unrealized built-in loss of $45 (basis $65, value $20), in exchange for 
T stock in a transaction that is described in section 351.
    (ii) P's acquisition of T results in T becoming a member of the P 
group (the SRLY event) and also results in an ownership change of T, 
within the meaning of section 382(g), that gives rise to a limitation 
under section 382(a) (the section 382 event).
    (iii) Because the SRLY event and the change date of the section 382 
event occur on the same date, there is an overlap of the application of 
the SRLY rules and the application of section 382. Consequently, under 
paragraph (g) of this section, the limitation under paragraph (a) of 
this section does not apply to T's net unrealized built-in loss when it 
joined the P group.
    (iv) Individual A's Year 4 contribution of a depreciable asset 
occurred after T was a member of the P group. Assuming that the amount 
of the net unrealized built-in loss exceeds the threshold requirement of 
section 382(h)(3)(B), the sale of asset 3 within the recognition period 
is subject to the SRLY limitation of paragraphs (a) and (b)(2)(ii) of 
this section.
    Example 3. Overlap rule. (i) Individual A owns all of the stock of 
P, the common parent of a consolidated group. B, an individual unrelated 
to Individual A, owns all of the stock of T. T has two depreciable 
assets. Asset 1 has an unrealized loss of $55 (basis $75, value $20), 
and asset 2 has an unrealized gain of $30 (basis $30, value $60). On 
February 28 of Year 2, P purchases 55% of T from Individual B. On June 
30, of Year 2, P purchases an additional 35% of T from Individual B.
    (ii) The February 28 purchase of 55% of T is a section 382 event 
because it results in an ownership change of T that gives rise to a 
section 382(a) limitation. The June 30 purchase of 35% of T results in T 
becoming a member of the P group and is therefore a SRLY event.
    (iii) Because the SRLY event occurred within six months of the 
change date of the section 382 event, there is an overlap of the 
application of the SRLY rules and the application of section 382, and 
paragraph (a) of this section does not apply. Therefore, the SRLY 
limitation does not apply to any of the $55 loss in asset 1 recognized 
by T after T joined the P group. See Sec.  1.1502-94 for rules relating 
to the application of section 382 with respect to T's $25 unrealized 
built-in loss.
    Example 4. Overlap rule-Fluctuation in value. (i) The facts are the 
same as in Example 3, except that by June 30, of Year 2, asset 1 had 
declined in value by a further $10. Thus asset 1 had an unrealized loss 
of $65 (basis $75, value $10), and asset 2 had an unrealized gain of $30 
(basis $30, value $60).
    (ii) Because paragraph (a) of this section does not apply, the 
further decrease in asset 1's value is disregarded. Consequently, the 
results are the same as in Example 3.

    (h) Effective date--(1) In general. This section generally applies 
to built-in losses recognized in taxable years for which the due date 
(without extensions) of the consolidated return is after June 25, 1999. 
However--
    (i) In the event that paragraphs (f)(1) and (g)(1) of this section 
do not apply to a particular built-in loss in the current group, then 
solely for purposes of applying paragraph (a) of this section to 
determine a limitation with respect to that built-in loss and with 
respect to which the SRLY register (consolidated taxable income 
determined by reference to only the member's (or subgroup's) items of 
income, gain, deduction, or loss) began in a taxable year for which the 
due date of the return was on or before June 25, 1999, paragraph (c)(3) 
of this section shall not apply; and
    (ii) For purposes of paragraph (g) of this section, only an 
ownership change to which section 382(a) as amended by the Tax Reform 
Act of 1986 applies shall constitute a section 382 event.
    (2) Prior periods. For certain taxable years ending on or before 
June 25, 1999, see Sec.  1.1502-15T in effect prior to June 25, 1999, as 
contained in 26 CFR part 1 revised April 1, 1999, as applicable.

[T.D. 8823, 64 FR 36101, July 2, 1999; 64 FR 41784, Aug. 2, 1999, as 
amended by T.D. 9048, 68 FR 12290, Mar. 14, 2003; T.D. 9187, 70 FR 
10326, Mar. 3, 2005; T.D. 9254, 71 FR 13018, Mar. 14, 2006; T.D. 9424, 
73 FR 53986, Sept. 17, 2008]

[[Page 665]]



Sec.  1.1502-16  Mine exploration expenditures.

    (a) Section 617--(1) In general. If the aggregate amount of the 
expenditures to which section 617(a) applies, paid or incurred with 
respect to mines or deposits located outside the United States (as 
defined in section 638 and the regulations thereunder), does not exceed:
    (i) $400,000 minus
    (ii) All amounts deducted or deferred during the taxable year and 
all preceding taxable years under section 617 or section 615 of the 
Internal Revenue Code of 1954 and section 23(ff) of the Internal Revenue 
Code of 1939 by corporations which are members of the group during the 
taxable year (and individuals or corporations which have transferred any 
mineral property to any such member within the meaning of section 
617(g)(2)(B)) for taxable years ending after December 31, 1950 and prior 
to the taxable year, then the deduction under section 617 with respect 
to such foreign expenditures and paragraph (c) of Sec.  1.1502-12 for 
each member shall be no greater than an allocable portion of such amount 
hereinafter referred to as the ``consolidated foreign exploration 
limitation.'' Such allocable portion shall be determined under 
subparagraph (2) of this paragraph. If the amount of such expenditures 
exceeds the consolidated foreign exploration limitation, no deduction 
shall be allowed with respect to such excess.
    (2) Allocable portion of limitation. A member's allocable portion of 
the consolidated foreign exploration limitation for a consolidated 
return year shall be:
    (i) The amount allocated by the common parent pursuant to an 
allocation plan adopted by the consolidated group, but in no event shall 
a member be allocated more than the amount it could have deducted had it 
filed a separate return. Such allocation plan must include a statement 
which also contains the total foreign exploration expenditures of each 
member which could have been deducted under section 617 if the member 
had filed a separate return. Such plan must be attached to a 
consolidated return filed on or before the due date of such return 
(including extensions of time), and may not be changed after such date, 
or
    (ii) If no plan is filed in accordance with subdivision (i) of this 
subparagraph, then the portion of the consolidated foreign exploration 
limitation allocable to each member incurring such expenditures is an 
amount equal to such limitation multiplied by a fraction, the numerator 
of which is the amount of foreign exploration expenditures which could 
have been deducted under section 617 by such member had it filed a 
separate return and the denominator of which is the aggregate of such 
amounts for all members of the group.
    (b) Section 615--(1) In general. If the aggregate amount of the 
expenditures, to which section 615(a) applies, which are paid or 
incurred by the members of the group during any consolidated return year 
exceeds the lesser of:
    (i) $100,000, or
    (ii) $400,000 minus all such expenditures deducted (or deferred) by 
corporations which are members of the group during the taxable year (and 
individuals or corporations which have transferred any mineral property 
to any such member within the meaning of section 615(c)(2)(B)) for 
taxable years ending after December 31, 1950, and prior to the taxable 
year, then the deduction (or amount deferrable) under section 615 and 
paragraph (c) of Sec.  1.1502-12 for each member shall be no greater 
than an allocable portion of such lesser amount, hereinafter referred to 
as the ``consolidated exploration limitation''. Such allocable portion 
shall be determined under subparagraph (2) of this paragraph.
    (2) Allocable portion of limitation. A member's allocable portion of 
the consolidated exploration limitation for a consolidated return year 
shall be:
    (i) The amount allocated by the common parent pursuant to an 
allocation plan adopted by the consolidated group, but in no event shall 
a member be allocated more than the amount it could have deducted (or 
deferred) had it filed a separate return. Such allocation plan must 
include a statement which also contains the total exploration 
expenditures of each member for the taxable year, and the expenditures 
of each member which could have been

[[Page 666]]

deducted (or deferred) under section 615 if the member had filed a 
separate return. Such plan must be attached to a consolidated return 
filed on or before the due date of such return (including extensions of 
time), and may not be changed after such date, or
    (ii) If no plan is filed in accordance with subdivision (i) of this 
subparagraph, then the portion of the consolidated exploration 
limitation allocable to each member incurring such expenditures is an 
amount equal to such limitation multiplied by a fraction, the numerator 
of which is the amount which could have been deducted (or deferred) 
under section 615 by such member had it filed a separate return and the 
denominator of which is the aggregate of such amounts for all members of 
the group.
    (c) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example 1. Corporation X and its wholly owned subsidiaries, 
corporations Y and Z, file a consolidated return for the calendar year 
1971. None of the corporations have incurred exploration expenditures 
described in section 617 in previous years. During 1971, X incurred 
foreign exploration expenditures of $30,000, Y of $20,000, and Z of 
$40,000. The amount of foreign exploration expenditures deductible under 
section 617 for purposes of computing separate taxable income under 
Sec.  1.1502-12 will be the amount actually expended by each 
corporation.
    Example 2. Assume the same facts as in example (1) except that prior 
to 1971, X, Y, and Z had deducted (or deferred) under section 615 and 
617 a total of $300,000 of exploration expenditures. During 1971, with 
respect to deposits located outside the United States X incurred 
exploration expenditures of $25,000, Y of $75,000, and Z of $125,000. 
The consolidated exploration limitation under paragraph (a) of this 
section with respect to the foreign deposits (there is no limitation 
with respect to the domestic expenditures) is $100,000. X may allocate 
the $100,000 in any manner among the three members, except that X may 
not be allocated more than $25,000 nor Y more than $75,000, the amount 
actually expended by X and Y and which they could have deducted had they 
each filed a separate return. If the allocation is not made in 
accordance with paragraph (a)(2)(i) of this section, the $100,000 
limitation will be allocated under paragraph (a)(2)(ii) of this section 
as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                                       Allocable
                      Corporation                         Expenditure    Fraction      Limitation       portion
----------------------------------------------------------------------------------------------------------------
                                                        ..............      25,000
X.....................................................         $25,000  ----------       $100,000  =     $12,500
                                                                                    x
                                                        ..............     200,000
 
                                                        ..............      75,000
Y.....................................................         $75,000  ----------       $100,000  =     $37,500
                                                                                    x
                                                        ..............     200,000
 
                                                        ..............     100,000
Z.....................................................        $125,000  ----------       $100,000  =     $50,000
                                                                                    x
                                                        ..............     200,000
----------------------------------------------------------------------------------------------------------------


The denominator of $200,000 was calculated as follows:

    X = $25,000
    Y = $75,000
    Z = $100,000 (maximum amount allowed if filed separately)
Total $200,000.
    Example 3. Assume the same facts as in example (2) and that on 
January 1, 1971, X acquired all of the stock of corporation T which 
prior to its taxable year beginning January 1, 1971, had previously 
deducted (or deferred) $310,000 of exploration expenditures. Assume 
further that in 1971 X incurred $25,000 of foreign exploration 
expenditures, Y $50,000, T $50,000, and Z none. A consolidated return is 
filed for 1971. None of the expenditures may be deducted under section 
617 since the consolidated exploration limitation is zero. The 
limitation is zero since the aggregate amount of previously deducted (or 
deferred) exploration expenditures by the members of the group exceeds 
$400,000. (The total of such expenditures is $410,000, of which $310,000 
is attributable to T and, assuming the allocation of the limitation in 
example (2) is made under paragraph (a)(2)(ii) of this section, $12,500 
is attributable to X, $37,500 to Y, and $50,000 to Z.
    Example 4. Assume the same facts as in example (3) except that on 
December 31, 1971, X sold all of the stock in Z to an unrelated party. 
The consolidated exploration limitation for 1972 will be $40,000, 
computed by subtracting from $400,000, the aggregate amount of 
previously deducted (or deferred) exploration expenditures incurred by 
the members of the group prior to 1972. (The total of such expenditures 
is $360,000, of which $12,500 is attributable to X, $37,500 to Y and 
$310,000 to T.) Amounts previously deducted (or deferred) by Z are not 
taken into account since

[[Page 667]]

it was not a member of the group at any time during 1972. Amounts 
previously deducted (or deferred) by Z shall be taken into account by it 
for subsequent separate return years.

[T.D. 7192, 37 FR 12949, June 30, 1972]



Sec.  1.1502-17  Methods of accounting.

    (a) General rule. The method of accounting to be used by each member 
of the group shall be determined in accordance with the provisions of 
section 446 as if such member filed a separate return. For treatment of 
depreciable property after a transfer within the group, see paragraph 
(g) of Sec.  1.1502-12.
    (b) Adjustments required if method of accounting changes--(1) 
General rule. If a member of a group changes its method of accounting 
for a consolidated return year, the terms and conditions prescribed by 
the Commissioner under section 446(e), including section 481(a) where 
applicable, shall apply to the member. If the requirements of section 
481(b) are met because applicable adjustments under section 481(a) are 
substantial, the increase in tax for any prior year shall be computed 
upon the basis of a consolidated return or a separate return, whichever 
was filed for such prior year.
    (2) Changes in method of accounting for intercompany transactions. 
If a member changes its method of accounting for intercompany 
transactions for a consolidated return year, the change in method 
generally will be effected on a cut-off basis.
    (c) Anti-avoidance rules--(1) General rule. If one member (B) 
directly or indirectly acquires an activity of another member (S), or 
undertakes S's activity, with the principal purpose to avail the group 
of an accounting method that would be unavailable (or would be 
unavailable without securing consent from the Commissioner) if S and B 
were treated as divisions of a single corporation, B must use the 
accounting method for the acquired or undertaken activity determined 
under paragraph (c)(2) of this section or must secure consent from the 
Commissioner under applicable administrative procedures to use a 
different method.
    (2) Treatment as divisions of a single corporation. B must use the 
method of accounting that would be required if B acquired the activity 
from S in a transaction to which section 381 applied. Thus, the 
principles of section 381 (c)(4) and (c)(5) apply to resolve any 
conflicts between the accounting methods of S and B, and the acquired or 
undertaken activity is treated as having the accounting method used by 
S. Appropriate adjustments are made to treat all acquisitions or 
undertakings that are part of the same plan or arrangement as a single 
acquisition or undertaking.
    (d) Examples. The provisions of this section are illustrated by the 
following examples:

    Example 1. Separate return treatment generally. X and its wholly-
owned subsidiary Y filed separate returns for their calendar years 
ending December 31, 1965. During calendar year 1965, X employed an 
accrual method of accounting, established a reserve for bad debts, and 
elected under section 171 to amortize bond premiums with respect to its 
fully taxable bonds. During calendar year 1965, Y employed the cash 
receipts and disbursements method, used the specific charge-off method 
with respect to its bad debts, and did not elect to amortize bond 
premiums under section 171 with respect to its bonds. X and Y filed a 
consolidated return for 1966. For 1966 X and Y must continue to compute 
income under their respective methods of accounting (unless a change in 
method under section 446 is made).
    Example 2. Adopting methods. Corporation P is a member of a 
consolidated group. P provides consulting services to customers under 
various agreements. For one type of customer, P's agreements require 
payment only when the contract is completed (payment-on-completion 
contracts). P uses an overall accrual method of accounting. Accordingly, 
P takes its income from consulting contracts into account when earned, 
received, or due, whichever is earlier. With the principal purpose to 
avoid seeking the consent of the Commissioner to change its method of 
accounting for the payment-on-completion contracts to the cash method, P 
forms corporation S, and S begins to render services to those customers 
subject to the payment-on-completion contracts. P continues to render 
services to those customers not subject to these contracts.
    (b) Under paragraph (c) of this section, S must account for the 
consulting income under the payment-on-completion contracts on an 
accrual method rather than adopting the cash method contemplated by P.
    Example 3. Changing inventory sub-method. (a) Corporation P is a 
member of a consolidated group. P operates a manufacturing business that 
uses dollar-value LIFO, and

[[Page 668]]

has built up a substantial LIFO reserve. P has historically manufactured 
all its inventory and has used one natural business unit pool. P begins 
purchasing goods identical to its own finished goods from a foreign 
supplier, and is concerned that it must establish a separate resale pool 
under Sec.  1.472-8(c). P anticipates that it will begin to purchase, 
rather than manufacture, a substantial portion of its inventory, 
resulting in a recapture of most of its LIFO reserve because of 
decrements in its manufacturing pool. With the principal purpose to 
avoid the decrements, P forms corporation S in Year 1. S operates as a 
distributor to nonmembers, and P sells all of its existing inventories 
to S. S adopts LIFO, and elects dollar-value LIFO with one resale pool. 
Thereafter, P continues to manufacture and purchase inventory, and to 
sell it to S for resale to nonmembers. P's intercompany gain from sales 
to S is taken into account under Sec.  1.1502-13. S maintains its Year 1 
base dollar value of inventory so that P will not be required to take 
its intercompany items (which include the effects of the LIFO reserve 
recapture) into account.
    (b) Under paragraph (c) of this section, S must maintain two pools 
(manufacturing and resale) to the same extent that P would be required 
to maintain those pools under Sec.  1.472-8 if it had not formed S.

    (e) Effective dates. Paragraph (b) of this section applies to 
changes in method of accounting effective for years beginning on or 
after July 12, 1995. For changes in method of accounting effective for 
years beginning before that date, see Sec.  1.1502-17 (as contained in 
the 26 CFR part 1 edition revised as of April 1, 1995). Paragraphs (c) 
and (d) apply with respect to acquisitions occurring or activities 
undertaken in years beginning on or after July 12, 1995.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 8597, 60 FR 
36708, July 18, 1995]



Sec.  1.1502-18  Inventory adjustment.

    (a) Definition of intercompany profit amount. For purposes of this 
section, the term ``intercompany profit amount'' for a taxable year 
means an amount equal to the profits of a corporation (other than those 
profits which such corporation has elected not to defer pursuant to 
Sec.  1.1502- 13(c)(3) or which have been taken into account pursuant to 
Sec.  1.1502-13(f)(1)(viii)) arising in transactions with other members 
of the group with respect to goods which are, at the close of such 
corporation's taxable year, included in the inventories of any member of 
the group. See Sec.  1.1502-13(c)(2) with respect to the determination 
of profits. See the last sentence of Sec.  1.1502-13(f)(1)(i) for rules 
for determining which goods are considered to be disposed of outside the 
group and therefore not included in inventories of members.
    (b) Addition of initial inventory amount to taxable income. If a 
corporation:
    (1) Is a member of a group filing a consolidated return for the 
taxable year,
    (2) Was a member of such group for its immediately preceding taxable 
year, and
    (3) Filed a separate return for such preceding year,

then the intercompany profit amount of such corporation for such 
separate return year (hereinafter referred to as the ``initial inventory 
amount'') shall be added to the income of such corporation for the 
consolidated return year (or years) in which the goods to which the 
initial inventory amount is attributable are disposed of outside the 
group or such corporation becomes a nonmember. Such amount shall be 
treated as gain from the sale or exchange of property which is neither a 
capital asset nor property described in section 1231.
    (c) Recovery of initial inventory amount--(1) Unrecovered inventory 
amount. The term ``unrecovered inventory amount'' for any consolidated 
return year means the lesser of:
    (i) The intercompany profit amount for such year, or
    (ii) The initial inventory amount.

However, if a corporation ceases to be a member of the group during a 
consolidated return year, its unrecovered inventory amount for such year 
shall be considered to be zero.
    (2) Recovery during consolidated return years. (i) To the extent 
that the unrecovered inventory amount of a corporation for a 
consolidated return year is less than such amount for its immediately 
preceding year, such decrease shall be treated for such year by such 
corporation as a loss from the sale or exchange of property which is 
neither a capital asset nor property described in section 1231.

[[Page 669]]

    (ii) To the extent that the unrecovered inventory amount for a 
consolidated return year exceeds such amount for the preceding year, 
such increase shall be treated as gain from the sale or exchange of 
property which is neither a capital asset nor property described in 
section 1231.
    (3) Recovery during first separate return year. For the first 
separate return year of a member following a consolidated return year, 
the unrecovered inventory amount for such consolidated return year 
(minus any part of the initial inventory amount which has not been added 
to income pursuant to paragraph (b) of this section) shall be treated as 
a loss from the sale or exchange of property which is neither a capital 
asset nor property described in section 1231.
    (4) Acquisition of group. For purposes of this section, a member of 
a group shall not become a nonmember or be considered as filing a 
separate return solely because of a termination of the group 
(hereinafter referred to as the ``terminating group'') resulting from:
    (i) The acquisition by a nonmember corporation of (a) the assets of 
the common parent in a reorganization described in subparagraph (A), 
(C), or (D) (but only if the requirements of subparagraphs (A) and (B) 
of section 354(b)(1) are met) of section 368 (a)(1), or (b) stock of the 
common parent, or
    (ii) The acquisition (in a transaction to which Sec.  1.1502-
75(d)(3) applies) by a member of (a) the assets of a nonmember 
corporation in a reorganization referred to in subdivision (i) of this 
subparagraph, or (b) stock of a nonmember corporation,

if all the members of the terminating group (other than such common 
parent if its assets are acquired) immediately before the acquisition 
are members immediately after the acquisition of another group 
(hereinafter referred to as the ``succeeding group'') which files a 
consolidated return for the first taxable year ending after the date of 
acquisition. The members of the succeeding group shall succeed to any 
initial inventory amount and to any unrecovered inventory amount of 
members of the terminating group. This subparagraph shall not apply with 
respect to acquisitions occurring before August 25, 1971.
    (d) Examples. The provisions of paragraphs (a), (b), and (c) of this 
section may be illustrated by the following examples:

    Example 1. Corporations P, S, and T report income on the basis of a 
calendar year. Such corporations file separate returns for 1965. P 
manufactures widgets which it sells to both S and T, who act as 
distributors. The inventories of S and T at the close of 1965 are 
comprised of widgets which they purchased from P and with respect to 
which P derived profits of $5,000 and $8,000, respectively. P, S, and T 
file a consolidated return for 1966. During 1966, P sells widgets to S 
and T with respect to which it derives profits of $7,000 and $10,000, 
respectively. The inventories of S and T as of December 31, 1966, are 
comprised of widgets on which P derived net profits of $4,000 and 
$8,000, respectively. P's initial inventory amount is $13,000, P's 
intercompany profit amount for 1965 (such $13,000 amount is the profits 
of P with respect to goods sold to S and T and included in their 
inventories at the close of 1965). Assuming that S and T identify their 
goods on a first-in, first-out basis, the entire opening inventory 
amount of $13,000 is added to P's income for 1966 as gain from the sale 
or exchange of property which is neither a capital asset nor properly 
described in section 1231, since the goods to which the initial 
inventory amount is attributable were disposed of in 1966 outside the 
group. However, since P's unrecovered inventory amount for 1966, $12,000 
(the intercompany profit amount for the year, which is less than the 
initial inventory amount), is less than the unrecovered inventory amount 
for 1965, $13,000, this decrease of $1,000 is treated by P for 1966 as a 
loss from the sale or exchange of property which is neither a capital 
asset nor property described in section 1231.
    Example 2. Assume the same facts as in example (1) and that at the 
close of 1967, a consolidated return year, the inventories of S and T 
are comprised of widgets on which P derived profits of $5,000 and 
$3,000, respectively. Since P's unrecovered inventory amount for 1967, 
$8,000, is less than $12,000, the unrecovered inventory amount for 1966, 
this decrease of $4,000 is treated by P for 1967 as a loss from the sale 
or exchange of property which is neither a capital asset nor property 
described in section 1231.
    Example 3. Assume the same facts as in examples (1) and (2) and that 
in 1968, a consolidated return year, P's intercompany profit amount is 
$11,000. P will report $3,000 (the excess of $11,000, P's unrecovered 
inventory amount for 1968, over $8,000, P's unrecovered inventory amount 
for 1967) for 1968 as a gain from the sale or exchange of property which 
is neither a capital asset nor property described in section 1231.

[[Page 670]]

    Example 4. Assume the same facts as in examples (1), (2), and (3) 
and that in 1969 P, S, and T file separate returns. P will report 
$11,000 (its unrecovered inventory amount for 1968, $11,000, minus the 
portion of the initial inventory amount which has not been added to 
income during 1966, 1967, and 1968, zero) as a loss from the sale or 
exchange of property which is neither a capital asset nor property 
described in section 1231.
    Example 5. Corporations P and S file a consolidated return for the 
first time for the calendar year 1966. P manufactures machines and sells 
them to S, which sells them to users throughout the country. At the 
close of 1965, S has on hand 20 machines which it purchased from P and 
with respect to which P derived profits of $3,500. During 1966, P sells 
6 machines to S on which it derives profits of $1,300, and S sells 5 
machines which it had on hand at the beginning of the year (S 
specifically identifies the machines which it sells) and on which P had 
derived profits of $900. P's initial inventory amount is $3,500, of 
which $900 is added to P's income in 1966 as gain from the sale or 
exchange of property which is neither a capital asset nor property 
described in section 1231, since such $900 amount is attributable to 
goods disposed of in 1966 outside the group, which goods were included 
in S's inventory at the close of 1965. If P and S continue to file 
consolidated returns, the remaining $2,600 of the initial inventory 
amount will be added to P's income as the machines on which such profits 
were derived are disposed of outside the group.
    Example 6. Assume that in example (5) S had elected to inventory its 
goods under section 472 (relating to last-in, first-out inventories). 
None of P's initial inventory amount of $3,500 would be added to P's 
income in 1966, since none of the goods to which such amount is 
attributable would be considered to be disposed of during such year 
under the last-in, first-out method of identifying inventories.

    (e) Section 381 transfer. If a member of the group is a transferor 
or distributor of assets to another member of the group within the 
meaning of section 381(a), then the acquiring corporation shall be 
treated as succeeding to the initial inventory amount of the transferor 
or distributor corporation to the extent that as of the date of 
distribution or transfer such amount has not yet been added to income. 
Such amount shall then be added to the acquiring corporation's income 
under the provisions of paragraph (b) of this section. For purposes of 
applying paragraph (c) of this section:
    (1) The initial inventory amount of the transferor or distributor 
corporation shall be added to such amount of the acquiring corporation 
as of the close of the acquiring corporation's taxable year in which the 
date of distribution or transfer occurs, and
    (2) The unrecovered inventory amount of the transferor or 
distributor corporation for its taxable year preceding the taxable year 
of the group in which the date of distribution or transfer occurs shall 
be added to such amount of the acquiring corporation.
    (f) Transitional rules for years before 1966--(1) In general. If:
    (i) A group filed a consolidated return for the taxable year 
immediately preceding the first taxable year to which this section 
applies,
    (ii) Any member of such group made an opening adjustment to its 
inventory pursuant to paragraph (b) of Sec.  1.1502-39A (as contained in 
the 26 CFR edition revised as of April 1, 1996), and
    (iii) Paragraph (c) of Sec.  1.1502-39A (as contained in the 26 CFR 
edition revised as of April 1, 1996), has not been applicable for any 
taxable year subsequent to the taxable year for which such adjustment 
was made,

then subparagraphs (2) and (3) of this paragraph shall apply.
    (2) Closing adjustment to inventory. (i) For the first consolidated 
return year to which this section applies, the increase in inventory 
prescribed in paragraph (c) of Sec.  1.1502-39A (as contained in the 26 
CFR edition revised as of April 1, 1996), shall be made as if such year 
were a separate return year.
    (ii) For the first separate return year of a member to which this 
section applies, the adjustment to inventory (whether an increase or a 
decrease) prescribed in paragraph (c) of Sec.  1.1502-39A (as contained 
in the 26 CFR edition revised as of April 1, 1996), minus any adjustment 
already made pursuant to subdivision (i) of this subparagraph, shall be 
made to the inventory of such member.
    (3) Addition and recovery of initial inventory amount. Each selling 
member shall treat as an initial inventory amount its share of the net 
amount by which the inventories of all members are increased pursuant to 
subparagraph (2)(i) of this paragraph for the first taxable year to 
which this section applies. A member's share shall be such net

[[Page 671]]

amount multiplied by a fraction, the numerator of which is its initial 
inventory amount (computed under paragraph (b) as if such taxable year 
were its first consolidated return year), and the denominator of which 
is the sum of such initial inventory amounts of all members. Such 
initial inventory amount shall be added to the income of such selling 
member and shall be recovered at the time and in the manner prescribed 
in paragraphs (b) and (c) of this section.
    (4) Example. The provisions of this paragraph may be illustrated by 
the following example:

    Example. (i) Corporations P, S, and T file consolidated returns for 
calendar 1966, having filed consolidated returns continuously since 
1962. P is a wholesale distributor of groceries selling to chains of 
supermarkets, including those owned by S and T. The opening inventories 
of S and T for 1962 were reduced by $40,000 and $80,000, respectively, 
pursuant to paragraph (b) of Sec.  1.1502-39A (as contained in the 26 
CFR edition revised as of April 1, 1996). At the close of 1965, S and T 
have on hand in their inventories goods on which P derived profits of 
$80,000 and $90,000, respectively. The inventories of S and T at the 
close of 1966 include goods which they purchased from P during the year 
on which P derived profits of $85,000 and $105,000, respectively.
    (ii) The opening inventories of S and T for 1966, the first year to 
which this section applies, are increased by $40,000 and $80,000, 
respectively, pursuant to the provisions of subparagraph (2)(i) of this 
paragraph. P will take into account (as provided in paragraphs (b) and 
(c) of this section) an initial inventory amount of $120,000 as of the 
beginning of 1966, the net amount by which the inventories of S and T 
were increased in such year. Since the increases in the inventories of S 
and T are the maximum allowable under paragraph (c) of Sec.  1.1502-39A 
(as contained in the 26 CFR edition revised as of April 1, 1996) (i.e., 
the amount by which such inventories were originally decreased), no 
further adjustments will be made pursuant to subparagraph (2)(ii) of 
this paragraph to such inventories in the event that separate returns 
are subsequently filed.

    (5) Election not to eliminate. If a group filed a consolidated 
return for the taxable year immediately preceding the first taxable year 
to which this section applies, and for such preceding year the members 
of the group did not eliminate gain or loss on intercompany inventory 
transactions pursuant to the adoption under Sec.  1.1502-31A(b)(1) (as 
contained in the 26 CFR edition revised as of April 1, 1996) of a 
consistent accounting practice taking into account such gain or loss, 
then for purposes of this section each member shall be treated as if it 
had filed a separate return for such immediately preceding year.
    (g) Transitional rules for years beginning on or after July 12, 
1995. Paragraphs (a) through (f) of this section do not apply for 
taxable years beginning on or after July 12, 1995. Any remaining 
unrecovered inventory amount of a member under paragraph (c) of this 
section is recovered in the first taxable year beginning on or after 
July 12, 1995, under the principles of paragraph (c)(3) of this section 
by treating the first taxable year as the first separate return year of 
the member. The unrecovered inventory amount can be recovered only to 
the extent it was previously included in taxable income. The principles 
of this section apply, with appropriate adjustments, to comparable 
amounts under paragraph (f) of this section.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7246, 38 FR 
762, Jan. 4, 1973; T.D. 8597, 60 FR 36709, July 18, 1995: T.D. 8677, 61 
FR 33323, June 27, 1996]



Sec.  1.1502-19  Excess loss accounts.

    (a) In general--(1) Purpose. This section provides rules for a 
member (M) to include in income its excess loss account in the stock of 
another member (S). The purpose of the excess loss account is to 
recapture in consolidated taxable income M's negative adjustments with 
respect to S's stock (e.g., under Sec.  1.1502-32 from S's deductions, 
losses, and distributions), to the extent the negative adjustments 
exceed M's basis in the stock. This section also provides rules for 
eliminating losses and other attributes attributable to S in certain 
cases in which S stock becomes worthless or S ceases to be a member and 
does not have a separate return year.
    (2) Excess loss accounts--(i) In general. M's basis in S's stock is 
adjusted under the consolidated return regulations and other rules of 
law. Negative adjustments may exceed M's basis in S's stock. The 
resulting negative amount

[[Page 672]]

is M's excess loss account in S's stock. For example:
    (A) Once M's negative adjustments under Sec.  1.1502-32 exceed its 
basis in S's stock, the excess is M's excess loss account in the S 
stock. If M has further adjustments, they first increase or decrease the 
excess loss account.
    (B) If M forms S by transferring property subject to liabilities in 
excess of basis, Sec.  1.1502-80(d) provides for the nonapplicability of 
section 357(c) and the resulting negative basis under section 358 is M's 
excess loss account in the S stock.
    (ii) Treatment as negative basis. M's excess loss account is treated 
for all Federal income tax purposes as basis that is a negative amount, 
and a reference to M's basis in S's stock includes a reference to M's 
excess loss account.
    (3) Application of other rules of law, duplicative recapture. See 
Sec.  1.1502-80(a) regarding the general applicability of other rules of 
law and a limitation on duplicative adjustments and recapture.
    (b) Excess loss account taken into account as income or gain--(1) 
Operating rules--(i) General rule. Except as provided in paragraph 
(b)(1)(ii) of this section, if M is treated under this section as 
disposing of a share of S's stock, M takes into account its excess loss 
account in the share as income or gain from the disposition.
    (ii) Special limitation on amount taken into account. 
Notwithstanding paragraph (b)(1)(i) of this section, if M is treated as 
disposing of a share of S's stock as a result of the application of 
paragraph (c)(1)(iii)(B) of this section, the aggregate amount of its 
excess loss account in the shares of S's stock that M takes into account 
as income or gain from the disposition shall not exceed the amount of 
S's indebtedness that is discharged that is neither included in gross 
income nor treated as tax-exempt income under Sec.  1.1502-
32(b)(3)(ii)(C)(1). If more than one share of S's stock has an excess 
loss account, such excess loss accounts shall be taken into account 
pursuant to the preceding sentence, to the extent possible, in a manner 
that equalizes the excess loss accounts in S's shares that have an 
excess loss account.
    (iii) Treatment of disposition. Except as provided in paragraph 
(b)(4) of this section, the disposition is treated as a sale or exchange 
for purposes of determining the character of the income or gain.
    (iv) Reduction of attributes in the case of certain dispositions by 
worthlessness or where S ceases to be a member and does not become a 
nonmember. If this paragraph (b)(1)(iv) applies, any net operating or 
capital loss carryover that is attributable to S, including any losses 
that would be apportioned to S under the principles of Sec.  1.1502-
21(b)(2) if S had a separate return year, any deferred deductions 
attributable to S, including S's portion of such consolidated tax 
attributes (for example, consolidated excess charitable contributions 
that would be apportioned to S under the principles of Sec.  1.1502-
79(e) if S had a separate return year), and any credit carryover 
attributable to S, including any consolidated credits that would be 
apportioned to S under the principles of Sec.  1.1502-79 if S had a 
separate return year, are eliminated. Attributes other than consolidated 
tax attributes (determined as of the disposition) are eliminated under 
this paragraph (b)(1)(iv) immediately before the disposition resulting 
in the application of this paragraph (b)(1)(iv). The elimination of 
attributes under this paragraph (b)(1)(iv) is not a noncapital, 
nondeductible expense described in Sec.  1.1502-32(b)(2)(iii). This 
paragraph (b)(1)(iv) applies if--
    (A) A share of S stock becomes worthless under section 165, the 
requirements of paragraph (c)(1)(iii) of this section are satisfied, M 
does not recognize a net deduction or loss on the S stock, and S is a 
member of the group on the day following the last day of the group's 
taxable year during which the share becomes worthless; or
    (B) M recognizes any amount that is not a net deduction or loss on 
the stock of S in a transaction in which S ceases to be a member and 
does not become a nonmember.
    (2) Nonrecognition or deferral--(i) In general. M's income or gain 
under paragraph (b)(1) of this section is subject to any nonrecognition 
or deferral rules applicable to the disposition. For example, if S 
liquidates and the exchange of M's stock in S is subject to section

[[Page 673]]

332, or M transfers all of its assets (including S's stock) to S in a 
reorganization to which section 361(a) applies, M's income or gain from 
the excess loss account is not recognized under these rules.
    (ii) Nonrecognition or deferral inapplicable. If M's income or gain 
under paragraph (b)(1) of this section is from a disposition described 
in paragraph (c)(1) (ii) or (iii) of this section (relating to 
deconsolidations and worthlessness), the income or gain is taken into 
account notwithstanding any nonrecognition or deferral rules (even if 
the disposition is also described in paragraph (c)(1)(i) of this 
section). For example, if M transfers S's stock to a nonmember in a 
transaction to which section 351 applies, M's income or gain from the 
excess loss account is taken into account.
    (3) Tiering up in chains. If the stock of more than one subsidiary 
is disposed of in the same transaction, the income or gain under this 
section is taken into account in the order of the tiers, from the lowest 
to the highest.
    (4) Insolvency--(i) In general. Gain under this section is treated 
as ordinary income to the extent of the amount by which S is insolvent 
(within the meaning of section 108(d)(3)) immediately before the 
disposition. For this purpose S's liabilities include any amount to 
which preferred stock would be entitled if S were liquidated immediately 
before the disposition, and any former liabilities that were discharged 
to the extent the discharge was treated as tax-exempt income under Sec.  
1.1502-32(b)(3)(ii)(C) (special rule for discharges).
    (ii) Reduction for amount of distributions. The amount treated as 
ordinary income under this paragraph (b)(4) is reduced to the extent it 
exceeds the amount of M's excess loss account redetermined without 
taking into account S's distributions to M to which Sec.  1.1502-
32(b)(2)(iv) applies.
    (c) Disposition of stock. For purposes of this section:
    (1) In general. M is treated as disposing of a share of S's stock:
    (i) Transfer, cancellation, etc. At the time--
    (A) M transfers or otherwise ceases to own the share for Federal 
income tax purposes, even if no gain or loss is taken into account; or
    (B) M takes into account gain or loss (in whole or in part) with 
respect to the share.
    (ii) Deconsolidation. At the time--
    (A) M becomes a nonmember, or a nonmember determines its basis in 
the share (or any other asset) by reference to M's basis in the share, 
directly or indirectly, in whole or in part (e.g., under section 362); 
or
    (B) S becomes a nonmember, or M's basis in the share is reflected, 
directly or indirectly, in whole or in part, in the basis of any asset 
other than member stock (e.g., under section 1071).
    (iii) Worthlessness. At the time--
    (A) All of S's assets (other than its corporate charter and those 
assets, if any, necessary to satisfy state law minimum capital 
requirements to maintain corporate existence) are treated as disposed 
of, abandoned, or destroyed for Federal income tax purposes (for 
example, under section 165(a) or Sec.  1.1502-80(c), or, if S's asset is 
stock of a lower-tier member, the stock is treated as disposed of under 
this paragraph (c)). An asset of S is not considered to be disposed of 
or abandoned to the extent the disposition is in complete liquidation of 
S under section 332 or is in exchange for consideration (other than 
relief from indebtedness);
    (B) An indebtedness of S is discharged, if any part of the amount 
discharged is not included in gross income and is not treated as tax-
exempt income under Sec.  1.1502-32(b)(3)(ii)(C); or
    (C) A member takes into account a deduction or loss for the 
uncollectibility of an indebtedness of S, and the deduction or loss is 
not matched in the same tax year by S's taking into account a 
corresponding amount of income or gain from the indebtedness in 
determining consolidated taxable income.
    (2) Becoming a nonmember. A member is treated as becoming a 
nonmember if it has a separate return year (including another group's 
consolidated return year). For example, S may become a nonmember if it 
issues additional stock to nonmembers, but S does not become a nonmember 
as a result of its complete liquidation. A disposition

[[Page 674]]

under paragraph (c)(1)(ii) of this section must be taken into account in 
the consolidated return of the group. For example, if a group ceases 
under Sec.  1.1502-75(c) to file a consolidated return as of the close 
of its consolidated return year, the disposition under paragraph 
(c)(1)(ii) of this section is treated as occurring immediately before 
the close of the year. If S becomes a nonmember because M sells S's 
stock to a nonmember, M's sale is a disposition under both paragraphs 
(c)(1) (i) and (ii) of this section. If a group terminates under Sec.  
1.1502-75(d) because the common parent is the only remaining member, the 
common parent is not treated as having a deconsolidation event under 
paragraph (c)(1)(ii) of this section.
    (3) Exception for acquisition of group--(i) Application. This 
paragraph (c)(3) applies only if a consolidated group (the terminating 
group) ceases to exist as a result of--
    (A) The acquisition of either the assets of the common parent of the 
terminating group in a reorganization described in section 381(a)(2), or 
the stock of the common parent of the terminating group; or
    (B) The application of the principles of Sec.  1.1502-75(d)(2) or 
(d)(3).
    (ii) General rule. Paragraph (c)(1)(ii) of this section does not 
apply solely by reason of the termination of a group in a transaction to 
which this paragraph (c)(3) applies, if there is a surviving group that 
is, immediately thereafter, a consolidated group. Instead, the surviving 
group is treated as the terminating group for purposes of applying this 
section to the terminating group. This treatment does not apply, 
however, to members of the terminating group that are not members of the 
surviving group immediately after the terminating group ceases to exist 
(e.g., under section 1504(a)(3) relating to reconsolidation, or section 
1504(c) relating to includible insurance companies).
    (d) Special allocation of basis in connection with an adjustment or 
determination--(1) Excess loss account in original shares. If a member 
has an excess loss account in shares of a class of S's stock at the time 
of a basis adjustment or determination under the Internal Revenue Code 
with respect to shares of the same class of S's stock owned by the 
member, the adjustment or determination is allocated first to equalize 
and eliminate that member's excess loss account. See Sec.  1.1502-32(c) 
for similar allocations of investment adjustments to prevent or 
eliminate excess loss accounts.
    (2) Excess loss account in new S shares. If a member would otherwise 
determine shares of a class of S's stock (new shares) to have an excess 
loss account and such member owns one or more other shares of the same 
class of S's stock, the basis of such other shares is allocated to 
eliminate and equalize any excess loss account that would otherwise be 
in the new shares.
    (e) Anti-avoidance rule. If any person acts with a principal purpose 
contrary to the purposes of this section, to avoid the effect of the 
rules of this section or apply the rules of this section to avoid the 
effect of any other provision of the consolidated return regulations, 
adjustments must be made as necessary to carry out the purposes of this 
section.
    (f) Predecessors and successors. For purposes of this section, any 
reference to a corporation (or to a share of the corporation's stock) 
includes a reference to a successor or predecessor (or to a share of 
stock of a predecessor or successor), as the context may require.
    (g) Examples. For purposes of the examples in this section, unless 
otherwise stated, M owns all 100 shares of the only class of S's stock 
and S owns all 100 shares of the only class of T's stock, the stock is 
owned for the entire year, T owns no stock of lower-tier members, the 
tax year of all persons is the calendar year, all persons use the 
accrual method of accounting, the facts set forth the only corporate 
activity, all transactions are between unrelated persons, and tax 
liabilities are disregarded. The principles of this section are 
illustrated by the following examples.

    Example 1. Taxable disposition of stock. (a) Facts. M has a $150 
basis in S's stock, and S has a $100 basis in T's stock. For Year 1, M 
has $500 of ordinary income, S has no income or loss, and T has a $200 
ordinary loss. S sells T's stock to a nonmember for $60 at the close of 
Year 1.
    (b) Analysis. Under paragraph (c) of this section, the sale is a 
disposition of T's stock

[[Page 675]]

at the close of Year 1 (the day of the sale). Under Sec.  1.1502-32(b), 
T's loss results in S having a $100 excess loss account in T's stock 
immediately before the sale. Under paragraph (b)(1) of this section, S 
takes into account the $100 excess loss account as an additional $100 of 
gain from the sale. Consequently, S takes into account a $160 gain from 
the sale in determining the group's consolidated taxable income. Under 
Sec.  1.1502-32(b), T's $200 loss and S's $160 gain result in a net $40 
decrease in M's basis in S's stock as of the close of Year 1, from $150 
to $110.
    (c) Intercompany sale followed by sale to nonmember. The facts are 
the same as in paragraph (a) of this Example 1, except that S sells T's 
stock to M for $60 at the close of Year 1, and M sells T's stock to a 
nonmember at a gain at the beginning of Year 5. Under paragraph (c) of 
this section, S's sale is treated as a disposition of T's stock at the 
close of Year 1 (the day of the sale). Under Sec.  1.1502-13 and 
paragraph (b)(2) of this section, S's $160 gain from the sale is 
deferred and taken into account in Year 5 as a result of M's sale of the 
T stock. Under Sec.  1.1502-32(b), the absorption of T's $200 loss in 
Year 1 results in M having a $50 excess loss account in S's stock at the 
close of Year 1. In Year 5, S's $160 gain taken into account eliminates 
M's excess loss account in S's stock and increases M's basis in the 
stock to $110.
    (d) Intercompany distribution followed by sale to a nonmember. The 
facts are the same as in paragraph (a) of this Example 1, except that 
the value of the T stock is $60 and S declares and distributes a 
dividend of all of the T stock to M at the close of Year 1, and M sells 
the T stock to a nonmember at a gain at the beginning of Year 5. Under 
paragraph (c) of this section, S's distribution is treated as a 
disposition of T's stock at the close of Year 1 (the day of the 
distribution). S's $100 excess loss account in T's stock is treated as 
additional gain under section 311(b) from the distribution. Under 
section 301(d), M's basis in the T stock is $60. Under Sec.  1.1502-13, 
and paragraph (b)(2) of this section, S's $160 gain from the 
distribution is deferred and taken into account in Year 5 as a result of 
M's sale of the T stock. Under Sec.  1.1502-32(b), T's $200 loss and S's 
$60 distribution result in M having a $110 excess loss account in S's 
stock at the close of Year 1. In Year 5, S's $160 gain taken into 
account eliminates M's excess loss account in S's stock and increases 
M's basis in the stock to $50.
    Example 2. Basis determinations under the Internal Revenue Code in 
intercompany reorganizations--transfer of shares without an excess loss 
account. (i) Facts. M owns all of the sole class of stock of each of S 
and T. M has 150 shares of S stock that it acquired on Date 1. Each S 
share has a $1 basis and a fair market value of $1. M has 100 shares of 
T stock that it acquired on Date 2. Each T share has a $1.20 excess loss 
account and a fair market value of $1. M transfers S's stock to T 
without receiving additional T stock. The transfer is an exchange 
described in both section 351 and section 354.
    (ii) Analysis. Under sections 351 and 354, M does not recognize gain 
in connection with the transfer. Under Sec.  1.358-2(a)(2)(iii), M is 
deemed to receive 150 shares of T stock of the same class. Without 
regard to the application of paragraph (d) of this section, under 
section 358 and Sec.  1.358-2(a)(2)(i), M would have a $1 basis in each 
such share. However, because the basis of the additional shares of T 
stock will be determined when M has an excess loss account in its 
original shares of T stock, under paragraph (d)(1) of this section, the 
basis that M would otherwise have in such additional shares will 
eliminate the excess loss account in M's original shares of T stock such 
that each original share of T stock will have a basis of $0 and each 
share of T stock deemed received will have a basis of $0.20. Then, under 
Sec.  1.358-2(a)(2)(iii), the T stock is deemed to be recapitalized in a 
reorganization under section 368(a)(1)(E) in which M receives 100 shares 
of T stock (those shares M actually owns immediately after the transfer) 
in exchange for those 100 shares of T stock that M held immediately 
prior to the transfer and those 150 shares of T stock M is deemed to 
receive in the transfer. Under Sec.  1.358-2(a)(2)(i), immediately after 
the transfer, M holds 100 shares of T stock, 60 of which take a basis of 
$0.50 each and 40 of which take a basis of $0 each. In addition, T takes 
a $1 basis in each share of S stock under section 362. (If M had 
actually received an additional 150 shares of T stock of the same class, 
paragraph (d)(1) of this section would apply to shift basis from such 
additional T shares to M's original T shares because the basis of the 
additional T stock would be determined when M had an excess loss account 
in its original T shares. M would have a basis of $0 in each of the 
original T shares and a basis of $0.20 in each of the additional T 
shares.)
    (iii) Transfer of shares with an excess loss account. The facts are 
the same as in paragraph (i) of this Example 2, except that M transfers 
T's stock to S without receiving additional S stock. The transfer is an 
exchange described in both section 351 and section 354. Under paragraph 
(c) of this section, M's transfer is treated as a disposition of T's 
stock. Under sections 351 and 354 and paragraph (b)(2) of this section, 
M does not recognize gain from the disposition. Under Sec.  1.358-
2(a)(2)(iii), M is deemed to have received 100 shares of S stock of the 
same class. Without regard to the application of paragraph (d) of this 
section, M would have a $1.20 excess loss account in each such share. 
However, because M will have an excess loss account in such shares and M 
owns other shares of S stock of the same class, under paragraph (d)(2) 
of this

[[Page 676]]

section, the excess loss account that M would otherwise have in such 
shares will decrease M's basis in its original shares of S's stock such 
that each such original share will have a basis of $0.20 and each share 
deemed received will have a basis of $0. Then, under Sec.  1.358-
2(a)(2)(iii), the S stock is deemed to be recapitalized in a 
reorganization under section 368(a)(1)(E) in which M receives 150 shares 
of S stock (those shares M actually owns immediately after the transfer) 
in exchange for those 150 shares of S stock that M held immediately 
prior to the transfer and those 100 shares of S stock that M is deemed 
to receive in connection with the transfer. Under Sec.  1.358-
2(a)(2)(i), immediately after the transfer, M holds 150 shares of S 
stock, 90 of which take a basis of $0.33 each and 60 of which take a 
basis of $0 each. In addition, S takes an excess loss account of $1.20 
in each share of T stock under section 362. (If M had actually received 
100 additional shares of S stock of the same class, paragraph (d)(2) of 
this section would apply to shift basis from M's original S stock 
because M would have otherwise had an excess loss account in such 
additional shares and M owned other shares of S stock of the same class. 
The excess loss account that M would have otherwise had in such 
additional shares would have decreased M's basis in its original shares 
of S's stock. M would have had a basis of $0.20 in each of the original 
shares and a basis of $0 in each of the additional shares.)
    (iv) Intercompany merger--shares with excess loss account retained. 
The facts are the same as in paragraph (i) of this Example 2, except 
that S merges into T in a reorganization described in section 
368(a)(1)(A) (and in section 368(a)(1)(D)), and M receives 150 
additional shares of T stock of the same class in the reorganization. 
Under section 354, M does not recognize gain. Without regard to the 
application of paragraph (d) of this section, under section 358 and 
Sec.  1.358-2(a)(2)(i), M would have a $1 basis in each such share. 
However, because the basis of the additional shares of T stock will be 
determined when M has an excess loss account in its original shares of T 
stock, under paragraph (d)(1) of this section, the basis that M would 
otherwise have in such additional shares eliminates the excess loss 
account in M's original shares of T stock such that each original share 
of T stock has a basis of $0 and each additional share of T stock has a 
basis of $0.20.
    (v) Intercompany merger--shares with excess loss account 
surrendered. The facts are the same as in paragraph (i) of this Example 
2, except that T merges into S in a reorganization described in section 
368(a)(1)(A) (and in section 368(a)(1)(D)), and M receives 100 
additional shares of S stock of the same class in the reorganization. 
Under section 354 and paragraph (b)(2) of this section, M does not 
recognize gain from the disposition. Without regard to the application 
of paragraph (d) of this section, under section 358 and Sec.  1.358-
2(a)(2)(i), M would have a $1.20 excess loss account in each additional 
share of S stock received. However, because M would have an excess loss 
account in such shares and M owns other shares of S stock of the same 
class, under paragraph (d)(2) of this section, the excess loss account 
that M would otherwise have in such shares decreases M's basis in its 
original shares of S's stock such that each original share of S stock 
has a basis of $0.20 and each additional share of S stock has a basis of 
$0.
    Example 3. Section 355 distribution of stock with an excess loss 
account. (a) Facts. M has a $30 excess loss account in S's stock, and S 
has a $90 excess loss account in T's stock. S distributes the T stock to 
M in a transaction to which section 355 applies, and neither M nor S 
recognizes any gain or loss. At the time of the distribution, the T 
stock represents 33% of the value of the S stock. Following the 
distribution, M's basis in the S stock is allocated under Sec.  1.358-2 
in proportion to the fair market values of the S stock and the T stock.
    (b) Analysis. Under paragraph (c) of this section, S's distribution 
of the T stock is treated as a disposition. Under section 355(c) and 
paragraph (b)(2) of this section, S does not recognize any gain from the 
distribution. Under section 358, S's excess loss account in the T stock 
is eliminated, and M's $30 excess loss account in the S stock is treated 
as basis allocated between the S stock and the T stock based on their 
relative values. Consequently, M has a $20 excess loss account in the S 
stock and a $10 excess loss account in the T stock. (If M had a $30 
basis rather than a $30 excess loss account in the S stock, S would not 
recognize gain, its excess loss account in the T stock would be 
eliminated, and M's basis in the stock of S and T would be $20 and $10, 
respectively.)
    (c) Section 355 distribution to nonmember. The facts are the same as 
in paragraph (a) of this Example 3, except that M also distributes the T 
stock to its shareholders in a transaction to which section 355 applies. 
Under paragraph (c) of this section, M's distribution is treated as a 
disposition of T's stock. Under paragraph (b)(2) of this section, 
because M's disposition is described in paragraph (c)(1)(ii) of this 
section, M's $10 excess loss account in the T stock must be taken into 
account at the time of the distribution, notwithstanding the 
nonrecognition rules of section 355(c).
    Example 4. Deconsolidation of a member. (a) Facts. M has a $50 
excess loss account in S's stock, and S has a $100 excess loss account 
in T's stock. T issues additional stock to a nonmember and, as a 
consequence, T becomes a nonmember.
    (b) Analysis. Under paragraph (c)(2) of this section, S is treated 
as disposing of each of its shares of T's stock immediately before T

[[Page 677]]

becomes a nonmember. Under paragraph (b)(1) of this section, S takes 
into account its $100 excess loss account as gain from the sale or 
exchange of T's stock. Under Sec.  1.1502-32(b) of this section, S's 
$100 gain eliminates M's excess loss account in S's stock and increases 
M's basis in S's stock to $50.
    (c) Deconsolidation of a higher-tier member. The facts are the same 
as in paragraph (a) of this Example 4, except that S (rather than T) 
issues the stock and, as a consequence, both S and T become nonmembers. 
Under paragraph (c)(2) of this section, M is treated as disposing of S's 
stock and S is treated as disposing of T's stock immediately before S 
and T become nonmembers. Under Sec.  1.1502-32(b) and paragraph (b)(3) 
of this section, because S and T become nonmembers in the same 
transaction and T is the lower-tier member, S is first treated under 
paragraph (b)(1) of this section as taking into account its $100 excess 
loss account as gain from the sale or exchange of T's stock. Under Sec.  
1.1502-32(b), S's $100 gain eliminates M's excess loss account in S's 
stock and increases M's basis in S's stock to $50 immediately before S 
becomes a nonmember. Thus, only S's $100 gain is taken into account in 
the determination of the group's consolidated taxable income.
    (d) Intercompany gain and deconsolidation. The facts are the same as 
in paragraph (c) of this Example 4, except that T has $30 of gain that 
is deferred under Sec.  1.1502-13 and taken into account in determining 
consolidated taxable income immediately before T becomes a nonmember. 
Under Sec.  1.1502-32(b), T's $30 gain decreases S's excess loss account 
in T's stock from $100 to $70 immediately before S is treated as 
disposing of T's stock. Under paragraph (b)(1) of this section, S is 
treated as taking into account its $70 excess loss account as gain from 
the disposition of T's stock. Under Sec.  1.1502-32(b), S's $70 gain 
from the excess loss account and T's $30 deferred gain that is taken 
into account eliminate M's $50 excess loss account in S's stock and 
increase M's basis in S's stock to $50 immediately before S becomes a 
nonmember.
    Example 5. Worthlessness. (a) Facts. M forms S with a $150 
contribution, and S borrows $150. For Year 1, S has a $50 ordinary loss 
that is carried over as part of the group's consolidated net operating 
loss. For Year 2, M has $160 of ordinary income, and S has a $160 
ordinary loss. Under Sec.  1.1502-32(b), S's loss results in M having a 
$10 excess loss account in S's stock. During Year 3, the value of S's 
assets (without taking S's liabilities into account) continues to 
decline and S's stock becomes worthless within the meaning of section 
165(g) (without taking into account Sec.  1.1502-80(c)). For Year 4, S 
has $10 of ordinary income.
    (b) Analysis. Under paragraph (c)(1)(iii)(A) of this section, M is 
not treated as disposing of S's stock in Year 3 solely because S's stock 
becomes worthless within the meaning of section 165(g) (taking S's 
liabilities into account). In addition, because S's stock is not treated 
as worthless, section 382(g)(4)(D) does not prevent the Year 1 
consolidated net operating loss carryover from offsetting S's $10 of 
income in Year 4.
    (c) Discharge of indebtedness. The facts are the same as in 
paragraph (a) of this Example 5, except that, instead of S's stock 
becoming worthless within the meaning of section 165(g), S's creditor 
discharges $40 of S's indebtedness during Year 3, S is insolvent by more 
than $40 before the discharge, the discharge is excluded from the M 
group's gross income under section 108(a), and $40 of the $50 
consolidated net operating loss carryover attributable to S is 
eliminated under section 108(b). Under Sec.  1.1502- 32(b)(3)(ii)(C), 
S's $40 of discharge income is treated as tax-exempt income because 
there is a corresponding decrease under Sec.  1.1502-32(b)(3)(iii) for 
elimination of the loss carryover. Under paragraph (c)(1)(iii)(B) of 
this section, M is treated as disposing of S's stock if the amount 
discharged is not included in gross income and is not treated as tax-
exempt income under Sec.  1.1502-32(b)(3)(ii)(C). Because the discharge 
is treated as tax-exempt income, M is not treated as disposing of S's 
stock by reason of the discharge.
    Example 6. Avoiding worthlessness. (a) Facts. M forms S with a $100 
contribution and S borrows $150. For Years 1 through 5, S has a $210 
ordinary loss that is absorbed by the group. Under Sec.  1.1502-32(b), 
S's loss results in M having a $110 excess loss account in S's stock. S 
defaults on the indebtedness, but the creditor does not discharge the 
debt (or initiate collection procedures). At the beginning of Year 6, S 
ceases any substantial operations with respect to the assets, but 
maintains their ownership with a principal purpose to avoid M's taking 
into account its excess loss account in S's stock.
    (b) Analysis. Under paragraph (c)(1)(iii)(A) of this section, M's 
excess loss account on each of its shares of S's stock ordinarily is 
taken into account at the time substantially all of S's assets are 
treated as disposed of, abandoned, or destroyed for Federal income tax 
purposes. Under paragraph (e) of this section, however, S's assets are 
not taken into account at the beginning of Year 6 for purposes of 
applying paragraph (c)(1)(iii)(A) of this section. Consequently, S is 
treated as worthless at the beginning of Year 6, and M's $110 excess 
loss account is taken into account.

    (h) Effective/applicability dates--(1) Application. This section 
applies with respect to determinations of the basis of (including an 
excess loss account in) the stock of a member in consolidated return 
years beginning on or after January 1, 1995. However, taxpayers may

[[Page 678]]

apply paragraph (c)(3)(i)(A) of this section to transactions that 
occurred prior to September 17, 2008. Any such determination or 
redetermination does not, however, affect any prior period. Paragraphs 
(a)(3), (c)(1)(iii)(A), and (c)(3)(i)(A) of this section apply with 
respect to determinations and transactions occurring on or after 
September 17, 2008. However, taxpayers may elect to apply paragraph 
(c)(3)(i)(A) of this section to transactions that occurred prior to 
September 17, 2008. The last sentence of paragraph (a)(1) and paragraph 
(b)(1)(iv) of this section applies with respect to dispositions on or 
after December 16, 2008.
    (2) Dispositions of stock--(i) Dispositions of stock before 
effective date. If M was treated as disposing of stock of S in a tax 
year beginning before January 1, 1995 (including, for example, a deemed 
disposition because S was worthless) under the rules of this section 
then in effect, the amount of M's income, gain, deduction, or loss, and 
the stock basis reflected in that amount, are not redetermined under 
paragraph (h)(1) of this section. See paragraph (h)(3) of this section 
for the applicable rules.
    (ii) Application of special limitation. If M was treated as 
disposing of stock of S because S was treated as worthless as a result 
of the application of paragraph (c)(1)(iii)(B) of this section after 
August 29, 2003, the amount of M's income, gain, deduction, or loss, and 
the stock basis reflected in that amount, are determined or redetermined 
with regard to paragraph (b)(1)(ii) of this section. If M was treated as 
disposing of stock of S because S was treated as worthless as a result 
of the application of paragraph (c)(1)(iii)(B) of this section on or 
before August 29, 2003, the group may determine or redetermine the 
amount of M's income, gain, deduction, or loss, and the stock basis 
reflected in that amount with regard to paragraph (b)(1)(ii) of this 
section.
    (iii) Intercompany amounts. For purposes of this paragraph (h)(2), a 
disposition does not include a transaction to which Sec.  1.1502-13, 
Sec.  1.1502-13T, Sec.  1.1502-14, or Sec.  1.1502-14T applies. Instead, 
the transaction is deemed to occur as the income, gain, deduction, or 
loss (if any) is taken into account.
    (iv) Intercompany reorganizations. Paragraphs (d) and (g) Example 2 
of this section apply to transactions occurring on or after July 18, 
2007. For transactions occurring on or after January 23, 2006, and 
before July 18, 2007, see Sec.  1.1502-19T as contained in 26 CFR part 1 
in effect April 1, 2007. For transactions occurring before January 23, 
2006, see Sec.  1.1502-19 as contained in 26 CFR part 1 in effect April 
1, 2005.
    (3) Prior law. For prior determinations, see prior regulations under 
section 1502 as in effect with respect to the determination. See, e.g., 
Sec.  1.1502-19 as contained in the 26 CFR part 1 edition revised as of 
April 1, 1994. For guidance regarding determinations of the basis of the 
stock of a subsidiary acquired in an intercompany reorganization before 
January 23, 2006, see paragraph (d) and (g) Example 2 of Sec.  1.1502-19 
as contained in the 26 CFR part 1 edition revised as of April 1, 2005.

[T.D. 8560, 59 FR 41677, Aug. 15, 1994, as amended by T.D. 8597, 62 FR 
12097, Mar. 14, 1997; T.D. 9089, 68 FR 52490, Sept. 4, 2003; T.D. 9192, 
70 FR 14403, Mar. 22, 2005; T.D. 9242, 71 FR 4274, Jan. 26, 2006; T.D. 
9341, 72 FR 39314, July 18, 2007; T.D. 9424, 73 FR 53948, Sept. 17, 
2008; 73 FR 62204, Oct. 20, 2008]

                    Computation of Consolidated Items



Sec.  1.1502-21  Net operating losses.

    (a) Consolidated net operating loss deduction--(1) In general. 
Subject to any limitations under the Internal Revenue Code or this 
chapter (for example, the limitations under section 172(a)(2) and 
paragraph (a)(2) of this section), the consolidated net operating loss 
deduction (or CNOL deduction) for any consolidated return year is the 
aggregate of the net operating loss carryovers and carrybacks to the 
year. The net operating loss carryovers and carrybacks consist of--
    (i) Any CNOLs (as defined in paragraph (e) of this section) of the 
consolidated group; and
    (ii) Any net operating losses (or NOLs) of the members arising in 
separate return years.
    (2) Application of section 172 for computing net operating loss 
deductions--(i) Overview. For purposes of Sec.  1.1502-11(a)(2) 
(regarding a CNOL deduction),

[[Page 679]]

the rules of section 172 regarding the use of net operating losses are 
taken into account as provided by this paragraph (a)(2) in calculating 
the consolidated taxable income of a group for a particular consolidated 
return year. More specifically, in computing taxable income for taxable 
years beginning after December 31, 2020, section 172(a) generally limits 
the deductibility of net operating losses arising in taxable years 
beginning after December 31, 2017 (post-2017 NOLs). However, these 
limitations do not apply to net operating losses arising in taxable 
years beginning before January 1, 2018 (pre-2018 NOLs). Therefore, in 
any particular consolidated return year beginning after December 31, 
2020, the group's CNOL deduction includes CNOLs arising in taxable years 
beginning before January 1, 2018 (pre-2018 CNOLs), without limitation 
under section 172(a). Following the deduction of pre-2018 CNOLs, this 
paragraph (a)(2) applies to compute the maximum amount of CNOLs from 
taxable years beginning after December 31, 2017 (post-2017 CNOLs), that 
can be deducted against taxable income in a consolidated return year 
beginning after December 31, 2020 (post-2017 CNOL deduction limit). See 
section 172(a)(2)(A) and (B).
    (ii) Computation of the 80-percent limitation and special rule for 
nonlife insurance companies--(A) Determinations based on status of group 
members. If a portion of a post-2017 CNOL is carried back or carried 
over to a consolidated return year beginning after December 31, 2020, 
whether the members of the group include nonlife insurance companies, 
other types of corporations, or both determines whether section 172(a) 
(including the limitation described in section 172(a)(2)(B)(ii) (80-
percent limitation)), section 172(f) (providing special rules for 
nonlife insurance companies), or both, apply to the group for the 
consolidated return year.
    (B) Determination of post-2017 CNOL deduction limit. The post-2017 
CNOL deduction limit is determined under paragraph (a)(2)(iii) of this 
section by applying section 172(a)(2)(B)(ii) (that is, the 80-percent 
limitation), section 172(f) (that is, the special rule for nonlife 
insurance companies), or both, to the group's consolidated taxable 
income for that year.
    (C) Inapplicability of 80-percent limitation. The 80-percent 
limitation does not apply to CNOL deductions taken in taxable years 
beginning before January 1, 2021, or to CNOLs arising in taxable years 
beginning before January 1, 2018 (that is, pre-2018 CNOLs). See section 
172(a).
    (iii) Computations under sections 172(a)(2)(B) and 172(f). This 
paragraph (a)(2)(iii) provides rules for applying sections 172(f) and 
172(a)(2)(B) to consolidated return years beginning after December 31, 
2020 (that is, for computing the post-2017 CNOL deduction limit). 
Section 172(f) applies to income of nonlife insurance company members, 
whereas section 172(a)(2)(B)(ii) applies to income of members that are 
not nonlife insurance companies. Thus, this paragraph (a)(2)(iii) 
provides specific rules for groups with no nonlife insurance company 
members, only nonlife insurance company members, or a combination of 
nonlife insurance company members and other members. For groups with 
both nonlife insurance company members and life insurance company 
members, see paragraph (b)(2)(iv)(E) of this section.
    (A) Groups without nonlife insurance company members. If no member 
of a group is a nonlife insurance company during a particular 
consolidated return year beginning after December 31, 2020, section 
172(a)(2)(B)(ii) (that is, the 80-percent limitation) applies to all 
income of the group for that year. Therefore, the post-2017 CNOL 
deduction limit for the group for that year is the lesser of--
    (1) The aggregate amount of post-2017 NOLs carried to that year; or
    (2) The amount determined by multiplying--
    (i) 80 percent, by
    (ii) Consolidated taxable income for the group for that year 
(determined without regard to any deductions under sections 172, 199A, 
and 250) less the aggregate amount of pre-2018 NOLs carried to that 
year.
    (B) Groups comprised solely of nonlife insurance companies. If a 
group is comprised solely of nonlife insurance companies during a 
particular consolidated return year beginning after December

[[Page 680]]

31, 2020, section 172(f) applies to all income of the group for that 
year. Therefore, the post-2017 CNOL deduction limit for the group for 
that year equals the lesser of--
    (1) The aggregate amount of post-2017 NOLs carried to that year, or
    (2) Consolidated taxable income less the aggregate amount of pre-
2018 NOLs carried to that year.
    (C) Groups that include both nonlife insurance companies and other 
corporations--(1) General rule. Except as provided in paragraph 
(a)(2)(iii)(C)(5) of this section, if a group has at least one member 
that is a nonlife insurance company and at least one member that is not 
a nonlife insurance company during a particular consolidated return year 
beginning after December 31, 2020, the post-2017 CNOL deduction limit 
for the group for that year equals the lesser of--
    (i) The aggregate amount of post-2017 NOLs carried to that year, or
    (ii) The sum of the amounts in the income pools determined under 
paragraphs (a)(2)(iii)(C)(2) and (3) of this section.
    (2) Residual income pool. The amount determined under this paragraph 
(a)(2)(iii)(C)(2) (residual income pool) is eighty percent of the excess 
of--
    (i) The consolidated taxable income of the group for a consolidated 
return year beginning after December 31, 2020, determined without regard 
to any income, gain, deduction, or loss of members that are nonlife 
insurance companies and without regard to any deductions under sections 
172, 199A, and 250, over
    (ii) The aggregate amount of pre-2018 NOLs carried to that year that 
are allocated to this income pool under paragraph (a)(2)(iii)(C)(4) of 
this section (that is, by applying the 80-percent limitation). See 
section 172(a)(2)(B)(ii).
    (3) Nonlife income pool. The amount determined under this paragraph 
(a)(2)(iii)(C)(3) (nonlife income pool) is the consolidated taxable 
income of the group for a consolidated return year beginning after 
December 31, 2020, determined without regard to any income, gain, 
deduction, or loss of members included in the computation under 
paragraph (a)(2)(iii)(C)(2) of this section, less the aggregate amount 
of pre-2018 NOLs carried to that year that are allocated to this income 
pool under paragraph (a)(2)(iii)(C)(4) of this section. See section 
172(f).
    (4) Pro rata allocation of pre-2018 NOLs between pools of income. 
For purposes of paragraphs (a)(2)(iii)(C)(2) and (3) of this section, 
the aggregate amount of pre-2018 NOLs carried to any particular 
consolidated return year beginning after December 31, 2020, is prorated 
between the residual income pool and the nonlife income pool based on 
the relative amounts of positive income of those two pools. For example, 
if $30 of pre-2018 NOLs is carried over to a consolidated return year in 
which the residual income pool contains $75 and the nonlife income pool 
contains $150, the residual income pool is allocated $10 of the pre-2018 
NOLs ($30 x $75/($75 + $150), or $30 x \1/3\), and the nonlife income 
pool is allocated the remaining $20 of pre-2018 NOLs ($30 x $150/($75 + 
$150), or $30 x \2/3\).
    (5) Exception. The post-2017 CNOL deduction limit for the group for 
a consolidated return year is determined under this paragraph 
(a)(2)(iii)(C)(5) if the amounts computed under paragraphs 
(a)(2)(iii)(C)(2) and (3) of this section for that year are not both 
positive.
    (i) Positive residual income pool and negative nonlife income pool. 
This paragraph (a)(2)(iii)(C)(5)(i) applies if the amount computed under 
paragraph (a)(2)(iii)(C)(2) of this section for the residual income pool 
is positive and the amount computed under paragraph (a)(2)(iii)(C)(3) of 
this section for the nonlife income pool is negative. If this paragraph 
(a)(2)(iii)(C)(5)(i) applies, the post-2017 CNOL deduction limit for the 
group for a consolidated return year equals the lesser of the aggregate 
amount of post-2017 NOLs carried to that year, or 80 percent of the 
consolidated taxable income of the entire group (determined without 
regard to any deductions under sections 172, 199A, and 250) after 
subtracting the aggregate amount of pre-2018 NOLs carried to that year 
(that is, by applying the 80-percent limitation). See section 
172(a)(2)(B).
    (ii) Positive nonlife income pool and negative residual income pool. 
If the amount computed under paragraph

[[Page 681]]

(a)(2)(iii)(C)(3) of this section for the nonlife income pool is 
positive and the amount computed under paragraph (a)(2)(iii)(C)(2) of 
this section for the residual income pool is negative, the post-2017 
CNOL deduction limit for the group for a consolidated return year equals 
the lesser of the aggregate amount of post-2017 NOLs carried to that 
year, or the consolidated taxable income of the entire group less the 
aggregate amount of pre-2018 NOLs carried to that year. See section 
172(f).
    (b) Net operating loss carryovers and carrybacks to consolidated 
return and separate return years. Net operating losses of members 
arising during a consolidated return year are taken into account in 
determining the group's CNOL under paragraph (e) of this section for 
that year. Losses taken into account in determining the CNOL may be 
carried to other taxable years (whether consolidated or separate) only 
under this paragraph (b).
    (1) Carryovers and carrybacks generally. The net operating loss 
carryovers and carrybacks to a taxable year are determined under the 
principles of, and are subject to any limitations under, section 172 and 
this section. Thus, losses permitted to be absorbed in a consolidated 
return year generally are absorbed in the order of the taxable years in 
which they arose, and losses carried from taxable years ending on the 
same date, and which are available to offset consolidated taxable income 
for the year, generally are absorbed on a pro rata basis. In addition, 
except as otherwise provided in this section, the amount of any CNOL 
absorbed by the group in any year is apportioned among members based on 
the percentage of the CNOL eligible for carryback or carryover that is 
attributable to each member as of the beginning of the year. The 
percentage of the CNOL attributable to a member is determined pursuant 
to paragraph (b)(2)(iv)(B) of this section. Additional rules provided 
under the Internal Revenue Code or regulations also apply. See, for 
example, section 382(l)(2)(B) (if losses are carried from the same 
taxable year, losses subject to limitation under section 382 are 
absorbed before losses that are not subject to limitation under section 
382). See paragraph (c)(1)(iii)(B) of this section, (Example 2), for an 
illustration of pro rata absorption of losses subject to a SRLY 
limitation.
    (2) Carryovers and carrybacks of CNOLs to separate return years--(i) 
In general. If any CNOL that is attributable to a member may be carried 
to a separate return year of the member, the amount of the CNOL that is 
attributable to the member is apportioned to the member (apportioned 
loss) and carried to the separate return year. If carried back to a 
separate return year, the apportioned loss may not be carried back to an 
equivalent, or earlier, consolidated return year of the group; if 
carried over to a separate return year, the apportioned loss may not be 
carried over to an equivalent, or later, consolidated return year of the 
group.
    (ii) Special rules--(A) Year of departure from group. If a 
corporation ceases to be a member during a consolidated return year, net 
operating loss carryovers attributable to the corporation are first 
carried to the consolidated return year, then are subject to reduction 
under section 108 and Sec.  1.1502-28 (regarding discharge of 
indebtedness income that is excluded from gross income under section 
108(a)), and then are subject to reduction under Sec.  1.1502-36 
(regarding transfers of loss shares of subsidiary stock). Only the 
amount that is neither absorbed by the group in that year nor reduced 
under section 108 and Sec.  1.1502-28 or under Sec.  1.1502-36 may be 
carried to the corporation's first separate return year. For rules 
concerning a member departing a subgroup, see paragraph (c)(2)(vii) of 
this section.
    (B) Offspring rule. In the case of a member that has been a member 
continuously since its organization (determined without regard to 
whether the member is a successor to any other corporation), the CNOL 
attributable to the member is included in the carrybacks to consolidated 
return years before the member's existence. If the group did not file a 
consolidated return for a carryback year, the loss may be carried back 
to a separate return year of the common parent under paragraph (b)(2)(i) 
of this section, but only if the common parent was not a member of a 
different consolidated group or

[[Page 682]]

of an affiliated group filing separate returns for the year to which the 
loss is carried or any subsequent year in the carryback period. 
Following an acquisition described in Sec.  1.1502-75(d)(2) or (3), 
references to the common parent are to the corporation that was the 
common parent immediately before the acquisition.
    (iii) Equivalent years. Taxable years are equivalent if they bear 
the same numerical relationship to the consolidated return year in which 
a CNOL arises, counting forward or backward from the year of the loss. 
For example, in the case of a member's third taxable year (which was a 
separate return year) that preceded the consolidated return year in 
which the loss arose, the equivalent year is the third consolidated 
return year preceding the consolidated return year in which the loss 
arose. See paragraph (b)(3)(iii) of this section for certain short 
taxable years that are disregarded in making this determination.
    (iv) Operating rules. (A) Amount of CNOL attributable to a member. 
The amount of a CNOL that is attributable to a member equals the product 
obtained by multiplying the CNOL and the percentage of the CNOL 
attributable to the member.
    (B) Percentage of CNOL attributable to a member--(1) In general. 
Except as provided in paragraph (b)(2)(iv)(B)(2) of this section, the 
percentage of the CNOL for the consolidated return year attributable to 
a member equals the separate net operating loss of the member for the 
consolidated return year divided by the sum of the separate net 
operating losses for that year of all members having such losses for 
that year. For this purpose, the separate net operating loss of a member 
is determined by computing the CNOL by reference to only the member's 
items of income, gain, deduction, and loss, including the member's 
losses and deductions actually absorbed by the group in the consolidated 
return year (whether or not absorbed by the member). The source and 
section 904(d) separate category of the CNOL attributable to a member is 
determined under Sec.  1.1502-4(c)(1)(iii).
    (2) Recomputed percentage. If, for any reason, a member's portion of 
a CNOL is absorbed or reduced on a non-pro rata basis (for example, 
under Sec.  1.1502-11(b) or (c), paragraph (b)(2)(iv)(C) of this 
section, Sec.  1.1502-28, or 1.1502-36(d), or as the result of a 
carryback to a separate return year), the percentage of the CNOL 
attributable to each member is recomputed. In addition, if a member with 
a separate net operating loss ceases to be a member, the percentage of 
the CNOL attributable to each remaining member is recomputed. The 
recomputed percentage of the CNOL attributable to each member equals the 
remaining CNOL attributable to the member at the time of the 
recomputation divided by the sum of the remaining CNOL attributable to 
all of the remaining members at the time of the recomputation. For 
purposes of this paragraph (b)(2)(iv)(B)(2), a CNOL that is permanently 
disallowed or eliminated is treated as absorbed.
    (C) Net operating loss carryovers and carrybacks--(1) General rules. 
Subject to the rules regarding allocation of special status losses under 
paragraph (b)(2)(iv)(D) of this section--
    (i) Nonlife insurance companies. The portion of a CNOL attributable 
to any members of the group that are nonlife insurance companies is 
carried back or carried over under the rules in section 172(b) 
applicable to nonlife insurance companies.
    (ii) Corporations other than nonlife insurance companies. The 
portion of a CNOL attributable to any other members of the group is 
carried back or carried over under the rules in section 172(b) 
applicable to corporations other than nonlife insurance companies.
    (2) Recomputed percentage. For rules governing the recomputation of 
the percentage of a CNOL attributable to each remaining member if any 
portion of the CNOL attributable to a member is carried back under 
section 172(b)(1)(B) or (C) and absorbed on a non-pro rata basis, see 
paragraph (b)(2)(iv)(B)(2) of this section.
    (D) Allocation of special status losses. The amount of the group's 
CNOL that is determined to constitute a farming loss (as defined in 
section 172(b)(1)(B)(ii)) or any other net operating loss that is 
subject to special carryback or carryover rules (special

[[Page 683]]

status loss) is allocated to each member separately from the remainder 
of the CNOL based on the percentage of the CNOL attributable to the 
member, as determined under paragraph (b)(2)(iv)(B) of this section. 
This allocation is made without regard to whether a particular member 
actually incurred specific expenses or engaged in specific activities 
required by the special status loss provisions. This paragraph 
(b)(2)(iv)(D) applies only with regard to losses for which the special 
carryback or carryover rules are dependent on the type of expense 
generating the loss, rather than on the special status of the entity to 
which the loss is allocable. See section 172(b)(1)(C) and paragraph 
(b)(2)(iv)(C)(1)(i) of this section (applicable to losses of nonlife 
insurance companies). This paragraph (b)(2)(iv)(D) does not apply to 
farming losses incurred by a consolidated group in any taxable year 
beginning after December 31, 2017, and before January 1, 2021.
    (E) Coordination with rules for life-nonlife groups under Sec.  
1.1502-47. For groups that include at least one member that is a life 
insurance company and for which an election is in effect under section 
1504(c)(2), any computation of the 80-percent limitation under paragraph 
(a)(2)(iii)(C) of this section is computed only with respect to items of 
income, gain, deduction, and loss of the members of the nonlife subgroup 
(as defined in Sec.  1.1502-47(b)(9)). For rules regarding the use of 
CNOLs of the nonlife subgroup to offset life insurance company taxable 
income of the life subgroup (each as defined in Sec.  1.1502-47(b)), or 
the use of CNOLs of the life subgroup to offset consolidated taxable 
income of the nonlife subgroup, see generally section 1503(c)(1) and 
Sec.  1.1502-47.
    (v) Examples. For purposes of the examples in this paragraph 
(b)(2)(v), unless otherwise stated, all groups file consolidated 
returns, all corporations have calendar taxable years, all losses are 
farming losses within the meaning of section 172(b)(1)(B)(ii), all 
taxable years begin after December 31, 2020, the facts set forth the 
only corporate activity, value means fair market value and the adjusted 
basis of each asset equals its value, all transactions are with 
unrelated persons, and the application of any limitation or threshold 
under section 382 is disregarded. The principles of this paragraph (b) 
are illustrated by the following examples:
    (A) Example 1: Offspring rule. (1) During Year 1, Individual A forms 
P and T, and they each file a separate return. P forms S on March 15 of 
Year 2, and P and S file a consolidated return. P acquires all the stock 
of T from Individual A at the beginning of Year 3, and T becomes a 
member of the P group. P's acquisition of T is not an ownership change 
within the meaning of section 382. P, S, and T sustain a $1,100 CNOL in 
Year 3 and, under paragraph (b)(2)(iv) of this section, the loss is 
attributable $200 to P, $300 to S, and $600 to T.
    (2) Of the $1,100 CNOL in Year 3, the $500 amount of the CNOL that 
is attributable to P and S ($200 + $300) may be carried to P's separate 
return in Year 1. Even though S was not in existence in Year 1, the $300 
amount of the CNOL attributable to S may be carried back to P's separate 
return in Year 1 because S (unlike T) has been a member of the P group 
since its organization and P is a qualified parent under paragraph 
(b)(2)(ii)(B) of this section. To the extent not absorbed in that year, 
the loss may then be carried to the P group's return in Year 2. The $600 
amount of the CNOL attributable to T is a net operating loss carryback 
to T's separate return in Year 1, and if not absorbed in Year 1, then to 
Year 2.
    (B) Example 2: Departing members. (1) The facts are the same as in 
Example 1. In addition, on June 15 of Year 4, P sells all the stock of 
T. The P group's consolidated return for Year 4 includes the income of T 
through June 15. T files a separate return for the period from June 16 
through December 31.
    (2) $600 of the Year 3 CNOL attributable to T is apportioned to T 
and is carried back to its separate return in Year 1. To the extent the 
$600 is not absorbed in T's separate return in Year 1 or Year 2, it is 
carried to the consolidated return in Year 4 before being carried to T's 
separate return in Year 4. Any portion of the loss not absorbed in T's 
Year 1 or Year 2 or in the P group's Year 4 is then carried to T's 
separate return in Year 4.

[[Page 684]]

    (C) Example 3. Offspring rule following acquisition. (1) Individual 
A owns all of the stock of P, the common parent of a consolidated group. 
In Year 1, B, an individual unrelated to Individual A, forms T. P 
acquires all of the stock of T at the beginning of Year 3, and T becomes 
a member of the P group. The P group has $200 of consolidated taxable 
income in Year 2, and $300 of consolidated taxable income in Year 3 
(computed without regard to the CNOL deduction). At the beginning of 
Year 4, T forms a subsidiary, Y, in a transaction described in section 
351. The P group has a $300 consolidated net operating loss in Year 4, 
and under paragraph (b)(2)(iv) of this section, the loss is attributable 
entirely to Y.
    (2) Even though Y was not in existence in Year 2, $300, the amount 
of the consolidated net operating loss attributable to Y, may be carried 
back to the P group's Year 2 consolidated return under paragraph 
(b)(2)(ii)(B) of this section because Y has been a member of the P group 
since its organization. To the extent not absorbed in that year, the 
loss may then be carried to the P group's consolidated return in Year 3.
    (D) Example 4: Allocation of a CNOL arising in a consolidated return 
year beginning after December 31, 2020. (1) P is the common parent of a 
consolidated group that includes S. Neither P nor S is a nonlife 
insurance company. The P group also includes nonlife insurance companies 
PC1, PC2, and PC3. In the P group's 2021 consolidated return year, all 
members except S have separate net operating losses, and the P group's 
CNOL in that year is $40. No member of the P group engages in farming 
activities. See section 172(b)(1)(B)(ii).
    (2) Under paragraphs (b)(1) and (b)(2)(iv)(B)(1) of this section, 
for purposes of carrying losses to other taxable years, the P group's 
$40 CNOL is allocated pro rata among the group members that have 
separate net operating losses. Under paragraph (b)(2)(iv)(C) of this 
section, those respective portions of the CNOL attributable to PC1, PC2, 
and PC3 (that is, members that are nonlife insurance companies) are 
carried back to each of the two preceding taxable years and then carried 
over to each of the 20 subsequent taxable years. See section 
172(b)(1)(C). The portion attributable to P (which is not a nonlife 
insurance company) may not be carried back but is carried over to future 
years. See section 172(b)(1)(A).
    (E) Example 5: Allocation of a CNOL arising in a consolidated return 
year beginning before January 1, 2021. The facts are the same as in 
paragraph (b)(2)(v)(D)(1) of this section, except that the P group 
incurred the CNOL during the P group's 2020 consolidated return year. 
The allocation among the P group members of the CNOL described in 
paragraph (b)(2)(v)(D)(2) of this section would be the same. However, 
those respective portions of the CNOL attributable to PC1, PC2, and PC3 
(that is, members that are nonlife insurance companies) will be carried 
back to each of the five preceding taxable years and then carried over 
to each of the 20 subsequent taxable years. See section 172(b)(1)(C) and 
section 172(b)(1)(D)(i). The portion attributable to P (which is not a 
nonlife insurance company) will be carried back to each of the five 
preceding taxable years and then carried over to future years. See 
section 172(b)(1)(A) and section 172(b)(1)(D)(i).
    (F) Example 6: CNOL deduction and application of section 172. (1) P 
(a type of corporation other than a nonlife insurance company) is the 
common parent of a consolidated group that includes PC1 (a nonlife 
insurance company). P and PC1 were both incorporated in Year 1 (a year 
beginning after December 31, 2020). In Year 1, P and PC1 have separate 
taxable income of $20 and $25, respectively. As a result, the P group 
has Year 1 consolidated taxable income of $45. In Year 2, P has separate 
taxable income of $24, and PC1 has a separate taxable loss of $40, 
resulting in a P group CNOL of $16. Additionally, in Year 3, P has 
separate taxable income of $15, and PC1 has a separate taxable loss of 
$45, resulting in a P group CNOL of $30. No member of the P group 
engages in farming activities. See section 172(b)(1)(B)(ii).
    (2) Under paragraph (b)(2)(iv)(B) of this section, the P group's 
Year 2 CNOL and Year 3 CNOL are entirely attributable to PC1, a nonlife 
insurance company. Therefore, under section 172(b)(1)(C)(i), the entire 
amount of

[[Page 685]]

each of these CNOLs is eligible to be carried back to Year 1.
    (3) Under paragraph (a)(2)(ii) of this section, the amount of the 
Year 2 CNOL that may be used by the P group in Year 1 is determined by 
taking into account the status (nonlife insurance company or other type 
of corporation) of the member that has separate taxable income composing 
in whole or in part the P group's consolidated taxable income. Because 
the P group includes both a nonlife insurance company member and a 
member that is not a nonlife insurance company, paragraph (a)(2)(iii)(C) 
of this section applies to determine the computation of the post-2017 
CNOL deduction limit for the group for Year 1. Therefore, the 80-percent 
limitation is applied to the residual income pool, which consists of the 
taxable income of P, a type of corporation other than a nonlife 
insurance company. Under the 80-percent limitation, the maximum amount 
of P's Year 1 income that may be offset by the P group's post-2017 CNOLs 
is $16, which equals 80 percent of the excess of P's taxable income for 
Year 1 ($20) over the aggregate amount of pre-2018 NOLs allocable to P 
($0) (80 percent x ($20-$0)). See paragraph (a)(2)(iii)(C)(2) and 
(a)(2)(iii)(C)(4) of this section. PC1 is a nonlife insurance company to 
which section 172(f), rather than the 80-percent limitation in section 
172(a)(2)(B)(ii), applies. Therefore, the maximum amount of PC1's Year 1 
income that may be offset by the P group's post-2017 CNOLs is $25, which 
equals the excess of PC1's taxable income for Year 1 ($25) over the 
aggregate amount of pre-2018 NOLs allocable to PC1 ($0). See paragraph 
(a)(2)(iii)(C)(3) and (4) of this section.
    (4) Based on paragraph (a)(2)(iii)(C) of this section and the 
analysis set forth in paragraph (b)(2)(v)(F)(3) of this section, at the 
end of Year 2, the P group's post-2017 CNOL deduction limit for Year 1 
is the lesser of the aggregate amount of post-2017 NOLs carried to Year 
1 ($16), or $41 ($16 + $25). Therefore, the P group can offset $16 of 
its Year 1 income with its CNOL carryback from Year 2.
    (5) When the Year 3 CNOL is carried back to Year 1, the P group's 
post-2017 CNOL deduction limit for Year 1 is the lesser of $46 (the 
aggregate amount of post-2017 NOLs carried to Year 1) or $41 ($16 + $25; 
see the computation in paragraph (b)(2)(v)(F)(3) of this section). Thus, 
the total amount of the P group's Year 1 income that may be offset by 
the P group's Year 2 and Year 3 CNOLs is $41 ($16 from Year 2 + $25 from 
Year 3). As a result, the P group reports $4 of income ($45-$41) in Year 
1 that is ineligible for offset by any other NOLs. The P group carries 
over its remaining $5 CNOL ($46-$41) to future years.
    (G) Example 7: Pre-2018 and post-2017 CNOLs. (1) P is the common 
parent of a consolidated group. No member of the P group is a nonlife 
insurance company or is engaged in a farming business, and no member of 
the P group has a loss that is subject to a SRLY limitation. The P group 
had the following consolidated taxable income or CNOL for the following 
taxable years:

                  Table 1 to Paragraph (b)(2)(v)(G)(1)
------------------------------------------------------------------------
  2014      2015      2016     2017     2018     2019     2020     2021
------------------------------------------------------------------------
    $60        $0       $0    ($90)      $30    ($40)   ($100)     $120
------------------------------------------------------------------------

    (2) Under section 172(a)(1), all $30 of the P group's 2018 
consolidated taxable income is offset by the 2017 CNOL carryover without 
limitation. The remaining $60 of the P group's 2017 CNOL is carried over 
to 2021 under section 172(b)(1)(A)(ii)(I).
    (3) Under section 172(b)(1)(D)(i)(I), the P group's $40 2019 CNOL is 
carried back to the five taxable years preceding the year of the loss. 
Thus, the P group's $40 2019 CNOL is carried back to offset $40 of its 
2014 consolidated taxable income.
    (4) Under section 172(a)(2) and paragraph (a)(2)(i) of this section, 
the P group's CNOL deduction for 2021 equals the aggregate amount of 
pre-2018 NOLs carried to 2021 plus the group's post-2017 CNOL deduction 
limit. The P group has $60 of pre-2018 NOLs carried

[[Page 686]]

to 2021 ($90-$30). Because no member of the P group is a nonlife 
insurance company, paragraph (a)(2)(iii)(A) of this section applies to 
determine the computation of the group's post-2017 CNOL deduction limit 
for 2021. See also section 172(a)(2)(B). Therefore, the post-2017 CNOL 
deduction limit of the P group for 2021 is $48, which equals the lesser 
of the aggregate amount of post-2017 NOLs carried to 2021 ($100), or 80 
percent of the excess of the P group's consolidated taxable income for 
that year computed without regard to any deductions under sections 172, 
199A, and 250 ($120) over the aggregate amount of pre-2018 NOLs carried 
to 2021 ($60) (that is, 80 percent x $60). Thus, the P group's CNOL 
deduction for 2021 equals $108 ($60 pre-2018 NOLs carried to 2021 + $48 
post-2017 CNOL deduction limit). See section 172(a)(2) and paragraph 
(a)(2)(i) of this section. The P group offsets $108 of its $120 of 2021 
consolidated taxable income, resulting in $12 of consolidated taxable 
income in 2021. The remaining $52 of the P group's 2020 CNOL ($100-$48) 
is carried over to future taxable years. See section 
172(b)(1)(A)(ii)(II).
    (3) Special rules--(i) Election to relinquish carryback. A group may 
make an irrevocable election under section 172(b)(3) to relinquish the 
entire carryback period with respect to a CNOL for any consolidated 
return year. Except as provided in Sec.  1.1502-21(b)(3)(ii)(B), the 
election may not be made separately for any member (whether or not it 
remains a member), and must be made in a separate statement entitled 
``THIS IS AN ELECTION UNDER Sec.  1.1502-21(b)(3)(i) TO WAIVE THE ENTIRE 
CARRYBACK PERIOD PURSUANT TO SECTION 172(b)(3) FOR THE [insert 
consolidated return year] CNOLs OF THE CONSOLIDATED GROUP OF WHICH 
[insert name and employer identification number of common parent] IS THE 
COMMON PARENT.'' The statement must be filed with the group's income tax 
return for the consolidated return year in which the loss arises. If the 
consolidated return year in which the loss arises begins before January 
1, 2003, the statement making the election must be signed by the common 
parent. If the consolidated return year in which the loss arises begins 
after December 31, 2002, the election may be made in an unsigned 
statement.
    (ii) Special elections--(A) Groups that include insolvent financial 
institutions. For rules applicable to relinquishing the entire carryback 
period with respect to losses attributable to insolvent financial 
institutions, see Sec.  301.6402-7 of this chapter.
    (B) Acquisition of member from another consolidated group. If one or 
more members of a consolidated group becomes a member of another 
consolidated group, the acquiring group may make an irrevocable election 
to relinquish, with respect to all consolidated net operating losses 
attributable to the member, the portion of the carryback period for 
which the corporation was a member of another group, provided that any 
other corporation joining the acquiring group that was affiliated with 
the member immediately before it joined the acquiring group is also 
included in the waiver. This election is not a yearly election and 
applies to all losses that would otherwise be subject to a carryback to 
a former group under section 172. The election must be made in a 
separate statement entitled ``THIS IS AN ELECTION UNDER Sec.  1.1502-
21(b)(3)(ii)(B) TO WAIVE THE PRE-[insert first taxable year for which 
the member (or members) was not a member of another group] CARRYBACK 
PERIOD FOR THE CNOLs attributable to [insert names and employer 
identification number of members].'' The statement must be filed with 
the acquiring consolidated group's original income tax return for the 
year the corporation (or corporations) became a member. If the year in 
which the corporation (or corporations) became a member begins before 
January 1, 2003, the statement must be signed by the common parent and 
each of the members to which it applies. If the year in which the 
corporation (or corporations) became a member begins after December 31, 
2002, the election may be made in an unsigned statement.
    (C) Waiver of carryback period for losses in taxable years to which 
statutorily amended carryback rules apply. For further information, see 
Sec.  1.1502-21T(b)(3)(ii)(C).

[[Page 687]]

    (D) Examples. For further information, see Sec.  1.1502-
21T(b)(3)(ii)(D).
    (iii) Short years in connection with transactions to which section 
381(a) applies. If a member distributes or transfers assets to a 
corporation that is a member immediately after the distribution or 
transfer in a transaction to which section 381(a) applies, the 
transaction does not cause the distributor or transferor to have a short 
year within the consolidated return year of the group in which the 
transaction occurred that is counted as a separate year for purposes of 
determining the years to which a net operating loss may be carried.
    (iv) Special status losses. [Reserved]
    (v) [Reserved] For further guidance, see Sec.  1.1502-21T(b)(3)(v).
    (c) Limitations on net operating loss carryovers and carrybacks from 
separate return limitation years--(1) SRLY limitation--(i) General rule. 
Except as provided in paragraph (g) of this section (relating to an 
overlap with section 382), the aggregate of the net operating loss 
carryovers and carrybacks of a member (SRLY member) arising (or treated 
as arising) in SRLYs (SRLY NOLs) that are included in the CNOL 
deductions for all consolidated return years of the group under 
paragraph (a) of this section may not exceed the aggregate consolidated 
taxable income for all consolidated return years of the group determined 
by reference to only the member's items of income, gain, deduction, and 
loss (cumulative register). For this purpose--
    (A) Consolidated taxable income is computed without regard to CNOL 
deductions;
    (B) Consolidated taxable income takes into account the member's 
losses and deductions (including capital losses) actually absorbed by 
the group in consolidated return years (whether or not absorbed by the 
member);
    (C) In computing consolidated taxable income, the consolidated 
return years of the group include only those years, including the year 
to which the loss is carried, that the member has been continuously 
included in the group's consolidated return, but exclude--
    (1) For carryovers, any years ending after the year to which the 
loss is carried; and
    (2) For carrybacks, any years ending after the year in which the 
loss arose;
    (D) The treatment under Sec.  1.1502-15 of a built-in loss as a 
hypothetical net operating loss carryover in the year recognized is 
solely for purposes of determining the limitation under this paragraph 
(c) with respect to the loss in that year and not for any other purpose. 
Thus, for purposes of determining consolidated taxable income for any 
other losses, a built-in loss allowed under this section in the year it 
arises is taken into account; and
    (E) If a limitation on the amount of taxable income that may be 
offset under section 172(a) (see paragraph (a)(2) of this section) 
applies in a taxable year to a member whose carryovers or carrybacks are 
subject to a SRLY limitation (SRLY member), the amount of net operating 
loss subject to a SRLY limitation that is available for use by the group 
in that year is limited to the percentage of the balance in the 
cumulative register that would be available for offset under section 
172(a) if the SRLY member filed a separate return and reported as 
taxable income in that year the amount contained in the cumulative 
register. For example, assume that a consolidated group has a SRLY 
member that is a corporation other than a nonlife insurance company, and 
that the SRLY member has a SRLY NOL that arose in a taxable year 
beginning after December 31, 2017 (post-2017 NOL). The group's 
consolidated taxable income for a consolidated return year beginning 
after December 31, 2020 is $200, but the cumulative register has a 
positive balance of only $120 (and no other net operating loss 
carryovers or carrybacks are available for the year). Because the SRLY 
limitation would be $96 ($120 x 80 percent), only $96 of SRLY loss may 
be used, rather than $160 ($200 x 80 percent). In addition, to the 
extent that this paragraph (c)(1)(i)(E) applies, the cumulative register 
is decreased by the full amount of income required under section 172(a) 
to support the amount of SRLY NOL absorption. See, for example, 
paragraph (c)(1)(iii)(A) and (B) of

[[Page 688]]

this section for examples illustrating the application of this rule.
    (ii) Losses treated as arising in SRLYs. If a net operating loss 
carryover or carryback did not arise in a SRLY but is attributable to a 
built-in loss (as defined under Sec.  1.1502-15), the carryover or 
carryback is treated for purposes of this paragraph (c) as arising in a 
SRLY if the built-in loss was not allowed, after application of the SRLY 
limitation, in the year it arose. For an illustration, see Sec.  1.1502-
15(d), Example 5. But see Sec.  1.1502-15(g)(1).
    (iii) Examples. For purposes of the examples in this paragraph 
(c)(1)(iii), no corporation is a nonlife insurance company and, unless 
otherwise specified, all taxable years begin after December 31, 2020, 
and all CNOLs arise in taxable years beginning after December 31, 2020. 
The principles of this paragraph (c)(1) are illustrated by the following 
examples:
    (A) Example 1: Determination of SRLY limitation. (1) Individual A 
owns P. In Year 1, Individual A forms T, and T sustains a $100 net 
operating loss that is carried forward. P acquires all the stock of T at 
the beginning of Year 2, and T becomes a member of the P group. The P 
group has $300 of consolidated taxable income in Year 2 (computed 
without regard to the CNOL deduction). Such consolidated taxable income 
would be $70 if determined by reference to only T's items.
    (2) T's $100 net operating loss carryover from Year 1 arose in a 
SRLY. See Sec.  1.1502-1(f)(2)(iii). P's acquisition of T was not an 
ownership change as defined by section 382(g). Thus, the $100 net 
operating loss carryover is subject to the SRLY limitation in paragraph 
(c)(1) of this section. The positive balance of the cumulative register 
of T for Year 2 equals the consolidated taxable income of the P group 
determined by reference to only T's items, or $70. However, due to the 
80-percent limitation and the application of paragraph (c)(1)(i)(E) of 
this section, the SRLY limitation is $56 ($70 x 80 percent). No losses 
from equivalent years are available, and the P group otherwise has 
sufficient consolidated taxable income to support the CNOL deduction 
($300 x 80 percent = $240). Therefore, $56 of the SRLY net operating 
loss is included under paragraph (a) of this section in the P group's 
CNOL deduction for Year 2. Although only $56 is absorbed, the cumulative 
register of T is reduced by $70, the full amount of income necessary to 
support the $56 deduction after taking into account the 80-percent 
limitation ($70 x 80 percent = $56).
    (3) The facts are the same as in paragraph (i) of this Example 1, 
except that such consolidated taxable income (computed without regard to 
the CNOL deduction and by reference to only T's items) for Year 2 is a 
loss (a CNOL) of $370. Because the SRLY limitation may not exceed the 
consolidated taxable income determined by reference to only T's items, 
and such items aggregate to a CNOL, T's $100 net operating loss 
carryover from Year 1 is not allowed under the SRLY limitation in Year 
2. Moreover, if consolidated taxable income (computed without regard to 
the CNOL deduction and by reference to only T's items) did not exceed 
$370 in Year 3, the carryover would still be restricted under paragraph 
(c) of this section in Year 3, because the aggregate consolidated 
taxable income for all consolidated return years of the group computed 
by reference to only T's items would not be a positive amount.
    (B) Example 2: Net operating loss carryovers. (1) In Year 1, 
Individual A forms P, and P sustains a $40 net operating loss that is 
carried forward. P has no income in Year 2. Individual A also owns T 
which sustains a net operating loss of $50 in Year 2 that is carried 
forward. P acquires the stock of T from Individual A during Year 3, but 
T is not a member of the P group for each day of the year. P and T file 
separate returns and sustain net operating losses of $120 and $60, 
respectively, for Year 3. The P group files consolidated returns 
beginning in Year 4. During Year 4, the P group has $160 of consolidated 
taxable income (computed without regard to the CNOL deduction). Such 
consolidated taxable income would be $70 if determined by reference to 
only T's items. These results are summarized as follows:

----------------------------------------------------------------------------------------------------------------
                                                                   Separate   Separate   Separate/  Consolidated
                                                                 ---------------------- affiliated -------------
                                                                                       ------------
                                                                    Year 1     Year 2     Year 3       Year 4
----------------------------------------------------------------------------------------------------------------
P...............................................................     $ (40)         $0     $ (120)           $90

[[Page 689]]

 
T...............................................................          0       (50)        (60)            70
                                                                                                   -------------
CTI.............................................................  .........  .........  ..........           160
----------------------------------------------------------------------------------------------------------------

    (2) P's Year 1, Year 2, and Year 3 are not SRLYs with respect to the 
P group. See Sec.  1.1502-1(f)(2)(i). Thus, P's $40 net operating loss 
arising in Year 1 and $120 net operating loss arising in Year 3 are not 
subject to the SRLY limitation under paragraph (c) of this section. 
Although the P group has $160 of taxable income in Year 4, the 80-
percent limitation reduces the P group's net operating loss deduction in 
that year to $128 ($160 x 80 percent). Under the principles of section 
172, paragraph (b) of this section requires that P's $40 loss arising in 
Year 1 be the first loss absorbed by the P group in Year 4. Absorption 
of this loss leaves $88 ($128-$40) of the P group's Year 4 consolidated 
taxable income available for offset by loss carryovers.
    (3) T's Year 2 and Year 3 are SRLYs with respect to the P group. See 
Sec.  1.1502-1(f)(2)(ii). P's acquisition of T was not an ownership 
change as defined by section 382(g). Thus, T's $50 net operating loss 
arising in Year 2 and $60 net operating loss arising in Year 3 are 
subject to the SRLY limitation. The positive balance of the cumulative 
register of T for Year 4 equals the P group's consolidated taxable 
income determined by reference to only T's items, or $70. Under 
paragraph (c)(1)(i)(E) of this section, after taking into account the 
80-percent limitation, T's SRLY limitation is $56 ($70 x 80 percent). 
Therefore, the P group can absorb up to $56 of T's SRLY net operating 
losses in Year 4. Under the principles of section 172, T's $50 SRLY net 
operating loss from Year 2 is included under paragraph (a) of this 
section in the P group's CNOL deduction for Year 4. After absorption of 
this loss, under paragraph (c)(1)(i) of this section, $6 of SRLY limit 
remains in Year 4 ($56-$50). Further, the total amount of Year 4 
consolidated taxable income available for offset by other loss 
carryovers under section 172(a) is $38 ($88-$50).
    (4) P and T each carry over net operating losses to Year 4 from a 
taxable year ending on the same date (that is, Year 3). The losses 
carried over from Year 3 total $180. However, the remaining Year 4 SRLY 
limit is $6. Therefore, the total amount of loss available for 
absorption is $126 ($120 allocable to P and $6 allocable to T). Under 
paragraph (b) of this section, the losses available for absorption that 
are carried over from Year 3 are absorbed on a pro rata basis, even 
though one loss arises in a SRLY and the other loss does not. Thus, 
$36.19 of P's Year 3 loss is absorbed ($120/($120 + $6)) x $38 = $36.19. 
In addition, $1.81 of T's Year 3 loss is absorbed ($6/($120 + $6)) x $38 
= $1.81.
    (5) After deduction of T's SRLY net operating losses in Year 4, the 
cumulative register of T is adjusted pursuant to paragraph (c)(1)(i)(E) 
of this section. A total of $51.81 of SRLY net operating losses were 
absorbed in Year 4 ($50 + $1.81). After taking into account the 80-
percent limitation, the amount of income necessary to support this 
deduction is $64.76 ($64.76 x 80 percent = $51.81). Therefore, the 
cumulative register of T is decreased by $64.76, and $5.24 remains in 
the cumulative register ($70-$64.76).
    (6) P carries its remaining $83.81 ($120-$36.19) Year 3 net 
operating loss and T carries its remaining $58.19 ($60-$1.81) Year 3 net 
operating loss over to Year 5. Assume that, in Year 5, the P group has 
$90 of consolidated taxable income (computed without regard to the CNOL 
deduction). The P group's consolidated taxable income determined by 
reference to only T's items is a CNOL of $4. Therefore, the positive 
balance of the cumulative register of T in Year 5 equals $1.24 ($5.24-
$4). Under paragraph (c)(1)(i)(E) of this section, after taking into 
account the 80-percent limitation, T's SRLY limitation is $0.99 ($1.24 x 
80 percent). For Year 5, the total amount of Year 5 consolidated taxable 
income available for offset by loss carryovers as a result of the 80-
percent limitation is $72 ($90 x 80 percent). Under paragraph (b) of 
this section, the losses carried over from Year 3 are absorbed on a pro 
rata basis, even though one loss arises in a SRLY and the other loss 
does not. Therefore, $71.16 of P's Year 3 loss is absorbed

[[Page 690]]

(($83.81/($83.81 + $0.99)) x $72 = $71.16). In addition, $0.84 of T's 
Year 3 losses is absorbed (($0.99/($83.81 + $0.99)) x $72 = $0.84).
    (C) Example 3: Net operating loss carrybacks. (1) P owns all of the 
stock of S and T. The members of the P group contribute the following to 
the consolidated taxable income of the P group for Years 1, 2, and 3:

------------------------------------------------------------------------
                                Year 1     Year 2     Year 3     Total
------------------------------------------------------------------------
P...........................       $100        $60        $80       $240
S...........................         20         20         30         70
T...........................         30         10       (50)       (10)
CTI.........................        150         90         60        300
------------------------------------------------------------------------

    (2) P sells all of the stock of T to Individual A at the beginning 
of Year 4, a taxable year that begins on January 1, 2021. For its Year 4 
separate return year, T has a net operating loss of $30.
    (3) T's Year 4 is a SRLY with respect to the P group. See Sec.  
1.1502-1(f)(1). T's $30 net operating loss carryback to the P group from 
Year 4 is not allowed under paragraph (c) of this section to be included 
in the CNOL deduction under paragraph (a) of this section for Year 1, 2, 
or 3, because the P group's consolidated taxable income would not be a 
positive amount if determined by reference to only T's items for all 
consolidated return years through Year 4 (without regard to the $30 net 
operating loss). The $30 loss is carried forward to T's Year 5 and 
succeeding taxable years as provided under the Internal Revenue Code.
    (D) Example 4: Computation of SRLY limitation for built-in losses 
treated as net operating loss carryovers. (1) Individual A owns P. In 
Year 1, Individual A forms T by contributing $300 and T sustains a $100 
net operating loss. During Year 2, T's assets decline in value by $100. 
At the beginning of Year 3, P acquires all the stock of T from 
Individual A, and T becomes a member of the P group in a transaction 
that does not result in an ownership change under section 382(g). At the 
time of the acquisition, T has a $100 net unrealized built-in loss, 
which exceeds the threshold requirements of section 382(h)(3)(B). During 
Year 3, T recognizes its unrealized loss as a $100 ordinary loss. The 
members of the P group contribute the following to the consolidated 
taxable income of the P group for Years 3 and 4 (computed without regard 
to T's recognition of its unrealized loss and any CNOL deduction under 
this section):

------------------------------------------------------------------------
                                                Year 3   Year 4   Total
------------------------------------------------------------------------
P group (without T)..........................     $100     $100     $200
T............................................       60       40      100
CTI..........................................      160      140      300
------------------------------------------------------------------------

    (2) Under Sec.  1.1502-15(a), T's $100 of ordinary loss in Year 3 
constitutes a built-in loss that is subject to the SRLY limitation under 
paragraph (c) of this section. The amount of the limitation is 
determined by treating the deduction as a net operating loss carryover 
from a SRLY. The built-in loss is therefore subject to both a SRLY 
limitation and the 80-percent limitation for Year 3. The built-in loss 
is treated as a net operating loss carryover solely for purposes of 
determining the extent to which the loss is not allowed by reason of the 
SRLY limitation, and for all other purposes the loss remains a loss 
arising in Year 3. See Sec.  1.1502-21(c)(1)(i)(D). Consequently, under 
paragraph (b) of this section, the built-in loss is absorbed by the P 
group before the net operating loss carryover from Year 1 is absorbed. 
The positive balance of the cumulative register of T for Year 3 equals 
the P group's consolidated taxable income determined by reference to 
only T's items, or $60. Under paragraph (c)(1)(i)(E) of this section, 
after taking into account the 80-percent limitation, the SRLY limitation 
for Year 3 is $48 ($60 x 80 percent). Therefore, $48 of the built-in 
loss is absorbed by the P group. None of T's $100 SRLY net operating 
loss carryover from Year 1 is allowed.
    (3) After deduction of T's $48 SRLY built-in loss in Year 4, the 
cumulative register of T is adjusted pursuant to paragraph (c)(1)(i)(E) 
of this section. After taking into account the 80-percent limitation, 
the amount of income necessary to support this deduction is $60 ($60 x 
80 percent = $48). Therefore, the cumulative register of T is decreased 
by $60, and zero remains in the cumulative register ($60-$60).
    (4) Under Sec.  1.1502-15(a), the $52 balance of the built-in loss 
that is not allowed in Year 3 because of the SRLY limitation and the 80-
percent limitation is treated as a $52 net operating loss arising in 
Year 3 that is subject to

[[Page 691]]

the SRLY limitation because, under paragraph (c)(1)(ii) of this section, 
Year 3 is treated as a SRLY. The built-in loss is carried to other years 
in accordance with the rules of paragraph (b) of this section. The 
positive balance of the cumulative register of T for Year 4 equals $40 
(zero from Year 3 + $40). Under paragraph (c)(1)(i)(E) of this section, 
after taking into account the 80-percent limitation, the SRLY limitation 
for Year 4 is $32 ($40 x 80 percent). Therefore, under paragraph (c) of 
this section, $32 of T's $100 net operating loss carryover from Year 1 
is included in the CNOL deduction under paragraph (a) of this section in 
Year 4.
    (5) After deduction of T's $32 SRLY net operating loss in Year 4, 
the cumulative register of T is adjusted pursuant to paragraph 
(c)(1)(i)(E) of this section. After taking into account the 80-percent 
limitation, the amount of income necessary to support this deduction is 
$40 ($40 x 80 percent = $32). Therefore, the cumulative register is 
decreased by $40, and zero remains in the cumulative register ($40-$40).
    (E) Example 5: Dual SRLY registers and accounting for SRLY losses 
actually absorbed. (1) In Year 1, T sustains a $100 net operating loss 
and a $50 net capital loss. At the beginning of Year 2, T becomes a 
member of the P group in a transaction that does not result in an 
ownership change under section 382(g). Both of T's carryovers from Year 
1 are subject to SRLY limits under this paragraph (c) and Sec.  1.1502-
22(c). The members of the P group contribute the following to the 
consolidated taxable income for Years 2 and 3 (computed without regard 
to T's CNOL deduction under this section or net capital loss carryover 
under Sec.  1.1502-22):

------------------------------------------------------------------------
                                                           P        T
------------------------------------------------------------------------
                              Year 1 (SRLY)
------------------------------------------------------------------------
Ordinary..............................................  .......    (100)
Capital...............................................  .......    (50)
                                 Year 2
------------------------------------------------------------------------
Ordinary..............................................       30       60
Capital...............................................        0    (20)
                                 Year 3
------------------------------------------------------------------------
Ordinary..............................................       10       40
Capital...............................................        0       30
------------------------------------------------------------------------

    (2) For Year 2, the P group computes separate SRLY limits for each 
of T's SRLY carryovers from Year 1. The group determines its ability to 
use its capital loss carryover before it determines its ability to use 
its ordinary loss carryover. Under section 1212, because the P group has 
no Year 2 capital gain, it cannot absorb any capital losses in Year 2. 
T's Year 1 net capital loss and the P group's Year 2 consolidated net 
capital loss (all of which is attributable to T) are carried over to 
Year 3.
    (3) The P group's ability to deduct net operating losses in Year 2 
is subject to the 80-percent limitation, based on the P group's 
consolidated taxable income for the year. Thus, the group's limitation 
for Year 2 is $72 ($90 x 80 percent). However, use of the Year 1 net 
operating loss also is subject to the SRLY limitation. The positive 
balance of the cumulative register of T applicable to SRLY net operating 
losses for Year 2 equals the P group's consolidated taxable income 
determined by reference to only T's items, or $60. Under paragraph 
(c)(1)(i)(E) of this section, after taking into account the 80-percent 
limitation, the SRLY limitation for Year 2 is $48 ($60 x 80 percent). 
Therefore, only $48 of T's Year 1 SRLY net operating loss is absorbed by 
the P group in Year 2. T carries over its remaining $52 of its Year 1 
loss to Year 3.
    (4) After deduction of T's SRLY net operating losses in Year 2, the 
net operating loss cumulative register is adjusted pursuant to paragraph 
(c)(1)(i)(E) of this section. The P group deducted $48 of T's SRLY net 
operating losses in Year 2. After taking into account the 80-percent 
limitation, the amount of taxable income necessary to support this 
deduction is $60 ($60 x 80 percent = $48). Therefore, the net operating 
loss cumulative register of T is decreased by $60, and zero remains in 
the net operating loss cumulative register ($60-$60).
    (5) For Year 3, the P group again computes separate SRLY limits for 
each of T's SRLY carryovers from Year 1. The group has consolidated net 
capital gain (without taking into account a net capital loss carryover 
deduction) of $30. Under Sec.  1.1502-22(c), the aggregate amount of T's 
$50 capital loss carryover from Year 1 that is included in computing the 
P group's consolidated

[[Page 692]]

net capital gain for all years of the group (in this case, Years 2 and 
3) may not exceed $30 (the aggregate consolidated net capital gain 
computed by reference only to T's items, including losses and deductions 
actually absorbed (that is, $30 of capital gain in Year 3)). Thus, the P 
group may include $30 of T's Year 1 capital loss carryover in its 
computation of consolidated net capital gain for Year 3, which offsets 
the group's capital gains for Year 3. T carries over its remaining $20 
of its Year 1 capital loss to Year 4. Therefore, the capital loss 
cumulative register of T is decreased by $30, and zero remains in the 
capital loss cumulative register ($30-$30). Further, because the net 
operating loss cumulative register includes all taxable income of T 
included in the P group, as well as all absorbed losses of T (including 
capital items), a zero net increase occurs in the net operating loss 
cumulative register. The P group carries over the Year 2 consolidated 
net capital loss to Year 4.
    (6) The P group's ability to deduct net operating losses in Year 3 
is subject to the 80-percent limitation, based on the P group's 
consolidated taxable income for the year. Thus, the P group's taxable 
income for Year 3 that can be offset, before use of net operating 
losses, is $40 (80 percent x the sum of zero capital gain, after use of 
the capital loss carryover, plus $50 of ordinary income). However, use 
of the Year 1 net operating loss also is subject to the SRLY limitation. 
The positive balance of the cumulative register of T applicable to SRLY 
net operating losses for Year 3 equals the P group's consolidated 
taxable income determined by reference only to T's items, or $40. This 
amount equals the sum obtained by adding the zero carryover from Year 2, 
a net inclusion of zero from capital items implicated in Year 3 ($30-
$30), and $40 of taxable income in Year 3. Under paragraph (c)(1)(i)(E) 
of this section, after taking into account the 80-percent limitation, 
the SRLY limitation for Year 3 is $32 ($40 x 80 percent). Therefore, 
only $32 of the Year 1 net operating loss is absorbed by the P group in 
Year 3. T carries over its remaining $20 of its Year 1 loss to Year 4.
    (F) Example 6: Pre-2018 NOLs and post-2017 NOLs. (1) Individual A 
owns P. On January 1, 2017, A forms T. P and T are calendar-year 
taxpayers. In 2017, T sustains a $100 net operating loss that is carried 
over. During 2018, 2019, and 2020, T deducts a total of $90 of its 2017 
net operating loss against its taxable income, and T carries over the 
remaining $10 of its 2017 net operating loss. In 2021, T sustains a net 
operating loss of $50. On December 31, 2021, P acquires all the stock of 
T, and T becomes a member of the P group. The P group has $300 of 
consolidated taxable income in 2022 (computed without regard to the CNOL 
deduction). Such consolidated taxable income would be $70 if determined 
by reference to only T's items. The P group has no other SRLY net 
operating loss carryovers or CNOL carryovers.
    (2) T's remaining $10 of net operating loss carryover from 2017 and 
its $50 net operating loss carryover from 2021 are both SRLY losses in 
the P group. See Sec.  1.1502-1(f)(2)(iii). P's acquisition of T was not 
an ownership change as defined by section 382(g). Thus, T's net 
operating loss carryovers are subject to the SRLY limitation in 
paragraph (c)(1) of this section. The SRLY limitation for the P group's 
2022 consolidated return year is consolidated taxable income determined 
by reference to only T's $70 of items.
    (3) Because T's oldest (2017) carryover was sustained in a year 
beginning before January 1, 2018, its use is not subject to limitation 
under section 172(a)(2)(B). Therefore, all $10 of T's 2017 SRLY net 
operating loss (that is, a pre-2018 NOL) is included under paragraph (a) 
of this section in the P group's CNOL deduction for 2022. After 
deduction of T's $10 SRLY net operating loss from 2017, the cumulative 
register of T is reduced on a dollar-for-dollar basis, pursuant to 
paragraph (c)(1)(i) of this section. Therefore, the cumulative register 
of T is decreased by $10, and $60 remains in the cumulative register 
($70-$10).
    (4) The P group's deduction of T's 2021 net operating loss is 
subject to both a SRLY limitation and the 80-percent limitation under 
section 172(a)(2)(B)(ii). Therefore, the total

[[Page 693]]

limitation on the use of T's 2021 net operating loss in the P group is 
$48 (the remaining cumulative register of $60 x 80 percent). No losses 
from equivalent years are available, and the P group otherwise has 
sufficient consolidated taxable income to support the CNOL deduction 
($290 x 80 percent = $232). Therefore, $48 of T's 2021 SRLY net 
operating loss is included under paragraph (a) of this section in the P 
group's CNOL deduction for 2022. The remaining $2 of T's 2021 SRLY net 
operating loss ($50-$48) is carried over to the P group's 2023 
consolidated return year.
    (5) After deduction of T's $48 SRLY NOL in 2022, the cumulative 
register of T is adjusted pursuant to paragraph (c)(1)(i)(E) of this 
section. After taking into account the 80-percent limitation, the amount 
of income necessary to support this deduction is $60 ($60 x 80 percent = 
$48). Therefore, the cumulative register of T is decreased by $60, and 
zero remains in the cumulative register ($60-$60).
    (2) SRLY subgroup limitation. In the case of a net operating loss 
carryover or carryback for which there is a SRLY subgroup, the 
principles of paragraph (c)(1) of this section apply to the SRLY 
subgroup, and not separately to its members. Thus, the contribution to 
consolidated taxable income and the net operating loss carryovers and 
carrybacks arising (or treated as arising) in SRLYs that are included in 
the CNOL deductions for all consolidated return years of the group under 
paragraph (a) of this section are based on the aggregate amounts of 
income, gain, deduction, and loss of the members of the SRLY subgroup 
for the relevant consolidated return years (as provided in paragraph 
(c)(1)(i)(C) of this section). For an illustration of aggregate amounts 
during the relevant consolidated return years following the year in 
which a member of a SRLY subgroup ceases to be a member of the group, 
see paragraph (c)(2)(viii) Example 4 of this section. A SRLY subgroup 
may exist only for a carryover or carryback arising in a year that is 
not a SRLY (and is not treated as a SRLY under paragraph (c)(1)(ii) of 
this section) with respect to another group (the former group), whether 
or not the group is a consolidated group, or for a carryover that was 
subject to the overlap rule described in paragraph (g) of this section 
or Sec.  1.1502-15(g) with respect to another group (the former group). 
A separate SRLY subgroup is determined for each such carryover or 
carryback. A consolidated group may include more than one SRLY subgroup, 
and a member may be a member of more than one SRLY subgroup. Solely for 
purposes of determining the members of a SRLY subgroup with respect to a 
loss:
    (i) Carryovers. In the case of a carryover, the SRLY subgroup is 
composed of the member carrying over the loss (the loss member) and each 
other member that was a member of the former group that becomes a member 
of the group at the same time as the loss member. A member remains a 
member of the SRLY subgroup until it ceases to be affiliated with the 
loss member. The aggregate determination described in paragraph (c)(1) 
of this section and this paragraph (c)(2) includes the amounts of 
income, gain, deduction, and loss of each member of the SRLY subgroup 
for the consolidated return years during which it remains a member of 
the SRLY subgroup. For an illustration of the aggregate determination of 
a SRLY subgroup, see paragraph (c)(2)(viii) Example 2 of this section.
    (ii) Carrybacks. In the case of a carryback, the SRLY subgroup is 
composed of the member carrying back the loss (the loss member) and each 
other member of the group from which the loss is carried back that has 
been continuously affiliated with the loss member from the year to which 
the loss is carried through the year in which the loss arises.
    (iii) Built-in losses. In the case of a built-in loss, the SRLY 
subgroup is composed of the member recognizing the loss (the loss 
member) and each other member that was part of the subgroup with respect 
to the loss determined under Sec.  1.1502-15(c)(2) immediately before 
the members became members of the group. The principles of paragraphs 
(c)(2)(i) and (ii) of this section apply to determine the SRLY subgroup 
for the built-in loss that is, under paragraph (c)(1)(ii) of this 
section, treated as arising in a SRLY with respect to the group in which 
the loss

[[Page 694]]

is recognized. For this purpose and as the context requires, a reference 
in paragraphs (c)(2)(i) and (ii) of this section to a group or former 
group is a reference to the subgroup determined under Sec.  1.1502-
15(c)(2).
    (iv) Principal purpose of avoiding or increasing a SRLY limitation. 
The members composing a SRLY subgroup are not treated as a SRLY subgroup 
if any of them is formed, acquired, or availed of with a principal 
purpose of avoiding the application of, or increasing any limitation 
under, this paragraph (c). Any member excluded from a SRLY subgroup, if 
excluded with a principal purpose of so avoiding or increasing any SRLY 
limitation, is treated as included in the SRLY subgroup.
    (v) Coordination with other limitations. This paragraph (c)(2) does 
not allow a net operating loss to offset income to the extent 
inconsistent with other limitations or restrictions on the use of 
losses, such as a limitation based on the nature or activities of 
members. For example, a net operating loss may not offset income in 
excess of any limitations under section 172(a) and paragraph (a)(2) of 
this section. Additionally, any dual consolidated loss may not reduce 
the taxable income to an extent greater than that allowed under section 
1503(d) and Sec. Sec.  1.1503(d)-1 through 1.1503(d)-8. See also Sec.  
1.1502-47(k) (relating to preemption of rules for life-nonlife groups).
    (vi) Anti-duplication. If the same item of income or deduction could 
be taken into account more than once in determining a limitation under 
this paragraph (c), or in a manner inconsistent with any other provision 
of the Internal Revenue Code or regulations incorporating this paragraph 
(c), the item of income or deduction is taken into account only once and 
in such manner that losses are absorbed in accordance with the ordering 
rules in paragraph (b) of this section and the underlying purposes of 
this section.
    (vii) Corporations that leave a SRLY subgroup. If a loss member 
ceases to be affiliated with a SRLY subgroup, the amount of the member's 
remaining SRLY loss from a specific year is determined pursuant to the 
principles of paragraphs (b)(2)(ii)(A) and (b)(2)(iv) of this section.
    (viii) Examples. For purposes of the examples in this paragraph 
(c)(2)(viii), no corporation is a nonlife insurance company or has any 
farming losses. The principles of this paragraph (c)(2) are illustrated 
by the following examples:
    (A) Example 1: Members of SRLY subgroups. (1) Individual A owns all 
of the stock of P, S, T and M. P and M are each the common parent of a 
consolidated group. During Year 1, P sustains a $50 net operating loss. 
At the beginning of Year 2, P acquires all the stock of S at a time when 
the aggregate basis of S's assets exceeds their aggregate value by $70, 
and S becomes a member of the P group. At the beginning of Year 3, P 
acquires all the stock of T, T has a $60 net operating loss carryover at 
the time of the acquisition, and T becomes a member of the P group. 
During Year 4, S forms S1 and T forms T1, each by contributing assets 
with built-in gains which are, in the aggregate, material. S1 and T1 
become members of the P group. During Year 7, M acquires all of the 
stock of P, and the members of the P group become members of the M group 
for the balance of Year 7. The $50 and $60 loss carryovers of P and T 
are carried to Year 7 of the M group, and the value and basis of S's 
assets did not change after it became a member of the former P group. 
None of the transactions described above resulted in an ownership change 
under section 382(g).
    (2) Under paragraph (c)(2) of this section, a separate SRLY subgroup 
is determined for each loss carryover and built-in loss. In the P group, 
P's $50 loss carryover is not treated as arising in a SRLY. See Sec.  
1.1502-1(f). Consequently, the carryover is not subject to limitation 
under paragraph (c) of this section in the P group.
    (3) In the M group, P's $50 loss carryover is treated as arising in 
a SRLY and is subject to the limitation under paragraph (c) of this 
section, including the limitation under paragraph (c)(1)(i)(E) of this 
section. A SRLY subgroup with respect to that loss is composed of 
members which were members of the P group, the group as to which the 
loss was not a SRLY. The SRLY subgroup is composed of P, the member 
carrying over the loss, and each other

[[Page 695]]

member of the P group that became a member of the M group at the same 
time as P. A member of the SRLY subgroup remains a member until it 
ceases to be affiliated with P. For Year 7, the SRLY subgroup is 
composed of P, S, T, S1, and T1.
    (4) In the P group, S's $70 unrealized loss, if recognized within 
the 5-year recognition period after S becomes a member of the P group, 
is subject to limitation under paragraph (c) of this section, including 
the limitation under paragraph (c)(1)(i)(E) of this section. See Sec.  
1.1502-15 and paragraph (c)(1)(ii) of this section. Because S was not 
continuously affiliated with P, T, or T1 for 60 consecutive months prior 
to joining the P group, these corporations cannot be included in a SRLY 
subgroup with respect to S's unrealized loss in the P group. See 
paragraph (c)(2)(iii) of this section. As a successor to S, S1 is 
included in a subgroup with S in the P group, and, because 100 percent 
of S1's stock is owned directly by corporations that were members of the 
SRLY subgroup when the members of the SRLY subgroup became members of 
the P group, its net positive income is not excluded from the 
consolidated taxable income of the P group that may be offset by the 
built-in loss. See paragraph (f) of this section.
    (5) In the M group, S's $70 unrealized loss, if recognized within 
the 5-year recognition period after S becomes a member of the M group, 
is subject to limitation under paragraph (c) of this section, including 
the limitation under paragraph (c)(1)(i)(E) of this section. Prior to 
becoming a member of the M group, S had been continuously affiliated 
with P (but not T or T1) for 60 consecutive months, and S1 is a 
successor that has remained continuously affiliated with S. Those 
members had a net unrealized built-in loss immediately before they 
became members of the group under Sec.  1.1502-15(c). Consequently, in 
Year 7, S, S1, and P compose a subgroup in the M group with respect to 
S's unrealized loss. Because S1 was a member of the SRLY subgroup when 
it became a member of the M group and also because 100 percent of S1's 
stock is owned directly by corporations that were members of the SRLY 
subgroup when the members of the SRLY subgroup became members of the M 
group, its net positive income is not excluded from the consolidated 
taxable income of the M group that may be offset by the recognized 
built-in loss. See paragraph (f) of this section.
    (6) In the P group, T's $60 loss carryover arose in a SRLY and is 
subject to limitation under paragraph (c) of this section, including the 
limitation under paragraph (c)(1)(i)(E) of this section. P, S, and S1 
were not members of the group in which T's loss arose, and T's loss 
carryover was not subject to the overlap rule described in paragraph (g) 
of this section with respect to the P group (the former group). Thus, P, 
S, and S1 are not members of a SRLY subgroup with respect to the T 
carryover in the P group. See paragraph (c)(2)(i) of this section. As a 
successor to T, T1 is included in a SRLY subgroup with T in the P group, 
and, because 100 percent of T1's stock is owned directly by corporations 
that were members of the SRLY subgroup when the members of the SRLY 
subgroup became members of the P group, its net positive income is not 
excluded from the consolidated taxable income of the P group that may be 
offset by the carryover. See paragraph (f) of this section.
    (7) In the M group, T's $60 loss carryover arose in a SRLY and is 
subject to limitation under paragraph (c) of this section, including the 
limitation under paragraph (c)(1)(i)(E) of this section. T and T1 remain 
the only members of a SRLY subgroup with respect to the carryover. 
Because T1 was a member of the SRLY subgroup when it became a member of 
the M group and also because 100 percent of T1's stock is owned directly 
by corporations that were members of the SRLY subgroup when the members 
of the SRLY subgroup became members of the M group, its net positive 
income is not excluded from the consolidated taxable income of the M 
group that may be offset by the carryover. See paragraph (f) of this 
section.
    (B) Example 2: Computation of SRLY subgroup limitation. (1) 
Individual A owns all of the stock of S, T, P and M, none of which is a 
nonlife insurance company. P and M are each the common parent of a 
consolidated group. In

[[Page 696]]

Year 2, P acquires all the stock of S and T from Individual A, and S and 
T become members of the P group. For Year 3 (a taxable year beginning 
after December 31, 2020), the P group has a $45 CNOL, which is 
attributable to P, and which P carries forward. M is the common parent 
of another group. At the beginning of Year 4, M acquires all of the 
stock of P, and the former members of the P group become members of the 
M group. None of the transactions described above resulted in an 
ownership change under section 382(g).
    (2) P's year to which the loss is attributable, Year 3, is a SRLY 
with respect to the M group. See Sec.  1.1502-1(f)(1). However, P, S, 
and T compose a SRLY subgroup with respect to the Year 3 loss under 
paragraph (c)(2)(i) of this section because Year 3 is not a SRLY (and is 
not treated as a SRLY) with respect to the P group. P's loss is carried 
over to the M group's Year 4 and is therefore subject to the SRLY 
subgroup limitation in paragraph (c)(2) of this section.
    (3) In Year 4, the M group has $10 of consolidated taxable income 
(computed without regard to the CNOL deduction for Year 4). That 
consolidated taxable income would be $45 if determined by reference only 
to the items of P, S, and T, the members included in the SRLY subgroup 
with respect to P's loss carryover. Therefore, the positive balance of 
the cumulative register of the P SRLY subgroup for Year 4 equals $45 
and, due to the application of the 80-percent limitation under paragraph 
(c)(2)(v) of this section, the SRLY subgroup limitation under this 
paragraph (c)(2) is $36 ($45 x 80 percent). However, the M group has 
only $10 of consolidated taxable income in Year 4. Thus, due to the 80-
percent limitation and the application of paragraph (b)(1) of this 
section, the M group's deduction of all net operating losses in Year 4 
is limited to $8 ($10 x 80 percent). As a result, the M group deducts $8 
of P's SRLY net operating loss carryover, and the remaining $37 is 
carried over to Year 5.
    (4) After deduction of $8 of P's SRLY net operating loss in Year 4, 
the cumulative register of the P SRLY subgroup is adjusted pursuant to 
paragraph (c)(1)(i)(E) of this section. After taking into account the 
80-percent limitation, the amount of income necessary to support this 
deduction is $10 ($10 x 80 percent = $8). Therefore, the cumulative 
register of the P SRLY subgroup is decreased by $10, and $35 remains in 
the cumulative register ($45-$10).
    (5) In Year 5, the M group has $100 of consolidated taxable income 
(computed without regard to the CNOL deduction for Year 5). None of P, 
S, or T has any items of income, gain, deduction, or loss in Year 5. 
Although the members of the P SRLY subgroup do not contribute to the 
$100 of consolidated taxable income in Year 5, the positive balance of 
the cumulative register of the P SRLY subgroup for Year 5 is $35 and, 
due to the application of the 80-percent limitation under paragraph 
(c)(2)(v) of this section, the SRLY subgroup limitation under this 
paragraph (c)(2) is $28 ($35 x 80 percent). Because of the 80-percent 
limitation and the application of paragraph (b)(1) of this section, the 
M group's deduction of net operating losses in Year 5 is limited to $80 
($100 x 80 percent). Because the $28 of net operating loss available to 
be absorbed is less than 80 percent of the M group's consolidated 
taxable income, $28 of P's SRLY net operating loss is absorbed in Year 
5, and the remaining $9 ($37-$28) is carried over to Year 6.
    (6) After deduction of $28 of P's SRLY net operating loss in Year 5, 
the cumulative register of the P SRLY subgroup is adjusted pursuant to 
paragraph (c)(1)(i)(E) of this section. After taking into account the 
80-percent limitation, the amount of income necessary to support this 
deduction is $35 ($35 x 80 percent = $28). Therefore, the cumulative 
register of the P SRLY subgroup is decreased by $35, and zero remains in 
the cumulative register ($35-$35).
    (C) Example 3: Inclusion in more than one SRLY subgroup. (1) 
Individual A owns all of the stock of S, T, P and M. S, P, and M are 
each the common parent of a consolidated group. At the beginning of Year 
1, S acquires all the stock of T from Individual A, and T becomes a 
member of the S group. For Year 1, the S group has a CNOL of $10, all of 
which is attributable to S and is carried over to Year 2. At the 
beginning of Year 2, P acquires all the stock of S, and S and T become 
members of the P group. For Year 2, the P group

[[Page 697]]

has a CNOL of $35, all of which is attributable to P and is carried over 
to Year 3. At the beginning of Year 3, M acquires all of the stock of P, 
and the former members of the P group become members of the M group. 
None of the transactions described above resulted in an ownership change 
under section 382(g).
    (2) P's and S's net operating losses arising in SRLYs with respect 
to the M group are subject to limitation under paragraph (c) of this 
section. P, S, and T compose a SRLY subgroup for purposes of determining 
the limitation for P's $35 net operating loss carryover arising in Year 
2 because, under paragraph (c)(2)(i) of this section, Year 2 is not a 
SRLY with respect to the P group. Similarly, S and T compose a SRLY 
subgroup for purposes of determining the limitation for S's $10 net 
operating loss carryover arising in Year 1 because Year 1 is not a SRLY 
with respect to the S group.
    (3) S and T are members of both the SRLY subgroup with respect to 
P's losses and the SRLY subgroup with respect to S's losses. Under 
paragraph (c)(2) of this section, S's and T's items cannot be included 
in the determination of the SRLY subgroup limitation for both SRLY 
subgroups for the same consolidated return year; paragraph (c)(2)(vi) of 
this section requires the M group to consider the items of S and T only 
once so that the losses are absorbed in the order of the taxable years 
in which they were sustained. Because S's loss was incurred in Year 1, 
while P's loss was incurred in Year 2, the items will be added in the 
determination of the consolidated taxable income of the S and T SRLY 
subgroup to enable S's loss to be absorbed first. The taxable income of 
the P, S, and T SRLY subgroup is then computed by including the 
consolidated taxable income for the S and T SRLY subgroup less the 
amount of any net operating loss carryover of S that is absorbed after 
applying this section to the S subgroup for the year.
    (D) Example 4: Corporation ceases to be affiliated with a SRLY 
subgroup. (1) Individual A owns all of the stock of P, and M. P and S 
are members of the P group and the P group has a CNOL of $30 in Year 1, 
all of which is attributable to P and carried over to Year 2. At the 
beginning of Year 2, M acquires all of the stock of P, and P and S 
become members of the M group. P and S compose a SRLY subgroup with 
respect to P's net operating loss carryover. For Year 2, consolidated 
taxable income of the M group determined by reference to only the items 
of P (and without regard to the CNOL deduction for Year 2) is $40. 
However, such consolidated taxable income of the M group determined by 
reference to the items of both P and S is a loss of $20. Thus, the SRLY 
subgroup limitation under paragraph (c)(2) of this section prevents the 
M group from including any of P's net operating loss carryover in the 
CNOL deduction under paragraph (a) of this section in Year 2, and P 
carries the Year 1 loss to Year 3.
    (2) At the end of Year 2, P sells all of the S stock, and S ceases 
to be a member of the M group and the P subgroup. For Year 3, 
consolidated taxable income of the M group is $50 (determined without 
regard to the CNOL deduction for Year 3), and such consolidated taxable 
income would be $10 if determined by reference to only items of P. 
However, the limitation under paragraph (c) of this section for Year 3 
for P's net operating loss carryover still prevents the M group from 
including any of P's loss in the CNOL deduction under paragraph (a) of 
this section. The limitation results from the inclusion of S's items for 
Year 2 in the determination of the SRLY subgroup limitation for Year 3 
even though S ceased to be a member of the M group (and the P subgroup) 
at the end of Year 2. Thus, the M group's consolidated taxable income 
determined by reference to only the SRLY subgroup members' items for all 
consolidated return years of the group through Year 3 (determined 
without regard to the CNOL deduction) is not a positive amount.
    (ix) Application to other than loss carryovers. Paragraph (g) of 
this section and the phrase ``or for a carryover that was subject to the 
overlap rule described in paragraph (g) of this section or Sec.  1.1502-
15(g) with respect to another group (the former group)'' in this 
paragraph (c)(2) apply only to carryovers of net operating losses, net 
capital losses, and for taxable years for which the due

[[Page 698]]

date (without extensions) of the consolidated return is after May 25, 
2000, to carryovers of credits described in section 383(a)(2). 
Accordingly, as the context may require, if another regulation 
references this section and such other regulation does not concern a 
carryover of net operating losses, net capital losses, or for taxable 
years for which the due date (without extensions) of the consolidated 
return is after May 25, 2000, carryovers of credits described in section 
383(a)(2), then such reference does not include a reference to such 
paragraph or phrase.
    (3) Cross-reference. For rules governing the application of a SRLY 
limitation to business interest expense for which a deduction is 
disallowed under section 163(j), see Sec.  1.163(j)-5(d) and (f).
    (d) Coordination with consolidated return change of ownership 
limitation and transactions subject to old section 382--(1) Consolidated 
return changes of ownership. If a consolidated return change of 
ownership occurred before January 1, 1997, the principles of Sec.  
1.1502-21A(d) apply to determine the amount of the aggregate of the net 
operating losses attributable to old members of the group that may be 
included in the consolidated net operating loss deduction under 
paragraph (a) of this section. For this purpose, Sec.  1.1502-1(g) is 
applied by treating that date as the end of the year of change.
    (2) Old section 382. The principles of Sec.  1.1502-21A(e) apply to 
disallow or reduce the amount of a net operating loss carryover of a 
member as a result of a transaction subject to old section 382.
    (e) Consolidated net operating loss. Any excess of deductions over 
gross income, as determined under Sec.  1.1502-11(a) (without regard to 
any consolidated net operating loss deduction), is also referred to as 
the consolidated net operating loss (or CNOL).
    (f) Predecessors and successors--(1) In general. For purposes of 
this section, any reference to a corporation, member, common parent, or 
subsidiary, includes, as the context may require, a reference to a 
successor or predecessor, as defined in Sec.  1.1502-1(f)(4).
    (2) Limitation on SRLY subgroups--(i) General rule. Except as 
provided in paragraph (f)(2)(ii) of this section, if a successor's items 
of income and gain exceed the successor's items of deduction and loss 
(net positive income), then the net positive income attributable to the 
successor is excluded from the computation of the consolidated taxable 
income of a SRLY subgroup.
    (ii) Exceptions. A successor's net positive income is not excluded 
from the consolidated taxable income of a SRLY subgroup if--
    (A) The successor acquires substantially all the assets and 
liabilities of its predecessor, and the predecessor ceases to exist;
    (B) The successor was a member of the SRLY subgroup when the SRLY 
subgroup members became members of the group;
    (C) 100 percent of the stock of the successor is owned directly by 
corporations that were members of the SRLY subgroup when the SRLY 
subgroup members became members of the group; or
    (D) The Commissioner so determines.
    (g) Overlap with section 382--(1) General rule. The limitation 
provided in paragraph (c) of this section does not apply to net 
operating loss carryovers (other than a hypothetical carryover described 
in paragraph (c)(1)(i)(D) of this section and a carryover described in 
paragraph (c)(1)(ii) of this section) when the application of paragraph 
(c) of this section results in an overlap with the application of 
section 382. For a similar rule applying in the case of net operating 
loss carryovers described in paragraphs (c)(1)(i)(D) and (c)(1)(ii) of 
this section, see Sec.  1.1502-15(g).
    (2) Definitions--(i) Generally. For purposes of this paragraph (g), 
the definitions and nomenclature contained in section 382, the 
regulations thereunder, and Sec. Sec.  1.1502-90 through 1.1502-99 
apply.
    (ii) Overlap. (A) An overlap of the application of paragraph (c) of 
this section and the application of section 382 with respect to a net 
operating loss carryover occurs if a corporation becomes a member of a 
consolidated group (the SRLY event) within six months of the change date 
of an ownership change giving rise to a section 382(a) limitation with 
respect to that carryover (the section 382 event).
    (B) If an overlap described in paragraph (g)(2)(ii)(A) of this 
section occurs

[[Page 699]]

with respect to net operating loss carryovers of a corporation whose 
SRLY event occurs within the six month period beginning on the date of a 
section 382 event, then an overlap is treated as also occurring with 
respect to that corporation's net operating loss carryover that arises 
within the period beginning with the section 382 event and ending with 
the SRLY event.
    (C) For special rules in the event that there is a SRLY subgroup 
and/or a loss subgroup as defined in Sec.  1.1502-91(d)(1) with respect 
to a carryover, see paragraph (g)(4) of this section.
    (3) Operating rules--(i) Section 382 event before SRLY event. If a 
SRLY event occurs on the same date as a section 382 event or within the 
six month period beginning on the date of the section 382 event, 
paragraph (g)(1) of this section applies beginning with the tax year 
that includes the SRLY event.
    (ii) SRLY event before section 382 event. If a section 382 event 
occurs within the period beginning the day after the SRLY event and 
ending six months after the SRLY event, paragraph (g)(1) of this section 
applies starting with the first tax year that begins after the section 
382 event.
    (4) Subgroup rules. In general, in the case of a net operating loss 
carryover for which there is a SRLY subgroup and a loss subgroup (as 
defined in Sec.  1.1502-91(d)(1)), the principles of this paragraph (g) 
apply to the SRLY subgroup, and not separately to its members. However, 
paragraph (g)(1) of this section applies--
    (i) With respect to a carryover described in paragraph (g)(2)(ii)(A) 
of this section only if--
    (A) All members of the SRLY subgroup with respect to that carryover 
are also included in a loss subgroup with respect to that carryover; and
    (B) All members of a loss subgroup with respect to that carryover 
are also members of a SRLY subgroup with respect to that carryover; and
    (ii) With respect to a carryover described in paragraph 
(g)(2)(ii)(B) of this section only if all members of the SRLY subgroup 
for that carryover are also members of a SRLY subgroup that has net 
operating loss carryovers described in paragraph (g)(2)(ii)(A) of this 
section that are subject to the overlap rule of paragraph (g)(1) of this 
section.
    (5) Examples. The principles of this paragraph (g) are illustrated 
by the following examples:
    (i) Example 1: Overlap--Simultaneous Acquisition. (A) Individual A 
owns all of the stock of P, which in turn owns all of the stock of S. P 
and S file a consolidated return. In Year 2, B, an individual unrelated 
to Individual A, forms T which incurs a $100 net operating loss for that 
year. At the beginning of Year 3, S acquires T.
    (B) S's acquisition of T results in T becoming a member of the P 
group (the SRLY event) and also results in an ownership change of T, 
within the meaning of section 382(g), that gives rise to a limitation 
under section 382(a) (the section 382 event) with respect to the T 
carryover.
    (C) Because the SRLY event and the change date of the section 382 
event occur on the same date, there is an overlap of the application of 
the SRLY rules and the application of section 382.
    (D) Consequently, under this paragraph (g), in Year 3 the SRLY 
limitation does not apply to the Year 2 $100 net operating loss.
    (ii) Example 2: Overlap--Section 382 event before SRLY event. (A) 
Individual A owns all of the stock of P, which in turn owns all of the 
stock of S. P and S file a consolidated return. In Year 1, B, an 
individual unrelated to Individual A, forms T which incurs a $100 net 
operating loss for that year. On February 28 of Year 2, S purchases 55% 
of T from Individual B. On June 30, of Year 2, S purchases an additional 
35% of T from Individual B.
    (B) The February 28 purchase of 55% of T is a section 382 event 
because it results in an ownership change of T, under section 382(g), 
that gives rise to a section 382(a) limitation with respect to the T 
carryover. The June 30 purchase of 35% of T results in T becoming a 
member of the P group and is therefore a SRLY event.
    (C) Because the SRLY event occurred within six months of the change 
date of the section 382 event, there is an overlap of the application of 
the SRLY rules and the application of section 382.
    (D) Consequently, under paragraph (g) of this section, in Year 2 the 
SRLY

[[Page 700]]

limitation does not apply to the Year 1 $100 net operating loss.
    (iii) Example 3: No overlap--Section 382 event before SRLY event. 
(A) The facts are the same as in Example 2 except that Individual B does 
not sell the additional 35% of T to S until September 30, Year 2.
    (B) The February 28 purchase of 55% of T is a section 382 event 
because it results in an ownership change of T, under section 382(g), 
that gives rise to a section 382(a) limitation with respect to the T 
carryover. The September 30 purchase of 35% of T results in T becoming a 
member of the P group and is therefore a SRLY event.
    (C) Because the SRLY event did not occur within six months of the 
change date of the section 382 event, there is no overlap of the 
application of the SRLY rules and the application of section 382. 
Consequently, the Year 1 net operating loss is subject to a SRLY 
limitation and a section 382 limitation.
    (iv) Example 4: Overlap--SRLY event before section 382 event. (A) P 
and S file a consolidated return. S has owned 40% of T for 6 years. For 
Year 6, T has a net operating loss of $500 that is carried forward. On 
March 31, Year 7, S acquires an additional 40% of T, and on August 31, 
Year 7, S acquires the remaining 20% of T.
    (B) The March 31 purchase of 40% of T results in T becoming a member 
of the P group and is therefore a SRLY event. The August 31 purchase of 
20% of T is a section 382 event because it results in an ownership 
change of T, under section 382(g), that gives rise to a section 382(a) 
limitation with respect to the T carryover.
    (C) Because the SRLY event occurred within six months of the change 
date of the section 382 event, there is an overlap of the application of 
the SRLY rules and the application of section 382 within the meaning of 
this paragraph (g).
    (D) Under this paragraph (g), the SRLY rules of paragraph (c) of 
this section will apply to the Year 7 tax year. Beginning in Year 8 (the 
year after the section 382 event), any unabsorbed portion of the Year 6 
net operating loss will not be subject to a SRLY limitation.
    (v) Example 5: Overlap--Coextensive subgroups. (A) Individual A owns 
all of the stock of S, which in turn owns all of the stock of T. S and T 
file a consolidated return beginning in Year 1. B, an individual 
unrelated to Individual A, owns all of the stock of P, the common parent 
of a consolidated group. In Year 2, the S group has a $200 consolidated 
net operating loss which is carried forward, of which $100 is 
attributable to S, and $100 is attributable to T. At the beginning of 
Year 3, the P group acquires all of the stock of S from Individual A.
    (B) P's acquisition of S results in S and T becoming members of the 
P group (the SRLY event). With respect to the Year 2 net operating loss 
carryover, S and T compose a SRLY subgroup under paragraph (c)(2) of 
this section.
    (C) S and T also compose a loss subgroup under Sec.  1.1502-91(d)(1) 
with respect to the Year 2 net operating loss carryover. P's acquisition 
also results in an ownership change of S, the subgroup parent, within 
the meaning of section 382(g), that gives rise to a limitation under 
section 382(a) (the section 382 event) with respect to the Year 2 
carryover.
    (D) Because the SRLY event and the change date of the section 382 
event occur on the same date, there is an overlap of the application of 
the SRLY rules and the application of section 382 within the meaning of 
paragraph (g) of this section. Because the SRLY subgroup and the loss 
subgroup are coextensive, under paragraph (g) of this section, the SRLY 
limitation does not apply to the Year 2 $200 net operating loss.
    (vi) Example 6: No overlap--Different subgroups. (A) Individual B 
owns all of the stock of P, the common parent of a consolidated group. P 
owns all of the stock of S and all of the stock of T. Individual A owns 
all of the stock of X, the common parent of another consolidated group. 
In Year 1, the P group has a $200 consolidated net operating loss, of 
which $100 is attributable to S and $100 is attributable to T. At the 
beginning of Year 3, the X group acquires all of the stock of S and T 
from P and does not make an election under Sec.  1.1502-91(d)(4) 
(concerning an election to treat

[[Page 701]]

the loss subgroup parent requirement as having been satisfied).
    (B) X's acquisition of S and T results in S and T becoming members 
of the X group (the SRLY event). With respect to the Year 1 net 
operating loss, S and T compose a SRLY subgroup under paragraph (c)(2) 
of this section.
    (C) S and T do not bear (and are not treated as bearing) a section 
1504(a)(1) relationship. Therefore S and T do not qualify as a loss 
subgroup under Sec.  1.1502-91(d)(1). X's acquisition of S and T results 
in separate ownership changes of S and T, that give rise to separate 
limitations under section 382(a) (the section 382 events) with respect 
to each of S and T's Year 1 net operating loss carryovers. See Sec.  
1.1502-94.
    (D) The SRLY event and the change dates of the section 382 events 
occur on the same date. However, paragraph (g)(1) of this section does 
not apply because the SRLY subgroup (composed of S and T) is not 
coextensive with a loss subgroup with respect to the Year 1 carryovers. 
Consequently, the Year 1 net operating loss is subject to both a SRLY 
subgroup limitation and also separate section 382 limitations for each 
of S and T.
    (vii) Example 7: No overlap--Different subgroups. (A) Individual A 
owns all of the stock of T and all of the stock of S, the common parent 
of a consolidated group. B, an individual unrelated to Individual A, 
owns all of the stock of P, the common parent of another consolidated 
group. In Year 1, T has a net operating loss of $100 that is carried 
forward. At the end of Year 2, S acquires all of the stock of T from 
Individual A. In Year 3, the S group sustains a $200 consolidated net 
operating loss that is carried forward. In Year 8, the P group acquires 
all of the stock of S from Individual A.
    (B) S's acquisition of T in Year 1 results in T becoming a member of 
the S group. The acquisition, however, did not result in an ownership 
change under section 382(g). As a result, T's Year 1 net operating loss 
is subject to SRLY within the S group. At the end of Year 7, Sec.  
1.1502-96(a) treats T's Year 1 net operating loss as not having arisen 
in a SRLY with respect to the S group. Section 1.1502-96(a), however, 
applies only for purposes of Sec. Sec.  1.1502-91 through 1.1502-96 and 
Sec.  1.1502-98 but not for purposes of this section. See Sec.  1.1502-
96(a)(5).
    (C) P's acquisition of S in Year 8 results in S and T becoming 
members of the P group (the SRLY event). With respect to the Year 1 net 
operating loss, S and T do not compose a SRLY subgroup under paragraph 
(c)(2) of this section.
    (D) S and T compose a loss subgroup under Sec.  1.1502-91(d)(1) with 
respect to the Year 1 net operating loss carryover. P's acquisition of S 
results in an ownership change of the loss subgroup, within the meaning 
of section 382(g), that gives rise to a subgroup limitation under 
section 382(a) (the section 382 event) with respect to that carryover.
    (E) The SRLY event and the change date of the section 382 event 
occur on the same date. However, under paragraph (g)(4) of this section, 
because the SRLY subgroup and the loss subgroup are not coextensive, T's 
Year 1 net operating loss carryover is subject to a SRLY limitation.
    (F) With respect to the Year 3 net operating loss carryover, S and T 
compose both a SRLY subgroup and a loss subgroup under Sec.  1.1502-
91(d)(1). Thus, paragraph (g)(1) of this section applies, and the S 
group's Year 3 net operating loss carryover is not subject to a SRLY 
limitation.
    (viii) Example 8: SRLY after overlap. (A) Individual A owns all of 
the stock of R and M, each the common parent of a consolidated group. B, 
an individual unrelated to Individual A, owns all of the stock of D. In 
Year 1, D incurs a $100 net operating loss that is carried forward. At 
the beginning of Year 3, R acquires all of the stock of D. In Year 5, M 
acquires all of the stock of R in a transaction that did not result in 
an ownership change of R.
    (B) R's Year 3 acquisition of D results in D becoming a member of 
the R group (the SRLY event) and also results in an ownership change of 
D, that gives rise to a limitation under section 382(a) (the section 382 
event) with respect to D's net operating loss carryover.
    (C) Because the SRLY event and the change date of the section 382 
event occur on the same date, there is an

[[Page 702]]

overlap of the application of paragraph (c) of this section and section 
382 with respect to D's net operating loss. Consequently, under this 
paragraph (g), D's Year 1 $100 net operating loss is not subject to a 
SRLY limitation in the R group.
    (D) M's Year 5 acquisition of R results in R and D becoming members 
of the M group (the SRLY event), but does not result in an ownership 
change of R or D that gives rise to a limitation under section 382(a). 
Because there is no section 382 event, the application of the SRLY rules 
and section 382 do not overlap. Consequently, D's Year 1 $100 net 
operating loss is subject to a SRLY limitation in the M group.
    (E) Because D's Year 1 net operating loss carryover was subject to 
the overlap rule of paragraph (g) of this section when it joined the R 
group, under Sec.  1.1502-21(c)(2), the SRLY subgroup with respect to 
that carryover includes all of the members of the R group that joined 
the M group at the same time as D.
    (ix) Example 9: Overlap--Interim losses. (A) Individual A owns all 
of the stock of P and S, each the common parent of a consolidated group. 
S owns all of the stock of T, its only subsidiary. B, an individual 
unrelated to Individual A, owns all of the stock of M, the common parent 
of a consolidated group. In Year 1, the S group has a $100 consolidated 
net operating loss. On January 1 of Year 2, P acquires all of the stock 
of S from Individual A. On December 31 of Year 2, M acquires 51% of the 
stock of P from Individual A. On May 31 of Year 3, M acquires the 
remaining 49% of the stock of P from Individual A. The P group, for the 
Year 3 period prior to June 1, had a $50 consolidated net operating 
loss, and under paragraph (b)(2)(iv) of this section, the loss is 
attributable entirely to S. Other than the losses described above, the P 
group does not have any other consolidated net operating losses.
    (B) In the P group, S's $100 loss carryover is treated as arising in 
a SRLY and is subject to the limitation under paragraph (c) of this 
section. A SRLY subgroup with respect to that loss is composed of S and 
T, the members which were members of the S group as to which the loss 
was not a SRLY.
    (C) M's December 31 purchase of 51% of P is a section 382 event 
because it results in an ownership change of the S loss subgroup that 
gives rise to a section 382(a) limitation (the section 382 event) with 
respect to the Year 1 net operating loss carryover. The purchase, 
however, does not result in an ownership change of P because it is not a 
loss corporation under section 382(k)(1). M's May 31 purchase of 49% of 
P results in P, S, and T becoming members of the M group and is 
therefore a SRLY event.
    (D) With respect to the Year 1 net operating loss, S and T compose a 
SRLY subgroup under paragraph (c)(2) of this section and a loss subgroup 
under Sec.  1.1502-91(d)(1). The loss subgroup does not include P 
because the only loss at the time of the section 382 event was subject 
to SRLY with respect to the P group. See Sec.  1.1502-91(d)(1).
    (E) Because the SRLY event occurred within six months of the change 
date of the section 382 event and the SRLY subgroup and loss subgroup 
are coextensive with respect to the Year 1 net operating loss carryover, 
there is an overlap of the application of the SRLY rules and the 
application of section 382 within the meaning of paragraph (g) of this 
section. Thus, the SRLY limitation does not apply to that carryover.
    (F) The Year 3 net operating loss, which arose between the section 
382 event and the SRLY event, is a net operating loss described in 
paragraph (g)(2)(ii)(B) of this section because it is the net operating 
loss of a corporation whose SRLY event occurs within the six month 
period beginning on the date of a section 382 event.
    (G) With respect to the Year 3 net operating loss, P, S, and T 
compose a SRLY subgroup under paragraph (c)(2) of this section. Because 
P, a member of the SRLY subgroup for the Year 3 carryover, is not also a 
member of a SRLY subgroup that has net operating loss carryovers 
described in paragraph (g)(2)(ii)(A) of this section (the Year 1 net 
operating loss), the Year 3 carryover is subject to a SRLY limitation in 
the M group. See paragraph (g)(4)(ii) of this section.
    (h) Effective/applicability date--(1) In general. This section 
generally applies to taxable years for which the due date

[[Page 703]]

(without extensions) of the consolidated return is after June 25, 1999. 
However--
    (i) In the event that paragraph (g)(1) of this section does not 
apply to a particular net operating loss carryover in the current group, 
then solely for purposes of applying paragraph (c) of this section to 
determine a limitation with respect to that carryover and with respect 
to which the SRLY register (consolidated taxable income determined by 
reference to only the member's or subgroup's items of income, gain, 
deduction, or loss) began in a taxable year for which the due date of 
the return was on or before June 25, 1999, paragraph (c)(2) of this 
section shall be applied without regard to the phrase ``or for a 
carryover that was subject to the overlap rule described in paragraph 
(g) of this section or Sec.  1.1502-15(g) with respect to another group 
(the former group)''; and
    (ii) For purposes of paragraph (g) of this section, only an 
ownership change to which section 382(a), as amended by the Tax Reform 
Act of 1986, applies shall constitute a section 382 event.
    (iii) Paragraphs (b)(2)(ii)(A) and (b)(2)(iv)(B)(2) of this section 
apply to taxable years for which the due date of the original return 
(without regard to extensions) is on or after September 17, 2008.
    (2) SRLY limitation. Except in the case of those members (including 
members of a SRLY subgroup) described in paragraph (h)(3) of this 
section, a group does not take into account a consolidated taxable year 
beginning before January 1, 1997, in determining the aggregate of the 
consolidated taxable income under paragraph (c)(1) of this section 
(including for purposes of Sec.  1.1502-15 and Sec.  1.1502-22(c)) for 
the members (or SRLY subgroups).
    (3) Prior retroactive election. A consolidated group that applied 
the rules of Sec.  1.1502-21T(g)(3) in effect prior to June 25, 1999, as 
contained in 26 CFR part 1 revised April 1, 1999, to all consolidated 
return years ending on or after January 29, 1991, and beginning before 
January 1, 1997, does not take into account a consolidated taxable year 
beginning before January 29, 1991, in determining the aggregate of the 
consolidated taxable income under paragraph (c)(1) of this section 
(including for purposes of Sec.  1.1502-15 and Sec.  1.1502-22(c)) for 
the members (or SRLY subgroups).
    (4) Offspring rule. Paragraph (b)(2)(ii)(B) of this section applies 
to net operating losses arising in taxable years ending on or after June 
25, 1999.
    (5) Waiver of carrybacks. Paragraph (b)(3)(ii)(B) of this section 
(relating to the waiver of carrybacks for acquired members) applies to 
acquisitions occurring after June 25, 1999.
    (6) Certain prior periods. Paragraphs (b)(1), (b)(2)(iv)(A), 
(b)(2)(iv)(B)(1), and (c)(2)(vii) of this section apply to taxable years 
for which the due date of the original return (without regard to 
extensions) is after March 21, 2005. Paragraphs (b)(2)(ii)(A) and 
(b)(2)(iv)(B)(2) (as contained in 26 CFR part 1 revised as of April 1, 
2008) apply to taxable years for which the due date of the original 
return (without regard to extensions) is on or after March 21, 2005, and 
before September 17, 2008. Paragraph (b)(2)(ii)(A) of this section and 
Sec.  1.1502-21T(b)(1), (b)(2)(iv), and (c)(2)(vii), as contained in 26 
CFR part 1 revised as of April 1, 2004, apply to taxable years for which 
the due date of the original return (without regard to extensions) is 
after August 29, 2003, and on or before March 21, 2005. For taxable 
years for which the due date of the original return (without regard to 
extensions) is on or before August 29, 2003, see paragraphs (b)(1), 
(b)(2)(ii)(A), (b)(2)(iv), and (c)(2)(vii) of this section and Sec.  
1.1502-21T(b)(1) as contained in 26 CFR part 1 revised as of April 1, 
2003.
    (7) Prior periods. For certain taxable years ending on or before 
June 25, 1999, see Sec.  1.1502-21T in effect prior to June 25, 1999, as 
contained in 26 CFR part 1 revised April 1, 1999, as applicable.
    (8) Losses treated as expired under Sec.  1.1502-35(f)(1). For rules 
regarding losses treated as expired under Sec.  1.1502-35(f) on or after 
March 10, 2006, see Sec.  1.1502-21(b)(3)(v) as contained in 26 CFR part 
1 in effect on April 1, 2006. For rules regarding losses treated as 
expired before March 10, 2006, see Sec.  1.1502-21T(h)(8) as contained 
in 26 CFR part 1 in effect on January 1, 2006.
    (9) For the applicability dates of paragraphs (b)(3)(ii)(C) and 
(b)(3)(ii)(D) of this section, see Sec.  1.1502-21T(h)(9).

[[Page 704]]

    (10) The rules of paragraphs (a), (b)(1), (b)(2)(iv), and 
(c)(1)(i)(E) of this section apply to taxable years beginning after 
December 31, 2020.

[T.D. 8823, 64 FR 36105, July 2, 1999]

    Editorial Note: For Federal Register citations affecting Sec.  
1.1502-21, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec.  1.1502-21T  Net operating losses (temporary).

    (a) For further guidance, see Sec.  1.1502-21(a).
    (b) For further guidance, see Sec.  1.1502-21(b) introductory text 
through (b)(2).
    (1)-(2) [Reserved]
    (3) For further guidance, see Sec.  1.1502-21(b)(3) introductory 
text through (b)(3)(ii)(B).
    (i) [Reserved]
    (ii)(A)-(B) [Reserved]
    (C) Waiver of carryback period for losses in taxable years to which 
statutorily amended carryback rules apply--(1) In general. An acquiring 
group may make either (but not both) an amended statute split-waiver 
election or an extended split-waiver election with respect to a 
particular amended carryback CNOL. (See paragraph (b)(3)(ii)(C)(2) of 
this section for definitions of terms used in this paragraph 
(b)(3)(ii)(C) and paragraph (b)(3)(ii)(D) of this section.) These 
elections are available only if the statutory amendment to the carryback 
period referred to in paragraph (b)(3)(ii)(C)(2)(iv) of this section 
occurs after the date of acquisition of an acquired member. A separate 
election is available for each taxable year to which amended carryback 
rules apply. An acquiring group may make an amended statute split-waiver 
election or an extended split-waiver election only if the acquiring 
group, with regard to that election--
    (i) Satisfies the requirements in paragraph (b)(3)(ii)(C)(3) of this 
section; and
    (ii) Follows the procedures in paragraphs (b)(3)(ii)(C)(5) and (6) 
of this section, as relevant to that election.
    (2) Definitions. The definitions provided in this paragraph 
(b)(3)(ii)(C)(2) apply for purposes of this paragraph (b)(3)(ii)(C) and 
paragraph (b)(3)(ii)(D) of this section.
    (i) Acquired member. The term acquired member means a member of a 
consolidated group that joins another consolidated group.
    (ii) Acquiring group. The term acquiring group means a consolidated 
group that has acquired a former member of another consolidated group 
(that is, an acquired member).
    (iii) Amended carryback CNOL. The term amended carryback CNOL means 
the portion of a CNOL attributable to an acquired member (determined 
pursuant to Sec.  1.1502-21(b)(2)(iv)(B)) arising in a taxable year to 
which amended carryback rules apply.
    (iv) Amended carryback rules. The term amended carryback rules means 
the rules of section 172 of the Code after amendment by statute to 
extend the carryback period for NOLs attributable to an acquired member 
(determined pursuant to Sec.  1.1502-21(b)(2)(iv)(B)).
    (v) Amended statute split-waiver election. The term amended statute 
split-waiver election means, with respect to any amended carryback CNOL, 
an irrevocable election made by an acquiring group to relinquish the 
portion of the carryback period (including the default carryback period 
and the extended carryback period) for that loss during which an 
acquired member was a member of any former group.
    (vi) Amended statute split-waiver election statement. The term 
amended statute split-waiver election statement has the meaning provided 
in paragraph (b)(3)(ii)(C)(5)(i) of this section.
    (vii) Default carryback period. The term default carryback period 
means the NOL carryback period existing at the time the acquiring group 
acquired the acquired member, before the applicability of amended 
carryback rules.
    (viii) Extended carryback period. The term extended carryback period 
means the additional taxable years added to a default carryback period 
by any amended carryback rules.
    (ix) Extended split-waiver election. The term extended split-waiver 
election means, with respect to any amended carryback CNOL, an 
irrevocable election made by an acquiring group to relinquish solely the 
portion of the extended carryback period (and no part of the default 
carryback period) for that

[[Page 705]]

loss during which an acquired member was a member of any former group.
    (x) Extended split-waiver election statement. The term extended 
split-waiver election statement has the meaning provided in paragraph 
(b)(3)(ii)(C)(5)(ii) of this section.
    (xi) Former group. The term former group means a consolidated group 
of which an acquired member previously was a member.
    (3) Conditions for making an amended statute split-waiver election 
or an extended split-waiver election. An acquiring group may make an 
amended statute split-waiver election or an extended split-waiver 
election (but not both) with respect to an amended carryback CNOL only 
if--
    (i) The acquiring group has not filed a valid election described in 
Sec.  1.1502-21(b)(3)(ii)(B) with respect to the acquired member on or 
before the effective date of amended carryback rules;
    (ii) The acquiring group has not filed a valid election described in 
section 172(b)(3) and Sec.  1.1502-21(b)(3)(i) with respect to a CNOL of 
the acquiring group from which the amended carryback CNOL is attributed 
to the acquired member;
    (iii) Any other corporation joining the acquiring group that was 
affiliated with the acquired member immediately before the acquired 
member joined the acquiring group is included in the waiver; and
    (iv) A former group does not claim any carryback (as provided in 
paragraph (b)(3)(ii)(C)(4) of this section) to any taxable year in the 
carryback period (in the case of an amended statute split-waiver 
election) or in the extended carryback period (in the case of an 
extended split-waiver election) with respect to the amended carryback 
CNOL on a return or other filing filed on or before the date the 
acquiring group files the election.
    (4) Claim for a carryback. For purposes of paragraph 
(b)(3)(ii)(C)(3)(iv) of this section, a carryback is claimed with 
respect to an amended carryback CNOL if there is a claim for refund, an 
amended return, an application for a tentative carryback adjustment, or 
any other filing that claims the benefit of the NOL in a taxable year 
prior to the taxable year of the loss, whether or not subsequently 
revoked in favor of a claim based on the period provided for in the 
amended carryback rules.
    (5) Procedures for making an amended statute split-waiver election 
or an extended split-waiver election--(i) Amended statute split-waiver 
election. An amended statute split-waiver election must be made in a 
separate statement entitled ``THIS IS AN ELECTION UNDER SECTION 1.1502-
21T(b)(3)(ii)(C)(1) TO WAIVE THE PRE-[insert first day of the first 
taxable year for which the acquired member was a member of the acquiring 
group] CARRYBACK PERIOD FOR THE CNOLS ATTRIBUTABLE TO THE [insert 
taxable year of losses] TAXABLE YEAR(S) OF [insert names and employer 
identification numbers of members]'' (amended statute split-waiver 
election statement). This statement must be filed as provided in 
paragraph (b)(3)(ii)(C)(6) of this section.
    (ii) Extended split-waiver election. An extended split-waiver 
election must be made in a separate statement entitled ``THIS IS AN 
ELECTION UNDER SECTION 1.1502-21T(b)(3)(iii)(C)(1) TO WAIVE THE PRE-
[insert first day of the first taxable year for which the acquired 
member was a member of the acquiring group] EXTENDED CARRYBACK PERIOD 
FOR THE CNOLS ATTRIBUTABLE TO THE [insert taxable year of losses] 
TAXABLE YEAR(S) OF [insert names and employer identification numbers of 
members]'' (extended split-waiver election statement). This statement 
must be filed as provided in paragraph (b)(3)(ii)(C)(6) of this section.
    (6) Time and manner for filing statement--(i) In general. Except as 
otherwise provided in paragraph (b)(3)(ii)(C)(6)(ii) or (iii) of this 
section, an amended statute split-waiver election statement or extended 
split-waiver election statement must be filed with the acquiring group's 
timely filed consolidated return (including extensions) for the year 
during which the amended carryback CNOL is incurred.
    (ii) Amended returns. This paragraph (b)(3)(ii)(C)(6)(ii) applies if 
the date of the filing required under paragraph (b)(3)(ii)(C)(6)(i) of 
this section is not at

[[Page 706]]

least 150 days after the date of the statutory amendment to the 
carryback period referred to in paragraph (b)(3)(ii)(C)(2)(iv) of this 
section. Under this paragraph (b)(3)(ii)(C)(6)(ii), an amended statute 
split-waiver election statement or extended split-waiver election 
statement may be attached to an amended return filed by the date that is 
150 days after the date of the statutory amendment referred to in 
paragraph (b)(3)(ii)(C)(2)(iv) of this section.
    (iii) Certain taxable years beginning before January 1, 2021. This 
paragraph (b)(3)(ii)(C)(6)(iii) applies to taxable years beginning 
before January 1, 2021, for which the date of the filing required under 
paragraph (b)(3)(ii)(C)(6)(i) of this section precedes November 30, 
2020. Under this paragraph (b)(3)(ii)(C)(6)(iii), an amended statute 
split-waiver election statement or extended split-waiver election 
statement may be attached to an amended return filed by November 30, 
2020.
    (D) Examples. The following examples illustrate the rules of 
paragraph (b)(3)(ii)(C) of this section. For purposes of these examples: 
All affiliated groups file consolidated returns; all corporations are 
includible corporations that have calendar taxable years; each of P, X, 
and T is a corporation having one class of stock outstanding; each of P 
and X is the common parent of a consolidated group (P Group and X Group, 
respectively); neither the P Group nor the X Group includes an insolvent 
financial institution or an insurance company; no NOL is a farming loss; 
there are no other relevant NOL carrybacks to the X Group's consolidated 
taxable years; except as otherwise stated, the X Group has sufficient 
consolidated taxable income determined under Sec.  1.1502-11 (CTI) to 
absorb the stated NOL carryback by T; T has sufficient SRLY register 
income within the X Group to absorb the stated NOL carryback by T; all 
transactions occur between unrelated parties; and the facts set forth 
the only relevant transactions.
    (1) Example 1: Computation and absorption of amended carrybacks--(i) 
Facts. In Year 1, T became a member of the X Group. On the last day of 
Year 5, P acquired all the stock of T from X. At the time of P's 
acquisition of T stock, the default carryback period was zero taxable 
years. The P Group did not make an irrevocable split-waiver election 
under Sec.  1.1502-21(b)(3)(ii)(B) to relinquish, with respect to all 
CNOLs attributable to T while a member of the P Group, the portion of 
the carryback period for which T was a member of the X Group (that is, a 
former group). In Year 7, the P Group sustained a $1,000 CNOL, $600 of 
which was attributable to T pursuant to Sec.  1.1502-21(b)(2)(iv)(B). In 
that year, P did not make an irrevocable general waiver election under 
section 172(b)(3) and Sec.  1.1502-21(b)(3)(i) with respect to the 
$1,000 CNOL when the P Group filed its consolidated return for Year 7. 
In Year 8, legislation was enacted that amended section 172 to require a 
carryback period of five years for NOLs arising in a taxable year 
beginning after Year 5 and before Year 9.
    (ii) Analysis. As a result of the amended carryback rules enacted in 
Year 8, the P Group's $1,000 CNOL in Year 7 must be carried back to Year 
2. Therefore, T's $600 attributed portion of the P Group's Year 7 CNOL 
(that is, T's amended carryback CNOL) must be carried back to taxable 
years of the X Group. See Sec. Sec.  1.1502-21(b)(1) and 1.1502-
21(b)(2)(i). To the extent T's amended carryback CNOL is not absorbed in 
the X Group's Year 2 taxable year, the remaining portion must be carried 
to the X Group's Year 3, Year 4, and Year 5 taxable years, as 
appropriate. See id. Any remaining portion of T's amended carryback CNOL 
is carried to consolidated return years of the P Group. See Sec.  
1.1502-21(b)(1).
    (2) Example 2: Amended statute split-waiver election--(i) Facts. The 
facts are the same as in paragraph (b)(3)(ii)(D)(1)(i) of this section 
(Example 1), except that, following the change in statutory carryback 
period in Year 8, the P Group made a valid amended statute split-waiver 
election under paragraph (b)(3)(ii)(C) of this section to relinquish 
solely the carryback of T's amended carryback CNOL.
    (ii) Analysis. Because the P Group made a valid amended statute 
split-waiver election, T's amended carryback CNOL is not eligible to be 
carried back to any taxable years of

[[Page 707]]

the X Group (that is, a former group). However, the amended statute 
split-waiver election does not prevent T's Year 7 amended carryback CNOL 
from being carried back to years of the P group (that is, the acquiring 
group) during which T was a member. See paragraph (b)(3)(ii)(C)(2)(v) of 
this section. As a result, the entire amount of T's amended carryback 
CNOL is eligible to be carried back to taxable Year 6 of the P Group. 
Any remaining CNOL may then be carried over within the P Group. See 
Sec.  1.1502-21(b)(1).
    (3) Example 3: Computation and absorption of extended carrybacks--
(i) Facts. The facts are the same as in paragraph (b)(3)(ii)(D)(1)(i) of 
this section (Example 1), except that the X Group had $300 of CTI in 
Year 4 and $200 of CTI in Year 5 and, at the time of the P Group's 
acquisition of T, the default carryback period was two years. Therefore, 
T's $600 attributed portion of the P Group's Year 7 CNOL was required to 
be carried back to the X Group's Year 5 taxable year, and the X Group 
was able to offset $200 of CTI in Year 5.
    (ii) Analysis. As a result of the amended carryback rules, the X 
Group must offset its $300 of CTI in Year 4 against T's amended 
carryback CNOL. See Sec. Sec.  1.1502-21(b)(1) and (b)(2)(i). The 
remaining $100 ($600-$300-$200) of T's amended carryback CNOL is carried 
to taxable years of the P Group. See Sec.  1.1502-21(b)(1).
    (4) Example 4: Extended split-waiver election--(i) Facts. The facts 
are the same as in paragraph (b)(3)(ii)(D)(3)(i) of this section 
(Example 3), except that, following the change in law in Year 8, the P 
Group made a valid extended split-waiver election under paragraph 
(b)(3)(ii)(C) of this section to relinquish the extended carryback 
period for T's amended carryback CNOL for years in which T was a member 
of the X Group.
    (ii) Analysis. As a result of the P Group's extended split-waiver 
election, T's amended carryback CNOL is not eligible to be carried back 
to any portion of the extended carryback period (that is, any taxable 
year prior to Year 5). See paragraph (b)(3)(ii)(C)(2)(ix) of this 
section. As a result, the X Group absorbs $200 of T's $600 loss in Year 
5, and the remaining $400 ($600-$200) is carried to taxable years of the 
P Group. See Sec.  1.1502-21(b)(1).
    (iii) For further guidance, see Sec.  1.1502-21(b)(3)(iii).
    (c) For further guidance, see Sec.  1.1502-21(c) through (h)(8).
    (d)-(g) [Reserved]
    (h)(1)-(8) [Reserved]
    (9) Amended carryback rules--(i) Applicability date. Paragraphs 
(b)(3)(ii)(C) and (D) of this section apply to any CNOLs arising in a 
taxable year ending after July 2, 2020. However, taxpayers may apply 
paragraphs (b)(3)(ii)(C) and (D) of this section to any CNOLs arising in 
a taxable year beginning after December 31, 2017.
    (ii) Expiration date. The applicability of paragraphs (b)(3)(ii)(C) 
and (D) of this section will expire on July 3, 2023.
    (i)-(j) [Reserved]

[T.D. 9900, 85 FR 40896, July 8, 2020; 85 FR 53162, Aug. 28, 2020]



Sec.  1.1502-22  Consolidated capital gain and loss.

    (a) Capital gain. The determinations under section 1222, including 
capital gain net income, net long-term capital gain, and net capital 
gain, with respect to members during consolidated return years are not 
made separately. Instead, consolidated amounts are determined for the 
group as a whole. The consolidated capital gain net income for any 
consolidated return year is determined by reference to--
    (1) The aggregate gains and losses of members from sales or 
exchanges of capital assets for the year (other than gains and losses to 
which section 1231 applies);
    (2) The consolidated net section 1231 gain for the year (determined 
under Sec.  1.1502-23); and
    (3) The net capital loss carryovers or carrybacks to the year.
    (b) Net capital loss carryovers and carrybacks--(1) In general. The 
determinations under section 1222, including net capital loss and net 
short-term capital loss, with respect to members during consolidated 
return years are not made separately. Instead, consolidated amounts are 
determined for the group as a whole. Losses included in the consolidated 
net capital loss may be carried to consolidated return years, and, after 
apportionment, may be carried to

[[Page 708]]

separate return years. The net capital loss carryovers and carrybacks 
consist of--
    (i) Any consolidated net capital losses of the group; and
    (ii) Any net capital losses of the members arising in separate 
return years.
    (2) Carryovers and carrybacks generally. The net capital loss 
carryovers and carrybacks to a taxable year are determined under the 
principles of section 1212 and this section. Thus, losses permitted to 
be absorbed in a consolidated return year generally are absorbed in the 
order of the taxable years in which they were sustained, and losses 
carried from taxable years ending on the same date, and which are 
available to offset consolidated capital gain net income, generally are 
absorbed on a pro rata basis. Additional rules provided under the 
Internal Revenue Code or regulations also apply, as well as the SRLY 
limitation under paragraph (c) of this section. See, e.g., section 
382(l)(2)(B).
    (3) Carryovers and carrybacks of consolidated net capital losses to 
separate return years. If any consolidated net capital loss that is 
attributable to a member may be carried to a separate return year under 
the principles of Sec.  1.1502-21(b)(2), the amount of the consolidated 
net capital loss that is attributable to the member is apportioned and 
carried to the separate return year (apportioned loss).
    (4) Special rules--(i) Short years in connection with transactions 
to which section 381(a) applies. If a member distributes or transfers 
assets to a corporation that is a member immediately after the 
distribution or transfer in a transaction to which section 381(a) 
applies, the transaction does not cause the distributor or transferor to 
have a short year within the consolidated return year of the group in 
which the transaction occurred that is counted as a separate year for 
purposes of determining the years to which a net capital loss may be 
carried.
    (ii) Special status losses. [Reserved]
    (c) Limitations on net capital loss carryovers and carrybacks from 
separate return limitation years. The aggregate of the net capital 
losses of a member arising (or treated as arising) in SRLYs that are 
included in the determination of consolidated capital gain net income 
for all consolidated return years of the group under paragraph (a) of 
this section may not exceed the aggregate of the consolidated capital 
gain net income for all consolidated return years of the group 
determined by reference to only the member's items of gain and loss from 
capital assets as defined in section 1221 and trade or business assets 
defined in section 1231(b), including the member's losses actually 
absorbed by the group in the taxable year (whether or not absorbed by 
the member). The principles of Sec.  1.1502-21(c) (including the SRLY 
subgroup principles under Sec.  1.1502-21(c)(2)) apply with appropriate 
adjustments for purposes of applying this paragraph (c).
    (d) Coordination with respect to consolidated return change of 
ownership limitation occurring in consolidated return years beginning 
before January 1, 1997. If a consolidated return change of ownership 
occurred before January 1, 1997, the principles of Sec.  1.1502-22A(d) 
apply to determine the amount of the aggregate of the net capital loss 
attributable to old members of the group (as those terms are defined in 
Sec.  1.1502-1(g)), that may be included in the net capital loss 
carryover under paragraph (b) of this section. For this purpose, Sec.  
1.1502-1(g) is applied by treating that date as the end of the year of 
change.
    (e) Consolidated net capital loss. Any excess of losses over gains, 
as determined under paragraph (a) of this section (without regard to any 
carryovers or carrybacks), is also referred to as the consolidated net 
capital loss.
    (f) Predecessors and successors. For purposes of this section, the 
principles of Sec.  1.1502-21(f) apply with appropriate adjustments.
    (g) Overlap with section 383--(1) General rule. The limitation 
provided in paragraph (c) of this section does not apply to net capital 
loss carryovers ((other than a hypothetical carryover like those 
described in Sec.  1.1502-21(c)(1)(i)(D) and a carryover like those 
described in Sec.  1.1502-21(c)(1)(ii)) when the application of 
paragraph (c) of this section results in an overlap with the application 
of section 383. For a similar rule applying in the case of net capital 
loss carryovers like those described in

[[Page 709]]

Sec. Sec.  1.1502-21(c)(1)(i)(D) and (c)(1)(ii), see Sec.  1.1502-15(g).
    (2) Definitions--(i) Generally. For purposes of this paragraph (g), 
the definitions and nomenclature contained in sections 382 and 383, the 
regulations thereunder, and Sec. Sec.  1.1502-90 through 1.1502-99 
apply.
    (ii) Overlap. (A) An overlap of the application of paragraph (c) of 
this section and the application of section 383 with respect to a net 
capital loss carryover occurs if a corporation becomes a member of the 
consolidated group (the SRLY event) within six months of the change date 
of an ownership change giving rise to a section 382 limitation with 
respect to that carryover (the section 383 event).
    (B) If an overlap described in paragraph (g)(2)(ii)(A) of this 
section occurs with respect to net capital loss carryovers of a 
corporation whose SRLY event occurs within the six month period 
beginning on the date of a section 383 event, then an overlap is treated 
as also occurring with respect to that corporation's net capital loss 
carryover that arises within the period beginning with the section 383 
event and ending with the SRLY event.
    (C) For special rules in the event that there is a SRLY subgroup 
and/or a loss subgroup as defined in Sec.  1.1502-91(d)(1) with respect 
to a carryover, see paragraph (g)(4) of this section.
    (3) Operating rules--(i) Section 383 event before SRLY event. If a 
SRLY event occurs on the same date as a section 383 event or within the 
six month period beginning on the date of the section 383 event, 
paragraph (g)(1) of this section applies beginning with the tax year 
that includes the SRLY event.
    (ii) SRLY event before section 383 event. If a section 383 event 
occurs within the period beginning the day after the SRLY event and 
ending six months after the SRLY event, paragraph (g)(1) of this section 
applies starting with the first tax year that begins after the section 
383 event.
    (4) Subgroup rules. In general, in the case of a net capital loss 
carryover for which there is a SRLY subgroup and a loss subgroup (as 
defined in Sec.  1.1502-91(d)(1)), the principles of this paragraph (g) 
apply to the SRLY subgroup, and not separately to its members. However, 
paragraph (g)(1) of this section applies--
    (i) With respect to a carryover described in paragraph (g)(2)(ii)(A) 
of this section only if--
    (A) All members of the SRLY subgroup with respect to that carryover 
are also included in a loss subgroup with respect to that carryover; and
    (B) All members of a loss subgroup with respect to that carryover 
are also members of a SRLY subgroup with respect to that carryover; and
    (ii) With respect to a carryover described in paragraph 
(g)(2)(ii)(B) of this section only if all members of the SRLY subgroup 
for that carryover are also members of a SRLY subgroup that has net 
capital loss carryovers described in paragraph (g)(2)(ii)(A) of this 
section that are subject to the overlap rule of paragraph (g)(1) of this 
section.
    (h) Effective date--(1) In general. This section generally applies 
to taxable years for which the due date (without extensions) of the 
consolidated return is after June 25, 1999. However--
    (i) In the event that paragraph (g)(1) of this section does not 
apply to a particular net capital loss carryover in the current group, 
then solely for purposes of applying paragraph (c) of this section to 
determine a limitation with respect to that carryover and with respect 
to which the SRLY register (consolidated taxable income determined by 
reference to only the member's or subgroup's items of income, gain, 
deduction, or loss) began in a taxable year for which the due date of 
the return was on or before June 25, 1999, the principles of Sec.  
1.1502-21(c)(2) shall be applied without regard to the phrase ``or for a 
carryover that was subject to the overlap rule described in paragraph 
(g) of this section or Sec.  1.1502-15(g) with respect to another group 
(the former group)''; and
    (ii) For purposes of paragraph (g) of this section, only an 
ownership change to which section 383, as amended by the Tax Reform Act 
of 1986, applies and which results in a section 382 limitation shall 
constitute a section 383 event.
    (2) Prior periods. For certain taxable years ending on or before 
June 25, 1999, see Sec.  1.1502-22T in effect prior to June

[[Page 710]]

25, 1999, as contained in 26 CFR part 1 revised April 1, 1999, as 
applicable.

[T.D. 8823, 64 FR 36114, July 2, 1999]



Sec.  1.1502-23  Consolidated net section 1231 gain or loss.

    (a) In general. Net section 1231 gains and losses of members arising 
during consolidated return years are not determined separately. Instead, 
the consolidated net section 1231 gain or loss is determined under this 
section for the group as a whole.
    (b) Example. The following example illustrates the provisions of 
this section:

    Example. Use of SRLY registers with net gains and net losses under 
section 1231. (i) In Year 1, T sustains a $20 net capital loss. At the 
beginning of Year 2, T becomes a member of the P group. T's capital loss 
carryover from Year 1 is subject to SRLY limits under Sec.  1.1502-
22(c). The members of the P group contribute the following to the 
consolidated taxable income for Year 2 (computed without regard to T's 
net capital loss carryover under Sec.  1.1502-22):

------------------------------------------------------------------------
                                                           P        T
------------------------------------------------------------------------
                              Year 1 (SRLY)
------------------------------------------------------------------------
Ordinary..............................................  .......  .......
Capital...............................................  .......     (20)
                                 Year 2
------------------------------------------------------------------------
Ordinary..............................................       10       20
Capital...............................................       70        0
Sec.   1231...........................................     (60)       30
------------------------------------------------------------------------

    (ii) Under section 1231, if the section 1231 losses for any taxable 
year exceed the section 1231 gains for such taxable year, such gains and 
losses are treated as ordinary gains or losses. Because the P group's 
section 1231 losses, $(60), exceed the section 1231 gains, $30, the P 
group's net loss is treated as an ordinary loss. T's net section 1231 
gain has the same character as the P group's consolidated net section 
1231 loss, so T's $30 of section 1231 income is treated as ordinary 
income for purposes of applying Sec.  1.1502-22(c). Under Sec.  1.1502-
22(c), the group's consolidated net capital gain determined by reference 
only to T's items is $0. None of T's capital loss carryover from Year 1 
may be taken into account in Year 2.

    (c) Recapture of ordinary loss. [Reserved]
    (d) Effective date--(1) In general. This section applies to gains 
and losses arising in the determination of consolidated net section 1231 
gain or loss for taxable years for which the due date (without 
extensions) of the consolidated return is after June 25, 1999.
    (2) Application to prior periods. See Sec.  1.1502-21(h)(3) for 
rules applicable to groups that applied the rules of this section to 
consolidated return years ending on or after January 29, 1991, and 
beginning before January 1, 1997.

[T.D. 8823, 64 FR 36115, July 2, 1999; 64 FR 41784, Aug. 2, 1999]



Sec.  1.1502-24  Consolidated charitable contributions deduction.

    (a) Determination of amount of consolidated charitable contributions 
deduction. The deduction allowed by section 170 for the taxable year 
shall be the lesser of:
    (1) The aggregate deductions of the members of the group allowable 
under section 170 (determined without regard to section 170(b)(2)), plus 
the consolidated charitable contribution carryovers to such year, or
    (2) Five percent of the adjusted consolidated taxable income as 
determined under paragraph (c) of this section.
    (b) Carryover of excess charitable contributions. The consolidated 
charitable contribution carryovers to any consolidated return year shall 
consist of any excess consolidated charitable contributions of the 
group, plus any excess charitable contributions of members of the group 
arising in separate return years of such members, which may be carried 
over to the taxable year under the principles of section 170(b) (2) and 
(3). However, such consolidated carryovers shall not include any excess 
charitable contributions apportioned to a corporation for a separate 
return year pursuant to paragraph (e) of Sec.  1.1502-79.
    (c) Adjusted consolidated taxable income. For purposes of this 
section, the adjusted consolidated taxable income of the group for any 
consolidated return year shall be the consolidated taxable income 
computed without regard to this section, section 242, section 243(a) (2) 
and (3), Sec.  1.1502-25, Sec.  1.1502-26, and Sec.  1.1502-27, and 
without regard to any consolidated net operating or net capital loss 
carrybacks to such year.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966]

[[Page 711]]



Sec.  1.1502-26  Consolidated dividends received deduction.

    (a) In general. (1) The consolidated dividends received deduction 
for the taxable year shall be the lesser of:
    (i) The aggregate of the deduction of the members of the group 
allowable under sections 243(a)(1), 244(a), and 245 (computed without 
regard to the limitations provided in section 246(b)), or
    (ii) 85 percent of the consolidated taxable income computed without 
regard to the consolidated net operating loss deduction, consolidated 
section 247 deduction, the consolidated dividends received deduction, 
and any consolidated net capital loss carryback to the taxable year.

Subdivision (ii) of this subparagraph shall not apply for any 
consolidated return year for which there is a consolidated net operating 
loss. (See Sec. Sec.  1.1502-21(e) or 1.1502-21A(f), as appropriate for 
the definition of a consolidated net operating loss.)
    (2) If any member computes a deduction under section 593(b)(2) for a 
taxable year beginning after July 11, 1969, and ending before August 30, 
1975, the deduction otherwise computed under this section shall be 
reduced by an amount determined by multiplying the deduction (determined 
without regard to this sentence and without regard to dividends received 
by the common parent if such parent does not use the percentage of 
income method provided by section 593(b)(2)) by the applicable 
percentage of the member with the highest applicable percentage 
(determined under subparagraphs (A) and (B) of section 593(b)(2)).
    (3) For taxable years ending on or after August 30, 1975, the 
deduction otherwise computed under this section shall be reduced by the 
sum of the amounts determined under paragraph (a)(4) of this section for 
each member that is a thrift institution that computes a deduction under 
section 593(b)(2).
    (4) For each thrift institution, the amount determined under this 
subparagraph is the product of:
    (i) The portion of the deduction determined with regard to the sum 
of the dividends received by: (A) The thrift institution, and (B) any 
member in which that thrift institution owns, directly and with the 
application of paragraph (a)(5) of this section, 5 percent or more of 
the stock on any day during the consolidated return year, and
    (ii) The thrift institution's applicable percentage determined under 
subparagraphs (A) and (B) of section 593(b)(2).

For purposes of this subparagraph, dividends allocated to a thrift 
institution under Sec.  1.596-1(c) shall be considered received by the 
thrift institution.
    (5) For purposes of paragraph (a)(4)(i) of this section, a member 
owning stock of another member (the ``second member'') shall be 
considered as owning its proportionate share of any stock of a member 
owned by the second member. Stock considered as being owned by reason of 
the preceding sentence shall, for purposes of applying that sentence, be 
treated as actually owned. The proportionate share of stock in a member 
owned by another member is the proportion which the value of the stock 
so owned bears to the value of all the outstanding stock in the member. 
For purposes of this paragraph the term ``stock'' includes nonvoting 
stock which is limited and preferred as to dividends.
    (6) For purposes of paragraph (a)(4)(i) of this section, if two or 
more thrift institutions that are both members of the group each owns 5 
percent or more of the same member's stock, the member's stock will be 
considered to be owned only by the thrift institution with the highest 
applicable percentage.
    (b) Intercompany dividends. The deduction determined under paragraph 
(a) of this section is determined without taking into account 
intercompany dividends to the extent that, under Sec.  1.1502-13(f)(2), 
they are not included in gross income. See Sec.  1.1502-13 for 
additional rules relating to intercompany dividends.
    (c) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example 1. Corporations P, S, and S-1 filed a consolidated return 
for the calendar year 1966 showing consolidated taxable income of 
$100,000 (determined without regard to the consolidated net operating 
loss deduction, consolidated dividends received deduction, and the 
consolidated section 247 deduction). Such corporations received 
dividends during such year from nonmember domestic corporations as 
follows:

[[Page 712]]



 
                                                               Dividends
 
Corporation:
  P.........................................................      $6,000
  S.........................................................      10,000
  S-1.......................................................      34,000
                                                             -----------
    Total...................................................      50,000
 


The dividends received deduction allowable to each member under section 
243(a)(1) (computed without regard to the limitation in section 246(b)) 
is as follows: P has $5,100 (85 percent of $6,000), S has $8,500 (85 
percent of $10,000), and S-1 has $28,900 (85 percent of $34,000), or a 
total of $42,500. Since $42,500 is less than $85,000 (85 percent of 
$100,000), the consolidated dividends received deduction is $42,500.
    Example 2. Assume the same facts as in example (1) except that 
consolidated taxable income (computed without regard to the consolidated 
net operating loss deduction, consolidated dividends received deduction, 
and the consolidated section 247 deduction) was $40,000. The aggregate 
of the dividends received deductions, $42,500, computed without regard 
to section 246(b), results in a consolidated net operating loss of 
$2,500. See section 172(d)(6). Therefore, paragraph (a)(2) of this 
section does not apply and the consolidated dividends received deduction 
is $42,500.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7631, 44 FR 
40497, July 11, 1979; T.D. 8597, 60 FR 36710, July 18, 1995; T.D. 8677, 
61 FR 33323, June 27, 1996; T.D. 8823, 64 FR 36099, July 2, 1999]



Sec.  1.1502-27  Consolidated section 247 deduction.

    (a) Amount of deduction. The consolidated section 247 deduction for 
the taxable year shall be an amount computed as follows:
    (1) First, determine the amount which is the lesser of:
    (i) The aggregate of the dividends paid (within the meaning of 
section 247(a)) during such year by members of the group which are 
public utilities (within the meaning of section 247(b)(1)) on preferred 
stock (within the meaning of section 247(b)(2)), other than dividends 
paid to other members of the group, or
    (ii) The aggregate of the taxable income (or loss) (as determined 
under paragraph (b) of this section) of each such member which is a 
public utility.
    (2) Then, multiply the amount determined under subparagraph (1) of 
this paragraph by the fraction specified in section 247(a)(2).
    (b) Computation of taxable income. For purposes of paragraph 
(a)(1)(ii) of this section, the taxable income (or loss) of a member of 
the group described in paragraph (a)(1)(i) shall be determined under 
Sec.  1.1502-12, adjusted for the following items taken into account in 
the computation of consolidated taxable income:
    (1) The portion of the consolidated net operating loss deduction, 
the consolidated charitable contributions deduction, and the 
consolidated dividends received deduction, attributable to such member;
    (2) 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 or carryback attributable to 
such member);
    (3) 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
    (4) The portion of any consolidated net capital loss carryover or 
carryback attributable to such member which is absorbed in the taxable 
year.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7728, 45 FR 
72650, Nov. 3, 1980]



Sec.  1.1502-28  Consolidated section 108.

    (a) In general. This section sets forth rules for the application of 
section 108(a) and the reduction of tax attributes pursuant to section 
108(b) when a member of the group realizes discharge of indebtedness 
income that is excluded from gross income under section 108(a) (excluded 
COD income).
    (1) Application of section 108(a). Section 108(a)(1)(A) and (B) is 
applied separately to each member that realizes excluded COD income. 
Therefore, the limitation of section 108(a)(3) on the amount of 
discharge of indebtedness income that is treated as excluded COD income 
is determined based on the assets (including stock and securities of 
other members) and liabilities (including liabilities to other members) 
of only the member that realizes excluded COD income.
    (2) Reduction of tax attributes attributable to the debtor--(i) In 
general. With

[[Page 713]]

respect to a member that realizes excluded COD income in a taxable year, 
the tax attributes attributable to that member (and its direct and 
indirect subsidiaries to the extent required by section 1017(b)(3)(D) 
and paragraph (a)(3) of this section), including basis of assets and 
losses and credits arising in separate return limitation years, shall be 
reduced as provided in sections 108 and 1017 and this section. Basis of 
subsidiary stock, however, shall not be reduced below zero pursuant to 
paragraph (a)(2) of this section (including when subsidiary stock is 
treated as depreciable property under section 1017(b)(3)(D) when there 
is an election under section 108(b)(5)).
    (ii) Consolidated tax attributes attributable to a member. For 
purposes of this section, the amount of a consolidated tax attribute 
(e.g., a consolidated net operating loss) that is attributable to a 
member shall be determined pursuant to the principles of Sec.  1.1502-
21(b)(2)(iv). In addition, if the member is a member of a separate 
return limitation year subgroup, the amount of a tax attribute that 
arose in a separate return limitation year that is attributable to that 
member shall also be determined pursuant to the principles of Sec.  
1.1502-21(b)(2)(iv).
    (3) Look-through rules--(i) Priority of section 1017(b)(3)(D). If a 
member treats stock of a subsidiary as depreciable property pursuant to 
section 1017(b)(3)(D), the basis of the depreciable property of such 
subsidiary shall be reduced pursuant to section 1017(b)(3)(D) prior to 
the application of paragraph (a)(3)(ii) of this section.
    (ii) Application of additional look-through rule. If the basis of 
stock of a corporation (the lower-tier member) that is owned by another 
corporation (the higher-tier member) is reduced pursuant to sections 108 
and 1017 and paragraph (a)(2) of this section (but not as a result of 
treating subsidiary stock as depreciable property pursuant to section 
1017(b)(3)(D)), and both of such corporations are members of the same 
consolidated group on the last day of the higher-tier member's taxable 
year that includes the date on which the excluded COD income is realized 
or the first day of the higher-tier member's taxable year that follows 
the taxable year that includes the date on which the excluded COD income 
is realized, solely for purposes of sections 108 and 1017 and this 
section other than paragraphs (a)(4) and (b)(1) of this section, the 
lower-tier member shall be treated as realizing excluded COD income on 
the last day of the taxable year of the higher-tier member that includes 
the date on which the higher-tier member realized the excluded COD 
income. The amount of such excluded COD income shall be the amount of 
such basis reduction. Accordingly, the tax attributes attributable to 
such lower-tier member shall be reduced as provided in sections 108 and 
1017 and this section. To the extent that the excluded COD income 
realized by the lower-tier member pursuant to this paragraph (a)(3) does 
not reduce a tax attribute attributable to the lower-tier member, such 
excluded COD income shall not be applied to reduce tax attributes 
attributable to any member under paragraph (a)(4) of this section and 
shall not cause an excess loss account to be taken into account under 
Sec.  1.1502-19(b)(1) and (c)(1)(iii)(B).
    (4) Reduction of certain tax attributes attributable to other 
members. To the extent that, pursuant to paragraph (a)(2) of this 
section, the excluded COD income is not applied to reduce the tax 
attributes attributable to the member that realizes the excluded COD 
income, after the application of paragraph (a)(3) of this section, such 
amount shall be applied to reduce the remaining consolidated tax 
attributes of the group, other than consolidated tax attributes to which 
a SRLY limitation applies, as provided in section 108 and this section. 
Such amount also shall be applied to reduce the tax attributes 
attributable to members that arose (or are treated as arising) in a 
separate return limitation year to the extent that the member that 
realizes excluded COD income is a member of the separate return 
limitation year subgroup with respect to such attribute if a SRLY 
limitation applies to the use of such attribute. In addition, such 
amount shall be applied to reduce the tax attributes attributable to 
members that arose in a separate return year or that arose (or are 
treated as arising) in a separate return limitation year if no SRLY 
limitation

[[Page 714]]

applies to the use of such attribute. The reduction of each tax 
attribute pursuant to the three preceding sentences shall be made in the 
order prescribed in section 108(b)(2) and pursuant to the principles of 
Sec.  1.1502-21(b)(1). Except as otherwise provided in this paragraph 
(a)(4), a tax attribute that arose in a separate return year or that 
arose (or is treated as arising) in a separate return limitation year is 
not subject to reduction pursuant to this paragraph (a)(4). Basis in 
assets is not subject to reduction pursuant to this paragraph (a)(4). 
Finally, to the extent that the realization of excluded COD income by a 
member pursuant to paragraph (a)(3) does not reduce a tax attribute 
attributable to such lower-tier member, such excess shall not be applied 
to reduce tax attributes attributable to any member pursuant to this 
paragraph (a)(4).
    (b) Special rules--(1) Multiple debtor members--(i) Reduction of tax 
attributes attributable to debtor members prior to reduction of 
consolidated tax attributes. If in a single taxable year multiple 
members realize excluded COD income, paragraphs (a)(2) and (3) of this 
section shall apply with respect to the excluded COD income of each such 
member before the application of paragraph (a)(4) of this section.
    (ii) Reduction of higher-tier debtor's tax attributes. If in a 
single taxable year multiple members realize excluded COD income and one 
such member is a higher-tier member of another such member, paragraphs 
(a)(2) and (3) of this section shall be applied with respect to the 
excluded COD income of the higher-tier member before such paragraphs are 
applied to the excluded COD income of the other such member. In applying 
the rules of paragraph (a)(2) and (3) of this section with respect to 
the excluded COD income of the higher-tier member, the liabilities that 
give rise to the excluded COD income of the other such member shall not 
be treated as discharged for purposes of computing the limitation on 
basis reduction under section 1017(b)(2). A member (the first member) is 
a higher-tier member of another member (the second member) if the first 
member is the common parent or investment adjustments under Sec.  
1.1502-32 with respect to the stock of the second member would affect 
investment adjustments with respect to the stock of the first member.
    (iii) Reduction of additional tax attributes. If more than one 
member realizes excluded COD income that has not been applied to reduce 
a tax attribute attributable to such member (the remaining COD amount) 
and the remaining tax attributes available for reduction under paragraph 
(a)(4) of this section are less than the aggregate of the remaining COD 
amounts, after the application of paragraph (a)(2) of this section, each 
such member's remaining COD amount shall be applied on a pro rata basis 
(based on the relative remaining COD amounts), pursuant to paragraph 
(a)(4) of this section, to reduce such remaining available tax 
attributes.
    (iv) Ownership of lower-tier member by multiple higher-tier members. 
If stock of a corporation is held by more than one higher-tier member of 
the group and more than one such higher-tier member reduces its basis in 
such stock, then under paragraph (a)(3) of this section the excluded COD 
income resulting from the stock basis reductions shall be applied on a 
pro rata basis (based on the amount of excluded COD income caused by 
each basis reduction) to reduce the attributes of the corporation.
    (v) Ownership of lower-tier member by multiple higher-tier members 
in multiple groups. If a corporation is a member of one group (the first 
group) on the last day of the first group's higher-tier member's taxable 
year that includes the date on which that higher-tier member realizes 
excluded COD income and is a member of another group (the second group) 
on the following day and the first group's higher-tier member and the 
second group's higher-tier member both reduce their basis in the stock 
of such corporation pursuant to sections 108 and 1017 and this section, 
paragraph (a)(3) of this section shall first be applied in respect of 
the excluded COD income that results from the reduction of the basis of 
the corporation's stock owned by the first group's higher-tier member 
and then shall be applied in respect of the excluded COD income that 
results from

[[Page 715]]

the reduction of the basis of the corporation's stock owned by the 
second group's higher-tier member.
    (2) Election under section 108(b)(5)--(i) Availability of election. 
The group may make the election described in section 108(b)(5) for any 
member that realizes excluded COD income. The election is made 
separately for each member. Therefore, an election may be made for one 
member that realizes excluded COD income (either actually or pursuant to 
paragraph (a)(3) of this section) while another election, or no 
election, may be made for another member that realizes excluded COD 
income (either actually or pursuant to paragraph (a)(3) of this 
section). See Sec.  1.108-4 for rules relating to the procedure for 
making an election under section 108(b)(5).
    (ii) Treatment of shares with an excess loss account. For purposes 
of applying section 108(b)(5)(B), the basis of stock of a subsidiary 
that has an excess loss account shall be treated as zero.
    (3) Application of section 1017--(i) Timing of basis reduction. 
Basis of property shall be subject to reduction pursuant to the rules of 
sections 108 and 1017 and this section after the determination of the 
tax imposed by chapter 1 of the Internal Revenue Code for the taxable 
year during which the member realizes excluded COD income and any prior 
years and coincident with the reduction of other attributes pursuant to 
section 108 and this section. However, only the basis of property held 
as of the beginning of the taxable year following the taxable year 
during which the excluded COD income is realized is subject to reduction 
pursuant to sections 108 and 1017 and this section.
    (ii) Limitation of section 1017(b)(2). The limitation of section 
1017(b)(2) on the reduction in basis of property shall be applied by 
reference to the aggregate of the basis of the property held by the 
member that realizes excluded COD income, not the aggregate of the basis 
of the property held by all of the members of the group, and the 
liabilities of such member, not the aggregate liabilities of all of the 
members of the group.
    (iii) Treatment of shares with an excess loss account. For purposes 
of applying section 1017(b)(2) and Sec.  1.1017-1, the basis of stock of 
a subsidiary that has an excess loss account shall be treated as zero.
    (4) Application of section 1245. Notwithstanding section 
1017(d)(1)(B), a reduction of the basis of subsidiary stock is treated 
as a deduction allowed for depreciation only to the extent that the 
amount by which the basis of the subsidiary stock is reduced exceeds the 
total amount of the attributes attributable to such subsidiary that are 
reduced pursuant to the subsidiary's consent under section 1017(b)(3)(D) 
or as a result of the application of paragraph (a)(3)(ii) of this 
section.
    (5) Reduction of basis of intercompany obligations and former 
intercompany obligations--(i) Intercompany obligations that cease to be 
intercompany obligations. If excluded COD income is realized in a 
consolidated return year in which an intercompany obligation becomes an 
obligation that is not an intercompany obligation because the debtor or 
creditor becomes a nonmember, or because the assets of the debtor or the 
creditor are acquired by a nonmember in a transaction to which section 
381 applies, then the basis of such intercompany obligation (or new 
obligation if the intercompany obligation is deemed reissued under Sec.  
1.1502-13(g)(3)) is available for reduction in respect of such excluded 
COD income pursuant to sections 108 and 1017 and this section.
    (ii) Intercompany obligations. The reduction of the basis of an 
intercompany obligation pursuant to sections 108 and 1017 and this 
section shall not result in the satisfaction and reissuance of the 
obligation under Sec.  1.1502-13(g). Therefore, any income or gain (or 
reduction of loss or deduction) attributable to a reduction of the basis 
of an intercompany obligation will be taken into account when Sec.  
1.1502-13(g)(3) applies to such obligation. Furthermore, Sec.  1.1502-
13(c)(6)(i) (regarding the treatment of intercompany items if 
corresponding items are excluded or nondeductible) will not apply to 
exclude any amount of income or gain attributable to a reduction of the 
basis of an intercompany obligation pursuant to sections 108 and 1017 
and this section. See Sec.  1.1502-13(g)(3)(i)(A)(1) and (g)(4)(i)(A).
    (6) Taking into account excess loss account--(i) Determination of 
inclusion.

[[Page 716]]

The determination of whether any portion of an excess loss account in a 
share of stock of a subsidiary that realizes excluded COD income is 
required to be taken into account as a result of the application of 
Sec.  1.1502-19(c)(1)(iii)(B) is made after the determination of the tax 
imposed by chapter 1 of the Internal Revenue Code for the year during 
which the member realizes excluded COD income (without regard to whether 
any portion of an excess loss account in a share of stock of the 
subsidiary is required to be taken into account) and any prior years, 
after the reduction of tax attributes pursuant to sections 108 and 1017 
and this section, and after the adjustment of the basis of the share of 
stock of the subsidiary pursuant to Sec.  1.1502-32 to reflect the 
amount of the subsidiary's deductions and losses that are absorbed in 
the computation of taxable income (or loss) for the year of the 
disposition and any prior years, and the excluded COD income applied to 
reduce attributes and the attributes reduced in respect thereof. See 
Sec.  1.1502-11(c) for special rules related to the computation of tax 
that apply when an excess loss account is required to be taken into 
account.
    (ii) Timing of inclusion. To the extent an excess loss account in a 
share of stock of a subsidiary that realizes excluded COD income is 
required to be taken into account as a result of the application of 
Sec.  1.1502-19(c)(1)(iii)(B), such amount shall be included on the 
group's tax return for the taxable year that includes the date on which 
the subsidiary realizes such excluded COD income.
    (7) Dispositions of stock. See Sec.  1.1502-11(c) for limitations on 
the reduction of tax attributes when a member disposes of stock of 
another member (including dispositions that result from the application 
of Sec.  1.1502-19(c)(1)(iii)(B)) during a taxable year in which any 
member realizes excluded COD income.
    (8) Departure of member. If the taxable year of a member (the 
departing member) during which such member realizes excluded COD income 
ends on or prior to the last day of the consolidated return year and, on 
the first day of the taxable year of such member that follows the 
taxable year during which such member realizes excluded COD income, such 
member is not a member of the group and does not have a successor member 
(within the meaning of paragraph (b)(10) of this section), all tax 
attributes listed in section 108(b)(2) that remain after the 
determination of the tax imposed that belong to members of the group 
(including the departing member and subsidiaries of the departing 
member) shall be subject to reduction as provided in section 108 and the 
regulations promulgated thereunder (including Sec.  1.108-7(c), if 
applicable) and this section.
    (9) Intragroup reorganization--(i) In general. If the taxable year 
of a member during which such member realizes excluded COD income ends 
prior to the last day of the consolidated return year and, on the first 
day that follows the taxable year of such member during which such 
member realizes excluded COD income, such member has a successor member, 
for purposes of applying the rules of sections 108 and 1017 and this 
section, notwithstanding Sec.  1.108-7, the successor member shall be 
treated as the member that realized the excluded COD income. Thus, all 
attributes attributable to the successor member listed in section 
108(b)(2) (including attributes that were attributable to the successor 
member prior to the date such member became a successor member) are 
available for reduction under paragraph (a)(2) of this section.
    (ii) Group structure change. If a member that realizes excluded COD 
income acquires the assets of the common parent of the consolidated 
group in a transaction to which section 381(a) applies and succeeds such 
common parent under the principles of Sec.  1.1502-75(d)(2) as the 
common parent of the consolidated group, the member's attributes that 
remain after the determination of tax for the group for the consolidated 
return year during which the excluded COD income is realized (and any 
prior years) (including attributes that were attributable to the former 
common parent prior to the date of the transaction to which section 
381(a) applies) shall be available for reduction under paragraph (a)(2) 
of this section.
    (10) Definition of successor member. A successor member means a 
person to

[[Page 717]]

which the member that realizes excluded COD income (or a successor 
member) transfers its assets in a transaction to which section 381(a) 
applies if such transferee is a member of the group immediately after 
the transaction.
    (11) Non-application of next day rule. For purposes of applying the 
rules of sections 108 and 1017 and this section, the next day rule of 
Sec.  1.1502-76(b)(1)(ii)(B) shall not apply to treat a member's 
excluded COD income as realized at the beginning of the day following 
the day on which such member's status as a member changes.
    (c) Examples. The principles of paragraphs (a) and (b) of this 
section are illustrated by the following examples. Unless otherwise 
indicated, no election under section 108(b)(5) has been made and the 
taxable year of all consolidated groups is the calendar year. The 
examples are as follows:

    Example 1. (i) Facts. P is the common parent of a consolidated group 
that includes subsidiary S1. P owns 80 percent of the stock of S1. In 
Year 1, the P group sustained a $250 consolidated net operating loss. 
Under the principles of Sec.  1.1502-21(b)(2)(iv), of that amount, $125 
was attributable to P and $125 was attributable to S1. On Day 1 of Year 
2, P acquired 100 percent of the stock of S2, and S2 joined the P group. 
As of the beginning of Year 2, S2 had a $50 net operating loss carryover 
from Year 1, a separate return limitation year. In Year 2, the P group 
sustained a $200 consolidated net operating loss. Under the principles 
of Sec.  1.1502-21(b)(2)(iv), of that amount, $90 was attributable to P, 
$70 was attributable to S1, and $40 was attributable to S2. In Year 3, 
S2 realized $200 of excluded COD income from the discharge of non-
intercompany indebtedness. In that same year, the P group sustained a 
$50 consolidated net operating loss, of which $40 was attributable to S1 
and $10 was attributable to S2 under the principles of Sec.  1.1502-
21(b)(2)(iv). As of the beginning of Year 4, S2 had Asset A with a fair 
market value of $10. After the computation of tax imposed for Year 3 and 
before the application of sections 108 and 1017 and this section, Asset 
A had a basis of $40 and S2 had no liabilities.
    (ii) Analysis--(A) Reduction of tax attributes attributable to 
debtor. Pursuant to paragraph (a)(2) of this section, the tax attributes 
attributable to S2 must first be reduced to take into account its 
excluded COD income in the amount of $200.
    (1) Reduction of net operating losses. Pursuant to section 
108(b)(2)(A) and paragraph (a) of this section, the net operating loss 
and the net operating loss carryovers attributable to S2 under the 
principles of Sec.  1.1502-21(b)(2)(iv) are reduced in the order 
prescribed by section 108(b)(4)(B). Accordingly, the consolidated net 
operating loss for Year 3 is reduced by $10, the portion of the 
consolidated net operating loss attributable to S2, to $40. Then, again 
pursuant to section 108(b)(4)(B), S2's net operating loss carryover of 
$50 from its separate return limitation year is reduced to $0. Finally, 
the consolidated net operating loss carryover from Year 2 is reduced by 
$40, the portion of that consolidated net operating loss carryover 
attributable to S2, to $160.
    (2) Reduction of basis. Following the reduction of the net operating 
loss and the net operating loss carryovers attributable to S2, S2 
reduces its basis in its assets pursuant to section 1017 and Sec.  
1.1017-1. Accordingly, S2 reduces its basis in Asset A by $40, from $40 
to $0.
    (B) Reduction of remaining consolidated tax attributes. The 
remaining $60 of excluded COD income then reduces consolidated tax 
attributes pursuant to paragraph (a)(4) of this section. In particular, 
the remaining $40 consolidated net operating loss for Year 3 is reduced 
to $0. Then, the consolidated net operating loss carryover from Year 1 
is reduced by $20 from $250 to $230. Pursuant to paragraph (a)(4) of 
this section, a pro rata amount of the consolidated net operating loss 
carryover from Year 1 that is attributable to each of P and S1 is 
treated as reduced. Therefore, $10 of the consolidated net operating 
loss carryover from Year 1 that is attributable to each of P and S1 is 
treated as reduced.
    Example 2. (i) Facts. P is the common parent of a consolidated group 
that includes subsidiaries S1 and S2. P owns 100 percent of the stock of 
S1 and S1 owns 100 percent of the stock of S2. None of P, S1, or S2 has 
a separate return limitation year. In Year 1, the P group sustained a 
$50 consolidated net operating loss. Under the principles of Sec.  
1.1502-21(b)(2)(iv), of that amount, $10 was attributable to P, $20 was 
attributable to S1, and $20 was attributable to S2. In Year 2, the P 
group sustained a $70 consolidated net operating loss. Under the 
principles of Sec.  1.1502-21(b)(2)(iv), of that amount, $30 was 
attributable to P, $30 was attributable to S1, and $10 was attributable 
to S2. In Year 3, S1 realized $170 of excluded COD income from the 
discharge of non-intercompany indebtedness. In that same year, the P 
group sustained a $50 consolidated net operating loss, of which $10 was 
attributable to S1 and $40 was attributable to S2 under the principles 
of Sec.  1.1502-21(b)(2)(iv). As of the beginning of Year 4, S1's sole 
asset was the stock of S2, and S2 had Asset A with a $10 value. After 
the computation of tax imposed for Year 3 and before the application of 
sections 108 and 1017 and this section, S1 had an $80 basis in the S2

[[Page 718]]

stock, Asset A had a basis of $0, and neither S1 nor S2 had any 
liabilities.
    (ii) Analysis--(A) Reduction of tax attributes attributable to 
debtor. Pursuant to paragraph (a)(2) of this section, the tax attributes 
attributable to S1 must first be reduced to take into account its 
excluded COD income in the amount of $170.
    (1) Reduction of net operating losses. Pursuant to section 
108(b)(2)(A) and paragraph (a) of this section, the net operating loss 
and the net operating loss carryovers attributable to S1 under the 
principles of Sec.  1.1502-21(b)(2)(iv) are reduced in the order 
prescribed by section 108(b)(4)(B). Accordingly, the consolidated net 
operating loss for Year 3 is reduced by $10, the portion of the 
consolidated net operating loss for Year 3 attributable to S1, to $40. 
Then, the consolidated net operating loss carryover from Year 1 is 
reduced by $20, the portion of that consolidated net operating loss 
carryover attributable to S1, to $30, and the consolidated net operating 
loss carryover from Year 2 is reduced by $30, the portion of that 
consolidated net operating loss carryover attributable to S1, to $40.
    (2) Reduction of basis. Following the reduction of the net operating 
loss and the net operating loss carryovers attributable to S1, S1 
reduces its basis in its assets pursuant to section 1017 and Sec.  
1.1017-1. Accordingly, S1 reduces its basis in the stock of S2 by $80, 
from $80 to $0.
    (3) Tiering down of stock basis reduction. Pursuant to paragraph 
(a)(3) of this section, for purposes of sections 108 and 1017 and this 
section, S2 is treated as realizing $80 of excluded COD income. Pursuant 
to section 108(b)(2)(A) and paragraph (a) of this section, therefore, 
the net operating loss and net operating loss carryovers attributable to 
S2 under the principles of Sec.  1.1502-21(b)(2)(iv) are reduced in the 
order prescribed by section 108(b)(4)(B). Accordingly, the consolidated 
net operating loss for Year 3 is reduced by an additional $40, the 
portion of the consolidated net operating loss for Year 3 attributable 
to S2, to $0. Then, the consolidated net operating loss carryover from 
Year 1 is reduced by $20, the portion of that consolidated net operating 
loss carryover attributable to S2, to $10. Then, the consolidated net 
operating loss carryover from Year 2 is reduced by $10, the portion of 
that consolidated net operating loss carryover attributable to S2, to 
$30. S2's remaining $10 of excluded COD income does not reduce 
consolidated tax attributes attributable to P or S1 under paragraph 
(a)(4) of this section.
    (B) Reduction of remaining consolidated tax attributes. Finally, 
pursuant to paragraph (a)(4) of this section, S1's remaining $30 of 
excluded COD income reduces the remaining consolidated tax attributes. 
In particular, the remaining $10 consolidated net operating loss 
carryover from Year 1 is reduced by $10 to $0, and the remaining $30 
consolidated net operating loss carryover from Year 2 is reduced by $20 
to $10.
    Example 3. (i) Facts. P is the common parent of a consolidated group 
that includes subsidiaries S1, S2, and S3. P owns 100 percent of the 
stock of S1, S1 owns 100 percent of the stock of S2, and S2 owns 100 
percent of the stock of S3. None of P, S1, S2, or S3 had a separate 
return limitation year prior to Year 1. In Year 1, the P group sustained 
a $150 consolidated net operating loss. Under the principles of Sec.  
1.1502-21(b)(2)(iv), of that amount, $50 was attributable to S2, and 
$100 was attributable to S3. In Year 2, the P group sustained a $50 
consolidated net operating loss. Under the principles of Sec.  1.1502-
21(b)(2)(iv), of that amount, $40 was attributable to S1 and $10 was 
attributable to S2. In Year 3, S1 realized $170 of excluded COD income 
from the discharge of non-intercompany indebtedness. In that same year, 
the P group sustained a $50 consolidated net operating loss, of which 
$10 was attributable to S1, $20 was attributable to S2, and $20 was 
attributable to S3 under the principles of Sec.  1.1502-21(b)(2)(iv). At 
the beginning of Year 4, S1's only asset was the stock of S2, and S2's 
only asset was the stock of S3 with a value of $10. After the 
computation of tax imposed for Year 3 and before the application of 
sections 108 and 1017 and this section, S1's stock of S2 had a basis of 
$120 and S2's stock of S3 had a basis of $180. In addition, none of S1, 
S2, and S3 had any liabilities.
    (ii) Analysis--(A) Reduction of tax attributes attributable to 
debtor. Pursuant to paragraph (a)(2) of this section, the tax attributes 
attributable to S1 must first be reduced to take into account its 
excluded COD income in the amount of $170.
    (1) Reduction of net operating losses. Pursuant to section 
108(b)(2)(A) and paragraph (a) of this section, the net operating loss 
and the net operating loss carryovers attributable to S1 under the 
principles of Sec.  1.1502-21(b)(2)(iv) are reduced in the order 
prescribed by section 108(b)(4)(B). Accordingly, the consolidated net 
operating loss for Year 3 is reduced by $10, the portion of the 
consolidated net operating loss attributable to S1, to $40. Then, the 
consolidated net operating loss carryover from Year 2 is reduced by $40, 
the portion of that consolidated net operating loss carryover 
attributable to S1, to $10.
    (2) Reduction of basis. Following the reduction of the net operating 
loss and the net operating loss carryovers attributable to S1, S1 
reduces its basis in its assets pursuant to section 1017 and Sec.  
1.1017-1. Accordingly, S1 reduces its basis in the stock of S2 by $120, 
from $120 to $0.
    (B) Tiering down of stock basis reduction to S2. Pursuant to 
paragraph (a)(3) of this section, for purposes of sections 108 and 1017 
and this section, S2 is treated as realizing $120 of

[[Page 719]]

excluded COD income. Pursuant to section 108(b)(2)(A) and paragraph (a) 
of this section, therefore, the net operating loss and net operating 
loss carryovers attributable to S2 under the principles of Sec.  1.1502-
21(b)(2)(iv) are reduced in the order prescribed by section 
108(b)(4)(B). Accordingly, the consolidated net operating loss for Year 
3 is further reduced by $20, the portion of the consolidated net 
operating loss attributable to S2, to $20. Then, the consolidated net 
operating loss carryover from Year 1 is reduced by $50, the portion of 
that consolidated net operating loss carryover attributable to S2, to 
$100. Then, the consolidated net operating loss carryover from Year 2 is 
further reduced by $10, the portion of that consolidated net operating 
loss carryover attributable to S2, to $0. Following the reduction of the 
net operating loss and the net operating loss carryovers attributable to 
S2, S2 reduces its basis in its assets pursuant to section 1017 and 
Sec.  1.1017-1. Accordingly, S2 reduces its basis in its S3 stock by $40 
to $140.
    (C) Tiering down of stock basis reduction to S3. Pursuant to 
paragraph (a)(3) of this section, for purposes of sections 108 and 1017 
and this section, S3 is treated as realizing $40 of excluded COD income. 
Pursuant to section 108(b)(2)(A) and paragraph (a) of this section, 
therefore, the net operating loss and the net operating loss carryovers 
attributable to S3 under the principles of Sec.  1.1502-21(b)(2)(iv) are 
reduced in the order prescribed by section 108(b)(4)(B). Accordingly, 
the consolidated net operating loss for Year 3 is further reduced by 
$20, the portion of the consolidated net operating loss attributable to 
S3, to $0. Then, the consolidated net operating loss carryover from Year 
1 is reduced by $20, the lesser of the portion of that consolidated net 
operating loss carryover attributable to S3 and the remaining excluded 
COD income, to $80.
    Example 4. (i) Facts. P is the common parent of a consolidated group 
that includes subsidiaries S1, S2, and S3. P owns 100 percent of the 
stock of each of S1 and S2. Each of S1 and S2 owns stock of S3 that 
represents 50 percent of the value of the stock of S3. None of P, S1, 
S2, or S3 had a separate return limitation year prior to Year 1. In Year 
1, the P group sustained a $160 consolidated net operating loss. Under 
the principles of Sec.  1.1502-21(b)(2)(iv), of that amount, $10 was 
attributable to P, $50 was attributable to S2, and $100 was attributable 
to S3. In Year 2, the P group sustained a $110 consolidated net 
operating loss. Under the principles of Sec.  1.1502-21(b)(2)(iv), of 
that amount, $40 was attributable to S1 and $70 was attributable to S2. 
In Year 3, S1 realized $200 of excluded COD income from the discharge of 
non-intercompany indebtedness, and S2 realized $270 of excluded COD 
income from the discharge of non-intercompany indebtedness. In that same 
year, the P group sustained a $50 consolidated net operating loss, of 
which $10 was attributable to S1, $20 was attributable to S2, and $20 
was attributable to S3 under the principles of Sec.  1.1502-
21(b)(2)(iv). At the beginning of Year 4, S3 had one asset with a value 
of $10. After the computation of tax imposed for Year 3 and before the 
application of sections 108 and 1017 and this section, S1's basis in its 
S3 stock was $60, S2's basis in its S3 stock was $120, and S3's asset 
had a basis of $200. In addition, none of S1, S2, and S3 had any 
liabilities.
    (ii) Analysis--(A) Reduction of tax attributes attributable to 
debtors. Pursuant to paragraph (b)(1)(i) of this section, the tax 
attributes attributable to each of S1 and S2 are reduced pursuant to 
paragraph (a)(2) of this section. Then, pursuant to paragraph (a)(3) of 
this section, the tax attributes attributable to S3 are reduced so as to 
reflect a reduction of S1's and S2's basis in the stock of S3. Then, 
paragraph (a)(4) is applied to reduce additional tax attributes.
    (1) Reduction of net operating losses generally. Pursuant to section 
108(b)(2)(A) and paragraph (a) of this section, the net operating losses 
and the net operating loss carryovers attributable to S1 and S2 under 
the principles of Sec.  1.1502-21(b)(2)(iv) are reduced in the order 
prescribed by section 108(b)(4)(B).
    (2) Reduction of net operating losses attributable to S1. The 
consolidated net operating loss for Year 3 is reduced by $10, the 
portion of the consolidated net operating loss attributable to S1, to 
$40. Then, the consolidated net operating loss carryover from Year 2 is 
reduced by $40, the portion of that consolidated net operating loss 
carryover attributable to S1, to $70.
    (3) Reduction of net operating losses attributable to S2. The 
consolidated net operating loss for Year 3 is also reduced by $20, the 
portion of the consolidated net operating loss attributable to S2, to 
$20. Then, the consolidated net operating loss carryover from Year 1 is 
reduced by $50, the portion of that consolidated net operating loss 
carryover attributable to S2, to $110. Then, the consolidated net 
operating loss carryover from Year 2 is reduced by $70, the portion of 
that consolidated net operating loss carryover attributable to S2, to 
$0.
    (4) Reduction of basis. Following the reduction of the net operating 
losses and the net operating loss carryovers attributable to S1 and S2, 
S1 and S2 must reduce their basis in their assets pursuant to section 
1017 and Sec.  1.1017-1. Accordingly, S1 reduces its basis in the stock 
of S3 by $60, from $60 to $0, and S2 reduces its basis in the stock of 
S3 by $120, from $120 to $0.
    (B) Tiering down of basis reduction. Pursuant to paragraph (a)(3) of 
this section, for purposes of sections 108 and 1017 and this section, S3 
is treated as realizing $180 of excluded COD income. Pursuant to section

[[Page 720]]

108(b)(2)(A) and paragraph (a) of this section, therefore, the net 
operating loss and the net operating loss carryovers attributable to S3 
under the principles of Sec.  1.1502-21(b)(2)(iv) are reduced in the 
order prescribed by section 108(b)(4)(B). Accordingly, the consolidated 
net operating loss for Year 3 is further reduced by $20, the portion of 
the consolidated net operating loss attributable to S3, to $0. Then, the 
consolidated net operating loss carryover from Year 1 is reduced by 
$100, the portion of that consolidated net operating loss carryover 
attributable to S3, to $10. Following the reduction of the net operating 
loss and the net operating loss carryover attributable to S3, S3 reduces 
its basis in its asset pursuant to section 1017 and Sec.  1.1017-1. 
Accordingly, S3 reduces its basis in its asset by $60, from $200 to 
$140.
    (C) Reduction of remaining consolidated tax attributes. Finally, 
pursuant to paragraph (a)(4) of this section, the remaining $90 of S1's 
excluded COD income and the remaining $10 of S2's excluded COD income 
reduce the remaining consolidated tax attributes. In particular, the 
remaining $10 consolidated net operating loss carryover from Year 1 is 
reduced by $10 to $0. Because that amount is less than the aggregate 
amount of remaining excluded COD income, such income is applied on a pro 
rata basis to reduce the remaining consolidated tax attributes. 
Accordingly, $9 of S1's remaining excluded COD income and $1 of S2's 
remaining excluded COD income is applied to reduce the remaining 
consolidated net operating loss carryover from Year 1. Consequently, of 
S1's excluded COD income of $200, only $119 is applied to reduce tax 
attributes, and, of S2's excluded COD income of $270, only $261 is 
applied to reduce tax attributes.
    Example 5. (i) Facts. P is the common parent of a consolidated group 
that includes subsidiaries S1, S2, and S3. P owns 100 percent of the 
stock of S1 and S2, and S1 owns 100 percent of the stock of S3. None of 
P, S1, S2, or S3 has a separate return limitation year prior to Year 1. 
In Year 1, the P group sustained a $90 consolidated net operating loss. 
Under the principles of Sec.  1.1502-21(b)(2)(iv), of that amount, $10 
was attributable to P, $15 was attributable to S1, $20 was attributable 
to S2, and $45 was attributable to S3. On January 1 of Year 2, P 
realized $140 of excluded COD income from the discharge of non-
intercompany indebtedness. On December 31 of Year 2, S1 issued stock 
representing 50 percent of the vote and value of its outstanding stock 
to a person that was not a member of the group. As a result of the 
issuance of stock, S1 and S3 ceased to be members of the P group. For 
the consolidated return year of Year 2, the P group sustained a $60 
consolidated net operating loss, of which $5 was attributable to S1, $40 
was attributable to S2, and $15 was attributable to S3 under the 
principles of Sec.  1.1502-21(b)(2)(iv). As of the beginning of Year 3, 
P's only assets were the stock of S1 and S2, S1's sole asset was the 
stock of S3, S2 had Asset A with a value of $10, and S3 had Asset B with 
a value of $10. After the computation of tax imposed for Year 2 and 
before the application of sections 108 and 1017 and this section, P had 
a $80 basis in the S1 stock and a $50 basis in the S2 stock, S1 had a 
$80 basis in the S3 stock, and Asset A and B each had a basis of $10. In 
addition, none of P, S1, S2, and S3 had any liabilities.
    (ii) Analysis. Pursuant to paragraph (a)(2) of this section, the tax 
attributes attributable to P must first be reduced to take into account 
its excluded COD income in the amount of $140.
    (A) Reduction of net operating losses. Pursuant to section 
108(b)(2)(A) and paragraph (a) of this section, the net operating loss 
and the net operating loss carryover attributable to P under the 
principles of Sec.  1.1502-21(b)(2)(iv) are reduced in the order 
prescribed by section 108(b)(4)(B). Accordingly, the consolidated net 
operating loss carryover from Year 1 is reduced by $10, the portion of 
that consolidated net operating loss carryover attributable to P, to 
$80.
    (B) Reduction of basis. Following the reduction of the net operating 
loss and the net operating loss carryover attributable to P, P reduces 
its basis in its assets pursuant to section 1017 and Sec.  1.1017-1. 
Accordingly, P reduces its basis in the stock of S1 by $80, from $80 to 
$0, and its basis in the stock of S2 by $50, from $50 to $0.
    (C) Tiering down of stock basis reduction to S1. Pursuant to 
paragraph (a)(3) of this section, for purposes of sections 108 and 1017 
and this section, S1 is treated as realizing $80 of excluded COD income, 
despite the fact that it ceases to be a member of the group at the end 
of the day on December 31 of Year 2. Pursuant to section 108(b)(2)(A) 
and paragraph (a) of this section, therefore, the net operating loss and 
net operating loss carryovers attributable to S1 under the principles of 
Sec.  1.1502-21(b)(2)(iv) are reduced in the order prescribed by section 
108(b)(4)(B). Accordingly, the consolidated net operating loss for Year 
2 is reduced by $5, the portion of the consolidated net operating loss 
for Year 2 attributable to S1, to $55. Then, the consolidated net 
operating loss carryover from Year 1 is reduced by an additional $15, 
the portion of that consolidated net operating loss carryover 
attributable to S1, to $65. Following the reduction of the net operating 
loss and the net operating loss carryover attributable to S1, S1 reduces 
its basis in its assets pursuant to section 1017 and Sec.  1.1017-1. 
Accordingly, S1 reduces its basis in the stock of S3 by $60, from $80 to 
$20.
    (D) Tiering down of stock basis reduction to S2. Pursuant to 
paragraph (a)(3) of this section, for purposes of sections 108 and 1017 
and this section, S2 is treated as realizing $50 of

[[Page 721]]

excluded COD income. Pursuant to section 108(b)(2)(A) and paragraph (a) 
of this section, therefore, the net operating loss and net operating 
loss carryovers attributable to S2 under the principles of Sec.  1.1502-
21(b)(2)(iv) are reduced in the order prescribed by section 
108(b)(4)(B). Accordingly, the consolidated net operating loss for Year 
2 is reduced by an additional $40, the portion of the consolidated net 
operating loss for Year 2 attributable to S2, to $15. Then, the 
consolidated net operating loss carryover from Year 1 is reduced by an 
additional $10, a portion of the consolidated net operating loss 
carryover attributable to S2, to $55.
    (E) Tiering down of stock basis reduction to S3. Pursuant to 
paragraph (a)(3) of this section, for purposes of sections 108 and 1017 
and this section, S3 is treated as realizing $60 of excluded COD income 
(by reason of S1's reduction in its basis of its S3 stock). Pursuant to 
section 108(b)(2)(A) and paragraph (a) of this section, therefore, the 
net operating loss and net operating loss carryovers attributable to S3 
under the principles of Sec.  1.1502-21(b)(2)(iv) are reduced in the 
order prescribed by section 108(b)(4)(B). Accordingly, the consolidated 
net operating loss for Year 2 is reduced by an additional $15, the 
portion of the consolidated net operating loss for Year 2 attributable 
to S3, to $0. Then, the consolidated net operating loss carryover from 
Year 1 is reduced by an additional $45, the portion of that consolidated 
net operating loss carryover attributable to S3, to $10.
    Example 6. (i) Facts. P1 is the common parent of a consolidated 
group that includes subsidiaries S1, S2, and S3. P1 owns 100 percent of 
the stock of S1 and S2. S1 owns 100 percent of the stock of S3. None of 
P1, S1, S2, or S3 has a separate return limitation year prior to Year 1. 
In Year 1, the P1 group sustained a $120 consolidated net operating 
loss. Under the principles of Sec.  1.1502-21(b)(2)(iv), of that amount, 
$40 was attributable to P1, $35 was attributable to S1, $30 was 
attributable to S2, and $15 was attributable to S3. On January 1 of Year 
2, S3 realized $65 of excluded COD income from the discharge of non-
intercompany indebtedness. On June 30 of Year 2, S3 issued stock 
representing 80 percent of the vote and value of its outstanding stock 
to P2, the common parent of another group. As a result of the issuance 
of stock, S3 ceased to be a member of the P1 group and became a member 
of the P2 group. For the consolidated return year of Year 2, the P1 
group sustained a $50 consolidated net operating loss, of which $5 was 
attributable to S1, $40 was attributable to S2, and $5 was attributable 
to S3 under the principles of Sec.  1.1502-21(b)(2)(iv). As of the 
beginning of its taxable year beginning on July 1 of Year 2, S3's sole 
asset was Asset A with a $10 value. After the computation of tax imposed 
for Year 2 on the P1 group and before the application of sections 108 
and 1017 and this section and the computation of tax imposed for Year 2 
on the P2 group, Asset A had a basis of $0. In addition, S3 had no 
liabilities. On January 1 of Year 3, P1 sold all of its stock of S1.
    (ii) Analysis--(A) Reduction of tax attributes attributable to 
debtor. Pursuant to paragraph (a)(2) of this section, the tax attributes 
attributable to S3 must first be reduced to take into account its 
excluded COD income in the amount of $65. Pursuant to section 
108(b)(2)(A) and paragraph (a) of this section, the net operating loss 
and the net operating loss carryover attributable to S3 under the 
principles of Sec.  1.1502-21(b)(2)(iv) are reduced in the order 
prescribed by section 108(b)(4)(B). Accordingly, the consolidated net 
operating loss for Year 2 is reduced by $5, the portion of the 
consolidated net operating loss for Year 2 attributable to S3, to $45. 
Then, the consolidated net operating loss carryover from Year 1 is 
reduced by $15, the portion of that consolidated net operating loss 
carryover attributable to S3, to $105.
    (B) Reduction of remaining consolidated tax attributes. Pursuant to 
paragraphs (a)(4) and (b)(8) of this section, S3's remaining $45 of 
excluded COD income reduces the remaining consolidated tax attributes in 
the P1 group. In particular, the remaining $45 consolidated net 
operating loss for Year 2 is reduced by an additional $45 to $0.
    (C) Basis Adjustments. For purposes of computing P1's gain or loss 
on the sale of the S1 stock in Year 3, P1's basis in its S1 stock will 
reflect a net positive adjustment of $40, which is the excess of the 
amount of S3's excluded COD income that is applied to reduce attributes 
($65) over the reduction of S1's and S3's attributes in respect of such 
excluded COD income ($25).
    Example 7. (i) Facts. P is the common parent of a consolidated group 
that includes subsidiaries S1 and S2. P owns 100 percent of the stock of 
S1, and S1 owns 100 percent of the stock of S2. None of P, S1, or S2 has 
a separate return limitation year prior to Year 1. In Year 1, the P 
group sustained a $50 consolidated net operating loss. Under the 
principles of Sec.  1.1502-21(b)(2)(iv), of that amount, $10 was 
attributable to P, $20 was attributable to S1, and $20 was attributable 
to S2. On January 1 of Year 2, S1 realized $55 of excluded COD income 
from the discharge of non-intercompany indebtedness. On June 30 of Year 
2, P transferred all of its assets to S1 in a transaction to which 
section 381(a) applied. As a result of that transaction, pursuant to 
Sec.  1.1502-75(d)(2)(ii), S1 succeeded P as the common parent of the 
group. Pursuant to Sec.  1.1502-75(d)(2)(iii), S1's taxable year closed 
on the date of the acquisition. However, P's taxable year did not close. 
On the consolidated return for Year 2, the group sustained a $50 
consolidated net operating loss. Under the principles of Sec.  1.1502-

[[Page 722]]

21(b)(2)(iv), of that amount, $10 was attributable to S1 for its taxable 
year that ended on June 30, $15 was attributable to S1 as the successor 
of P, and $25 was attributable to S2.
    (ii) Analysis. Pursuant to paragraph (a)(2) of this section, the tax 
attributes attributable to S1 must first be reduced to take into account 
its excluded COD income in the amount of $55. For this purpose, S1's 
attributes that remain after the determination of tax for the group for 
Year 2 are subject to reduction. Pursuant to section 108(b)(2)(A) and 
paragraph (a) of this section, the net operating loss and the net 
operating loss carryover attributable to S1 under the principles of 
Sec.  1.1502-21(b)(2)(iv) are reduced. Accordingly, the consolidated net 
operating loss for Year 2 is reduced by $25, the portion of the 
consolidated net operating loss for Year 2 attributable to S1, to $25. 
Then, the consolidated net operating loss carryover from Year 1 is 
reduced by $30, the portion of that consolidated net operating loss 
carryover attributable to S1 (which includes the portion attributable to 
P), to $20.

    (d) Effective dates. This section applies to discharges of 
indebtedness that occur after March 21, 2005. Groups, however, may apply 
this section in whole, but not in part, to discharges of indebtedness 
that occur on or before March 21, 2005, and after August 29, 2003. For 
discharges of indebtedness occurring on or before March 21, 2005, and 
after August 29, 2003, with respect to which a group chooses not to 
apply this section, see Sec.  1.1502-28T as contained in 26 CFR part 1 
revised as of April 1, 2004. Furthermore, groups may apply paragraph 
(b)(4) of this section to discharges of indebtedness that occur on or 
before August 29, 2003, in cases in which section 1017(b)(3)(D) was 
applied. Paragraph (b)(5)(i) of this section and the last sentence of 
paragraph (b)(5)(ii) of this section applies to transactions occurring 
in consolidated return years beginning on or after December 24, 2008.

[T.D. 9192, 70 FR 14404, Mar. 22, 2005, as amended by T.D. 9442, 73 FR 
79334, Dec. 29, 2008]

         Basis, Stock Ownership, and Earnings and Profits Rules



Sec.  1.1502-30  Stock basis after certain triangular reorganizations.

    (a) Scope. This section provides rules for determining the basis of 
the stock of an acquiring corporation as a result of a triangular 
reorganization. The definitions and nomenclature contained in Sec.  
1.358-6 apply to this section.
    (b) General rules--(1) Forward triangular merger, triangular C 
reorganization, or triangular B reorganization. P adjusts its basis in 
the stock of S as a result of a forward triangular merger, triangular C 
reorganization, or triangular B reorganization under Sec.  1.358-6(c) 
and (d), except that Sec.  1.358-6 (c)(1)(ii) and (d)(2) do not apply. 
Instead, P adjusts such basis by taking into account the full amount 
of--
    (i) T liabilities assumed by S or the amount of liabilities to which 
the T assets acquired by S are subject, and
    (ii) The fair market value of any consideration not provided by P 
pursuant to the plan of reorganization.
    (2) Reverse triangular merger. If P adjusts its basis in the T stock 
acquired as a result of a reverse triangular merger under Sec.  1.358-6 
(c)(2)(i) and (d), Sec.  1.358-6 (c)(1)(ii) and (d)(2) do not apply. 
Instead, P adjusts such basis by taking into account the full amount 
of--
    (i) T liabilities deemed assumed by S or the amount of liabilities 
to which the T assets deemed acquired by S are subject, and
    (ii) The fair market value of any consideration not provided by P 
pursuant to the plan of reorganization.
    (3) Excess loss accounts. Negative adjustments under this section 
may exceed P's basis in its S or T stock. The resulting negative amount 
is P's excess loss account in its S or T stock. See Sec.  1.1502-19 for 
rules treating excess loss accounts as negative basis, and treating 
references to stock basis as including references to excess loss 
accounts.
    (4) Application of other rules of law. If a transaction otherwise 
subject to this section is also a group structure change subject to 
Sec.  1.1502-31, the provisions of Sec.  1.1502-31 and not this section 
apply to determine stock basis. See Sec.  1.1502-80(a) regarding the 
general applicability of other rules of law and a limitation on 
duplicative adjustments. See Sec.  1.1502-80(d) for the non-application 
of section 357(c) to P.
    (5) Examples. The rules of this paragraph (b) are illustrated by the 
following examples. For purposes of these

[[Page 723]]

examples, P, S, and T are domestic corporations, P and S file 
consolidated returns, P owns all of the only class of S stock, the P 
stock exchanged in the transaction satisfies the requirements of the 
applicable triangular reorganization provisions, the facts set forth the 
only corporate activity, and tax liabilities are disregarded.

    Example 1. Liabilities. (a) Facts. T has assets with an aggregate 
basis of $60 and fair market value of $100. T's assets are subject to 
$70 of liabilities. Pursuant to a plan, P forms S with $5 of cash (which 
S retains), and T merges into S. In the merger, the T shareholders 
receive P stock worth $30 in exchange for their T stock. The transaction 
is a reorganization to which sections 368 (a)(1)(A) and (a)(2)(D) apply.
    (b) Basis adjustment. Under Sec.  1.358-6, P adjusts its $5 basis in 
the S stock as if P had acquired the T assets with a carryover basis 
under section 362 and transferred these assets to S in a transaction in 
which P determines its basis in the S stock under section 358. Under the 
rules of this section, the limitation described in Sec.  1.358-
6(c)(1)(ii) does not apply. Thus, P adjusts its basis in the S stock by 
-$10 (the aggregate adjusted basis of T's assets decreased by the amount 
of liabilities to which the T assets are subject). Consequently, as a 
result of the reorganization, P has an excess loss account of $5 in its 
S stock.
    Example 2. Consideration not provided by P. (a) Facts. T has assets 
with an aggregate basis of $10 and fair market value of $100 and no 
liabilities. S is an operating company with substantial assets that has 
been in existence for several years. P has a $5 basis in its S stock. 
Pursuant to a plan, T merges into S and the T shareholders receive $70 
of P stock provided by P pursuant to the plan of reorganization and $30 
of cash provided by S in exchange for their T stock. The transaction is 
a reorganization to which sections 368 (a)(1)(A) and (a)(2)(D) apply.
    (b) Basis adjustment. Under Sec.  1.358-6, P adjusts its $5 basis in 
the S stock as if P had acquired the T assets with a carryover basis 
under section 362 and transferred these assets to S in a transaction in 
which P determines its basis in the S stock under section 358. Under the 
rules of this section, the limitation described in Sec.  1.358-6(d)(2) 
does not apply. Thus, P adjusts its basis in the S stock by -$20 (the 
aggregate adjusted basis of T's assets decreased by the fair market 
value of the consideration provided by S). As a result of the 
reorganization, P has an excess loss account of $15 in its S stock.
    (c) Appreciated asset. The facts are the same as in paragraph (a) of 
this Example 2, except that in the reorganization S provides an asset 
with a $20 adjusted basis and $30 fair market value instead of $30 cash. 
The basis is adjusted in the same manner as in paragraph (b) of this 
Example 2. In addition, because S recognizes a $10 gain from the asset 
under section 1001, P's basis in its S stock is increased under Sec.  
1.1502-32(b) by S's $10 gain. Consequently, as a result of the 
reorganization, P has an excess loss account of $5 in its S stock. (The 
results would be the same if the appreciated asset provided by S was P 
stock with respect to which S recognized gain. See Sec.  1.1032-2(c)).
    Example 3. Reverse triangular merger. (a) Facts. T has assets with 
an aggregate basis of $60 and fair market value of $100. T's assets are 
subject to $70 of liabilities. P owns all of the only class of S stock. 
P has a $5 basis in its S stock. Pursuant to a plan, S merges into T 
with T surviving. In the merger, the T shareholders exchange their T 
stock for $2 cash from P and $28 worth of P stock provided by P pursuant 
to the plan. The transaction is a reorganization to which sections 368 
(a)(1)(A) and (a)(2)(E) apply.
    (b) Basis adjustment. Under Sec.  1.358-6, P's basis in the T stock 
acquired equals its $5 basis in its S stock immediately before the 
transaction adjusted by the $60 basis in the T assets deemed 
transferred, and the $70 of liabilities to which the T assets are 
subject. Under the rules of this section, the limitation described in 
Sec.  1.358-6(c)(1)(ii) does not apply. Consequently, P has an excess 
loss account of $5 in its T stock as a result of the transaction.

    (c) Effective/applicability date. This section applies to 
reorganizations occurring on or after December 21, 1995. However, 
paragraph (b)(4) of this section applies to reorganizations occurring on 
or after September 17, 2008.

[T.D. 8648, 60 FR 66082, Dec. 21, 1995, as amended by T.D. 9424, 73 FR 
53949, Sept. 17, 2008]



Sec.  1.1502-31  Stock basis after a group structure change.

    (a) In general--(1) Overview. If one corporation (P) succeeds 
another corporation (T) under the principles of Sec.  1.1502-75(d) (2) 
or (3) as the common parent of a consolidated group in a group structure 
change, the basis of members in the stock of the former common parent 
(or the stock of a successor) is adjusted or determined under this 
section. See Sec.  1.1502-33(f)(1) for the definition of group structure 
change. For example, if P owns all of the stock of another corporation 
(S), and T merges into S in a group structure

[[Page 724]]

change that is a reorganization described in section 368(a)(2)(D) in 
which P becomes the common parent of the T group, P's basis in S's stock 
must be adjusted to reflect the change in S's assets and liabilities. 
The rules of this section coordinate with the earnings and profits 
adjustments required under Sec.  1.1502-33(f)(1), generally conforming 
the results of transactions in which the T group continues under Sec.  
1.1502-75 with P as the common parent. By preserving in P the 
relationship between T's earnings and profits and asset basis, these 
adjustments limit possible distortions under section 1502 (e.g., in the 
deconsolidation rules for earnings and profits under Sec.  1.1502-33(e), 
and the continued filing requirements under Sec.  1.1502-75(a)). This 
section applies whether or not T continues to exist after the group 
structure change.
    (2) Application of other rules of law. If a transaction subject to 
this section is also a triangular reorganization otherwise subject to 
Sec.  1.1502-30, the provisions of this section and not those of Sec.  
1.1502-30 apply to determine stock basis. See Sec.  1.1502-80(a) 
regarding the general applicability of other rules of law and a 
limitation on duplicative adjustments.
    (b) General rules. Except as otherwise provided in this section--
    (1) Asset acquisitions. If a corporation acquires the former common 
parent's assets (and any liabilities assumed or to which the assets are 
subject) in a group structure change, the basis of members in the stock 
of the acquiring corporation is adjusted immediately after the group 
structure change to reflect the acquiring corporation's allocable share 
of the former common parent's net asset basis as determined under 
paragraph (c) of this section. For example, if S acquires all of T's 
assets in a group structure change that is a reorganization described in 
section 368(a)(2)(D), P's basis in S's stock is adjusted to reflect T's 
net asset basis. If P owned some of T's stock before the group structure 
change, the results would be the same because P's basis in the T stock 
is not taken into account in determining P's basis in S's stock. If T's 
net asset basis is a negative amount, it reduces P's basis in S's stock 
and, if the reduction exceeds P's basis in S's stock, the excess is P's 
excess loss account in S's stock. See Sec.  1.1502-19 for rules treating 
P's excess loss account as negative basis, and treating a reference to 
P's basis in S's stock as including an excess loss account.
    (2) Stock acquisitions. If a corporation acquires stock of the 
former common parent in a group structure change, the basis of the 
members in the former common parent's stock immediately after the group 
structure change (including any stock of the former common parent owned 
before the group structure change) that is, or would otherwise be, 
transferred basis property is redetermined in accordance with the 
results for an asset acquisition described in paragraph (b)(1) of this 
section. For example, if all of T's stock is contributed to P in a group 
structure change to which section 351 applies, P's basis in T's stock is 
T's net asset basis, rather than the amount determined under section 
362. Similarly, if S merges into T in a group structure change described 
in section 368(a)(2)(E) and P acquires all of the T stock, P's basis in 
T's stock is the basis that P would have in S's stock under paragraph 
(b)(1) of this section if T had merged into S in a group structure 
change described in section 368(a)(2)(D).
    (c) Net asset basis. The former common parent's net asset basis is 
the basis it would have in the stock of a newly formed subsidiary, if--
    (1) The former common parent transferred its assets (and any 
liabilities assumed or to which the assets are subject) to the 
subsidiary in a transaction to which section 351 applies;
    (2) The former common parent and the subsidiary were members of the 
same consolidated group (see Sec.  1.1502-80(d) for the non-application 
of section 357(c) to the transfer); and
    (3) The asset basis taken into account is each asset's basis 
immediately after the group structure change (e.g., taking into account 
any income or gain recognized in the group structure change and 
reflected in the asset's basis).
    (d) Additional adjustments. In addition to the adjustments in 
paragraph (b) of this section, the following adjustments are made:

[[Page 725]]

    (1) Consideration not provided by P. The basis is reduced to reflect 
the fair market value of any consideration not provided by the member. 
For example, if S acquires T's assets in a group structure change 
described in section 368(a)(2)(D), and S provides an appreciated asset 
(e.g., stock of P) as partial consideration in the transaction, P's 
basis in S's stock is reduced by the fair market value of the asset.
    (2) Allocable share--(i) Asset acquisitions. If a corporation 
receives less than all of the former common parent's assets and 
liabilities in the group structure change, the former common parent's 
net asset basis taken into account under paragraph (b)(1) of this 
section is adjusted accordingly.
    (ii) Stock acquisitions. If less than all of the former common 
parent's stock is subject to the redetermination described in paragraph 
(b)(2) of this section, the percentage of the former common parent's net 
asset basis taken into account in the redetermination equals the 
percentage (by fair market value) of the former common parent's stock 
subject to the redetermination. For example, if P owns less than all of 
the former common parent's stock immediately after the group structure 
change and such stock would otherwise be transferred basis property, 
only an allocable part of the basis determined under this section is 
reflected in the shares owned by P (and the amount allocable to shares 
owned by nonmembers has no effect on the basis of their shares). 
Alternatively, if P acquired 10 percent of the former common parent's 
stock in a transaction in which the stock basis was determined by P's 
cost, and P later acquires the remaining 90 percent of the former common 
parent's stock in a separate transaction that is described in paragraph 
(b)(2) of this section, P retains its cost basis in its original stock 
and the basis of P's newly acquired shares reflects only an allocable 
part of the former common parent's net asset basis.
    (3) Allocation among shares of stock. The basis determined under 
this section is allocated among shares under the principles of section 
358. For example, if P owns multiple classes of the former common 
parent's stock immediately after the group structure change, only an 
allocable part of the basis determined under this section is reflected 
in the basis of each share. See Sec.  1.1502-19(d), for special 
allocations with respect to excess loss accounts.
    (4) Higher-tier members. To the extent that the former common parent 
is owned by members other than the new common parent, the basis of 
members in the stock of all subsidiaries owning, directly or indirectly, 
in whole or in part, an interest in the former common parent's assets or 
liabilities is adjusted in accordance with the principles of this 
section. The adjustments are applied in the order of the tiers, from the 
lowest to the highest.
    (e) Waiver of loss carryovers of former common parent--(1) General 
rule. An irrevocable election may be made to treat all or any portion of 
a loss carryover attributable to the common parent as expiring for all 
Federal income tax purposes immediately before the group structure 
change. Thus, if the loss carryover is treated as expiring under the 
election, it will not result in a negative adjustment to the basis of 
P's stock under Sec.  1.1502-32(b).
    (2) Election. The election described in paragraph (e)(1) of this 
section must be made in a separate statement entitled, ``ELECTION TO 
TREAT LOSS CARRYOVER AS EXPIRING UNDER Sec.  1.1502-31(e).'' The 
election must be filed by including the statement on or with the 
consolidated group's income tax return for the year that includes the 
group structure change. The statement must identify the amount of each 
loss carryover deemed to expire (or the amount of each loss carryover 
deemed not to expire, with any balance of any loss carryovers being 
deemed to expire).
    (f) Predecessors and successors. For purposes of this section, any 
reference to a corporation includes a reference to a successor or 
predecessor as the context may require. See Sec.  1.1502-32(f) for 
definitions of predecessor and successor.
    (g) Examples. For purposes of the examples in this section, unless 
otherwise stated, all corporations have only one class of stock 
outstanding, the tax year of all persons is the calendar year, all 
persons use the accrual method of accounting, the facts set forth the 
only corporate activity, all transactions are

[[Page 726]]

between unrelated persons, and tax liabilities are disregarded. The 
principles of this section are illustrated by the following examples:

    Example 1. Forward triangular merger. (i) Facts. P is the common 
parent of one group and T is the common parent of another. T has assets 
with an aggregate basis of $60 and fair market value of $100 and no 
liabilities. T's shareholders have an aggregate basis of $50 in T's 
stock. In Year 1, pursuant to a plan, P forms S and T merges into S with 
the T shareholders receiving $100 of P stock in exchange for their T 
stock. The transaction is a reorganization described in section 
368(a)(2)(D). The transaction is also a reverse acquisition under Sec.  
1.1502-75(d)(3) because the T shareholders, as a result of owning T's 
stock, own more than 50% of the value of P's stock immediately after the 
transaction. Thus, the transaction is a group structure change under 
Sec.  1.1502-33(f)(1), and P's earnings and profits are adjusted to 
reflect T's earnings and profits immediately before T ceases to be the 
common parent of the T group.
    (ii) Analysis. Under paragraph (b)(1) of this section, P's basis in 
S's stock is adjusted to reflect T's net asset basis. Under paragraph 
(c) of this section, T's net asset basis is $60, the basis T would have 
in the stock of a subsidiary under section 358 if T had transferred all 
of its assets and liabilities to the subsidiary in a transaction to 
which section 351 applies. Thus, P has a $60 basis in S's stock.
    (iii) Pre-existing S. The facts are the same as in paragraph (i) of 
this Example 1, except that P has owned the stock of S for several years 
and P has a $50 basis in the S stock before the merger with T. Under 
paragraph (b)(1) of this section, P's $50 basis in S's stock is adjusted 
to reflect T's net asset basis. Thus, P's basis in S's stock is $110 
($50 plus $60).
    (iv) Excess loss account included in former common parent's net 
asset basis. The facts are the same as in paragraph (i) of this Example 
1, except that T has two assets, an operating asset with an $80 basis 
and $90 fair market value, and stock of a subsidiary with a $20 excess 
loss account and $10 fair market value. Under paragraph (c) of this 
section, T's net asset basis is $60 ($80 minus $20). See sections 351 
and 358, and Sec.  1.1502-19. Consequently, P has a $60 basis in S's 
stock. Under section 362 and Sec.  1.1502-19, S has an $80 basis in the 
operating asset and a $20 excess loss account in the stock of the 
subsidiary.
    (v) Liabilities in excess of basis. The facts are the same as in 
paragraph (i) of this Example 1, except that T's assets have a fair 
market value of $170 (and $60 basis) and are subject to $70 of 
liabilities. Under paragraph (c) of this section, T's net asset basis is 
negative $10 ($60 minus $70). See sections 351 and 358, and Sec. Sec.  
1.1502-19 and 1.1502-80(d). Thus, P has a $10 excess loss account in S's 
stock. Under section 362, S has a $60 basis in its assets (which are 
subject to $70 of liabilities). (Under paragraph (a)(2) of this section, 
because the liabilities are taken into account in determining net asset 
basis under paragraph (c) of this section, the liabilities are not also 
taken into account as consideration not provided by P under paragraph 
(d)(1) of this section.)
    (vi) Consideration provided by S. The facts are the same as in 
paragraph (i) of this Example 1, except that P forms S with a $100 
contribution at the beginning of Year 1, and during Year 6, pursuant to 
a plan, S purchases $100 of P stock and T merges into S with the T 
shareholders receiving P stock in exchange for their T stock. Under 
paragraph (b)(1) of this section, P's $100 basis in S's stock is 
increased by $60 to reflect T's net asset basis. Under paragraph (d)(1) 
of this section, P's basis in S's stock is decreased by $100 (the fair 
market value of the P stock) because the P stock purchased by S and used 
in the transaction is consideration not provided by P.
    (vii) Appreciated asset provided by S. The facts are the same as in 
paragraph (i) of this Example 1, except that P has owned the stock of S 
for several years, and the shareholders of T receive $60 of P stock and 
an asset of S with a $30 adjusted basis and $40 fair market value. S 
recognizes a $10 gain from the asset under section 1001. Under paragraph 
(b)(1) of this section, P's basis in S's stock is increased by $60 to 
reflect T's net asset basis. Under paragraph (d)(1) of this section, P's 
basis in S's stock is decreased by $40 (the fair market value of the 
asset provided by S). In addition, P's basis in S's stock is increased 
under Sec.  1.1502-32(b) by S's $10 gain.
    (viii) Depreciated asset provided by S. The facts are the same as in 
paragraph (i) of this Example 1, except that P has owned the stock of S 
for several years, and the shareholders of T receive $60 of P stock and 
an asset of S with a $50 adjusted basis and $40 fair market value. S 
recognizes a $10 loss from the asset under section 1001. Under paragraph 
(b)(1) of this section, P's basis in S's stock is increased by $60 to 
reflect T's net asset basis. Under paragraph (d)(1) of this section, P's 
basis in S's stock is decreased by $40 (the fair market value of the 
asset provided by S). In addition, S's $10 loss is taken into account 
under Sec.  1.1502-32(b) in determining P's basis adjustments under that 
section.
    Example 2. Stock acquisition. (i) Facts. P is the common parent of 
one group and T is the common parent of another. T has assets with an 
aggregate basis of $60 and fair market value of $100 and no liabilities. 
T's shareholders have an aggregate basis of $50 in T's stock. Pursuant 
to a plan, P forms S and S acquires all of T's stock in exchange for P 
stock in a transaction described in section 368(a)(1)(B). The 
transaction is also a reverse

[[Page 727]]

acquisition under Sec.  1.1502-75(d)(3). Thus, the transaction is a 
group structure change under Sec.  1.1502-33(f)(1), and the earnings and 
profits of P and S are adjusted to reflect T's earnings and profits 
immediately before T ceases to be the common parent of the T group.
    (ii) Analysis. Under paragraph (d)(4) of this section, although S is 
not the new common parent of the T group, adjustments must be made to 
S's basis in T's stock in accordance with the principles of this 
section. Although S's basis in T's stock would ordinarily be determined 
under section 362 by reference to the basis of T's shareholders in T's 
stock immediately before the group structure change, under the 
principles of paragraph (b)(2) of this section, S's basis in T's stock 
is determined by reference to T's net asset basis. Thus, S's basis in 
T's stock is $60.
    (iii) Higher-tier adjustments. Under paragraph (d)(4) of this 
section, P's basis in S's stock is increased by $60 (to be consistent 
with the adjustment to S's basis in T's stock).
    (iv) Cross ownership. The facts are the same as in paragraph (i) of 
this Example 2, except S purchased 10% of T's stock from an unrelated 
person for cash. In an unrelated transaction, S acquires the remaining 
90% of T's stock in exchange for P stock. S's basis in the initial 10% 
of T's stock is not redetermined under this section. However, S's basis 
in the additional 90% of T's stock is redetermined under this section. 
S's basis in that stock is adjusted to $54 (90% of T's net asset basis).
    (v) Allocable share. The facts are the same as in paragraph (i) of 
this Example 2, except that P owns only 90% of S's stock immediately 
after the group structure change. S's basis in T's stock is the same as 
in paragraph (ii) of this Example 2. Under paragraph (d)(2) of this 
section, P's basis in its S stock is increased by $54 (90% of S's $60 
adjustment).
    Example 3. Taxable stock acquisition. (i) Facts. P is the common 
parent of one group and T is the common parent of another. T has assets 
with an aggregate basis of $60 and fair market value of $100 and no 
liabilities. T's shareholders have an aggregate basis of $50 in T's 
stock. Pursuant to a plan, P acquires all of T's stock in exchange for 
$70 of P's stock and $30 in a transaction that is a group structure 
change under Sec.  1.1502-33(f)(1). P's acquired T stock is not 
transferred basis property. (Because of P's use of cash, the acquisition 
is not a transaction described in section 368(a)(1)(B).)
    (ii) Analysis. The rules of this section do not apply to determine 
P's basis in T's stock. Therefore, P's basis in T's stock is $100.

    (h) Effective/applicability dates--(1) General rule. This section 
applies to group structure changes that occur after April 26, 2004. 
However, a group may apply this section to group structure changes that 
occurred on or before April 26, 2004, and in consolidated return years 
beginning on or after January 1, 1995. In addition, paragraph (a)(2) of 
this section applies to group structure changes that occurred on or 
after September 17, 2008. Paragraph (e)(2) of this section applies to 
any original consolidated Federal income tax return due (without 
extensions) after June 14, 2007. For original consolidated Federal 
income tax returns due (without extensions) after May 30, 2006, and on 
or before June 14, 2007, see Sec.  1.1502-31T as contained in 26 CFR 
part 1 in effect on April 1, 2007. For original consolidated Federal 
income tax returns due (without extensions) on or before May 30, 2006, 
see Sec.  1.1502-31 as contained in 26 CFR part 1 in effect on April 1, 
2006.
    (2) Prior law. For group structure changes that occur on or before 
April 26, 2004, and in consolidated return years beginning on or after 
January 1, 1995, with respect to which the group does not elect to apply 
the provisions of this section, see Sec.  1.1502-31 as contained in the 
26 CFR part 1 edition revised as of April 1, 2003. For group structure 
changes that occur in consolidated return years beginning before January 
1, 1995, see Sec.  1.1502-31T as contained in the 26 CFR part 1 edition 
revised as of April 1, 1994.

[T.D. 8560, 59 FR 41683, Aug. 15, 1994, as amended by T.D. 9122, 69 FR 
22400, Apr. 26, 2004; T.D. 9264, 71 FR 30602, May 30, 2006; T.D. 9329, 
72 FR 32804, June 14, 2007; T.D. 9424, 73 FR 53949, Sept. 17, 2008]



Sec.  1.1502-32  Investment adjustments.

    (a) In general--(1) Purpose. This section provides rules for 
adjusting the basis of the stock of a subsidiary (S) owned by another 
member (M). These rules modify the determination of M's basis in S's 
stock under applicable rules of law by adjusting M's basis to reflect 
S's distributions and S's items of income, gain, deduction, and loss 
taken into account for the period that S is a member of the consolidated 
group. The purpose of the adjustments is to treat M and S as a single 
entity so that consolidated taxable income reflects the group's income. 
For example, if M forms S with a $100 contribution,

[[Page 728]]

and S takes into account $10 of income, M's $100 basis in S's stock 
under section 358 is increased by $10 under this section to prevent S's 
income from being taken into account a second time on M's disposition of 
S's stock. Comparable adjustments are made for tax-exempt income and 
noncapital, nondeductible expenses that S takes into account, to 
preserve their treatment under the Internal Revenue Code.
    (2) Application of other rules of law, duplicative adjustments. See 
Sec.  1.1502-80(a) regarding the general applicability of other rules of 
law and a limitation on duplicative adjustments. The rules of this 
section are in addition to other rules of law. See, e.g., section 358 
(basis determinations for distributees), section 1016 (adjustments to 
basis), Sec.  1.1502-11(b) (limitations on the use of losses), Sec.  
1.1502-19 (treatment of excess loss accounts), Sec.  1.1502-31 (basis 
after a group structure change), and Sec.  1.1502-35 (additional rules 
relating to stock loss, including losses attributable to worthlessness 
and certain dispositions not followed by a separate return year). M's 
basis in S's stock must not be adjusted under this section and other 
rules of law in a manner that has the effect of duplicating an 
adjustment.
    (3) Overview--(i) In general. The amount of the stock basis 
adjustments and their timing are determined under paragraph (b) of this 
section. Under paragraph (c) of this section, the amount of the 
adjustment is allocated among the shares of S's stock. Paragraphs (d) 
through (g) of this section provide definitions, an anti-avoidance rule, 
successor rules, and recordkeeping requirements.
    (ii) Excess loss account. Negative adjustments under this section 
may exceed M's basis in S's stock. The resulting negative amount is M's 
excess loss account in S's stock. See Sec.  1.1502-19 for rules treating 
excess loss accounts as negative basis, and treating references to stock 
basis as including references to excess loss accounts.
    (iii) Tiering up of adjustments. The adjustments to S's stock under 
this section are taken into account in determining adjustments to 
higher-tier stock. The adjustments are applied in the order of the 
tiers, from the lowest to the highest. For example, if M is also a 
subsidiary, M's adjustment to S's stock is taken into account in 
determining the adjustments to stock of M owned by other members.
    (b) Stock basis adjustments--(1) Timing of adjustments--(i) In 
general. Adjustments under this section are made as of the close of each 
consolidated return year, and as of any other time (an interim 
adjustment) if a determination at that time is necessary to determine a 
tax liability of any person. For example, adjustments are made as of M's 
sale of S's stock in order to measure M's gain or loss from the sale, 
and if M's interest in S's stock is not uniform throughout the year 
(e.g., because M disposes of a portion of its S stock, or S issues 
additional shares to another person), the adjustments under this section 
are made by taking into account the varying interests. An interim 
adjustment may be necessary even if tax liability is not affected until 
a later time. For example, if M sells only 50% of S's stock and S 
becomes a nonmember, adjustments must be made for the retained stock as 
of the disposition (whether or not M has an excess loss account in that 
stock). Similarly, if S liquidates during a consolidated return year, 
adjustments must be made as of the liquidation (even if the liquidation 
is tax free under section 332).
    (ii) Special rule for discharge of indebtedness income. Adjustments 
under this section resulting from the realization of discharge of 
indebtedness income of a member that is excluded from gross income under 
section 108(a) (excluded COD income) and from the reduction of 
attributes in respect thereof pursuant to sections 108 and 1017 and 
Sec.  1.1502-28 (including reductions in the basis of property) when a 
member (the departing member) ceases to be a member of the group on or 
prior to the last day of the consolidated return year that includes the 
date the excluded COD income is realized are made immediately after the 
determination of tax for the group for the taxable year during which the 
excluded COD income is realized (and any prior years) and are effective 
immediately before the beginning of the taxable year of the departing 
member following the taxable year during which the excluded COD income

[[Page 729]]

is realized. Such adjustments when a corporation (the new member) is not 
a member of the group on the last day of the consolidated return year 
that includes the date the excluded COD income is realized but is a 
member of the group at the beginning of the following consolidated 
return year are also made immediately after the determination of tax for 
the group for the taxable year during which the excluded COD income is 
realized (and any prior years) and are effective immediately before the 
beginning of the taxable year of the new member following the taxable 
year during which the excluded COD income is realized. If the new member 
was a member of another group immediately before it became a member of 
the group, such adjustments are treated as occurring immediately after 
it ceases to be a member of the prior group.
    (iii) Allocation of items. If Sec.  1.1502-76(b) applies to S for 
purposes of an adjustment before the close of the group's consolidated 
return year, the amount of the adjustment is determined under that 
section. If Sec.  1.1502-76(b) does not apply to the interim adjustment, 
the adjustment is determined under the principles of Sec.  1.1502-76(b), 
consistently applied, and ratable allocation under the principles of 
Sec.  1.1502-76(b)(2)(ii) or (iii) may be used without filing an 
election under Sec.  1.1502-76(b)(2). The principles would apply, for 
example, if M becomes a nonmember but S remains a member.
    (2) Amount of adjustments. M's basis in S's stock is increased by 
positive adjustments and decreased by negative adjustments under this 
paragraph (b)(2). The amount of the adjustment, determined as of the 
time of the adjustment, is the net amount of S's--
    (i) Taxable income or loss;
    (ii) Tax-exempt income;
    (iii) Noncapital, nondeductible expenses; and
    (iv) Distributions with respect to S's stock.
    (3) Operating rules. For purposes of determining M's adjustments to 
the basis of S's stock under paragraph (b)(2) of this section--
    (i) Taxable income or loss. S's taxable income or loss is 
consolidated taxable income (or loss) determined by including only S's 
items of income, gain, deduction, and loss taken into account in 
determining consolidated taxable income (or loss), treating S's 
deductions and losses as taken into account to the extent they are 
absorbed by S or any other member. For this purpose:
    (A) To the extent that S's deduction or loss is absorbed in the year 
it arises or is carried forward and absorbed in a subsequent year (e.g., 
under section 172, 465, or 1212), the deduction or loss is taken into 
account under paragraph (b)(2) of this section in the year in which it 
is absorbed.
    (B) To the extent that S's deduction or loss is carried back and 
absorbed in a prior year (whether consolidated or separate), the 
deduction or loss is taken into account under paragraph (b)(2) of this 
section in the year in which it arises and not in the year in which it 
is absorbed.
    (ii) Tax-exempt income--(A) In general. S's tax-exempt income is its 
income and gain which is taken into account but permanently excluded 
from its gross income under applicable law, and which increases, 
directly or indirectly, the basis of its assets (or an equivalent 
amount). For example, S's dividend income to which Sec.  1.1502-
13(f)(2)(ii) applies, and its interest excluded from gross income under 
section 103, are treated as tax-exempt income. However, S's income not 
recognized under section 1031 is not treated as tax- exempt income 
because the corresponding basis adjustments under section 1031(d) 
prevent S's nonrecognition from being permanent. Similarly, S's tax-
exempt income does not include gain not recognized under section 332 
from the liquidation of a lower-tier subsidiary, or not recognized under 
section 118 or section 351 from a transfer of assets to S.
    (B) Equivalent deductions. To the extent that S's taxable income or 
gain is permanently offset by a deduction or loss that does not reduce, 
directly or indirectly, the basis of S's assets (or an equivalent 
amount), the income or gain is treated as tax-exempt income and is taken 
into account under paragraph (b)(3)(ii)(A) of this section. In addition, 
the income and the offsetting item are taken into account under 
paragraph (b)(3)(i) of this section. For example, if S receives a $100 
dividend with respect

[[Page 730]]

to which a $70 dividends received deduction is allowed under section 
243, $70 of the dividend is treated as tax-exempt income. Accordingly, 
M's basis in S's stock increases by $100 because the $100 dividend and 
$70 deduction are taken into account under paragraph (b)(3)(i) of this 
section (resulting in $30 of the increase), and $70 of the dividend is 
also taken into account under paragraph (b)(3)(ii)(A) of this section as 
tax-exempt income (resulting in $70 of the increase). (See paragraph 
(b)(3)(iii) of this section if there is a corresponding negative 
adjustment under section 1059.) Similarly, income from mineral 
properties is treated as tax-exempt income to the extent it is offset by 
deductions for depletion in excess of the basis of the property.
    (C) Discharge of indebtedness income--(1) In general. Excluded COD 
income is treated as tax-exempt income only to the extent the discharge 
is applied to reduce tax attributes attributable to any member of the 
group under section 108, section 1017 or Sec.  1.1502-28. However, if S 
is treated as realizing excluded COD income pursuant to Sec.  1.1502-
28(a)(3), S shall not be treated as realizing excluded COD income for 
purposes of the preceding sentence.
    (2) Expired loss carryovers. If the amount of the discharge exceeds 
the amount of the attribute reduction under sections 108 and 1017, and 
Sec.  1.1502-28, the excess nevertheless is treated as applied to reduce 
tax attributes to the extent a loss carryover attributable to S expired 
without tax benefit, the expiration was taken into account as a 
noncapital, nondeductible expense under paragraph (b)(3)(iii) of this 
section, and the loss carryover would have been reduced had it not 
expired.
    (D) Basis shifts. An increase in the basis of S's assets (or an 
equivalent as described in paragraph (b)(3)(iv)(B) of this section) is 
treated as tax-exempt income to the extent that the increase is not 
otherwise taken into account in determining stock basis, it corresponds 
to a negative adjustment that is taken into account by the group under 
this paragraph (b) (or incurred by the common parent), and it has the 
effect (viewing the group in the aggregate) of a permanent recovery of 
the reduction. For example, S's basis increase under section 50(c)(2) is 
treated as tax-exempt income to the extent the preceding basis reduction 
under section 50(c)(1) is reflected in the basis of a member's stock. On 
the other hand, if S increases the basis of an asset as the result of an 
accounting method change, and the related positive section 481(a) 
adjustment is taken into account over time, the basis increase is not 
treated as tax-exempt income.
    (E) [Reserved]
    (iii) Noncapital, nondeductible expenses--(A) In general. S's 
noncapital, nondeductible expenses are its deductions and losses that 
are taken into account but permanently disallowed or eliminated under 
applicable law in determining its taxable income or loss, and that 
decrease, directly or indirectly, the basis of its assets (or an 
equivalent amount). For example, S's Federal taxes described in section 
275 and loss not recognized under section 311(a) are noncapital, 
nondeductible expenses. Similarly, if a loss carryover (e.g., under 
section 172 or 1212) attributable to S expires or is reduced under 
section 108(b) and Sec.  1.1502-28, it becomes a noncapital, 
nondeductible expense at the close of the last tax year to which it may 
be carried. However, when a tax attribute attributable to S is reduced 
as required pursuant to Sec.  1.1502-28(a)(3), the reduction of the tax 
attribute is not treated as a noncapital, nondeductible expense of S. 
Finally, if S sells and repurchases a security subject to section 1091, 
the disallowed loss is not a noncapital, nondeductible expense because 
the corresponding basis adjustments under section 1091(d) prevent the 
disallowance from being permanent.
    (B) Nondeductible basis recovery. Any other decrease in the basis of 
S's assets (or an equivalent as described in paragraph (b)(3)(iv)(B) of 
this section) may be a noncapital, nondeductible expense to the extent 
that the decrease is not otherwise taken into account in determining 
stock basis and is permanently eliminated for purposes of determining 
S's taxable income or loss. Whether a decrease is so treated is 
determined by taking into account both the purposes of the Code or 
regulatory provision resulting in the decrease and the purposes of this 
section. For example, S's

[[Page 731]]

noncapital, nondeductible expenses include any basis reduction under 
section 50(c)(1), section 1017, section 1059, Sec.  1.1502-35(b) or 
(f)(2). Also included as a noncapital, nondeductible expense is the 
amount of any gross-up for taxes paid by another taxpayer that S is 
treated as having paid (e.g., income included under section 78, or the 
portion of an undistributed capital gain dividend that is treated as tax 
deemed to have been paid by a shareholder under section 
852(b)(3)(D)(ii), whether or not any corresponding amount is claimed as 
a tax credit). In contrast, a decrease generally is not a noncapital, 
nondeductible expense if it results because S redeems stock in a 
transaction to which section 302(a) applies, S receives assets in a 
liquidation to which section 332 applies and its basis in the assets is 
less than its basis in the stock canceled, or S distributes the stock of 
a subsidiary in a distribution to which section 355 applies.
    (C) [Reserved]
    (iv) Special rules for tax-exempt income and noncapital, 
nondeductible expenses. For purposes of paragraphs (b)(3)(ii) and (iii) 
of this section:
    (A) Treatment as permanent. An amount is permanently excluded from 
gross income, or permanently disallowed or eliminated, if it is so 
treated by S even though another person may take a corresponding amount 
into account. For example, if S sells property to a nonmember at a loss 
that is disallowed under section 267(a), S's loss is a noncapital, 
nondeductible expense even though under section 267(d) the nonmember may 
treat a corresponding amount of gain as not recognized. (If the 
nonmember is a subsidiary in another consolidated group, its gain not 
recognized under section 267(d) is tax-exempt income under paragraph 
(b)(3)(ii)(A) of this section.)
    (B) Amounts equivalent to basis and adjustments to basis. Amounts 
equivalent to basis include the amount of money, the amount of a loss 
carryover, and the amount of an adjustment to gain or loss under section 
475(a) for securities described in section 475(a)(2). An equivalent to a 
basis increase includes a decrease in an excess loss account, and an 
equivalent to a basis decrease includes the denial of basis for taxable 
income.
    (C) Timing. An amount is taken into account in the year in which it 
would be taken into account under paragraph (b)(3)(i) of this section if 
it were subject to Federal income taxation.
    (D) Tax sharing agreements. Taxes are taken into account by applying 
the principles of section 1552 and the percentage method under Sec.  
1.1502-33(d)(3) (and by assuming a 100% allocation of any decreased tax 
liability). The treatment of amounts allocated under this paragraph 
(b)(3)(iv)(D) is analogous to the treatment of allocations under Sec.  
1.1552-1(b)(2). For example, if one member owes a payment to a second 
member, the first member is treated as indebted to the second member. 
The right to receive payment is treated as a positive adjustment under 
paragraph (b)(3)(ii) of this section, and the obligation to make payment 
is treated as a negative adjustment under paragraph (b)(3)(iii) of this 
section. If the obligation is not paid, the amount not paid generally is 
treated as a distribution, contribution, or both, depending on the 
relationship between the members.
    (v) Distributions. Distributions taken into account under paragraph 
(b)(2) of this section are distributions with respect to S's stock to 
which section 301 applies and all other distributions treated as 
dividends (e.g., under section 356(a)(2)). See Sec.  1.1502-13(f)(2)(iv) 
for taking into account distributions to which section 301 applies (but 
not other distributions treated as dividends) under the entitlement 
rule.
    (4) Waiver of loss carryovers from separate return limitation 
years--(i) General rule. If S has a loss carryover from a separate 
return limitation year when it becomes a member of a consolidated group, 
the group may make an irrevocable election to treat all or any portion 
of the loss carryover as expiring for all Federal income tax purposes 
immediately before S becomes a member of the consolidated group (deemed 
expiration). If S was a member of another group immediately before it 
became a member of the consolidated group, the expiration is also 
treated as occurring immediately after it ceases to be a member of the 
prior group.
    (ii) Stock basis adjustments from a waiver--(A) Qualifying 
transactions. If S becomes a member of the consolidated

[[Page 732]]

group in a qualifying cost basis transaction and an election under this 
paragraph (b)(4) is made, the noncapital, nondeductible expense 
resulting from the deemed expiration does not result in a corresponding 
stock basis adjustment for any member under this section. A qualifying 
cost basis transaction is the purchase (i.e., a transaction in which 
basis is determined under section 1012) by members of the acquiring 
consolidated group (while they are members) in a 12-month period of an 
amount of S's stock satisfying the requirements of section 1504(a)(2).
    (B) Nonqualifying transactions. If S becomes a member of the 
consolidated group other than in a qualifying cost basis transaction and 
an election under this paragraph (b)(4) is made, the basis of its stock 
that is owned by members immediately after it becomes a member is 
subject to reduction under the principles of this section to reflect the 
deemed expiration. The reduction occurs immediately before S becomes a 
member, but after it ceases to be a member of any prior group, and it 
therefore does not result in a corresponding stock basis adjustment for 
any higher-tier member of the transferring or acquiring consolidated 
group. Any basis reduction under this paragraph (b)(4)(ii)(B) is taken 
into account in making determinations of basis under the Code with 
respect to S's stock (e.g., a determination under section 362 because 
the stock is acquired in a transaction described in section 
368(a)(1)(B)), but it does not result in corresponding stock basis 
adjustments under this section for any higher-tier member. If the basis 
reduction exceeds the basis of S's stock, the excess is treated as an 
excess loss account to which the members owning S's stock succeed.
    (C) Higher-tier corporations. If S becomes a member of the 
consolidated group as a result, in whole or in part, of a higher-tier 
corporation becoming a member (whether or not in a qualifying cost basis 
transaction), additional adjustments are required. The highest-tier 
corporation (T) whose becoming a member resulted in S becoming a member, 
and T's chain of lower-tier corporations that includes S, are subject to 
the adjustment. The deemed expiration of S's loss carryover that results 
in a negative adjustment for the first higher-tier corporation is 
treated as an expiring loss carryover of that higher-tier corporation 
for purposes of applying paragraph (b)(4)(ii)(B) of this section to that 
corporation. For example, if M purchases all of the stock of T, T owns 
all of the stock of T1, T1 owns all of the stock of S, S becomes a 
member as a result of T becoming a member, and the election under this 
paragraph (b)(4) is made, the basis of the S stock is reduced and the 
reduction tiers up to T1, T1 treats the negative adjustment to its basis 
in S's stock as an expiring loss carryover of T1, and T then adjusts its 
basis in T1's stock. In addition, if T becomes a member of the acquiring 
group in a transaction other than a qualifying cost basis transaction, 
the amount that tiers up to T also reduces the basis of its stock under 
paragraph (b)(4)(ii)(B) of this section (but the amount does not tier up 
to higher-tier members).
    (iii) Net asset basis limitation. Basis reduced under this paragraph 
(b)(4) is restored before S becomes a member (and before the basis of 
S's stock is taken into account in determining basis under the Code) to 
the extent necessary to conform a share's basis to its allocable portion 
of net asset basis. In the case of higher-tier corporations under 
paragraph (b)(4)(ii)(C) of this section, the restoration does not tier 
up but is instead applied separately to each higher-tier corporation. 
For purposes of determining each corporation's net asset basis 
(including the basis of stock in lower-tier corporations), the 
restoration is applied in the order of tiers, from the lowest to the 
highest. For purposes of the restoration:
    (A) A member's net asset basis is the positive or negative 
difference between the adjusted basis of its assets (and the amount of 
any of its loss carryovers that are not deemed to expire) and its 
liabilities. Appropriate adjustments must be made, for example, to 
disregard liabilities that subsequently will give rise to deductions 
(e.g., liabilities to which section 461(h) applies).
    (B) Within a class of stock, each share has the same allocable 
portion of

[[Page 733]]

net asset basis. If there is more than one class of common stock, the 
net asset basis is allocated to each class by taking into account the 
terms of each class and all other facts and circumstances relating to 
the overall economic arrangement.
    (iv) Election. The election described in paragraph (b)(4) of this 
section must be made in a separate statement entitled, ``ELECTION TO 
TREAT LOSS CARRYOVER OF [INSERT NAME AND EMPLOYER IDENTIFICATION NUMBER 
OF S] AS EXPIRING UNDER Sec.  1.1502-32(b)(4).'' The election must be 
filed by including a statement on or with the consolidated group's 
income tax return for the year S becomes a member. A separate statement 
must be made for each member whose loss carryover is deemed to expire. 
The statement must identify the amount of each loss carryover deemed to 
expire (or the amount of each loss carryover deemed not to expire, with 
any balance of any loss carryovers being deemed to expire) and the basis 
of any stock reduced as a result of the deemed expiration.
    (v) Special rule for loss carryovers of a subsidiary acquired in a 
transaction for which an election under Sec.  1.1502-20(i)(2) is made--
(A) Expired losses. Notwithstanding paragraph (b)(4)(iv) of this 
section, unless a group otherwise chooses, to the extent that S's loss 
carryovers are increased by reason of an election under Sec.  1.1502-
20(i)(2) and such loss carryovers expire or would have been properly 
used to offset income in a taxable year for which the refund of an 
overpayment is prevented by any law or rule of law as of the date the 
group files its original return for the taxable year in which S receives 
the notification described in Sec.  1.1502-20(i)(3)(iv) and at all times 
thereafter, the group will be deemed to have made an election under 
paragraph (b)(4) of this section to treat all of such loss carryovers as 
expiring for all Federal income tax purposes immediately before S became 
a member of the consolidated group. A group may choose not to apply the 
rule of the previous sentence to all of such loss carryovers of S by 
taking a position on an original or amended tax return for each relevant 
taxable year that is consistent with having made such choice.
    (B) Available losses. Notwithstanding paragraph (b)(4)(iv) of this 
section, to the extent that S's loss carryovers are increased by reason 
of an election under Sec.  1.1502-20(i)(2) and such loss carryovers have 
not expired and would not have been properly used to offset income in a 
taxable year for which the refund of an overpayment is prevented by any 
law or rule of law as of the date the group files its original return 
for the taxable year in which S receives the notification described in 
Sec.  1.1502-20(i)(3)(iv) and at all times thereafter, the group may 
make an election under paragraph (b)(4) of this section to treat all or 
a portion of such loss carryovers as expiring for all Federal income tax 
purposes immediately before S became a member of the consolidated group. 
Such election must be filed with the group's original return for the 
taxable year in which S receives the notification described in Sec.  
1.1502-20(i)(3)(iv).
    (C) Effective dates. Paragraph (b)(4)(v) of this section is 
applicable on and after March 3, 2005. For prior periods, see Sec.  
1.1502-32T(b)(4)(v) as contained in the 26 CFR part 1 in effect on March 
2, 2005.
    (vi) Special rules in the case of certain transactions subject to 
Sec.  1.1502-35. If a member of a consolidated group transfers stock of 
a subsidiary and such stock has a basis that exceeds its value 
immediately before such transfer or a subsidiary is deconsolidated and 
any stock of such subsidiary owned by members of the group immediately 
before such deconsolidation has a basis that exceeds its value, all 
members of the group are subject to the provisions of Sec.  1.1502-
35(b), which generally require a redetermination of members' basis in 
all shares of subsidiary stock.
    (vii) Special rules for amending waiver of loss carryovers from 
separate return limitation year--(A) Waivers that increased allowable 
loss or reduced basis reduction required. If, in connection with the 
acquisition of S, the group made an election pursuant to paragraph 
(b)(4) of this section to treat all or any portion of S's loss 
carryovers as expiring, and the prior group elected to determine the 
amount of the allowable loss or the basis reduction required with 
respect

[[Page 734]]

to the stock of S or a higher-tier corporation of S by applying the 
provisions described in Sec.  1.1502-20(i)(2)(i) or (ii), then the group 
may reduce the amount of any loss carryover deemed to expire (or 
increase the amount of any loss carryover deemed not to expire) as a 
result of the election made pursuant to paragraph (b)(4) of this 
section. The aggregate amount of loss carryovers that may be treated as 
not expiring as a result of amendments made pursuant to this paragraph 
(b)(4)(vii)(A) with respect to S and any higher- and lower-tier 
corporation of S may not exceed the amount described in Sec.  1.1502-
20(c)(1)(iii) with respect to the acquired stock (computed without 
regard to the effect of the group's election or elections pursuant to 
paragraph (b)(4) of this section, but with regard to the effect of the 
prior group's election pursuant to Sec.  1.1502-20(g), if any, prior to 
the application of Sec.  1.1502-20(i)(3)). For purposes of determining 
the aggregate amount of loss carryovers that may be treated as not 
expiring as a result of amendments made pursuant to this paragraph 
(b)(4)(vii)(A) with respect to S and any higher- and lower-tier 
corporation of S, the group may rely on a written notification provided 
by the prior group. Nothing in this paragraph shall be construed as 
permitting a group to increase the amount of any loss carryover deemed 
to expire (or reduce the amount of any loss carryover deemed not to 
expire) as a result of the election made pursuant to paragraph (b)(4) of 
this section.
    (B) Inadvertent waivers of loss carryovers previously subject to an 
election described in Sec.  1.1502-20(g). If, in connection with the 
acquisition of S, the group made an election pursuant to paragraph 
(b)(4) of this section to waive loss carryovers of S by identifying the 
amount of each loss carryover deemed not to expire, the prior group 
elected to determine the amount of the allowable loss or the basis 
reduction required with respect to the stock of S or a higher-tier 
corporation of S by applying the provisions described in Sec.  1.1502-
20(i)(2)(i) or (ii), and the amount of S's loss carryovers treated as 
reattributed to the prior group pursuant to the election described in 
Sec.  1.1502-20(g) is reduced pursuant to Sec.  1.1502-20(i)(3), then 
the group may amend its election made pursuant to paragraph (b)(4) of 
this section to provide that all or a portion of the loss carryovers of 
S that are treated as loss carryovers of S as a result of the prior 
group's election to apply the provisions described in Sec.  1.1502-
20(i)(2)(i) or (ii) are deemed not to expire. This paragraph 
(b)(4)(vii)(B), however, does not permit a group to reduce the amount of 
any loss carryover deemed not to expire as a result of the election made 
pursuant to paragraph (b)(4) of this section.
    (C) Time and manner of amending an election under Sec.  1.1502-
32(b)(4). The amendment of an election made pursuant to paragraph (b)(4) 
of this section must be made in a statement entitled Amendment of 
Election to Treat Loss Carryover as Expiring Under Sec.  1.1502-32(b)(4) 
Pursuant to Sec.  1.1502-32(b)(4)(vii). The statement must be filed with 
or as part of any timely filed (including extensions) original return 
for the taxable year that includes August 26, 2004, or with or as part 
of an amended return filed before the date the original return for the 
taxable year that includes August 26, 2004, is due (with regard to 
extensions). A separate statement shall be filed for each election made 
pursuant to paragraph (b)(4) of this section that is being amended 
pursuant to this paragraph (b)(4)(vii). For purposes of making this 
statement, the group may rely on the statements set forth in a written 
notification provided by the prior group. The statement filed under this 
paragraph must include the following--
    (1) The name and employer identification number (E.I.N.) of S;
    (2) In the case of an amendment made pursuant to paragraph 
(b)(4)(vii)(A), a statement that the group has received a written 
notification from the prior group confirming that the group's prior 
election or elections pursuant to paragraph (b)(4) of this section had 
the effect of either increasing the prior group's allowable loss on the 
disposition of subsidiary stock or reducing the prior group's amount of 
basis reduction required;
    (3) The amount of each loss carryover of S deemed to expire (or the 
amount of loss carryover deemed not to expire) as

[[Page 735]]

set forth in the election made pursuant to paragraph (b)(4) of this 
section;
    (4) The amended amount of each loss carryover of S deemed to expire 
(or the amended amount of loss carryover deemed not to expire); and
    (5) In the case of an amendment made pursuant to paragraph 
(b)(4)(vii)(A) of this section, a statement that the aggregate amount of 
loss carryovers of S and any higher- and lower-tier corporation of S 
that will be treated as not expiring as a result of amendments made 
pursuant to paragraph (b)(4)(vii)(A) of this section will not exceed the 
amount described in Sec.  1.1502-20(c)(1)(iii) with respect to the 
acquired stock (computed without regard to the effect of the group's 
election or elections pursuant to paragraph (b)(4) of this section, but 
with regard to the effect of the prior group's election pursuant to 
Sec.  1.1502-20(g), if any, prior to the application of Sec.  1.1502-
20(i)(3)).
    (D) Items taken into account in open years. An amendment to an 
election made pursuant to paragraph (b)(4) of this section affects the 
group's items of income, gain, deduction, or loss only to the extent 
that the amendment gives rise, directly or indirectly, to items or 
amounts that would properly be taken into account in a year for which an 
assessment of deficiency or a refund for overpayment, as the case may 
be, is not prevented by any law or rule of law. Under this paragraph, if 
the year to which a loss previously deemed to expire as a result of an 
election made pursuant to paragraph (b)(4) of this section is deemed not 
to expire as a result of an election made pursuant to this paragraph 
would have been carried back or carried forward is a year for which a 
refund of overpayment is prevented by law, then to the extent that the 
absorption of such loss in such year would have affected the tax 
treatment of another item (e.g., another loss that was absorbed in such 
year) that has an effect in a year for which a refund of overpayment is 
not prevented by any law or rule of law, the amendment to the election 
made pursuant to paragraph (b)(4) of this section will affect the 
treatment of such other item. Therefore, if the absorption of such loss 
(the first loss) in a year for which a refund of overpayment is 
prevented by law would have prevented the absorption of another loss 
(the second loss) in such year and such second loss would have been 
carried to and used in a year for which a refund of overpayment is not 
prevented by any law or rule of law (the other year), the amendment of 
the election makes the second loss available for use in the other year.
    (E) Higher- and lower-tier corporations of S. A higher-tier 
corporation of S is a corporation that was a member of the prior group 
and, as a result of such higher-tier corporation becoming a member of 
the group; S became a member of the group. A lower-tier corporation of S 
is a corporation that was a member of the prior group and became a 
member of the group as a result of S becoming a member of the group.
    (F) Effective date. This paragraph (b)(4)(vii) is applicable on and 
after March 3, 2005. For prior periods, see Sec.  1.1502-32T(b)(4)(vii) 
as contained in the 26 CFR part 1 in effect on March 2, 2005.
    (5) Examples--(i) In general. For purposes of the examples in this 
section, unless otherwise stated, M owns all of the only class of S's 
stock, the stock is owned for the entire year, S owns no stock of lower-
tier members, the tax year of all persons is the calendar year, all 
persons use the accrual method of accounting, the facts set forth the 
only corporate activity, preferred stock is described in section 
1504(a)(4), all transactions are between unrelated persons, and tax 
liabilities are disregarded.
    (ii) Stock basis adjustments. The principles of this paragraph (b) 
are illustrated by the following examples.

    Example 1. Taxable income. (a) Current taxable income. For Year 1, 
the M group has $100 of taxable income when determined by including only 
S's items of income, gain, deduction, and loss taken into account. Under 
paragraph (b)(1) of this section, M's basis in S's stock is adjusted 
under this section as of the close of Year 1. Under paragraph (b)(2) of 
this section, M's basis in S's stock is increased by the amount of the M 
group's taxable income determined by including only S's items taken into 
account. Thus, M's basis in S's stock is increased by $100 as of the 
close of Year 1.
    (b) Intercompany gain that is not taken into account. The facts are 
the same as in paragraph (a) of this Example 1, except that S also sells 
property to another member at a

[[Page 736]]

$25 gain in Year 1, the gain is deferred under Sec.  1.1502-13 and taken 
into account in Year 3, and M sells 10% of S's stock to nonmembers in 
Year 2. Under paragraph (b)(3)(i) of this section, S's deferred gain is 
not additional taxable income for Year 1 or 2 because it is not taken 
into account in determining the M group's consolidated taxable income 
for either of those years. The deferred gain is not tax-exempt income 
under paragraph (b)(3)(ii) of this section because it is not permanently 
excluded from S's gross income. The deferred gain does not result in a 
basis adjustment until Year 3, when it is taken into account in 
determining the M group's consolidated taxable income. Consequently, M's 
basis in the S shares sold is not increased to reflect S's gain from the 
intercompany sale of the property. In Year 3, the deferred gain is taken 
into account, but the amount allocable to the shares sold by M does not 
increase their basis because these shares are held by nonmembers.
    (c) Intercompany gain taken into account. The facts are the same as 
in paragraph (b) of this Example 1, except that M sells all of S's stock 
in Year 2 (rather than only 10%). Under Sec.  1.1502-13, S takes the $25 
gain into account immediately before S becomes a nonmember. Thus, M's 
basis in S's stock is increased to reflect S's gain from the 
intercompany sale of the property.
    Example 2. Tax loss. (a) Current absorption. For Year 2, the M group 
has a $50 consolidated net operating loss when determined by taking into 
account only S's items of income, gain, deduction, and loss. S's loss is 
absorbed by the M group in Year 2, offsetting M's income for that year. 
Under paragraph (b)(3)(i)(A) of this section, because S's loss is 
absorbed in the year it arises, M has a $50 negative adjustment with 
respect to S's stock. Under paragraph (b)(2) of this section, M reduces 
its basis in S's stock by $50. Under paragraph (a)(3)(ii) of this 
section, if the decrease exceeds M's basis in S's stock, the excess is 
M's excess loss account in S's stock.
    (b) Interim determination from stock sale. The facts are the same as 
in paragraph (a) of this Example 2, except that S's Year 2 loss arises 
in the first half of the calendar year, M sells 50% of S's stock on July 
1 of Year 2, and M's income for Year 2 does not arise until after the 
sale of S's stock. M's income for Year 2 (exclusive of the sale of S's 
stock) is offset by S's loss, even though the income arises after the 
stock sale, and no loss remains to be apportioned to S. See Sec. Sec.  
1.1502-11 and 1.1502-21(b). Under paragraph (b)(3)(i)(A) of this 
section, because S's $50 loss is absorbed in the year it arises, it 
reduces M's basis in the S shares sold by $25 immediately before the 
stock sale. Because S becomes a nonmember, the loss also reduces M's 
basis in the retained S shares by $25 immediately before S becomes a 
nonmember.
    (c) Loss carryback. The facts are the same as in paragraph (a) of 
this Example 2, except that M has no income or loss for Year 2, S's $50 
loss is carried back and absorbed by the M group in Year 1 (offsetting 
the income of M or S), and the M group receives a $17 tax refund in Year 
2 that is paid to S. Under paragraph (b)(3)(i)(B) of this section, 
because the $50 loss is carried back and absorbed in Year 1, it is 
treated as a tax loss for Year 2 (the year in which it arises). Under 
paragraph (b)(3)(ii) of this section, the refund is treated as tax-
exempt income of S. Under paragraph (b)(3)(iv)(C) of this section, the 
tax- exempt income is taken into account in Year 2 because that is the 
year it would be taken into account under S's method of accounting if it 
were subject to Federal income taxation. Thus, under paragraph (b)(2) of 
this section, M reduces its basis in S's stock by $33 as of the close of 
Year 2 (the $50 tax loss, less the $17 tax refund).
    (d) Loss carryforward. The facts are the same as in paragraph (a) of 
this Example 2, except that M has no income or loss for Year 2, and S's 
loss is carried forward and absorbed by the M group in Year 3 
(offsetting the income of M or S). Under paragraph (b)(3)(i)(A) of this 
section, the loss is not treated as a tax loss under paragraph (b)(2) of 
this section until Year 3.
    Example 3. Tax-exempt income and noncapital, nondeductible expenses. 
(a) Facts. For Year 1, the M group has $500 of consolidated taxable 
income. However, the M group has a $100 consolidated net operating loss 
when determined by including only S's items of income, gain, deduction, 
and loss taken into account. Also for Year 1, S has $80 of interest 
income that is permanently excluded from gross income under section 103, 
and S incurs $60 of related expense for which a deduction is permanently 
disallowed under section 265.
    (b) Analysis. Under paragraph (b)(3)(i)(A) of this section, S has a 
$100 tax loss for Year 1. Under paragraph (b)(3)(ii)(A) of this section, 
S has $80 of tax-exempt income. Under paragraph (b)(3)(iii)(A) of this 
section, S has $60 of noncapital, nondeductible expense. Under paragraph 
(b)(3)(iv)(C) of this section, the tax-exempt income and noncapital, 
nondeductible expense are taken into account in Year 1 because that is 
the year they would be taken into account under S's method of accounting 
if they were subject to Federal income taxation. Thus, under paragraph 
(b) of this section, M reduces its basis in S's stock as of the close of 
Year 1 by an $80 net amount (the $100 tax loss, less $80 of tax-exempt 
income, plus $60 of noncapital, nondeductible expenses).
    Example 4. Discharge of indebtedness. (a) Facts. M forms S on 
January 1 of Year 1 and S borrows $200. During Year 1, S's assets 
decline in value and the M group has a $100 consolidated net operating 
loss. Of that amount, $10 is attributable to M and $90 is

[[Page 737]]

attributable to S under the principles of Sec.  1.1502-21(b)(2)(iv). 
None of the loss is absorbed by the group in Year 1, and S is discharged 
from $100 of indebtedness at the close of Year 1. M has a $0 basis in 
the S stock. M and S have no attributes other than the consolidated net 
operating loss. Under section 108(a), S's $100 of discharge of 
indebtedness income is excluded from gross income because of insolvency. 
Under section 108(b) and Sec.  1.1502-28, the consolidated net operating 
loss is reduced to $0.
    (b) Analysis. Under paragraph (b)(3)(iii)(A) of this section, the 
reduction of $90 of the consolidated net operating loss attributable to 
S is treated as a noncapital, nondeductible expense in Year 1 because 
that loss is permanently disallowed by section 108(b) and Sec.  1.1502-
28. Under paragraph (b)(3)(ii)(C)(1) of this section, all $100 of S's 
discharge of indebtedness income is treated as tax-exempt income in Year 
1 because the discharge results in a $100 reduction to the consolidated 
net operating loss. Consequently, the loss and the cancellation of the 
indebtedness result in a net positive $10 adjustment to M's basis in its 
S stock.
    (c) Insufficient attributes. The facts are the same as in paragraph 
(a) of this Example 4, except that S is discharged from $120 of 
indebtedness at the close of Year 1. Under section 108(a), S's $120 of 
discharge of indebtedness income is excluded from gross income because 
of insolvency. Under section 108(b) and Sec.  1.1502-28, the 
consolidated net operating loss is reduced by $100 to $0 after the 
determination of tax for Year 1. Under paragraph (b)(3)(iii)(A) of this 
section, the reduction of $90 of the consolidated net operating loss 
attributable to S is treated as a noncapital, nondeductible expense. 
Under paragraph (b)(3)(ii)(C)(1) of this section, only $100 of the 
discharge is treated as tax-exempt income because only that amount is 
applied to reduce tax attributes. The remaining $20 of discharge of 
indebtedness income excluded from gross income under section 108(a) has 
no effect on M's basis in S's stock.
    (d) Purchase price adjustment. Assume instead that S buys land in 
Year 1 in exchange for S's $100 purchase money note (bearing interest at 
a market rate of interest in excess of the applicable Federal rate, and 
providing for a principal payment at the end of Year 10), and the seller 
agrees with S in Year 4 to discharge $60 of the note as a purchase price 
adjustment to which section 108(e)(5) applies. S has no discharge of 
indebtedness income that is treated as tax-exempt income under paragraph 
(b)(3)(ii) of this section. In addition, the $60 purchase price 
adjustment is not a noncapital, nondeductible expense under paragraph 
(b)(3)(iii) of this section. A purchase price adjustment is not 
equivalent to a discharge of indebtedness that is offset by a deduction 
or loss. Consequently, the purchase price adjustment results in no net 
adjustment to M's basis in S's stock under paragraph (b) of this 
section.
    Example 5. Distributions. (a) Amounts declared and distributed. For 
Year 1, the M group has $120 of consolidated taxable income when 
determined by including only S's items of income, gain, deduction, and 
loss taken into account. S declares and makes a $10 dividend 
distribution to M at the close of Year 1. Under paragraph (b) of this 
section, M increases its basis in S's stock as of the close of Year 1 by 
a $110 net amount ($120 of taxable income, less a $10 distribution).
    (b) Distributions in later years. The facts are the same as in 
paragraph (a) of this Example 5, except that S does not declare and 
distribute the $10 until Year 2. Under paragraph (b) of this section, M 
increases its basis in S's stock by $120 as of the close of Year 1, and 
decreases its basis by $10 as of the close of Year 2. (If M were also a 
subsidiary, the basis of its stock would also be increased in Year 1 to 
reflect M's $120 adjustment to basis of S's stock; the basis of M's 
stock would not be changed as a result of S's distribution in Year 2, 
because M's $10 of tax-exempt dividend income under paragraph (b)(3)(ii) 
of this section would be offset by the $10 negative adjustment to M's 
basis in S's stock for the distribution.)
    (c) Amounts declared but not distributed. The facts are the same as 
in paragraph (a) of this Example 5, except that, during December of Year 
1, S declares (and M becomes entitled to) another $70 dividend 
distribution with respect to its stock, but M does not receive the 
distribution until after it sells all of S's stock at the close of Year 
1. Under Sec.  1.1502-13(f)(2)(iv), S is treated as making a $70 
distribution to M at the time M becomes entitled to the distribution. 
(If S is distributing an appreciated asset, its gain under section 311 
is also taken into account under paragraph (b)(3)(i) of this section at 
the time M becomes entitled to the distribution.) Consequently, under 
paragraph (b) of this section, M increases its basis in S's stock as of 
the close of Year 1 by only a $40 net amount ($120 of taxable income, 
less two distributions totalling $80). Any further adjustments after S 
ceases to be a member and the $70 distribution is made would be 
duplicative, because the stock basis has already been adjusted for the 
distribution. Accordingly, the distribution will not result in further 
adjustments or gain, even if the distribution is a payment to which 
section 301(c)(2) or (3) applies.
    Example 6. Reorganization with boot. (i) Facts. M owns all the stock 
of S and T. M owns ten shares of the same class of common stock of S and 
ten shares of the same class of common stock of T. The fair market value 
of each share of S stock is $10 and the fair market value of each share 
of T stock is $10. On January 1 of Year 1, M has a $5 basis in each of 
its ten shares of S stock and a $10

[[Page 738]]

basis in each of its ten shares of T stock. S and T have no items of 
income, gain, deduction, or loss for Year 1. S and T each have 
substantial earnings and profits. At the close of Year 1, T merges into 
S in a reorganization described in section 368(a)(1)(A) (and in section 
368(a)(1)(D)). M receives no additional S stock, but does receive $10 
which is treated as a dividend under section 356(a)(2).
    (ii) Analysis. The merger of T into S is a transaction to which 
Sec.  1.1502-13(f)(3) applies. Under Sec.  1.1502-13(f)(3) and Sec.  
1.358-2(a)(2)(iii), M is deemed to receive ten additional shares of S 
stock with a total fair market value of $100 (the fair market value of 
the T stock surrendered by M). Under Sec.  1.358-2(a)(2)(i), M will have 
a basis of $10 in each share of S stock deemed received in the 
reorganization. Under Sec.  1.358-2(a)(2)(iii), M is deemed to surrender 
all twenty shares of its S stock in a recapitalization under section 
368(a)(1)(E) in exchange for the ten shares of S stock, the number of 
shares of S stock held by M immediately after the transaction. Thus, 
under Sec.  1.358-2(a)(2)(i), M has five shares of S stock each with a 
basis of $10 and five shares of S stock each with a basis of $20. The 
$10 M received is treated as a dividend distribution under section 301 
and, under paragraph (b)(3)(v) of this section, the $10 is a 
distribution to which paragraph (b)(2)(iv) of this section applies. 
Accordingly, M's total basis in the S stock is decreased by the $10 
distribution.
    Example 7. Tiering up of basis adjustments. M owns all of S's stock, 
and S owns all of T's stock. For Year 1, the M group has $100 of 
consolidated taxable income when determined by including only T's items 
of income, gain, deduction, and loss taken into account, and $50 of 
consolidated taxable income when determined by including only S's items 
taken into account. S increases its basis in T's stock by $100 under 
paragraph (b) of this section. Under paragraph (a)(3) of this section, 
this $100 basis adjustment is taken into account in determining M's 
adjustments to its basis in S's stock. Thus, M increases its basis in 
S's stock by $150 under paragraph (b) of this section.
    Example 8. Allocation of items. (a) Acquisition in mid-year. M is 
the common parent of a consolidated group, and S is an unaffiliated 
corporation filing separate returns on a calendar-year basis. M acquires 
all of S's stock and S becomes a member of the M group on July 1 of Year 
1. For the entire calendar Year 1, S has $100 of ordinary income and 
under Sec.  1.1502-76(b) $60 is allocated to the period from January 1 
to June 30 and $40 to the period from July 1 to December 31. Under 
paragraph (b) of this section, M increases its basis in S's stock by 
$40.
    (b) Sale in mid-year. The facts are the same as in paragraph (a) of 
this Example 8, except that S is a member of the M group at the 
beginning of Year 1 but ceases to be a member on June 30 as a result of 
M's sale of S's stock. Under paragraph (b) of this section, M increases 
its basis in S's stock by $60 immediately before the stock sale. (M's 
basis increase would be the same if S became a nonmember because S 
issued additional shares to nonmembers.)
    (c) Absorption of loss carryovers. Assume instead that S is a member 
of the M group at the beginning of Year 1 but ceases to be a member on 
June 30 as a result of M's sale of S's stock, and a $100 consolidated 
net operating loss attributable to S is carried over by the M group to 
Year 1. The consolidated net operating loss may be apportioned to S for 
its first separate return year only to the extent not absorbed by the M 
group during Year 1. Under paragraph (b)(3)(i) of this section, if the 
loss is absorbed by the M group in Year 1, whether the offsetting income 
arises before or after M's sale of S's stock, the absorption of the loss 
carryover is included in the determination of S's taxable income or loss 
for Year 1. Thus, M's basis in S's stock is adjusted under paragraph (b) 
of this section to reflect any absorption of the loss by the M group.
    Example 9. Gross-ups. (a) Facts. M owns all of the stock of S, and S 
owns all of the stock of T, a newly formed controlled foreign 
corporation that is not a passive foreign investment company. In Year 1, 
T has $100 of subpart F income and pays $34 of foreign income tax, 
leaving T with $66 of earnings and profits. The M group has $100 of 
consolidated taxable income when determined by taking into account only 
S's items (the inclusion under section 951(a), taking into account the 
section 78 gross-up). As a result of the section 951(a) inclusion, S 
increases its basis in T's stock by $66 under section 961(a).
    (b) Analysis. Under paragraph (b)(3)(i) of this section, S has $100 
of taxable income. Under paragraph (b)(3)(iii)(B) of this section, the 
$34 gross-up for taxes paid by T that S is treated as having paid is a 
noncapital, nondeductible expense (whether or not any corresponding 
amount is claimed by the M group as a tax credit). Thus, M increases its 
basis in S's stock under paragraph (b) of this section by the net 
adjustment of $66.
    (c) Subsequent distribution. The facts are the same as in paragraph 
(a) of this Example 9, except that T distributes its $66 of earnings and 
profits in Year 2. The $66 distribution received by S is excluded from 
S's income under section 959(a) because the distribution represents 
earnings and profits attributable to amounts that were included in S's 
income under section 951(a) for Year 1. In addition, S's basis in T's 
stock is decreased by $66 under section 961(b). The excluded 
distribution is not tax-exempt income under paragraph (b)(3)(ii) of this 
section because of the corresponding reduction to S's basis in T's 
stock. Consequently, M's basis in S's stock is

[[Page 739]]

not adjusted under paragraph (b) of this section for Year 2.
    Example 10. Recapture of tax-exempt items. (a) Facts. S is a life 
insurance company. For Year 1, the M group has $200 of consolidated 
taxable income, determined by including only S's items of income, gain, 
deduction, and loss taken into account (including a $300 small company 
deduction under section 806). In addition, S has $100 of tax-exempt 
interest income, $60 of which is S's company share. The remaining $40 of 
tax-exempt income is the policyholders' share that reduces S's deduction 
for increase in reserves.
    (b) Tax-exempt items generally. Under paragraph (b)(3)(i) of this 
section, S has $200 of taxable income for Year 1. Also for Year 1, S has 
$100 of tax-exempt income under paragraph (b)(3)(ii)(A) of this section, 
and another $300 is treated as tax-exempt income under paragraph 
(b)(3)(ii)(B) of this section because of the deduction under section 
806. Under paragraph (b)(3)(iii) of this section, S has $40 of 
noncapital, nondeductible expenses for Year 1 because S's deduction 
under section 807 for its increase in reserves has been permanently 
reduced by the $40 policyholders' share of the tax-exempt interest 
income. Thus, M increases its basis in S's stock by $560 under paragraph 
(b) of this section.
    (c) Recapture. Assume instead that S is a property and casualty 
company and, for Year 1, S accrues $100 of estimated salvage recoverable 
under section 832. Of this amount, $87 (87% of $100) is excluded from 
gross income because of the ``fresh start'' provisions of Sec. 11305(c) 
of P.L. 101-508 (the Omnibus Budget Reconciliation Act of 1990). Thus, S 
has $87 of tax-exempt income under paragraph (b)(3)(ii)(A) of this 
section that increases M's basis in S's stock for Year 1. (S also has 
$13 of taxable income over the period of inclusion under section 481.) 
In Year 5, S determines that the $100 salvage recoverable was 
overestimated by $30 and deducts $30 for the reduction of the salvage 
recoverable. However, S has $26.10 (87% of $30) of taxable income in 
Year 5 due to the partial recapture of its fresh start. Because S has no 
basis corresponding to this income, S is treated under paragraph 
(b)(3)(iii)(B) of this section as having a $26.10 noncapital, 
nondeductible expense in Year 5. This treatment is necessary to reflect 
the elimination of the erroneous fresh start in S's stock basis and 
causes a decrease in M's basis in S's stock by $30 for Year 5 (a $3.90 
taxable loss and a $26.10 special adjustment).

    (c) Allocation of adjustments among shares of stock--(1) In 
general--(i) Distributions. The adjustment that is described in 
paragraph (b)(2)(iv) of this section (negative adjustments for 
distributions) is allocated to the shares of S stock to which the 
distribution relates.
    (ii) Special rules applicable in the case of certain loss transfers 
of subsidiary stock--(A) Losses reattributed pursuant to an election 
under Sec.  1.1502-36(d)(6)--(1) General rule. If a member transfers 
loss shares of S stock and the common parent elects under Sec.  1.1502-
36(d)(6) to reattribute all or a portion of S's attributes, S's 
resulting noncapital, nondeductible expense is allocated to all loss 
shares of S stock transferred by members in the transaction. The expense 
is allocated among those S shares in proportion to the loss in the 
shares. The tier-up of that expense is included in the remaining 
adjustment (see paragraph (c)(1)(iii) of this section).
    (2) Reattribution of attributes of a subsidiary that is lower-tier 
to S. If a member transfers loss shares of S stock and the common parent 
elects under Sec.  1.1502-36(d)(6) to reattribute attributes of a 
subsidiary (S2) that is lower-tier to S, S2's resulting noncapital, 
nondeductible expense is allocated among S2 shares held by members as of 
the transaction, other than those transferred in the transaction and 
with respect to which gain or loss was recognized (recognition 
transfer), in a manner that permits the full amount of the expense to 
tier up and be applied to the bases of the loss shares of S stock 
transferred by members in the transaction. The expense is allocated 
among those S2 shares with positive basis in a manner that, first, 
reduces the bases of S2's preferred shares to equalize and then 
eliminate loss and, second, reduces the bases of S2's common shares in a 
manner that reduces disparity among the bases of those common shares to 
the greatest extent possible. The noncapital, nondeductible expense 
applied to the S2 shares tiers up and is applied to the stock of any 
subsidiaries that are lower-tier to S (middle-tier subsidiaries) in a 
manner that will permit the full amount of this expense to be applied to 
reduce the bases of the loss shares of S stock transferred by members in 
the transaction. Similar to the allocation among the S2 shares, the 
tier-up of this expense is allocated among the middle-tier subsidiary

[[Page 740]]

shares held by members as of the transaction, other than those 
transferred in a recognition transfer, in a manner that permits the full 
amount of the expense to tier up and be applied to the bases of the loss 
shares of S stock transferred by members in the transaction. The tier-up 
of this expense is allocated among those middle-tier subsidiary shares 
with positive basis in a manner that, first, reduces the bases of the 
middle-tier subsidiary's preferred shares to equalize and then eliminate 
loss and, second, reduces the bases of the middle-tier subsidiary's 
common shares in a manner that reduces disparity among the bases of 
those common shares to the greatest extent possible. The tier-up of this 
expense is allocated to the loss shares of S stock transferred by 
members in the transaction in the same manner as provided in paragraph 
(c)(1)(ii)(A)(1) of this section, and thereafter the tier-up of that 
expense is included in the remaining adjustment (see paragraph 
(c)(1)(iii) of this section).
    (3) Example. The following example illustrates the rules of this 
paragraph (c)(1)(ii)(A).

    Example. Assume P owns M1, P and M1 own M2, M2 owns S, M1 and S own 
S1, and M1 and S1 own S2. If S sells a portion of the S1 shares at a 
gain and M2 sells all of the S stock at a net loss (after adjusting the 
basis for the gain recognized by S on the sale of the S1 shares), and P 
elects under Sec.  1.1502-36(d)(6) to reattribute attributes of S2, the 
resulting noncapital, nondeductible expense is allocated entirely to the 
S2 shares held by S1 with positive basis in a manner that reduces the 
disparity in those bases to the greatest extent possible. The tier-up of 
this amount is allocated entirely to the S1 shares held by S (excluding 
the S1 shares sold) with positive basis in a manner that reduces the 
disparity in those bases to the greatest extent possible. The tier-up of 
this amount is allocated to the loss shares of S stock sold by M2 in 
proportion to the loss in those shares. The tier-up of this amount is 
then included in the remaining adjustment and tiers up from M2 to M1 and 
P, and from M1 to P under the general rules of this section.

    (B) Tier-up of reallocated investment adjustments subject to prior 
use limitation. If the reallocation of an investment adjustment under 
Sec.  1.1502-36(b)(2) is subject to the prior use limitation in Sec.  
1.1502-36(b)(2)(iii)(B)(2), no amount of the tier-up of such reallocated 
investment adjustment shall be allocated to any share whose prior use 
resulted in the application of the limitation. Thereafter, the tier-up 
of this amount is included in the remaining adjustment (see paragraph 
(c)(1)(iii) of this section).
    (iii) Remaining adjustment. The remaining adjustment is the 
adjustment that consists of the items described in paragraphs (b)(2)(i) 
through (b)(2)(iii) of this section (adjustments for taxable income or 
loss, tax-exempt income, and noncapital, nondeductible expenses), 
including adjustments to lower-tier stock basis that tier up under 
paragraph (a)(3)(iii) of this section, but only to the extent not 
specially allocated under paragraph (c)(1)(ii) of this section. The 
remaining adjustment is allocated among the shares of S stock as 
provided in paragraphs (c)(2) through (c)(4) of this section. If the 
remaining adjustment is positive, it is allocated first to any preferred 
stock as provided in paragraph (c)(3) of this section, and then to the 
common stock as provided in paragraph (c)(2) of this section. If the 
remaining adjustment is negative, it is allocated only to common stock 
as provided in paragraph (c)(2) of this section.
    (iv) Nonmember shares. No adjustment under this section that is 
allocated to a share for the period it is owned by a nonmember affects 
the basis of the share.
    (v) Cross-references. See paragraph (c)(4) of this section for the 
reallocation of adjustments, and paragraph (d) of this section for 
definitions. See Sec.  1.1502-19(d) for special allocations of basis 
determined or adjusted under the Internal Revenue Code (Code) with 
respect to excess loss accounts.
    (2) Common stock--(i) Allocation within a class. The remaining 
adjustment described in paragraph (c)(1)(iii) of this section that is 
allocable to a class of common stock is generally allocated equally to 
each share within the class. However, if a member has an excess loss 
account in a share of a class of common stock at the time a positive 
remaining adjustment is to be allocated, the portion of the positive 
remaining adjustment allocable to the member with respect to the class 
is allocated first to equalize and then

[[Page 741]]

eliminate that member's excess loss accounts. It is then allocated 
equally among the members' shares in that class. Similarly, the portion 
of any negative remaining adjustment allocable to the member with 
respect to the class is allocated equally to the member's shares with 
positive bases, eliminating all positive basis in shares of the class 
before creating or increasing any excess loss accounts. After positive 
basis is eliminated, any remaining portion of the negative remaining 
adjustment is allocated to equalize the member's excess loss accounts in 
the shares of that class to the greatest extent possible. Distributions 
and any adjustments or determinations under the Internal Revenue Code 
(for example, under section 358, including any modifications under Sec.  
1.1502-19(d)) are taken into account before the allocation is made under 
this paragraph (c)(2)(i).
    (ii) Allocation among classes--(A) General rule. If S has more than 
one class of common stock, the extent to which the remaining adjustment 
described in paragraph (c)(1)(iii) of this section is allocated to each 
class is determined, based on consistently applied assumptions, by 
taking into account the terms of each class and all other facts and 
circumstances relating to the overall economic arrangement. The 
allocation generally must reflect the manner in which the classes 
participate in the economic benefit or burden (if any) corresponding to 
the items of income, gain, deduction, or loss allocated. In determining 
participation, any differences in voting rights are not taken into 
account, and the following factors are among those to be considered--
    (1) The interest of each share in economic profits and losses (if 
different from the interest in taxable income);
    (2) The interest of each share in cash flow and other non-
liquidating distributions; and
    (3) The interest of each share in distributions in liquidation.
    (B) Distributions and Code adjustments. Distributions and any 
adjustments or determinations under the Internal Revenue Code are taken 
into account before the allocation is made under this paragraph 
(c)(2)(ii).
    (3) Preferred stock. If the remaining adjustment described in 
paragraph (c)(1)(iii) of this section is positive, it is allocated to 
preferred stock to the extent required (when aggregated with prior 
allocations to the preferred stock during the period that S is a member 
of the consolidated group) to reflect distributions described in section 
301 (and all other distributions treated as dividends) to which the 
preferred stock becomes entitled, and arrearages arising, during the 
period that S is a member of the consolidated group. For this purpose, 
the preferred stock is treated as entitled to a distribution no later 
than the time the distribution is taken into account under the Internal 
Revenue Code (e.g., under section 305). If the amount of distributions 
and arrearages exceeds the positive amount (when aggregated with prior 
allocations), the positive amount is first allocated among classes of 
preferred stock to reflect their relative priorities, and the amount 
allocated to each class is then allocated pro rata within the class. An 
allocation to a share with respect to arrearages and distributions for 
the period the share is owned by a nonmember is not reflected in the 
basis of the share under paragraph (b) of this section. However, if M 
and S cease to be members of one consolidated group and remain 
affiliated as members of another consolidated group, M's ownership of 
S's stock during consolidated return years of the prior group is treated 
for this purpose as ownership by a member to the extent that the 
adjustments during the prior consolidated return years are still 
reflected in the basis of the preferred stock.
    (4) Cumulative redetermination--(i) General rule. A member's basis 
in each share of S preferred and common stock must be redetermined 
whenever necessary to determine the tax liability of any person. See 
paragraph (b)(1) of this section. The redetermination is made by 
reallocating S's adjustments described in paragraphs (c)(1)(ii)(B) 
(specially allocated adjustments for tier-up of reallocated investment 
adjustments subject to prior use limitation) and (c)(1)(iii) (remaining 
adjustments) of this section for each consolidated return year (or other 
applicable period) of the group by taking into account all

[[Page 742]]

of the facts and circumstances affecting allocations under this 
paragraph (c) as of the redetermination date with respect to all of the 
S shares. For this purpose:
    (A) Amounts may be reallocated from one class of S's stock to 
another class, but not from one share of a class to another share of the 
same class.
    (B) If there is a change in the equity structure of S (e.g., as the 
result of S's issuance, redemption, or recapitalization of shares), a 
cumulative redetermination is made for the period before the change. If 
a reallocation is required by another redetermination after a change, 
amounts arising after the change are reallocated before amounts arising 
before the change.
    (C) If S becomes a nonmember as a result of a change in its equity 
structure, any reallocation is made only among the shares of S's stock 
immediately before the change. For example, if S issues stock to a 
nonmember creditor in exchange for its debt, and the exchange results in 
S becoming a nonmember, any reallocation is only among the shares of S's 
stock immediately before the exchange.
    (D) Any reallocation is treated for all purposes after it is made 
(including subsequent redeterminations) as the original allocation of an 
amount under this paragraph (c), but the reallocation does not affect 
any prior period.
    (ii) Prior use of allocations. An amount may not be reallocated 
under paragraph (c)(4)(i) of this section to the extent that the amount 
has been used before the reallocation. For this purpose, an amount has 
been used to the extent it has been taken into account, directly or 
indirectly, by any member in determining income, gain, deduction, or 
loss, or in determining the basis of any property that is not subject to 
this section (e.g., stock of a corporation that has become a nonmember). 
For example, if M sells a share of S stock, an amount previously 
allocated to the share cannot be reallocated to another share of S 
stock, but an amount allocated to another share of S stock can still be 
reallocated to the sold share because the reallocated amount has not 
been taken into account; however, any adjustment reallocated to the sold 
share may effectively be eliminated, because the reallocation was not in 
effect when the share was previously sold and M's gain or loss from the 
sale is not redetermined. If, however, M sells the share of S stock to 
another member, the amount is not used until M's gain or loss is taken 
into account under Sec.  1.1502-13.
    (5) Examples. The principles of this paragraph (c) are illustrated 
by the following examples.

    Example 1. Ownership of less than all the stock. (a) Facts. M owns 
80% of S's only class of stock with an $800 basis. For Year 1, S has 
$100 of taxable income.
    (b) Analysis. Under paragraph (c)(1) of this section, the $100 
positive adjustment under paragraph (b) of this section for S's taxable 
income is allocated among the shares of S's stock, including shares 
owned by nonmembers. Under paragraph (c)(2)(i) of this section, the 
adjustment is allocated equally to each share of S's stock. Thus, M 
increases its basis in S's stock under paragraph (b) of this section as 
of the close of Year 1 by $80. (The basis of the 20% of S's stock owned 
by nonmembers is not adjusted under this section.)
    (c) Varying interest. The facts are the same as in paragraph (a) of 
this Example 1, except that M buys the remaining 20% of S's stock at the 
close of business on June 30 of Year 1 for $208. Under paragraph (b)(1) 
of this section and the principles of Sec.  1.1502-76(b), S's $100 of 
taxable income is allocable $40 to the period from January 1 to June 30 
and $60 to the period from July 1 to December 31. Thus, for the period 
ending June 30, M is treated as having a $32 adjustment with respect to 
the S stock that M has owned since January 1 (80% of $40) and, under 
paragraph (c)(2)(i) of this section, the adjustment is allocated equally 
among those shares. For the period ending December 31, M is treated as 
having a $60 adjustment (100% of $60) that is also allocated equally 
among M's shares of S's stock owned after June 30. M's basis in the 
shares owned as of the beginning of the year therefore increases by $80 
(the sum of 80% of $40 and 80% of $60), from $800 to $880, and M's basis 
in the shares purchased on June 30 increases by $12 (20% of $60), from 
$208 to $220. Thus, M's aggregate basis in S's stock as of the end of 
Year 1 is $1,100.
    (d) Tax liability. The facts are the same as in paragraph (a) of 
this Example 1, except that M pays S's $34 share of the group's 
consolidated tax liability resulting from S's taxable income, and S does 
not reimburse M. S's $100 of taxable income results in a positive 
adjustment under paragraph (b)(3)(i) of this section, and S's $34 of tax 
liability results in a negative adjustment under paragraph (b)(3)(iv)(D) 
of this section and the principles of section 1552. Because S does not 
make any payment in recognition of the additional tax

[[Page 743]]

liability, by analogy to the treatment under Sec.  1.1552-1(b)(2), S is 
treated as having made a $34 payment that is described in paragraph 
(b)(3)(iii) of this section (noncapital, nondeductible expenses) and as 
having received an equal amount from M as a capital contribution. Thus, 
M increases its basis in its S stock by $52.80 (80% of the $100 of 
taxable income, less 80% of the $34 tax payment). In addition, M 
increases its basis in S's stock by $34 under the Internal Revenue Code 
and paragraph (a)(2) of this section to reflect the capital 
contribution. In the aggregate, M increases its basis in S's stock by 
$86.80. (If, as in paragraph (c) of this Example 1, M buys the remaining 
20% of S's stock at the close of business on June 30, M increases its 
basis in S's stock by another $7.90 for the additional 20% interest in 
S's income after June 30 ($60 multiplied by 20%, less 20% of the $20.40 
tax payment on $60); the $34 capital contribution by M is reflected in 
all of its S shares (not just the original 80%), and M's aggregate basis 
adjustment under this section is $94.70 ($86.80 plus $7.90).)
    Example 2. Preferred stock. (a) Facts. M owns all of S's common 
stock with an $800 basis, and nonmembers own all of S's preferred stock. 
The preferred stock was issued for $200, has a $20 annual, cumulative 
preference as to dividends, and has an initial liquidation preference of 
$200. For Year 1, S has $50 of taxable income and no distributions are 
declared or made.
    (b) Analysis of arrearages. Under paragraphs (c) (1) and (3) of this 
section, $20 of the $50 positive adjustment under paragraph (b) of this 
section is allocated first to the preferred stock to reflect the 
dividend arrearage arising in Year 1. The remaining $30 of the positive 
adjustment is allocated to the common stock, increasing M's basis from 
$800 to $830 as of the close of Year 1. (The basis of the preferred 
stock owned by nonmembers is not adjusted under this section.)
    (c) Current distribution. The facts are the same as in paragraph (a) 
of this Example 2, except that S declares and makes a $20 distribution 
with respect to the preferred stock during Year 1 in satisfaction of its 
preference. The results are the same as in paragraph (b) of this Example 
2.
    (d) Varying interest. The facts are the same as in paragraph (a) of 
this Example 2, except that S has no income or loss for Years 1 and 2, M 
purchases all of S's preferred stock at the beginning of Year 3 for 
$240, and S has $70 of taxable income for Year 3. Under paragraph (c)(3) 
of this section, $60 of the $70 positive adjustment under paragraph (b) 
of this section is allocated to the preferred stock to reflect the 
dividends arrearages for Years 1 through 3, but only the $20 for Year 3 
is reflected in the basis of the preferred stock under paragraph (b) of 
this section. (The remaining $40 is not reflected because the preferred 
stock was owned by nonmembers during Years 1 and 2.) Thus, M increases 
its basis in S's preferred stock from $240 to $260, and its basis in S's 
common stock from $800 to $810, as of the close of Year 3. (If M had 
acquired all of S's preferred stock in a transaction to which section 
351 applies, and M's initial basis in S's preferred stock was $200 under 
section 362, M's basis in S's preferred stock would increase from $200 
to $220.)
    (e) Varying interest with current distributions. The facts are the 
same as in paragraph (d) of this Example 2, except that S declares and 
makes a $20 distribution with respect to the preferred stock in each of 
Years 1 and 2 in satisfaction of its preference, and M purchases all of 
S's preferred stock at the beginning of Year 3 for $200. Under paragraph 
(c)(3) of this section, $40 of the $70 positive adjustment under 
paragraph (b) of this section is allocated to the preferred stock to 
reflect the distributions in Years 1 and 2, and $20 of the $70 is 
allocated to the preferred stock to reflect the arrearage for Year 3. 
However, as in paragraph (d) of this Example 2, only the $20 
attributable to Year 3 is reflected in the basis of the preferred stock 
under paragraph (b) of this section. Thus, M increases its basis in S's 
preferred stock from $200 to $220, and M increases its basis in S's 
common stock from $800 to $810.
    Example 3. Cumulative redetermination. (a) Facts. M owns all of S's 
common and preferred stock. The preferred stock has a $100 annual, 
cumulative preference as to dividends. For Year 1, S has $200 of taxable 
income, the first $100 of which is allocated to the preferred stock and 
the remaining $100 of which is allocated to the common stock. For Year 
2, S has no adjustment under paragraph (b) of this section, and M sells 
all of S's common stock at the close of Year 2.
    (b) Analysis. Under paragraph (c)(4) of this section, M's basis in 
S's common stock must be redetermined as of the sale of the stock. The 
redetermination is made by reallocating the $200 positive adjustment 
under paragraph (b) of this section for Year 1 by taking into account 
all of the facts and circumstances affecting allocations as of the sale. 
Thus, the $200 positive adjustment for Year 1 is reallocated entirely to 
the preferred stock to reflect the dividend arrearages for Years 1 and 
2. The reallocation away from the common stock reflects the fact that, 
because of the additional amount of arrearage in Year 2, the common 
stock is not entitled to any part of the $200 of taxable income from 
Year 1. Thus, the common stock has no positive or negative adjustment, 
and the preferred stock has a $200 positive adjustment. These 
reallocations are treated as the original allocations for Years 1 and 2. 
(The results for the common stock would be the same if the common and 
preferred stock were not owned by the same member, or the preferred 
stock were owned by nonmembers.)

[[Page 744]]

    (c) Preferred stock issued after adjustment arises. The facts are 
the same as in paragraph (a) of this Example 3, except that S does not 
issue its preferred stock until the beginning of Year 2, S has no 
further adjustment under paragraph (b) of this section for Years 2 and 
3, and M sells S's common stock at the close of Year 3. Under paragraphs 
(c) (1) and (2) of this section, the $200 positive adjustment for Year 1 
is initially allocated entirely to the common stock. Under paragraph 
(c)(4) of this section, the $200 adjustment is reallocated to the 
preferred stock to reflect the arrearages for Years 2 and 3. Thus, the 
common stock has no positive or negative adjustment.
    (d) Common stock issued after adjustment arises. The facts are the 
same as in paragraph (a) of this Example 3, except that S has no 
preferred stock, S issues additional common stock of the same class at 
the beginning of Year 2, S has no further adjustment under paragraph (b) 
of this section in Years 2 and 3, and M sells its S common stock at the 
close of Year 3. Under paragraphs (c) (1) and (2) of this section, the 
$200 positive adjustment for Year 1 is initially allocated entirely to 
the original common stock. Under paragraph (c)(4)(i)(A) of this section, 
the $200 adjustment is not reallocated among the original common stock 
and the additional stock. Unlike the preferred stock in paragraph (c) of 
this Example 3, the additional common stock is of the same class as the 
original stock, and there is no reallocation between shares of the same 
class.
    (e) Positive and negative adjustments. The facts are the same as in 
paragraph (a) of this Example 3, except that S has a $200 loss for Year 
2 that results in a negative adjustment to the common stock before any 
redetermination. For purposes of the basis redetermination under 
paragraph (c)(4) of this section, the Year 1 and 2 adjustments under 
paragraph (b) of this section are not netted. Thus, as in paragraph (b) 
of this Example 3, the redetermination is made by reallocating the $200 
positive adjustment for Year 1 entirely to the preferred stock. The $200 
negative adjustment for Year 2 is allocated entirely to the common 
stock. Consequently, the preferred stock has a $200 positive cumulative 
adjustment, and the common stock has a $200 negative cumulative 
adjustment. (The results would be the same if there were no other 
adjustments described in paragraph (b) of this section, M sells S's 
common stock at the close of Year 3 rather than Year 2, and an 
additional $100 arrearage arises in Year 3; only adjustments under 
paragraph (b) of this section may be reallocated, and there is no 
additional adjustment for Year 3.)
    (f) Current distributions. The facts are the same as in paragraph 
(a) of this Example 3, except that, during Year 1, S declares and makes 
a distribution to M of $100 as a dividend on the preferred stock and 
$100 as a dividend on the common stock. The taxable income and 
distributions result in no Year 1 adjustment under paragraph (b) of this 
section for either the common or preferred stock. For example, if T 
merges into S, S is treated, as the context may require, as a successor 
to T and as becoming a member of the group. However, as in paragraph (b) 
of this Example 3, the redetermination under paragraph (c)(4) of this 
section is made by reallocating a $200 positive adjustment for Year 1 
(S's net adjustment described in paragraph (b) of this section, 
determined without taking distributions into account) to the preferred 
stock. Consequently, the preferred stock has a $100 positive cumulative 
adjustment ($200 of taxable income, less a $100 distribution with 
respect to the preferred stock) and the common stock has a $100 negative 
cumulative adjustment (for the distribution).
    (g) Convertible preferred stock. The facts are the same as in 
paragraph (a) of this Example 3, except that the preferred stock is 
convertible into common stock that is identical to the common stock 
already outstanding, the holders of the preferred stock convert the 
stock at the close of Year 2, and no stock is sold until the close of 
Year 5. Under paragraph (c)(4) of this section, the $200 positive 
adjustment for Year 1 is reallocated entirely to the preferred stock 
immediately before the conversion. The newly issued common stock is 
treated as a second class of S common stock, and adjustments under 
paragraph (b) of this section are allocated between the original and the 
new common stock under paragraph (c)(2)(ii) of this section. Although 
the preferred stock is converted to common stock, the $200 adjustment to 
the preferred stock is not subsequently reallocated between the original 
and the new common stock. Because the original and the new stock are 
equivalent, adjustments under paragraph (b) of this section for 
subsequent periods are allocated equally to each share.
    (h) Prior use of allocations. The facts are the same as in paragraph 
(a) of this Example 3, except that M sells 10% of S's common stock at 
the close of Year 1, and the remaining 90% at the close of Year 2. M's 
basis in the common stock sold in Year 1 reflects $10 of the adjustment 
allocated to the common stock for Year 1. Under paragraph (c)(4)(ii) of 
this section, because $10 of the Year 1 adjustment was used in 
determining M's gain or loss, only $90 is reallocated to the preferred 
stock, and $10 remains allocated to the common stock sold.
    (i) Lower-tier members. The facts are the same as in paragraph (a) 
of this Example 3, except that M owns only S's common stock, and M is 
also a subsidiary. If there is a redetermination under paragraph (c)(4) 
of this section by a member owning M's stock, a redetermination with 
respect to S's stock must be made first, and the effect of that 
redetermination on M's adjustments is taken

[[Page 745]]

into account under paragraph (b) of this section. However, as in 
paragraph (h) of this Example 3, to the extent an amount of the initial 
adjustments with respect to S's common stock have already been tiered up 
and used by a member owning M's stock, that amount remains with S's 
common stock (and the higher-tier member using the adjustment with 
respect to M's stock), and may not be reallocated to S's preferred 
stock.
    Example 4. Allocation to preferred stock between groups. (a) Facts. 
M owns all of S's only class of stock, and S owns all of T's common and 
preferred stock. The preferred stock has a $100 annual, cumulative 
preference as to dividends. For Year 1, T has $200 of taxable income, 
the first $100 of which is allocated to the preferred stock and the 
remaining $100 of which is allocated to the common stock, and S has no 
adjustments other than the amounts tiered up from T. S and T have no 
adjustments under paragraph (b) of this section for Years 2 and 3. X, 
the common parent of another consolidated group, purchases all of S's 
stock at the close of Year 3, and S and T become members of the X group. 
For Year 4, T has $200 of taxable income, and S has no adjustments other 
than the amounts tiered up from T.
    (b) Analysis for Years 1 through 3. Under paragraph (c)(4) of this 
section, the allocation of S's adjustments under paragraph (b) of this 
section (determined without taking distributions into account) must be 
redetermined as of the time M sells S's stock. As a result of this 
redetermination, T's common stock has no positive or negative adjustment 
and the preferred stock has a $200 positive adjustment.
    (c) Analysis for Year 4. Under paragraph (c)(3) of this section, the 
allocation of T's $200 positive adjustment in Year 4 to T's preferred 
stock with respect to arrearages is made by taking into account the 
consolidated return years of both the M group and the X group. Thus, the 
allocation of the $200 positive adjustment for Year 4 to T's preferred 
stock is not treated as an allocation for a period for which the 
preferred stock is owned by a nonmember. Thus, the $200 adjustment is 
reflected in S's basis in T's preferred stock under paragraph (b) of 
this section.

    (d) Definitions. For purposes of this section--
    (1) Class. The shares of a member having the same material terms 
(without taking into account voting rights) are treated as a single 
class of stock.
    (2) Preferred stock. Preferred stock is stock that is limited and 
preferred as to dividends and has a liquidation preference. A class of 
stock that is not described in section 1504(a)(4), however, is not 
treated as preferred stock for purposes of paragraph (c) of this section 
if members own less than 80% of each class of common stock (determined 
without taking this paragraph (d)(2) into account).
    (3) Common stock. Common stock is stock that is not preferred stock.
    (4) Becoming a nonmember. A member is treated as becoming a 
nonmember if it has a separate return year (including another group's 
consolidated return year). For example, S may become a nonmember if it 
issues additional stock to nonmembers, but S does not become a nonmember 
as a result of its complete liquidation.
    (e) Anti-avoidance rule--(1) General rule. If any person acts with a 
principal purpose contrary to the purposes of this section, to avoid the 
effect of the rules of this section or apply the rules of this section 
to avoid the effect of any other provision of the consolidated return 
regulations, adjustments must be made as necessary to carry out the 
purposes of this section.
    (2) Examples. The principles of this paragraph (e) are illustrated 
by the following examples.

    Example 1. Preferred stock treated as common stock. (a) Facts. S has 
100 shares of common stock and 100 shares of preferred stock described 
in section 1504(a)(4). M owns 80 shares of S's common stock and all of 
S's preferred stock. The shareholders expect that S will have negative 
adjustments under paragraph (b) of this section for Years 1 and 2 (all 
of which will be allocable to S's common stock), the negative 
adjustments will have no significant effect on the value of S's stock, 
and S will have offsetting positive adjustments thereafter. When the 
preferred stock was issued, M intended to cause S to recapitalize the 
preferred stock into additional common stock at the end of Year 2 in a 
transaction described in section 368(a)(1)(E). M's temporary ownership 
of the preferred stock is with a principal purpose to limit M's basis 
reductions under paragraph (b) of this section to 80% of the anticipated 
negative adjustments. The recapitalization is intended to cause 
significantly more than 80% of the anticipated positive adjustments to 
increase M's basis in S's stock because of M's increased ownership of 
S's common stock immediately after the recapitalization.
    (b) Analysis. S has established a transitory capital structure with 
a principal purpose to enhance M's basis in S's stock under this 
section. Under paragraph (e)(1) of this section, all of S's common and 
preferred stock

[[Page 746]]

is treated as a single class of common stock in Years 1 and 2 for 
purposes of this section. Thus, S's items are allocated under the 
principles of paragraph (c)(2)(ii) of this section, and M decreases its 
basis in both the common and preferred stock accordingly.
    Example 2. Contribution of appreciated property. (a) Facts. M owns 
all of the stock of S and T, and S and T each own 50% of the stock of U. 
M's S stock has a $150 basis and $200 value, and M's T stock has a $200 
basis and $200 value. With a principal purpose to eliminate M's gain 
from an anticipated sale of S's stock, T contributes to U an asset with 
a $100 value and $0 basis, and S contributes $100 cash. U sells T's 
asset and recognizes a $100 gain that results in a $100 positive 
adjustment under paragraph (b) of this section.
    (b) Analysis. Under paragraph (c)(2) of this section, U's adjustment 
ordinarily would be allocated equally to each share of U's stock. If so 
allocated, M's basis in S's stock would increase from $150 to $200 and M 
would recognize no gain from the sale of S's stock for $200. Under 
paragraph (e)(1) of this section, however, because T transferred an 
appreciated asset to U with a principal purpose to shift a portion of 
the stock basis increase from M's stock in T to M's stock in S, the 
allocation of the $100 positive adjustment under paragraph (c) of this 
section between the shares of U's stock must take into account the 
contribution. Consequently, all $100 of the positive adjustment is 
allocated to the U stock owned by T, rather than $50 to the U stock 
owned by S and $50 to the U stock owned by T. M's basis in S's stock 
remains $150, and its basis in T's stock increases to $300. Thus, M 
recognizes a $50 gain from its sale of S's stock for $200.
    Example 3. Reorganizations. (a) Facts. M forms S with an $800 
contribution, $200 of which is in exchange for S's preferred stock 
described in section 1504(a)(4) and the balance of which is for S's 
common stock. For Years 1 through 3, S has a total of $160 of ordinary 
income, $60 of which is distributed with respect to the preferred stock 
in satisfaction of its $20 annual preference as to dividends. Under this 
section, M's basis in S's preferred stock is unchanged, and its basis in 
S's common stock is increased from $600 to $700. To reduce its gain from 
an anticipated sale of S's preferred stock, M forms T at the close of 
Year 3 with a contribution of all of S's stock in exchange for 
corresponding common and preferred stock of T in a transaction to which 
section 351 applies. At the time of the contribution, the fair market 
value of the common stock is $700 and the fair market value of the 
preferred stock is $300 (due to a decrease in prevailing market interest 
rates). M subsequently sells T's preferred stock for $300.
    (b) Analysis. Under section 358(b), M ordinarily has a $630 basis in 
T's common stock (70% of the $900 aggregate stock basis) and a $270 
basis in T's preferred stock (30% of the $900 aggregate stock basis). 
However, because M transferred S's stock to T with a principal purpose 
to shift the allocation of basis adjustments under this section, 
adjustments are made under paragraph (e)(1) of this section to preserve 
the allocation under this section. Thus, M has a $700 basis in T's 
common stock and a $200 basis in T's preferred stock. Consequently, M 
recognizes a $100 gain from the sale of T's preferred stock.
    Example 4. Post-deconsolidation basis adjustments. (a) Facts. For 
Year 1, the M group has $40 of taxable income when determined by 
including only S's items of income, gain, deduction, and loss taken into 
account, and M increases its basis in S's stock by $40 under paragraph 
(b) of this section. M anticipates that S will have a $40 ordinary loss 
for Year 2 that will be carried back and offset S's income in Year 1 and 
result in a $40 reduction to M's basis in S's stock for Year 2 under 
paragraph (b) of this section. With a principal purpose to avoid the 
reduction, M causes S to issue voting preferred stock that results in S 
becoming a nonmember at the beginning of Year 2. As anticipated, S has a 
$40 loss for Year 2, which is carried back to Year 1 and offsets S's 
income from Year 1.
    (b) Analysis. Under paragraph (e)(1) of this section, because M 
caused S to become a nonmember with a principal purpose to absorb S's 
loss but avoid the corresponding negative adjustment under this section, 
and M bears a substantial portion of the loss because of its continued 
ownership of S common stock, the basis of M's common stock in S is 
decreased by $40 for Year 2. (If M has less than a $40 basis in the 
retained S stock, M must recognize income for Year 2 to the extent of 
the excess.) Section 1504(a)(3) limits the ability of S to subsequently 
rejoin the M group's consolidated return.
    (c) Carryback to pre-consolidation year. The facts are the same as 
in paragraph (a) of this Example 4, except that M anticipates that S's 
loss will be carried back and absorbed in a separate return year of S 
before Year 1 (rather than to the M group's consolidated return for Year 
1). Although M causes S to become a nonmember with a principal purpose 
to avoid the negative adjustment under this section, and M bears a 
substantial portion of the loss because of its continued ownership of S 
common stock, both S's income and loss are taken into account under the 
separate return rules. Consequently, no one has acted with a principal 
purpose contrary to the purposes of this section, and no adjustments are 
necessary to carry out the purposes of this section.
    Example 5. Pre-consolidation basis adjustments. (a) Facts. M forms S 
with a $100 contribution, and S becomes a member of the M affiliated 
group which does not file consolidated returns. For Years 1 through 3, S 
earns $300. M anticipates that it will elect under

[[Page 747]]

section 1501 for the M group to begin filing consolidated returns in 
Year 5. In anticipation of filing consolidated returns, and to avoid the 
negative stock basis adjustment that would result under paragraph (b) of 
this section from distributing S's earnings after Year 5, M causes S to 
distribute $300 during Year 4 as a qualifying dividend within the 
meaning of section 243(b). There is no plan or intention to recontribute 
the funds to S after the distribution.
    (b) Analysis. Although S's distribution of $300 is with a principal 
purpose to avoid a corresponding negative adjustment under this section, 
the $300 was both earned and distributed entirely under the separate 
return rules. Consequently, M and S have not acted with a principal 
purpose contrary to the purposes of this section, and no adjustments are 
necessary to carry out the purposes of this section.

    (f) Predecessors and successors. For purposes of this section, any 
reference to a corporation or to a share of stock includes a reference 
to a successor or predecessor as the context may require. A corporation 
is a successor if the basis of its assets is determined, directly or 
indirectly, in whole or in part, by reference to the basis of another 
corporation (the predecessor). For example, if T merges into S, S is 
treated, as the context may require, as a successor to T and as becoming 
a member of the group. A share is a successor if its basis is 
determined, directly or indirectly, in whole or in part, by reference to 
the basis of another share (the predecessor).
    (g) Recordkeeping. Adjustments under this section must be reflected 
annually on permanent records (including work papers). See also section 
6001, requiring records to be maintained. The group must be able to 
identify from these permanent records the amount and allocation of 
adjustments, including the nature of any tax-exempt income and 
noncapital, nondeductible expenses, so as to permit the application of 
the rules of this section for each year.
    (h) Effective/applicability date--(1) General rule. Except as 
provided in paragraph (h)(8) of this section, this section applies with 
respect to determinations of the basis of the stock of a subsidiary 
(e.g., for determining gain or loss from a disposition of stock), in 
consolidated return years beginning on or after January 1, 1995. If this 
section applies, basis must be determined or redetermined as if this 
section were in effect for all years (including, for example, the 
consolidated return years of another consolidated group to the extent 
adjustments from those years are still reflected). For example, if the 
portion of a consolidated net operating loss carryover attributable to S 
expired in 1990 and is treated as a noncapital, nondeductible expense 
under paragraph (b) of this section, it is taken into account in tax 
years beginning on or after January 1, 1995 as a negative adjustment for 
1990. Any such determination or redetermination does not, however, 
affect any prior period. Thus, the negative adjustment for S's 
noncapital, nondeductible expense is not taken into account for tax 
years beginning before January 1, 1995.
    (2) Dispositions of stock before effective date--(i) In general. If 
M disposes of stock of S in a consolidated return year beginning before 
January 1, 1995, the amount of M's income, gain, deduction, or loss, and 
the basis reflected in that amount, are not redetermined under this 
section. See Sec.  1.1502-19 as contained in the 26 CFR part 1 edition 
revised as of April 1, 1994 for the definition of disposition, and 
paragraph (h)(5) of this section for the rules applicable to such 
dispositions.
    (ii) Lower-tier members. Although M disposes of S's stock in a tax 
year beginning before January 1, 1995, S's determinations or adjustments 
with respect to the stock of a lower-tier member with which it continues 
to file a consolidated return are redetermined in accordance with the 
rules of this section (even if they were previously taken into account 
by M and reflected in income, gain, deduction, or loss from the 
disposition of S's stock). For example, assume that M owns all of S's 
stock, S owns all of T's stock, and T owns all of U's stock. If S sells 
80% of T's stock in a tax year beginning before January 1, 1995 (the 
effective date), the amount of S's income, gain, deduction, or loss from 
the sale, and the stock basis adjustments reflected in that amount, are 
not redetermined if M sells S's stock after the effective date. If S 
sells the remaining 20% of T's stock after the effective date, S's stock 
basis adjustments with respect to that

[[Page 748]]

T stock are also not redetermined because T became a nonmember before 
the effective date. However, if T and U continue to file a consolidated 
return with each other and T sells U's stock after the effective date, 
T's stock basis adjustments with respect to U's stock are redetermined 
(even though some of those adjustments may have been taken into account 
by S in its prior sale of T's stock before the effective date).
    (iii) Deferred amounts. For purposes of this paragraph (h)(2), a 
disposition does not include a transaction to which Sec.  1.1502-13, 
Sec.  1.1502-13T, Sec.  1.1502-14, or Sec.  1.1502-14T applies. Instead, 
the transaction is deemed to occur as the income, gain, deduction, or 
loss (if any) is taken into account.
    (3) Distributions--(i) Deemed dividend elections. If there is a 
deemed distribution and recontribution pursuant to Sec.  1.1502-32(f)(2) 
as contained in the 26 CFR part 1 edition revised as of April 1, 1994 in 
a consolidated return year beginning before January 1, 1995, the deemed 
distribution and recontribution under the election are treated as an 
actual distribution by S and recontribution by M as provided under the 
election.
    (ii) Affiliated earnings and profits. This section does not apply to 
reduce the basis in S's stock as a result of a distribution of earnings 
and profits accumulated in separate return years, if the distribution is 
made in a consolidated return year beginning before January 1, 1995, and 
the distribution does not cause a negative adjustment under the 
investment adjustment rules in effect at the time of the distribution. 
See paragraph (h)(5) of this section for the rules in effect with 
respect to the distribution.
    (4) Expiring loss carryovers. If S became a member of a consolidated 
group in a consolidated return year beginning before January 1, 1995, 
and S had a loss carryover from a separate return limitation year at 
that time, the group does not treat any expiration of the loss carryover 
(even if in a tax year beginning on or after January 1, 1995) as a 
noncapital, nondeductible expense resulting in a negative adjustment 
under this section. If S becomes a member of a consolidated group in a 
consolidated return year beginning on or after January 1, 1995, and S 
has a loss carryover from a separate return limitation year at that 
time, adjustments with respect to the expiration are determined under 
this section.
    (5) Prior law--(i) In general. For prior determinations, see prior 
regulations under section 1502 as in effect with respect to the 
determination. See, e.g., Sec. Sec.  1.1502-32 and 1.1502-32T as 
contained in the 26 CFR part 1 edition revised as of April 1, 1994.
    (ii) Continuing basis reductions for certain deconsolidated 
subsidiaries. If a subsidiary ceases to be a member of a group in a 
consolidated return year beginning before January 1, 1995, and its basis 
was subject to reduction under Sec.  1.1502-32T or Sec.  1.1502-32(g) as 
contained in the 26 CFR part 1 edition revised as of April 1, 1994, its 
basis remains subject to reduction under those principles. For example, 
if S ceased to be a member in 1990, and M's basis in any retained S 
stock was subject to a basis reduction account, the basis remains 
subject to reduction. Similarly, if an election could be made to apply 
Sec.  1.1502-32T instead of Sec.  1.1502-32(g), the election remains 
available. However, Sec. Sec.  1.1502-32T and 1.1502-32(g) do not apply 
as a result of a subsidiary ceasing to be a member in tax years 
beginning on or after January 1, 1995.
    (6) Loss suspended under Sec.  1.1502-35(c) or disallowed under 
Sec.  1.1502-35(g)(3)(iii). Paragraphs (a)(2), (b)(3)(iii)(C), 
(b)(3)(iii)(D), and (b)(4)(vi) of this section are applicable on and 
after March 10, 2006. For rules applicable before March 10, 2006, see 
Sec.  1.1502-32T(h)(6) as contained in 26 CFR part 1 in effect on 
January 1, 2006.
    (7) Rules related to discharge of indebtedness income excluded from 
gross income. Paragraphs (b)(1)(ii), (b)(3)(ii)(C)(1), (b)(3)(iii)(A), 
and (b)(5)(ii), Example 4, paragraphs (a), (b), and (c) of this section 
apply with respect to determinations of the basis of the stock of a 
subsidiary in consolidated return years the original return for which is 
due (without regard to extensions) after March 21, 2005. However, groups 
may apply those provisions with respect to determinations of the basis 
of the stock of a subsidiary in consolidated return years the original 
return for

[[Page 749]]

which is due (without regard to extensions) on or before March 21, 2005, 
and after August 29, 2003. For determinations of the basis of the stock 
of a subsidiary in consolidated return years the original return for 
which is due (without regard to extensions) on or before March 21, 2005, 
and after August 29, 2003, with respect to which a group chooses not to 
apply paragraphs (b)(1)(ii), (b)(3)(ii)(C)(1), (b)(3)(iii)(A), and 
(b)(5)(ii), Example 4, paragraphs (a), (b), and (c) of this section, see 
Sec.  1.1502-32T(b)(3)(ii)(C)(1), (b)(3)(iii)(A), and (b)(5)(ii), 
Example 4, paragraphs (a), (b), and (c) as contained in 26 CFR part 1 
revised as of April 1, 2004.
    (8) Determination of stock basis in reorganization with boot. 
Paragraph (b)(5)(ii) Example 6 of this section applies only with respect 
to determinations of the basis of the stock of a subsidiary on or after 
January 23, 2006. For determinations of the basis of the stock of a 
subsidiary before January 23, 2006, see Sec.  1.1502-32(b)(5)(ii) 
Example 6 as contained in the 26 CFR part 1 edition revised as of April 
1, 2005.
    (9) Allocations of investment adjustments, including adjustments 
attributable to certain loss transfers; certain conforming amendments. 
Paragraphs (a)(2), (b)(3)(ii)(C)(2), (c)(1), (c)(2)(i), (c)(2)(ii)(A), 
(c)(3), and (c)(4)(i) of this section are applicable for determinations 
of the basis of stock of a subsidiary on or after September 17, 2008.
    (i) [Reserved]. For further guidance, see Sec.  1.1502-32T(i) 
through (j)(1).
    (j) Effective/applicability date. Paragraph (b)(4)(iv) of this 
section applies to any original consolidated Federal income tax return 
due (without extensions) after June 14, 2007. For original consolidated 
Federal income tax returns due (without extensions) after May 30, 2006, 
and on or before June 14, 2007, see Sec.  1.1502-32T as contained in 26 
CFR part 1 in effect on April 1, 2007. For original consolidated Federal 
income tax returns due (without extensions) on or before May 30, 2006, 
see Sec.  1.1502-32 as contained in 26 CFR part 1 in effect on April 1, 
2006.
    (k) [Reserved]. For further guidance, see Sec.  1.1502-32T(k).

[T.D. 8560, 59 FR 41685, Aug. 15, 1994]

    Editorial Note: For Federal Register citations affecting Sec.  
1.1502-32, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec.  1.1502-33  Earnings and profits.

    (a) In general--(1) Purpose. This section provides rules for 
adjusting the earnings and profits of a subsidiary (S) and any member 
(P) owning S's stock. These rules modify the determination of P's 
earnings and profits under applicable rules of law, including section 
312, by adjusting P's earnings and profits to reflect S's earnings and 
profits for the period that S is a member of the consolidated group. The 
purpose for modifying the determination of earnings and profits is to 
treat P and S as a single entity by reflecting the earnings and profits 
of lower-tier members in the earnings and profits of higher-tier members 
and consolidating the group's earnings and profits in the common parent. 
References in this section to earnings and profits include deficits in 
earnings and profits.
    (2) Application of other rules of law, duplicative adjustments. See 
Sec.  1.1502-80(a) regarding the general applicability of other rules of 
law and a limitation on duplicative adjustments. The rules of this 
section are in addition to other rules of law. For example, the 
allowance for depreciation is determined in accordance with section 
312(k). P's earnings and profits must not be adjusted under this section 
and other rules of law in a manner that has the effect of duplicating an 
adjustment. For example, if S's earnings and profits are reflected in 
P's earnings and profits under paragraph (b) of this section, and S 
transfers its assets to P in a liquidation to which section 332 applies, 
S's earnings and profits that P succeeds to under section 381 must be 
adjusted to prevent duplication.
    (b) Tiering up earnings and profits--(1) General rule. P's earnings 
and profits are adjusted under this section to reflect changes in S's 
earnings and profits in accordance with the applicable principles of 
Sec.  1.1502-32, consistently applied, and an adjustment to P's earnings 
and profits for a tax year under this paragraph (b)(1) is treated as 
earnings and profits of P for the tax year in which the adjustment 
arises. Under

[[Page 750]]

these principles, for example, the adjustments are made as of the close 
of each consolidated return year, and as of any other time if a 
determination at that time is necessary to determine the earnings and 
profits of any person. Similarly, S's earnings and profits are allocated 
under the principles of Sec.  1.1502-32(c), and the adjustments are 
applied in the order of the tiers, from the lowest to the highest. 
However, modifications to the principles include:
    (i) The amount of P's adjustment is determined by reference to S's 
earnings and profits, rather than S's taxable and tax-exempt items (and 
therefore, for example, the deferral of a negative adjustment for S's 
unabsorbed losses does not apply).
    (ii) The tax sharing rules under paragraph (d) of this section apply 
rather than those of Sec.  1.1502-32(b)(3)(iv)(D).
    (2) Affiliated earnings and profits. The reduction in S's earnings 
and profits under section 312 from a distribution of earnings and 
profits accumulated in separate return years of S that are not separate 
return limitation years does not tier up to P's earnings and profits. 
Thus, the increase in P's earnings and profits under section 312 from 
receipt of the distribution is not offset by a corresponding reduction.
    (3) Examples--(i) In general. For purposes of the examples in this 
section, unless otherwise stated, P owns all of the only class of S's 
stock, the stock is owned for the entire year, S owns no stock of lower-
tier members, the tax year of all persons is the calendar year, all 
persons use the accrual method of accounting, the facts set forth the 
only corporate activity, preferred stock is described in section 
1504(a)(4), all transactions are between unrelated persons, and tax 
liabilities are disregarded.
    (ii) Tiering up earnings and profits. The principles of this 
paragraph (b) are illustrated by the following examples.

    Example 1. Tier-up and distribution of earnings and profits. (a) 
Facts. P forms S in Year 1 with a $100 contribution. S has $100 of 
earnings and profits for Year 1 and no earnings and profits for Year 2. 
During Year 2, S declares and distributes a $50 dividend to P.
    (b) Analysis. Under paragraph (b)(1) of this section, S's $100 of 
earnings and profits for Year 1 increases P's earnings and profits for 
Year 1. P has no additional earnings and profits for Year 2 as a result 
of the $50 distribution in Year 2, because there is a $50 increase in 
P's earnings and profits as a result of the receipt of the dividend and 
a corresponding $50 decrease in S's earnings and profits under section 
312(a) that is reflected in P's earnings and profits under paragraph 
(b)(1) of this section.
    (c) Distribution of current earnings and profits. The facts are the 
same as in paragraph (a) of this Example 1, except that S distributes 
the $50 dividend at the end of Year 1 rather than during Year 2. Under 
paragraph (b)(1) of this section, P's earnings and profits are increased 
by $100 (S's $50 of undistributed earnings and profits, plus P's receipt 
of the $50 distribution). Thus, S's earnings and profits increase by $50 
and P's earnings and profits increase by $100.
    (d) Affiliated earnings and profits. The facts are the same as in 
paragraph (a) of this Example 1, except that P and S do not begin filing 
consolidated returns until Year 2. Because P and S file separate returns 
for Year 1, P's basis in S's stock remains $100 under Sec.  1.1502-32 
and this section, S has $100 of earnings and profits, and none of S's 
earnings and profits is reflected in P's earnings and profits under 
paragraph (b) of this section. S's distribution in Year 2 ordinarily 
would reduce S's earnings and profits but not increase P's earnings and 
profits. (P's $50 of earnings and profits from the dividend would be 
offset by S's $50 reduction in earnings and profits that tiers up under 
paragraph (b) of this section.) However, under paragraph (b)(2) of this 
section, the negative adjustment for S's distribution to P does not 
apply. Thus, S's distribution reduces its earnings and profits by $50 
but increases P's earnings and profits by $50. (If S's earnings and 
profits had been accumulated in a separate return limitation year, 
paragraph (b)(2) of this section would not apply and the distribution 
would reduce S's earnings and profits but not increase P's earnings and 
profits.)
    (e) Earnings and profits deficit. Assume instead that after P forms 
S in Year 1 with a $100 contribution, S borrows additional funds and has 
a $150 deficit in earnings and profits for Year 1. The corresponding 
loss for tax purposes is not absorbed in Year 1, and is included in the 
group's consolidated net operating loss carried forward to Year 2. Under 
paragraph (b)(1) of this section, however, S's $150 deficit in earnings 
and profits decreases P's earnings and profits for Year 1 by $150. 
(Absorption of the loss in a later tax year has no effect on the 
earnings and profits of P and S.)
    Example 2. Section 355 distribution. (a) Facts. P owns all of S's 
stock and S owns all of T's stock. For Year 1, T has $100 of earnings 
and profits. Under paragraph (b)(1) of this section, the earnings and 
profits of T tier up to S and to P. S and P have no other earnings and 
profits for Year 1. S distributes T's stock

[[Page 751]]

to P at the end of Year 1 in a distribution to which section 355 
applies.
    (b) Analysis. Because S's distribution of T's stock is a 
distribution to which section 355 applies, the applicable principles of 
Sec.  1.1502-32(b)(2)(iv) do not require P's earnings and profits to be 
adjusted by reason of the distribution. In addition, although S's 
earnings and profits may be reduced under section 312(h) as a result of 
the distribution, the applicable principles of Sec.  1.1502-
32(b)(3)(iii) do not require P's earnings and profits to be adjusted to 
reflect this reduction in S's earnings and profits.
    Example 3. Allocating earnings and profits among shares. P owns 80% 
of S's stock throughout Year 1. For Year 1, S has $100 of earnings and 
profits. Under paragraph (b)(1) of this section, $80 of S's earnings and 
profits is allocated to P based on P's ownership of S's stock. 
Accordingly, $80 of S's earnings and profits for Year 1 is reflected in 
P's earnings and profits for Year 1.

    (c) Special rules. For purposes of this section--
    (1) Stock of members. For purposes of determining P's earnings and 
profits from the disposition of S's stock, P's basis in S's stock is 
adjusted to reflect S's earnings and profits determined under paragraph 
(b) of this section, rather than under Sec.  1.1502-32. For example, P's 
basis in S's stock is increased by positive earnings and profits and 
decreased by deficits in earnings and profits. Similarly, P's basis in 
S's stock is not reduced for distributions to which paragraph (b)(2) of 
this section applies (affiliated earnings and profits). P may have an 
excess loss account in S's stock for earnings and profits purposes 
(whether or not there is an excess loss account under Sec.  1.1502-32), 
and the excess loss account is determined, adjusted, and taken into 
account in accordance with the principles of Sec. Sec.  1.1502-19 and 
1.1502-32.
    (2) Intercompany transactions. Intercompany items and corresponding 
items are not reflected in earnings and profits before they are taken 
into account under Sec.  1.1502-13. See Sec.  1.1502-13 for the 
applicable rules and definitions.
    (3) Example. The principles of this paragraph (c) are illustrated by 
the following example.

    Example. Adjustments to stock basis. (a) Facts. P forms S in Year 1 
with a $100 contribution. For Year 1, S has $75 of taxable income and 
$100 of earnings and profits. For Year 2, S has no taxable income or 
earnings and profits, and S declares and distributes a $50 dividend to 
P. P sells all of S's stock for $150 at the end of Year 2.
    (b) Analysis. Under paragraph (c)(1) of this section, P's basis in 
S's stock for earnings and profits purposes immediately before the sale 
is $150 (the $100 initial basis, plus S's $100 of earnings and profits 
for Year 1, minus the $50 distribution of earnings and profits in Year 
2). Thus, P recognizes no gain or loss from the sale of S's stock for 
earnings and profits purposes.
    (c) Earnings and profits deficit. Assume instead that S has a $100 
tax loss and earnings and profits deficit for Year 1. The tax loss is 
not absorbed in Year 1 and is included in the group's consolidated net 
operating loss carried forward to Year 2. Under paragraph (b) of this 
section, S's $100 deficit in earnings and profits decreases P's earnings 
and profits for Year 1. Under paragraph (c) of this section, P decreases 
its basis in S's stock for purposes of determining earnings and profits 
from $100 to $0. (If S had borrowed an additional $50 that it also lost 
in Year 1, P would have decreased its earnings and profits for Year 1 by 
the additional $50, and P would have had a $50 excess loss account in 
S's stock for earnings and profits purposes, which would be taken into 
account in determining P's earnings and profits from its sale of S's 
stock.)
    (d) Affiliated earnings and profits. Assume instead that P and S do 
not begin filing consolidated returns until Year 2. Under paragraph (b) 
of this section, the negative adjustment under Sec.  1.1502-32(b) for 
distributions does not apply to S's distribution of earnings and profits 
accumulated in a separate return year that is a not separate return 
limitation year. Thus, P's basis in S's stock for earnings and profits 
purposes remains $100, and P has $50 of earnings and profits from the 
sale of S's stock.

    (d) Federal income tax liability--(1) In general--(i) Extension of 
tax allocations. Section 1552 allocates the tax liability of a 
consolidated group among its members for purposes of determining the 
amounts by which their earnings and profits are reduced for taxes. 
Section 1552 does not reflect the absorption by one member of another 
member's tax attributes (e.g., losses, deductions and credits). For 
example, if P's $100 of income is offset by S's $100 of deductions, 
consolidated tax liability is $0 and no amount is allocated under 
section 1552. However, the group may elect under this paragraph (d) to 
allocate additional amounts to reflect the absorption by one member of 
the tax

[[Page 752]]

attributes of another member. Permissible methods are set forth in 
paragraphs (d)(2) through (4) of this section, and election procedures 
are provided in paragraph (d)(5) of this section. Allocations under this 
paragraph (d) must be reflected annually on permanent records (including 
work papers). Any computations of separate return tax liability are 
subject to the principles of section 1561.
    (ii) Effect of extended tax allocations. The amounts allocated under 
this paragraph (d) are treated as allocations of tax liability for 
purposes of Sec.  1.1552-1(b)(2). For example, if P's taxable income is 
offset by S's loss, and tax liability is allocated under the percentage 
method of paragraph (d)(3) of this section, P's earnings and profits are 
reduced as if its income were subject to tax, P is treated as liable to 
S for the amount of the tax, and corresponding adjustments are made to 
S's earnings and profits. If the liability of one member to another is 
not paid, the amount not paid generally is treated as a distribution, 
contribution, or both, depending on the relationship between the 
members.
    (2) Wait-and-see method. The wait-and-see method under this 
paragraph (d)(2) is derived from Securities and Exchange Commission 
procedures. In the year that a member's tax attribute is absorbed, the 
group's consolidated tax liability is allocated in accordance with the 
group's method under section 1552. When, in effect, the member with the 
tax attribute could have absorbed the attribute on a separate return 
basis in a later year, a portion of the group's consolidated tax 
liability for the later year that is otherwise allocated to members 
under section 1552 is reallocated. The reallocation takes into account 
all consolidated return years to which this paragraph (d) applies (the 
computation period), and is determined by comparing the tax allocated to 
a member during the computation period with the member's tax liability 
determined as if it had filed separate returns during the computation 
period.
    (i) Cap on allocation under section 1552. A member's allocation 
under section 1552 for a tax year may not exceed the excess, if any, 
of--
    (A) The total of the tax liabilities of the member for the 
computation period (including the current year), determined as if the 
member had filed separate returns; over
    (B) The total amount allocated to the member under section 1552 and 
this paragraph (d) for the computation period (except the current year).
    (ii) Reallocation of capped amounts. To the extent that the amount 
allocated to a member under section 1552 exceeds the limitation under 
paragraph (d)(2)(i) of this section, the excess is allocated among the 
remaining members in proportion to (but not to exceed the amount of) 
each member's excess, if any, of--
    (A) The total of the tax liabilities of the member for the 
computation period (including the current year), determined as if the 
member had filed separate returns; over
    (B) The total amount allocated to the member under section 1552 and 
this paragraph (d) for the computation period (including for the current 
year only the amount allocated under section 1552).
    (iii) Reallocation of excess capped amounts. If the reductions under 
paragraph (d)(2)(i) of this section exceed the amounts allocable under 
paragraph (d)(2)(ii) of this section, the excess is allocated among the 
members in accordance with the group's method under section 1552 without 
taking this paragraph (d)(2) into account.
    (3) Percentage method. The percentage method under this paragraph 
(d)(3) allocates tax liability based on the absorption of tax 
attributes, without taking into account the ability of any member to 
subsequently absorb its own tax attributes. The allocation under this 
method is in addition to the allocation under section 1552.
    (i) Decreased earnings and profits. A member's allocation under 
section 1552 for any year is increased, thereby decreasing its earnings 
and profits, by a fixed percentage (not to exceed 100%) of the excess, 
if any, of--
    (A) The member's separate return tax liability for the consolidated 
return year as determined under Sec.  1.1552-1(a)(2)(ii); over
    (B) The amount allocated to the member under section 1552.

[[Page 753]]

    (ii) Increased earnings and profits. An amount equal to the total 
decrease in earnings and profits under paragraph (d)(3)(i) of this 
section (including amounts allocated as a result of a carryback) 
increases the earnings and profits of the members whose attributes are 
absorbed, and is allocated among them in a manner that reasonably 
reflects the absorption of the tax attributes.
    (4) Additional methods. The absorption by one member of the tax 
attributes of another member may be reflected under any other method 
approved in writing by the Commissioner.
    (5) Election of allocation method--(i) In general. Tax liability may 
be allocated under this paragraph (d) only if an election is filed with 
the group's first return. The election must--
    (A) Be made in a separate statement entitled ``ELECTION TO ALLOCATE 
TAX LIABILITY UNDER Sec.  1.1502-33(d)'';
    (B) State the allocation method elected under Sec.  1.1502-33(d) and 
under section 1552;
    (C) If the percentage method is elected, state the percentage (not 
to exceed 100%) to be used; and
    (D) If a method is permitted under paragraph (d)(4) of this section, 
provide the date and control number of the private letter ruling issued 
by the Internal Revenue Service approving such method.
    (ii) Consent--(A) Electing or changing methods. An election for a 
later year, or an election to change methods, may be made only with the 
written consent of the Commissioner.
    (B) Prior law elections. An election in effect for the last tax year 
beginning before January 1, 1995, remains in effect under this section. 
However, a group may elect to conform its earnings and profits 
computations to the method described in Sec.  1.1502-32(b)(3)(iv)(D) 
(the percentage method, using a 100% allocation), whether or not it has 
previously made an election for earnings and profits purposes. If a 
conforming election is made, the group must make all adjustments 
necessary to prevent amounts from being duplicated or omitted. The 
conforming election is made by attaching a statement entitled ``ELECTION 
TO CONFORM TAX ALLOCATIONS UNDER Sec. Sec.  1.1502-32 and 1.1502-33(d)'' 
to the consolidated group's return for its first tax year beginning on 
or after January 1, 1995. The statement must be signed by the common 
parent, and must specify whether the method is conformed only for years 
beginning on or after January 1, 1995 or as if the method were in effect 
for all prior years. The statement must also describe the adjustments 
made by reason of the change (e.g., to reflect prior use of earnings and 
profits).
    (6) Examples. The principles of this paragraph (d) are illustrated 
by the following examples.

    Example 1. Wait-and-see method. (a) Facts. P owns all of the stock 
of S1 and S2. The P group uses the wait-and-see method of allocation 
under paragraph (d)(2) of this section in conjunction with Sec.  1.1552-
1(a)(1). For Year 1, each member's taxable income, both for purposes of 
Sec.  1.1552-1(a)(1) and redetermined as if the member had filed 
separate returns, is as follows: P $0, S1 $2,000, and S2 ($1,000). Thus, 
the P group's consolidated tax liability for Year 1 is $340 (assuming a 
34% tax rate).
    (b) Analysis. Under Sec.  1.1552-1(a)(1)(i), the tax liability of 
the P group is allocated among the members in accordance with the 
portion of the consolidated taxable income attributable to each member 
having taxable income. Thus, all of the P group's $340 consolidated tax 
liability is allocated to S1. As a result, S1 decreases its earnings and 
profits under section 1552 by $340 (even if S1 does not pay the tax 
liability). No further allocations are made under paragraph (d)(2) of 
this section because S2 cannot yet absorb its loss on a separate return 
basis.
    (c) Payment of tax liability. If S1 pays the $340 tax liability, 
there is no further effect on the income, earnings and profits, or stock 
basis of any member. If P pays the $340 tax liability (and the payment 
is not a loan from P to S1), P is treated as making a $340 contribution 
to the capital of S1; if S2 pays the $340 tax liability (and the payment 
is not a loan from S2 to S1), S2 is treated as making a $340 
distribution to P with respect to its stock, and P is treated as making 
a $340 contribution to the capital of S1. See Sec.  1.1552-1(b)(2).
    (d) Year 2. For Year 2, each member's taxable income, under Sec.  
1.1552-1(a)(1)(ii) and redetermined as if the member had filed separate 
returns, without taking into account any carryover from Year 1, is as 
follows: P $0, S1 $1,000, and S2 $3,000. Thus, the P group's 
consolidated tax liability for Year 2 is $1,360 (assuming a 34% tax 
rate). Of this amount, section 1552 would allocate $340 to

[[Page 754]]

S1 and $1,020 to S2. However, under paragraph (d)(2)(i) of this section, 
no more than $680 may be allocated to S2. This is because S2 would have 
had an aggregate tax liability of $680 if it had filed separate returns 
for Years 1 and 2 (a $0 tax liability for Year 1, and a $680 tax 
liability for Year 2, taking into account a $1,000 net operating loss 
carryover from Year 1). Under paragraph (d)(2)(ii) of this section, the 
entire excess of $340 which would otherwise be allocated to S2 under 
Sec.  1.1552-1(a)(1) is allocated to S1. This is because S1 would have 
had an additional $340 of aggregate tax liability if it had filed 
separate returns for Years 1 and 2 (a $680 tax liability for Year 1, and 
a $340 tax liability for Year 2, not taking into account S2's $1,000 net 
operating loss for Year 1). The effect of the allocation of $680 to S1 
and $680 to S2 is determined under Sec.  1.1552-1(b)(2).
    Example 2. Percentage method. (a) Facts. The facts are the same as 
in Example 1, but the P group uses the percentage method of allocation 
under paragraph (d)(3) of this section, with a percentage of 100%. In 
addition, the taxable incomes and losses of the members are the same if 
computed as provided in Sec.  1.1552-1(a)(2)(ii).
    (b) Analysis. Under Sec.  1.1552-1(a)(2)(ii), $340 of tax liability 
is allocated to S1 for Year 1. Under paragraph (d)(3)(i) of this 
section, S1 is allocated another $340 of tax liability because S1 would 
have had a $680 tax liability if it had filed separate returns but only 
$340 is allocated to S1 under section 1552. Thus, S1's earnings and 
profits are decreased by the $680 total. Under paragraph (d)(3)(ii) of 
this section, S2's earnings and profits are increased by $340 because 
the additional $340 allocated to S1 under paragraph (d)(3)(i) of this 
section is attributable to the absorption of S2's losses.
    (c) Payment of tax liability. If S1 pays the $340 tax liability of 
the P group and pays $340 to S2, the Year 1 tax liability results in no 
further adjustments to the income, earnings and profits, or basis of any 
member's stock. If S1 pays the $340 tax liability of the P group and 
pays the other $340 to P instead of S2 because, for example, of an 
agreement among the members, S2 is treated as distributing $340 to P 
with respect to its stock in the year that S1 makes the payment to P. 
See Sec.  1.1552-1(b)(2).
    (d) Year 2. For Year 2, $340 is allocated to S1 and $1,020 is 
allocated to S2 under section 1552. No additional amounts are allocated 
under paragraph (d)(3) of this section.

    (e) Deconsolidations--(1) In general. Immediately before it becomes 
a nonmember, S's earnings and profits are eliminated to the extent they 
were taken into account by any member under this section. If S's 
earnings and profits are eliminated under this paragraph (e)(1), no 
corresponding adjustment is made to the earnings and profits of P (or 
any other member) under paragraph (b) of this section or to any basis in 
a member's stock under paragraph (c) of this section. For this purpose, 
S is treated as becoming a nonmember on the first day of its first 
separate return year (including another group's consolidated return 
year).
    (2) Acquisition of group--(i) Application. This paragraph (e)(2) 
applies only if a consolidated group (the terminating group) ceases to 
exist as a result of--
    (A) The acquisition of either the assets of the common parent of the 
terminating group in a reorganization described in section 381(a)(2), or 
the stock of the common parent of the terminating group; or
    (B) The application of the principles of Sec.  1.1502-75(d)(2) or 
(d)(3).
    (ii) General rule. Paragraph (e)(1) of this section does not apply 
solely by reason of the termination of a group because it is acquired, 
if there is a surviving group that is, immediately thereafter, a 
consolidated group. Instead, the surviving group is treated as the 
terminating group for purposes of applying this paragraph (e) to the 
terminating group. This treatment does not apply, however, to members of 
the terminating group that are not members of the surviving consolidated 
group immediately after the terminating group ceases to exist (e.g., 
under section 1504(a)(3) relating to reconsolidation, or section 1504(c) 
relating to includible insurance companies).
    (3) Certain corporate separations and reorganizations. The 
adjustments under paragraph (e)(1) of this section must be modified to 
the extent necessary to effectuate the principles of section 312(h). 
Thus, P's earnings and profits rather than S's earnings and profits may 
be eliminated immediately before S becomes a nonmember. P's earnings and 
profits are eliminated to the extent that its earnings and profits 
reflect S's earnings and profits after applying section 312(h) 
immediately after S becomes a nonmember (determined without taking this 
paragraph (e) into account).

[[Page 755]]

    (4) Special uses of earnings and profits. Paragraph (e)(1) of this 
section does not apply for purposes of determining--
    (i) The extent to which a distribution is charged to reserve 
accounts under section 593(e);
    (ii) The extent to which a distribution is taxable to the recipient 
under sections 805(a)(4) and 832; and
    (iii) Any other special use identified in guidance published in the 
Internal Revenue Bulletin.
    (5) Example. The principles of this paragraph (e) are illustrated by 
the following example.

    Example. (a) Facts. Individuals A and B own all of P's stock, and P 
owns all of the stock of S and T, each with a $500 basis. For Year 1, S 
has $100 of earnings and profits and T has $50 of earnings and profits. 
Under paragraph (b)(1) of this section, the earnings and profits of S 
and T tier up to P, and P has $150 of earnings and profits for Year 1. P 
sells all of S's stock for $600 at the close of Year 1.
    (b) Analysis. Under paragraph (e)(1) of this section, S's $100 of 
earnings and profits is eliminated immediately before S becomes a 
nonmember because the earnings and profits are taken into account under 
paragraph (b) of this section in P's earnings and profits. However, no 
corresponding adjustment is made to P's earnings and profits or to P's 
basis in S's stock for purposes of earnings and profits. P's earnings 
and profits for Year 1 remain $150 following the sale of S's stock.
    (c) Forward merger. The facts are the same as in paragraph (a) of 
this Example, except that, rather than P selling S's stock, S merges 
into a nonmember in a transaction described in section 368(a)(2)(D). 
Under paragraph (h) of this section, the nonmember is treated as a 
successor to S. Thus, as in paragraph (b) of this Example, S's $100 of 
earnings and profits is eliminated immediately before S ceases to be a 
member.
    (d) Acquisition of entire group. The facts are the same as in 
paragraph (a) of this Example, except that X, the common parent of 
another consolidated group, purchases all of P's stock at the close of 
Year 1, and P sells S's stock during Year 3. Under paragraph (e)(2) of 
this section, the earnings and profits of S and T are not eliminated as 
a result of X purchasing P's stock. However, S's earnings and profits 
from consolidated return years of both the P group and the X group are 
eliminated immediately before S becomes a nonmember of the X group.
    (e) Earnings and profits deficit. The facts are the same as in 
paragraph (d) of this Example, except that S has a $550 deficit in 
earnings and profits for Year 1. The effect of paragraph (e)(1) of this 
section is the same. Under paragraph (c)(1) of this section, P would 
have an excess loss account in S's stock for earnings and profits 
purposes under the principles of Sec. Sec.  1.1502-19 and 1.1502-32, 
and, under the principles of Sec.  1.1502-19(c)(2), the excess loss 
account is not taken into account as a result of X's purchase of P's 
stock. Under paragraph (e)(2) of this section, S's deficit is not 
eliminated under paragraph (e)(1) of this section immediately before X's 
purchase of P's stock. However, S's earnings and profits (or deficit) is 
eliminated immediately before S becomes a nonmember of the X group.
    (f) Section 355 distribution. The facts are the same as in paragraph 
(a) of this Example, except that, rather than selling S's stock, P 
distributes S's stock to A at the close of Year 1 in a distribution to 
which section 355 applies. Under paragraph (e)(3) of this section, P's 
earnings and profits may be reduced under section 312(h) as a result of 
the distribution. To the extent that P's earnings and profits are 
reduced, S's earnings and profits are not eliminated under paragraph 
(e)(1) of this section.

    (f) Changes in the structure of the group--(1) Changes in the common 
parent--(i) General rule. If P succeeds another corporation under the 
principles of Sec.  1.1502-75(d) (2) or (3) as the common parent of a 
consolidated group (a group structure change), the earnings and profits 
of P are adjusted immediately after P becomes the new common parent to 
reflect the earnings and profits of the former common parent immediately 
before the former common parent ceases to be the common parent. The 
adjustment is made as if P succeeds to the earnings and profits of the 
former common parent in a transaction described in section 381(a). See 
Sec.  1.1502-31 for the basis of the stock of members following a group 
structure change.
    (ii) Minority shareholders. If the former common parent's stock is 
not wholly owned by members of the consolidated group immediately after 
the former common parent ceases to be the common parent, appropriate 
adjustments must be made to reflect in the new common parent only an 
allocable part of the former common parent's earnings and profits.
    (iii) Higher-tier members. To the extent that earnings and profits 
are adjusted under this paragraph (f)(1), and the former common parent 
is owned by members other than P, the earnings and profits of the 
intermediate subsidiaries must be adjusted in accordance with the 
principles of this section.

[[Page 756]]

    (iv) Example. The principles of this paragraph (f)(1) are 
illustrated by the following example.

    Example. (a) Facts. X is the common parent of a consolidated group 
with $100 of earnings and profits, and P is the common parent of another 
consolidated group with $20 of earnings and profits. P acquires all of 
X's stock at the close of Year 1 in exchange for 70% of P's stock. The 
exchange is a reverse acquisition under Sec.  1.1502-75(d)(3), and the X 
group is treated as remaining in existence with P as its new common 
parent.
    (b) Adjustments for X group earnings and profits. Under paragraph 
(f)(1) of this section, P's earnings and profits are adjusted 
immediately after P becomes the new common parent, to reflect X's $100 
of earnings and profits immediately before X ceases to be the common 
parent. The adjustment is made as if P succeeds to X's earnings and 
profits in a transaction described in section 381(a). Thus, immediately 
after the acquisition, P has $120 of accumulated earnings and profits 
and X continues to have $100 of accumulated earnings and profits.
    (c) Adjustments for P group earnings and profits. Although the P 
group terminates on P's acquisition of X's stock, under paragraph (e)(2) 
of this section, no adjustments are made to the earnings and profits of 
any subsidiaries in the terminating P group.
    (d) Acquisition of separate return corporation. The facts are the 
same as in paragraph (a) of this Example, except that, immediately 
before the acquisition of its stock by P, X is not affiliated with any 
other corporation. The exchange is a reverse acquisition under Sec.  
1.1502-75(d)(3), and P is treated as the common parent of the X group. 
Consequently, the results are the same as in paragraphs (b) and (c) of 
this Example.

    (2) Change in the location of subsidiaries. If the location of a 
member within a group changes, appropriate adjustments must be made to 
the earnings and profits of the members to prevent the earnings and 
profits from being eliminated. For example, if P transfers all of S's 
stock to another member in a transaction to which section 351 and Sec.  
1.1502-13 apply, the transferee's earnings and profits are adjusted 
immediately after the transfer to reflect S's earnings and profits 
immediately before the transfer from consolidated return years. On the 
other hand, if the transferee purchases S's stock from P, the 
transferee's earnings and profits are not adjusted.
    (g) Anti-avoidance rule. If any person acts with a principal purpose 
contrary to the purposes of this section, to avoid the effect of the 
rules of this section or apply the rules of this section to avoid the 
effect of any other provision of the consolidated return regulations, 
adjustments must be made as necessary to carry out the purposes of this 
section.
    (h) Predecessors and successors. For purposes of this section, any 
reference to a corporation or to a share includes a reference to a 
successor or predecessor as the context may require. A corporation is a 
successor if its earnings and profits are determined, directly or 
indirectly, in whole or in part, by reference to the earnings and 
profits of another corporation (the predecessor). A share is a successor 
if its basis is determined, directly or indirectly, in whole or in part, 
by reference to the basis of another share (the predecessor).
    (i) [Reserved]
    (j) Effective/applicability date--(1) General rule. This section 
applies with respect to determinations of the earnings and profits of a 
member (e.g., for purposes of a characterizing a distribution to which 
section 301 applies) in consolidated return years beginning on or after 
January 1, 1995. If this section applies, earnings and profits must be 
determined or redetermined as if this section were in effect for all 
years (including, for example, the consolidated return years of another 
consolidated group to the extent the earnings and profits from those 
years are still reflected). For example, if a distribution by P to a 
nonmember shareholder in 1990 was a dividend because of an unabsorbed 
loss carryover attributable to S, P's earnings and profits in tax years 
beginning after January 1, 1995 are redetermined by taking into account 
a negative adjustment in the tax year S's loss arose and in 1990 for P's 
distribution, and any subsequent absorption of the loss has no effect on 
earnings and profits. Any such determination or redetermination does 
not, however, affect any prior period. Thus, the shareholder's treatment 
in 1990 of the distribution as a dividend (and the effect of the 
distribution on stock basis) is not redetermined under this section. 
Paragraphs (a)(2) and (e)(2)(i)(A) of this section apply with

[[Page 757]]

respect to determinations of the earnings and profits of a member in 
consolidated return years beginning on or after September 17, 2008. 
However, taxpayers may apply paragraph (e)(2)(i)(A) of this section with 
respect to determinations of the earnings and profits of a member in 
consolidated return years beginning prior to September 17, 2008.
    (2) Dispositions of stock before effective date--(i) In general. If 
P disposes of stock of S in a consolidated return year beginning before 
January 1, 1995, the amount of P's earnings and profits with respect to 
S are not redetermined under paragraph (j)(1) of this section. See Sec.  
1.1502-19 as contained in the 26 CFR part 1 edition revised as of April 
1, 1994 for the definition of disposition, and paragraph (j)(5) of this 
section for the rules applicable to such dispositions.
    (ii) Lower-tier members. Although P disposes of S's stock in a tax 
year beginning before January 1, 1995, S's determinations or adjustments 
with respect to lower-tier members with which it continues to file a 
consolidated return are redetermined in accordance with the rules of 
this section (even if S's earnings and profits were previously taken 
into account by P). For example, assume that P owns all of S's stock, S 
owns all of T's stock, and T owns all of U's stock. If S sells 80% of 
T's stock in a tax year beginning before January 1, 1995 (the effective 
date), the amount of S's earnings and profits from the sale, and the 
adjustments to stock basis for earnings and profits purposes that are 
reflected in that amount, are not redetermined if P sells S's stock 
after the effective date. If S sells the remaining 20% of T's stock 
after the effective date, S's stock basis adjustments with respect to 
that T stock are also not redetermined because T became a nonmember 
before the effective date. However, if T and U continue to file a 
consolidated return with each other, paragraph (e)(1) of this section 
did not apply, and T sells U's stock after the effective date, T's 
earnings and profits with respect to U are redetermined (even though 
some of the earnings and profits may have been taken into account by S 
in its prior sale of T's stock before the effective date).
    (iii) Deferred amounts. For purposes of this paragraph (j)(2), a 
disposition does not include a transaction to which Sec.  1.1502-13, 
Sec.  1.1502-13T, Sec.  1.1502-14, or Sec.  1.1502-14T applies. Instead, 
the transaction is deemed to occur as the earnings and profits (if any) 
are taken into account.
    (3) Deconsolidations and group structure changes--(i) In general. 
Paragraphs (e) and (f) of this section apply with respect to 
deconsolidations and group structure changes occurring in consolidated 
return years beginning on or after January 1, 1995.
    (ii) Prior period group structure changes. If there was a group 
structure change in a consolidated return year beginning before January 
1, 1995, and earnings and profits were not determined under Sec.  
1.1502-33T(a) as contained in the 26 CFR part 1 edition revised as of 
April 1, 1994, a distribution in a tax year ending after September 7, 
1988, of earnings and profits that are not reflected in the earnings and 
profits of the distributee member, but would have been so reflected if 
Sec.  1.1502-33T(a) as contained in the 26 CFR part 1 edition revised as 
of April 1, 1994 had applied, the negative adjustment under paragraph 
(b) of this section for distributions does not apply (and there is 
therefore no offset to the increase in the earnings and profits of the 
distributee).
    (4) Deemed dividend elections. If there is a deemed distribution and 
recontribution pursuant to Sec.  1.1502-32(f)(2) as contained in the 26 
CFR part 1 edition revised as of April 1, 1994 in a consolidated return 
year beginning before January 1, 1995, the deemed distribution and 
recontribution under the election are treated as an actual distribution 
by S and recontribution by P as provided under the election.
    (5) Prior law. For prior determinations, see prior regulations under 
section 1502 as in effect with respect to the determination. See, e.g., 
Sec. Sec.  1.1502-33 and 1.1502-33T as contained in the 26 CFR part 1 
edition revised as of April 1, 1994.
    (k) Effective/applicability date. Paragraph (d)(5)(i)(D) of this 
section applies to any original consolidated Federal

[[Page 758]]

income tax return due (without extensions) after June 14, 2007. For 
original consolidated Federal income tax returns due (without 
extensions) after May 30, 2006, and on or before June 14, 2007, see 
Sec.  1.1502-33T as contained in 26 CFR part 1 in effect on April 1, 
2007. For original consolidated Federal income tax returns due (without 
extensions) on or before May 30, 2006, see Sec.  1.1502-33 as contained 
in 26 CFR part 1 in effect on April 1, 2006.

[T.D. 8560, 59 FR 41695, Aug. 15, 1994, as amended by T.D. 8597, 60 FR 
36710, July 18, 1995; T.D. 9264, 71 FR 30603, May 30, 2006; T.D. 9329, 
72 FR 32805, June 14, 2007; T.D. 9424, 73 FR 53951, Sept. 17, 2008; 73 
FR 62204, Oct. 20, 2008]



Sec.  1.1502-34  Special aggregate stock ownership rules.

    For purposes of Sec. Sec.  1.1502-1 through 1.1502-80, in 
determining the stock ownership of a member of a group in another 
corporation (the ``issuing corporation'') for purposes of determining 
the application of section 165(g)(3)(A), 332(b)(1), 333(b), 351(a), 
732(f), or 904(f), in a consolidated return year, there shall be 
included stock owned by all other members of the group in the issuing 
corporation. Thus, assume that members A, B, and C each own 33\1/3\ 
percent of the stock issued by D. In such case, A, B, and C shall each 
be treated as meeting the 80-percent stock ownership requirement for 
purposes of section 332, and no member can elect to have section 333 
apply. Furthermore, the special rule for minority shareholders in 
section 337(d) cannot apply with respect to amounts received by A, B, or 
C in liquidation of D.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 8949, 66 FR 
32902, June 19, 2001]



Sec.  1.1502-35  Transfers of subsidiary stock and deconsolidations of 
subsidiaries.

    (a) In general--(1) Purpose. The purpose of this section is to 
prevent a group from obtaining more than one tax benefit from a single 
economic loss. The provisions of this section shall be construed in a 
manner that is consistent with that purpose and in a manner that 
reasonably carries out that purpose.
    (2) Dates of applicability. This section applies if--
    (i) On or after March 7, 2002, a member recognizes a loss on the 
disposition of a share of stock of a subsidiary (or, on or after April 
10, 2007, a share of stock of a former subsidiary) or a carryover basis 
asset (subject to paragraph (c)(6) of this section),
    (ii) The member's loss on the share of subsidiary stock or the 
carryover basis asset is allowed on or before the date that is ten years 
after the disposition of the share or carryover basis asset, and
    (iii) If the disposition is of a share of subsidiary stock, it is 
not a transfer to which Sec.  1.1502-36 applies.
    (b) Redetermination of basis on certain nondeconsolidating transfers 
of subsidiary stock and on certain deconsolidations of subsidiaries--(1) 
Redetermination of basis on certain nondeconsolidating transfers of 
subsidiary stock. Except as provided in paragraph (b)(3)(i) of this 
section, if, immediately after a transfer of stock of a subsidiary that 
has a basis that exceeds its value, the subsidiary remains a member of 
the group, then the basis in each share of subsidiary stock owned by 
each member of the group shall be redetermined in accordance with the 
provisions of this paragraph (b)(1) immediately before such transfer. 
All of the members' bases in the shares of subsidiary stock immediately 
before such transfer shall be aggregated. Such aggregated basis shall be 
allocated first to the shares of the subsidiary's preferred stock that 
are owned by the members of the group immediately before such transfer, 
in proportion to, but not in excess of, the value of those shares at 
such time. After allocation of the aggregated basis to all shares of the 
preferred stock of the subsidiary pursuant to the preceding sentence, 
any remaining basis shall be allocated among all common shares of 
subsidiary stock held by members of the group immediately before the 
transfer, in proportion to the value of such shares at such time.
    (2) Redetermination of basis on certain deconsolidations of 
subsidiaries--(i) Allocation of reallocable basis amount. Except as 
provided in paragraph (b)(3)(ii) of this section, if, immediately before 
a

[[Page 759]]

deconsolidation of a subsidiary, any share of stock of such subsidiary 
owned by a member of the group has a basis that exceeds its value, then 
the basis in each share of the subsidiary's stock owned by each member 
of the group shall be redetermined in accordance with the provisions of 
this paragraph (b)(2) immediately before such deconsolidation. The basis 
in each share of the subsidiary's stock held by members of the group 
immediately before the deconsolidation that has a basis in excess of 
value at such time shall be reduced, but not below such share's value, 
in a manner that, to the greatest extent possible, causes the ratio of 
the basis to the value of each such share to be the same; provided, 
however, that the aggregate amount of such reduction shall not exceed 
the reallocable basis amount (as computed pursuant to paragraph 
(b)(2)(ii) of this section). Then, to the extent of the reallocable 
basis amount, the basis of each share of the preferred stock of the 
subsidiary that are held by members of the group immediately before the 
deconsolidation shall be increased, but not above such share's value, in 
a manner that, to the greatest extent possible, causes the ratio of the 
basis to the value of each such share to be the same. Then, to the 
extent that the reallocable basis amount does not increase the basis of 
shares of preferred stock of the subsidiary pursuant to the third 
sentence of this paragraph (b)(2)(i), such amount shall increase the 
basis of all common shares of the subsidiary's stock held by members of 
the group immediately before the deconsolidation in a manner that, to 
the greatest extent possible, causes the ratio of the basis to the value 
of each such share to be the same.
    (ii) Calculation of reallocable basis amount. The reallocable basis 
amount shall equal the lesser of--
    (A) The aggregate of all amounts by which, immediately before the 
deconsolidation, the basis exceeds the value of a share of subsidiary 
stock owned by any member of the group at such time; and
    (B) The total of the subsidiary's (and any predecessor's) items of 
deduction and loss, and the subsidiary's (and any predecessor's) 
allocable share of items of deduction and loss of all lower-tier 
subsidiaries, that were taken into account in computing the adjustment 
under Sec.  1.1502-32 to the bases of shares of stock of the subsidiary 
(and any predecessor) held by members of the group immediately before 
the deconsolidation, other than shares that have bases in excess of 
value immediately before the deconsolidation.
    (3) Exceptions to application of redetermination rules. (i) 
Paragraph (b)(1) of this section shall not apply to a transfer of 
subsidiary stock if--
    (A) During the taxable year of such transfer, in one or more fully 
taxable transactions, the members of the group dispose of all of the 
shares of the subsidiary stock that they own immediately before the 
transfer, other than the shares the transfer of which would otherwise 
trigger the application of paragraph (b)(1) of this section, to a person 
or persons that are not members of the group;
    (B) During the taxable year of such transfer, the members of the 
group are allowed a worthless stock loss under section 165(g) (taking 
into account the provisions of Sec.  1.1502-80(c)) with respect to all 
of the shares of subsidiary stock that they own immediately before the 
transfer, other than the shares the transfer of which would otherwise 
trigger the application of paragraph (b)(1) of this section; or
    (C) Such transfer is to a member of the group and section 332 
(provided the stock is transferred to an 80-percent distributee), 
section 351, section 354, or section 361 applies to such transfer.
    (ii) Paragraph (b)(2) of this section shall not apply to a 
deconsolidation of a subsidiary if--
    (A) During the taxable year of such deconsolidation, in one or more 
fully taxable transactions, the members of the group dispose of all of 
the shares of the subsidiary stock that they own immediately before the 
deconsolidation to a person or persons that are not members of the 
group;
    (B) Such deconsolidation results from a fully taxable disposition, 
to a person or persons that are not members of the group, of some of the 
shares of the subsidiary, and, during the taxable year of such 
deconsolidation, the members of the group are allowed a worthless

[[Page 760]]

stock loss under section 165(g) with respect to all of the shares of the 
subsidiary stock that they own immediately after the deconsolidation;
    (C) The members of the group are allowed a worthless stock loss 
under section 165(g) with respect to all of the shares of the subsidiary 
stock that they own immediately before the deconsolidation;
    (D) The deconsolidation of the subsidiary results from the 
deconsolidation of a higher-tier subsidiary and, immediately after the 
deconsolidation of the subsidiary, none of the stock of the subsidiary 
is owned by a group member; or
    (E) The deconsolidation of the subsidiary results from a termination 
of the group.
    (4) Special rule for lower-tier subsidiaries. If, immediately after 
a transfer of subsidiary stock or a deconsolidation of a subsidiary, a 
lower-tier subsidiary some of the stock of which is owned by the 
subsidiary is a member of the group, then, for purposes of applying this 
paragraph (b), the subsidiary shall be treated as having transferred its 
stock of the lower-tier subsidiary. This principle shall apply to stock 
of subsidiaries that are owned by such lower-tier subsidiary.
    (5) Stock basis adjustments for higher-tier stock. The basis 
adjustments required under this paragraph (b) result in basis 
adjustments to higher-tier member stock. The adjustments are applied in 
the order of the tiers, from the lowest to highest. For example, if a 
common parent owns stock of a subsidiary that owns stock of a lower-tier 
subsidiary and the subsidiary recognizes a loss on the disposition of a 
portion of its shares of the lower-tier subsidiary stock, the common 
parent must adjust its basis in its subsidiary stock under the 
principles of Sec.  1.1502-32 to reflect the adjustments that the 
subsidiary must make to its basis in its stock of the lower-tier 
subsidiary.
    (6) Ordering rules. (i) The rules of this paragraph (b) apply after 
the rules of Sec.  1.1502-32 are applied.
    (ii) The rules of this paragraph (b) apply before the rules of Sec.  
1.337(d)-2 and paragraphs (c) and (f) of this section are applied.
    (iii) This paragraph (b) (and any resulting basis adjustments to 
higher-tier member stock made pursuant to paragraph (b)(5) of this 
section) applies to redetermine the basis of stock of a lower-tier 
subsidiary before this paragraph (b) applies to a higher-tier member of 
such lower-tier subsidiary.
    (c) Loss suspension--(1) General rule. Any loss recognized by a 
member of a consolidated group with respect to the disposition of a 
share of subsidiary stock shall be suspended to the extent of the 
duplicated loss with respect to such share of stock if, immediately 
after the disposition, the subsidiary is a member of the consolidated 
group of which it was a member immediately prior to the disposition (or 
any successor group).
    (2) Special rule for lower-tier subsidiaries. This paragraph (c)(2) 
applies if neither paragraph (c)(1) nor (f) of this section applies to a 
member's disposition of a share of stock of a subsidiary (the departing 
member), a loss is recognized on the disposition of such share, and the 
departing member owns stock of one or more other subsidiaries (a 
remaining member) that is a member of such group immediately after the 
disposition. In that case, such loss shall be suspended to the extent 
the duplicated loss with respect to the departing member stock disposed 
of is attributable to the remaining member or members.
    (3) Treatment of suspended loss--(i) General rule. For purposes of 
the rules of Sec.  1.1502-32, any loss suspended pursuant to paragraph 
(c)(1) or (c)(2) of this section is treated as a noncapital, 
nondeductible expense of the member that disposes of subsidiary stock, 
incurred during the taxable year that includes the date of the 
disposition of stock to which paragraph (c)(1) or (c)(2) of this section 
applies. See Sec.  1.1502-32(b)(3)(iii)(C). Consequently, the basis of a 
higher-tier member's stock of the member that disposes of subsidiary 
stock is reduced by the suspended loss in the year it is suspended.
    (ii) Location of suspended loss following deconsolidation of selling 
member. If a member recognizes a loss that is suspended under this 
paragraph (c) but that member ceases to be a member of the group before 
the loss is allowable,

[[Page 761]]

the common parent is treated as succeeding to the loss in a transaction 
to which section 381(a) applies.
    (4) Reduction of suspended loss--(i) General rule. The amount of any 
loss suspended pursuant to paragraph (c)(1) or (c)(2) of Sec.  1.1502-35 
shall be reduced, but not below zero, by the subsidiary's (and any 
successor's) items of deduction and loss, and the subsidiary's (and any 
successor's) allocable share of items of deduction and loss of all 
lower-tier subsidiaries, that are allocable to the period beginning on 
the date of the disposition that gave rise to the suspended loss and 
ending on the day before the first date on which the subsidiary (and any 
successor) is not a member of the group of which it was a member 
immediately prior to the disposition (or any successor group), and that 
are taken into account in determining consolidated taxable income (or 
loss) of such group for any taxable year that includes any date on or 
after the date of the disposition and before the first date on which the 
subsidiary (and any successor) is not a member of such group; provided, 
however, that such reduction shall not exceed the excess of the amount 
of such items over the amount of such items that are taken into account 
in determining the basis adjustments made under Sec.  1.1502-32 to stock 
of the subsidiary (or any successor) owned by members of the group. The 
preceding sentence shall not apply to items of deduction and loss to the 
extent that the group can establish that all or a portion of such items 
was not reflected in the computation of the duplicated loss with respect 
to the subsidiary on the date of the disposition of stock that gave rise 
to the suspended loss.
    (ii) Operating rules--(A) Year in which deduction or loss is taken 
into account. For purposes of paragraph (c)(4)(i) of this section, a 
subsidiary's (or any successor's) deductions and losses are treated as 
taken into account when and to the extent they are absorbed by the 
subsidiary (or any successor) or any other member. To the extent that 
the subsidiary's (or any successor's) deduction or loss is absorbed in 
the year it arises or is carried forward and absorbed in a subsequent 
year (e.g., under section 172, 465, or 1212), the deduction is treated 
as taken into account in the year in which it is absorbed. To the extent 
that a subsidiary's (or any successor's) deduction or loss is carried 
back and absorbed in a prior year (whether consolidated or separate), 
the deduction or loss is treated as taken into account in the year in 
which it arises and not in the year in which it is absorbed.
    (B) Determination of items that are allocable to the post-
disposition, pre-deconsolidation period. For purposes of paragraph 
(c)(4)(i) of this section, the determination of whether a subsidiary's 
(or any successor's) items of deduction and loss and allocable share of 
items of deduction and loss of all lower-tier subsidiaries are allocable 
to the period beginning on the date of the disposition of subsidiary 
stock that gave rise to the suspended loss and ending on the day before 
the first date on which the subsidiary (or any successor) is not a 
member of the consolidated group of which it was a member immediately 
prior to the disposition (or any successor group) is determined pursuant 
to the rules of Sec.  1.1502-76(b)(2), without regard to Sec.  1.1502-
76(b)(2)(ii)(D), as if the subsidiary ceased to be a member of the group 
at the end of the day before the disposition and filed separate returns 
for the period beginning on the date of the disposition and ending on 
the day before the first date on which it is not a member of such group.
    (5) Allowable loss--(i) General rule. To the extent not reduced 
under paragraph (c)(4) of this section, any loss suspended pursuant to 
paragraph (c)(1) or (c)(2) of this section shall be allowed, to the 
extent otherwise allowable under applicable provisions of the Internal 
Revenue Code and regulations, on a return filed by the group of which 
the subsidiary was a member on the date of the disposition of subsidiary 
stock that gave rise to the suspended loss (or any successor group) for 
the taxable year that includes the earlier of--
    (A) The day before the first date on which the subsidiary (and any 
successor) is not a member of such group or the date the group is 
allowed a worthless stock loss under section 165 (taking into account 
the provisions of Sec.  1.1502-80(c)) with respect to all of the

[[Page 762]]

subsidiary stock owned by members and;
    (B) The date that is ten years after the date of the disposition of 
subsidiary stock that gave rise to the suspended loss.
    (ii) No tiering up of certain adjustments. No adjustments shall be 
made to a member's basis of stock of a subsidiary (or any successor) for 
a suspended loss that is taken into account under paragraph (c)(5)(i) of 
this section. See Sec.  1.1502-32(a)(2).
    (iii) Statement of allowed loss. Paragraph (c)(5)(i) of this section 
applies only if the separate statement required under this paragraph 
(c)(5)(iii) is filed with, or as part of, the taxpayer's return for the 
year in which the loss is allowable. The statement must be entitled 
``ALLOWED LOSS UNDER Sec.  1.1502-35(c)(5)'' and must contain the name 
and employer identification number of the subsidiary the stock of which 
gave rise to the loss.
    (6) Special rule for dispositions of certain carryover basis assets. 
If--
    (i) A member of a group recognizes a loss on the disposition of an 
asset other than stock of a subsidiary;
    (ii) Such member's basis in the asset disposed of was determined, 
directly or indirectly, in whole or in part, by reference to the basis 
of stock of a subsidiary and, at the time of the determination of the 
member's basis in the asset disposed of, there was a duplicated loss 
with respect to such stock of the subsidiary; and
    (iii) Immediately after the disposition, the subsidiary is a member 
of such group, then such loss shall be suspended pursuant to the 
principles of paragraphs (c)(1) and (c)(2) of this section to the extent 
of the duplicated loss with respect to such stock at the time of the 
determination of basis of the asset disposed of. Principles similar to 
those set forth in paragraphs (c)(3), (c)(4), and (c)(5) of this section 
shall apply to a loss suspended pursuant to this paragraph (c)(6).
    (7) Coordination with loss deferral, loss disallowance, and other 
rules--(i) In general. Loss recognized on the disposition of subsidiary 
stock or another asset is subject to redetermination, deferral, or 
disallowance under other applicable provisions of the Internal Revenue 
Code and regulations thereunder, including sections 267(f) and 482. 
Paragraphs (c)(1), (c)(2), and (c)(6) of this section do not apply to a 
loss that is disallowed under any other provision. If loss is deferred 
under any other provision, paragraphs (c)(1), (c)(2), and (c)(6) of this 
section apply when the loss would otherwise be taken into account under 
such other provision. However, if an overriding event described in 
paragraph (c)(7)(ii) of this section occurs before the deferred loss is 
taken into account, paragraphs (c)(1), (c)(2), and (c)(6) of this 
section apply to the loss immediately before the event occurs, even 
though the loss may not be taken into account until a later time.
    (ii) Overriding events. For purposes of paragraph (c)(7)(i) of this 
section, the following are overriding events--
    (A) The stock ceases to be owned by a member of the consolidated 
group;
    (B) The stock is canceled or redeemed (regardless of whether it is 
retired or held as treasury stock); or
    (C) The stock is treated as disposed of under Sec.  1.1502-
19(c)(1)(ii)(B) or (c)(1)(iii).
    (8) No elimination of economic loss. This paragraph (c) shall not be 
applied in a manner that permanently disallows a deduction for an 
economic loss, provided that such deduction is otherwise allowable. If 
the application of any provision of this paragraph (c) results in such a 
disallowance, proper adjustment may be made to prevent such a 
disallowance. Whether a provision of this paragraph (c) has resulted in 
such a disallowance is determined on the date on which the subsidiary 
(or any successor) the disposition of the stock of which gave rise to a 
suspended stock loss is not a member of the group or the date the group 
is allowed a worthless stock loss under section 165(g) (taking into 
account the provisions of Sec.  1.1502-80(c)) with respect to all of 
such subsidiary stock owned by members. Proper adjustment in such cases 
shall be made by restoring the suspended stock loss immediately before 
the subsidiary ceases to be a member of the group or the group is 
allowed a worthless stock loss under section 165(g) (taking into account 
the provisions of Sec.  1.1502-80(c)) with respect to all of such 
subsidiary stock owned by

[[Page 763]]

members, to the extent that its reduction pursuant to paragraph (c)(4) 
of this section had the result of permanently disallowing a deduction 
for an economic loss.
    (9) Ordering rule. The rules of this paragraph (c) apply after the 
rules of paragraph (b) of this section and Sec.  1.337(d)-2 are applied.
    (d) Definitions--(1) Disposition means any event in which gain or 
loss is recognized, in whole or in part.
    (2) Deconsolidation means any event that causes a subsidiary to no 
longer be a member of the consolidated group.
    (3) Value means fair market value.
    (4) Duplicated loss--(i) In general. Duplicated loss is determined 
immediately after a disposition and equals the excess, if any, of--
    (A) The sum of--
    (1) The aggregate adjusted basis of the subsidiary's assets other 
than any stock that subsidiary owns in another subsidiary;
    (2) Any losses attributable to the subsidiary and carried to the 
subsidiary's first taxable year following the disposition; and
    (3) Any deductions of the subsidiary that have been recognized but 
are deferred under a provision of the Internal Revenue Code (such as 
deductions deferred under section 469); over
    (B) The sum of--
    (1) The value of the subsidiary's stock; and
    (2) Any liabilities of the subsidiary that have been taken into 
account for tax purposes.
    (ii) Special rules. (A) The amounts determined under paragraph 
(d)(4)(i) (other than amounts described in paragraph (d)(4)(i)(B)(1)) of 
this section with respect to a subsidiary include its allocable share of 
corresponding amounts with respect to all lower-tier subsidiaries. If 80 
percent or more in value of the stock of a subsidiary is acquired by 
purchase in a single transaction (or in a series of related transactions 
during any 12-month period), the value of the subsidiary's stock may not 
exceed the purchase price of the stock divided by the percentage of the 
stock (by value) so purchased. For this purpose, stock is acquired by 
purchase if the transferee is not related to the transferor within the 
meaning of sections 267(b) and 707(b)(1), using the language ``10 
percent'' instead of ``50 percent'' each place that it appears, and the 
transferee's basis in the stock is determined wholly by reference to the 
consideration paid for such stock.
    (B) The amounts determined under paragraph (d)(4)(i) of this section 
are not applied more than once to suspend a loss under this section.
    (5) Predecessor and successor. A predecessor is a transferor of 
assets to a transferee (the successor) in a transaction--
    (i) To which section 381(a) applies;
    (ii) In which substantially all of the assets of the transferor are 
transferred to members in a complete liquidation;
    (iii) In which the successor's basis in assets is determined 
(directly or indirectly, in whole or in part) by reference to the 
transferor's basis in such assets, but the transferee is a successor 
only with respect to the assets the basis of which is so determined; or
    (iv) Which is an intercompany transaction, but only with respect to 
assets that are being accounted for by the transferor in a prior 
intercompany transaction.
    (6) Successor group. A surviving group is treated as a successor 
group of a consolidated group (the terminating group) that ceases to 
exist as a result of--
    (i) The acquisition by a member of another consolidated group of 
either the assets of the common parent of the terminating group in a 
reorganization described in section 381(a)(2), or the stock of the 
common parent of the terminating group; or
    (ii) The application of the principles of Sec.  1.1502-75(d)(2) or 
(3).
    (7) Preferred stock, common stock. Preferred stock and common stock 
shall have the meanings set forth in Sec.  1.1502-32(d)(2) and (3), 
respectively.
    (8) Higher-tier. A subsidiary is higher-tier with respect to a 
member if or to the extent investment adjustments under Sec.  1.1502-32 
with respect to the stock of the latter member would affect investment 
adjustments with respect to the stock of the former member.
    (9) Lower-tier. A subsidiary is lower-tier with respect to a member 
if or to

[[Page 764]]

the extent investment basis adjustments under Sec.  1.1502-32 with 
respect to the stock of the former member would affect investment 
adjustments with respect to the stock of the latter member.
    (e) Examples. For purposes of the examples in this section, unless 
otherwise stated, all groups file consolidated returns on a calendar-
year basis, the facts set forth the only corporate activity, all 
transactions are between unrelated persons, and tax liabilities are 
disregarded. In addition, all transactions described in section 362(a) 
are completed before October 22, 2004, and therefore are not subject to 
section 362(e)(2). The principles of paragraphs (a) through (d) of this 
section are illustrated by the following examples:

    Example 1. Nondeconsolidating sale of preferred stock of lower-tier 
subsidiary. (i) Facts. P owns 100 percent of the common stock of each of 
S1 and S2. S1 and S2 each have only one class of stock outstanding. P's 
basis in the stock of S1 is $100 and the value of such stock is $130. 
P's basis in the stock of S2 is $120 and the value of such stock is $90. 
P, S1, and S2 are all members of the P group. S1 and S2 form S3. In Year 
1, in transfers to which section 351 applies, S1 contributes $100 to S3 
in exchange for all of the common stock of S3 and S2 contributes an 
asset with a basis of $50 and a value of $20 to S3 in exchange for all 
of the preferred stock of S3. S3 becomes a member of the P group. In 
Year 3, in a transaction that is not part of the plan that includes the 
contributions to S3, S2 sells the preferred stock of S3 for $20. 
Immediately after the sale, S3 is a member of the P group.
    (ii) Application of basis redetermination rule. Because S2's basis 
in the preferred stock of S3 exceeds its value immediately prior to the 
sale and S3 is a member of the P group immediately after the sale, all 
of the P group members' bases in the stock of S3 is redetermined 
pursuant to paragraph (b)(1) of this section. Of the group members' 
total basis of $150 in the S3 stock, $20 is allocated to the preferred 
stock, the fair market value of the preferred stock on the date of the 
sale, and $130 is allocated to the common stock. S2's sale of the 
preferred stock results in the recognition of $0 of gain/loss. Pursuant 
to paragraph (b)(5) of this section, the redetermination of S1's and 
S2's bases in the stock of S3 results in adjustments to P's basis in the 
stock of S1 and S2. In particular, P's basis in the stock of S1 is 
increased by $30 to $130 and its basis in the stock of S2 is decreased 
by $30 to $90.
    Example 2. Deconsolidating sale of common stock. (i) Facts. In Year 
1, in a transfer to which section 351 applies, P contributes Asset A 
with a basis of $900 and a value of $200 to S in exchange for one share 
of S common stock (CS1). In Years 2 and 3, in successive but unrelated 
transfers to which section 351 applies, P transfers $200 to S in 
exchange for one share of S common stock (CS2), Asset B with a basis of 
$300 and a value of $200 in exchange for one share of S common stock 
(CS3), and Asset C with a basis of $1000 and a value of $200 in exchange 
for one share of S common stock (CS4). In Year 4, S sells Asset A for 
$200, recognizing $700 of loss that is used to offset income of P 
recognized during Year 4. As a result of the sale of Asset A, the basis 
of each of P's four shares of S common stock is reduced by $175. 
Therefore, the basis of CS1 is $725. The basis of CS2 is $25. The basis 
of CS3 is $125, and the basis of CS4 is $825. In Year 5 in a transaction 
that is not part of a plan that includes the Year 1 contribution, P 
sells CS4 for $200. Immediately after the sale of CS4, S is not a member 
of the P group.
    (ii) Application of basis redetermination rule. Because P's basis in 
each of CS1 and CS4 exceeds its value immediately prior to the 
deconsolidation of S, P's basis in its shares of S common stock is 
redetermined pursuant to paragraph (b)(2) of this section. Pursuant to 
paragraph (b)(2)(ii) of this section, the reallocable basis amount is 
$350 (the lesser of $1150, the gross loss inherent in the stock of S 
owned by P immediately before the sale, and $350, the aggregate amount 
of S's items of deduction and loss that were previously taken into 
account in the computation of the adjustment to the basis of the stock 
of S that P did not hold at a loss immediately before the 
deconsolidation). Pursuant to paragraph (b)(2)(i) of this section, 
first, P's basis in CS1 is reduced from $725 to $600 and P's basis in 
CS4 is reduced from $825 to $600. Then, the reallocable basis amount 
increases P's basis in CS2 from $25 to $250 and P's basis in CS3 from 
$125 to $250. P recognizes $400 of loss on the sale of CS4. The loss 
suspension rule does not apply because S is no longer a member of the P 
group. Thus, the loss is allowable at that time.
    Example 3. Nondeconsolidating sale of common stock. (i) Facts. In 
Year 1, P forms S with a contribution of $80 in exchange for 80 shares 
of the common stock of S, which at that time represents all of the 
outstanding stock of S. S becomes a member of the P group. In Year 2, P 
contributes Asset A with a basis of $50 and a value of $20 in exchange 
for 20 shares of the common stock of S in a transfer to which section 
351 applies. In Year 4, in a transaction that is not part of the plan 
that includes the Year 2 contribution, P sells the 20 shares of the 
common stock of S that it acquired in Year 2 for $20. Immediately after 
the Year 4 stock sale, S is a member of the P group. At the time of the 
Year 4 stock sale, S has $80 and Asset A. In

[[Page 765]]

Year 5, S sells Asset A, the basis and value of which have not changed 
since its contribution to S. On the sale of Asset A for $20, S 
recognizes a $30 loss. The P group cannot establish that all or a 
portion of the $30 loss was not reflected in the calculation of the 
duplicated loss of S on the date of the Year 4 stock sale. The $30 loss 
is used on the P group return to offset income of P. In Year 6, P sells 
its remaining S common stock for $80.
    (ii) Application of basis redetermination and loss suspension rules. 
Because P's basis in the common stock sold exceeds its value immediately 
prior to the sale and S is a member of the P group immediately after the 
sale, P's basis in all of the stock of S is redetermined pursuant to 
paragraph (b)(1) of this section. Of P's total basis of $130 in the S 
common stock, a proportionate amount is allocated to each of the 100 
shares of S common stock. Accordingly, $26 is allocated to the common 
stock of S that is sold and $104 is allocated to the common stock of S 
that is retained. On P's sale of the 20 shares of the common stock of S 
for $20, P recognizes a loss of $6. Because the sale of the 20 shares of 
common stock of S does not result in the deconsolidation of S, under 
paragraph (c)(1) of this section, that loss is suspended to the extent 
of the duplicated loss with respect to the shares sold. The duplicated 
loss with respect to the shares sold is $6. Therefore, the entire $6 
loss is suspended.
    (iii) Effect of subsequent asset sale on stock basis. Of the $30 
loss recognized on the sale of Asset A, $24 is taken into account in 
determining the basis adjustments made under Sec.  1.1502-32 to the 
stock of S owned by P. Accordingly, P's basis in its S stock is reduced 
by $24 from $104 to $80.
    (iv) Effect of subsequent asset sale on suspended loss. Because P 
cannot establish that all or a portion of the loss recognized on the 
sale of Asset A was not reflected in the calculation of the duplicated 
loss of S on the date of the Year 4 stock sale and such loss is 
allocable to the period beginning on the date of the Year 4 disposition 
of the S stock and ending on the day before the first date on which S is 
not a member of the P group and is taken into account in determining 
consolidated taxable income (or loss) of the P group for a taxable year 
that includes a date on or after the date of the Year 4 disposition and 
before the first date on which S is not a member of the P group, such 
asset loss reduces the suspended loss pursuant to paragraph (c)(4) of 
this section. The amount of such reduction, however, cannot exceed $6, 
the excess of the amount of such loss, $30, over the amount of such loss 
that is taken into account in determining the basis adjustment made to 
the stock of S owned by P, $24. Therefore, the suspended loss is reduced 
to zero.
    (v) Effect of subsequent stock sale. P recognizes $0 gain/loss on 
the Year 6 sale of its remaining S common stock. No amount of suspended 
loss remains to be allowed under paragraph (c)(5) of this section.
    Example 4. Nondeconsolidating sale of common stock of lower-tier 
subsidiary. (i) Facts. In Year 1, P forms S1 with a contribution of $200 
in exchange for all of the common stock of S1, which represents all of 
the outstanding stock of S1. In the same year, S1 forms S2 with a 
contribution of $80 in exchange for 80 shares of the common stock of S2, 
which at that time represents all of the outstanding stock of S2. S1 and 
S2 become members of the P group. In the same year, S2 purchases Asset A 
for $80. In Year 2, S1 contributes Asset B with a basis of $50 and a 
value of $20 in exchange for 20 shares of the common stock of S2 in a 
transfer to which section 351 applies. In Year 4, S1 sells the 20 shares 
of the common stock of S2 that it acquired in Year 2 for $20. 
Immediately after the Year 4 stock sale, S2 is a member of the P group. 
At the time of the Year 4 stock sale, the bases and values of Asset A 
and Asset B are unchanged. In Year 5, S2 sells Asset B for $45, 
recognizing a $5 loss. The P group cannot establish that all or a 
portion of the $5 loss was not reflected in the calculation of the 
duplicated loss of S2 on the date of the Year 4 stock sale. The $5 loss 
is used on the P group return to offset income of P. In Year 6, S1 sells 
its remaining S2 common stock for $100.
    (ii) Application of basis redetermination and loss suspension rules. 
Because S1's basis in the S2 common stock sold exceeds its value 
immediately prior to the sale and S2 is a member of the P group 
immediately after the sale, S1's basis in all of the stock of S2 is 
redetermined pursuant to paragraph (b)(1) of this section. Of S1's total 
basis of $130 in the S2 common stock, a proportionate amount is 
allocated to each of the 100 shares of S2 common stock. Accordingly, a 
total of $26 is allocated to the common stock of S2 that is sold and 
$104 is allocated to the common stock of S2 that is retained. On S1's 
sale of the 20 shares of the common stock of S2 for $20, S1 recognizes a 
loss of $6. Because the sale of the 20 shares of common stock of S2 does 
not result in the deconsolidation of S2, under paragraph (c)(1) of this 
section, that loss is suspended to the extent of the duplicated loss 
with respect to the shares sold. The duplicated loss with respect to the 
shares sold is $6. Therefore, the entire $6 loss is suspended. Pursuant 
to paragraph (c)(3) of this section and Sec.  1.1502-32(b)(3)(iii)(C), 
the suspended loss is treated as a noncapital, nondeductible expense 
incurred by S1 during the tax year that includes the date of the 
disposition of stock to which paragraph (c)(1) of this section applies. 
Accordingly, P's basis in its S1 stock is reduced from $200 to $194.
    (iii) Effect of subsequent asset sale on stock basis. Of the $5 loss 
recognized on the sale of

[[Page 766]]

Asset B, $4 is taken into account in determining the basis adjustments 
made under Sec.  1.1502-32 to the stock of S2 owned by S1. Accordingly, 
S1's basis in its S2 stock is reduced by $4 from $104 to $100 and P's 
basis in its S1 stock is reduced by $4 from $194 to $190.
    (iv) Effect of subsequent asset sale on suspended loss. Because P 
cannot establish that all or a portion of the loss recognized on the 
sale of Asset B was not reflected in the calculation of the duplicated 
loss of S2 on the date of the Year 4 stock sale and such loss is 
allocable to the period beginning on the date of the Year 4 disposition 
of the S2 stock and ending on the day before the first date on which S2 
is not a member of the P group and is taken into account in determining 
consolidated taxable income (or loss) of the P group for a taxable year 
that includes a date on or after the date of the Year 4 disposition and 
before the first date on which S2 is not a member of the P group, such 
asset loss reduces the suspended loss pursuant to paragraph (c)(4) of 
this section. The amount of such reduction, however, cannot exceed $1, 
the excess of the amount of such loss, $5, over the amount of such loss 
that is taken into account in determining the basis adjustment made to 
the stock of S2 owned by members of the P group, $4. Therefore, the 
suspended loss is reduced to $5.
    (v) Effect of subsequent stock sale. In year 6, when S1 sells its 
remaining S2 stock for $100, it recognizes $0 gain/loss. Pursuant to 
paragraph (c)(5) of this section, the remaining $5 of the suspended loss 
is allowed on the P group's return for Year 6 when S1 sells its 
remaining S2 stock.
    Example 5. Deconsolidating sale of subsidiary owning stock of 
another subsidiary that remains in group. (i) Facts. In Year 1, P forms 
S1 with a contribution of Asset A with a basis of $50 and a value of $20 
in exchange for 100 shares of common stock of S1 in a transfer to which 
section 351 applies. Also in Year 1, P and S1 form S2. P contributes $80 
to S2 in exchange for 80 shares of common stock of S2. S1 contributes 
Asset A to S2 in exchange for 20 shares of common stock of S2 in a 
transfer to which section 351 applies. In Year 3, in a transaction that 
is not part of a plan that includes the Year 1 contributions, P sells 
its 100 shares of S1 common stock for $20. Immediately after the Year 3 
stock sale, S2 is a member of the P group. At the time of the Year 3 
stock sale, S1 owns 20 shares of common stock of S2, and S2 has $80 and 
Asset A. In Year 4, S2 sells Asset A, the basis and value of which have 
not changed since its contribution to S2. On the sale of Asset A for 
$20, S2 recognizes a $30 loss. That $30 loss is used on the P group 
return to offset income of P. In Year 5, P sells its S2 common stock for 
$80.
    (ii) Application of basis redetermination and loss suspension rules. 
Pursuant to paragraph (b)(4) of this section, because immediately before 
P's transfer of S1 stock S1 owns stock of S2 (another subsidiary of the 
same group) that has a basis that exceeds its value, paragraph (b) of 
this section applies as if S1 had transferred its stock of S2. Because 
S2 is a member of the group immediately after the transfer of the S1 
stock, the group member's basis in the S2 stock is redetermined pursuant 
to paragraph (b)(1) of this section immediately prior to the sale of the 
S1 stock. Of the group members' total basis of $130 in the S2 stock, $26 
is allocated to S1's 20 shares of S2 common stock and $104 is allocated 
to P's 80 shares of S2 common stock. Pursuant to paragraph (b)(5) of 
this section, the redetermination of S1's basis in the stock of S2 
results in an adjustment to P's basis in the stock of S1. In particular, 
P's basis in the stock of S1 is decreased by $24 to $26. On P's sale of 
its 100 shares of S1 common stock for $20, P recognizes a loss of $6. 
Because S1 is not a member of the P group immediately after P's sale of 
the S1 stock, paragraph (c)(1) of this section does not apply to suspend 
such loss. However, because P recognizes a loss with respect to the 
disposition of the S1 stock and S1 owns stock of S2 (which is a member 
of the P group immediately after the disposition), paragraph (c)(2) of 
this section does apply to suspend up to $6 of that loss, an amount 
equal to the amount by which the duplicated loss with respect to the 
stock of S1 sold is attributable to S2's adjusted basis in its assets, 
loss carryforwards, and deferred deductions.
    (iii) Effect of subsequent asset sale on stock basis. Of the $30 
loss recognized on the sale of Asset A, $24 is taken into account in 
determining the basis adjustments made under Sec.  1.1502-32 to the 
stock of S2 owned by P. Accordingly, P's basis in its S2 stock is 
reduced by $24 from $104 to $80.
    (iv) Effect of subsequent asset sale on suspended loss. Because P 
cannot establish that all or a portion of the loss recognized on the 
sale of Asset A was not reflected in the calculation of the duplicated 
loss of S2 on the date of the Year 3 stock sale and such loss is 
allocable to the period beginning on the date of the Year 3 deemed 
disposition of the S2 stock and ending on the day before the first date 
on which S2 is not a member of the P group and is taken into account in 
determining consolidated taxable income (or loss) of the P group for a 
taxable year that includes a date on or after the date of the Year 3 
deemed disposition and before the first date on which S2 is not a member 
of the P group, such asset loss reduces the suspended loss pursuant to 
paragraph (c)(4) of this section. The amount of such reduction, however, 
cannot exceed $6, the excess of the amount of such loss, $30, over the 
amount of such loss that is taken into account in determining the basis 
adjustment made to the stock of S2

[[Page 767]]

owned by P, $24. Therefore, the suspended loss is reduced to zero.
    (v) Effect of subsequent stock sale. P recognizes $0 gain/loss on 
the Year 5 sale of its remaining S2 common stock. No amount of suspended 
loss remains to be allowed under paragraph (c)(5) of this section.
    Example 6. Loss recognized on asset with basis determined by 
reference to stock basis of subsidiary. (i) Facts. In Year 1. P forms S 
with a contribution of $80 in exchange for 80 shares of common stock of 
S which at that time represents all of the outstanding stock of S. S 
becomes a member of the P group. In Year 2, P contributes Asset A with a 
basis of $50 and a value of $20 in exchange for 20 shares of common 
stock of S in a transfer to which section 351 applies. In Year 4, in a 
transaction that is not part of a plan that includes the Year 1 and Year 
2 contributions, P contributes the 20 shares of S common stock it 
acquired in Year 2 to PS, a partnership, in exchange for a 20 percent 
capital and profits interest in a transaction described in section 721. 
Immediately after the contribution to PS, S is a member of the P group. 
In Year 5, P sells its interest in PS for $20.
    (ii) Application of basis redetermination rule upon nonrecognition 
transfer. Because P's basis in the S common stock contributed to PS 
exceeds its value immediately prior to the transfer and S is a member of 
the P group immediately after the transfer, P's basis in all of the S 
stock is redetermined pursuant to paragraph (b)(1) of this section. Of 
P's total basis of $130 in the common stock of S, a proportionate amount 
is allocated to each share of S common stock. Accordingly, $26 is 
allocated to the S common stock that is contributed to PS and, under 
section 722, P's basis in its interest in PS is $26.
    (iii) Application of loss suspension rule on disposition of asset 
with basis determined by reference to stock basis of subsidiary. P 
recognizes a $6 loss on its disposition of its interest in PS. Because 
P's basis in its interest in PS was determined by reference to the basis 
of S stock and at the time of the determination of P's basis in its 
interest in PS such S stock had a duplicated loss of $6, and, 
immediately after the disposition, S is a member of the P group, such 
loss is suspended to the extent of such duplicated loss. Principles 
similar to those of paragraphs (c)(3), (c)(4), and (c)(5) of this 
section shall apply to such suspended loss.

    (f) Worthlessness not followed by separate return years. 
Notwithstanding any other provision in the regulations under section 
1502, if a member of a group (the claiming group) treats stock of a 
subsidiary as worthless under section 165 (taking into account the 
provisions of Sec.  1.1502-80(c)) and, on the day following the last day 
of the claiming group's taxable year in which the worthless stock 
deduction is claimed, the subsidiary (or its successor, determined 
without regard to paragraphs (d)(5)(iii) and (iv) of this section) is a 
member of a group that includes any corporation that, during that 
taxable year, was a member of the claiming group (other than a lower-
tier subsidiary of the subsidiary) or is a successor (determined without 
regard to paragraphs (d)(5)(iii) and (iv) of this section) of such a 
member, then all losses treated as attributable to the subsidiary under 
the principles of Sec.  1.1502-21(b)(2)(iv) shall be treated as expired 
as of the beginning of the day following the last day of the claiming 
group's taxable year in which the worthless stock deduction is claimed. 
In addition, notwithstanding any other provision in the regulations 
under section 1502, if a member recognizes a loss with respect to 
subsidiary stock and on the following day the subsidiary is not a member 
of the group and does not have a separate return year, then all losses 
treated as attributable to the subsidiary under the principles of Sec.  
1.1502-21(b)(2)(iv) shall be treated as expired as of the beginning of 
the day following the last day of the group's taxable year in which the 
stock loss is claimed. For purposes of this paragraph (f), the 
determination of the losses attributable to the subsidiary shall be made 
after computing the taxable income of the group for the taxable year in 
which the group treats the stock of the subsidiary as worthless or the 
subsidiary liquidates and after computing the taxable income for any 
taxable year to which such losses may be carried back. The loss treated 
as expired under this paragraph (f) shall not be treated as a 
noncapital, nondeductible expense under Sec.  1.1502-32(b)(2)(iii). This 
paragraph (f) applies to worthlessness determinations and liquidations 
that occur on or after March 10, 2006. For rules applicable to worthless 
determinations and liquidations before March 10, 2006, see Sec.  1.1502-
35T(f)(1) and (2) as contained in 26 CFR part 1 in effect on January 1, 
2006.
    (g) Anti-avoidance rules--(1) Transfer of share without a loss in 
avoidance. If a share of subsidiary stock has a basis

[[Page 768]]

that does not exceed its value and the share is transferred with a view 
to avoiding application of the rules of paragraph (b) of this section 
prior to the transfer of a share of subsidiary stock that has a basis 
that does exceed its value or a deconsolidation of a subsidiary, the 
rules of paragraph (b) of this section shall apply immediately prior to 
the transfer of stock that has a basis that does not exceed its value.
    (2) Transfers of loss property in avoidance. If a member of a 
consolidated group contributes an asset with a basis that exceeds its 
value to a partnership in a transaction described in section 721 or a 
corporation that is not a member of such group in a transfer described 
in section 351, such partnership or corporation contributes such asset 
to a subsidiary in a transfer described in section 351, and such 
contributions are undertaken with a view to avoiding the rules of 
paragraph (b) or (c) of this section, adjustments must be made to carry 
out the purposes of this section.
    (3) Anti-loss reimportation rule--(i) Conditions for application. 
This paragraph (g)(3) applies when--
    (A) A member of a group (selling group) recognized and was allowed a 
loss with respect to a share of stock of S, a subsidiary or former 
subsidiary of the selling group;
    (B) That stock loss was duplicated (in whole or in part) in S's 
attributes (duplicating items) at the earlier of the time that the loss 
was recognized or that S ceased to be a member; and
    (C) Within ten years of the date that S ceased to be a member, there 
is a reimportation event. For this purpose, a reimportation event is any 
event after which a duplicating item is a reimported item. A reimported 
item is any duplicating item that is reflected in the attributes of any 
member of the selling group, including S, or, if not reflected in the 
attributes, would be properly taken into account by any member of the 
selling group (for example as the result of a carryback).
    (ii) Effect of application. Immediately before the time that a 
reimported item (or any portion of a reimported item) would be properly 
taken into account (but for the application of this paragraph (g)(3)), 
such item (or such portion of the item) is reduced to zero and no 
deduction or loss is allowed, directly or indirectly, with respect to 
that item.
    (iii) Operating rules. For purposes of this paragraph (g)(3)--
    (A) The terms member, subsidiary, and group include their 
predecessors and successors to the extent necessary to effectuate the 
purposes of this section; and
    (B) The reduction of a reimported item (other than duplicating items 
that are carried back to a consolidated return year of the selling 
group) is a noncapital, nondeductible expense within the meaning of 
Sec.  1.1502-32(b)(3)(iii).
    (4) Avoidance of recognition of gain. (i) If a transaction is 
structured with a view to, and has the effect of, deferring or avoiding 
the recognition of gain on a disposition of stock by invoking the 
application of paragraph (b)(1) of this section to redetermine the basis 
of stock of a subsidiary, and the stock loss that gives rise to the 
application of paragraph (b)(1) of this section is not significant, 
paragraphs (b) and (c) of this section shall not apply.
    (ii) If a transaction is structured with a view to, and has the 
effect of, deferring or avoiding the recognition of gain on a 
disposition of stock by invoking the application of paragraph (b)(2) of 
this section to redetermine the basis of stock of a subsidiary, and the 
duplicated loss of the subsidiary that is reflected in stock of the 
subsidiary owned by members of the group immediately before the 
deconsolidation is not significant, paragraphs (b) and (c) of this 
section shall not apply.
    (5) Examples. For purposes of the examples in this section, all 
transactions described in section 362(a) are completed before October 
22, 2004, and therefore are not subject to section 362(e)(2). The 
principles of this paragraph (g) are illustrated by the following 
examples:

    Example 1. Transfers of property in the avoidance of basis 
redetermination rule. (i) Facts. In Year 1, P forms S with a 
contribution of $100 in exchange for 100 shares of common stock of S 
which at that time represents all of the outstanding stock of S. S 
becomes a member of the P group. In Year 2, P contributes 20 shares of 
common stock of S to PS, a partnership, in exchange for a 20 percent 
capital

[[Page 769]]

and profits interest in a transaction described in section 721. In Year 
3, P contributes Asset A with a basis of $50 and a value of $20 to PS in 
exchange for an additional capital and profits interest in PS in a 
transaction described in section 721. Also in Year 3, PS contributes 
Asset A to S and P contributes an additional $80 to S in transfers to 
which section 351 applies. In Year 4, S sells Asset A for $20, 
recognizing a loss of $30. The P group uses that loss to offset income 
of P. In Year 5, P sells its entire interest in PS for $40.
    (ii) Analysis. Pursuant to paragraph (g)(2) of this section, if P's 
contributions of S stock and Asset A to PS were undertaken with a view 
to avoiding the application of the basis redetermination or the loss 
suspension rule, adjustments must be made such that the group does not 
obtain more than one tax benefit from the $30 loss inherent in Asset A.
    Example 2. Transfers effecting a reimportation of loss. (i) Facts. 
In Year 1, P forms S with a contribution of Asset A with a value of $100 
and a basis of $120, Asset B with a value of $50 and a basis of $70, and 
Asset C with a value of $90 and a basis of $100 in exchange for all of 
the common stock of S and S becomes a member of the P group. In Year 2, 
in a transaction that is not part of a plan that includes the 
contribution, P sells the stock of S for $240, recognizing a loss of 
$50. At such time, the bases and values of Assets A, B, and C have not 
changed since their contribution to S. In Year 3, S sells Asset A, 
recognizing a $20 loss. In Year 3, S merges into M in a reorganization 
described in section 368(a)(1)(A). In Year 8, P purchases all of the 
stock of M for $300. At that time, M has a $10 net operating loss. In 
addition, M owns Asset D, which was acquired in an exchange described in 
section 1031 in connection with the surrender of Asset B. Asset C has a 
value of $80 and a basis of $100. Asset D has a value of $60 and a basis 
of $70. In Year 9, P has operating income of $100 and M recognizes $20 
of loss on the sale of Asset C. In Year 10, P has operating income of 
$50 and M recognizes $50 of loss on the sale of Asset D.
    (ii) Analysis. P's $50 loss on the sale of S stock is entirely 
attributable to duplicated loss. Therefore, pursuant to paragraph (g)(3) 
of this section, assuming the P group cannot establish otherwise, M's 
$10 net operating loss is treated as attributable to assets that were 
owned by S on the date of the disposition and that had bases in excess 
of value on such date. Without regard to any other limitations on the 
group's use of M's net operating loss, the P group cannot use M's $10 
net operating loss pursuant to paragraph (g)(3)(iii)(D) of this section. 
Pursuant to paragraph (g)(3)(iv) of this section and Sec.  1.1502-
32(b)(3)(iii)(D), such loss is treated as a noncapital, nondeductible 
expense of M incurred during the taxable year that it would otherwise be 
absorbed, namely in Year 9. In addition, the P group is denied the use 
of $10 of the loss recognized on the sale of Asset C. Finally, the P 
group is denied the use of $10 of the loss recognized on the sale of 
Asset D. Pursuant to paragraph (g)(3)(iv) of this section and Sec.  
1.1502-32(b)(3)(iii)(D), each such disallowed loss is treated as a 
noncapital, nondeductible expense of M incurred during the taxable year 
that includes the date of the disposition of the asset with respect to 
which such loss was recognized.
    Example 3. Transfers to avoid recognition of gain. (i) Facts. P owns 
all of the stock of S1 and S2. The S2 stock has a basis of $400 and a 
value of $500. S1 owns 50% of the S3 common stock with a basis of $150. 
S2 owns the remaining 50% of the S3 common stock with a basis of $100 
and a value of $200 and one share of S3 preferred stock with a basis of 
$10 and a value of $9. P intends to sell all of its S2 stock to an 
unrelated buyer. P, therefore, engages in the following steps to dispose 
of S2 without recognizing a substantial portion of the built-in gain in 
S2. First, P causes a recapitalization of S3 in which S2's S3 common 
stock is exchanged for new S3 preferred shares. P then sells all of its 
S2 stock. Immediately after the sale of the S2 stock, S3 is a member of 
the P group.
    (ii) Analysis. Pursuant to paragraph (b)(4) of this section, because 
S2 owns stock of S3 (another subsidiary of the same group) and, 
immediately after the sale of the S2 stock, S3 is a member of the group, 
then for purposes of applying paragraph (b) of this section, S2 is 
deemed to have transferred its S3 stock. Because S3 is a member of the 
group immediately after the transfer of the S2 stock and the S3 stock 
deemed transferred has a basis in excess of value, the group in the S3 
stock is redetermined pursuant to paragraph (b)(1) of this section 
immediately prior to the sale of the S2 stock. Accordingly, P would 
recognize only $1 of gain on the sale of its S2 stock. However, because 
the recapitalization of the S3 was structured with a view to, and has 
the effect of, avoiding the recognition of gain on a disposition of 
stock by invoking the application of paragraph (b) of this section, 
paragraph (g)(4)(i) of this section applies. Accordingly, paragraph (b) 
of this section does not apply upon P's disposition of the S2 stock and 
P recognizes $100 gain on the disposition of the S2 stock.

    (6) General anti-avoidance rule. If a taxpayer acts with a view to 
avoid the purposes of this section, appropriate adjustments will be made 
to carry out the purposes of this section.
    (h) Application of other rules of law. See Sec.  1.1502-80(a) 
regarding the general applicability of other rules of law.
    (i) [Reserved]

[[Page 770]]

    (j) Effective/applicability dates. This section applies after 
September 16, 2008. For prior law, see Sec. Sec.  1.1502-35 and 1.1502-
35T as contained in 26 CFR part 1 in effect on April 1, 2008.

[T.D. 9254, 71 FR 13010, Mar. 14, 2006, as amended by T.D. 9264, 71 FR 
30603, 30607, May 30, 2006; T.D. 9254, 71 FR 48473, Aug. 21, 2006; T.D. 
9322, 72 FR 17805, Apr. 10, 2007; T.D. 9342, 72 FR 39736, July 20, 2007; 
T.D. 9424, 73 FR 53951, Sept. 17, 2008; 75 FR 10172, Mar. 5, 2010]



Sec.  1.1502-36  Unified loss rule.

    (a) In general--(1) Scope. This section provides rules for adjusting 
members' bases in stock of a subsidiary (S) and for reducing S's 
attributes when a member (M) transfers a loss share of S stock. See 
paragraph (f) of this section for definitions of the terms used in this 
section, including transfer and value.
    (2) Purpose. The rules in this section have two principal purposes. 
The first is to prevent the consolidated return provisions from reducing 
a group's consolidated taxable income through the creation and 
recognition of noneconomic loss on S stock. The second is to prevent 
members (including former members) of the group from collectively 
obtaining more than one tax benefit from a single economic loss. 
Additional purposes are set forth in other paragraphs of this section. 
The rules of this section must be interpreted and applied in a manner 
that is consistent with and reasonably carries out the purposes of this 
section.
    (3) Overview--(i) General application of section. This section 
applies when M transfers a share of S stock and, after taking into 
account the effects of all applicable rules of law (even if the 
adjustments required by such provisions are not deemed effective until 
after the transfer, such as certain adjustments required under sections 
108 and 1017 and Sec.  1.1502-28), the share is a loss share. When this 
section applies, paragraph (b) of this section applies first and may 
redetermine members' bases in their shares of S stock. If the 
transferred share is a loss share after any basis redetermination under 
paragraph (b) of this section, paragraph (c) of this section applies and 
may reduce M's basis in the transferred loss share. If the transferred 
share is a loss share after any basis reduction required by paragraph 
(c) of this section, paragraph (d) of this section applies and may 
reduce attributes of S and subsidiaries that are lower-tier to S. 
Although the determination of whether there is a transfer of a loss 
share is made as of the transfer, this section applies, and any 
adjustments it requires are given effect, immediately before the 
transfer. Paragraphs (e), (f), and (g) of this section provide general 
operating rules (including rules for transfers of S stock between 
members), definitions, and an anti-abuse rule, respectively.
    (ii) Stock of multiple subsidiaries transferred in the transaction--
(A) Initial application of section to transferred shares in lowest tier. 
If shares of stock of more than one subsidiary are transferred in a 
transaction, the application of this section begins at the lowest tier. 
If no transferred shares of stock of the lowest-tier subsidiary (S2) are 
loss shares, any gain recognized with respect to the S2 shares 
immediately tiers up and adjusts members' bases in subsidiary stock 
under Sec.  1.1502-32. However, if any of the transferred S2 shares are 
loss shares, paragraph (b) of this section applies with respect to those 
shares. If, after the application of paragraph (b) of this section, any 
transferred S2 shares are still loss shares, paragraph (c) of this 
section applies with respect to those shares. If, after the application 
of paragraph (c) of this section, any transferred S2 shares are still 
loss shares and P makes an election under paragraph (d)(6) of this 
section with respect to those S2 shares, then paragraph (d) of this 
section applies with respect to those shares, but only to the extent 
necessary to give effect to the election. After taking into account the 
effects of any adjustments required by this initial application of this 
section, recognized gain or loss is computed on all transferred S2 
shares. Any adjustments under paragraph (b) or (c) of this section, the 
effect of any election under paragraph (d)(6) of this section, any gain 
or loss recognized on the transferred S2 shares (whether allowed or 
disallowed), and any other related or resulting adjustments then tier-up 
and apply to adjust members' bases in subsidiary stock under Sec.  
1.1502-32.
    (B) Initial application of section to transferred shares in higher 
tiers. After

[[Page 771]]

taking into account the effects of any adjustments described in 
paragraph (a)(3)(ii)(A) of this section, transferred shares in the next 
higher tier, and then in each next higher tier successively, other than 
the transferred loss shares at the highest tier, are treated in the 
manner described in paragraph (a)(3)(ii)(A) of this section.
    (C) Application of section to transferred shares in highest tier. 
After paragraphs (b) and (c) of this section, and, to the extent 
necessary to give effect to any election under paragraph (d)(6) of this 
section, paragraph (d) of this section, have been applied to or with 
respect to all lower-tier transferred loss shares, and after all lower-
tier adjustments have been taken into account (whether resulting from 
the application of paragraph (b) or (c) of this section, an election 
under paragraph (d)(6) of this section, the recognition of gain or loss 
on a transfer, or otherwise), paragraphs (b), then (c), and then (d) of 
this section apply with respect to the highest-tier shares that are 
transferred loss shares.
    (D) Final application of section to transferred shares in lower 
tiers. After paragraph (d) of this section has been applied with respect 
to transferred loss shares in the highest tier, it is applied with 
respect to transferred shares in each next lower tier, successively, to 
the extent such shares are loss shares after the application of 
paragraph (d) of this section.
    (4) Other rules of law and coordination with deferral and 
disallowance provisions. In general, this section applies and has effect 
immediately upon the transfer of a loss share even if the loss is 
deferred, disallowed, or otherwise not taken into account under any 
other applicable rules of law. However, see paragraph (e)(3) of this 
section for special rules applicable to shares of S stock transferred in 
an intercompany transaction. See section Sec.  1.1502-80(a) for the 
general applicability of other rules of law and a limitation on 
duplicative adjustments.
    (5) Nomenclature, factual assumptions adopted in this section. 
Unless otherwise stated, for purposes of this section, the following 
nomenclature and assumptions are adopted. P is the common parent of a 
consolidated group of which S, M, and M1 are members. X is not a member 
of the P group. If a corporation has preferred stock outstanding, it is 
stock described in section 1504(a)(4). The examples set forth the only 
facts, elections, and activities relevant to the example. All 
transactions are between unrelated persons and are independent of each 
other. Tax liabilities and their effect, and the application of any 
other loss disallowance or deferral provisions of the Internal Revenue 
Code (Code) or regulations, including but not limited to section 267, 
are disregarded. All persons report on a calendar year basis and use the 
accrual method of accounting. All parties comply with filing and other 
requirements of this section and all other provisions of the Code and 
regulations.
    (b) Basis redetermination to reduce disparity--(1) In general--(i) 
Purpose and scope. The rules of this paragraph (b) reduce the extent to 
which there is disparity in members' bases in shares of S stock. These 
rules supplement the operation of the investment adjustment system; 
their purpose is to prevent the realization of noneconomic loss and 
facilitate the elimination of duplicated loss when members hold S shares 
with disparate bases. The rules of this paragraph (b) only reallocate 
investment adjustments previously applied to members' bases in shares of 
S stock, thus they do not alter the aggregate amount of basis in shares 
of S stock held by members or the aggregate amount of investment 
adjustments applied to shares of S stock.
    (ii) Special rules for applicability of redetermination rule. 
Notwithstanding the general rule in paragraph (b)(2) of this section, 
members' bases in shares of S stock are not redetermined under this 
paragraph (b) if--
    (A) There is no disparity among members' bases in shares of S common 
stock and no member owns a share of S preferred stock with respect to 
which there is unrecognized gain or loss; or
    (B) All the shares of S stock held by members are transferred to one 
or more nonmembers, become worthless under section 165 (taking into 
account the provisions of Sec.  1.1502-80(c)), or a combination thereof, 
in one fully taxable transaction. However, in such a case, P may elect 
to redetermine such bases under this paragraph (b). Such an

[[Page 772]]

election is made in the manner provided in paragraph (e)(5) of this 
section. If stock of more than one subsidiary is transferred in the 
transaction, the election may be made with respect to one or more of 
such subsidiaries.
    (iii) Investment adjustment. For purposes of this paragraph (b), the 
term investment adjustment includes adjustments specially allocated 
under Sec.  1.1502-32(c)(1)(ii)(B) and remaining adjustments described 
in Sec.  1.1502-32(c)(1)(iii). In applying any provision of this 
section, the term includes all such adjustments reflected in the basis 
of the share as of the application of the provision, whether originally 
allocated under Sec.  1.1502-32 or otherwise. The term therefore 
includes adjustments previously reallocated to the share, and it does 
not include adjustments previously reallocated from the share, whether 
pursuant to this section or any other provision of law. It also includes 
the proportionate amount of adjustments reflected in the exchanged basis 
of a share, such as the basis determined under section 358 in connection 
with a reorganization or a transaction qualifying under section 355.
    (2) Basis redetermination rule. If M transfers a loss share of S 
stock, all members' bases in all their shares of S stock are subject to 
redetermination under this paragraph (b). The determination of whether a 
share is a loss share is made as of the transfer, taking into account 
the effects of all applicable rules of law. The redeterminations are 
made immediately before applying paragraph (c) of this section and in 
accordance with the following:
    (i) Decreasing the bases of transferred loss shares--(A) Removing 
positive investment adjustments from transferred loss shares of common 
stock. M's basis in each of its transferred loss shares of S common 
stock is first reduced, but not below value, by removing positive 
investment adjustments previously applied to the basis of the share. The 
positive investment adjustments removed from transferred loss shares of 
S common stock are reallocated under paragraph (b)(2)(ii) of this 
section after negative investment adjustments are reallocated under 
paragraph (b)(2)(i)(B) of this section.
    (B) Reallocating negative investment adjustments from shares of S 
common stock. If a transferred share is still a loss share after 
applying paragraph (b)(2)(i)(A) of this section, M's basis in the share 
is reduced, but not below value, by reallocating negative investment 
adjustments to the transferred loss share (whether common or preferred 
stock) from members' shares of S common stock that are not transferred 
loss shares. The adjustments reallocated under this paragraph 
(b)(2)(i)(B) are reallocated and applied first to M's bases in 
transferred loss shares of S preferred stock and then to M's bases in 
transferred loss shares of S common stock. Reallocations under this 
paragraph (b)(2)(i)(B) are made in a manner that, to the greatest extent 
possible, reduces the disparity among members' bases in all transferred 
loss shares of S preferred stock, and reduces the disparity among 
members' bases in all shares of S common stock.
    (ii) Increasing the bases of gain preferred and all common shares--
(A) Preferred stock. After the application of paragraph (b)(2)(i) of 
this section, the positive investment adjustments removed from 
transferred loss shares of S common stock under paragraph (b)(2)(i)(A) 
of this section are reallocated and applied to increase, but not above 
value, members' bases in shares of S preferred stock (without regard to 
whether such shares are transferred in the transaction). Reallocations 
under this paragraph (b)(2)(ii)(A) are made in a manner that, to the 
greatest extent possible, reduces the disparity among members' bases in 
all shares of S preferred stock.
    (B) Common stock. Any positive investment adjustments removed from 
transferred loss shares of S common stock under paragraph (b)(2)(i)(A) 
of this section and not reallocated and applied to S preferred shares 
are reallocated and applied to increase members' bases in shares of S 
common stock. Reallocations are made to shares of S common stock without 
regard to whether a particular share is a loss share or a transferred 
share, and without regard to the share's value. Reallocations under this 
paragraph (b)(2)(ii)(B) are made in a manner that, to the greatest 
extent possible, reduces

[[Page 773]]

the disparity among members' bases in all shares of S common stock.
    (iii) Operating rules--(A) Method. In general, reallocations should 
be made first with respect to the earliest available adjustments. 
However, the overall application of this paragraph (b) to a transaction 
must be made in a manner that, to the greatest extent possible, reduces 
basis disparity (as provided in paragraphs (b)(2)(i)(B) and (b)(2)(ii) 
of this section). The specific reallocation of an investment adjustment 
under this paragraph (b) may be made using any reasonable method or 
formula that is consistent with the provisions of this paragraph (b)(2) 
and furthers the purposes of this section.
    (B) Limits on reallocation--(1) Restriction to members' outstanding 
shares. Investment adjustments can only be reallocated to shares that 
were held by members at the time the adjustment was originally applied.
    (2) Limitation by prior use--(i) In general. In order to prevent the 
reallocation of investment adjustments from either increasing or 
decreasing members' aggregate bases in subsidiary stock, no investment 
adjustment (positive or negative) may be reallocated under this 
paragraph (b)(2) to the extent that it was (or would have been) used 
prior to the time that it would otherwise be reallocated under this 
paragraph (b)(2). For this purpose, an investment adjustment was used 
(or would have been used) to the extent that it was reflected in (or 
would have been reflected in) the basis of a share of subsidiary stock 
and the basis of that share has already been taken into account, 
directly or indirectly, in determining income, gain, deduction, or loss 
(including by affecting the application of this section to a prior 
transfer of subsidiary stock) or in determining the basis of any 
property that is not subject to Sec.  1.1502-32. However, if the prior 
use was in an intercompany transaction, an investment adjustment may be 
reallocated to the extent that Sec.  1.1502-13 has prevented the gain or 
loss on the transaction from being taken into account. (In that case, 
appropriate adjustments must be made to the intercompany item from the 
prior intercompany transaction that has not yet been taken into 
account.) Further, if an investment adjustment was reflected in (or 
would have been reflected in) the basis of a share that has been taken 
into account, the limitation on reallocation under this paragraph 
(b)(2)(iii)(B)(2) does not apply to the extent the basis of that share 
would not change as a result of the reallocation (for example, because 
the reallocation is between shares that are both lower-tier to the share 
with the previously used basis). See Sec.  1.1502-32(c)(1)(ii)(B) 
regarding special allocations applicable to the tier-up of the 
reallocated investment adjustment if the reallocation is limited under 
this paragraph (b)(2)(iii)(B)(2) due to prior use at a higher tier.
    (ii) Example. The application of this paragraph (b)(2)(iii)(B)(2) is 
illustrated by the following example:

    Example. (i) Facts. P owns all 20 shares of M stock, and 10 shares 
of S stock. M owns the remaining 10 shares of S stock. In year 1, S 
recognizes $200 of income that results in a $10 positive investment 
adjustment being allocated to each share of S stock. The group does not 
recognize any other items. The $100 positive adjustment to M's basis in 
the S stock tiers up, and results in a $5 positive adjustment to each 
share of M stock. In year 2, P sells one share of M stock and recognizes 
a gain. In year 3, M sells one loss share of S stock, and this paragraph 
(b) applies and requires a reallocation of the year 1 positive 
investment adjustment applied to the basis of the transferred S share.
    (ii) Application of limitation by prior use. M's basis in the 
transferred loss share of S stock reflects a $10 positive investment 
adjustment attributable to S's year 1 income. Under the general rule of 
this paragraph (b), that $10 would be subject to reallocation to reduce 
basis disparity. However, that $10 adjustment had originally tiered up 
to adjust P's basis in its M shares and, as a result, $.50 of that 
adjustment was reflected in P's basis in each share of M stock. When P 
sold the share of M stock, the basis of that share (which included the 
tiered-up $.50) was used in determining the gain on the sale. Thus, $.50 
of the $10 investment adjustment originally allocated to the transferred 
S share that tiered-up to the sold M share was previously used and, as 
such, cannot be reallocated in a manner that would (if it were the 
original allocation) affect the basis of the sold M share. Accordingly, 
no more than $9.50 of the adjustment to M's transferred S share could be 
reallocated to P's shares of S stock. If so, under the special 
allocation rule in Sec.  1.1502-32(c)(1)(ii)(B), the tier-up of this 
$9.50 would only be allocated among P's remaining 19

[[Page 774]]

shares of M stock. Alternatively, all $10 of the investment adjustment 
could be reallocated to M's other S shares (because the tier-up to P's M 
shares would have been the same regardless which of M's shares of S 
stock were adjusted).
    (iii) Application of limitation where adjustment would have been 
used. The facts are the same as in paragraph (i) of this Example except 
that M does not sell any shares of S stock and, in year 3, P sells a 
loss share of S stock. As in paragraph (i) of this Example, when P sold 
the share of M stock, the basis of that share was used in determining 
the gain on the share. When P sells the loss share of S stock, the $10 
positive investment adjustment from S's year 1 income cannot be 
reallocated in a manner that would (if it were the original adjustment) 
affect the basis of the sold M share. If this $10 positive investment 
adjustment had originally been allocated to the S shares held by M, $.50 
of the $10 investment adjustment would have tiered up to the M share 
that P sold, would have been reflected in P's basis in that M share, and 
would have been used in determining P's gain or loss on the sale. 
Accordingly, up to $9.50 of the $10 investment adjustment applied to the 
basis of P's transferred S share could be reallocated to M's shares of S 
stock. If so, under the special allocation rule in Sec.  1.1502-
32(c)(1)(ii)(B), the tier-up of this $9.50 would only be allocated among 
P's remaining 19 shares of M stock. Alternatively, all $10 of the 
investment adjustment could be reallocated to P's other S shares.

    (3) Examples. The general application of this paragraph (b) is 
illustrated by the following examples:

    Example 1. Transfer of stock received in section 351 exchange. (i) 
Redetermination to prevent noneconomic loss. (A) Facts. For many years, 
M has owned two assets, Asset 1 and Asset 2. On January 1, year 1, M 
receives the only four outstanding shares of S common stock (Block 1 
shares) in exchange for Asset 1, which has a basis and value of $80. 
Section 351 applies to the exchange and, therefore, under section 358, 
M's aggregate basis in the Block 1 shares is $80 ($20 per share). On 
July 1, year 2, M receives another share of S common stock (Block 2 
share) in exchange for Asset 2, which has a basis of $0 and value of 
$20. Section 351 applies to this exchange and, under section 358, M's 
basis in the Block 2 share is $0. On October 1, year 3, S sells Asset 2 
for $20, recognizing a $20 gain. On December 31, year 3, M sells one of 
its Block 1 shares to X for $20. After taking into account the effects 
of all applicable rules of law, M's basis in each Block 1 share is $24 
(M's original $20 basis increased under Sec.  1.1502-32 by $4, the 
share's allocable portion of the $20 gain recognized on the sale of 
Asset 2). In addition, M's basis in its Block 2 share is $4 (M's 
original $0 basis increased under Sec.  1.1502-32 by $4 (the share's 
allocable portion of the $20 gain recognized on the sale of Asset 2)). 
M's sale of the Block 1 share is a transfer of a loss share and 
therefore subject to this section.
    (B) Basis redetermination under this paragraph (b). Under this 
paragraph (b), M's bases in all its shares of S stock are subject to 
redetermination. First, paragraph (b)(2)(i)(A) of this section applies 
to reduce M's basis in the transferred loss share, but not below value, 
by removing positive investment adjustments applied to the basis of the 
share. Accordingly, M's basis in the transferred Block 1 share is 
reduced by $4 (the amount of the positive investment adjustment applied 
to the share), from $24 to $20. Even if there were negative investment 
adjustments applied to adjust the bases of nontransferred common shares, 
no further reduction to the basis of the share would be required under 
this paragraph (b) because the basis of the transferred share is then 
equal to the share's value. Under paragraph (b)(2)(ii)(B) of this 
section, the positive investment adjustment removed from the transferred 
loss share is reallocated and applied to increase M's bases in its S 
common shares in a manner that reduces disparity in M's bases in all the 
S common shares, to the greatest extent possible. Accordingly, the $4 
positive investment adjustment removed from the Block 1 share is 
reallocated and applied to the basis of the Block 2 share, increasing it 
from $4 to $8.
    (C) Application of paragraphs (c) and (d) of this section. Because 
M's sale of the Block 1 share is not a transfer of a loss share after 
the application of this paragraph (b), neither paragraph (c) of this 
section nor paragraph (d) of this section applies to the transfer.
    (ii) Redetermination to eliminate duplicated loss. (A) Facts. The 
facts are the same as in paragraph (i)(A) of this Example 1, except 
that, at the time of the second contribution, the value of Asset 1 had 
declined to $20 and so, instead of contributing Asset 2, M contributed 
Asset 3 to S in exchange for the Block 2 share. At the time of that 
exchange, Asset 3 had a basis and value of $5. On October 1, year 3, S 
sells Asset 1 for $20, recognizing a $60 loss that is absorbed by the 
group. On December 31, year 3, M sells one of its Block 1 shares to X 
for $5. After taking into account the effects of all applicable rules of 
law, M's basis in each Block 1 share is $8 (M's original $20 basis 
decreased under Sec.  1.1502-32 by $12 (the share's allocable portion of 
the $60 loss recognized on the sale of Asset 1)). M's basis in its Block 
2 share is an excess loss account of $7 (M's original basis of $5 
reduced under Sec.  1.1502-32 by $12, the share's allocable portion of 
the loss recognized on the sale of Asset 1). M's sale of the Block 1 
share is a transfer of a loss share and therefore subject to this 
section.

[[Page 775]]

    (B) Basis redetermination under this paragraph (b). Under this 
paragraph (b), M's bases in all its shares of S stock are subject to 
redetermination. There are no positive investment adjustments and so 
there is no adjustment under paragraph (b)(2)(i)(A) of this section. 
However, under paragraph (b)(2)(i)(B) of this section, M's basis in the 
transferred Block 1 share is reduced, but not below value, by 
reallocating negative investment adjustments from common shares that are 
not transferred loss shares. In total, there were $48 of negative 
investment adjustments applied to common shares that are not transferred 
loss shares. Accordingly, M's basis in the Block 1 share is reduced by 
$3, from $8 to its value of $5. Under paragraph (b)(2)(i)(B) of this 
section, the negative investment adjustments applied to the transferred 
share are reallocated from (and therefore cause an increase in the basis 
of) S common shares that are not transferred loss shares in a manner 
that reduces disparity among members' bases in all S common shares to 
the greatest extent possible. Accordingly, the $3 negative investment 
adjustment reallocated and applied to the transferred Block 1 share is 
reallocated entirely from the Block 2 share, increasing the basis in the 
Block 2 share from an excess loss account of $7 to an excess loss 
account of $4.
    (C) Application of paragraphs (c) and (d) of this section. Because 
M's sale of the Block 1 share is not a transfer of a loss share after 
the application of this paragraph (b), neither paragraph (c) of this 
section nor paragraph (d) of this section applies to the transfer.
    (iii) Nonapplicability of redetermination rule to sale of entire 
interest. The facts are the same as in paragraph (ii)(A) of this Example 
1, except that, on December 31, year 3, M sells all its shares of S 
stock to X for $25. M's sale of the S stock to X is a transfer of all of 
the shares of S stock held by members to one or more nonmembers in one 
fully taxable transaction and, therefore, basis is not redetermined 
under this paragraph (b). Accordingly, the sale of the Block 1 shares 
remains a transfer of loss shares and, as such, subject to paragraphs 
(c) and (d) of this section. However, paragraphs (c)(7) and (d)(3)(i)(A) 
of this section apply netting principles to prevent adjustments under 
either paragraph (c) or paragraph (d) of this section, respectively. 
Alternatively, the group could elect to apply this paragraph (b). In 
that case, the $12 negative adjustment applied to the Block 2 shares 
would be reallocated to the Block 1 shares with the result that there 
would be no loss (or gain) on any of the transferred shares following 
the application of this paragraph (b). In that case, there would be no 
further application of this section to the transfer.
    (iv) Transfer of entire interest, partially taxable. The facts are 
the same as in paragraph (iii) of this Example 1, except that, instead 
of selling the Block 2 share to X, M contributes the share to a 
nonmember in a section 351 exchange that is part of the same 
transaction. Although all the S shares held by members are transferred 
in the transaction, not all the shares are transferred to one or more 
nonmembers in one fully taxable transaction. Therefore, paragraph 
(b)(1)(ii)(B) of this section does not apply and M must redetermine its 
bases in its shares of S stock under this paragraph (b). In total, there 
were $12 of negative investment adjustments applied to common shares 
that are not transferred loss shares (the Block 2 share, a gain share). 
Accordingly, M's basis in each of the Block 1 shares is reduced by $3, 
from $8 to its value of $5. Under paragraph (b)(2)(i)(B) of this 
section, the negative investment adjustments applied to the transferred 
shares are reallocated from (and therefore cause an increase in the 
basis of) S shares that are not transferred loss shares in a manner that 
reduces disparity among members' bases in all S common shares to the 
greatest extent possible. Accordingly, the $12 negative investment 
adjustment reallocated and applied to the transferred Block 1 shares is 
reallocated entirely from the Block 2 share, increasing the basis in the 
Block 2 share from an excess loss account of $7 to a basis of $5. 
Because M's transfer is not a transfer of loss shares after the 
application of this paragraph (b), neither paragraph (c) of this section 
nor paragraph (d) of this section applies to the transfer.
    Example 2. Redetermination increases basis of transferred loss 
share. (i) Facts. On January 1, year 1, M owns all 10 outstanding shares 
of S common stock. Five of the shares have a basis of $20 per share 
(Block 1 shares) and five of the shares have a basis of $10 per share 
(Block 2 shares). S's only asset, Asset 1, has a basis of $50. S has no 
other attributes. On October 1, year 1, S sells Asset 1 for $100, 
recognizing a $50 gain. On December 31, year 2, M sells one Block 1 
share and one Block 2 share to X for $10 per share. After taking into 
account the effects of all applicable rules of law, M's basis in each 
Block 1 share is $25 (M's original $20 basis increased under Sec.  
1.1502-32 by $5, the share's allocable portion of the $50 gain 
recognized on the sale of Asset 1), and M's basis in each Block 2 share 
is $15 (M's original $10 basis increased under Sec.  1.1502-32 by $5, 
the share's allocable portion of the $50 gain recognized on the sale of 
Asset 1). M's sale of the Block 1 and Block 2 shares is a transfer of 
loss shares and therefore subject to this section.
    (ii) Basis redetermination under this paragraph (b). Under this 
paragraph (b), M's bases in all its shares of S stock are subject to 
redetermination. First, paragraph (b)(2)(i)(A) of this section applies 
to reduce M's basis in the transferred Block 1 and Block 2 shares, but 
not below value, by removing the positive investment adjustments applied 
to the

[[Page 776]]

bases of the transferred loss shares. Accordingly, the basis of the 
transferred Block 1 share is reduced by $5, from $25 to $20. The basis 
of the transferred Block 2 share is also reduced by $5, from $15 to $10. 
(Although the transferred Block 1 share is still a loss share, there is 
no reduction to its basis under paragraph (b)(2)(i)(B) of this section 
because there were no negative investment adjustments applied to the 
bases of the S common shares that are not transferred loss shares.) 
Next, paragraph (b)(2)(ii)(B) of this section applies to reallocate and 
apply the $10 of positive investment adjustments removed from the 
transferred loss shares to increase M's bases in its S common shares in 
a manner that reduces the disparity in its bases in all S common shares 
to the greatest extent possible. Accordingly, of the $10 of positive 
investment adjustments to be reallocated, $6 is reallocated and applied 
to the basis of the transferred Block 2 share (increasing it from $10 to 
$16) and $4 is reallocated and applied equally to the basis of each of 
the four retained Block 2 shares (increasing the basis of each from $15 
to $16). After giving effect to the reallocations under this paragraph 
(b), M's basis in each retained Block 1 share is $25, M's basis in the 
transferred Block 1 share is $20, and M's basis in each Block 2 share is 
$16.
    (iii) Application of paragraph (c) of this section. After the 
application of this paragraph (b), M's sale of the Block 1 and Block 2 
shares is still a transfer of loss shares and, accordingly, subject to 
paragraph (c) of this section. No adjustment is required to the basis of 
the transferred Block 1 share under paragraph (c) of this section 
because, after its basis is redetermined under this paragraph (b), the 
net positive adjustment to the basis of the share is $0. See paragraph 
(c)(3) of this section. However, under paragraph (c) of this section M's 
basis in the transferred Block 2 share is reduced by $6 (the lesser of 
its net positive adjustment, $6, and its disconformity amount, $6), from 
$16 to $10, its value. See paragraph (c)(2) of this section.
    (iv) Application of paragraph (d) of this section. After the 
application of paragraph (c) of this section, M's sale of the Block 1 
share is still a transfer of a loss share and, accordingly, subject to 
paragraph (d) of this section. No adjustment is required under paragraph 
(d) of this section because there is no aggregate inside loss. See 
paragraph (d)(3)(iii) of this section. Because M's sale of the Block 2 
share is no longer a transfer of a loss share after the application of 
paragraph (c) of this section, paragraph (d) of this section does not 
apply to the transfer of the Block 2 share.
    Example 3. Tiered subsidiaries. (i) Transfer of all shares of common 
stock. (A) Facts. P owns the sole outstanding share of S stock with a 
basis of $100, and the sole outstanding share of M stock with a basis of 
$300. M has $200 and owns an asset with a basis of $0. S owns one asset, 
Asset 1, with a basis of $100. At a time when Asset 1 has a value of 
$200, S issues a second share of common stock to M in exchange for $200. 
Later S sells Asset 1 for $200, recognizing a $100 gain. After taking 
into account the effects of all applicable rules of law, P's basis in 
its S stock is $150 (P's original $100 basis increased under Sec.  
1.1502-32 by $50, the share's allocable portion of the $100 gain 
recognized on the sale of Asset 1), M's basis in its S stock is $250 
(M's original $200 basis increased under Sec.  1.1502-32 by $50, the 
share's allocable portion of the $100 gain recognized on the sale of 
Asset 1), and P's basis in its M stock is $350 (P's original $300 basis 
increased under Sec.  1.1502-32 by $50, the tier-up of M's increase in 
its basis in its S stock). P then sells its M share and its S share to X 
for $300 and $200, respectively. M and S are not members of the same 
consolidated group immediately after the sale. Therefore, the M share 
and both of the S shares are transferred in the transaction. Regarding 
P's sale of its share of S stock and its share of M stock, see paragraph 
(f)(10)(i)(A) of this section (ceasing to own a share in a taxable 
transaction) and paragraph (f)(10)(i)(C) of this section (nonmember 
acquires share); regarding M's share of S stock, see paragraph 
(f)(10)(i)(B) of this section (ceasing to be members of the same group). 
The application of this section begins with respect to the stock of S, 
the subsidiary at the lowest tier in which there is a transfer of 
subsidiary stock. See paragraph (a)(3)(ii) of this section. Although 
both P and M transfer their S shares, only M's S share is a loss share. 
Thus, only M's transfer is a transfer of a loss share of S stock and 
only M's transfer is subject to this section.
    (B) Application of section to transferred S shares. Although only 
M's transfer is subject to this section, all members' bases in their 
shares of S stock are subject to redetermination under this paragraph 
(b). First, paragraph (b)(2)(i)(A) of this section applies to reduce M's 
basis in its transferred S share, but not below value, by removing the 
positive investment adjustment applied to that share. Accordingly, the 
basis of M's S share is reduced by $50, from $250 to $200 (under Sec.  
1.1502-32, that redetermination adjustment tiers up to reduce P's basis 
in its M stock by $50, from $350 to $300). Because there are no negative 
adjustments to reallocate under paragraph (b)(2)(i)(B) of this section, 
paragraph (b)(2)(ii)(B) of this section then applies to reallocate and 
apply the $50 positive investment adjustment removed from the 
transferred loss S share to increase P's basis in its S share in a 
manner that reduces disparity among members' bases in all S common 
shares to the greatest extent possible. Accordingly, all $50 of the 
positive investment adjustment is reallocated and applied to P's basis 
in its S share (increasing the basis

[[Page 777]]

from $150 to $200). Because M's transfer of its S share is not a 
transfer of a loss share after the application of this paragraph (b), 
neither paragraph (c) of this section nor paragraph (d) of this section 
applies to that transfer.
    (C) Application of section to transfers at next higher tier. After 
the adjustments to M's share of S stock are given effect, P's transfer 
of its share of M stock is not a transfer of a loss share and so this 
section does not apply to that transfer.
    (D) Result of application of section. After the application of this 
section, P recognizes no gain or loss on its sale of either the S share 
or the M share. In addition, the unrecognized (noneconomic) loss in M's 
basis in its S share is eliminated. The results would be the same if, in 
addition to the facts in paragraph (i)(A) of this Example 3, M 
transferred its S share to X in a fully taxable transaction and, as 
permitted under paragraph (b)(1)(ii)(B) of this section, P elected to 
redetermine basis under this paragraph (b).
    (ii) Transfer of less than all lower-tier shares of stock. (A) 
Facts. The facts are the same as in paragraph (i)(A) of this Example 1, 
except that M and S are members of the same consolidated group 
immediately after the sale. Therefore, in this case, M's S share is not 
transferred and so this section has no application with respect to M's S 
share. P's transfer of its S share is not a transfer of a loss share and 
so is also not subject to this section. However, P's sale of its share 
of M stock is a transfer of a loss share and is subject to this section.
    (B) Basis redetermination under this paragraph (b). Although P's 
transfer of its share of M stock is subject to this section, this 
paragraph (b) does not apply to the transfer because there is only one 
share of M stock outstanding (and so there can be no disparity among 
members' bases in common shares and there are no outstanding preferred 
shares with respect to which there can be unrecognized gain or loss). 
Accordingly, after the application of this paragraph (b), P's sale of 
its M share is still a transfer of a loss share and therefore subject to 
paragraph (c) of this section.
    (C) Application of paragraphs (c) and (d) of this section. Under 
paragraph (c) of this section, P must reduce its basis in its M share by 
$50, the lesser of its net positive adjustment ($50, see paragraph 
(c)(3) of this section) and its disconformity amount ($150, see 
paragraphs (c)(4), (c)(5), and (c)(6) of this section). As a result, the 
share is no longer a loss share and the transfer is not subject to 
paragraph (d) of this section.
    (D) Result of application of section. After the application of this 
section, P recognizes a $50 gain on its sale of the S share and no loss 
on its sale of the M share. Although there is unrecognized loss 
preserved in M's basis in its S share, if M later transfers the share 
when it is a loss share, that transfer will be subject to this section.
    Example 4. Application to outstanding common and preferred shares. 
(i) Facts. P owns all the stock of M and all eight outstanding shares of 
S common stock. S also has two shares of nonvoting preferred stock 
outstanding; the preferred shares each have a $100 annual, cumulative 
preference as to dividends. M owns one of the preferred shares (PS1) and 
P owns the other (PS2). On January 1, year 1, the bases and values of 
the outstanding S shares are:

----------------------------------------------------------------------------------------------------------------
                                     Preferred                                Common
                                 -------------------------------------------------------------------------------
                                    PS1     PS2     CS1     CS2     CS3     CS4     CS5     CS6     CS7     CS8
                                    (M)     (P)     (P)     (P)     (P)     (P)     (P)     (P)     (P)     (P)
----------------------------------------------------------------------------------------------------------------
Basis...........................    1250     990    1025     710     550     400     375     250     215     100
Value...........................    1000    1000     375     375     375     375     375     375     375     375
----------------------------------------------------------------------------------------------------------------

    (A) As of January 1, year 1, there are no arrearages on the 
preferred stock. In year 1, S has a $1100 capital loss and $100 of 
ordinary income. The group absorbs the loss and the negative remaining 
adjustment of $1000 is allocable entirely to the common stock, equally 
to each common share ($125 per share). See Sec.  1.1502-32(c)(1)(iii) 
and (c)(2).
    (B) In year 2, S has $700 of ordinary income and a $100 ordinary 
loss. Also, on October 1, year 2, S declares and makes a $200 dividend 
distribution with respect to the preferred stock ($100 per share). Under 
Sec.  1.1502-32(c)(1)(i), a negative adjustment of $100 is first 
allocated to each of the preferred shares to reflect the declaration of 
the dividend. The $600 positive remaining adjustment determined under 
Sec.  1.1502-32(c)(1)(iii) (reflecting S's net income reduced by the 
distribution) is then allocated to each of the preferred shares to the 
extent of its entitlement to dividends accruing in year 1 and year 2 
($200 per share). See Sec.  1.1502-32(c)(1)(iii) and (c)(3). The $200 of 
the positive remaining adjustment not allocated to the preferred shares 
is then allocated to the common stock, equally to each common share ($25 
per share). See Sec.  1.1502-32(c)(1)(iii) and (c)(2). After taking into 
account the effects of all applicable rules of law, the adjusted bases 
and the values of the shares as of January 1, year 3, are:

[[Page 778]]



----------------------------------------------------------------------------------------------------------------
                                     Preferred                                Common
                                 -------------------------------------------------------------------------------
                                    PS1     PS2     CS1     CS2     CS3     CS4     CS5     CS6     CS7     CS8
                                    (M)     (P)     (P)     (P)     (P)     (P)     (P)     (P)     (P)     (P)
----------------------------------------------------------------------------------------------------------------
Basis...........................    1250     990    1025     710     550     400     375     250     215     100
Year 1Sec.   1.1502-32               N/A     N/A    -125    -125    -125    -125    -125    -125    -125    -125
 adjustments....................
Year 2Sec.   1.1502-32              -100    -100    + 25    + 25    + 25    + 25    + 25    + 25    + 25    + 25
 adjustments....................
                                   + 200   + 200  ......  ......  ......  ......  ......  ......  ......  ......
                                 -------------------------
                                   + 100   + 100  ......  ......  ......  ......  ......  ......  ......  ......
                                 =========================
Adjusted basis..................    1350    1090     925     610     450     300     275     150     115       0
Value...........................    1100    1100     275     275     275     275     275     275     275     275
Unrecognized gain/(loss)........   (250)      10   (650)   (335)   (175)    (25)       0     125     160     275
----------------------------------------------------------------------------------------------------------------

    (C) On January 1, year 3, M sells PS1 for $1100 and P sells CS2 for 
$275. The sales of PS1 and CS2 are transfers of loss shares and 
therefore subject to this section.
    (ii) Basis redetermination under this paragraph (b). Under this 
paragraph (b), all members' bases in shares of S stock are subject to 
redetermination in accordance with the following:
    (A) Removing positive investment adjustments from transferred loss 
common shares. First, paragraph (b)(2)(i)(A) of this section applies to 
reduce P's basis in CS2, but not below value, by removing the positive 
investment adjustment applied to the basis of the share. Accordingly, 
P's basis in CS2 is reduced by $25, from $610 to $585.
    (B) Reallocating negative investment adjustments from common shares 
that are not transferred loss shares. Because the transferred shares 
remain loss shares after the removal of positive investment adjustments, 
their bases are further reduced under paragraph (b)(2)(i)(B) of this 
section, but not below value, by reallocating negative investment 
adjustments applied to common shares that are not transferred loss 
shares. Reallocations are made first to preferred shares and then to the 
common shares, in a manner that reduces disparity among members' bases 
in transferred loss preferred shares, and reduces disparity among 
members' bases in all common shares, to the greatest extent possible. 
The loss on PS1 is $250, the remaining loss on CS2 is $310, and the 
total amount of negative investment adjustments applied to shares that 
are not transferred loss shares is $875 (the sum of the negative 
adjustments applied to all common shares other than CS2). Thus, $250 of 
negative investment adjustments are reallocated and applied to the basis 
of PS1, reducing it to the share's value, $1100. The negative investment 
adjustments are reallocated from the common shares that are not 
transferred loss shares in a manner that reduces disparity among 
members' bases in all common shares to the greatest extent possible. The 
negative investment adjustments may be reallocated to PS1 from the 
common shares that are not transferred loss shares as follows: $125 from 
each of CS7 and CS8. Such reallocations increase the basis of CS7 by 
$125, from $115 to $240, and increase the basis of CS8 by $125, from $0 
to $125. Negative investment adjustments are then reallocated to CS2 
from the common shares that are not transferred loss shares in a manner 
that reduces disparity among members' bases in all common shares to the 
greatest extent possible. The negative investment adjustments may be 
reallocated to CS2 from the other common shares as follows: $80 from 
CS4, $105 from CS5, and $125 from CS6. Such reallocations reduce the 
basis of CS2 by $310, from $585 to $275, increase the basis of CS4 by 
$80, from $300 to $380, increase the basis of CS5 by $105, from $275 to 
$380, and increase the basis of CS6 by $125, from $150 to $275. However, 
there may be other reasonable reallocations.
    (C) Increasing basis by reallocated positive investment adjustments. 
Under paragraph (b)(2)(ii)(A) of this section, the $25 positive 
investment adjustment removed from CS2 (the transferred loss common 
share) is then reallocated and applied to increase the basis of 
preferred shares, but not above value. Accordingly, $10 of that amount 
is reallocated to PS2, increasing its basis from $1090 to $1100, its 
value. Under paragraph (b)(2)(ii)(B) of this section, the remaining $15 
is reallocated and applied to the common shares in a manner that reduces 
disparity among members' bases in all common shares to the greatest 
extent possible. The $15 positive investment adjustment that is 
reallocated to common shares may be reallocated entirely to CS8, 
increasing its basis from $125 to $140. However, there may be other 
reasonable reallocations.
    (D) Summary of the reallocation of adjustments. The adjustments made 
under this paragraph (b) are:

[[Page 779]]



----------------------------------------------------------------------------------------------------------------
                                     Preferred                                Common
                                 -------------------------------------------------------------------------------
                                    PS1     PS2     CS1     CS2     CS3     CS4     CS5     CS6     CS7     CS8
                                    (M)     (P)     (P)     (P)     (P)     (P)     (P)     (P)     (P)     (P)
----------------------------------------------------------------------------------------------------------------
Adjusted basis before               1350    1090     925     610     450     300     275     150     115       0
 redetermination................
Removing positive adjustments     ......  ......  ......     -25
 from transferred loss shares...
Reallocating negative               -250  ......  ......    -310  ......    + 80   + 105   + 125   + 125   + 125
 adjustments....................
Applying positive adjustments     ......    + 10  ......  ......  ......  ......  ......  ......  ......    + 15
 removed from transferred loss
 shares.........................
Basis after redetermination.....    1100    1100     925     275     450     380     380     275     240     140
Value...........................    1100    1100     275     275     275     275     275     275     275     275
Gain/(loss).....................       0       0   (650)       0   (175)   (105)   (105)       0      35     135
----------------------------------------------------------------------------------------------------------------

    (iii) Application of paragraphs (c) and (d) of this section. Because 
M's sale of PS1 and P's sale of CS2 are not transfers of loss shares 
after the application of this paragraph (b), paragraphs (c) and (d) of 
this section do not apply.
    (iv) Higher-tier effects. The $250 reduction in the basis of PS1 
under this paragraph (b) is a noncapital, nondeductible expense under 
Sec.  1.1502-32(b)(3)(iii)(B) that will be included in the year 3 
investment adjustment to be applied to P's basis in its M stock.

    (c) Stock basis reduction to prevent noneconomic loss--(1) In 
general. The rules of this paragraph (c) reduce M's basis in a 
transferred share of S stock to prevent noneconomic stock loss and thus 
promote the clear reflection of the group's income. These rules limit 
the reduction to M's basis in the S share to the amount of net 
unrealized appreciation reflected in the share's basis as of the 
transfer (the disconformity amount). These rules also limit the 
reduction to M's basis in the S share to the portion of the share's 
basis that is attributable to investment adjustments made pursuant to 
the consolidated return regulations.
    (2) Basis reduction rule. This paragraph (c) applies if M transfers 
a share of S stock and, after taking into account the effects of all 
applicable rules of law, including any adjustments under paragraph (b) 
of this section, the share is a loss share. Under this paragraph (c), 
M's basis in the share is reduced, but not below value, by the lesser 
of--
    (i) The share's net positive adjustment (as defined in paragraph 
(c)(3) of this section); and
    (ii) The share's disconformity amount (as defined in paragraph 
(c)(4) of this section).
    (3) Net positive adjustment. A share's net positive adjustment is 
the greater of--
    (i) Zero; and
    (ii) The sum of all investment adjustments reflected in the basis of 
the share. The term investment adjustment has the same meaning as in 
paragraph (b)(1)(iii) of this section, except that it includes all 
adjustments specially allocated under Sec.  1.1502-32(c)(1)(ii).
    (4) Disconformity amount. A share's disconformity amount is the 
excess, if any, of--
    (i) M's basis in the share; over
    (ii) The share's allocable portion of S's net inside attribute 
amount (as defined in paragraph (c)(5) of this section).
    (5) Net inside attribute amount. S's net inside attribute amount is 
determined as of the transfer, taking into account all applicable rules 
of law (even if the adjustments required by such rules are not deemed 
effective until after the transfer, such as certain adjustments required 
under sections 108 and 1017 and Sec.  1.1502-28). S's net inside 
attribute amount is the sum of S's net operating and capital loss 
carryovers, deferred deductions, money, and basis in assets other than 
money, reduced by the amount of S's liabilities. For this purpose, S's 
basis in any share of lower-tier subsidiary stock is generally S's basis 
in that share, adjusted to reflect any gain or loss recognized in the 
transaction with respect to the share and any other related or resulting 
adjustments to the basis of the share. However, see paragraph (c)(6) of 
this section for special rules regarding the computation of S's net 
inside attribute amount for purposes of this paragraph (c) if S holds 
stock of a subsidiary that is not transferred in the transaction.

[[Page 780]]

See paragraph (f) of this section for definitions of ``allocable 
portion,'' ``deferred deduction,'' ``liability,'' ``loss carryover,'' 
and other relevant terms.
    (6) Determination of S's net inside attribute amount if S owns stock 
of a lower-tier subsidiary--(i) Overview. If a loss share of S stock is 
transferred when S holds a share of stock of another subsidiary (S1) and 
the S1 share is not transferred in the same transaction, S's net inside 
attribute amount is determined by treating S's basis in its S1 share as 
tentatively reduced under this paragraph (c)(6). The purpose of this 
rule is to reduce the extent to which S1's investment adjustments 
increase noneconomic loss on S stock (as a result of S1's recognition of 
items that are indirectly reflected in a member's basis in a share of S 
stock).
    (ii) General rule for nontransferred shares of lower-tier subsidiary 
stock. For purposes of determining the disconformity amount of a share 
of S stock, S's basis in a nontransferred share of S1 stock is treated 
as reduced by the share's tentative reduction amount. The tentative 
reduction amount is the lesser of the S1 share's net positive adjustment 
and the S1 share's disconformity amount.
    (iii) Multiple tiers of nontransferred shares. If S directly or 
indirectly owns nontransferred shares of stock of subsidiaries in 
multiple tiers, then, subject to the limitations in paragraph (c)(6)(iv) 
of this section (regarding nontransferred shares that are lower-tier to 
transferred shares), the rules of this paragraph (c)(6) first apply to 
determine the tentatively reduced basis of stock of the subsidiary at 
the lowest tier. These rules then apply to determine the tentatively 
reduced basis of nontransferred shares of stock of subsidiaries 
successively at each next higher tier that is lower-tier to S. The 
tentative reductions at each tier are treated as noncapital, 
nondeductible expenses that tier up under the principles of Sec.  
1.1502-32, and, as such, result in a tentative reduction of basis and 
any net positive adjustment of subsidiary shares that are lower-tier to 
S.
    (iv) Nonapplicability of tentative basis reduction rule to 
transferred shares. The tentative basis reduction rule in this paragraph 
(c)(6) does not apply to any share of stock of a lower-tier subsidiary 
(S1) that is transferred in the same transaction in which the S share is 
transferred. Further, for purposes of determining the S share's 
disconformity amount, the tentative basis reduction rule in this 
paragraph (c)(6) only applies with respect to stock of a lower-tier 
subsidiary if such stock is lower-tier to a nontransferred S1 share. The 
purpose of this rule is to prevent tentative adjustments to the bases of 
lower-tier shares if this paragraph (c) has already applied with respect 
to the shares, without regard to whether such application resulted in 
the reduction of the basis of any share.
    (v) Example. The rules of this paragraph (c)(6) are illustrated by 
the following example:

    Example. (i) Facts. M owns the sole outstanding share of S stock, S 
owns the sole outstanding share of S1 stock, S1 owns all five 
outstanding shares of S2 stock (the bases of which are equal), and S2 
owns the sole outstanding share of S3 stock. The basis of each of the 
shares reflects its allocable portion of a $5 positive investment 
adjustment attributable to income recognized by S3. The basis of the S 
share exceeds its value by $10 and the basis of the S1 share exceeds its 
value by $5. The basis of each S2 share is $1 less than its value. In 
one transaction, M sells its S share to X, S1 issues new shares in an 
amount that prevents S and S1 from being members of the same group, and 
S1 sells one of its S2 shares to an unrelated individual. S1, S2, and S3 
elect to file a consolidated return following the transaction.
    (ii) General applicability of section. As a result of the 
transaction, there is a transfer of the S share and the S2 share that 
was sold (because both shares were sold to nonmembers) and of the S1 
share (because S and S1 cease to be members of the same group as a 
result of the stock issuance). The transfer of the S2 share is not a 
transfer of a loss share, and so this section does not apply to that 
transfer. The transfers of the S and S1 shares are transfers of loss 
shares, and so this section applies to those transfers. The S3 share and 
the four retained S2 shares are not transferred in the transaction. 
Under paragraph (a)(3)(ii)(A) of this section, this section applies 
first to the transfer of the S1 share because it is the lowest-tier 
transferred loss share.
    (iii) Application of paragraph (b) of this section and this 
paragraph (c) to transfer of S1 stock. First, the $1 gain recognized on 
the transfer of the S2 share tiers up to adjust the basis of each upper-
tier share. The transferred S1 share is still a loss share (by $4)

[[Page 781]]

and is therefore subject to this section. Although the transfer is 
subject to paragraph (b) of this section, there is no basis 
redetermination under paragraph (b) of this section because there is 
only one share of S1 stock outstanding (and so there can be no disparity 
among members' bases in common shares and there are no outstanding 
preferred shares with respect to which there can be unrecognized gain or 
loss). See paragraph (b)(1)(ii)(A) of this section. Therefore, after the 
application of paragraph (b) of this section, the S1 share is still a 
loss share and, as such, subject to this paragraph (c). In determining 
the amount of any basis reduction under this paragraph (c), the 
disconformity amount of the S1 share is computed by comparing S's basis 
in its S1 share to S1's net inside attribute amount (because there is 
only one S1 share outstanding, the entire amount is allocable to that 
share). In determining S1's net inside attribute amount, the tentative 
reduction rule in this paragraph (c)(6) applies to nontransferred lower-
tier shares (provided they are lower-tier to nontransferred shares). 
Thus, the rule applies to S1's four retained shares of S2 stock and to 
S2's share of S3 stock. The tentative reduction begins at the lowest 
level (S2's share of S3 stock) and any tentative reduction amount tiers 
up as a noncapital, nondeductible expense under the principles of Sec.  
1.1502-32, tentatively reducing the bases of any upper tier 
nontransferred shares that are lower-tier to the transferred loss share 
(the S1 share). Accordingly, each of S1's nontransferred share of S2 
stock is tentatively reduced by its portion of the tentative reduction 
to S2's share of S3 stock. S1 then applies the tentative reduction rule 
to its four nontransferred S2 shares. S1's net inside attribute amount 
is the sum of its basis in each of its nontransferred S2 shares, as 
tentatively reduced under this paragraph (c)(6) and S1's actual basis in 
the transferred S2 share, increased to reflect the gain recognized on 
the sale of that share. After the application of this paragraph (c) to 
the transfer of the S1 share, paragraph (b) of this section applies to 
M's transfer of the S share.
    (iv) Application of section to transfer of S stock. Because the S 
share is still a loss share after applying paragraph (b) of this section 
and this paragraph (c) to the transfer of the S1 stock, this section 
applies to M's transfer of the S share. Although paragraph (b) of this 
section applies to the transfer, there is no basis redetermination under 
paragraph (b) of this section because there is only one share of S stock 
outstanding (and so there can be no disparity among members' bases in 
common shares and there are no outstanding preferred shares with respect 
to which there can be unrecognized gain or loss). See paragraph 
(b)(1)(ii)(A) of this section. Therefore, after the application of 
paragraph (b) of this section, the share is still a loss share and, as 
such, subject to this paragraph (c). In determining the disconformity 
amount of the S share, S's net inside attribute amount is determined 
using S's actual basis in the transferred S1 stock (after any reduction 
under this paragraph (c)), because the tentative reduction rule in this 
paragraph (c)(6) does not apply to shares that are transferred in the 
transaction. All other shares are lower-tier to the transferred S1 share 
and are therefore also not subject to tentative reduction for purposes 
of determining the disconformity amount of the S share. After the 
application of this paragraph (c) to the transfer of the S share, 
paragraph (d) of this section applies with respect to M's transfer of 
the S share. After the application of paragraph (d) of this section with 
respect to the transfer of the S share, if the S1 share is still a loss 
share, paragraph (d) of this section applies with respect to S's 
transfer of the S1 share.

    (7) Netting of gains and losses taken into account--(i) General 
rule. Solely for purposes of computing the basis reduction required 
under this paragraph (c), the basis of each transferred loss share of S 
stock is treated as reduced proportionately (as to loss) by the amount 
of income or gain taken into account by members with respect to 
transferred shares of S stock, provided that--
    (A) The shares are transferred in one transaction; and
    (B) The gain is taken into account as of the transaction.
    (ii) Example. The netting rule of this paragraph (c)(7) is 
illustrated by the following example:

    Example. Disposition of gain and loss shares. (i) Facts. M owns the 
only three outstanding shares of S stock. Share A has a basis of $54, 
Share B has a basis of $100, and Share C has a basis of $80. In the same 
transaction, M sells all three S shares to X for $60 each. M realizes a 
gain of $6 on Share A, a loss of $40 on Share B, and a loss of $20 on 
Share C. M's sales of Share B and Share C are transfers of loss shares 
and therefore subject to this section. M's sale is a transfer of all of 
the shares of S stock held by members to one or more nonmembers in one 
fully taxable transaction and, therefore, basis is not redetermined 
under paragraph (b) of this section. See paragraph (b)(1)(ii)(B) of this 
section. The transfer is then subject to this paragraph (c). However, 
for this purpose, M treats its bases in Share B and Share C as reduced 
by the $6 gain taken into account on Share A. The gain is allocated to 
Share B and Share C proportionately based on the amount of loss in each 
share. Thus, $4 of gain ($40/$60 x $6) is treated as allocated to Share 
B and $2 of gain ($20/$60 x $6) is treated as allocated to Share

[[Page 782]]

C. Accordingly, M computes the basis reduction required under this 
paragraph (c) by treating its basis in Share B as $96 ($100 less $4) and 
its basis in Share C as $78 ($80 less $2). If, after the application of 
this paragraph (c), the sales of Share B and Share C are still transfers 
of loss shares, then the transfers are subject to paragraph (d) of this 
section. (Although the bases of Share B and Share C are not actually 
reduced by any portion of the gain, paragraph (d)(3)(i)(A) of this 
section applies netting principles to limit adjustments under paragraph 
(d) of this section.)
    (ii) Disposition of stock with deferred gain. The facts are the same 
as in paragraph (i) of this Example, except that M sells the gain share 
to another member. Under Sec.  1.1502-13, M's gain recognized on Share A 
is not taken into account in the taxable year of the transfer and 
therefore cannot be treated as reducing M's loss recognized on Share B 
and Share C for purposes of this paragraph (c). The applicability of 
this section to the transfer of Share A is determined as of the time 
that the intercompany item (the gain on M's sale to the other member) is 
taken into account; see paragraph (e)(3) of this section. However, if 
Share B (instead of Share A) were sold to a member, the entire gain on 
Share A would be treated as reducing the loss on Share C for purposes of 
applying this paragraph (c); see paragraph (e)(3) of this section.

    (8) Examples. The application of this paragraph (c) is illustrated 
by the following examples.

    Example 1. Appreciation reflected in stock basis at acquisition. (i) 
Appreciation recognized as gain. (A) Facts. On January 1, year 1, M 
purchases the sole outstanding share of S stock for $100. At that time, 
S owns two assets, Asset 1 with a basis of $0 and a value of $40, and 
Asset 2 with a basis and value of $60. In year 1, S sells Asset 1 for 
$40, recognizing a $40 gain. On December 31, year 1, M sells its S share 
for $100. After taking into account the effects of all applicable rules 
of law, M's basis in the S share is $140 (M's original $100 basis 
increased under Sec.  1.1502-32 by $40, the share's allocable portion of 
the gain recognized on the sale of Asset 1). M's sale of the S share is 
a transfer of a loss share and therefore subject to this section.
    (B) Application of paragraph (b) of this section. Although the 
transfer is subject to this section, there is no basis redetermination 
under paragraph (b) of this section because there is only one share of S 
stock outstanding (and so there can be no disparity among members' bases 
in common shares and there are no outstanding preferred shares with 
respect to which there can be unrecognized gain or loss). See paragraph 
(b)(1)(ii)(A) of this section. Therefore, after the application of 
paragraph (b) of this section, the share is still a loss share and, as 
such, subject to this paragraph (c).
    (C) Basis reduction under this paragraph (c). Under this paragraph 
(c), M's basis in the S share, $140, is reduced, but not below value, 
$100, by the lesser of the share's net positive adjustment and 
disconformity amount. The share's net positive adjustment is the greater 
of zero and the sum of all investment adjustments (as defined in 
paragraph (b)(1)(iii) of this section) applied to the basis of the 
share. The only investment adjustment applied to the basis of the share 
is the $40 adjustment attributable to the gain recognized on the sale of 
Asset 1. Thus, the share's net positive adjustment is $40. The share's 
disconformity amount is the excess, if any, of its basis, $140, over its 
allocable portion of S's net inside attribute amount. S's net inside 
attribute amount is the sum of S's money ($40 from the sale of Asset 1) 
and S's basis in Asset 2, $60, or $100. The share is the only 
outstanding S share and so its allocable portion of the $100 net inside 
attribute amount is the entire $100. Thus, the share's disconformity 
amount is $40, the excess of $140 over $100. The lesser of the net 
positive adjustment, $40, and the share's disconformity amount, $40, is 
$40. Accordingly, immediately before the application of paragraph (d) of 
this section, M's basis in the share is reduced by $40, from $140 to 
$100.
    (D) Application of paragraph (d) of this section. Because M's sale 
of the S share is not a transfer of a loss share after the application 
of this paragraph (c), paragraph (d) of this section does not apply to 
the transfer.
    (ii) Appreciation recognized as income earned in the consumption of 
built-in gain. The facts are the same as in paragraph (i)(A) of this 
Example 1, except that, instead of selling Asset 1, the value of Asset 1 
is consumed in the production of $40 of income in year 1 (reducing the 
value of Asset 1 to $0). Because the net positive adjustment includes 
items of income as well as items of gain, the results are the same as 
those described in paragraph (i) of this Example 1.
    (iii) Post-acquisition appreciation eliminates stock loss. The facts 
are the same as in paragraph (i)(A) of this Example 1 except that, in 
addition, the value of Asset 2 increases to $100 before the stock is 
sold. As a result, M sells the S share for $140. Because M's sale of the 
S share is not a transfer of a loss share, this section does not apply 
to the transfer, notwithstanding that P's basis in the S share was 
increased by the gain recognized on Asset 1.
    (iv) Distributions. (A) Facts. The facts are the same as in 
paragraph (i)(A) of this Example 1 except that, in addition, S declares 
and makes a $10 dividend distribution before the end of year 1. As a 
result, the value of the share decreases and M sells the share for $90. 
After taking into account the effects of all applicable rules of law, 
M's basis in the S

[[Page 783]]

share is $130 (M's original $100 basis increased under Sec.  1.1502-32 
by $30, the $10 distribution on the share reduced by the share's 
allocable portion of the $40 gain recognized on the sale of Asset 1). 
M's sale of the S share is a transfer of a loss share and therefore 
subject to this section.
    (B) Application of paragraph (b) of this section. Although the 
transfer is subject to this section, there is no basis redetermination 
under paragraph (b) of this section for the reasons set forth in 
paragraph (i)(B) of this Example 1. Therefore, after the application of 
paragraph (b) of this section, the share is still a loss share and, as 
such, subject to this paragraph (c).
    (C) Basis reduction under this paragraph (c). Under this paragraph 
(c), M's basis in the S share, $130, is reduced, but not below value, 
$90, by the lesser of the share's net positive adjustment and 
disconformity amount. The share's net positive adjustment is $40 (the 
sum of all investment adjustments (as defined in paragraph (b)(1)(iii) 
of this section) applied to the basis of the share). The share's 
disconformity amount is the excess of its basis, $130, over its 
allocable portion of S's net inside attribute amount. S's net inside 
attribute amount is $90, the sum of S's money ($30, the $40 sale 
proceeds less the $10 distribution) and S's basis in Asset 2, $60. The 
share is the only outstanding S share and so its allocable portion of 
the $90 net inside attribute amount is the entire $90. The lesser of the 
share's net positive adjustment, $40, and its disconformity amount, $40, 
is $40. Accordingly, immediately before the application of paragraph (d) 
of this section, the basis in the share is reduced by $40, from $130 to 
$90.
    (D) Application of paragraph (d) of this section. Because M's sale 
of the S share is not a transfer of a loss share after the application 
of this paragraph (c), paragraph (d) of this section does not apply to 
the transfer.
    Example 2. Loss of appreciation reflected in basis. (i) Facts. On 
January 1, year 1, M purchases the sole outstanding share of S stock for 
$100. At that time, S owns two assets, Asset 1 with a basis of $0 and a 
value of $40, and Asset 2 with a basis and value of $60. The value of 
Asset 1 declines to $0 and M sells its S share for $60. After taking 
into account the effects of all applicable rules of law, M's basis in 
the S share is $100. M's sale of the S share is a transfer of a loss 
share and therefore subject to this section.
    (ii) Application of paragraph (b) of this section. Although the 
transfer is subject to this section, there is no basis redetermination 
under paragraph (b) of this section because there is only one share of S 
stock outstanding (and so there can be no disparity among members' bases 
in common shares and there are no outstanding preferred shares with 
respect to which there can be unrecognized gain or loss). See paragraph 
(b)(1)(ii)(A) of this section. Therefore, after the application of 
paragraph (b) of this section, the share is still a loss share and, as 
such, subject to this paragraph (c).
    (iii) Basis reduction under this paragraph (c). Under this paragraph 
(c), M's $100 basis in the S share is reduced, but not below its $60 
value by the lesser of the share's net positive adjustment and 
disconformity amount. There were no investment adjustments applied to 
M's basis in the share and so the share's net positive adjustment is $0. 
Thus, although the share's disconformity amount is $40 (the excess of 
M's $100 basis in the share over the share's $60 allocable portion of 
S's net inside attribute amount), no basis reduction is required under 
this paragraph (c).
    (iv) Application of paragraph (d) of this section. After the 
application of this paragraph (c), M's sale of the S share is still a 
transfer of a loss share, and, accordingly, subject to paragraph (d) of 
this section. No adjustment is required under paragraph (d) of this 
section because there is no aggregate inside loss. See paragraph 
(d)(3)(iii) of this section.
    Example 3. Items accruing after S becomes a member. (i) Recognition 
of loss accruing after S becomes a member. (A) Facts. On January 1, year 
1, M purchases the sole outstanding share of S stock for $100. At that 
time, S owns two assets, Asset 1, with a basis of $0 and a value of $40, 
and Asset 2, with a basis and value of $60. In year 1, S sells Asset 1 
for $40, recognizing a $40 gain. Also in year 1, the value of Asset 2 
declines and S sells Asset 2 for $20, recognizing a $40 loss that is 
absorbed by the group. On December 31, year 1, M sells its S share for 
$60. After taking into account the effects of all applicable rules of 
law, M's basis in the S share is $100 (M's original $100 basis, 
unadjusted under Sec.  1.1502-32 because the $40 gain recognized on the 
sale of Asset 1 and the $40 loss on the sale of Asset 2 net, resulting 
in an adjustment of $0). M's sale of the S share is a transfer of a loss 
share and therefore subject to this section.
    (B) Application of paragraph (b) of this section. Although the 
transfer is subject to this section, there is no basis redetermination 
under paragraph (b) of this section because there is only one share of S 
stock outstanding (and so there can be no disparity among members' bases 
in common shares and there are no outstanding preferred shares with 
respect to which there can be unrecognized gain or loss). See paragraph 
(b)(1)(ii)(A) of this section. Therefore, after the application of 
paragraph (b) of this section, the share is still a loss share and, as 
such, subject to this paragraph (c).
    (C) Basis reduction under this paragraph (c). Under this paragraph 
(c), M's basis in the S share is reduced, but not below the share's $60 
value, by the lesser of the share's net positive adjustment and 
disconformity amount. The share's net positive adjustment

[[Page 784]]

is $0. Thus, although the share has a disconformity amount of $40 (the 
excess of M's basis in the share, $100, over the share's allocable 
portion of S's net inside attribute amount, $60), no basis reduction is 
required under this paragraph (c).
    (D) Application of paragraph (d) of this section. After the 
application of this paragraph (c), M's sale of the S share is still a 
transfer of a loss share, and, accordingly, subject to paragraph (d) of 
this section. No adjustment is required under paragraph (d) of this 
section because there is no aggregate inside loss. See paragraph 
(d)(3)(iii) of this section.
    (ii) Recognition of gain accruing after S becomes a member. (A) 
Facts. The facts are the same as in paragraph (i)(A) of this Example 3, 
except that M does not sell the S share and S does not sell either asset 
in year 1. In addition, in year 2, the value of Asset 1 declines to $0, 
the value of Asset 2 returns to $60, and S creates Asset 3 (with a basis 
of $0). In year 3, S sells Asset 3 for $40, recognizing a $40 gain. On 
December 31, year 3, M sells its S share for $100. After taking into 
account the effects of all applicable rules of law, M's basis in the S 
share is $140 (M's original $100 basis increased under Sec.  1.1502-32 
by $40 (the share's allocable portion of the gain recognized on the sale 
of Asset 3 in year 3)). M's sale of the S share is a transfer of a loss 
share and therefore subject to this section.
    (B) Application of paragraph (b) of this section. Although the 
transfer is subject to this section, there is no basis redetermination 
under paragraph (b) of this section for the reasons set forth in 
paragraph (i)(B) of this Example 3. Therefore, after the application of 
paragraph (b) of this section, the share is still a loss share and, as 
such, subject to this paragraph (c).
    (C) Basis reduction under this paragraph (c). Under this paragraph 
(c), M's basis in the S share, $140, is reduced, but not below value, 
$100, by the lesser of the share's net positive adjustment and 
disconformity amount. The share's net positive adjustment is $40 (the 
year 3 investment adjustment). The share's disconformity amount is the 
excess of its basis, $140, over its allocable portion of S's net inside 
attribute amount. S's net inside attribute amount is $100, the sum of 
S's money ($40 from the sale of Asset 3) and its basis in its assets 
($60 (the sum of Asset 1's basis of $0 and Asset 2's basis of $60)). S's 
$100 net inside attribute amount is allocable entirely to the sole 
outstanding S share. Thus, the share's disconformity amount is the 
excess of $140 over $100, or $40. The lesser of the share's net positive 
adjustment, $40, and its disconformity amount, $40, is $40. Accordingly, 
the basis in the share is reduced by $40, from $140 to $100.
    (D) Application of paragraph (d) of this section. Because M's sale 
of the S share is not a transfer of a loss share after the application 
of this paragraph (c), paragraph (d) of this section does not apply to 
the transfer.
    (iii) Recognition of income earned after S becomes a member. The 
facts are the same as in paragraph (ii)(A) of this Example 3, except 
that instead of creating Asset 3, S earns $40 of income from services 
provided in year 3. Because the net positive adjustment includes items 
of income as well as items of gain, the results are the same as those 
described in paragraph (ii) of this Example 3.
    Example 4. Computing the disconformity amount. (i) Unrecognized loss 
reflected in stock basis. (A) Facts. M owns the sole outstanding share 
of S stock with a basis of $100. S owns two assets, Asset 1 with a basis 
of $20 and a value of $60, and Asset 2 with a basis of $60 and a value 
of $40. In year 1, S sells Asset 1 for $60, recognizing a $40 gain. On 
December 31, year 1, M sells the S share for $100. After taking into 
account the effects of all applicable rules of law, M's basis in the S 
share is $140 (M's original $100 basis increased under Sec.  1.1502-32 
by $40, the share's allocable portion of the gain recognized on the sale 
of Asset 1). M's sale of the S share is a transfer of a loss share and 
therefore subject to this section.
    (B) Application of paragraph (b) of this section. Although the 
transfer is subject to this section, there is no basis redetermination 
under paragraph (b) of this section because there is only one share of S 
stock outstanding (and so there can be no disparity among members' bases 
in common shares and there are no outstanding preferred shares with 
respect to which there can be unrecognized gain or loss). See paragraph 
(b)(1)(ii)(A) of this section. Therefore, after the application of 
paragraph (b) of this section, the share is still a loss share and, as 
such, subject to this paragraph (c).
    (C) Basis reduction under this paragraph (c). Under this paragraph 
(c), M's basis in the S share, $140, is reduced, but not below the 
share's $100 value, by the lesser of the share's net positive adjustment 
and disconformity amount. The share's net positive adjustment is $40 
(the year 1 investment adjustment). The share's disconformity amount is 
the excess of its basis, $140, over its allocable portion of S's net 
inside attribute amount. S's net inside attribute amount is $120, the 
sum of S's money ($60 from the sale of Asset 1) and S's basis in Asset 
2, $60. S's net inside attribute amount is allocable entirely to the 
sole outstanding S share. Thus, the share's disconformity amount is $20, 
the excess of $140 over $120. The lesser of the share's net positive 
adjustment, $40, and its disconformity amount, $20, is $20. Accordingly, 
the basis in the share is reduced by $20, from $140 to $120.
    (D) Application of paragraph (d) of this section. After the 
application of this paragraph (c), M's sale of the S share is still a 
transfer

[[Page 785]]

of a loss share, and, accordingly, S's attributes (to the extent of the 
$20 duplicated loss) are subject to reduction under paragraph (d) of 
this section.
    (ii) Loss carryover. The facts are the same as in paragraph (i)(A) 
of this Example 4, except that Asset 2 has a basis of $0 (rather than 
$60) and S has a $60 loss carryover (as defined in paragraph (f)(6) of 
this section). The analysis is the same as paragraph (i) of this Example 
4. Furthermore, the analysis of the application of this paragraph (c) 
would be the same if the $60 loss carryover were subject to a section 
382 limitation from a prior ownership change, or if, instead, the $60 
loss carryover were subject to the limitation in Sec.  1.1502-21(c) on 
losses carried from separate return limitation years.
    (iii) Liabilities. The facts are the same as in paragraph (i)(A) of 
this Example 4, except that S borrows $100 before M sells the S share. 
S's net inside attribute amount remains $120, computed as the sum of S's 
money ($160, $60 from the sale of Asset 1 plus the $100 borrowed) and 
S's basis in Asset 2, $60, less its liabilities, $100. Thus, the S 
share's disconformity amount remains the excess of $140 over $120, or 
$20. The results are the same as in paragraph (i) of this Example 4.
    Example 5. Computing the allocable portion of the net inside 
attribute amount. (i) Facts. On January 1, year 1, M owns all five 
outstanding shares of S stock with a basis of $20 per share. S owns 
Asset with a basis of $0. In year 1, S sells Asset for $100, recognizing 
a $100 gain. On December 31, year 1, M sells one of the S shares, Share 
1, for $20. After taking into account the effects of all applicable 
rules of law, M's basis in Share 1 is $40 (M's original $20 basis 
increased under Sec.  1.1502-32 by $20 (the share's allocable portion of 
the gain recognized on the sale of Asset)). M's sale of Share 1 is a 
transfer of a loss share and therefore subject to this section.
    (ii) Application of paragraph (b) of this section. Although the 
transfer is subject to this section, basis is not redetermined under 
paragraph (b) of this section because there is no disparity among M's 
bases in shares of S common stock and there are no shares of S preferred 
stock outstanding (so there can be no unrecognized gain or loss with 
respect to preferred shares). See paragraph (b)(1)(ii)(A) of this 
section. After the application of paragraph (b) of this section, M's 
sale of Share 1 is still a transfer of a loss share and therefore 
subject to this paragraph (c).
    (iii) Basis reduction under this paragraph (c). Under this paragraph 
(c), M's $40 basis in Share 1 is reduced, but not below its $20 value by 
the lesser of the share's net positive adjustment and disconformity 
amount. Share 1's net positive adjustment is $20 (the year 1 investment 
adjustment). Share 1's disconformity amount is the excess of its $40 
basis over its allocable portion of S's net inside attribute amount. S's 
net inside attribute amount is equal to the amount of S's money ($100 
from the sale of the asset). Share 1's allocable portion of S's $100 net 
inside attribute amount is $20 (1/5 x $100). Thus, Share 1's 
disconformity amount is the excess of $40 over $20, or $20. The lesser 
of the share's $20 net positive adjustment and its $20 disconformity 
amount is $20. Accordingly, the basis in the share is reduced by $20, 
from $40 to $20.
    (iv) Application of paragraph (d) of this section. Because M's sale 
of Share 1 is not a transfer of a loss share after the application of 
this paragraph (c), paragraph (d) of this section does not apply to the 
transfer.
    Example 6. Liabilities. (i) In general. (A) Facts. On January 1, 
year 1, M purchases the sole outstanding share of S stock for $100. At 
that time, S owns Asset, with a basis of $0 and value of $100, and $100 
cash. S also has a $100 liability. In year 1, S declares and makes a $60 
dividend distribution to M and recognizes $20 of income. The value of 
Asset declines to $60 and, on December 31, year 1, M sells the S share 
for $20. After taking into account the effects of all applicable rules 
of law, M's basis in the S share is $60 (M's original $100 basis 
decreased under Sec.  1.1502-32 by $40 (the net of the $60 distribution 
and the $20 income recognized)). M's sale of the S share is a transfer 
of a loss share and therefore subject to this section.
    (B) Application of paragraph (b) of this section. Although the 
transfer is subject to this section, there is no basis redetermination 
under paragraph (b) of this section because there is only one share of S 
stock outstanding (and so there can be no disparity among members' bases 
in common shares and there are no outstanding preferred shares with 
respect to which there can be unrecognized gain or loss). See paragraph 
(b)(1)(ii)(A) of this section. Therefore, after the application of 
paragraph (b) of this section, the share is still a loss share and, as 
such, subject to this paragraph (c).
    (C) Basis reduction under this paragraph (c). Under this paragraph 
(c), M's basis in the S share, $60, is reduced, but not below value, 
$20, by the lesser of the share's net positive adjustment and 
disconformity amount. The share's net positive adjustment is $20 (the 
year 1 investment adjustment, as defined in paragraph (b)(1)(iii) of 
this section). The share's disconformity amount is the excess of its 
basis, $60, over its allocable portion of S's net inside attribute 
amount. S's net inside attribute amount is negative $40, computed as the 
sum of S's money ($60 ($100 less the $60 distribution plus the $20 
income recognized)) and S's basis in Asset, $0, less S's liability, 
$100. S's net inside attribute amount is allocable entirely to the sole 
outstanding S share. Thus, the share's disconformity amount is the 
excess of $60 over negative $40, or $100. The lesser of the share's

[[Page 786]]

net positive adjustment, $20, and its disconformity amount, $100, is 
$20. Accordingly, the basis in the share is reduced by $20, from $60 to 
$40.
    (D) Application of paragraph (d) of this section. After the 
application of this paragraph (c), the S share is still a loss share 
and, accordingly, S's attributes are subject to reduction under 
paragraph (d) of this section. No adjustment is required under paragraph 
(d) of this section, however, because there is no aggregate inside loss. 
See paragraph (d)(3)(iii) of this section.
    (ii) Excluded cancellation of indebtedness income--insufficient 
attributes available for reduction under sections 108 and 1017, and 
Sec.  1.1502-28. (A) Facts. The facts are the same as in paragraph 
(i)(A) of this Example 6, except that M does not sell the S share. 
Instead, in year 4, Asset is destroyed in a fire and S spends its $60 on 
deductible expenses that are not absorbed by the group. S's loss becomes 
part of the consolidated net operating loss (CNOL). In year 5, S becomes 
insolvent and S's debt is discharged. Because of S's insolvency, S's 
discharge of indebtedness income is excluded under section 108 and, as a 
result, S's attributes are subject to reduction under sections 108 and 
1017, and Sec.  1.1502-28. S's only attribute is the portion of the CNOL 
attributable to S, $60, and it is reduced to $0. There are no other 
consolidated attributes. In year 5, the S stock (which is treated as a 
capital asset) becomes worthless under section 165, taking into account 
Sec.  1.1502-80(c). After taking into account the effects of all 
applicable rules of law, M's basis in the S share is $60 (M's original 
$100 basis decreased under Sec.  1.1502-32 by the year 1 investment 
adjustment of $40 (the net of the $60 distribution and the $20 income 
recognized). The investment adjustment for year 5 is $0 (the net of the 
$60 tax exempt income from the excluded COD applied to reduce attributes 
and the $60 noncapital, nondeductible expense from the reduction of S's 
portion of the CNOL). Under paragraph (f)(10)(i)(D) of this section, a 
share is transferred on the last day of the taxable year during which it 
becomes worthless under section 165 if the share is treated as a capital 
asset, or the date the share becomes worthless if the share is not 
treated as a capital asset, taking into account Sec.  1.1502-80(c). 
Accordingly, M transfers the loss share of S stock on December 31, year 
5, and the transfer is therefore subject to this section.
    (B) Application of paragraph (b) of this section. Although the 
transfer is subject to this section, there is no basis redetermination 
under paragraph (b) of this section for the reasons set forth in 
paragraph (i)(B) of this Example 6. Therefore, after the application of 
paragraph (b) of this section, the share is still a loss share and, as 
such, subject to this paragraph (c).
    (C) Basis reduction under this paragraph (c). Under this paragraph 
(c), M's basis in its S share, $60, is reduced, but not below value, $0, 
by the lesser of the share's net positive adjustment and disconformity 
amount. The share's net positive adjustment is $20 (the year 1 
investment adjustment, as defined in paragraph (b)(1)(iii) of this 
section). The share's disconformity amount is the excess of its basis, 
$60, over its allocable portion of S's net inside attribute amount. S's 
net inside attribute amount is $0. (The effects of the attribute 
reduction required under sections 108 and 1017 and Sec.  1.1502-28 are 
taken into account in applying this section; therefore, for purposes of 
this section, S's portion of the CNOL is treated as eliminated under 
section 108 and Sec.  1.1502-28.) S's net inside attribute amount is 
allocable entirely to the sole outstanding S share. Thus, the share's 
disconformity amount is the excess of $60 over $0, or $60. The lesser of 
the share's net positive adjustment, $20, and its disconformity amount, 
$60, is $20. Accordingly, the basis in the share is reduced by $20, from 
$60 to $40, immediately before the transfer.
    (D) Application of paragraph (d) of this section. After the 
application of this paragraph (c), the S share is still a loss share, 
and, accordingly, S's attributes are subject to reduction under 
paragraph (d) of this section. No adjustment is required under paragraph 
(d) of this section, however, because there is no aggregate inside loss. 
See paragraph (d)(3)(iii) of this section.
    (iii) Excluded cancellation of indebtedness income--full attribute 
reduction under sections 108 and 1017, and Sec.  1.1502-28 (using 
attributes attributable to another member). (A) Facts. The facts are the 
same as in paragraph (ii)(A) of this Example 6 except that M loses the 
$60 distributed in year 1 and the group does not absorb the loss. Thus, 
as of December 31, year 5, the CNOL is $120, attributable $60 to S and 
$60 to P. As a result, under Sec.  1.1502-28(a)(4), after the portion of 
the CNOL attributable to S is reduced to $0, the remaining $40 of 
excluded COD applies to the portion of the CNOL attributable to P, 
reducing it from $60 to $20. After taking into account the effects of 
all applicable rules of law, M's basis in the S share at the end of year 
5 is $100 (M's original $100 basis decreased under Sec.  1.1502-32 by 
$40 at the end of the year 1 and then increased under Sec.  1.1502-32 by 
$40 at end of the year 5 (the net of the $100 tax exempt income from the 
excluded COD applied to reduce attributes and the $60 noncapital, 
nondeductible expense from the reduction of S's portion of the CNOL)). 
Under paragraph (f)(10)(i)(D) of this section, a share is transferred on 
the last day of the taxable year during which it becomes worthless under 
section 165 if the share is treated as a capital asset, or the date the 
share becomes worthless if the share is not treated as a capital

[[Page 787]]

asset, taking into account Sec.  1.1502-80(c). Accordingly, M transfers 
the loss share of S stock on December 31, year 5, and the transfer is 
therefore subject to this section.
    (B) Application of paragraph (b) of this section. Although the 
transfer is subject to this section, there is no basis redetermination 
under paragraph (b) of this section for the reasons set forth in 
paragraph (i)(B) of this Example 6. Therefore, after the application of 
paragraph (b) of this section, the share is still a loss share and, as 
such, subject to this paragraph (c).
    (C) Basis reduction under this paragraph (c). Under this paragraph 
(c), M's basis in the S share, $100, is reduced, but not below value, 
$0, by the lesser of the share's net positive adjustment and 
disconformity amount. The share's net positive adjustment is $60 (the 
sum of the year 1 investment adjustment, as defined in paragraph 
(b)(1)(iii) of this section, $20, and the year 5 investment adjustment, 
$40). The share's disconformity amount is the excess of its basis, $100, 
over its allocable portion of S's net inside attribute amount. S's net 
inside attribute amount is $0 (taking into account the effects of the 
attribute reduction required under sections 108 and 1017 and Sec.  
1.1502-28). S's net inside attribute amount is allocable entirely to the 
sole outstanding S share. The share's disconformity amount is therefore 
$100. The lesser of the share's net positive adjustment, $60, and its 
disconformity amount, $100, is $60. Accordingly, M's basis in the share 
is reduced by $60, from $100 to $40, immediately before the transfer.
    (D) Application of paragraph (d) of this section. After the 
application of this paragraph (c), the S share is still a loss share, 
and, accordingly, S's attributes are subject to reduction under 
paragraph (d) of this section. No adjustment is required under paragraph 
(d) of this section, however, because there is no aggregate inside loss. 
See paragraph (d)(3)(iii) of this section.
    Example 7. Lower-tier subsidiary (no transfer of lower-tier stock). 
(i) Facts. M owns the sole outstanding share of S stock with a basis of 
$160. S owns two assets, Asset 1 with a basis and value of $100, and the 
sole outstanding share of S1 stock with a basis of $60. S1 owns one 
asset, Asset 2, with a basis of $20 and value of $60. In year 1, S1 
sells Asset 2 to X for $60, recognizing a $40 gain. On December 31, year 
1, M sells its S share to Y, a member of another consolidated group, for 
$160. After taking into account the effects of all applicable rules of 
law, M's basis in the S share is $200 (M's original $160 basis increased 
under Sec.  1.1502-32 by $40 (to reflect the tier-up of the adjustment 
to S's basis in the S1 stock for the gain recognized on S1's sale of 
Asset 2)). M's sale of the S share is a transfer of a loss share and 
therefore subject to this section. (S does not transfer the S1 share 
because S and S1 are members of the same group following the transfer. 
See paragraph (f)(10) of this section.)
    (ii) Application of paragraph (b) of this section. Although the 
transfer is subject to this section, there is no basis redetermination 
under paragraph (b) of this section because there is only one share of S 
stock outstanding (and so there can be no disparity among members' bases 
in common shares and there are no outstanding preferred shares with 
respect to which there can be unrecognized gain or loss). See paragraph 
(b)(1)(ii)(A) of this section. Therefore, after the application of 
paragraph (b) of this section, the share is still a loss share and, as 
such, subject to this paragraph (c).
    (iii) Basis reduction under this paragraph (c). (A) In general. 
Under this paragraph (c), M's basis in the S share, $200, is reduced, 
but not below value, $160, by the lesser of the share's net positive 
adjustment and disconformity amount. The S share's net positive 
adjustment is $40. The share's disconformity amount is the excess of its 
basis, $200, over the share's allocable portion of S's net inside 
attribute amount. S's net inside attribute amount is the sum of S's 
basis in Asset 1, $100, and S's basis in the S1 share.
    (B) S's basis in the S1 share. Although S's actual basis in the S1 
share is $100 (S's original $60 basis increased under Sec.  1.1502-32 by 
$40 (the share's allocable portion of the gain recognized on the sale of 
Asset 2)), for purposes of computing the S share's disconformity amount, 
S's net inside attribute amount is determined by treating S's basis in 
the S1 share as tentatively reduced by the lesser of the S1 share's net 
positive adjustment and the S1 share's disconformity amount. The S1 
share's net positive adjustment is $40 (the year 1 investment 
adjustment). The S1 share's disconformity amount is the excess of its 
basis, $100, over the share's allocable portion of S1's net inside 
attribute amount. S1's net inside attribute amount is equal to the 
amount of S1's money ($60 from the sale of Asset 2), and is allocable 
entirely to the sole outstanding S1 share. Thus, the S1 share's 
disconformity amount is the excess of $100 over $60, or $40. The lesser 
of the S1 share's net positive adjustment, $40, and its disconformity 
amount, $40, is $40. Accordingly, for purposes of computing the 
disconformity amount of the S share, S's net inside attribute amount is 
determined by treating S's basis in its S1 share as tentatively reduced 
by $40, from $100 to $60.
    (C) The disconformity amount of M's S share. S's net inside 
attribute amount is treated as the sum of its basis in Asset 1, $100, 
and its tentatively reduced basis in the S1 share, $60, or $160. S's net 
inside attribute amount is allocable entirely to the sole outstanding S 
share. Thus, the S share's disconformity amount is the excess of $200 
over $160, or $40.
    (D) Amount of reduction. M's basis in its S share is reduced by the 
lesser of the S share's

[[Page 788]]

net positive adjustment, $40, and disconformity amount, $40, or $40. 
Accordingly, M's basis in the S share is reduced by $40, from $200 to 
$160.
    (E) Effect on S's basis in its S1 share. The tentative reduction 
under this paragraph (c) has no effect on S's actual basis in the S1 
share. Thus, after the application of this paragraph (c), S owns the S1 
share with a basis of $100 (S's original $60 basis increased under Sec.  
1.1502-32 by $40 (the share's allocable portion of the gain recognized 
on the sale of Asset 2)).
    (iv) Application of paragraph (d) of this section. Because M's sale 
of the S share is not a transfer of a loss share after the application 
of this paragraph (c), paragraph (d) of this section does not apply to 
the transfer.

    (d) Attribute reduction to prevent duplication of loss--(1) In 
general. The rules of this paragraph (d) reduce attributes of S and its 
lower-tier subsidiaries to the extent they duplicate a net loss on 
shares of S stock transferred by members in one transaction. This rule 
furthers single-entity principles by preventing S (or its lower-tier 
subsidiaries) from using deductions and losses to the extent that the 
group or its members (including former members) have either used, or 
preserved for later use, a corresponding loss in S shares.
    (2) Attribute reduction rule--(i) General rule. If a transferred 
share is a loss share after taking into account the effects of all 
applicable rules of law, including any adjustments under paragraph (b), 
(c), or (d)(5)(iii) of this section, S's attributes are reduced by S's 
attribute reduction amount immediately before the transfer. S's 
attribute reduction amount is determined under paragraph (d)(3) of this 
section and applied in accordance with the provisions of paragraphs 
(d)(4), (d)(5), and (d)(6) of this section. In addition, paragraph 
(d)(7) of this section provides for additional attribute reduction in 
the case of certain transfers due to worthlessness and certain transfers 
not followed by a separate return year.
    (ii) Attribute reduction amount less than five percent of value. 
This paragraph (d) generally does not apply to a transaction if the 
aggregate attribute reduction amount in the transaction is less than 
five percent of the aggregate value of the shares transferred by members 
in the transaction. However, in such a case, P may elect to apply this 
paragraph (d) to the transaction. If such an election is made, this 
paragraph (d) will apply with respect to the entire aggregate attribute 
reduction amount determined in the transaction. Such an election is made 
in the manner provided in paragraph (e)(5) of this section.
    (3) Attribute reduction amount--(i) In general. S's attribute 
reduction amount is the lesser of--
    (A) The net stock loss (as defined in paragraph (d)(3)(ii) of this 
section); and
    (B) S's aggregate inside loss (as defined in paragraph (d)(3)(iii) 
of this section).
    (ii) Net stock loss. The net stock loss is the excess, if any, of--
    (A) The aggregate basis of all shares of S stock transferred by 
members in the transaction; over
    (B) The aggregate value of those shares.
    (iii) Aggregate inside loss--(A) In general. S's aggregate inside 
loss is the excess, if any, of--
    (1) S's net inside attribute amount; over
    (2) The value of all outstanding shares of S stock.
    (B) Net inside attribute amount. S's net inside attribute amount 
generally has the same meaning as in paragraph (c)(5) of this section. 
However, if S holds stock of a lower-tier subsidiary, the provisions of 
paragraph (d)(5) of this section (and not the provisions of paragraph 
(c)(6) of this section) modify the computation of S's net inside 
attribute amount for purposes of this paragraph (d).
    (iv) Lower-tier subsidiaries. See paragraph (d)(5) of this section 
for special rules relating to the application of this paragraph (d) if S 
owns shares of stock of a subsidiary.
    (4) Application of attribute reduction amount--(i) Attributes 
available for reduction. S's attributes available for reduction under 
this paragraph (d) are--
    (A) Category A. Capital loss carryovers;
    (B) Category B. Net operating loss carryovers;
    (C) Category C. Deferred deductions; and
    (D) Category D. Basis of assets other than assets identified as 
Class I assets in Sec.  1.338-6(b)(1).

[[Page 789]]

    (ii) Rules of application--(A) Category A, Category B, and Category 
C attributes. S's attribute reduction amount is first allocated and 
applied to reduce the attributes in Category A, Category B, and Category 
C.
    (1) Attribute reduction amount less than total attributes in 
Category A, Category B, and Category C. If S's attribute reduction 
amount is less than S's total attributes in Category A, Category B, and 
Category C, all of S's attribute reduction amount will be applied to 
reduce such attributes. However, P may specify the allocation of S's 
attribute reduction amount among such attributes. An election to specify 
the allocation of S's attribute reduction amount is made in the manner 
provided in paragraph (e)(5) of this section. To the extent that P does 
not specify an allocation of S's attribute reduction amount, S's 
attribute reduction amount will be applied to reduce any Category A 
attributes not reduced as a result of the specific allocation of S's 
attribute reduction amount, from oldest to newest, until they are 
eliminated. Then, any remaining attribute reduction amount will be 
applied to reduce any Category B attributes not reduced as a result of 
the specific allocation of S's attribute reduction amount, from oldest 
to newest, until they are eliminated. Finally, any remaining attribute 
reduction amount will be applied to reduce any Category C attributes not 
reduced as a result of the specific allocation of S's attribute 
reduction amount, proportionately.
    (2) Attribute reduction amount not less than the total attributes in 
Category A, Category B, and Category C. If S's attribute reduction 
amount equals or exceeds S's total attributes in Category A, Category B, 
and Category C, all such attributes are eliminated and any remaining 
attribute reduction amount is allocated and applied as provided in 
paragraphs (d)(4)(ii)(B) and (d)(4)(ii)(C) of this section.
    (B) Category D attributes. Any attribute reduction amount not 
applied to reduce S's Category A, Category B, and Category C attributes 
is allocated and applied as provided in this paragraph (d)(4)(ii)(B) 
and, to the extent applicable, paragraph (d)(5) of this section.
    (1) Allocation if S holds stock of another subsidiary. If S holds 
shares of stock of another subsidiary, the attribute reduction amount 
not applied to reduce S's Category A, Category B, and Category C 
attributes is first allocated between S's shares of lower-tier 
subsidiary stock and S's other Category D assets in the manner provided 
in paragraph (d)(5)(ii) of this section. S's attribute reduction amount 
allocated to shares of lower-tier subsidiary stock is applied to reduce 
S's bases in those shares, becomes an attribute reduction amount of the 
lower-tier subsidiary, and, subject to certain limitations, reduces the 
lower-tier subsidiary's attributes. See paragraphs (d)(5)(iii) through 
(d)(5)(vi) of this section.
    (2) Allocation and application of attribute reduction amount not 
applied to lower-tier subsidiary stock. Any portion of S's attribute 
reduction amount not applied to reduce S's Category A, Category B, and 
Category C attributes and not allocated to lower-tier subsidiary stock 
is allocated to S's Category D assets other than lower-tier subsidiary 
stock in the manner provided in this paragraph (d)(4)(ii)(B)(2). Such 
amount is first allocated to S's bases (if any) in its assets identified 
as Class VII assets in Sec.  1.338-6(b)(2)(vii). If the attribute 
reduction amount allocated to Class VII assets is less than S's 
aggregate basis in those assets, it is applied proportionately (by 
basis) to reduce the bases of such assets. If the attribute reduction 
amount allocated to Class VII assets equals or exceeds S's aggregate 
basis in those assets, it is applied to reduce the bases of such assets 
to zero. Any remaining attribute reduction amount is then allocated and 
applied in the same manner to reduce S's bases (if any) in assets 
identified as Class VI assets in Sec.  1.338-6(b)(2)(vi), and then to 
reduce S's bases (if any) in its assets identified in Sec.  1.338-
6(b)(2) as Class V, Class IV, Class III, and Class II, successively.
    (C) Attribute reduction amount exceeding attributes available for 
reduction. If the amount to be allocated and applied to attributes in 
Category D other than lower-tier subsidiary stock exceeds the amount of 
attributes in that category, then--

[[Page 790]]

    (1) To the extent of any liabilities of S that are not taken into 
account for tax purposes before the transfer, such excess amount is 
suspended. The suspended amount is applied proportionately to reduce any 
amounts attributable to S that would be deductible or capitalizable as a 
result of such liabilities being taken into account by S or any other 
person. Solely for purposes of this paragraph (d)(4)(ii)(C)(1) and 
paragraph (d)(5)(ii)(B) of this section, the term liability means any 
liability or obligation the satisfaction of which would be required to 
be capitalized as an assumed liability by a person that purchased all of 
S's assets and assumed all of S's liabilities in a single transaction.
    (2) To the extent such excess amount is greater than any amount 
suspended under paragraph (d)(4)(ii)(C)(1) of this section, it is 
disregarded and has no further effect.
    (iii) Time and effect of attribute reduction. In general, the 
reduction of attributes is effective immediately before the transfer of 
a loss share of S stock. If the reduction to a member's basis in a share 
of lower-tier subsidiary stock exceeds the basis of that share, to the 
extent the excess is not restored under paragraph (d)(5)(vi) of this 
section it is an excess loss account in that share (and such excess loss 
account is not taken into account under Sec.  1.1502-19 or otherwise as 
a result of the transaction). The reductions to attributes required 
under this paragraph (d)(4), including by reason of paragraph (d)(5)(v) 
of this section (tier down of attribute reduction amounts to lower-tier 
subsidiaries), are not noncapital, nondeductible expenses described in 
Sec.  1.1502-32(b)(2)(iii).
    (5) Special rules applicable if S holds stock of another subsidiary. 
If S holds shares of stock of any other subsidiary (S1) as of a transfer 
of loss shares of S stock, the rules of this paragraph (d)(5) apply with 
respect to each such subsidiary.
    (i) Treatment of lower-tier subsidiary stock for computation of S's 
attribute reduction amount. For purposes of determining S's net inside 
attribute amount and attribute reduction amount under paragraph (d)(3) 
of this section--
    (A) Single share. All of S's shares of S1 stock held as of the 
transfer of S stock (whether or not transferred in, or held by S 
immediately after, the transaction) are treated as a single share of 
stock (generally referred to as the S1 stock); and
    (B) Deemed basis. S's basis in its S1 stock is treated as its deemed 
basis in the stock, which is equal to the greater of--
    (1) The sum of S's basis in each share of S1 stock (adjusted to 
reflect any gain or loss recognized on the transfer of any S1 shares in 
the transaction, whether allowed or disallowed); and
    (2) The portion of S1's net inside attribute amount allocable to S's 
shares of S1 stock.
    (C) Multiple tiers. For purposes of computing deemed basis under 
paragraph (d)(5)(i)(B) of this section, a subsidiary's basis in stock of 
a lower-tier subsidiary is the deemed basis in that lower-tier 
subsidiary stock. Thus, if stock is held in multiple tiers, the 
computation of deemed basis begins at the lowest tier, so that the 
computation of deemed basis at each tier takes into account the deemed 
basis of all lower-tier shares.
    (ii) Allocation of S's attribute reduction amount between lower-tier 
subsidiary stock and other Category D assets. The portion of S's 
attribute reduction amount that is not applied to reduce S's Category A, 
Category B, and Category C attributes must be allocated between each of 
S's deemed single shares of S1 stock and all of S's other Category D 
assets. For this purpose, S's Category D assets other than lower-tier 
subsidiary stock are treated as one asset with a basis equal to the 
aggregate bases of all Category D assets other than lower-tier 
subsidiary stock (non-stock Category D asset). S's attribute reduction 
amount is allocated proportionately (by basis) between (among) the non-
stock Category D asset and S's deemed single share(s) of subsidiary 
stock. (See paragraphs (d)(4)(ii)(B)(2) and (d)(4)(ii)(C) of this 
section regarding the portion of S's attribute reduction amount 
allocated to the Category D assets other than lower-tier subsidiary 
stock.) For allocation purposes, S's basis in each deemed single share 
of S1 stock is its

[[Page 791]]

deemed basis (determined under paragraphs (d)(5)(i)(B) and (d)(5)(i)(C) 
of this section), reduced by--
    (A) The value of S's transferred shares of S1 stock; and
    (B) The nontransferred S1 shares' allocable portion of the excess of 
S1's non-loss assets over S1's liabilities (including liabilities 
described in paragraph (d)(4)(ii)(C)(1) of this section). For this 
purpose, S1's non-loss assets are--
    (1) S1's assets identified as Class I assets in Sec.  1.338-6(b)(1),
    (2) The value of S1's transferred shares of lower-tier subsidiary 
stock, and
    (3) The nontransferred lower-tier subsidiary shares' allocable 
portions of lower-tier non-loss assets (net of liabilities, including 
liabilities described in paragraph (d)(4)(ii)(C)(1) of this section) of 
all lower-tier subsidiaries.
    (iii) Application of attribute reduction amount to S's S1 stock. The 
portion of S's attribute reduction amount allocated under paragraph 
(d)(5)(ii) of this section to each deemed single share of S1 stock 
(allocated attribute reduction amount) is apportioned among, and applied 
to reduce S's bases in, individual S1 shares in accordance with the 
following--
    (A) No portion of the allocated attribute reduction amount is 
apportioned to an individual share of transferred S1 stock if gain or 
loss is recognized on its transfer (recognition transfer);
    (B) The allocated attribute reduction amount is apportioned among 
all of S's other shares of S1 stock in a manner that, first reduces the 
loss in and disparity among S's bases in loss shares of S1 preferred 
stock to the greatest extent possible, and then reduces the disparity 
among S's bases in the shares of S1 common stock (other than those 
transferred in a recognition transfer) to the greatest extent possible;
    (C) The allocated attribute reduction amount apportioned to an 
individual S1 share is applied to reduce the basis of that share to, but 
not below, value if the share is either a preferred share or a common 
share that is transferred other than in a recognition transfer; and
    (D) The allocated attribute reduction amount apportioned to an 
individual S1 share is applied to reduce the basis of that share without 
regard to value if the share is a common share that is not transferred 
in the transaction.
    (iv) Unapplied allocated attribute reduction amount. Any portion of 
the allocated attribute reduction amount that is not applied to reduce 
S's basis in a share of S1 stock has no effect on any other attributes 
of S, it is not a noncapital, nondeductible expense of S, and it does 
not cause S to recognize income or gain. However, such amounts continue 
to be part of the allocated attribute reduction amount for purposes of 
the tier down rule in paragraph (d)(5)(v) of this section.
    (v) Tier down of attribute reduction amount--(A) General rule. The 
allocated attribute reduction amount of each deemed single share of S1 
stock is an attribute reduction amount of S1 (tier-down attribute 
reduction amount). Accordingly, the tier-down attribute reduction 
amount, in combination with any attribute reduction amount computed with 
respect to the transferred S1 shares (if any) (direct S1 attribute 
reduction amount), applies to reduce S1's attributes under the 
provisions of this paragraph (d). The tier-down attribute reduction 
amount is an attribute reduction amount of S1 that must be allocated to 
S1's assets, and may become an allocated attribute reduction amount of 
lower-tier subsidiary stock (and thus a tier-down attribute reduction 
amount of a lower-tier subsidiary), even if its application to S1's 
attributes is limited under paragraph (d)(5)(v)(B) of this section.
    (B) Conforming limitation on reduction of lower-tier subsidiary's 
attributes. Notwithstanding the general rule in paragraph (d)(5)(v)(A) 
of this section, and unless P elects otherwise in the manner provided in 
paragraph (e)(5) of this section, the application of S1's tier-down 
attribute reduction amount to S1's attributes is limited to an amount 
equal to the excess of the portion of S1's net inside attribute amount 
that is allocable to all S1 shares held by members as of the transaction 
(whether or not transferred in the transaction) over the sum of--

[[Page 792]]

    (1) Any direct S1 attribute reduction amount;
    (2) The aggregate value of all S1 shares transferred by members in 
the transaction with respect to which gain or loss was recognized 
(recognition transfer);
    (3) The sum of all members' bases (after any reduction under this 
section, including this paragraph (d)) in any shares of S1 stock 
transferred by members in the transaction (other than in a recognition 
transfer), reduced by any direct S1 attribute reduction amount computed 
with respect to the transfer of such S1 shares; and
    (4) The sum of all members' bases (after any reduction under this 
section, including this paragraph (d)) in any nontransferred shares of 
S1 stock held as of the transaction.
    (vi) Stock basis restoration--(A) In general. After paragraph 
(d)(5)(v) of this section has applied with respect to all shares of 
subsidiary stock transferred in the transaction, lower-tier subsidiary 
stock basis is restored under this paragraph (d)(5)(vi). Under this 
paragraph (d)(5)(vi), the reductions to members' bases in shares of 
lower-tier subsidiary stock under paragraph (d)(5)(iii) of this section 
are reversed to the extent necessary to restore such bases to an amount 
that conforms the basis of each such share to its allocable portion of 
the subsidiary's net inside attribute amount, taking into account any 
reductions under this paragraph (d). Restoration adjustments are first 
made at the lowest tier and then at each next higher tier successively. 
Restoration adjustments do not tier up to affect the bases of higher-
tier shares. Rather, restoration is computed and applied separately at 
each tier. For purposes of this rule, when computing a subsidiary's net 
inside attribute amount--
    (1) The subsidiary's basis in stock of a lower-tier subsidiary is 
the actual basis of the stock after application of this paragraph (d); 
and
    (2) Any attribute reduction amount allocated to the subsidiary's 
Category D assets other than lower-tier subsidiary stock that is 
suspended under paragraph (d)(4)(ii)(C)(1) of this section is treated as 
reducing the subsidiary's net inside attribute amount.
    (B) Election not to restore basis. Notwithstanding paragraph 
(d)(5)(vi)(A) of this section, P may elect not to restore basis in stock 
of a lower-tier subsidiary that was reduced under paragraph (d)(5)(iii) 
of this section. An election not to restore lower-tier subsidiary stock 
basis is made in the manner provided in paragraph (e)(5) of this 
section.
    (6) Elections to reduce the potential for loss duplication--(i) In 
general. Notwithstanding the general operation of this paragraph (d), P 
may elect to reduce the potential for loss duplication, and thereby 
reduce or avoid attribute reduction. To the extent of S's attribute 
reduction amount tentatively computed without regard to any election 
under this paragraph (d)(6), P may elect--
    (A) To reduce all or any portion (including any portion in excess of 
a specified amount) of members' bases in transferred loss shares of S 
stock;
    (B) To reattribute all or any portion (including any portion in 
excess of a specified amount) of S's Category A, Category B, and 
Category C attributes (including such attributes of lower-tier 
subsidiaries), to the extent they would otherwise be subject to 
reduction under this paragraph (d); or
    (C) Any combination thereof.
    (ii) Manner and effect of election. An election to reduce loss 
duplication under this paragraph (d)(6) is made in the manner provided 
in paragraph (e)(5) of this section. Although such elections are 
irrevocable, they have no effect--
    (A) If there is no attribute reduction amount; or
    (B) To the extent S's attribute reduction amount is less than the 
amount specified in the election.
    (iii) Order of application--(A) Stock of one subsidiary transferred 
in the transaction. If shares of stock of only one subsidiary are 
transferred in the transaction, any stock basis reduction and 
reattribution of attributes (including from lower-tier subsidiaries) is 
deemed to occur immediately before the application of this paragraph 
(d). If a transferred share is still a loss share after giving effect to 
this election, the other provisions of this paragraph (d) then apply 
with respect to that share.

[[Page 793]]

    (B) Stock of multiple subsidiaries transferred in the transaction. 
If shares of stock of more than one subsidiary are transferred in the 
transaction and elections under this paragraph (d)(6) are made with 
respect to transfers of stock of subsidiaries in multiple tiers, effect 
is given to the elections from the lowest tier to the highest tier in 
the manner provided in this paragraph (d)(6)(iii)(B). The amount of the 
election for the transfer at the lowest tier is determined by applying 
this paragraph (d) with respect to the transferred loss shares of this 
lowest-tier subsidiary immediately after applying paragraphs (b) and (c) 
of this section to the stock of such subsidiary. The effect of any stock 
basis reduction or reattribution of losses immediately tiers up under 
Sec.  1.1502-32 to adjust members' bases in higher-tier shares. 
Elections and adjustments are then made with respect to transfers at 
each next higher tier successively.
    (iv) Special rules for reattribution elections--(A) In general. 
Because the reattribution election is intended to provide the group a 
means to retain certain S attributes, and not to change the location of 
attributes where S continues to be a member of the same group as P, the 
election to reattribute attributes may only be made if S becomes a 
nonmember (within the meaning of Sec.  1.1502-19(c)(2)) as a result of 
the transaction and S does not become a member of any group that 
includes P. The election to reattribute S's attributes can only be made 
for attributes in Category A, Category B, and Category C. The attributes 
that would otherwise be reduced under paragraph (d)(4) of this section 
may be reattributed to P. Accordingly, P may specify the attributes in 
Category A, Category B, and Category C to be reattributed. Such an 
election is made in the manner provided in paragraph (e)(5) of this 
section. To the extent that P elects to reattribute attributes but does 
not specify the attributes to be reattributed, any attributes not 
specifically reattributed will be reattributed in the default amount, 
order, and category described in paragraph (d)(4)(ii)(A)(1) of this 
section. P succeeds to reattributed attributes as if such attributes 
were succeeded to in a transaction to which section 381(a) applies. Any 
owner shift of the subsidiary (including any deemed owner shift 
resulting from section 382(g)(4)(D) or section 382(l)(3)) in connection 
with the transaction is not taken into account under section 382 with 
respect to the reattributed attributes. (See Sec.  1.1502-96(d) for 
rules relating to section 382 and the reattribution of losses under this 
paragraph (d)(6).) The reattribution of S's attributes is a noncapital, 
nondeductible expense described in Sec.  1.1502-32(b)(2)(iii). See Sec.  
1.1502-32(c)(1)(ii)(A) regarding special allocations applicable to such 
noncapital, nondeductible expense. If P elects to reattribute S 
attributes (including attributes of a lower-tier subsidiary) and reduce 
S stock basis, the reattribution is given effect before the stock basis 
reduction.
    (B) Insolvency limitation. If S, or any higher-tier subsidiary, is 
insolvent within the meaning of section 108(d)(3) at the time of the 
transfer, S's losses may be reattributed only to the extent they exceed 
the sum of the separate insolvencies of any subsidiaries (taking into 
account only S and its higher-tier subsidiaries) that are insolvent. For 
purposes of determining insolvency, liabilities owed to higher-tier 
members are not taken into account, and stock of a subsidiary that is 
limited and preferred as to dividends and that is not owned by higher-
tier members is treated as a liability to the extent of the amount of 
preferred distributions to which the stock would be entitled if the 
subsidiary were liquidated on the date of the transfer.
    (C) Limitation on reattribution from lower-tier subsidiaries. P's 
ability to reattribute attributes of lower-tier subsidiaries is limited 
under this paragraph (d)(6)(iv)(C) in order to prevent circular 
computations of the attribute reduction amount. Accordingly, attributes 
that would otherwise be reduced as a result of tier-down attribute 
reduction under paragraph (d)(5)(v) of this section may only be 
reattributed to the extent that the reduction in the basis of any lower-
tier subsidiary stock resulting from the noncapital, nondeductible 
expense (as allocated under Sec.  1.1502-32(c)(1)(ii)(A)(2)) will not 
create

[[Page 794]]

an excess loss account in any such stock.
    (v) Special rules for stock basis reduction elections--(A) In 
general. An election to reduce basis in S stock is made with respect to 
all members' bases in loss shares of S stock that are transferred in the 
transaction. The reduction is allocated among all such shares in 
proportion to the amount of loss on each share. This reduction in S 
stock basis is a noncapital, nondeductible expense described in Sec.  
1.1502-32(b)(2)(iii) of the transferring member.
    (B) Adjustment to the attribute reduction amount. The attribute 
reduction amount (determined under paragraph (d)(3)(i) of this section) 
is treated as reduced by the amount of any elective reduction in the 
basis of the S stock under this paragraph (d)(6). Accordingly, the 
election to reduce stock basis under this paragraph (d)(6) is treated as 
reducing or eliminating the duplication even if the shares of S stock 
are loss shares after giving effect to the election.
    (C) Deemed stock basis reduction election in the case of certain 
disallowed stock losses. If there is a net stock loss in transferred 
shares after taking into account any actual elections under this 
paragraph (d)(6), and the stock loss would otherwise be permanently 
disallowed (for example, under section 311(a)), P will be deemed to have 
made a stock basis reduction election equal to such net stock loss.
    (7) Additional attribute reduction in the case of certain transfers 
due to worthlessness and certain transfers not followed by a separate 
return year--(i) In general. Notwithstanding any other provision of this 
paragraph (d), if a transfer is subject to this paragraph (d)(7) any of 
S's Category A, Category B, and Category C attributes not otherwise 
reduced or reattributed under this paragraph (d), and any credit 
carryover attributable to S, including any consolidated credits that 
would be apportioned to S under the principles of Sec.  1.1502-79 if S 
had a separate return year, are eliminated. Attributes other than 
consolidated tax attributes are eliminated under this paragraph 
(d)(7)(i) immediately before the transfer subject to this paragraph 
(d)(7)(i). The elimination of attributes under this paragraph (d)(7)(i) 
is not a noncapital, nondeductible expense described in Sec.  1.1502-
32(b)(2)(iii).
    (ii) Transfers subject to this paragraph (d)(7). A transfer is 
subject to this paragraph (d)(7) if--
    (A) M transfers a share of S stock solely by reason of a transfer 
defined in paragraph (f)(10)(i)(D) of this section (worthlessness where 
the provisions of Sec.  1.1502-80(c) are satisfied), M recognizes a net 
deduction or loss on the share, and S is a member of the group on the 
day following the last day of the group's taxable year during which the 
share becomes worthless under section 165 (taking into account the 
provisions of Sec.  1.1502-80(c)), or
    (B) M recognizes a net deduction or loss on the stock of S in a 
transaction in which S ceases to be a member and does not become a 
nonmember within the meaning of Sec.  1.1502-19(c)(2).
    (iii) Example. The application of this paragraph (d) to transfers 
due to worthlessness and to loss transfers not followed by separate 
return years is illustrated by the following example.

    Example. (i) Worthlessness where S continues as a member. M owns the 
sole share of S stock. The share is worthless under section 165. In 
addition, S has disposed of all its assets within the meaning of Sec.  
1.1502-19(c)(1)(iii)(A) and therefore satisfies the provisions of Sec.  
1.1502-80(c). M claims a worthless securities deduction with respect to 
the share. The worthlessness is a transfer of the S share, a loss share, 
and therefore subject to this section. After the application of 
paragraphs (b) and (c) of this section, M's basis in the share (and 
therefore M's net stock loss) is $75. The portion of the consolidated 
net operating loss attributable to S is $100. Under the general rules of 
this paragraph (d), S's attribute reduction amount is $75 (the lesser of 
M's $75 net stock loss and S's $100 aggregate inside loss ($100 net 
inside attribute amount over $0 value of S share)). S's attributes are 
reduced by $75, from $100 to $25. In addition, if S remains a member of 
the P group, this paragraph (d)(7) applies to eliminate the remaining 
$25 of the consolidated net operating loss attributable to S because the 
S share is worthless, and M recognizes a deduction (taking into account 
Sec.  1.1502-80(c)) with respect to the share. Accordingly, after the 
application of this section, M recognizes a $75 worthless securities 
deduction, S has $0 net inside attributes, and the consolidated net 
operating loss is reduced by a total of $100.
    (ii) Dissolution of insolvent subsidiary. The facts are the same as 
in paragraph (i) of this

[[Page 795]]

Example, except that S is insolvent, does not dispose of all its assets 
within the meaning of Sec.  1.1502-19(c)(1)(iii)(A), M causes S to be 
legally dissolved, and the S share held by M is cancelled without 
consideration. Under paragraph (d)(7)(ii)(B) of this section, the 
dissolution of S is subject to this paragraph (d)(7) and the result is 
the same as in paragraph (i) of this Example. The result would also be 
the same if instead of being legally dissolved, S was converted into an 
entity that is disregarded as separate from M.
    (iii) Stock cancelled in connection with a section 381(a) 
transaction with another member. M owns the sole share of S common stock 
with a basis of $75. M1 owns the sole share of S preferred stock. The 
value of S's assets (net of liabilities) is less than the liquidation 
preference on the S preferred stock. In a reorganization described in 
section 368(a)(1)(D), S transfers all of its assets to M2 in exchange 
for M2 common stock and M2's assumption of S's liabilities, S 
distributes all of the M2 common stock received in the exchange to M1 in 
exchange for M1's S preferred stock, the S common stock held by M is 
cancelled without consideration, and S ceases to exist. Notwithstanding 
that M is not entitled to treat its common share of S stock as worthless 
until Sec.  1.1502-80(c) is satisfied, M's share is transferred within 
the meaning of paragraph (f)(10)(i)(A) of this section because M ceases 
to own the share in a transaction in which, but for this section (and 
notwithstanding the deferral of any amount recognized on the transfer, 
other than by reason of Sec.  1.1502-13), M would recognize a loss or 
deduction with respect to the share. Accordingly, there is a transfer of 
the S common share and this section applies to the transfer. There are 
no adjustments under paragraphs (b) or (c) of this section because no 
investment adjustments have been applied to the bases of the shares. The 
transfer of the S common stock is subject to the general rules of this 
paragraph (d), but is not subject to the additional attribute reduction 
under this paragraph (d)(7) because the transfer was not solely by 
reason of worthlessness where Sec.  1.1502-80(c) is satisfied, and S did 
not cease to be a member because M2 is a successor to S.
    (iv) Stock cancelled in connection with a section 381(a) transaction 
with a nonmember. The facts are the same as in paragraph (iii) of this 
Example, except that the S preferred share is held by X, instead of M2 
acquiring S's assets, S merges into Y in a reorganization described in 
section 368(a)(1)(A), M1 receives all of the Y stock issued in the 
merger in exchange for M1's S preferred stock, and Y does not become a 
member as a result of the transaction. M treats the cancelled S common 
stock as worthless, and Sec.  1.1502-80(c) is satisfied because S ceases 
to be a member. In this case, there is a transfer of M's S common share 
because it becomes worthless (taking into account Sec.  1.1502-80(c)); 
because M ceases to own the share in a transaction in which, but for 
this section (and notwithstanding the deferral of any amount recognized 
on the transfer, other than by reason of Sec.  1.1502-13), M would 
recognize a loss or deduction with respect to the share; and because M 
and S cease to be members of the same group. The transfer of the S 
common stock is subject to the general rules of this paragraph (d), but 
is not subject to the additional attribute reduction under this 
paragraph (d)(7) because the transfer was not solely by reason of 
worthlessness where Sec.  1.1502-80(c) is satisfied and, although S did 
cease to be a member, S became a nonmember within the meaning of Sec.  
1.1502-19(c)(2) because Y is a successor to S.

    (8) Examples. The application of this paragraph (d) is illustrated 
by the following examples:

    Example 1. Computation of attribute reduction amount. (i) Transfer 
of all S shares. (A) Facts. M owns all 100 of the outstanding shares of 
S stock with a basis of $2 per share. S owns land with a basis of $100, 
has a $120 loss carryover, and has no liabilities. Each share has a 
value of $1. M sells 30 of the S shares to X for $30. As a result of the 
sale, M and S cease to be members of the same group. Accordingly, all 
100 of the S shares are transferred. See paragraphs (f)(10)(i)(A), 
(f)(10)(i)(B), and (f)(10)(i)(C) (with respect to the 30 S shares sold 
to X) of this section. M's transfer of the S shares is a transfer of 
loss shares and therefore subject to this section.
    (B) Application of paragraphs (b) and (c) of this section. Although 
the transfer is subject to this section, there is no basis 
redetermination under paragraph (b) of this section because there is no 
disparity among M's bases in shares of S common stock and there are no 
shares of S preferred stock outstanding (so there can be no unrecognized 
gain or loss on preferred stock). See paragraph (b)(1)(ii)(A) of this 
section. Therefore, after the application of paragraph (b) of this 
section, the share is still a loss share and, as such, subject to 
paragraph (c) of this section. No adjustment is required under paragraph 
(c) of this section because the net positive adjustment is $0. See 
paragraph (c)(3) of this section. Thus, after the application of 
paragraph (c) of this section, M's transfer of the S shares is still a 
transfer of loss shares and, accordingly, subject to this paragraph (d).
    (C) Attribute reduction under this paragraph (d). Under this 
paragraph (d), S's attributes are reduced by S's attribute reduction 
amount. Paragraph (d)(3) of this section provides that S's attribute 
reduction amount is the lesser of the net stock loss and S's aggregate 
inside loss. The net stock loss is the excess of the $200 aggregate 
bases of the transferred shares over the $100 aggregate value of

[[Page 796]]

the transferred shares, or $100. S's aggregate inside loss is the excess 
of its $220 net inside attribute amount (the sum of the $100 basis in 
the land and the $120 loss carryover) over the $100 value of all 
outstanding S shares, or $120. The attribute reduction amount is 
therefore the lesser of the $100 net stock loss and the $120 aggregate 
inside loss, or $100. Under paragraph (d)(4) of this section, S's $100 
attribute reduction amount is allocated and applied to reduce S's $120 
loss carryover to $20. Under paragraph (d)(4)(iii) of this section, the 
reduction of the loss carryover is not a noncapital, nondeductible 
expense and has no effect on M's basis in the S stock.
    (ii) Transfer of less than all S shares. (A) Facts. The facts are 
the same as in paragraph (i)(A) of this Example 1, except that M only 
sells 20 S shares to X. M's sale of the 20 S shares is a transfer of 
loss shares and therefore subject to this section. See paragraph 
(f)(10)(i)(A) and (f)(10)(i)(C) of this section. (There is no transfer 
of the remaining shares because S and M remain members of the same 
group.)
    (B) Application of paragraphs (b) and (c) of this section. No 
adjustment is required under paragraph (b) or paragraph (c) of this 
section for the reasons set forth in paragraph (i)(B) of this Example 1. 
Thus, after the application of paragraph (c) of this section, M's 
transfer of the S shares is still a transfer of loss shares and, 
accordingly, subject to this paragraph (d).
    (C) Attribute reduction under this paragraph (d). Under this 
paragraph (d), S's attributes are reduced by S's attribute reduction 
amount. Paragraph (d)(3) of this section provides that S's attribute 
reduction amount is the lesser of the net stock loss and S's aggregate 
inside loss. The net stock loss is $20, the excess of the $40 aggregate 
bases of the transferred shares over the $20 aggregate value of the 
transferred shares. S's aggregate inside loss is $120, the excess of its 
$220 net inside attribute amount (the sum of the $100 basis in the land 
and the $120 loss carryover) over the $100 value of all outstanding S 
shares. The attribute reduction amount is therefore $20, the lesser of 
the $20 net stock loss and the $120 aggregate inside loss. Under 
paragraph (d)(4) of this section, S's $20 attribute reduction amount is 
allocated and applied to reduce S's $120 loss carryover to $100.
    Example 2. Proportionate allocation of attribute reduction amount. 
(i) Facts. M owns the sole outstanding share of S stock with a basis of 
$150. S owns land with a basis of $60, a factory with a basis of $30, 
publicly traded property with a basis of $30 and goodwill with a basis 
of $30. M sells its S share for $90. M's sale of the S share is a 
transfer of a loss share and therefore subject to this section. See 
paragraphs (f)(10)(i)(A), (f)(10)(i)(B), and (f)(10)(i)(C) of this 
section.
    (ii) Application of paragraphs (b) and (c) of this section. Although 
the transfer is subject to this section, there is no basis 
redetermination under paragraph (b) of this section because there is 
only one share of S stock outstanding (and so there can be no disparity 
among members' bases in common shares and there are no outstanding 
preferred shares with respect to which there can be unrecognized gain or 
loss). See paragraph (b)(1)(ii)(A) of this section. Therefore, after the 
application of paragraph (b) of this section, the share is still a loss 
share and, as such, subject to paragraph (c) of this section. No 
adjustment is required under paragraph (c) of this section because both 
the disconformity amount and the net positive adjustment are $0. See 
paragraph (c)(3) of this section. Thus, after the application of 
paragraph (c) of this section, M's sale of the S share is still a 
transfer of a loss share and, accordingly, subject to this paragraph 
(d).
    (iii) Attribute reduction under this paragraph (d). Under paragraph 
(d)(3) of this section, S's attribute reduction amount is determined to 
be $60, the lesser of the $60 net stock loss ($150 basis over $90 value) 
and S's $60 aggregate inside loss (the excess of S's $150 net inside 
attribute amount (the $60 basis of the land, plus the $30 basis of the 
factory, plus the $30 basis of the publicly traded property, plus the 
$30 basis of the goodwill) over the $90 value of the S share). Under 
paragraph (d)(4)(ii)(B)(2) of this section, the $60 attribute reduction 
amount is allocated and applied to reduce S's bases in its Category D 
assets, S's only attributes available for reduction, as follows:

----------------------------------------------------------------------------------------------------------------
                                                                              Allocable portion of     Adjusted
       Available attributes, basis in Category D assets         Attribute     attribute reduction     attribute
                                                                  amount             amount             amount
----------------------------------------------------------------------------------------------------------------
Class VII, Goodwill..........................................          $30                      $30           $0
Class V:
    Land.....................................................           60          (60/90 x 60) 40           20
    Factory..................................................           30          (30/90 x 60) 20           10
                                                              --------------------------------------------------
        Total Class V........................................           90                       60           30
Class II, publicly traded property...........................           30                        0           30
                                                              --------------------------------------------------
        Totals...............................................          150                       60           90
----------------------------------------------------------------------------------------------------------------


[[Page 797]]

    Example 3. Attribute reduction amount less than total attributes in 
Category A, Category B, and Category C. (i) No election to prescribe the 
allocation of S's attribute reduction amount. (A) Facts. P owns the sole 
outstanding share of M stock with a basis of $1,000 and M owns the sole 
outstanding share of S stock with a basis of $210. M sells its S share 
to X for $100. M's sale of the S share is a transfer of a loss share and 
therefore subject to this section. See paragraphs (f)(10)(i)(A), 
(f)(10)(i)(B), and (f)(10)(i)(C) of this section. At the time of the 
sale, S has no liabilities and the following attributes:

------------------------------------------------------------------------
                                                               Attribute
              Category                       Attribute           amount
------------------------------------------------------------------------
Category A..........................  Capital loss carryover.        $10
Category B..........................  NOL carryover..........        200
Category C..........................  Deferred deductions....         40
Category D, Class V.................  Basis in Land..........         50
                                                              ----------
    Total Attributes................  .......................        300
------------------------------------------------------------------------

    (B) Application of paragraphs (b) and (c) of this section. Although 
the transfer is subject to this section, there is no basis 
redetermination under paragraph (b) of this section because there is 
only one share of S stock outstanding (and so there can be no disparity 
among members' bases in common shares and there are no outstanding 
preferred shares with respect to which there can be unrecognized gain or 
loss). See paragraph (b)(1)(ii)(A) of this section. Therefore, after the 
application of paragraph (b) of this section, the share is still a loss 
share and, as such, subject to paragraph (c) of this section. No 
adjustment is required under paragraph (c) of this section because both 
the disconformity amount and the net positive adjustment are $0. See 
paragraph (c)(3) of this section. Thus, after the application of 
paragraph (c) of this section, M's transfer of the S share is still a 
transfer of a loss share and, accordingly, subject to this paragraph 
(d).
    (C) Attribute reduction under this paragraph (d). (1) Computation of 
attribute reduction amount. Under paragraph (d)(3) of this section, S's 
attribute reduction amount is the lesser of the $110 net stock loss 
($210 basis over $100 value) and S's aggregate inside loss. S's 
aggregate inside loss is $200 (S's $300 net inside attribute amount (the 
$10 capital loss carryover, plus the $200 NOL carryover, plus the $40 
deferred deductions, plus the $50 basis in land) less the $100 value of 
all outstanding S shares). Thus, the attribute reduction amount is $110, 
the lesser of the $110 net stock loss and S's $200 aggregate inside 
loss. Under paragraph (d)(4)(ii)(A)(1) of this section, the $110 
attribute reduction amount is allocated and applied to reduce S's 
attributes as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                 Allocation of
                                                                  Attribute        attribute         Adjusted
              Category                       Attribute              amount         reduction        attribute
                                                                                     amount           amount
----------------------------------------------------------------------------------------------------------------
Category A..........................  Capital loss carryover.              $10              $10               $0
Category B..........................  NOL carryover..........              200              100              100
Category C..........................  Deferred deductions....               40                0               40
Category D, Class V.................  Basis in land..........               50                0               50
                                                              --------------------------------------------------
    1Totals.........................  .......................              300              110              190
----------------------------------------------------------------------------------------------------------------

    (ii) Election to prescribe the allocation of attribute reduction 
amount. (A) Facts. The facts are the same as in paragraph (i)(A) of this 
Example 3, except that P elects to allocate the attribute reduction 
amount to eliminate the Category C attributes, preserve the capital loss 
carryover, and reduce Category B attributes.
    (B) Application of paragraphs (b) and (c) of this section. No 
adjustment is required under paragraph (b) or paragraph (c) of this 
section for the reasons set forth in paragraph (i)(B) of this Example 3. 
Thus, after the application of paragraph (c) of this section, M's sale 
of the S share is still a transfer of a loss share, and accordingly, 
subject to this paragraph (d).
    (C) Attribute reduction under this paragraph (d). For the reasons 
set forth in paragraph (i)(C) of this Example 3, under this paragraph 
(d)(3), S's attribute reduction amount is determined to be $110. M 
elects to apply S's $110 attribute reduction amount as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                   Allocation of
                                                                     Attribute       attribute       Adjusted
               Category                         Attribute             amount         reduction       attribute
                                                                                      amount          amount
----------------------------------------------------------------------------------------------------------------
Category A............................  Capital loss carryover..             $10              $0             $10
Category B............................  NOL carryover...........             200              70             130
Category C............................  Deferred deductions.....              40              40               0
Category D, Class V...................  Basis of land...........              50               0              50
                                                                 -----------------------------------------------

[[Page 798]]

 
    Totals............................  ........................             300             110             190
----------------------------------------------------------------------------------------------------------------

    Example 4. Attributes attributable to liability not taken into 
account. (i) S operates one business. (A) Facts. On January 1, year 1, M 
forms S by exchanging $150 for the sole outstanding share of S stock. In 
year 1, S earns $500, purchases land for $50, spends $100 to build a 
factory on that land, and then purchases publicly traded property for 
$250. In year 2, S earns a section 38 general business credit of $50. 
However, pollution generated by S's business gives rise to an 
environmental remediation liability under Federal law that would be 
required to be capitalized if a person purchased S's assets and assumed 
the liability. Before any amounts have been taken into account with 
respect to the environmental remediation liability, when the liability 
has a present value of $500, M sells its S share to X for $150. After 
giving effect to all other provisions of law, M's basis in the S share 
is $650 (the original basis of $150 increased under Sec.  1.1502-32 by 
$500 for the income earned). The sale is therefore a transfer of a loss 
share of subsidiary stock and subject to this section. See paragraphs 
(f)(10)(i)(A), (f)(10)(i)(B), and (f)(10)(i)(C) of this section.
    (B) Application of paragraphs (b) and (c) of this section. Although 
the transfer is subject to this section, there is no basis 
redetermination under paragraph (b) of this section because there is 
only one share of S stock outstanding (and so there can be no disparity 
among members' bases in common shares and there are no outstanding 
preferred shares with respect to which there can be unrecognized gain or 
loss). See paragraph (b)(1)(ii)(A) of this section. Therefore, after the 
application of paragraph (b) of this section, the share is still a loss 
share and, as such, subject to paragraph (c) of this section. No 
adjustment to basis is made under paragraph (c) of this section because, 
although the net positive adjustment is $500, the disconformity amount 
is $0. See paragraph (c)(3) of this section. Thus, after the application 
of paragraph (c) of this section, M's sale of the S share is still a 
transfer of a loss share and, accordingly, subject to this paragraph 
(d).
    (C) Attribute reduction under this paragraph (d). (1) Under 
paragraph (d)(3) of this section, S's attribute reduction amount is the 
lesser of the $500 net stock loss ($650 basis over $150 value) and the 
aggregate inside loss. The aggregate inside loss is $500, computed as 
the excess of S's $650 net inside attribute amount (the sum of S's $100 
basis in the factory, $50 basis in the land, $250 basis in the publicly 
traded property, and $250 cash remaining after the purchases) over the 
$150 value of the S share. Thus, S's attribute reduction amount is $500, 
the lesser of the $500 net stock loss and the $500 aggregate inside 
loss. Under paragraph (d)(4)(ii)(B)(2) of this section, S's $500 
attribute reduction amount is allocated and applied to reduce S's 
attributes as follows:

----------------------------------------------------------------------------------------------------------------
                                                                               Allocable portion     Adjusted
                    Available attributes                         Attribute       of attribute        attribute
                                                                  amount       reduction amount       amount
----------------------------------------------------------------------------------------------------------------
Category D:
    Class V Assets:
        Basis of factory....................................            $100                $100              $0
        Basis of land.......................................              50                  50               0
    Class II Assets:
        Publicly traded property............................             250                 250               0
----------------------------------------------------------------------------------------------------------------

    (2) The remaining $100 attribute reduction amount is not applied to 
S's $250 cash (Class I asset) or to S's $50 general business tax credit. 
Under the general rule of this paragraph (d), that remaining $100 
attribute reduction amount would have no further effect on S's 
attributes. However, S has a $500 liability that has not been taken into 
account. Therefore, under paragraph (d)(4)(ii)(C)(1) of this section, 
the remaining $100 attribute reduction amount is suspended and will be 
allocated and applied to reduce any amounts that become deductible or 
capitalizable as a result of the environmental remediation liability 
later being taken into account. If the liability is satisfied for an 
amount that is less than $100, under paragraph (d)(4)(ii)(C)(2) of this 
section the remaining portion of that $100 suspended attribute reduction 
amount is disregarded and has no further effect.
    (ii) Lower-tier subsidiary with additional liability. (A) Facts. The 
facts are the same as in paragraph (i)(A) of Example 4, except that, in

[[Page 799]]

addition, S exchanged $50 for the sole outstanding share of stock of S1. 
S1 has $50 and equipment with an aggregate basis of $0. S1 also has 
employee medical expense liabilities that have not been taken into 
account and that would be required to be capitalized if a person 
purchased S1's assets and assumed the liabilities. At the time of the 
sale, S's environmental remediation liability had a present value of 
$475 and S1's employee medical expenses had a present value of $25. For 
the reasons set forth in paragraph (i)(A) of this Example 4, M's sale of 
the S share is a transfer of a loss share and therefore subject to this 
section.
    (B) Application of paragraphs (b) and (c) of this section. No 
adjustment is made under paragraph (b) or paragraph (c) of this section 
for the reasons set forth in paragraph (i)(B) of this Example 4. Thus, 
after the application of paragraph (c) of this section, M's sale of the 
S share is still a transfer of a loss share and, accordingly, subject to 
this paragraph (d).
    (C) Attribute reduction under this paragraph (d). (1) Computation of 
attribute reduction amount. Under paragraph (d)(3) of this section, S's 
attribute reduction amount is the lesser of the $500 net stock loss 
($650 basis over $150 value) and the aggregate inside loss. The 
aggregate inside loss is the excess of S's net inside attribute amount 
over the value of the S share. Under paragraphs (d)(3)(iii)(B) and 
(d)(5)(i)(B) of this section, S's net inside attribute amount is 
determined by using S's $50 deemed basis in the S1 share (the greater of 
S's $50 actual basis in the share and S1's $50 net inside attribute 
amount). Accordingly, S's net inside attribute amount is $650 (the sum 
of its $100 basis in the factory, $50 basis in the land, $250 basis in 
the publicly traded property, $200 cash, and $50 deemed basis in its S1 
share). The aggregate inside loss is $500, the excess of S's $650 net 
inside attribute amount over the $150 value of the S share. Thus, S's 
attribute reduction amount is $500, the lesser of the $500 net stock 
loss and S's $500 aggregate inside loss.
    (2) Allocation, apportionment, and application of attribute 
reduction amount. Under paragraphs (d)(4) and (d)(5)(ii) of this 
section, S's $500 attribute reduction amount is allocated 
proportionately (by basis) between its S1 share and its non-stock 
Category D asset (consisting of all S's Category D assets other than its 
share of S1 stock, with a basis equal to $600, the aggregate basis of 
S's non-stock assets). However, under paragraph (d)(5)(ii) of this 
section, for purposes of allocating S's attribute reduction amount 
between its non-stock Category D asset and the S1 share, S's $50 deemed 
basis in its S1 share is treated as reduced by S1's $25 net non-loss 
assets (its Class I asset, $50 cash over S1's liabilities (which, for 
this purpose include the $25 of employee medical expense liabilities not 
taken into account as of the transfer)). As a result, S's attribute 
reduction amount is allocated $480 (600/625 x 500) to S's non-stock 
Category D asset and $20 (25/625 x 500) to the S1 share. The $480 
attribute reduction amount allocated to S's non-stock Category D asset 
produces the same reduction in the bases of S's assets (other than the 
S1 stock) as in paragraph (i)(C) of this Example 4; in addition, the $80 
attribute reduction amount not applied to reduce S's attributes is 
suspended and applied to reduce any amounts that become deductible or 
capitalizable as a result of the environmental remediation liability 
later being taken into account. If the liability is satisfied for an 
amount that is less than $80, under paragraph (d)(4)(ii)(C)(2) of this 
section the remaining portion of that $80 suspended attribute reduction 
amount is disregarded and has no further effect. Because the S1 share is 
not transferred within the meaning of paragraph (f)(10) of this section, 
the allocated attribute reduction amount apportioned to the S1 share is 
applied fully to reduce the basis of the S1 share to $30. See paragraph 
(d)(5)(iii) of this section.
    (D) Tier down of S's attribute reduction amount. The $20 portion of 
S's attribute reduction amount allocated to the S1 share is an attribute 
reduction amount of S1. Because S1 holds only cash, it has no attributes 
available for reduction under this paragraph (d). However, because S1 
has a $25 liability not taken into account for tax purposes, paragraph 
(d)(4)(ii)(C)(1) of this section requires that $20 of the unapplied 
attribute reduction amount be suspended and then allocated and applied 
to reduce any amounts that become deductible or capitalizable as a 
result of the employee medical expense liabilities later being taken 
into account. If these liabilities are satisfied for an amount that is 
less than $20, under paragraph (d)(4)(ii)(C)(2) of this section the 
remaining portion of that $20 suspended attribute reduction amount is 
disregarded and has no further effect.
    Example 5. Wholly owned lower-tier subsidiary (no lower-tier 
transfer). (i) Application of conforming limitation. (A) Facts. M owns 
the sole outstanding share of S stock with a basis of $250. S owns Asset 
with a basis of $100 and the only two outstanding shares of S1 stock 
(Share A has a basis of $40 and Share B has a basis of $60). S1 owns 
Asset 1 with a basis of $50. M sells its S share to P1, the common 
parent of another consolidated group, for $50. The sale is a transfer of 
a loss share and therefore subject to this section. See paragraphs 
(f)(10)(i)(A), (f)(10)(i)(B), and (f)(10)(i)(C) of this section.
    (B) Application of paragraphs (b) and (c) of this section. Although 
the transfer is subject to this section, there is no basis 
redetermination under paragraph (b) of this section because there is 
only one share of S stock

[[Page 800]]

outstanding (and so there can be no disparity among members' bases in 
common shares and there are no outstanding preferred shares with respect 
to which there can be unrecognized gain or loss). See paragraph 
(b)(1)(ii)(A) of this section. Therefore, after the application of 
paragraph (b) of this section, the share is still a loss share and, as 
such, subject to paragraph (c) of this section. No adjustment is 
required under paragraph (c) of this section because, although there is 
a $50 disconformity amount, the net positive adjustment is $0. See 
paragraph (c)(3) of this section. Thus, after the application of 
paragraph (c) of this section, M's sale of the S share is still a 
transfer of a loss share and, accordingly, subject to this paragraph 
(d).
    (C) Attribute reduction under this paragraph (d). (1) Computation of 
attribute reduction amount. Under paragraph (d)(3) of this section, S's 
attribute reduction amount is the lesser of M's net stock loss and S's 
aggregate inside loss. M's net stock loss is $200 ($250 basis over $50 
value). S's aggregate inside loss is the excess of S's net inside 
attribute amount over the value of the S share. Under paragraphs 
(d)(3)(iii)(B) and (d)(5)(i)(B) of this section, S's net inside 
attribute amount is $200, computed as the sum of S's $100 basis in Asset 
and its $100 deemed basis in the deemed single share of S1 stock 
(computed as the greater of S's $100 aggregate basis in the S1 shares 
and S1's $50 basis in Asset 1). S's aggregate inside loss is therefore 
$150, $200 net inside attribute amount over the $50 value of the S 
share. Accordingly, S's attribute reduction amount is $150, the lesser 
of the $200 net stock loss and the $150 aggregate inside loss.
    (2) Allocation, apportionment, and application of S's attribute 
reduction amount. Under paragraphs (d)(4) and (d)(5)(ii) of this 
section, S's $150 attribute reduction amount is allocated 
proportionately (by basis) between Asset (non-stock Category D asset) 
with a basis of $100, and the S1 stock (treated as a single share with a 
deemed basis of $100). Accordingly, $75 of the attribute reduction 
amount ($100/$200 x $150) is allocated to Asset and $75 of the attribute 
reduction amount ($100/$200 x $150) is allocated to the S1 stock. The 
$75 of the attribute reduction amount allocated to Asset is applied to 
reduce S's basis in Asset from $100 to $25. The $75 of the attribute 
reduction amount allocated to the S1 stock is first apportioned between 
the shares in a manner that reduces disparity to the greatest extent 
possible. Thus, of the total $75 allocated to the S1 stock, $27.50 is 
apportioned to Share A and $47.50 is apportioned to Share B. Because 
neither of the S1 shares is transferred within the meaning of paragraph 
(f)(10) of this section, the allocated attribute reduction amount 
apportioned to each of the individual S1 shares is applied fully to 
reduce the basis of each share to $12.50. See paragraph (d)(5)(iii) of 
this section. As a result, immediately after the allocation, 
apportionment, and application of S's attribute reduction amount, S's 
basis in Asset is $25 and S's basis in each of the S1 shares is $12.50.
    (3) Tier down of S's attribute reduction amount, application of 
conforming limitation. Under paragraph (d)(5)(v)(A) of this section, the 
$75 portion of S's attribute reduction amount allocated to the S1 stock 
is an attribute reduction amount of S1 (regardless of the extent, if 
any, to which it is apportioned and applied to reduce the basis of any 
shares of S1 stock). Under the general rules of this paragraph (d), the 
$75 tier-down attribute reduction amount would be allocated and applied 
to reduce S1's basis in Asset 1 from $50 to $0. However, under paragraph 
(d)(5)(v)(B) of this section, S1's attributes can be reduced by only 
$25, the excess of the $50 portion of S1's net inside attribute amount 
that is allocable to all S1 shares held by members as of the transaction 
over $25, the aggregate amount of members' bases in nontransferred S1 
shares after reduction under this paragraph (d). Thus, of S1's $75 tier-
down attribute reduction amount, only $25 is applied to reduce S1's 
basis in Asset 1, from $50 to $25. The $50 unapplied portion of the 
tier-down attribute reduction amount subject to the conforming 
limitation has no further effect.
    (ii) Application of basis restoration rule. (A) Facts. The facts are 
the same as in paragraph (i)(A) of this Example 5, except that S's basis 
in Share A is $15 and S's basis in Share B is $35, and S1's basis in 
Asset 1 is $100.
    (B) Basis redetermination and basis reduction under paragraphs (b) 
and (c) of this section. No adjustment is required under paragraph (b) 
or paragraph (c) of this section for the reasons set forth in paragraph 
(i)(B) of this Example 5. Thus, after the application of paragraph (c) 
of this section, M's transfer of the S share is still a transfer of a 
loss share and, accordingly, subject to this paragraph (d).
    (C) Attribute reduction under this paragraph (d). (1) Computation of 
attribute reduction amount. Under paragraph (d)(3) of this section, S's 
attribute reduction amount is the lesser of M's net stock loss and S's 
aggregate inside loss. M's net stock loss is $200 ($250 basis over $50 
value). S's aggregate inside loss is the excess of S's net inside 
attribute amount over the value of the S share. Under paragraphs 
(d)(3)(iii)(B) and (d)(5)(i)(B) of this section, S's net inside 
attribute amount is $200, the sum of S's $100 basis in Asset and its 
$100 deemed basis in the deemed single share of S1 stock (computed as 
the greater of S's $50 aggregate basis in the S1 shares and S1's $100 
basis in Asset 1). S's aggregate inside loss is therefore $150, $200 net 
inside attribute amount over the $50 value of the S share. Accordingly, 
S's attribute reduction amount is $150, the lesser of the $200 net stock 
loss and the $150 aggregate inside loss.

[[Page 801]]

    (2) Allocation, apportionment, and application of S's attribute 
reduction amount. Under paragraphs (d)(4) and (d)(5)(ii) of this 
section, S's $150 attribute reduction amount is allocated 
proportionately (by basis) between Asset (non-stock Category D asset) 
with a basis of $100, and the S1 stock (treated as a single share with a 
deemed basis of $100). Accordingly, $75 of the attribute reduction 
amount ($100/$200 x $150) is allocated to Asset and $75 of the attribute 
reduction amount ($100/$200 x $150) is allocated to the S1 stock. The 
$75 of the attribute reduction amount allocated to Asset is applied to 
reduce S's basis in Asset from $100 to $25. The $75 of the attribute 
reduction amount allocated to the S1 stock is first apportioned between 
the shares in a manner that reduces disparity to the greatest extent 
possible. Thus, of the total $75 allocated to the S1 stock, $27.50 is 
apportioned to Share A and $47.50 is apportioned to Share B. Because 
neither of the S1 shares is transferred within the meaning of paragraph 
(f)(10) of this section, the allocated attribute reduction amount 
apportioned to each of the individual S1 shares is applied fully to 
reduce the basis of each share to an excess loss account of $12.50. See 
paragraph (d)(5)(iii) of this section. As a result, immediately after 
the allocation, apportionment, and application of S's attribute 
reduction amount, S's basis in Asset is $25 and S's basis in each of the 
S1 shares is an excess loss account of $12.50.
    (3) Tier down of S's attribute reduction amount. Under paragraph 
(d)(5)(v)(A) of this section, the $75 portion of S's attribute reduction 
amount allocated to S1 stock is an attribute reduction amount of S1 
(regardless of the extent, if any, to which it is apportioned and 
applied to reduce the basis of any shares of S1 stock). Accordingly, 
under the general rules of this paragraph (d), the $75 tier-down 
attribute reduction amount is applied to reduce S1's basis in Asset 1 
from $100 to $25.
    (4) Basis restoration. Under paragraph (d)(5)(vi)(A) of this 
section, after this paragraph (d) has been applied with respect to all 
transfers of subsidiary stock, any reduction made to the basis of a 
share of lower-tier subsidiary stock under paragraph (d)(5)(iii) of this 
section is reversed to the extent necessary to conform the basis of that 
share to the share's allocable portion of the subsidiary's net inside 
attribute amount (after reduction). S1's net inside attribute amount 
after the application of this paragraph (d) is $25 and thus each of the 
two S1 share's allocable portion of S1's net inside attribute amount is 
$12.50. Accordingly, the reductions to Share A and to Share B under 
paragraph (d)(5)(iii) of this section are reversed to the extent 
necessary to restore the basis of each share to $12.50. Thus, $25 of the 
$27.50 of reduction to the basis of Share A, and $25 of the $47.50 of 
reduction to the basis of share B, is reversed, restoring the basis of 
each share to $12.50.
    Example 6. Multiple blocks of lower-tier subsidiary stock 
outstanding. (i) Excess loss account taken into account (transfer of 
upper-tier share causes disposition within the meaning of Sec.  1.1502-
19(c)(1)(ii)(B)). (A) Facts. M owns the sole outstanding share of S 
stock with a basis of $200. S holds all five outstanding shares of S1 
common stock (Shares A, B, C, D, and E). S has an excess loss account of 
$20 in Share A and a positive basis of $20 in each of the other shares. 
The only investment adjustment applied to any S1 share was a negative 
$20 investment adjustment applied to Share A when it was the only 
outstanding share, and this amount tiered up and adjusted M's basis in 
the S share. S1 owns one asset with a basis of $250. M sells its S share 
to P1, the common parent of a consolidated group, for $20. The sale of 
the S share is a disposition of Share A under Sec.  1.1502-
19(c)(1)(ii)(B) (S1 becomes a nonmember because it will have a separate 
return year as a member of the P1 group). Accordingly, under Sec.  
1.1502-19(b)(1)(i) and paragraph (a)(3)(i) of this section, before the 
application of this section, S's excess loss account in Share A is taken 
into account, increasing S's basis in Share A to $0 and M's basis in its 
S share to $220. After giving effect to the recognition of the excess 
loss account, M's sale of the S share is a transfer of a loss share and 
therefore subject to this section. See paragraphs (f)(10)(i)(A), 
(f)(10)(i)(B), and (f)(10)(i)(C) of this section.
    (B) Basis redetermination and basis reduction under paragraphs (b) 
and (c) of this section. Although the transfer is subject to this 
section, there is no basis redetermination under paragraph (b) of this 
section because there is only one share of S stock outstanding (and so 
there can be no disparity among members' bases in common shares and 
there are no outstanding preferred shares with respect to which there 
can be unrecognized gain or loss). See paragraph (b)(1)(ii)(A) of this 
section. Therefore, after the application of paragraph (b) of this 
section, the share is still a loss share and, as such, subject to 
paragraph (c) of this section. No adjustment is made under paragraph (c) 
of this section because, even though there is a disconformity amount of 
$140, the net positive adjustment is $0. See paragraph (c)(3) of this 
section. Thus, after the application of paragraph (c) of this section, 
M's sale of the S share remains a transfer of a loss share and, 
accordingly, subject to this paragraph (d).
    (C) Attribute reduction under this paragraph (d). (1) Computation of 
attribute reduction amount. Under paragraph (d)(3) of this section, S's 
attribute reduction amount is the lesser of M's net stock loss and S's 
aggregate inside loss. M's net stock loss is $200 ($220 basis over $20 
value). S's aggregate inside loss is the excess of S's net inside 
attribute

[[Page 802]]

amount over the value of the S share. Under paragraphs (d)(3)(iii)(B) 
and (d)(5)(i)(B) of this section, S's net inside attribute amount is 
$250, S's $250 deemed basis in the deemed single share of S1 stock 
(computed as the greater of S's $80 aggregate basis in the S1 shares ($0 
basis in Share A plus $20 basis in each of the four other shares) and 
S1's $250 basis in its asset). S's aggregate inside loss is therefore 
$230, $250 net inside attribute amount over the $20 value of the S 
share. Accordingly, S's attribute reduction amount is $200, the lesser 
of the $200 net stock loss and the $230 aggregate inside loss.
    (2) Allocation, apportionment, and application of S's attribute 
reduction amount. Under paragraphs (d)(4) and (d)(5)(ii) of this 
section, S's $200 attribute reduction amount is allocated entirely to 
the S1 stock (treated as a single share) and then apportioned among the 
shares in a manner that reduces disparity to the greatest extent 
possible. Thus, $24 is apportioned to Share A and $44 is apportioned to 
each of the other shares. Because none of the S1 shares are transferred 
within the meaning of paragraph (f)(10) of this section (notwithstanding 
that there is a disposition under Sec.  1.1502-19(c)(1)(ii)(B)), the 
allocated attribute reduction amount apportioned to each of the 
individual S1 shares is applied fully to reduce the basis of each share 
to an excess loss account of $24. See paragraph (d)(5)(iii) of this 
section.
    (3) Tier down of S's attribute reduction amount. Under paragraph 
(d)(5)(v)(A) of this section, the $200 of S's attribute reduction amount 
allocated to the S1 shares is an attribute reduction amount of S1 
(regardless of the extent, if any, to which it is apportioned and 
applied to reduce the basis of any shares of S1 stock). Under the 
general rules of this paragraph (d), S1's $200 tier-down attribute 
reduction amount is allocated and applied to reduce S1's basis in its 
asset from $250 to $50.
    (4) Basis restoration. Under paragraph (d)(5)(vi)(A) of this 
section, after this paragraph (d) has been applied with respect to all 
transfers of subsidiary stock, any reduction made to the basis of a 
share of lower-tier subsidiary stock under paragraph (d)(5)(iii) of this 
section is reversed to the extent necessary to conform the basis of that 
share to the share's allocable portion of the subsidiary's net inside 
attribute amount (after reduction). S1's net inside attribute amount 
after the application of this paragraph (d) is $50 and thus each of the 
five S1 share's allocable portion of S1's net inside attribute amount is 
$10. Accordingly, the reductions to the bases of S1 shares under 
paragraph (d)(5)(iii) of this section are reversed to the extent 
necessary to restore (to the extent possible) the basis of each share to 
$10. Thus, $24 of the $24 of reduction to the basis of Share A is 
reversed, restoring the basis of Share A to $0, and $34 of the $44 of 
reduction to the basis of each other share is reversed, restoring the 
basis of each of those shares to $10.
    (ii) Sale of gain share to member. (A) Facts. The facts are the same 
as in paragraph (i)(A) of this Example 6, except that M owns Shares A, 
B, C, and D, S owns Share E, S has a liability of $20, and S1's basis in 
its asset is $500. Also, as part of the transaction, S sells Share E to 
M for $40. Unlike under the facts of paragraph (i)(A) of this Example 6, 
there is no disposition of Share A within the meaning of Sec.  1.1502-
19(c)(1)(ii)(B) (S1 continues to be a member of the group, and thus does 
not have a separate return year). As a result, the Share A excess loss 
account is not taken into account. Although S's sale of Share E is a 
transfer of that share, the share is not a loss share and thus the 
transfer is not subject to this section. M's sale of the S share, 
however, is a transfer of a loss share and therefore subject to this 
section. See paragraphs (f)(10)(i)(A), (f)(10)(i)(B), and (f)(10)(i)(C) 
of this section.
    (B) Transfer in lowest tier (gain share). S's sale of Share E is the 
lowest-tier transfer in the transaction. Under paragraph (a)(3)(ii)(A) 
of this section, because there are no transfers of loss shares at that 
tier, no adjustments are required under paragraph (b) or (c) of this 
section. However, S's gain recognized on the transfer of Share E is 
computed and immediately adjusts members' bases in subsidiary stock 
under Sec.  1.1502-32 (because M and S are not members of the same group 
immediately after the transaction, the sale is not an intercompany 
transaction subject to Sec.  1.1502-13). Accordingly, M's basis in its S 
share is increased by $20, from $200 to $220.
    (C) Transfers in next higher tier, application of paragraphs (b) and 
(c) of this section. The next higher tier transfer is M's sale of the S 
stock. The sale is a transfer of a loss share and therefore subject to 
this section. Although the transfer is subject to this section, there is 
no basis redetermination under paragraph (b) of this section because 
there is only one share of S stock outstanding (and so there can be no 
disparity among members' bases in common shares and there are no 
outstanding preferred shares with respect to which there can be 
unrecognized gain or loss). See paragraph (b)(1)(ii)(A) of this section. 
Therefore, after the application of paragraph (b) of this section, the 
share is still a loss share and, as such, subject to paragraph (c) of 
this section. Under paragraph (c) of this section, M's basis in its S 
share is decreased by $20, the lesser of S's $200 disconformity amount 
(computed as the excess of M's $220 basis in the S stock over S's $20 
net inside attribute amount (computed as the $20 basis in Share E, 
increased by $20 to reflect the gain recognized with respect to the 
share, less the $20 liability)), and the $20 net positive adjustment. 
Thus, after the application of paragraph (c) of this section, M's

[[Page 803]]

basis in the S share is $200, and the sale remains a transfer of a loss 
share. There are no higher tier transfers and, therefore, M's transfer 
of the S share is then subject to this paragraph (d).
    (D) Attribute reduction under this paragraph (d). (1) Computation of 
attribute reduction amount. Under paragraph (d)(3) of this section, S's 
attribute reduction amount is the lesser of M's net stock loss and S's 
aggregate inside loss. M's net stock loss is $180 ($200 basis over $20 
value). S's aggregate inside loss is the excess of S's net inside 
attribute amount over the value of the S share. Under paragraphs 
(d)(3)(iii)(B) and (d)(5)(i)(B) of this section, S's net inside 
attribute amount is $80, computed as $100 (S's deemed basis in Share E 
(the greater of $40 (S's $20 basis in Share E, adjusted for the $20 gain 
recognized with respect to the share), and Share E's allocable portion 
of S1's net inside attribute amount of $100 (1/5 of S1's $500 basis in 
its asset)), less S's $20 liability. Accordingly, S's aggregate inside 
loss is $60 ($80 net inside attribute amount over the $20 value of the S 
stock). S's attribute reduction amount is therefore $60, the lesser of 
$180 net stock loss and $60 aggregate inside loss.
    (2) Allocation, apportionment, and application of S's attribute 
reduction amount. Under paragraphs (d)(4) and (d)(5)(ii) of this 
section, S's $60 attribute reduction amount is allocated entirely to its 
S1 stock, Share E. However, because Share E was transferred within the 
meaning of paragraph (f)(10) of this section and gain was recognized on 
its transfer, none of the allocated amount is apportioned to, or applied 
to reduce the basis of Share E. See paragraph (d)(5)(iii)(A) of this 
section. Under paragraph (d)(5)(iv) of this section, the $60 allocated 
attribute reduction amount not apportioned or applied to Share E has no 
effect on S or S's attributes.
    (3) Tier down of S's attribute reduction amount. Notwithstanding the 
fact that no portion of the allocated attribute reduction amount was 
apportioned to or applied to reduce the basis of Share E, the entire $60 
allocated attribute reduction amount is an attribute reduction amount of 
S1. See paragraph (d)(5)(v)(A) of this section. Under the general rules 
of this paragraph (d), S1's $60 tier-down attribute reduction amount is 
allocated and applied to reduce S1's basis in its asset from $500 to 
$440.
    (4) Basis restoration. Under paragraph (d)(5)(vi)(A) of this 
section, after this paragraph (d) has been applied with respect to all 
transfers of subsidiary stock, any reduction made to the basis of a 
share of subsidiary stock under paragraph (d)(5)(iii) of this section is 
reversed to the extent necessary to conform the basis of that share to 
the share's allocable portion of the subsidiary's net inside attribute 
amount. No reduction was made to the basis of the S1 stock under 
paragraph (d)(5)(iii) of this section. Therefore, no stock basis is 
increased under the basis restoration rule in paragraph (d)(5)(vi)(A) of 
this section.
    Example 7. Allocation of attribute reduction if lower-tier 
subsidiary has non-loss assets or liabilities. (i) S1 holds cash. (A) 
Facts. M owns the sole outstanding share of S stock with a basis of 
$800. S owns Asset with a basis of $400 and the sole outstanding share 
of S1 stock with a basis of $300. S1 holds Asset 1 with a basis of $50, 
and $100 cash. M sells its S share to P1, the common parent of a 
consolidated group, for $100. The sale is not a transfer of the S1 share 
because S and S1 are members of the same group following the 
transaction. However, the sale is a transfer of the S share, a loss 
share, and therefore subject to this section. See paragraphs 
(f)(10)(i)(A), (f)(10)(i)(B), and (f)(10)(i)(C) of this section.
    (B) Application of paragraphs (b) and (c) of this section. Although 
the transfer is subject to this section, there is no basis 
redetermination under paragraph (b) of this section because there is 
only one share of S stock outstanding (and so there can be no disparity 
among members' bases in common shares and there are no outstanding 
preferred shares with respect to which there can be unrecognized gain or 
loss). See paragraph (b)(1)(ii)(A) of this section. Therefore, after the 
application of paragraph (b) of this section, the share is still a loss 
share and, as such, subject to the provisions of this paragraph (c). No 
adjustment is required under paragraph (c) of this section because, even 
though there is a disconformity amount of $100, the net positive 
adjustment is $0. See paragraph (c)(3) of this section. Thus, after the 
application of paragraph (c) of this section, M's sale of the S share is 
still a transfer of a loss share and, accordingly, subject to this 
paragraph (d).
    (C) Attribute reduction under this paragraph (d). (1) Computation of 
attribute reduction amount. Under paragraph (d)(3) of this section, S's 
attribute reduction amount is the lesser of M's net stock loss and S's 
aggregate inside loss. M's net stock loss is $700 ($800 basis over $100 
value). S's aggregate inside loss is the excess of S's net inside 
attribute amount over the value of the S share. Under paragraphs 
(d)(3)(iii)(B) and (d)(5)(i)(B) of this section, S's net inside 
attribute amount is $700, the sum of its $400 basis in Asset and its 
$300 deemed basis in the S1 share (computed as the greater of S's $300 
basis in the S1 share and S1's $150 net inside attribute amount 
(reflecting the sum of S1's $50 basis in Asset 1 and S1's $100 cash)). 
Therefore, S's aggregate inside loss is $600 ($700 net inside attribute 
amount over the $100 value of the S stock). S's attribute reduction 
amount is $600, the lesser of the $700 net stock loss and the $600 
aggregate inside loss.
    (2) Allocation, apportionment, and application of S's attribute 
reduction amount. Under

[[Page 804]]

paragraphs (d)(4) and (d)(5)(ii) of this section, S's $600 attribute 
reduction amount is allocated proportionately (by basis) between S's 
$400 basis in Asset (non-stock Category D asset) and its deemed basis in 
the S1 share. However, under paragraph (d)(5)(ii) of this section, for 
purposes of allocating the attribute reduction amount, S's $300 deemed 
basis in the S1 share is treated as reduced by S1's net non-loss assets 
(its Class I asset, $100 cash) to $200. Thus, the $600 is allocated $400 
to Asset ($400/$600 x $600) and $200 to the S1 share ($200/$600 x $600). 
The $400 allocated to Asset is applied to reduce S's basis in Asset from 
$400 to $0. Because the S1 share is not transferred within the meaning 
of paragraph (f)(10) of this section, the allocated attribute reduction 
amount apportioned to the S1 share is applied fully to reduce the basis 
of the S1 share to $100. See paragraph (d)(5)(iii) of this section.
    (3) Tier down of S's attribute reduction amount. Under paragraph 
(d)(5)(v)(A) of this section, the $200 portion of S's attribute 
reduction amount allocated to the S1 stock is an attribute reduction 
amount of S1 (regardless of the extent, if any, to which it is 
apportioned and applied to reduce the basis of any shares of S1 stock). 
Under the general rules of this paragraph (d), S1's $200 tier-down 
attribute reduction amount is allocated and applied to reduce S1's basis 
in Asset 1 (S1's only attribute available for reduction) from $50 to $0. 
The $150 unapplied attribute reduction amount is disregarded and has no 
further effect.
    (4) Basis restoration. Under paragraph (d)(5)(vi)(A) of this 
section, after this paragraph (d) has been applied with respect to all 
transfers of subsidiary stock, any reduction made to the basis of a 
share of subsidiary stock under paragraph (d)(5)(iii) of this section is 
reversed to the extent necessary to conform the basis of that share to 
the share's allocable portion of the subsidiary's net inside attribute 
amount. There is only one share of S1 stock outstanding and so S1's 
entire $100 net inside attribute amount is allocable to that share. 
Because S's $100 basis in the S1 share (as reduced under this paragraph 
(d)) is already conformed with its $100 allocable portion of S1's net 
inside attribute amount, there is no restoration under paragraph 
(d)(5)(vi)(A) of this section.
    (ii) S1 borrows cash. The facts are the same as in paragraph (i)(A) 
of this Example 7 except that, in addition, S1 borrows $50 from X 
immediately before M sells the S share. The computation of the attribute 
reduction amount is the same as in paragraph (i)(C) of this Example 7 
(the $50 cash from the loan proceeds and the $50 liability offset in the 
computation of S1's net inside attribute amount and so the net amount is 
unaffected, and the computation of S's deemed basis in the S1 stock is 
unaffected). Similarly, for purposes of allocating the attribute 
reduction amount between the non-stock Category D asset and the S1 
stock, paragraph (d)(5)(ii) of this section requires S's deemed basis in 
the S1 share to be treated as reduced by S1's net non-loss assets (S1's 
non-loss assets over S1's liabilities). Accordingly, the additional $50 
cash proceeds is offset by the $50 liability and there is no effect on 
the allocation of the attribute reduction amount. The results are the 
same as in paragraph (i) of this Example 7.
    (iii) S1 has a liability not taken into account for tax purposes. 
(A) Facts. The facts are the same as in paragraph (ii) of this Example 7 
except that, in addition, S1 has a $40 liability that is not taken into 
account for tax purposes as of the transfer and that would be required 
to be capitalized if a person purchased S1's assets and assumed the 
liability.
    (B) Application of paragraphs (b) and (c) of this section. No 
adjustment is required under paragraph (b) or paragraph (c) of this 
section for the reasons set forth in paragraph (i)(B) of this Example 7. 
Thus, after the application of paragraph (c) of this section, P's sale 
of the S share is still a transfer of a loss share and, accordingly, 
subject to this paragraph (d).
    (C) Attribute reduction under this paragraph (d). (1) Computation of 
attribute reduction amount. The attribute reduction amount is the same 
as computed in paragraph (i)(C)(1) of this Example 7 (under paragraph 
(f)(5) of this section, the term liability does not include liabilities 
not taken into account for tax purposes and so the additional $40 
liability not yet taken into account for tax purposes does not affect 
the computation of S's attribute reduction amount).
    (2) Allocation, apportionment, and application of S's attribute 
reduction amount. Under paragraphs (d)(4) and (d)(5)(ii) of this 
section, S's $600 attribute reduction amount is allocated 
proportionately (by basis) between S's $400 basis in Asset 1 (non-stock 
Category D asset) and its deemed basis in the S1 share. However, under 
paragraph (d)(5)(ii) of this section, for purposes of allocating the 
attribute reduction amount, S's $300 deemed basis in the S1 share is 
treated as reduced by S1's net non-loss assets (S1's non-loss assets 
over S1's liabilities). For this purpose, the term liabilities includes 
liabilities not taken into account for tax purposes, as described in 
paragraph (d)(4)(ii)(C)(1) of this section (generally, liabilities that, 
if assumed in a purchase, would give rise to a capitalized amount when 
satisfied). Thus, for this purpose, S's $300 deemed basis in the S1 
share is reduced by S1's $60 net non-loss assets (the excess of S1's 
$150 non-loss assets (its Class I asset, $150 cash) over S1's $90 
liabilities ($50 loan and $40 liability not yet taken into account for 
tax purposes)), to $240. Accordingly, S's $600 attribute reduction 
amount is allocated and applied $375 ($400/$640 x $600) to Asset 
(reducing S's basis in Asset from $400

[[Page 805]]

to $25) and $225 ($240/$640 x $600) to the S1 share. Because the S1 
share is not transferred within the meaning of paragraph (f)(10) of this 
section, the allocated attribute reduction amount apportioned to the S1 
share is applied fully to reduce the basis of the S1 share to $75. See 
paragraph (d)(5)(iii) of this section.
    (3) Tier down of S's attribute reduction amount, application of 
conforming limitation. Under paragraph (d)(5)(v)(A) of this section, the 
$225 portion of S's attribute reduction amount allocated to the S1 stock 
is an attribute reduction amount of S1 (regardless of the extent, if 
any, to which it is apportioned and applied to reduce the basis of any 
shares of S1 stock). Under the general rules of this paragraph (d), S1's 
$225 tier-down attribute reduction amount would be allocated and applied 
to reduce S1's attributes. However, under paragraph (d)(5)(v)(B) of this 
section, S1's attributes can be reduced by only $75, the excess of the 
$150 portion of S1's net inside attribute amount that is allocable to 
all S1 shares held by members as of the transaction over $75, the 
aggregate amount of members' bases in nontransferred S1 shares, after 
reduction under this paragraph (d). Thus, of S1's $225 tier-down 
attribute reduction amount, $50 is applied to reduce S1's basis in Asset 
1, from $50 to $0. Although the $25 unapplied attribute reduction amount 
not subject to the conforming limitation would generally be disregarded 
without further effect, because S1 has a $40 liability not taken into 
account for tax purposes, paragraph (d)(4)(ii)(C)(1) of this section 
requires that the $25 of the unapplied attribute reduction amount not 
subject to the conforming limitation be suspended and then allocated and 
applied to reduce any amounts that become deductible or capitalizable as 
a result of that liability later being taken into account. If the 
liability is satisfied for an amount that is less than $25, under 
paragraph (d)(4)(ii)(C)(2) of this section the remaining portion of that 
$25 suspended attribute reduction amount is disregarded and has no 
further effect. The $150 unapplied portion of the tier-down attribute 
reduction amount subject to the conforming limitation has no further 
effect.
    (4) Basis restoration. Under paragraph (d)(5)(vi)(A) of this 
section, after this paragraph (d) has been applied with respect to all 
transfers of subsidiary stock, any reduction made to the basis of a 
share of lower-tier subsidiary stock under paragraph (d)(5)(iii) of this 
section is reversed to the extent necessary to conform the basis of that 
share to the share's allocable portion of the subsidiary's net inside 
attribute amount. Paragraph (d)(5)(vi)(A) provides that, for this 
purpose, S1's net inside attribute amount is its net inside attribute 
amount, taking into account any reductions under this paragraph (d) and 
treating it as reduced by any attribute reduction amount suspended under 
paragraph (d)(4)(ii)(C)(1) of this section. Because S's $75 basis in its 
S1 stock (after application of this paragraph (d)) is already conformed 
with its $75 allocable portion of S1's net inside attribute amount ($100 
net inside attributes after reduction, reduced by S1's $25 suspended 
attribute reduction amount), there is no restoration under paragraph 
(d)(5)(vi)(A) of this section.
    Example 8. Election to reduce stock basis or reattribute attributes 
under paragraph (d)(6) of this section. (i) Deconsolidating sale. (A) 
Facts. P owns the sole outstanding share of M stock with a basis of 
$1,000. M owns all 100 outstanding shares of S stock with a basis of 
$2.10 per share ($210 total). M sells all its S shares to X for $1 per 
share ($100 total). M's sale of the S shares is a transfer of loss 
shares and therefore subject to this section. See paragraphs 
(f)(10)(i)(A), (f)(10)(i)(B), and (f)(10)(i)(C) of this section. At the 
time of the sale, S has no liabilities and the following:

------------------------------------------------------------------------
                                                              Attribute
              Category                      Attribute           amount
------------------------------------------------------------------------
Category A.........................  Capital loss carryover          $10
Category B.........................  NOL carryover.........           90
Category C.........................  Deferred deduction....           40
                                                            ------------
    Total Category A, Category B,    140...................
     and Category C Attributes.
Category D, Class V................  Basis in land.........           70
                                                            ------------
    Total Attributes...............  210...................
------------------------------------------------------------------------

    (B) Application of paragraphs (b) and (c) of this section. Although 
the transfer is subject to this section, there is no basis 
redetermination under paragraph (b) of this section because there is no 
disparity among M's bases in shares of S common stock and there are no 
shares of S preferred stock outstanding (so there can be no unrecognized 
gain or loss with respect to preferred shares). See paragraph 
(b)(1)(ii)(A) of this section. No adjustment is required under paragraph 
(c) of this section because both the disconformity amount and the net 
positive adjustment are $0. See paragraph (c)(3) of this section. Thus, 
after the application of paragraph (c) of this section, M's transfer of 
the

[[Page 806]]

S shares is still a transfer of loss shares and, accordingly, subject to 
this paragraph (d).
    (C) Attribute reduction under this paragraph (d). (1) Computation of 
attribute reduction amount. Under paragraph (d)(3) of this section, S's 
attribute reduction amount is the lesser of the $110 net stock loss 
($210 aggregate basis over the $100 aggregate value) and S's aggregate 
inside loss. S's aggregate inside loss is $110 (S's $210 net inside 
attribute amount (the $10 capital loss carryover, plus the $90 NOL 
carryover, plus the $40 deferred deduction, plus the $70 basis in the 
land) over the $100 value of all outstanding S shares). S's attribute 
reduction amount is $110, the lesser of the $110 net stock loss and the 
$110 aggregate inside loss.
    (2) Application of attribute reduction amount. (i) S's $110 
attribute reduction amount is applied as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                 Allocation of
                                                                    Attribute      attribute         Adjusted
               Category                         Attribute             amount       reduction        attribute
                                                                                     amount           amount
----------------------------------------------------------------------------------------------------------------
Category A............................  Capital loss carryover...          $10              $10               $0
Category B............................  NOL carryover............           90               90                0
Category C............................  Deferred deduction.......           40               10               30
Category D, Class V...................  Basis in land............           70                0               70
                                                                  ----------------------------------------------
    Totals............................  210......................          110              100
----------------------------------------------------------------------------------------------------------------

    (ii) Alternatively, under paragraph (d)(4)(ii)(A)(1) of this 
section, P could specify the allocation of S's $110 attribute reduction 
amount among S's $10 capital loss carryover, S's $90 NOL carryover, and 
S's $40 deferred deduction.
    (D) Results. The P group recognizes a $110 loss on M's sale of the S 
shares that is absorbed by the group, which reduces P's basis in the M 
share under Sec.  1.1502-32 from $1,000 to $890. Immediately after the 
transaction, the entities own the following:

------------------------------------------------------------------------
           Entity                           Asset                 Basis
------------------------------------------------------------------------
P...........................  M share..........................     $890
X...........................  100 S shares.....................      100
S...........................  Category C, deferred deduction...       30
                              Category D, Class V Asset (land).       70
------------------------------------------------------------------------

    (E) Election to reduce stock basis. The facts are the same as in 
paragraph (i)(A) of this Example 8 except that P elects under paragraph 
(d)(6) of this section to reduce M's basis in the S shares by the full 
attribute reduction amount of $110, in lieu of S reducing its 
attributes. The election is effective for all transferred loss shares 
and is allocated to those shares in proportion to the loss in each. See 
paragraph (d)(6)(v)(A) of this section. Accordingly, the basis of each 
of the 100 transferred shares is reduced from $2.10 to $1.00. After 
giving effect to the election, the S shares are not loss shares and this 
section has no further application to the transfer. The $110 reduction 
in M's basis in the S shares pursuant to the election under paragraph 
(d)(6) of this section is a noncapital, nondeductible expense of M that 
will reduce P's basis in the M share. See paragraph (d)(6)(v)(A) of this 
section. Immediately after the transaction, the entities own the 
following:

------------------------------------------------------------------------
                                                                Basis/
          Entity                         Asset                attribute
------------------------------------------------------------------------
P........................  M share.........................         $890
X........................  100 S shares....................          100
S........................  Category A, capital loss                   10
                            carryover.
                           Category B, NOL carryover.......           90
                           Category C, deferred deduction..           40
                           Category D, Class V Asset (land)           70
------------------------------------------------------------------------

    (F) Election to reattribute losses. The facts are the same as in 
paragraph (i)(A) of this Example 8 except that P elects under paragraph 
(d)(6) of this section to reattribute S's attributes. S's attribute 
reduction amount is $110, and P can reattribute all or any portion of 
the attributes in Category A, Category B, and Category C to the extent 
of $110. P elects to reattribute the $90 NOL, and, as a result, S's NOL 
is $0. Under paragraph (d)(6)(iv)(A) of this section, the reattribution 
of the $90 NOL is a noncapital, nondeductible expense of S. Under Sec.  
1.1502-32(c)(1)(ii)(A)(1) this $90 expense is allocated to the 
transferred loss shares of S stock in proportion to the loss in the 
shares, or $.90 per share. Further, this expense tiers up under Sec.  
1.1502-32 and reduces P's basis in the M stock by $90. After giving 
effect to the election, the P group would recognize a $20 loss on M's 
sale of the S shares, S would have an aggregate inside loss of $20 (S's 
$120 net inside attribute amount (the $10 capital loss carryover, plus 
the $40 deferred deduction, plus the $70 basis in the land) over the 
$100 value of all outstanding S shares), and S's attribute reduction 
amount would be $20 (applied $10 to the $10 capital loss carryover and 
$10 to the $40 deferred deduction). (Alternatively, under paragraph 
(d)(4)(ii)(A)(1) of this section, P could specify the allocation of S's 
$20 attribute reduction amount between S's $10 capital loss carryover 
and S's $40 deferred deduction. Further, P could elect to reduce M's 
remaining basis in the S shares by any amount up to the $20

[[Page 807]]

attribute reduction amount, thereby reducing or eliminating S's 
attribute reduction amount.)
    (ii) Nondeconsolidating sale. (A) Facts. The facts are the same as 
in paragraph (i)(A) of this Example 8, except that M only sells 20 S 
shares ($20 total).
    (B) Application of paragraphs (b) and (c) of this section. No 
adjustment is required under paragraph (b) or paragraph (c) of this 
section for the reasons set forth in paragraph (i)(B) of this Example 8. 
Thus, after the application of paragraph (c) of this section, M's sale 
of the S shares is still a transfer of loss shares and, accordingly, 
subject to this paragraph (d).
    (C) Attribute reduction under this paragraph (d). (1) Computation of 
attribute reduction amount. Under paragraph (d)(3) of this section, S's 
attribute reduction amount is the lesser of the $22 net stock loss ($42 
aggregate basis over $20 aggregate value) and S's $110 aggregate inside 
loss (as calculated in paragraph (i)(C)(1) of this Example 8). S's 
attribute reduction amount is $22, the lesser of the $22 net stock loss 
and the $110 aggregate inside loss.
    (2) Application of attribute reduction amount. (i) S's $22 attribute 
reduction amount is applied as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                     Allocation of
                                                                        Attribute      attribute       Adjusted
                Category                           Attribute              amount       reduction      attribute
                                                                                         amount         amount
----------------------------------------------------------------------------------------------------------------
Category A..............................  Capital loss carryover.....          $10              $10           $0
Category B..............................  NOL carryover..............           90               12           78
Category C..............................  Deferred deduction.........           40                0           40
Category D, Class V.....................  Land.......................           70                0           70
----------------------------------------------------------------------------------------------------------------

    (ii) Alternatively, under paragraph (d)(4)(ii)(A)(1) of this 
section, P could specify the allocation of S's $22 attribute reduction 
amount among S's $10 capital loss carryover, S's $90 NOL carryover, and 
S's $40 deferred deduction.
    (D) Results. The P group recognizes a $22 loss on M's sale of the S 
shares that is absorbed by the group, which reduces P's basis in the M 
share under Sec.  1.1502-32 from $1,000 to $978. Immediately after the 
transaction, the entities have the following:

------------------------------------------------------------------------
          Entity                         Asset                  Basis
------------------------------------------------------------------------
P........................  M share.........................         $978
X........................  20 S shares.....................           20
S........................  Category B, NOL carryover.......           78
                           Category C, deferred deduction..           40
                           Category D, Class V Asset (land)           70
------------------------------------------------------------------------

    (E) Election to reduce stock basis. The facts are the same as in 
paragraph (ii)(A) of this Example 8, except that P elects under 
paragraph (d)(6) of this section to reduce M's basis in the S shares by 
the full attribute reduction amount of $22, in lieu of S reducing its 
attributes. The election is effective for all transferred loss shares 
and is allocated to such shares in proportion to the loss in each share. 
See paragraph (d)(6)(v)(A) of this section. Accordingly, the basis of 
each of the 20 transferred shares is reduced from $2.10 to $1.00. After 
giving effect to the election, the transferred S shares are not loss 
shares and this section has no further application to the transfer. The 
$22 reduction in M's basis in the S shares pursuant to the election 
under paragraph (d)(6) of this section is a noncapital, nondeductible 
expense of M that will reduce P's basis in the M share. See paragraph 
(d)(6)(v)(A) of this section. Immediately after the transaction, the 
entities have the following:

------------------------------------------------------------------------
                                                                Basis/
          Entity                         Asset                attribute
------------------------------------------------------------------------
P........................  M share.........................         $978
M........................  80 S shares.....................          168
X........................  20 S shares.....................           20
S........................  Category A, capital loss                   10
                            carryover.
                           Category B, NOL.................           90
                           Category C, deferred deduction..           40
                           Category D Class V Asset (land).           70
------------------------------------------------------------------------

    (F) Election to reattribute attributes. The facts are the same as in 
paragraph (ii)(A) of this Example 8. Because S remains a member of the 
same group as P following M's sale of S stock, P cannot elect under 
paragraph (d)(6) of this section to reattribute any portion of S's 
attributes in lieu of attribute reduction.
    Example 9. Transfers at multiple tiers, gain and loss shares. (i) 
Facts. M owns the sole outstanding share of S stock with a basis of 
$700. S owns Asset 1 (basis of $170) and all ten outstanding shares of 
S1 common stock ($170 basis in share 1, $10 basis in share 2, and $15 
basis in each of share 3 through share 10). S1 owns the sole outstanding 
share of S2 ($0 basis), the sole outstanding share of S3 ($60 basis), 
and the sole outstanding share of S4 ($100 basis). S2's sole asset is 
Asset 2 ($75 basis). S3's sole asset is Asset 3 ($75 basis). S4's sole 
asset is Asset 4 ($80 basis). In one transaction, M sells its S share to 
P1 (the common parent of a consolidated group) for $240, S sells S1 
share 1 to X for $20, S contributes S1 share 2 to a partnership in a 
section 721 transaction, and S1 sells its S2 share to Y

[[Page 808]]

for $50. M's sale of the S share and S1's sale of the S2 share are 
transfers under paragraphs (f)(10)(i)(A), (f)(10)(i)(B), and 
(f)(10)(i)(C) of this section. S's sale of S1 share 1 to X is a transfer 
under paragraphs (f)(10)(i)(A) and (f)(10)(i)(C) of this section. S's 
contribution of S1 share 2 to the partnership is a transfer under 
paragraph (f)(10)(i)(C) of this section.
    (ii) Transfer in lowest tier (gain share). However, S1's gain 
recognized on the transfer of the S2 share is computed and immediately 
adjusts members' bases in subsidiary stock under Sec.  1.1502-32. Under 
paragraph (a)(3)(ii)(A) of this section, because there are no transfers 
of loss shares at that tier, no adjustments are required under paragraph 
(b) or (c) of this section. However, S1's gain recognized on the 
transfer of the S2 share is computed and immediately adjusts members 
bases in subsidiary stock under Sec.  1.1502-32. Accordingly, $5 is 
allocated to each of 10 S1 shares, increasing the basis of share 1 to 
$175, the basis of share 2 to $15, and the basis of each other share to 
$20. The $50 applied to S's bases in the S1 shares then tiers up to 
increase P's basis in the S share from $700 to $750.
    (iii) Transfers in next highest tier (loss share). S's sale of the 
S1 share 1 and S's transfer of the S1 share 2 to a partnership are both 
transfers of stock in the next higher tier. However, only the S1 share 1 
is a loss share and so this section only applies with respect to the 
transfer of that share.
    (A) Basis redetermination under paragraph (b) of this section. Under 
paragraph (b)(2)(i)(A) of this section, members' bases in S1 shares are 
redetermined by first removing the positive investment adjustments 
applied to the bases of transferred loss common shares. Accordingly, the 
$5 positive investment adjustment applied to the basis of S1 share 1 is 
removed, reducing the basis of S1 share 1 from $175 to $170. Because 
there were no negative adjustments applied to the bases of S1 shares, 
there are no negative adjustments that can be reallocated to further 
reduce the basis of S1 share 1 under paragraph (b)(2)(i)(B) of this 
section. Finally, under paragraph (b)(2)(ii)(B) of this section, the $5 
positive investment adjustment removed from S1 share 1 is reallocated 
and applied to increase the bases of other S1 common shares in a manner 
that reduces disparity to the greatest extent possible. Accordingly, the 
entire $5 investment adjustment removed from S1 share 1 is reallocated 
and applied to increase the basis of S1 share 2, from $15 to $20. After 
basis is redetermined under paragraph (b) of this section, the S1 share 
1 is still a loss share and therefore subject to basis reduction under 
paragraph (c) of this section. (Because the S1 share 2 is not a loss 
share, this section does not apply with respect to the transfer of that 
share.)
    (B) Basis reduction under paragraph (c) of this section. No 
adjustment is required to the basis of S1 share 1 under paragraph (c) of 
this section. The S1 share 1 has a disconformity amount of $149. This 
$149 disconformity amount is computed as the excess of the $170 basis in 
the S1 share 1 over the S1 share 1's $21 allocable portion (1/10) of 
S1's $210 net inside attribute amount. S1's $210 net inside attribute 
amount is determined under paragraph (c)(5) of this section as the sum 
of $50 (S1's $0 basis in the S2 share, adjusted for the $50 gain 
recognized with respect to that share), S1's $60 basis in the S3 stock, 
and S1's $100 basis in the S4 stock. (In computing the disconformity 
amount, the basis of the S2 share is not treated as tentatively reduced 
because that share is transferred in the transaction, and the bases of 
the S3 and S4 shares are not treated as tentatively reduced because no 
positive investment adjustments were applied to the bases of those 
shares.) However, the S1 share 1's net positive adjustment is $0 because 
the $5 positive investment adjustment originally allocated to S1 share 1 
was reallocated to S1 share 2 under paragraph (b) of this section. See 
paragraph (c)(3) of this section. No adjustment is required to the basis 
of S1 share 2 under paragraph (c) of this section because S1 share 2 is 
not a loss share.
    (C) Computation of loss, adjustments to stock basis. S recognizes a 
loss of $150 on the sale of the S1 share 1 ($170 basis over $20 amount 
realized) that is absorbed by the group. Under Sec.  1.1502-32, M's 
basis in its S share is therefore decreased by $100, the net of the $150 
loss recognized by S on the sale of the S1 share, and the $50 gain that 
tiered up from S1 (as a result of S1's sale of the S2 share). Following 
these adjustments, M's basis in the S share is $600 and the sale of the 
S share is still a transfer of a loss share.
    (iv) Transfer in highest tier (loss share). The sale of the S share 
is a transfer in the next higher tier, which is the highest tier in this 
transaction. Because the sale is a transfer of a loss share, it is 
subject to this section.
    (A) Basis redetermination and basis reduction under paragraphs (b) 
and (c) of this section. Although the transfer is subject to this 
section, there is no basis redetermination under paragraph (b) of this 
section because there is only one share of S stock outstanding (and so 
there can be no disparity among members' bases in common shares and 
there are no outstanding preferred shares with respect to which there 
can be unrecognized gain or loss). See paragraph (b)(1)(ii)(A) of this 
section. Therefore, after the application of paragraph (b) of this 
section, the share is still a loss share and, as such, subject to 
paragraph (c) of this section. In addition, no adjustment is required 
under paragraph (c) of this section. The S share has a disconformity 
amount of $230. This $230 disconformity amount is computed as the excess 
of the $600

[[Page 809]]

basis in the S share over the S share's $370 allocable portion (1/1) of 
S's $370 net inside attribute amount. S's $370 net inside attribute 
amount is determined under paragraph (c)(5) of this section as the sum 
of $200 (S's $170 basis in the S1 share 1, adjusted for the $150 loss 
recognized with respect to that share, and S's $20 basis in each of S1 
share 2 through share 10), and S's $170 basis in Asset 1. (In computing 
the disconformity amount, the bases of S1 share 1 and share 2 are not 
treated as tentatively reduced because those shares are transferred in 
the transaction, and the bases of S1 share 3 through share 10 are not 
treated as tentatively reduced because none of those shares have a 
disconformity amount--each share has a basis of $20 and a $21 allocable 
portion (1/10) of S1's $210 net inside attribute amount, as determined 
in paragraph (iii)(B) of this Example 9.) However, the S share's net 
positive adjustment is $0 (the S share's net adjustment is negative 
$100). See paragraph (c)(3) of this section. Accordingly, the sale of 
the S share is still a transfer of a loss share. Because there are no 
higher-tier loss shares transferred in the transaction, this paragraph 
(d) then applies with respect to the transfer of the S share.
    (B) Attribute reduction under this paragraph (d). (1) Computation of 
S's attribute reduction amount. Under paragraph (d)(3) of this section, 
S's attribute reduction amount is the lesser of P's net stock loss and 
S's aggregate inside loss. P's net stock loss is $360 ($600 basis over 
$240 amount realized). S's aggregate inside loss is the excess of S's 
net inside attribute amount over the value of the S share. S's net 
inside attribute amount is the sum of its bases in its assets, treating 
its S1 shares as a single share (the S1 stock) and treating S's deemed 
basis in the S1 stock as its basis in that stock. Under paragraph 
(d)(5)(i)(C) of this section, when subsidiaries are owned in multiple 
tiers, deemed basis is first determined for shares at the lowest tier, 
and then for stock in each next higher tier. Under paragraph 
(d)(5)(i)(B) of this section, S1's deemed basis in the S2 stock is $75 
(computed as the greater of $50 (S1's $0 basis in the S2 share, adjusted 
for the $50 gain recognized with respect to the share) and $75 (S2's net 
inside attribute amount, the basis in Asset 2)). S1's deemed basis in 
the S3 stock is $75 (computed as the greater of $60 (S1's basis in the 
S3 share) and $75 (S3's net inside attribute amount, the basis in Asset 
3)). S1's deemed basis in the S4 stock is $100 (computed as the greater 
of $100 (S1's basis in the S4 share) and $80 (S4's net inside attribute 
amount, the basis in Asset 4)). Accordingly, S1's net inside attribute 
amount is $250 ($75 deemed basis in the S2 stock plus $75 deemed basis 
in the S3 stock plus $100 deemed basis in the S4 stock). S's deemed 
basis in the S1 stock is the greater of the sum of S's actual basis in 
each share of S1 stock (adjusted for any gain or loss recognized) and 
S1's net inside attribute amount. S's actual basis in the S1 stock, 
adjusted for the loss recognized, is $200 (the sum of S's $170 basis in 
the S1 share 1, adjusted by the $150 loss recognized with respect to the 
share, and S's $20 basis in each of S1 share 2 through share 10). Thus, 
S's deemed basis in the S1 stock is $250, the greater of $200 (aggregate 
basis in S1 shares, adjusted for loss recognized) and $250 (S1's net 
inside attribute amount). As a result, S's net inside attribute amount 
is $420, the sum of S's $250 deemed basis in the S1 stock and S's $170 
basis in Asset 1. Accordingly, the aggregate inside loss is $180, the 
excess of S's $420 net inside attribute amount over the $240 value of 
all of the S stock. S's attribute reduction amount is therefore $180, 
the lesser of the $360 net stock loss and the $180 aggregate inside 
loss.
    (2) Allocation, apportionment, and application of S's attribute 
reduction amount. Under paragraphs (d)(4) and (d)(5)(ii) of this 
section, S's $180 attribute reduction amount is allocated 
proportionately (by basis) between Asset 1 (non-stock Category D asset) 
and the S1 stock. However, under paragraph (d)(5)(ii) of this section, 
for purposes of allocating S's $180 attribute reduction amount between 
S's non-stock Category D asset and the S1 stock, S's $250 deemed basis 
in the S1 stock is reduced by the $40 value of the transferred S1 shares 
(S1 share 1 and share 2) and the nontransferred S1 shares' $40 allocable 
portion (8/10) of S1's $50 net non-loss assets. S1's net non-loss assets 
is the $50 value of S1's transferred S2 shares. (S1 has no other non-
loss assets, and there are no non-loss assets held by lower-tier 
subsidiaries.) Accordingly, for this purpose, S's deemed basis in the S1 
stock is reduced by $80, from $250 to $170. Thus, $90 of the attribute 
reduction amount ($170/$340 x $180) is allocated to Asset 1 (reducing 
S's basis in Asset 1 from $170 to $80) and $90 of the attribute 
reduction amount ($170/$340 x $180) is allocated to the S1 stock. Under 
paragraph (d)(5)(iii)(A) of this section, none of the $90 allocated 
attribute reduction amount is apportioned to S1 share 1 because loss is 
recognized on the transfer of S1 share 1. Under paragraph (d)(5)(iii)(B) 
of this section, the $90 allocated attribute reduction amount is 
apportioned among the other nine shares of S1 common stock in a manner 
that reduces disparity to the greatest extent possible. Accordingly, of 
the total $90 allocated amount, $10 is apportioned to each of the 
remaining nine shares of S1 stock. Under paragraph (d)(5)(iii)(C) of 
this section, the allocated attribute reduction amount apportioned to an 
individual share cannot be applied to reduce the basis of the share 
below its value if the share is transferred other than in a recognition 
transfer. Because the S1 share 2 is transferred (contributed to the

[[Page 810]]

partnership) and the basis of S1 share 2 is already equal to its value, 
none of the $10 allocated attribute reduction amount apportioned to S1 
share 2 is applied to reduce its basis. Because none of S1 share 3 
through share 10 are transferred within the meaning of paragraph (f)(10) 
of this section, the $10 allocated attribute reduction amount 
apportioned to each of S1 share 3 through share 10 is applied fully to 
reduce the basis of each of those shares from $20 to $10. As a result, 
immediately after the allocation and application of S's attribute 
reduction amount, S's basis in Asset 1 is $80 ($170 minus $90), its 
bases in S1 share 1 and share 2 are not adjusted under paragraph 
(d)(5)(iii), and its basis in each of S1 share 3 through share 10 is 
$10. Under paragraph (d)(5)(v)(A) of this section, the entire $90 of S's 
attribute reduction amount that was allocated to the S1 stock is an 
attribute reduction amount of S1, regardless of the fact that none of 
the allocated amount was apportioned to S1 share 1 and none of the 
amount apportioned to S1 share 2 was applied to reduce the basis of S1 
share 2.
    (v) Attribute reduction under this paragraph (d) in next lower tier. 
(A) Computation of S1's attribute reduction amount. S's sale of S1 share 
1 is a transfer of a loss share and it is in the next lower tier. Thus, 
this paragraph (d) next applies with respect to S's transfer of S1 share 
1. S1's attribute reduction amount will include both the $90 attribute 
reduction amount that tiered down from S and any attribute reduction 
amount resulting from the application of this paragraph (d) with respect 
to S's transfer of S1 share 1 and share 2 (S1's direct attribute 
reduction amount). Under paragraph (d)(3) of this section, S1's direct 
attribute reduction amount is the lesser of the net stock loss on 
transferred S1 shares and S1's aggregate inside loss. The net stock loss 
on transferred S1 shares is $150, computed as the excess of S's $190 
adjusted bases in transferred shares of S1 stock ($170 in S1 share 1 
plus $20 in S1 share 2) over the $40 aggregate value of those shares. 
S1's aggregate inside loss is $50, the excess of S1's $250 net inside 
attribute amount (as calculated in paragraph (iv)(B)(1) of this Example 
9) over the $200 value of all outstanding S1 shares. Therefore, S1's 
direct attribute reduction amount is $50, the lesser of the $150 net 
stock loss and S1's $50 aggregate inside loss. S1's total attribute 
reduction amount is thus $140, the sum of the $90 tier-down attribute 
reduction amount and the $50 direct attribute reduction amount.
    (B) Allocation, apportionment, and application of S1's attribute 
reduction amount. Under paragraphs (d)(4) and (d)(5)(ii) of this 
section, S1's $140 attribute reduction amount is allocated 
proportionately (by basis) among the S2 stock, the S3 stock, and the S4 
stock. However, under paragraph (d)(5)(ii) of this section, for purposes 
of allocating S1's $140 attribute reduction amount among S1's lower-tier 
subsidiary stock, S1's $75 deemed basis in the S2 stock is reduced by 
the $50 value of the transferred S2 share. Accordingly, for this 
purpose, S1's deemed basis in the S2 stock is reduced by $50, from $75 
to $25. Thus, $17.50 of S1's attribute reduction amount ($25/$200 x 
$140) is allocated to the S2 stock, $52.50 of S1's attribute reduction 
amount ($75/$200 x $140) is allocated to the S3 stock, and $70 of S1's 
attribute reduction amount ($100/$200 x $140) is allocated to the S4 
stock. Under paragraph (d)(5)(iii)(A) of this section, none of the 
$17.50 of S1's attribute reduction amount allocated to S2 stock is 
apportioned to the S2 share because gain was recognized on the transfer 
of the S2 share. Because neither the S3 share nor the S4 share is 
transferred within the meaning of paragraph (f)(10) of this section, the 
$52.50 of S1's attribute reduction amount allocated to the S3 stock, and 
the $70 of S1's attribute reduction amount allocated to the S4 stock, is 
apportioned to and applied fully to reduce the basis of such shares. 
Thus, S1's basis in the S3 share is reduced by $52.50, from $60 to 
$7.50, and S1's basis in the S4 stock is reduced by $70, from $100 to 
$30. (Note: The conforming limitation in paragraph (d)(5)(v)(B) of this 
section limits the application of the $90 tier down attribute reduction 
amount to $80, the amount by which the portion (10/10) S1's $250 net 
inside attribute amount attributable to S1 shares held by members 
exceeds $170 (the sum of the $50 direct attribute reduction amount, the 
$20 value of the S1 share 1 transferred in a recognition transfer, the 
$20 basis (after reduction) in the S1 share 2 transferred other than in 
a recognition transfer, and the $80 aggregate basis (after reduction) in 
the nontransferred S1 shares held by members). However, the conforming 
limitation does not limit the application of S1's $90 tier-down 
attribute reduction amount because none of the $17.50 of S1's total 
attribute reduction amount allocated to the S2 share was applied to 
reduce the basis of the share. Accordingly, only $78.75 ($90--($17.50 x 
($90/$140)) of the $90 tier-down attribute reduction was applied to 
reduce S1's attributes.) Under paragraph (d)(5)(v)(A) of this section, 
the attribute reduction amount allocated to the S2 stock, the S3 stock, 
and the S4 stock becomes an attribute reduction amount of S2, S3, and 
S4, respectively (even though the amount allocated to S2 stock was not 
apportioned to or applied to reduce the basis of the S2 share).
    (vi) Attribute reduction under this paragraph (d) in lowest tier. 
Although the sale of the S2 share is a transfer of subsidiary stock at 
the next lower tier, the S2 share is not a loss share. Thus, this 
paragraph (d) does not apply with respect to that transfer. However, S2, 
S3, and S4 have attribute reduction amounts that tiered down from S1 and 
that

[[Page 811]]

are applied to reduce attributes under this paragraph (d).
    (A) Tier down of S1's attribute reduction amount to S2. Under the 
general rules of this paragraph (d), S2's $17.50 tier-down attribute 
reduction amount is allocated and applied to reduce S2's basis in Asset 
2 from $75 to $57.50.
    (B) Tier down of S1's attribute reduction amount to S3. Under the 
general rules of this paragraph (d), S3's $52.50 tier-down attribute 
reduction amount is allocated and applied to reduce S3's basis in Asset 
3 from $75 to $22.50.
    (C) Tier down of S1's attribute reduction amount to S4, application 
of conforming limitation. Under the general rules of this paragraph (d), 
S4's $70 tier-down attribute reduction amount is allocated to, and would 
be applied to reduce, S4's basis in Asset 4. However, under paragraph 
(d)(5)(v)(B) of this section, the reduction is limited to the excess of 
S4's $80 net inside attribute amount over the $30 basis of the S4 share 
(after reduction under this paragraph (d)). As a result, only $50 (the 
excess of $80 over $30) of S4's $70 attribute reduction amount is 
applied to S4's basis in Asset 4, reducing it from $80 to $30. The $20 
unapplied portion of S4's tier-down attribute reduction amount subject 
to the conforming limitation is disregarded and has no further effect.
    (vii) Application of basis restoration rule. Under paragraph 
(d)(5)(vi)(A) of this section, after this paragraph (d) has been applied 
with respect to all transfers of subsidiary stock, any reduction made to 
the basis of a share of lower-tier subsidiary stock under paragraph 
(d)(5)(iii) of this section is reversed to the extent necessary to 
conform the basis of that share to the share's allocable portion of the 
subsidiary's net inside attribute amount. Restoration adjustments are 
first made at the lowest tier and then at each next higher tier 
successively.
    (A) Basis restoration at lowest tier. The basis of the S2 share was 
not reduced under paragraph (d)(5)(iii) of this section and so there is 
no restoration of any basis in the S2 share. S3's $22.50 net inside 
attribute amount (after reduction under this paragraph (d)) exceeds S1's 
$7.50 basis in the S3 share (after reduction under this paragraph (d)) 
by $15. To conform S1's basis in the S3 share to S3's net inside 
attribute amount, the $52.50 reduction to the basis of the S3 share 
under paragraph (d)(5)(iii) of this section is reversed by $15 
(restoring S1's basis in the S3 share to $22.50). The restoration of 
S1's basis in the S3 share does not tier up to affect the basis in stock 
of any other subsidiary. S1's $30 basis in the S4 share (after reduction 
under this paragraph (d)) is already conformed with S4's $30 net inside 
attribute amount (after reduction under this paragraph (d)) and so there 
is no restoration of any basis in the S4 share.
    (B) Basis restoration at next higher tier. Each share of S1 stock 
has an allocable portion of S1's net inside attribute amount (after 
reduction) equal to $10.25 (1/10 x $102.50, the sum of S1's $0 basis in 
the S2 stock, adjusted for the $50 gain recognized with respect to the 
share, S1's $22.50 basis in the S3 stock (after restoration), and S1's 
$30 basis in the S4 stock). Neither S's basis in S1 share 1 nor S's 
basis in S1 share 2 was reduced under paragraph (d)(5)(iii) of this 
section. Accordingly, there is no restoration of any basis in either S1 
share 1 or share 2. However, S's basis in each of S1 share 3 through 
share 10 was reduced under paragraph (d)(5)(iii) of this section by $10, 
from $20 to $10. Accordingly, the $10 reduction to the basis of each of 
those shares is reversed to the extent of $.25, to restore the basis of 
each such share to $10.25 (its allocable portion of S1's net inside 
attribute amount).
    (viii) Results. After the application of this section, P recognizes 
a loss of $360 on the sale of the S share, S recognizes a loss of $150 
on the sale of S1 share 1, and S1 recognizes a $50 gain on the sale of 
the S2 share. Immediately after the transaction, the entities each 
directly own the following:

----------------------------------------------------------------------------------------------------------------
                    Entity                                      Asset                      Basis        Value
----------------------------------------------------------------------------------------------------------------
P1............................................  S share..............................         $240          $240
P.............................................  Proceeds of the sale of S share......          240           240
S.............................................  Proceeds of sale of S1 share 1.......           20            20
                                                Partnership interest received for S1            20            20
                                                 share 2.
                                                S1 share 3 through share 10..........   82 ($10.25
                                                                                        per share)
                                                Asset 1..............................           80
S1............................................  Proceeds of sale of S2 share.........           50            50
                                                The S3 share.........................        22.50
                                                The S4 share.........................           30
S2............................................  Asset 2..............................        57.50
S3............................................  Asset 3..............................        22.50
S4............................................  Asset 4..............................           30
X.............................................  S1 share 1...........................           20            20
Partnership...................................  S1 share 2...........................           20            20
Y.............................................  The S2 share.........................           50            50
----------------------------------------------------------------------------------------------------------------


[[Page 812]]

    (e) Operating rules--(1) Predecessors, successors. This section 
applies to predecessor or successor persons, groups, and assets to the 
extent necessary to effectuate the purposes of this section.
    (2) Adjustments for prior transactions that altered stock basis or 
other attributes. In certain situations, M's basis in S stock or S's 
attributes may be adjusted in a manner that alters the relationship 
between stock basis and inside attributes and prevents that relationship 
from identifying the extent to which stock basis reflects unrecognized 
gain and duplicated loss. The provisions of this paragraph (e)(2) modify 
the computations in paragraphs (c) and (d) of this section to adjust for 
the effects of such adjustments.
    (i) Prior reductions to S's basis in assets or other attributes 
pursuant to section 362(e)(2)(A). If M transferred loss property to S in 
an intercompany transaction subject to section 362(e)(2) (for example, 
if the transfer was prior to September 17, 2008, no election was made to 
apply Sec.  1.1502-80(h), and, as a result, S's attributes were reduced 
under section 362(e)(2)), then the disconformity amount of the S shares 
received in the section 362(e)(2) transaction is reduced by the amount 
that the basis in such shares would have been reduced under section 
362(e)(2)(C) had such an election been made. In addition, for purposes 
of determining the attribute reduction amount under paragraph (d) of 
this section resulting from the transfer of any S shares received (or 
deemed received) in such a transfer, and for purposes of applying 
paragraph (d)(5)(v)(B) of this section (conforming limitation) to S, the 
bases in such shares is treated as reduced by the amount the bases in 
such shares would have been reduced under section 362(e)(2)(C) had such 
an election been made.
    (ii) Prior reductions to the basis of any share of S stock pursuant 
to an election under section 362(e)(2)(C). If M transferred loss 
property to S in an intercompany transaction subject to section 
362(e)(2) and the basis of any share of S stock was reduced as the 
result of an election under section 362(e)(2)(C) (including in the hands 
of a predecessor, to the extent that the effect of the election remains 
reflected in the basis of the S stock), then, for purposes of computing 
either any S share's disconformity amount or S's aggregate inside loss, 
and for purposes of applying paragraph (d)(5)(vi)(A) of this section 
(stock basis restoration) to S, S's net inside attribute amount is 
treated as reduced by the amount that S's attributes would have been 
reduced under section 362(e)(2)(A) in the absence of an election under 
section 362(e)(2)(C). Notwithstanding the general rule of this paragraph 
(e)(2)(ii), no reduction will be required to the extent that the group 
can establish that the net loss in the S shares transferred by M is no 
longer reflected in S's net inside attributes.
    (iii) Other adjustments. Appropriate adjustments will be made in any 
other case in which an adjustment to S's net inside attributes or to M's 
basis in a share of S stock alters the relationship between such 
amounts, and the adjustment does not relate to the extent to which loss 
reflected in M's basis in S stock is noneconomic or duplicated within 
the meaning of this section.
    (3) Special rules for subsidiary stock transferred in an 
intercompany transaction--(i) In general. This section applies with 
respect to M's transfer of a share of S stock to another member in an 
intercompany transaction in which M's intercompany item is deferred 
under Sec.  1.1502-13 (and to any subsequent transfer of that share by a 
member) as of the time M's intercompany item is taken into account under 
Sec.  1.1502-13. In determining the application of this section, all 
transferor-members are treated as divisions of a single corporation. 
Appropriate adjustments will be made to the intercompany item(s), any 
member's basis in an S share, to S's attributes, or any combination 
thereof, to further the purposes of this section and Sec.  1.1502-13.
    (ii) Certain prior intercompany transactions. If M transferred a 
share of S stock to another member before September 17, 2008 and M's 
intercompany item related to the transfer is taken into account on or 
after September 17, 2008, P may elect to apply this paragraph (e)(3) to 
the transfer. The election is made in the manner provided in paragraph 
(e)(5) of this section.

[[Page 813]]

    (iii) Examples. The application of this paragraph (e)(3) is 
illustrated by the following examples:

    Example 1. Intercompany sale with duplicated loss. (i) Buying member 
later sells at gain. (A) Facts. M owns the sole outstanding share of 
stock of S with a basis of $100. S has one asset with a basis of $100. M 
sells the S share to M1 for $70, recognizing a loss of $30. While owned 
by M1, S recognizes $10 of depreciation deductions that are absorbed by 
the group. S's basis in the asset is reduced by $10 (from $100 to $90), 
and M1's basis in the S stock is reduced under Sec.  1.1502-32 by $10 
(from $70 to $60). Later, M1 sells the S share to X, an unrelated 
person, for $80.
    (B) Analysis. M's sale of its S share to M1 is a transfer of the 
share, but this section applies as of the time M's intercompany item is 
taken into account under Sec.  1.1502-13, as if M and M1 were divisions 
of a single corporation. If M and M1 were divisions of a single 
corporation, the S share's basis would be $90 ($100 reduced by $10 for 
the depreciation deductions absorbed by the group) and the group would 
recognize a $10 loss on the sale of the share that is potentially 
subject to this section. Thus, the sale would be a transfer of a loss 
share (to the extent of $10) and would be subject to this section (to 
the extent of that $10). Although the transfer would be subject to this 
section, there would be no adjustment under paragraph (b) of this 
section (S has only one share outstanding and so there is no disparity 
in bases of common shares and no unrecognized gain or loss with respect 
to preferred) or under paragraph (c) of this section (S has no net 
positive adjustment). Thus, after the application of paragraph (c) of 
this section, the share would still be a loss share and would therefore 
be subject to paragraph (d) of this section. Under paragraph (d) of this 
section, S would be subject to $10 of attribute reduction (the lesser of 
the $10 net stock loss and S's $10 aggregate inside loss), allocable to 
the basis in S's asset. Accordingly, S's basis in its asset is reduced 
by $10, from $90 to $80, M takes its $30 intercompany stock loss into 
account, and M1 recognizes a $20 stock gain.
    (ii) Selling member deconsolidates. Assume the same facts as in 
paragraph (i)(A) of this Example 1, except that M1 does not sell the S 
share and M ceases to be a member of the group when the value of the S 
share is $80. Under Sec.  1.1502-13, M's deconsolidation causes M's 
intercompany loss to be taken into account and this section applies at 
that time. At the time that M deconsolidates, if M and M1 were divisions 
of a single corporation, the basis in the S share would be $90 ($100 
reduced by $10 for the depreciation deductions absorbed by the group) 
and the group would recognize a $10 loss on the sale of the share that 
is potentially subject to this section. Such a sale would be a transfer 
of a loss share (to the extent of $10) and would be subject to this 
section (to the extent of that $10). The analysis is then the same as in 
paragraph (i)(B) of this Example 1. As a result, S's basis in its asset 
is reduced from $90 to $80, M takes its $30 intercompany stock loss into 
account, and M1 holds the S stock with a basis of $60 (and an 
unrecognized gain of $20).
    (iii) M1 sells the S share at a loss. Assume the same facts as in 
paragraph (i)(A) of this Example 1, except that S declines in value and 
M1 sells the S share to X for $50, realizing a $10 loss. In this case, 
if M and M1 were divisions of a single corporation, the share's basis 
would be $90 ($100 reduced by $10 for the depreciation deductions 
absorbed by the group) and the group would recognize a $40 loss on the 
sale of the share that is potentially subject to this section. Thus, the 
sale would be a transfer of a loss share (to the extent of $40) and 
would be subject to this section (to the extent of that $40). Although 
the transfer would be subject to this section, for the reasons set forth 
in paragraph (i)(B) of this Example 1, there would be no adjustment 
under either paragraph (b) or paragraph (c) of this section. Thus, after 
the application of paragraph (c), the share would still be a loss share 
and would therefore be subject to paragraph (d) of this section. Under 
paragraph (d) of this section, S would be subject to $40 of attribute 
reduction (the lesser of the $40 net stock loss and S's $40 aggregate 
inside loss), allocable to the basis in S's asset. Accordingly, S's 
basis in its asset is reduced by $40, from $90 to $50, M takes its $30 
intercompany stock loss into account, and M1 recognizes a $10 stock 
loss.
    Example 2. Intercompany sale of built-in gain stock. (i) Facts. M 
owns the sole outstanding share of stock of S with a basis of $100. S's 
sole asset has a basis of $0. S sells its asset for $100 and recognizes 
a $100 gain that increases M's basis in its S share under Sec.  1.1502-
32 to $200. M sells the S share to M1 for $100 and recognizes a $100 
intercompany loss. Later, M1 sells the S share to X, an unrelated 
person, for $120.
    (ii) Analysis. M's sale of the S share to M1 is a transfer of the 
share, but this section applies as of the time M's intercompany item is 
taken into account under Sec.  1.1502-13, as if M and M1 were divisions 
of a single corporation. If M and M1 were divisions of a single 
corporation, the S share's basis would be $200 ($100 increased by $100 
for the gain recognized on the sale of the asset) and the group would 
recognize an $80 loss on the sale of the share that is potentially 
subject to this section. Thus, the sale would be a transfer of a loss 
share (to the extent of $80) and would be subject to this section (to 
the extent of that $80). Although the transfer would be subject to this 
section, there would be no adjustment under paragraph (b) of this 
section (S has only one share outstanding and so there

[[Page 814]]

is no disparity in bases of common shares and no unrecognized gain or 
loss with respect to preferred). Thus, after the application of 
paragraph (b), the share would still be a loss share and would therefore 
be subject to paragraph (c) of this section. Under paragraph (c) of this 
section, the basis in the S share would be reduced, but not below its 
$120 value, by the lesser of the $100 disconformity amount and the $100 
net positive adjustment that was applied to the share when held by M. 
Accordingly, the basis in the S share would be reduced by $80, to $120. 
Because the S share would not be a loss share after the application of 
paragraph (c) of this section, paragraph (d) of this section would not 
apply to the transfer. As a result, because the positive adjustment was 
applied to the share when held by M, M's intercompany item is adjusted 
to reflect what it would have been had M's basis in its S share been 
reduced by $80 immediately before its sale to M1. Thus, M's intercompany 
loss is reduced to $20 and M takes this loss into account, and M1 
recognizes a gain of $20.
    Example 3. Intercompany sale creates built-in gain stock. (i) Facts. 
M owns the sole outstanding share of stock of S with a basis of $0. S's 
sole asset has a basis of $0. M sells the S share to M1 for $100 and 
recognizes a $100 intercompany gain. While owned by M1, S sells its 
asset for $100, recognizing a $100 gain that increases M1's basis in the 
S share under Sec.  1.1502-32 to $200. Later, M1 sells the S share to X 
for $120.
    (ii) Analysis. M's sale of its S share to M1 is a transfer of the 
share, but this section applies as of the time M's intercompany item is 
taken into account under Sec.  1.1502-13, as if M and M1 were divisions 
of a single corporation. If M and M1 were divisions of a single 
corporation, the S share's basis would be $100 ($0 increased by $100 for 
the gain recognized on the sale of the asset) and the group would 
recognize a $20 gain on the sale of the share. Thus, the sale would not 
be a transfer of a loss share and this section would not apply to the 
transfer. Accordingly, under this paragraph (e)(3), no portion of M1's 
$80 loss is subject to this section. M takes its $100 intercompany stock 
gain into account, and M1 recognizes an $80 loss.
    Example 4. Disparate bases in members' shares. (i) Facts. M holds 
Share A, one of the two outstanding shares of S stock, with a basis of 
$50 and M1 holds Share B, the other outstanding share of S stock with a 
basis of $0. S has $50 cash and an asset with a basis of $0. S sells the 
asset for $50, recognizing a $50 gain that increases M's basis in its S 
share under Sec.  1.1502-32 by $25 (from $50 to $75) and increases M1's 
basis under Sec.  1.1502-32 by $25 (from $0 to $25). Later, M sells its 
Share A to M1 for $50 and recognizes a $25 intercompany loss. Later, M1 
sells both S shares to X for $100.
    (ii) Analysis. M's sale of its Share A to M1 is a transfer of the 
share, but this section applies as of the time M's intercompany item is 
taken into account under Sec.  1.1502-13, as if M and M1 were divisions 
of a single corporation. If M and M1 were divisions of a single 
corporation, the basis of Share A would be $75 ($50 increased by $25 for 
its share of the gain recognized on the sale of the asset), the basis of 
Share B would be $25, and the group would recognize a $25 loss on the 
sale of Share A that is potentially subject to this section and a $25 
gain on the sale of Share B. Thus, the sale would be a transfer of a 
loss share (to the extent of $25) and would be subject to this section 
(to the extent of that $25). Although the transfer is subject to this 
section, there would be no adjustment under paragraph (b) of this 
section (all S shares held by members are transferred to a nonmember in 
one taxable transaction). Thus, after the application of paragraph (b), 
Share A would still be a loss share and therefore subject to paragraph 
(c) of this section. Under paragraph (c)(7) of this section, the basis 
of Share A would be treated as reduced by the gain recognized and taken 
into account with respect to the transfer of Share B in the same 
transaction, and so Share A would not be a loss share for purposes of 
paragraph (c) of this section. Although the share would be a loss share 
after the application of paragraph (c) of this section, no adjustment 
would be required under paragraph (d) of this section because there 
would be no net stock loss in the transaction. Because no adjustment 
would be made under this section if M and M1 were divisions of a single 
corporation, M takes its $25 intercompany stock loss into account and M1 
recognizes a gain of $25. Alternatively, if the group elects to apply 
paragraph (b) of this section, M's intercompany item would be adjusted 
to reflect what it would have been had the $25 investment adjustment 
applied to Share A been reallocated to Share B, and M1's basis in Share 
B would be increased by that amount. If so, M's $25 intercompany loss 
would be reduced to zero, M1's basis in Share B would be increased from 
$25 to $50, and there would be no gain or loss recognized on either 
share.
    Example 5. Subsidiary with built-in gain and built-in loss assets. 
(i) Facts. M owns the sole outstanding share of stock of S with a basis 
of $100. S has two assets, Asset 1 with a basis of $0 and Asset 2 with a 
basis of $80. M sells the S share to M1 for $90 and recognizes a $10 
intercompany loss. While owned by M1, S sells Asset 1 for $60, 
recognizing a $60 gain that increases M1's basis in the S share under 
Sec.  1.1502-32 to $150. Later, M1 sells the S share to X for $90.
    (ii) Analysis. M's sale of the S share to M1 is a transfer of the 
share, but this section applies as of the time M's intercompany item is 
taken into account under Sec.  1.1502-13, as if M

[[Page 815]]

and M1 were divisions of a single corporation. If M and M1 were 
divisions of a single corporation, the S share's basis would be $160 
($100 increased by $60 for the gain recognized on the sale of Asset 1) 
and the group would recognize a $70 loss on the sale of the share that 
is potentially subject to this section. Thus, the sale would be a 
transfer of a loss share (to the extent of $70) and would be subject to 
this section (to the extent of that $70). Although the transfer is 
subject to this section, there would be no adjustment under paragraph 
(b) of this section (S has only one share outstanding and so there is no 
disparity in bases of common shares and no unrecognized gain or loss 
with respect to preferred). Thus, after the application of paragraph 
(b), the share would still be a loss share and would therefore be 
subject to paragraph (c) of this section. Under paragraph (c) of this 
section, the basis in the S share would be reduced, but not below its 
$90 value, by the lesser of the $20 disconformity amount ($160 stock 
basis over $140 net inside attribute amount) and the $60 net positive 
adjustment that was applied to the share when held by M1. Accordingly, 
the basis in the S share would be reduced by $20, to $140. Because the S 
share would still be a loss share after the application of paragraph (c) 
of this section, paragraph (d) of this section would apply to the 
transfer. Under paragraph (d) of this section, S would have an attribute 
reduction amount of $50, the lesser of the $50 net stock loss ($140 
basis over $90 value) and S's $50 aggregate inside loss (the excess of 
the sum of S's $80 basis in Asset 2 and S's $60 cash from the sale of 
Asset 1, over the $90 value of the S share). The adjustments required 
under this section are applied as follows: because the positive 
adjustment was applied to the share when held by M1, the $20 basis 
reduction required under paragraph (c) of this section is applied to 
M1's basis in its S share immediately before its sale to X, reducing it 
from $150 to $130. In addition, pursuant to paragraph (d) of this 
section, S's basis in Asset 2 is reduced by $50, from $80 to $30. M 
takes its $10 intercompany stock loss into account and M1 recognizes a 
loss of $40.
    (iii) Allocation of basis reduction. Assume the same facts as in 
paragraph (i) of this Example 5, except that, while S is held by M, S 
earns $30 (consuming a portion of Asset 1) and, while S is held by M1, S 
earns $20 (consuming a portion of Asset 1) and sells Asset 1 for $10. 
Thus, M's basis in the S share immediately before the sale to M1 is 
$130, and M recognizes a $40 intercompany stock loss, and M1's basis in 
the S share immediately before the sale to X is $120. The analysis 
regarding the application of this section is the same as in paragraph 
(ii) of this Example 5. On a separate entity basis, M's basis in the S 
share would be subject to a $20 reduction under paragraph (c) of this 
section (at the time M transferred the S share the share had a $30 net 
positive adjustment and a $20 disconformity amount), and M1's basis in 
the S share would not be subject to reduction under paragraph (c) of 
this section (at the time M1 transferred the S share the share had a $30 
net positive adjustment and a $20 negative disconformity amount). 
Therefore, the $20 basis reduction required under paragraph (c) of this 
section is allocated entirely to M. Accordingly, M's intercompany item 
is adjusted to reflect what it would have been had the entire $20 basis 
reduction been applied to the S share while held by M, and M1's basis in 
the S share is not reduced. Thus, M's intercompany stock loss is reduced 
by $20 to $20 and M takes this loss into account, and M1 recognizes a 
$30 loss. S's basis in Asset 2 is reduced by $50, from $80 to $30.

    (4) Limited application to multiple-member section 332 liquidations. 
If more than one member owns shares of S stock, paragraphs (c) and (d) 
of this section do not apply to any transfer of S shares resulting from 
a liquidation of S to which section 332 applies.
    (5) Form and manner of election(s) under this section. The elections 
provided in this section are irrevocable and made in the form of a 
statement titled ``Section 1.1502-36 Statement.'' The statement must be 
included on or with the group's timely filed return (original or 
amended, if filed by the due date for the return, including extensions) 
for the taxable year of the transfer of the subsidiary stock to which 
the election relates or, in the case of an intercompany transfer, the 
year in which the intercompany item from the transfer is taken into 
account. The statement must include--
    (i) The name and employer identification number (E.I.N.) of each 
subsidiary with respect to which an election is being made;
    (ii) If P is electing under paragraph (b)(1)(ii) of this section to 
redetermine basis with respect to the transfer of stock of one or more 
subsidiaries, a statement that members' bases in shares of [name of 
subsidiary or subsidiaries] stock are being redetermined notwithstanding 
that all members' shares of [name of subsidiary or subsidiaries] are 
being transferred to one or more nonmembers in one fully taxable 
transaction;
    (iii) If P is electing under paragraph (d)(2)(ii) of this section 
(attribute reduction amount less than five percent

[[Page 816]]

of value) to apply the attribute reduction provisions, a statement that 
paragraph (d) of this section is being applied to the transfer of shares 
of stock of [names of all subsidiaries whose shares are transferred] 
notwithstanding that the aggregate attribute reduction amount in the 
transaction is less than five percent of the aggregate value of the 
stock of [names of all subsidiaries whose shares are transferred] 
transferred by members in the transaction;
    (iv) If P is electing under paragraph (d)(4)(ii)(A)(1) of this 
section to specify the allocation of the attribute reduction amount, a 
statement (for each subsidiary for which the election is being made) 
that the attribute reduction amount of [name of subsidiary] is being 
applied (or not applied) to reduce [identify the attributes in Category 
A, Category B, and Category C, and the amount of each, with respect to 
which the election is being made];
    (v) If P is electing under paragraph (d)(5)(v)(B) of this section 
not to apply the conforming limitation on tier-down attribute reduction 
with respect to one or more subsidiaries, a statement that the 
conforming limitation in paragraph (d)(5)(v)(B) of this section is not 
being applied with respect to [name of subsidiary or subsidiaries];
    (vi) If P is electing under paragraph (d)(5)(vi)(B) of this section 
not to restore lower-tier subsidiary stock basis with respect to one or 
more subsidiaries, a statement that members' bases in [name of 
subsidiary or subsidiaries] is not being restored under paragraph 
(d)(5)(vi)(A) of this section;
    (vii) If P is electing under paragraph (d)(6) of this section to 
reattribute attributes, a statement (for each subsidiary for which the 
election is being made) that [identify the attributes in Category A, 
Category B, and Category C, and the amount of each or the amount in 
excess of an amount, with respect to which the election is being made] 
of [name of subsidiary] are being reattributed (or not) to P;
    (viii) If P is electing under paragraph (d)(6) of this section to 
reduce stock basis, a statement (for each subsidiary for which the 
election is being made) that members' bases in shares of stock of [name 
of subsidiary] are being reduced by [specify amount or the amount in 
excess of an amount];
    (ix) If P is electing under paragraph (e)(3)(ii) of this section to 
apply paragraph (e)(3) of this section to an intercompany transfer that 
occurred before September 17, 2008, a statement that paragraph (e)(3) of 
this section is being elected to apply to the transfer of stock of [name 
of subsidiary] by [name of transferor subsidiary] to [name of transferee 
subsidiary] on [date of transfer]; and
    (x) If P is electing under Sec.  1.1502-96(d)(5) to reattribute to 
itself all or any part of a section 382 limitation, a statement that P 
is electing to reattribute a section 382 limitation with respect to 
losses of [name of subsidiary or, if two or more subsidiaries are 
members of a loss subgroup, the name of each subsidiary in the loss 
subgroup]. A separate statement is made for each subsidiary or loss 
subgroup for which an election is being made. Each statement must 
include--
    (A) The date of the ownership change giving rise to the separate 
section 382 limitation or subgroup section 382 limitation that is being 
apportioned;
    (B) The amount of the separate (or subgroup) section 382 limitation 
for the taxable year in which the reattribution occurs (determined 
without reference to any apportionment under this section or Sec.  
1.1502-95(c)); and
    (C) The amount of each net operating loss carryover, capital loss 
carryover, or deferred deduction, and the year in which it arose, of the 
subsidiary (or subsidiaries) that is subject to the separate section 382 
limitation or subgroup section 382 limitation that is being apportioned 
to the common parent, and the amount of the value element and adjustment 
element of that limitation that is apportioned to the common parent.
    (f) Definitions. In addition to the definitions in other paragraphs 
of this section and in other provisions of the regulations under section 
1502, the following definitions apply for purposes of this section.
    (1) Allocable portion has the same meaning as in Sec.  1.1502-
32(b)(4)(iii)(B). Thus, for example, within a class of

[[Page 817]]

stock, each share has the same allocable portion of the net inside 
attribute amount and, if there is more than one class of stock, the net 
inside attribute amount is allocated to each class by taking into 
account the terms of each class and all other facts and circumstances 
relating to the overall economic arrangement.
    (2) Deferred deduction means any deduction for expenses or loss that 
would be taken into account under general tax accounting principles as 
of the time of the transfer of the share, but that is nevertheless not 
taken into account immediately after the transfer by reason of the 
application of a deferral provision. Such provisions include, for 
example, sections 163(j), 267(f), and 469, and Sec.  1.1502-13. 
``Deferred deduction'' also includes S's portion of such consolidated 
tax attributes, for example consolidated excess charitable contributions 
that would be apportioned to S under the principles of Sec.  1.1502-
79(e) if S had a separate return year. Additionally, it includes amounts 
equivalent to deductions, such as negative adjustments under section 475 
(mark to market accounting method for dealers in securities) and section 
481 (adjustments required by changes in method of accounting).
    (3) Distribution has the same meaning as in Sec.  1.1502-
32(b)(3)(v).
    (4) Higher-tier, lower-tier. A subsidiary (S1) (and its shares of 
stock) is ``higher-tier'' with respect to another subsidiary (S2) (and 
its shares of stock) if investment adjustments made to the bases of 
shares of S2 stock under Sec.  1.1502-32 affect the investment 
adjustments made to the bases of shares of S1 stock. A subsidiary (S1) 
(and its shares of stock) is ``lower-tier'' with respect to another 
subsidiary (S) (and its shares of stock) if investment adjustments made 
to the bases of shares of S1 stock affect the investment adjustments 
made to the bases of shares of S stock. The term lowest-tier subsidiary 
generally refers to a subsidiary that owns no stock of another 
subsidiary. The term highest-tier subsidiary generally refers to a 
subsidiary the stock of which is not lower tier to any shares 
transferred in the transaction.
    (5) Liability means a liability that has been incurred within the 
meaning of section 461(h), except to the extent otherwise provided in 
paragraph (d)(4)(ii)(C)(1) of this section.
    (6) Loss carryover means any net operating or capital loss carryover 
that is attributable to S, including any losses that would be 
apportioned to S under the principles of Sec.  1.1502-21(b)(2) if S had 
a separate return year. However, solely for purposes of applying 
paragraph (d) of this section, loss carryovers do not include the amount 
of any losses waived under Sec.  1.1502-32(b)(4).
    (7) Loss share, gain share. A loss share is a share of stock with a 
basis that exceeds its value. A gain share is a share of stock with a 
value that exceeds its basis.
    (8) Preferred stock, common stock. Preferred stock and common stock 
have the same meanings as in Sec.  1.1502-32(d)(2) and (3), 
respectively.
    (9) Transaction includes all the steps taken pursuant to the same 
plan or arrangement.
    (10) Transfer--(i) Definition. Except as provided in paragraph 
(f)(10)(ii) of this section, for purposes of this section, M transfers a 
share of S stock on the earliest of--
    (A) The date that M ceases to own the share as a result of a 
transaction in which, but for the application of this section (and 
notwithstanding the deferral of any amount recognized on the transfer, 
other than by reason of Sec.  1.1502-13), M would recognize income, 
gain, loss or deduction with respect to the share (see paragraph (e)(3) 
of this section in the case of a transfer in an intercompany 
transaction);
    (B) The date that M and S cease to be members of the same group;
    (C) The date that a nonmember acquires the share from M; and
    (D) The last day of the taxable year during which the share becomes 
worthless under section 165 (taking into account the provisions of Sec.  
1.1502-80(c)) if the share is treated as a capital asset, or the date 
the share becomes worthless (taking into account the provisions of Sec.  
1.1502-80(c)) if the share is not treated as a capital asset.
    (ii) Excluded transactions. Notwithstanding paragraph (f)(10)(i) of 
this section, M does not transfer a share of S stock if--

[[Page 818]]

    (A) M ceases to own the share as a result of a transaction to which 
section 381(a) applies and in which either a member acquires assets from 
S or S acquires assets from M, provided that--
    (1) M recognizes no income, gain, loss, or deduction with respect to 
the share, and
    (2) If the transaction is a liquidation to which section 332 
applies, M is the only member that owns shares of S stock (if another 
member owns shares of S stock, see paragraph (e)(4) of this section for 
a limitation on the application of this section); or
    (B) M ceases to own the share as a result of a distribution of the 
share to a nonmember in a transaction to which section 355 applies, and 
in which the share is treated as qualified property for purposes of 
section 355(c) or section 361(c).
    (11) Value means the amount realized, if any, or otherwise the fair 
market value.
    (g) Anti-abuse rule--(1) General rule. If a taxpayer acts with a 
view to avoid the purposes of this section or to apply the rules of this 
section to avoid the purposes of any other rule of law, appropriate 
adjustments will be made to carry out the purposes of this section or 
such other rule of law.
    (2) Examples. The following examples illustrate the principles of 
the anti-abuse rule in this paragraph (g). No implication is intended 
regarding the potential applicability of any other anti-abuse rules:

    Example 1. Loss Trafficking. (i) Facts. M purchases the sole 
outstanding share of S stock for $100. At that time, S owns Asset 1 with 
a basis of $0. S sells Asset 1 for $100. Later, S purchases the sole 
outstanding share of X stock, a corporation with losses, with a view to 
liquidating X in a transaction to which section 332 applies in order to 
reduce S's disconformity amount. S purchases the X share for $1, and X 
has a $100 NOL and an asset with a basis of $1. Subsequently, M sells 
its S share for $100. After taking into account the effects of all 
applicable rules of law, M's basis in the S share is $200 (M's original 
$100 basis, increased under Sec.  1.1502-32 to reflect the $100 gain 
recognized on the sale of Asset 1). M's sale of the S share is a 
transfer of a loss share and therefore subject to this section.
    (ii) Analysis. Although M's transfer of the S share is subject to 
this section, there is no adjustment under paragraph (b) of this section 
(S has only one share outstanding and so there is no disparity in bases 
of common shares and no shares of S preferred stock outstanding (and so 
there is no unrecognized gain or loss on S preferred stock)). See 
paragraph (b)(1)(ii)(A) of this section. Accordingly, after the 
application of paragraph (b) of this section, M's sale of the S share is 
still a transfer of a loss share and therefore subject to paragraph (c) 
of this section. Under paragraph (c) of this section, M's $200 basis in 
the S share is reduced, but not below the share's $100 value, by the 
lesser of the share's net positive adjustment and disconformity amount. 
The share's net positive adjustment is $100, the positive adjustment 
attributable to the gain recognized on the sale of Asset 1. The share's 
disconformity amount is $0, the excess of M's $200 basis in the S share 
over S's $200 net inside attribute amount. Thus, the reduction to basis 
under paragraph (c) of this section would be $0. However, because S 
purchased the X stock and liquidated X with a view to avoiding the 
purposes of this section (by using X's attributes to minimize the 
disconformity amount of the S share), the attributes acquired from X are 
disregarded for purposes of applying this section. Accordingly, S's net 
inside attribute amount is limited to the $100 of attributes S would 
have had absent the purchase of the X stock, S's money ($100 from the 
sale of Asset 1). The loss share's disconformity amount is therefore the 
excess of $200 over $100, or $100. The lesser of the share's $100 net 
positive adjustment and $100 disconformity amount is $100. As a result, 
M's $200 basis in the S share is reduced by $100, to $100, and M 
recognizes no gain or loss on the sale of the S share.
    Example 2. Use of a partnership to prevent current attribute 
reduction. (i) Facts. M owns all 5 outstanding shares of S common stock 
with a basis of $200 each. S owns Asset 1 with a basis of $1000. In year 
1, with a view to preventing a current reduction in the basis of Asset 
1, S contributes Asset 1 to a partnership in a transaction in which S 
recognizes no gain or loss. On December 31, year 2, M sells one S share 
for $20. After taking into account the effects of all applicable rules 
of law, M's basis in each S share is $200. M's sale of the S share is a 
transfer of a loss share and therefore subject to this section.
    (ii) Analysis. Although M's transfer of the S share is subject to 
this section, there is no basis redetermination under paragraph (b) of 
this section because there is no disparity among M's bases in its shares 
of S common stock and there are no shares of S preferred stock 
outstanding (and so there is no unrecognized gain or loss on S preferred 
stock). See paragraph (b)(1)(ii)(A) of this section. Accordingly, after 
the application of paragraph (b) of this section, M's sale of the S 
share is still a transfer of a loss share and therefore subject to 
paragraph (c) of this section. However, no adjustment is required

[[Page 819]]

under paragraph (c) of this section because both the disconformity 
amount and the net positive adjustment are $0. See paragraph (c)(3) of 
this section. Under paragraph (d) of this section, S's attribute 
reduction amount is $180 (the lesser of the $180 net stock loss and S's 
$900 aggregate inside loss ($1000 of attributes over $100 value of all 
of the S shares)). Absent the application of this paragraph (g), the 
$180 attribute reduction amount would be applied to reduce S's basis in 
the partnership interest. However, because S acted with a view to 
avoiding a current reduction in the basis of Asset 1 under paragraph (d) 
of this section, this section is applied by treating S as if it held 
Asset 1 at the time of the stock sale. The basis of Asset 1 is reduced 
by $180, to $820, effective immediately before the transfer to the 
partnership and, as a result, S's basis in its partnership interest is 
$820.
    Example 3. Creation of an intercompany receivable to mitigate 
attribute reduction. (i) Facts. M owns all five outstanding shares of S 
common stock each with equal basis that exceeds value. S holds cash and 
Asset 1 with a basis that exceeds value. In year 1, with a view to 
mitigating a reduction in the basis of Asset 1, S lends the cash to M1. 
Asset 1 and the intercompany note received from M1 are assets of the 
same class under Sec.  1.338-6(b)(2). On December 31, year 2, M sells 
one of its S shares and, without regard to this section, recognizes a 
loss. M's sale of the S share is a transfer of a loss share and 
therefore subject to this section.
    (ii) Analysis. Although M's transfer of the S share is subject to 
this section, no adjustment is required under paragraph (b) of this 
section because there is no disparity among M's bases in shares of S 
common stock and there are no shares of S preferred stock outstanding 
(and so there is no unrecognized gain or loss on S preferred stock). See 
paragraph (b)(1)(ii)(A) of this section. Accordingly, after the 
application of paragraph (b) of this section, M's sale of the S shares 
is still a transfer of a loss share and therefore subject to paragraph 
(c) of this section. However, there is no adjustment under paragraph (c) 
of this section because the net positive adjustment is $0. See paragraph 
(c)(3) of this section. Under paragraph (d) of this section, S's 
attribute reduction amount would be applied to reduce S's basis in Asset 
1 and the intercompany receivable in proportion to basis. However, 
because S acted with a view to mitigating the reduction in the basis of 
Asset 1 under paragraph (d) of this section, this section is applied 
without regard to the intercompany receivable. Accordingly, S's basis in 
Asset 1 is reduced by the full attribute reduction amount.
    Example 4. Use of a partnership to reduce net stock loss. (i) Facts. 
M owns all ten outstanding shares of S common stock, one share (Share 1) 
has a basis of $0, and one share (Share 2) has a basis of $160. S has an 
aggregate inside loss of $80. In one transaction and with a view to 
mitigating a reduction in S's attributes, M contributes Share 1 to a 
partnership, recognizing no gain or loss, and sells Share 2 for $80. M's 
contribution of Share 1 to the partnership is a transfer, but the share 
is not a loss share and so the transfer is not subject to this section. 
M's sale of Share 2 is a transfer of a loss share and is therefore 
subject to this section.
    (ii) Analysis. Although M's transfer of Share 2 is subject to this 
section, there is no adjustment under paragraph (b) of this section 
because there are no investment adjustments that have been applied to 
the shares. Accordingly, after the application of paragraph (b) of this 
section, M's sale of Share 2 is still a transfer of a loss share and 
therefore subject to paragraph (c) of this section. There is no 
adjustment under paragraph (c) of this section because the net positive 
adjustment is $0. See paragraph (c)(3) of this section. Accordingly, 
after the application of paragraph (c) of this section, M's sale of 
Share 2 is still a transfer of loss shares and therefore subject to 
paragraph (d) of this section. Under paragraph (d) of this section, the 
net stock loss would be determined to be $0, the excess of the $160 
aggregate basis in all of the transferred shares over the $160 aggregate 
value of those shares. S's attribute reduction amount would be 
determined to be $0, the lesser of the $0 net stock loss and S's $80 
aggregate inside loss. Thus, there would be no reduction of attributes 
under this paragraph (d) of this section. However, because M acted with 
a view to reducing the attribute reduction amount by transferring a gain 
share to a partnership while avoiding the recognition of the gain on the 
share, this section is applied without regard to the transfer of the 
gain share. Accordingly, the net stock loss is determined to be $80, and 
the attribute reduction amount is determined to be $80.
    Example 5. Stuffing gain asset. (i) Facts. M owns the sole 
outstanding share of S stock (Share 1) with a basis of $100. S owns 
Asset 1 with a basis of $100 and a value of $20. With a view to avoid 
the purposes of this section, M transfers Asset 2 with a basis of $0 and 
a value of $80 to S in exchange for four additional shares of S stock 
(Share 2 through Share 5) in a transaction to which section 351 applies. 
M later sells Share 1 to X for $20. M's sale of Share 1 is a transfer of 
a loss share and therefore subject to this section.
    (ii) Analysis. Although M's transfer of the Share 1 is subject to 
this section, there is no adjustment under paragraph (b) of this section 
because no investment adjustments have been applied to the basis of any 
S shares. Thus, after the application of paragraph (b) of this section, 
M's sale of the S share is still a transfer of a loss share and

[[Page 820]]

therefore subject to paragraph (c) of this section. There is no 
adjustment under paragraph (c) of this section because the net positive 
adjustment is $0. Accordingly, after the application of paragraph (c) of 
this section, M's sale of the S share is still a transfer of a loss 
share and therefore subject to paragraph (d) of this section. Under 
paragraph (d) of this section, S's attribute reduction amount would be 
$0, the lesser of the $80 net stock loss and S's $0 aggregate inside 
loss ($100 of attributes does not exceed the $100 value of all of the S 
shares). However, because M transferred Asset 2 to S with a view to 
avoid the purposes of this section, the application of this section to 
M's transfer of Share 1 is made without regard to the transfer of Asset 
2. Accordingly, under paragraph (d) of this section, S's attribute 
reduction amount is $80, the lesser of the $80 net stock loss and S's 
$80 aggregate inside loss (computed without regard to Asset 2). S's 
basis in Asset 1 is therefore reduced by $80, from $100 to $20, under 
paragraph (d) of this section.
    (iii) Transfer of all S shares. Assume the same facts as in 
paragraph (i) of this Example 5, except that M sells all five S shares 
to X, recognizing both the gain and the loss on the S shares. The 
transfer of Share 1 is still a transfer of a loss share and therefore 
subject to this section. However, because all the shares are 
transferred, the group's income is clearly reflected. Therefore, the 
purposes of this section are not avoided and this section applies 
without modification. S's attribute reduction amount is $0, the lesser 
of the $0 net stock loss and S's $0 aggregate inside loss.

    (h) Applicability date--(1) In general. This section applies to 
transfers of shares of subsidiary stock on or after September 17, 2008 
unless the transfer was made pursuant to a binding agreement that was in 
effect prior to September 17, 2008 and at all times thereafter. For 
transfers of shares of subsidiary stock that are not subject to this 
section, see Sec. Sec.  1.337(d)-2 and 1.1502-35.
    (2) Definition in paragraph (f)(2) of this section. Paragraph (f)(2) 
of this section applies to taxable years beginning on or after November 
13, 2020. For taxable years beginning before November 13, 2020, see 
Sec.  1.1502-36 as contained in 26 CFR part 1, revised April 1, 2019. 
However, taxpayers and their related parties, within the meaning of 
sections 267(b) and 707(b)(1), may choose to apply the rules of this 
section to a taxable year beginning after December 31, 2017, and before 
November 13, 2020, so long as the taxpayers and their related parties 
consistently apply the rules of this section, the section 163(j) 
regulations (as defined in Sec.  1.163(j)-1(b)(37)), and, if applicable, 
Sec. Sec.  1.263A-9, 1.263A-15, 1.381(c)(20)-1, 1.382-1, 1.382-2, 1.382-
5, 1.382-6, 1.382-7, 1.383-0, 1.383-1, 1.469-9, 1.469-11, 1.704-1, 
1.882-5, 1.1362-3, 1.1368-1, 1.1377-1, 1.1502-13, 1.1502-21, 1.1502-79, 
1.1502-91 through 1.1502-99 (to the extent they effectuate the rules of 
Sec. Sec.  1.382-2, 1.382-5, 1.382-6, 1.382-7, and 1.383-1), and 1.1504-
4, to that taxable year.

[T.D. 9424, 73 FR 53952, Sept. 17, 2008, as amended at 73 FR 62204, Oct. 
20, 2008; 73 FR 65982, Nov. 6, 2008; T.D. 9905, 85 FR 56843, Sept. 14, 
2020]

                       Special Taxes and Taxpayers



Sec.  1.1502-42  Mutual savings banks, etc.

    (a) In general. This section applies to mutual savings banks and 
other institutions described in section 593(a).
    (b) Total deposits. In computing for purposes of section 
593(b)(1)(B)(ii) total deposits or withdrawable accounts at the close of 
the taxable year, the total deposits or withdrawable accounts of other 
members shall be excluded.
    (c) Taxable income; taxable years for which the due date (without 
extensions) for filing returns is before March 15, 1983. For taxable 
years for which the due date (without extensions) for filing returns is 
before March 15, 1983, a member's taxable income for purposes of section 
593(b)(2) is determined under Sec.  1.1502-27(b) (computed without 
regard to any deduction under section 593(b)(2)). In addition, for 
taxable years beginning after July 11, 1969, taxable income as computed 
under the preceding sentence is subject to the adjustments provided in 
section 593(b)(2)(E). See Sec.  1.593-6A(b)(5).
    (d) Taxable income; taxable years for which the due date (without 
extensions) for filing returns is after March 14, 1983--(1) In general. 
For a taxable year for which the due date (without extensions) for 
filing returns is after March 14, 1983, a thrift's taxable income for 
purposes of section 593(b)(2) is its tentative taxable income (as 
defined in paragraph (e)(1) of this section).
    (2) Definitions. For purposes of this section:

[[Page 821]]

    (i) A thrift is a member described in section 593(a).
    (ii) A nonthrift is a member that is not a thrift.
    (e) Tentative taxable income (or loss)--(1) Thrift. For purposes of 
this section, a thrift's tentative taxable income (or loss) is its 
separate taxable income (determined under Sec.  1.1502-12 without 
paragraph (q) thereof and without any deduction under section 593(b)), 
subject to the following adjustments in the following order:
    (i) The adjustments described in paragraph (e)(3) of this section;
    (ii) The adjustments described in section 593(b)(2)(E) for those 
thrifts with separate taxable income greater than zero (determined after 
the adjustments under paragraph (e)(3) of this section); and
    (iii) The adjustments described in paragraph (f) of this section.
    (2) Nonthrift. For purposes of this section, a nonthrift's tentative 
taxable income (or loss) is its separate taxable income (determined 
under Sec.  1.1502-12), adjusted for the portion of the consolidated net 
operating loss deduction attributable to the member, the portion of the 
consolidated net capital loss carryover or carryback attributable to the 
member, and further adjusted as described in paragraph (e)(3) of this 
section.
    (3) Adjustments for all members. For each member, the following 
adjustments taken into account in the computation of consolidated 
taxable income are included in determining its tentative taxable income 
(or loss) in order to adjust separate taxable income of the member to 
take into account certain consolidated items:
    (i) The portions of the consolidated charitable contributions 
deduction and the consolidated dividends received deduction attributable 
to the member.
    (ii) The member's capital gain net income, determined without any 
net capital loss carryover or carryback attributable to the member.
    (iii) The member's net capital loss and section 1231 net loss, 
reduced by the portion of the consolidated net capital loss attributable 
to the member.
    (f) Adjustments for thrifts--(1) Reductions. A thrift's separate 
taxable income (as adjusted under paragraph (e)(3) of this section) is 
reduced (but not below zero) by losses of thrifts and to the extent 
attributable to functionally related activities, losses of a nonthrift. 
Certain operating rules for determining the amount of the reductions are 
provided in paragraph (f)(4) of this section. The reductions are made in 
the following amounts in the following order:
    (i) The thrift's allocable share (as determined under paragraph 
(h)(2) of this section) of another thrift's tentative taxable loss. That 
tentative taxable loss is determined by including a deduction under 
section 593(b) (other than paragraph (2) thereof) for the year in which 
the loss arises.
    (ii) The thrift's allocable share (as determined under paragraph 
(h)(3) of this section) of the portion of the consolidated net operating 
loss deduction attributable to it or another thrift. That consolidated 
net operating loss deduction is determined by including a deduction 
under section 593(b) (other than paragraph (2) thereof) for the year in 
which the loss arose. The portion of a consolidated net operating loss 
deduction attributable to another thrift is computed by excluding losses 
arising in taxable years for which the due date (without extensions) for 
filing returns is before March 15, 1983.
    (iii) The thrift's allocable share (as determined under paragraph 
(h)(4) of this section) of the loss attributable to functionally related 
activities of a nonthrift (as determined under paragraph (g) of this 
section). For a rule netting that share against certain income 
attributable to functionally related activities of that nonthrift, see 
paragraph (f)(4)(iv) of this section.
    (iv) The thrift's allocable share (as determined under paragraph 
(h)(3) of this section) of the portion of the consolidated net operating 
loss deduction attributable to functionally related activities of a 
nonthrift (as determined under paragraph (h)(5) of this section). That 
consolidated net operating loss deduction is determined by excluding 
losses arising in taxable years for which the due date (without 
extensions) for filing returns is before March 15, 1983. For a rule 
netting that share against certain income attributable to functionally 
related activities of that

[[Page 822]]

nonthrift, see paragraph (f)(4)(iv) of this section.
    (2) Increases. (i) A thrift's separate taxable income (as adjusted 
under paragraphs (e)(3) and (f)(1) of this section) is increased in a 
subsequent consolidated return year to restore reductions made in a 
prior consolidated return year to a thrift's separate taxable income by 
reason of losses of a nonthrift. This increase is the amount of the 
thrift's allocable share (as determined under paragraph (h)(6) of this 
section) of the income attributable to functionally related activities 
of a nonthrift in a consolidated return year and is made only in that 
year. This increase is made only if both the thrift and the nonthrift 
were members of the group in the consolidated return years in which both 
the reduction and increase are made.
    (ii) This subdivision (ii) limits the increases to a thrift's 
separate taxable income to assure that income of a particular nonthrift 
is used to restore reductions of a thrift only to the extent that such 
nonthrift's losses reduced the thrift's income. Therefore, as of the end 
of a consolidated return year, the cumulative increases to a thrift's 
tentative taxable income (by reason of income attributable to 
functionally related activities of a nonthrift) may not exceed the 
cumulative reductions to the thrift's separate taxable income made (by 
reason of the nonthrift's functionally related activities) under 
paragraph (f)(1) (iii) and (iv) of this section in the current and all 
prior consolidated return years during which both the thrift institution 
and the nonthrift institution were members of the group.
    (iii) For a netting rule, see paragraph (f)(4)(iv) of this section.
    (3) Special Rule. (i) If a carryback to a thrift's separate taxable 
income diminishes the reduction to a thrift's separate taxable income 
for a prior consolidated return year otherwise required by paragraph 
(f)(1) (iii) or (iv) of this section, then any increases to a thrift's 
separate taxable income under paragraph (f)(2) of this section for an 
intervening consolidated return year must be recomputed to take into 
account the effect of such carryback. Thus, if a net operating loss 
attributable to a thrift is carried back and completely offsets the 
thrift's separate taxable income (before the reductions under paragraph 
(f)(1) (iii) or (iv) or this section), any increase to the thrift's 
separate taxable income under paragraph (f)(2) of this section 
(attributable to a reduction in the year to which the loss is carried) 
for an intervening consolidated return year will be eliminated. The 
recomputation required by this subparagraph (3) must be reflected on an 
amended return for the intervening consolidated return year for which 
the increase was previously reported. See example (2) in paragraph (j) 
of this section.
    (ii) If a deficiency for an intervening consolidated return year 
results from the application of paragraph (f)(3)(i) of this section with 
respect to an item to which section 6501(h) applies, the deficiency may 
be assessed at any time within the period described in section 6501(h).
    (iii) For purposes of chapter 67 of the Code (relating to interest), 
the last date prescribed for payment of any tax owed as a result of the 
application of paragraph (f)(3)(i) of this section is deemed to be the 
last day of the taxable year for which the item carried back arose.
    (4) Operating rules. For purposes of paragraphs (d) through (j) of 
this section:
    (i) The portion of a consolidated net operating loss deduction 
attributable to a member is determined as follows:
    (A) First, determine under Sec. Sec.  1.1502-21(b) (or Sec.  1.1502-
79A(a)(3), as appropriate) the portion of each consolidated net 
operating loss attributable to the member for the particular year in 
which the loss arose.
    (B) Second, apply the anti-double-counting rule in paragraph 
(h)(3)(iii) of this section so as not to take the same loss into account 
twice.
    (C) Finally, apply the loss absorption limit in paragraph 
(f)(4)(iii) of this section to the total amount of the consolidated net 
operating loss deduction from a particular loss year.
    (ii) Capital loss carryovers and carrybacks shall be taken into 
account in a manner consistent with the principles of paragraphs (d) 
through (j) of this section.

[[Page 823]]

    (iii) This subdivision (iii) prescribes a loss absorption limit. The 
total amount of the consolidated net operating loss deduction from a 
given year (loss year) taken into account as reductions under paragraph 
(f)(1) of this section for another year (absorption year) shall not 
exceed the amount of the consolidated net operating loss deduction 
attributable to the loss year absorbed in computing consolidated taxable 
income for the absorption year. For this purpose, consolidated taxable 
income for the absorption year shall include a deduction under section 
593(b) (other than paragraph (2) thereof) for each thrift member.
    (iv) This subdivision (iv) prescribes a rule for netting in certain 
cases income attributable to functionally related activities of a 
nonthrift in a consolidated return year (``income year'') against losses 
attributable to functionally related activities of that nonthrift which 
arise in a consolidated return year (``loss year''). That nonthrift's 
income is netted against the portion of that nonthrift's loss which 
would otherwise be applied in a consolidated return year (``reduction 
year'') under paragraph (f)(1) (iii) or (iv) of this section to reduce a 
thrift's tentative taxable income, but:
    (A) Only if the income year is not later than the loss year and the 
reduction year, and
    (B) Only to the extent the income had not previously been taken into 
account under paragraph (f)(2) of this section or this subdivision (iv) 
as of the close of the later of the loss year and the reduction year.
    (g) Income (or loss) attributable to functionally related activities 
of a nonthrift--(1) In general. For purposes of this section, the income 
(or loss) attributable to functionally related activities of a nonthrift 
is the income (or loss) of the nonthrift:
    (i) Attributable to the provision of assets or the rendition of 
services to a thrift (such as the leasing of office space or providing 
computer or financial services), or
    (ii) Derived from the assets described in section 7701(a)(19)(C) 
(iii) through (x), but only if such assets comprise 5 percent or more of 
the gross assets of the nonthrift.
    (2) Amount of income (or loss).The amount of income (or loss) from 
such activities is the excess of (i) gross income from such activities 
over (ii) the deductions of the nonthrift allocable and apportionable to 
that gross income under the principles of Sec.  1.861-8. The loss 
attributable to functionally related activities of a nonthrift is the 
excess (if any) of such deductions over such gross income. That loss, 
however, may not exceed the amount of the tentative taxable loss of that 
nonthrift (determined by excluding losses arising in taxable years for 
which the due date (without extensions) for filing returns is before 
March 15, 1983).
    (h) Allocation of income and losses--(1) In general. Paragraphs 
(h)(2) through (5) of this section provides rules for allocating 
different losses among thrifts that have tentative taxable income 
greater than zero. Generally, these allocations are made in the order 
listed in paragraph (f)(1) of this section and are based upon the 
relative tentative taxable income of the thrifts to which the particular 
loss is allocated. For purposes of each allocation under a subdivision 
of such paragraph (f)(1), the tentative taxable income of the thrifts 
used in making this allocation is reduced by the thrift's allocable 
share of losses allocated to the thrift under a prior subdivision of 
such paragraph (f)(1). Accordingly, for purposes of this paragraph (h), 
tentative taxable income is determined without regard to paragraph (f) 
of this section, except as otherwise provided. Paragraph (h)(6) of this 
section provides rules for allocating income attributable to 
functionally related activities of a nonthrift based upon the relative 
reductions to thrift income made on account of that nonthrift.
    (2) Allocation of tentative taxable loss of other thrifts. For 
purposes of paragraph (f)(1)(i) of this section, a thrift's allocable 
share of another thrift's tentative taxable loss is the loss multiplied 
by a fraction. The numerator of the fraction is the tentative taxable 
income (if greater than zero) of the thrift, and the denominator is the 
aggregate of such tentative taxable income of each thrift.
    (3) Allocation of portions of a consolidated net operating loss 
deduction. (i)

[[Page 824]]

For purposes of paragraph (f)(1)(ii) of this section, a first thrift's 
allocable share of the portion of the consolidated net operating loss 
deduction attributable to another thrift is determined under paragraph 
(h)(2) of this section as if that portion were a tentative taxable loss 
of that other thrift and by computing tentative taxable income under 
such paragraph (h)(2) by taking into account paragraph (f)(1)(i) of this 
section. A thrift's allocable share of the portion of the consolidated 
net operating loss deduction attributable to that thrift is equal to 
that entire portion.
    (ii) For purposes of paragraph (f)(1)(iv) of this section, a 
thrift's allocable share of the portion of a consolidated net operating 
loss deduction attributable to functionally related activities of a 
nonthrift (determined under paragraph (h)(5) of this section) is 
determined under paragraph (h)(4) of this section as if that portion 
were a loss attributable to functionally related activities of the 
nonthrift and by computing tentative taxable income under such paragraph 
(h)(4) by taking into account paragraph (f)(1) (i), (ii), and (iii) of 
this section.
    (iii) This subdivision (iii) prevents the ``double-counting'' of 
losses. The reduction to the tentative taxable income of a thrift is 
diminished to the extent the loss that gave rise to the reduction has 
previously been taken into account in reducing a thrift's tentative 
taxable income. Thus, any loss taken into account as a reduction to a 
thrift's separate taxable income under any subdivision of paragraph 
(f)(1) of this section shall be reduced (but not below zero) to the 
extent taken into account:
    (A) In a prior consolidated return year under any subdivision of 
such paragraph (f)(1) or
    (B) In the current consolidated return year under a previous 
subdivision of such paragraph (f)(1).
    (4) Allocation of loss attributable to functionally related 
activities of a nonthrift. For purposes of paragraph (f)(1)(iii) of this 
section, a thrift's allocable share of a loss attributable to 
functionally related activities of a nonthrift is determined by 
multiplying the loss by a fraction. The numerator of the fraction is the 
tentative taxable income (if greater than zero) of the thrift (taking 
into account paragraph (f)(1) (i) and (ii) of this section) and the 
denominator is the aggregate of such tentative taxable income (so 
determined) of each thrift.
    (5) Portion of the consolidated net operating loss deduction 
attributable to functionally related activities of a particular 
nonthrift. The portion of the consolidated net operating loss deduction 
attributable to functionally related activities of a particular 
nonthrift is the lesser of the following two amounts:
    (i) The portion of the consolidated net operating loss deduction 
attributable to that nonthrift.
    (ii) The aggregate of the losses attributable to functionally 
related activities of that nonthrift for the taxable years in which the 
consolidated net operating loss deduction arose.
    (6) Allocation of income attributable to functionally related 
activities of a nonthrift. For purposes of paragraph (f)(2) of this 
section, a thrift institution's allocable share of the income 
attributable to functionally related activities of a nonthrift is 
determined by multiplying that income by a fraction. The numerator of 
the fraction is the amount of the cumulative reductions referred to in 
paragraph (f)(2)(ii) of this section (minus the cumulative increases 
under paragraph (f)(2) of this section) made on account of that 
nonthrift for the thrift and the denominator is the sum of such 
cumulative reductions (minus such cumulative increases) made on account 
of that nonthrift for all thrifts.
    (7) Proper accounting The provisions of section 482 apply in 
determining a thrift institution's tentative taxable income, and in 
determining the gross income and deductions attributable to functionally 
related activities. For example, an expense such as the salary of an 
individual who performs services for both a thrift and a nonthrift must 
be allocated in a manner that fairly reflects the value of the services 
rendered to each.
    (i) [Reserved]
    (j) Examples. The provisions of this section may be illustrated by 
the following examples. In each example the letter ``T'' for a member 
denotes a

[[Page 825]]

thrift and the letters ``NT'' denote a nonthrift. Also, in each example, 
a thrift loss includes a bad debt deduction under section 593(b) (other 
than paragraph (2) thereof) for such year and a thrift with income would 
have such a bad debt deduction of zero.

    Example 1. (a) In 1983, corporations T1, T2, NT1, and NT2 are 
formed. These corporations constitute an affiliated group that files a 
consolidated return on the basis of a calendar year. For 1983, 1984, and 
1985, the tentative taxable income (or loss) of each member (before the 
application of paragraph (f) of this section) is as follows:

------------------------------------------------------------------------
                                                 1983     1984     1985
------------------------------------------------------------------------
NT1...........................................   $(60)    $(140)     $15
T1............................................   1,000       500     750
NT2...........................................    (90)     (220)     150
T2............................................   (300)       400     250
------------------------------------------------------------------------

    In 1983, NT1, in addition to its other business activities, acted as 
a collection agency for T1. Deductions attributable to those activities 
exceeded gross income attributable to those activities by $70. NT1's 
other activities generated a $10 gain. In 1984 and 1985, NT1 acted as a 
collection agency for T1 as its sole activity.
    (b) The tentative taxable incomes of T1 and T2 for 1983 (determined 
under paragraph (e) of this section) as of the close of that year are 
adjusted by paragraph (f) of this section as follows:

(i) T1's tentative taxable income:
  T1's tentative taxable income (before the             .......   $1,000
   application of paragraph (f) of this section.......
Less:
  T2's tentative taxable loss.........................     $300  .......
  NT1's functionally related loss (limited by NT1's          60      360
   overall loss)......................................
                                                       -----------------
  T1's tentative taxable income for 1983..............  .......      640
 

    (ii) T2's tentative taxable income for 1983 is zero.
    (c) The tentative taxable incomes of T1 and T2 for 1984 (determined 
under paragraph (e) of this section as of the close of that year) are 
adjusted by paragraph (f) of this section as follows:
    (i) T1's tentative taxable income:

T1's tentative taxable income (before the application of            $500
 paragraph (f) of this section)................................
Less:
  T1's allocable portion of NT1's functionally related loss           78
   (140 x 500/(500 + 400)).....................................
                                                                --------
  T1's tentative taxable income for 1984.......................      422
                                                                ========
(ii) T2's tentative taxable income:
  T2's tentative taxable income (before the application of           400
   paragraph (f) of this section...............................
Less:
  T2's allocable portion of NT1's functionally related loss           62
   (140 x 400/(500 + 400)).....................................
  T2's tentative taxable income for 1984.......................      338
 

    (d) For 1985, the amount under paragraph (f) (2) of this section for 
both T1 and T2 is $15 (NT1's tentative taxable income from functionally 
related activities for 1985). For 1983 and 1984, T1's tentative taxable 
income was reduced by a total of $138 (i.e., $60 + $78) due to NT1's 
losses from functionally related activities. For 1984, T2's tentative 
taxable income was reduced by $62 due to those losses. Accordingly, 
under paragraph (f)(2) of this section, T1's tentative taxable income 
for 1983 is increased by $10 (i.e., $15x$138/($138 + $62)) and T2's 
tentative taxable income is increased by $5 (i.e., $15x$62/($138 + 
$62)).
    Example 2. (a) In 1983, corporations T, NT1, and NT2 are formed. 
these corporations constitute an affiliated group. NT2 provides computer 
services to T as its sole activity. For the calendar years 1983, 1984, 
and 1985, the group files a consolidated return. The tentative taxable 
income of each member (before the application of paragraph (f) of this 
section) is as follows:

------------------------------------------------------------------------
                                                 1983     1984     1985
------------------------------------------------------------------------
T............................................     $100       $0   $(200)
NT1..........................................      200        0      100
NT2..........................................     (20)       20        0
------------------------------------------------------------------------

    (b) Under paragraph (f)(1) of this section, T's tentative taxable 
income for 1983 (determined at the close of that year) is reduced to $80 
(i.e., $100 less NT2's $20 loss). For 1984, under paragraph (f)(2) of 
this section, T's tentative taxable income is increased by $20. For 
1985, the consolidated net operating loss of $100 (all of which is 
attributable to T) is carried back to 1983. That $100 carryback is not 
limited by paragraph (f)(4)(iii) of this section, since consolidated 
taxable income for 1983 available for absorption after a bad debt 
deduction of $0 under section 593(b) (other than paragraph (2) thereof) 
for that year is $280. Accordingly, under paragraph (f)(1)(ii) of this 
section, T's tentative taxable income is reduced by the full $100, which 
is taken into account before the previous reduction of T's tentative 
taxable income under paragraph (f)(1)(iii) of this section. In addition, 
under paragraph (f)(3)(i) of this section, the group must file an 
amended return for 1984 to eliminate the increase to T's bad debt 
deduction for 1984 by reason of the consolidated net operating loss 
carryback to 1983.
    Example 3. (a) T and NT are formed in 1983 and are the only members 
of an affiliated group filing a consolidated return on a calendar year 
basis. NT provided computer services to T as its sole activity. For 
1983, 1984, and 1985, the tentative taxable income of T and NT (before 
the application of paragraph (f) of this section) is as follows:

[[Page 826]]



------------------------------------------------------------------------
                                                 1983     1984     1985
------------------------------------------------------------------------
T............................................     $100       $0       $0
NT...........................................        0       40     (40)
------------------------------------------------------------------------

    (b) At the close of 1983, T's tentative taxable income is $100. For 
1985, however, the group has a consolidated net operating loss of $40, 
all of which is attributable to NT's functionally related activities and 
which is carried back to 1983. However, T's tentative taxable income for 
1983 is not reduced under paragraph (f)(1)(iv) of this section, since, 
under paragraph (f)(4)(iv) of this section, NT's 1984 income 
attributable to functionally related activities of $40 is netted against 
that $40 carryback.
    Example 4. (a) In 1983, corporations T1, T2, NT1, and NT2 are 
formed. For calendar years 1983, 1984, and 1985, the affiliated group 
consisting of T1, T2, NT1, and NT2 filed a consolidated return. NT1 
provided computer services to T1 as its sole activity. The tentative 
taxable income of each member (before the application of paragraph (f) 
of this section) is as follows:

------------------------------------------------------------------------
                                                 1983     1984     1985
------------------------------------------------------------------------
T1...........................................     (50)      100       30
T2...........................................     (50)     (80)     (25)
NT1..........................................     (50)     (40)     (99)
NT2..........................................      120       30      100
------------------------------------------------------------------------

    (b) For 1983, the group has a consolidated net operating loss of 
$30, apportioned $10 each to T1, T2, and NT1 under Sec.  1.1502-
79A(a)(3). For 1984, the only thrift with tentative taxable income 
greater than zero (before applying paragraph (f) of this section) is T1. 
That tentative taxable income of $100 is first reduced to $20 by T2's 
$80 1984 loss under paragraph (f)(1)(i) of this section. Next, T1's 
remaining tentative taxable income of $20 is reduced to $10 by the 
portions attributable to T1 and T2 of the 1983 consolidated net 
operating loss carryover to 1984 under paragraph (f)(1)(ii) of this 
section. The sum of those portions is limited to $10 (i.e., $5 each) by 
paragraph (f)(4)(iii) of this section because 1984 consolidated taxable 
income available for absorption after a bad debt deduction under section 
593(b) (other than paragraph (2) thereof) for each thrift member for 
that year is $10. For that reason, paragraph (f)(4)(iii) of this section 
also prevents any further portion of that carryover from being taken 
into account in 1984 as a reduction under paragraph (f)(1) of this 
section. T1's remaining tentative taxable income of $10 is reduced to 
zero, under paragraph (f)(1)(iii) of this section, by NT1's 1984 
tentative taxable loss.
    (c) For 1985, the only thrift with tentative taxable income greater 
than zero (before applying paragraph (f) of this section) is T1. T1's 
tentative taxable income for 1985 of $30 is reduced to $5 by T2's 1985 
loss of $25 under paragraph (f)(1)(i) of this section. Next, the 
portions attributable to T1 and T2 of the consolidated net operating 
loss carryover from 1983 to 1985 for purposes of paragraph (f)(1)(ii) of 
this section must be determined. That determination is made without 
applying the rules for loss absorption in computing consolidated taxable 
income under Sec.  1.1502-21A(b)(3). Those portions are instead 
determined in 3 steps under paragraph (f)(4)(i) of this section. The 
first of those steps is to determine each of T1's and T2's attributable 
portions of the 1983 consolidated net operating loss which under Sec.  
1.1502-79A (a)(3) is $10 or $20 for both thrifts. The second of those 
steps is to apply the anti-double counting rule under paragraph 
(h)(3)(iii) of this section to reduce that $20 amount by the $10 total 
of the two $5 portions attributable to T1 and T2 of the consolidated net 
operating loss carryover from 1983 to 1984 taken into account as 
reductions to T1's tentative taxable income for 1984 under paragraph 
(f)(1)(ii) of this section. That leaves a $10 total amount available to 
be taken into account as reductions to T1's remaining tentative taxable 
income of $5 for 1985 under paragraph (f)(1)(ii) of this section. Under 
the third of those steps that $10 amount, however, is limited, under the 
loss absorption limit of paragraph (f)(4)(iii) of this section, to the 
$6 of the 1983 consolidated net operating loss carryover to 1985 which 
is absorbed in computing consolidated taxable income for 1985 since 1985 
consolidated taxable income available for absorption after a bad debt 
deduction under section 593(b) (other than paragraph (2) thereof) for 
that year is $6 (i.e., $30 + $100-$99-$25). Because separate taxable 
income cannot be reduced below zero under paragraph (f)(1) of this 
section, T1's remaining tentative taxable income of $5 is thus reduced 
to zero by the portions attributable to T1 and T2, respectively, of the 
consolidated net operating loss carryover from 1983 to 1985 under 
paragraph (f)(1)(ii) of this section.

(Sec. 1502, 7805, Internal Revenue Code of 1954 (68A Stat. 367 and 917; 
(26 U.S.C. 1502 and 7805))

[T.D. 7637, 44 FR 46841, Aug. 9, 1979, as amended by T.D. 7815, 47 FR 
11516, Mar. 17, 1982; T.D. 7876, 48 FR 11258, Mar. 17, 1983; 48 FR 
13165, Mar. 30, 1983; T.D. 8677, 61 FR 33324, June 27, 1996; T.D. 8823, 
64 FR 36100, July 2, 1999]



Sec.  1.1502-43  Consolidated accumulated earnings tax.

    (a) Group subject to tax--(1) General rule. For a group filing a 
consolidated return for the taxable year, the accumulated earnings tax 
under section 531 is imposed on consolidated accumulated taxable income 
(as defined in

[[Page 827]]

paragraph (b) of this section). This tax applies to any group that is 
formed or availed of to avoid or prevent the imposition of the 
individual income tax on the shareholders of either any of its members 
or any other corporation by permitting earnings and profits to 
accumulate instead of dividing or distributing them. Section 531 and 
this section do not apply to a group that is treated as a ``personal 
holding company'' under section 542(a)(1) as a result of the application 
of section 542(b)(1). Special rules are provided in this section for 
other groups which include one or more personal holding companies.
    (2) Evidence of purpose to avoid income tax. (i) Under section 
533(a), the fact that the group's earnings and profits are permitted to 
accumulate beyond the reasonable needs of its business is determinative 
of the purpose to avoid the income tax with respect to shareholders, 
unless the group by the preponderance of the evidence proves to the 
contrary.
    (ii) The fact that a group is a mere holding or investment group is 
prima facie evidence of the group's purpose to avoid the income tax with 
respect to the shareholders. The activities of a member which is a 
personal holding company are not taken into account in determining if 
the group is a mere holding or investment group.
    (3) Earnings and profits. For purposes of this paragraph (a) and 
paragraph (d) of this section, the following rules apply:
    (i) If no member of the group is a personal holding company, the 
group's earnings and profits are the aggregate of the earnings and 
profits (or deficit) of each corporation that is a member at the close 
of the taxable year, determined in accordance with Sec.  1.1502-33.
    (ii) Earnings and profits resulting from the application of Sec.  
1.1502-33(b) are not taken into account.
    (iii) Earnings and profits resulting from the disposition of a 
member's stock are determined without regard to the stock basis 
adjustments under Sec. Sec.  1.1502-32 and 1.1502-33(c)(1).
    (4) Reasonable needs of the business. The reasonable needs of the 
group's business include the reasonable needs of the business of any 
corporation (other than a personal holding company) that is a member at 
the close of the taxable year. Thus, the earnings and profits of one 
member may be accumulated with respect to the reasonable business needs 
of another member. If under Sec.  1.537-3(b) the business of a nonmember 
corporation is considered the business of a member, then the earnings 
and profits of any member may be accumulated with respect to such 
nonmember's reasonable business needs.
    (5) Burden of proof. The notification described in section 534(b) 
and the statement described in section 534(c) are made to or by the 
common parent corporation in accordance with Sec.  1.1502-77.
    (b) Consolidated accumulated taxable income--(1) In general. 
``Consolidated accumulated taxable income'' is the group's consolidated 
taxable income determined under Sec.  1.1502-11 adjusted in the manner 
provided in paragraph (b)(2) of this section, minus the sum of--
    (i) The consolidated dividends paid deduction determined under 
paragraph (c) of this section and
    (ii) The consolidated accumulated earnings credit determined under 
paragraph (d) of this section.
    (2) Adjustments to consolidated taxable income. For purposes of 
paragraph (b)(1) of this section, consolidated taxable income is 
adjusted as follows:
    (i) Under section 535(b)(1), the deduction for taxes is the excess 
of--
    (A) The consolidated liability for tax determined without Sec.  
1.1502-2(a)(2) through (4), and without the foreign tax credit provided 
by section 27, over
    (B) The consolidated foreign tax credit determined pursuant to Sec.  
1.1502-4. Foreign taxes deductible under Sec.  1.535-2(a)(2) are also 
allowed as a deduction under section 535(b)(1).
    (ii) The consolidated charitable contributions deduction under Sec.  
1.1502-24 does not apply. Under section 535(b)(2), there shall be 
allowed the aggregate charitable contributions of the members allowable 
under section 170, determined without section 170 (b)(2) and (d)(2).
    (iii) Under section 535(b)(3), the deductions provided in Sec. Sec.  
1.1502-26 and 1.1502-27 are not allowed.

[[Page 828]]

    (iv) Under section 535(b)(4), the consolidated net operating loss 
deduction described in Sec. Sec.  1.1502-21(a) or 1.1502-21A(a), as 
appropriate is not allowed.
    (v) Under section 535(b)(5), there is allowed as a deduction the 
consolidated net capital loss, determined under Sec. Sec.  1.1502-22(a) 
or 1.1502-22A(a), as appropriate .
    (vi) Under section 535(b)(6), there is allowed as a deduction an 
amount equal to (A) the excess of the consolidated net long-term capital 
gain (determined under Sec. Sec.  1.1502-22(a) or 1.1502-41A, as 
appropriate over the consolidated net short-term capital loss 
(determined under Sec. Sec.  1.1502-22T(a) or 1.1502-41A, as 
appropriate), minus (B) the taxes attributable to this excess. This 
consolidated net short-term capital loss is determined without the 
consolidated net capital loss carryovers or carrybacks to the taxable 
year.
    (vii) Under section 535(b)(7), the consolidated net capital loss 
carryovers and carrybacks are not allowed. See Sec. Sec.  1.1502-22(b) 
or 1.1502-22A(b), as appropriate.
    (viii) Sections 1.1502-15A (Limitations on built-in deductions not 
subject to Sec.  1.1502-15) and 1.1502-15 do not apply.
    (3) Personal holding company a member. If a member is a personal 
holding company for the taxable year--
    (i) [Reserved]
    (ii) In applying paragraph (b)(2)(i) of this section, consolidated 
liability for tax (as determined under that paragraph (b)(2)(i)) is 
reduced by the portion thereof allocable to that member under section 
1552(a) (1), (2), (3), or (4) (or Sec.  1.1502-33(d)), whichever is 
applicable. The consolidated foreign tax credit is computed by excluding 
the taxable income and any foreign taxes paid or accrued by that member, 
and foreign taxes deductible under Sec.  1.535-2(a)(2) do not include 
foreign taxes attributable to that member.
    (c) Consolidated dividends paid deduction--(1) General rule. For 
purposes of this section, the consolidated dividends paid deduction is 
the aggregate of the members' deductions under section 561(a) (1) and 
(2). This deduction is determined by excluding deductions for dividends 
paid to other members.
    (2) Exception for certain personal holding companies. [Reserved]
    (3) Dividends paid defined. For purposes of this paragraph (c), 
``dividends paid'' and ``dividend (or portion thereof) paid'' include 
amounts treated as dividends paid during the taxable year under sections 
562(b)(1), 563, and 565 (relating respectively to liquidating 
distributions, dividends paid after year end, and consent dividends).
    (4) Examples. This paragraph (c) can be illustrated by the following 
examples:

    Example 1. Corporations P and S constitute an affiliated group which 
files a consolidated return on a calendar year basis for 1984 and 1985. 
P owns all of S's stock and two individuals own all of P's stock. 
Neither member of the group is a personal holding company for 1984. 
Assume that on December 15, 1984, S pays a dividend (as defined in 
section 316 (a)) of $2,000 to P, and P pays a dividend (as so defined) 
of $3,000 on January 15, 1985, to its individual shareholders. All 
dividends are paid in cash and are pro rata with no preference as to any 
shares or class of stock. For purposes of this paragraph (c), the 
consolidated dividends paid deduction for 1984 is $3,000, i.e., the 
dividend paid on January 15, 1985, by P to its nonmember shareholders. 
See section 563 (a). The $2,000 dividend paid by S to P is not taken 
into account in computing the consolidated dividends paid deduction.
    Example 2. [Reserved]

    (d) Consolidated accumulated earnings credit--(1) In general. 
[Reserved]
    (2) Special rule if a consolidated group is part of a controlled 
group. If a consolidated group is treated collectively as being one 
component member of a controlled group, or if each member of a 
consolidated group is treated as being a separate component member of a 
controlled group, see section 1561 for determining the portion of the 
accumulated earnings credit to be allocated to such group or to such 
members.
    (e) Effective/applicability date. This section applies to any 
consolidated Federal income tax return due (without extensions) on or 
after December 21, 2009. However, a consolidated group may apply this 
section to any consolidated Federal income tax return filed on or after 
December 21, 2009. For returns due before December 21, 2009, see

[[Page 829]]

Sec.  1.1502-43T as contained in 26 CFR part 1 in effect on April 1, 
2009.

[T.D. 7937, 49 FR 3462, Jan. 27, 1984, as amended by T.D. 8560, 59 FR 
41674, Aug. 15, 1994; T.D. 8677, 61 FR 33324, June 27, 1996; T.D. 8560, 
62 FR 12098, Mar. 14, 1997; T.D. 8823, 64 FR 36100, July 2, 1999; T.D. 
9304, 71 FR 76907, Dec. 22, 2006; T.D. 9476, 74 FR 68532, Dec. 28, 2009; 
T.D. 9885, 84 FR 67039, Dec. 6, 2019]



Sec.  1.1502-44  Percentage depletion for independent producers and 
royalty owners.

    (a) In general. The sum of the percentage depletion deductions for 
the taxable year for all oil or gas property owned by all members, plus 
any carryovers under section 613A(d)(1) or paragraph (d) of this section 
from a prior taxable year, may not exceed 65 percent of the group's 
adjusted consolidated taxable income (under paragraph (b) of this 
section) for the consolidated return year.
    (b) Adjusted consolidated taxable income. For purposes of this 
section, adjusted consolidated taxable income is an amount (not less 
than zero) equal to the group's consolidated taxable income determined 
without:
    (1) Any depletion with respect to an oil or gas property (other than 
a gas property with respect to which the depletion allowance for all 
production is determined pursuant to section 613A(b)) for which 
percentage depletion would exceed cost depletion in the absence of the 
depletable quantity limitations contained in section 613A(c) (1) and (6) 
and the consolidated taxable income limitation contained in paragraph 
(a) of this section.
    (2) Any consolidated net operating loss carryback to the 
consolidated return year under Sec. Sec.  1.1502-21 or 1.1502-21A (as 
appropriate) and
    (3) Any consolidated net capital loss carryback to the consolidated 
return year under Sec. Sec.  1.1502-22 or 1.1502-22A (as appropriate).
    (c) Allocation to oil and gas properties. The maximum amount 
allowable as a deduction under section 613A(c), after the application of 
paragraph (a) of this section, is allocated to properties held by 
members in accordance with the regulations under section 613A(d). Those 
regulations provide for an initial allocation and possible reallocation 
of the maximum allowable percentage depletion deduction among oil and 
gas properties. Thus, if, after the initial allocation, cost depletion 
exceeds the percentage depletion that would be allowable for a 
particular oil or gas property, cost depletion must be used for that 
property and the maximum amount of percentage depletion allowable as a 
deduction for the group is reallocated among only the remaining 
properties held by all members.
    (d) Carryover for disallowed amounts. (1) If any amount is 
disallowed as a deduction for the taxable year by reason of section 
613A(d)(1) or paragraph (a) of this section, the disallowed amount for 
each oil or gas property is treated as an amount allowed as a deduction 
under section 613A(c), for the following taxable year for the member 
that owned the property, in accordance with the regulations under 
section 613A and paragraphs (a) and (d)(2) of this section.
    (2) Any amount that was disallowed as a deduction in a separate 
return limitation year of a member may be carried to a consolidated 
return year only to the extent that 65 percent of the excess determined 
under paragraph (d)(3) of this section exceeds the sum of the otherwise 
allowable percentage depletion deductions for the member's oil and gas 
properties for the year.
    (3) The excess determined in this subparagraph (3) for a member is 
the excess, if any, of adjusted consolidated taxable income for the year 
under paragraph (b) of this section over that income recomputed by 
excluding the items of income and deductions of the member.
    (e) Effective date. This section applies to taxable years for which 
the due date (without extensions) for filing returns is after September 
30, 1980.

[T.D. 7725, 45 FR 65561, Oct. 3, 1980, as amended by T.D. 8677, 61 FR 
33324, June 27, 1996; T.D. 8823, 64 FR 36100, July 2, 1999]



Sec.  1.1502-47  Consolidated returns by life-nonlife groups.

    (a) Scope--(1) In general. Under section 1504(b)(2), insurance 
companies that are taxed under section 801 (relating to life insurance 
companies) are not treated as includible corporations

[[Page 830]]

for purposes of determining under section 1504(a) the existence of an 
affiliated group and the composition of its membership. Section 
1504(c)(2) provides an election whereby certain life insurance companies 
may be treated as includible corporations, and thus members, of a group 
composed of other includible corporations. This section provides 
regulations for the making of this election and for the determination of 
an electing group's composition, its consolidated taxable income (or 
loss), and its consolidated tax liability.
    (2) General method of consolidation--(i) Subgroup method. The 
regulations adopt a subgroup method to determine consolidated taxable 
income. One subgroup is the group's nonlife companies. The other 
subgroup is the group's life insurance companies. Initially, the nonlife 
subgroup computes nonlife consolidated taxable income and the life 
subgroup computes consolidated LICTI. A subgroup's income may in effect 
be reduced by a loss of the other subgroup, subject to the limitations 
in sections 172 and 1503(c). The life subgroup losses consist of life 
consolidated net operating loss, consolidated operations loss carryovers 
from taxable years beginning before January 1, 2018 (consolidated 
operations loss carryovers), and life consolidated net capital loss. The 
nonlife subgroup losses consist of nonlife consolidated net operating 
loss and nonlife consolidated net capital loss. Consolidated taxable 
income is therefore defined in pertinent part as the sum of nonlife 
consolidated taxable income and consolidated LICTI, reduced by life 
subgroup losses and/or nonlife subgroup losses.
    (ii) Subgroup loss. A subgroup loss does not actually affect the 
computation of nonlife consolidated taxable income or consolidated 
LICTI. It merely constitutes a bottom-line adjustment in reaching 
consolidated taxable income. Furthermore, the amount of a subgroup's 
loss, if any, that is eligible to be carried back to a prior taxable 
year first must be carried back against income of the same subgroup 
before it may be used as a setoff against the other subgroup's income in 
the taxable year the loss arose. (See sections 172(b)(1) and 1503(c)(1); 
see also Sec.  1.1502-21(b).) The carryback of losses from one subgroup 
may not be used to offset income of the other subgroup in the year to 
which the loss is to be carried. This carryback of one subgroup's loss 
may ``bump'' the other subgroup's loss that, in effect, previously 
reduced the income of the first subgroup. The subgroup's loss that is 
bumped in appropriate cases may, in effect, reduce a succeeding year's 
income of either subgroup. This approach gives the group the tax savings 
of the use of losses, but the bumping rule assures that, insofar as 
possible, life deductions will be matched against life income and 
nonlife deductions against nonlife income.
    (iii) Carryover of subgroup loss. A subgroup's loss may be used in a 
succeeding year, but in any particular succeeding year the loss must be 
used to reduce the income of the same subgroup before it may be used as 
a setoff against the other subgroup's income.
    (3) Other provisions. The provisions of Sec. Sec.  1.1502-0 through 
1.1502-100 apply unless this section provides otherwise. Further, unless 
otherwise indicated in this section, a term used in this section has the 
same meaning as in sections 801-848.
    (b) Definitions. For purposes of this section:
    (1) Life company. The term life company means a life insurance 
company as defined in section 816 and subject to tax under section 801. 
Section 816 applies to each company separately.
    (2) Nonlife insurance company. The term nonlife insurance company 
has the meaning provided in Sec.  1.1502-1(k).
    (3) Life insurance company taxable income. The term life insurance 
company taxable income or LICTI has the meaning provided in section 
801(b).
    (4) Group. The term group has the meaning provided in Sec.  1.1502-
1(a). Unless otherwise indicated in this section, a group's composition 
is determined without regard to section 1504(b)(2).
    (5) Member. The term member has the meaning provided in Sec.  
1.1502-1(b). A life company is tentatively treated as a member for any 
taxable year for purposes of determining if it is an eligible 
corporation under paragraph (b)(12) of this section and, therefore, if 
it is an includible corporation under section 1504(c)(2). If such a 
company is eligible

[[Page 831]]

and includible (under section 1504(c)(2)), it will actually be treated 
as a member of the group.
    (6) Life member. A life member is a member of the group that is a 
life company.
    (7) Nonlife member. A nonlife member is a member of the group that 
is not a life company.
    (8) Life subgroup. A life subgroup is composed of those members that 
are life members. If the group has only one life member, it constitutes 
a life subgroup.
    (9) Nonlife subgroup. A nonlife subgroup is composed of those 
members that are nonlife members. If the group has only one nonlife 
member, it constitutes a nonlife subgroup.
    (10) Separate return year. The term separate return year has the 
meaning provided in Sec.  1.1502-1(e). For purposes of this paragraph 
(b)(10), the term group is defined with regard to section 1504(b)(2) for 
years in which an election under section 1504(c)(2) is not in effect. 
Thus, a separate return year includes a taxable year for which that 
election is not in effect.
    (11) Separate return limitation year. Section 1.1502-1(f)(2) 
provides exceptions to the definition of the term separate return 
limitation year. For purposes of applying those exceptions to this 
section, the term group is defined without regard to section 1504(b)(2), 
and the definition in this paragraph (b)(11) applies separately to the 
nonlife subgroup in determining nonlife consolidated taxable income 
under paragraph (f) of this section and to the life subgroup in 
determining consolidated LICTI under paragraph (g) of this section. 
Paragraph (h)(3)(ix) of this section defines the term separate return 
limitation year for purposes of determining whether the losses of one 
subgroup may be used against the income of the other subgroup.
    (12) Eligible corporations--(i) In general. A corporation is an 
eligible corporation for a taxable year of a group only if, throughout 
every day of the base period the corporation:
    (A) Was in existence and a member of the group determined without 
the exclusions in section 1504(b)(2) (see paragraphs (b)(12) (iii) 
through (vi) of this section),
    (B) Was engaged in the active conduct of a trade or business 
(``active business''),
    (C) Did not experience a change in tax character (see paragraph 
(b)(12)(vii) of this section), and
    (D) Did not undergo disproportionate asset acquisitions (see 
paragraph (b)(12)(viii) of this section).
    (ii) Base period. The base period consists of the common parent's 
five taxable years immediately preceding the group's taxable year for 
which the consolidated return and the determination of eligibility are 
made. Eligibility is determined for each consolidated return year 
beginning with the first year for which the election under section 
1504(c)(2) is effective.
    (iii) In existence. Except as provided in paragraphs (b)(12) (v) and 
(vi) of this section, a corporation organized after the base period 
begins is not eligible even though it is a member of the group 
immediately after its organization. For purposes of this paragraph 
(b)(12)(iii), a corporation that was a party to a reorganization 
described in section 368(a)(1)(F) shall be treated as the same entity 
both before and after the reorganization.
    (iv) Membership period. Except as provided in paragraphs (b)(12) (v) 
and (vi) of this section, a corporation must have been a member of the 
group throughout the base period to be eligible. Thus, an ineligible 
corporation includes one whose stock was acquired from outside the group 
at any time during the base period or one which was a member of a 
different group (whether by application of reverse acquisition rules in 
Sec.  1.1502-75(d)(3) or otherwise) at any time during the base period. 
For purposes of this subdivision (iv), the common parent of a group is 
treated as constituting a group (and hence is a member) during any 
period when it was not a member of an affiliated group within the 
meaning of section 1504(a) (applied without section 1504(b)(2)).
    (v) Tacking rule. The period during which an old corporation is in 
existence and a member of the group engaged in active business is 
included in (or tacks onto) the period for the new corporation if the 
following four conditions listed in this paragraph (b)(12)(v)

[[Page 832]]

are met. For purposes of this paragraph (b)(12)(v), a new corporation is 
a corporation (whether or not newly organized) during the period its 
eligibility depends upon the tacking rule. The four conditions are as 
follows--
    (A) The first condition is that, at any time, 80 percent or more of 
the new corporation's assets it acquired (other than in the ordinary 
course of its trade or business) were acquired from the old corporation 
in one or more transactions described in section 351(a) or 381(a). This 
asset test is applied by using the fair market values of assets on the 
date they were acquired and without regard to liabilities. Assets 
acquired in the ordinary course of business will be excluded from total 
assets only if they were acquired after the new corporation became a 
member of the group (determined without section 1504(b)(2)). In 
addition, assets that the old corporation acquired from outside the 
group in transactions not conducted in the ordinary course of its trade 
or business are not included in the 80 percent (but are included in 
total assets) if the old corporation acquired those assets within five 
calendar years before the date of their transfer to the new corporation.
    (B) The second condition is that at the end of the taxable year 
during which the first condition is first met, the old corporation and 
the new corporation must both have the same tax character. For purposes 
of this paragraph (b)(12), a corporation's tax character is the section 
under which it would be taxed (for example, section 11, section 801, or 
section 831) if it filed a separate return. If the old corporation is 
not in existence (or adopts a plan of complete liquidation) at the end 
of that taxable year, this paragraph (b)(12)(v)(B) will apply to the old 
corporation's taxable year immediately preceding the beginning of the 
taxable year during which the first condition is first met.
    (C) The third condition is that, at the end of the taxable year 
during which the first condition is first met, the new corporation does 
not undergo a disproportionate asset acquisition under paragraph 
(b)(12)(viii) of this section.
    (D) The fourth condition is that, if there is more than one old 
corporation, the first two conditions apply to all of the corporations. 
Thus, the second condition (tax character) must be met by all of the old 
corporations transferring assets taken into account in meeting the test 
in paragraph (b)(12)(v)(A) of this section.
    (vi) Old group remaining in existence. If the common parent of a 
group (or a new common parent) became the common parent in a transaction 
described in Sec.  1.1502-75 (d)(2) or (d)(3) where a group remained in 
existence, then paragraph (b)(12) (ii) through (iv) of this section 
apply by treating that common parent as if it were also the previous 
common parent of the group that remains in existence. If this paragraph 
(b)(12)(vi) applies to a transaction, the tacking rule in paragraph 
(b)(12)(v) of this section does not apply to the transaction.
    (vii) Change in tax character. A corporation must not experience 
during the base period a change in tax character (as defined in 
paragraph (b)(12)(v)(B) of this section) if the change is attributable 
to an acquisition of assets from outside the group in transactions not 
conducted in the ordinary course of its trade or business. However, if a 
new corporation relies on the tacking rules in paragraph (b)(12)(v) of 
this section, this paragraph (b)(12)(vii) shall apply during the base 
period and the current consolidated return year even if the change in 
tax character is attributable to an asset acquisition from within the 
group.
    (viii) Disproportionate asset acquisition. To be eligible, a 
corporation must not undergo during the base period disproportionate 
asset acquisitions which are attributable to an acquisition (or a series 
of acquisitions) of assets from outside the group in transactions not 
conducted in the ordinary course of its trade or business (special 
acquisition). Whether special acquisitions are disproportionate is 
determined at the end of each base period. Whether an acquisition 
results in a disproportionate asset acquisition depends on all of the 
facts and circumstances including the following factors and rules:
    (A) One factor is the portion of the insurance reserves (that is, 
total reserves in section 816(c), as modified by

[[Page 833]]

section 816(h)) of the acquiring company at the end of the base period 
which is attributable to special acquisitions.
    (B) A second factor is the portion of the fair market value of the 
assets (without reduction for liabilities) of the acquiring company at 
the end of the base period that is attributable to special acquisitions.
    (C) A third factor is the portion of the premiums generated during 
the last taxable year of the base period which are attributable to 
special acquisitions.
    (D) A corporation will not experience a disproportionate asset 
acquisition unless 75 percent of one factor (whether or not listed in 
this paragraph (b)(12)(viii)) is attributable to special acquisitions.
    (E) Money or other property contributed to a corporation by a 
shareholder that is not a member of the group (without section 
1504(b)(2)) is not a special acquisition.
    (F) If a new corporation relies on the tacking rules in paragraph 
(b)(12)(v) of this section, this paragraph (b)(12)(viii) applies to that 
corporation during a consolidated return year. Thus, if at any time 
during a consolidated return year, a new corporation undergoes a 
disproportionate asset acquisition, the corporation becomes ineligible 
at that time.
    (13) Ineligible corporation. A corporation that is not an eligible 
corporation is ineligible. If a life company is ineligible, it is not 
treated under section 1504(c)(2) as an includible corporation. Losses of 
a nonlife member arising in years when it is ineligible may not be used 
under section 1503(c)(2) and paragraph (g) of this section to set off 
the income of a life member. If a life company is ineligible and is the 
common parent of the group (without regard to section 1504(b)(2)), the 
election under section 1504(c)(2) may not be made.
    (14) Examples The following examples illustrate this paragraph (b). 
In each example, L indicates a life company, another letter indicates a 
nonlife company, and each corporation uses the calendar year as its 
taxable year.
    (i) Example 1. P has owned all of the stock of S since 2012. On 
January 1, 2018, P purchased all of the stock of L1 which 
owns all of the stock of L2 and S2. L1 
and L2 are treated as members for purposes of determining if 
they are eligible for 2020. However, for 2020, L1, 
L2, and S2 are ineligible because none of them has 
been a member of the group for P's five taxable years preceding 2020. 
For 2020, L1 and L2 may elect to file a 
consolidated return because they constitute an affiliated group under 
section 1504(c)(1), and P and S may file a consolidated return. 
S2 must file its own separate return for 2020.
    (ii) Example 2. Since 2012, L1 has been a life company owning all 
the stock of L2. In 2018, L1 transfers assets to S1, a new nonlife 
insurance company subject to taxation under section 831(a). For 2020, 
only L1 and L2 are eligible corporations. The tacking rule in paragraph 
(b)(12)(v) of this section does not apply in 2020 because the old 
corporation (L1) and the new corporation (S1) do not have the same tax 
character.
    (iii) Example 3. Since 2012, L has owned all the stock of 
L1 which has owned all the stock of S1, a nonlife 
insurance company. L1 writes some accident and health 
insurance business. In 2018, L1 transfers this business, and 
S1 transfers some of its business, to a new nonlife insurance 
company, S2., in a transaction described in section 351 (a). 
The property transferred to S2. by L1 had a fair 
market value of $50 million. The property transferred by S1 
had a fair market value of $40 million. S2. is ineligible for 
2020 because the tacking rule in paragraph (b)(12)(v) of this section 
does not apply. The old corporations (L1 and S1) 
and the new corporation (S2.) do not all have the same tax 
character. See subparagraph (b)(12)(v)(B) and (E) of this section. The 
result would be the same if L1 transferred other property 
(for example, stock and securities) with the same value, rather than 
accident and health insurance contracts, to S2.
    (iv) Example 4. Since 2012, P has owned all the stock of S and 
L1. L1 is a large life company engaged in active 
business since 2012. On January 1, 2020, L1 transfers in a 
section 351 (a) transaction assets (not acquired from outside the group) 
to a new life company, L2. For 2020, L2 is 
eligible because

[[Page 834]]

under paragraph (b)(12)(v) of this section, L2 is considered 
to have been in existence and a member of the group engaged in the 
active business since 2012 which is the period L1, the old 
corporation, was in existence and a member of the group so engaged.
    (v) Example 5. The facts are the same as in example (4). Assume that 
the fair market value of the assets L1 transferred to 
L2 was $10 million on January 1, 2020 and that L2 
acquired no other assets prior to June 30, 2021. Assume further that on 
January 1, 2021, L1 acquires (other than in the ordinary 
course of its trade or business) assets having a fair market value of 
$40 million from L3, an unrelated life company. On June 30, 
2021, L1 transfers those assets to L2. 
L2 becomes ineligible on June 30, 2021. Since by fair market 
values, 80 percent (in other words, 40/50) of L2's assets are 
attributable to special acquisitions, L2 has undergone a 
disproportionate asset acquisition at that time. See paragraph 
(b)(12)(viii)(B), (D), and (F) of this section.
    (vi) Example 6. The facts are the same as in example (5) except that 
L1 transfers assets (other than life insurance contracts) 
having a fair market value of $40 million to L2 and 
L2 purchases the assets of L3 on June 30, 2021. 
the result of the 2021 acquisition is the same as in example (5).
    (vii) Example 7. The facts are the same as in example (5) except the 
acquired assets acquired by L2 in 2021 from L1 
have a fair market value of $20 million. In 2021, L2 had $1 
million of premiums on its pre-existing contracts but premiums generated 
by the acquired business for the entire year would have been $2 million. 
L2 is eligible in 2021 because it did not experience a 
disproportionate asset acquisition on June 30, 2021.
    (viii) Example 8. Since 2012, L, a State A corporation, has owned 
all of the stock of L1 and S1. On January 1, 2020, 
L merges into L3, a smaller State B corporation, which owns 
the stock of S2. The transaction is a reverse acquisition 
described in Sec.  1.1502-75(d)(3) and the group of which L was the 
common parent remains in existence. Under paragraph (b)(12)(vi) of this 
section, L3 is eligible for 2020. However, S2 is 
ineligible in 2020 under paragraph (b)(12)(iv) of this section.
    (ix) Example 9. The facts are the same as in example (8) except that 
L acquires the stock of L3. L3 and S2 
are both ineligible for 2020. On January 1, 2021, the fair market value 
of L3's assets are $5 million (without liabilities) and on 
that date L transfers assets (not acquired from outside the group) 
having a fair market value of $95 million (without liabilities) to 
L3. L and L3 are life companies at the end of 
2021. L3 is eligible in 2021 under the tacking rule in 
paragraph (b)(12)(v) of this section. S2 is ineligible in 
that year. The result would be the same if L3 was not a life 
company prior to January 1, 2021. See paragraph (b)(12)(v)(B) of this 
section.
    (x) Example 10. Since 2012, X, a foreign corporation, has owned all 
the stock of S2 and S1, and S1 has 
owned all of the stock of L1. On January 1, 2020, X 
incorporates a new U.S. company P, and transfers the stock of 
S1 and S2 to P. Assume that under Sec.  1.1502-
75(d)(3) (relating to reverse acquisitions), the S1-
L1 affiliated group remains in existence. Under paragraph 
(b)(12)(vi) of this section, P, S1, and L1 are 
eligible but S2 is ineligible. The result would be the same 
if X were an individual.
    (xi) Example 11. The facts are the same as in Example (10) except 
that X owns all of the stock of S1, L1, and 
S2. In addition, on January 1, 2020, X transfers the stock of 
S1 and S2 to L1. L1 is 
eligible in 2020 under paragraph (b)(12)(iv) of this section. 
L1 would still be eligible even if it owned a subsidiary 
during the base period but sold the subsidiary prior to January 1, 2020. 
S1 and S2 are ineligible in 2020.
    (xii) Example 12. Since 2012, S1 has owned all of the 
stock of L1. S2, an unrelated company, has owned 
all of the stock of L2 and S3 for 10 years. 
S1 and S2 are active nonlife insurance companies 
and not holding companies. On January 1, 2020, S1 and 
S2 merge into a new nonlife insurance company, S, in a 
transaction described in Sec.  1.1502-75(d)(3) so that the group of 
which S1 was the common parent remains in existence. S and 
L1 are eligible in 2020 under paragraph (b)(12)(vi) of this 
section. L2 and S3 are ineligible.
    (xiii) Example 13. The facts are the same as in Example (12) except 
that S2

[[Page 835]]

(the first corporation in Sec.  1.1502-75(d)(3)) acquires the stock of 
S1 in exchange for the stock of S2. The result is 
that only S2, S1, and L1 are eligible 
in 2020.
    (c) Election--(1) In general. The election under section 1504(c)(2) 
may not be made if the group's common parent is an ineligible life 
company. The election under section 1504(c)(2) may only be made by the 
common parent of the group (as defined in section 1504(c)(2) without the 
exclusions in section 1504(b)(2)). For example, assume that P owns all 
of the stock of L1, an eligible life company, which owns the 
stock of S1. Assume further that P also owns the stock of 
L2, an ineligible life member, which (for more than five 
years) has owned the stock of a nonlife company, S2. Only P 
may make the election and, if it does so, P, L1, and 
S1 may file a consolidated return under this section. 
L2 may not make the election under section 1504(c)(2) and may 
not file a consolidated return with S2.
    (2) How election is made--(i) General rule. The election under 
section 1504(c)(2) is generally made by the group's common parent in the 
same manner (and it has the same effect) as the election to file a 
consolidated return is made under Sec.  1.1502-75 (a) and (b) for a 
group which did not file a consolidated return for the immediately 
preceding taxable year. The procedure for making the election under 
section 1504(c)(2) is the same whether or not a consolidated return was 
filed by the life members or the nonlife members for the immediately 
preceding taxable year.
    (ii) Special rule. Notwithstanding the general rule, however, if the 
nonlife members in the group filed a consolidated return for the 
immediately preceding taxable year and had executed and filed a Form 
1122 that is effective for the preceding year, then such members will be 
treated as if they filed a Form 1122 when they join in the filing of a 
consolidated return under section 1504(c)(2) and they will be deemed to 
consent to the regulations under this section. However, an affiliation 
schedule (Form 851) must be filed by the group and the life members must 
execute a Form 1122 in the manner prescribed in Sec.  1.1502-75(h)(2).
    (3) Irrevocability. Except as provided in Sec.  1.1502-75(c), the 
election under section 1504(c)(2) is irrevocable.
    (4) Cross reference. If an election is made under section 
1504(c)(2), see Sec.  1.1502-75 (e) and (f) for rules that apply for not 
including (or including) a member or a nonmember in the consolidated 
return.
    (d) Effect of election. If the common parent makes the election 
under section 1504(c)(2), the following rules apply:
    (1) Termination of group. A mere election under section 1504(c)(2) 
will not cause the creation of a new group or the termination of an 
affiliated group that files a consolidated return in the immediately 
preceding taxable year.
    (2) Effect of eligibility. If a life member is eligible after an 
election under section 1504(c)(2), it may not be included as a member of 
an affiliated group as defined in section 1504(c)(1).
    (3) Eligible and ineligible life companies. If any life company was 
a member of an affiliated group of life companies (as defined in section 
1504(c)(1)) but is ineligible for a taxable year for which the election 
under section 1504(c)(2) is effective, that year is not a separate 
return year merely by reason of the election under section 1504(c)(2) in 
applying Sec. Sec.  1.1502-13 and 1.1502-19 to transactions occurring in 
prior consolidated return years of that affiliated group. In addition, 
if more than one ineligible life member of the group (as defined in 
section 1504(c)(1)) joined in the filing of a consolidated return in the 
taxable year immediately preceding the year for which the election under 
section 1504(c)(2) is effective and, solely as a result of the election, 
one of the ineligible life members becomes the common parent of such a 
group (section 1504(c)(1)), the group must continue to file a 
consolidated return. For example, assume that L1 owns all of 
the stock of S1 and all of the stock of L2. 
L2 owns the stock of L3. L1, 
L2, and L3 are life companies and S1 is 
a nonlife company. Assume further that in 2019, L1, 
L2, and L3 file a consolidated return but 
L1 makes the election under section 1504(c)(2) for 2020 and 
L2 and L3 are ineligible. L2 and 
L3 must continue to

[[Page 836]]

file a consolidated return in 2020. Moreover, L2 could elect 
in 2020 to file a consolidated return (section 1504(c)(1)) with 
L3 even if they did not file a consolidated return in 2019 
with L1.
    (4) Inclusion of life company. If a life company is ineligible in 
the consolidated return year for which the election is effective, it 
will be treated as an includible corporation for the common parent's 
first taxable year in which the company becomes eligible.
    (5) Dividends received deduction--(i) Dividends received by an 
includible insurance company. Dividends received by an includible member 
insurance company, taxed under either section 801 or section 831, from 
another includible member of the group are treated for Federal income 
tax purposes as if the group did not file a consolidated return. See 
sections 818(e)(2) and 805(a)(4) for rules regarding a member taxed 
under section 801, and see sections 832(g) and 832(b)(5)(B) through (E) 
for rules regarding a member taxed under section 831.
    (ii) Other dividends. Dividends received from a life company member 
of the group that are not subject to paragraph (d)(5)(i) of this section 
are not included in gross income of the distributee member. See section 
1504(c)(2)(B)(i). If the distributee corporation is a nonlife insurance 
company subject to tax under section 831, the rules of section 
832(b)(5)(B) through (E) apply.
    (6) Controlled group. Sections 1563 (a)(4), (b)(2)(D), and (b)(3)(C) 
(insofar as it applies to corporations described in section 
1563(b)(2)(D)) do not apply to any eligible or ineligible life company 
that is a member of the group for a taxable year during which the 
election is effective.
    (7) Consolidated tax. The tax liability of a group for a 
consolidated return year (before application of credits against that 
tax) is computed on a consolidated basis by adding together the 
following taxes:
    (i) The tax imposed under section 11 on consolidated taxable income 
(as determined under paragraph (e) of this section). The taxes imposed 
under sections 801(a) and 831(a) will each be treated as a tax imposed 
under section 11.
    (ii) Any taxes described in Sec.  1.1502-2 (other than in Sec.  
1.1502-2(a)(1), (a)(6), and (a)(7)).
    (e) Consolidated taxable income. The consolidated taxable income is 
the sum of the following two amounts:
    (1) Nonlife consolidated taxable income. The nonlife consolidated 
taxable income (as defined in paragraph (f) of this section) of the 
nonlife subgroup, as set off by the life subgroup losses as provided in 
paragraph (j) of this section. The amount in this paragraph (e)(1) may 
not be less than zero.
    (2) Consolidated LICTI. The consolidated LICTI (as defined in 
paragraph (g)(1) of this section) of the life subgroup, as set off by 
the nonlife subgroup losses as provided in paragraph (h) of this 
section. The amount in this paragraph (e)(2) may not be less than zero.
    (f) Nonlife consolidated taxable income--(1) In general. Nonlife 
consolidated taxable income is the consolidated taxable income of the 
nonlife subgroup, computed under Sec.  1.1502-11 as modified by this 
paragraph (f). For this purpose, separate taxable income of a member 
includes insurance company taxable income (as defined in section 832).
    (2) Nonlife consolidated net operating loss deduction--(i) In 
general. In applying Sec.  1.1502-21, the rules in this paragraph (f)(2) 
apply in determining for the nonlife subgroup the nonlife net operating 
loss and the portion of the nonlife net operating loss carryovers and 
carrybacks to the taxable year.
    (ii) Nonlife CNOL. The nonlife consolidated net operating loss is 
determined under Sec.  1.1502-21(e) by treating the nonlife subgroup as 
the group.
    (iii) Carrybacks. The portion of the nonlife consolidated net 
operating loss for the nonlife subgroup described in paragraph 
(f)(2)(vi) of this section, if any, that is eligible to be carried back 
to prior taxable years under Sec.  1.1502-21 is carried back to the 
appropriate years (whether consolidated or separate) before the nonlife 
consolidated net operating loss may be used as a nonlife subgroup loss 
under paragraphs (e)(2) and (h) of this section to set off consolidated 
LICTI in the year the loss arose. The election under section 172(b)(3) 
to relinquish the entire carryback period

[[Page 837]]

for the net operating loss of the nonlife subgroup may be made by the 
agent for the group within the meaning of Sec.  1.1502-77.
    (iv) Subgroup rule. In determining the portion of the nonlife 
consolidated net operating loss that is absorbed when the loss is 
carried back to a consolidated return year, Sec.  1.1502-21 is applied 
by treating the nonlife subgroup as the group. Therefore, the absorption 
is determined without taking into account any life subgroup losses that 
were previously reported on a consolidated return as setting off nonlife 
consolidated taxable income for the year to which the nonlife subgroup 
loss is carried back.
    (v) Carryover. The portion of the nonlife consolidated net operating 
loss that is not absorbed in a prior year as a carryback, or as a 
nonlife subgroup loss that set off consolidated LICTI for the year the 
loss arose, constitutes a nonlife carryover under this paragraph (f)(2) 
to reduce nonlife consolidated taxable income before that portion may 
constitute a nonlife subgroup loss that sets off consolidated LICTI for 
a particular year. For limitations on the use of nonlife carryovers to 
offset nonlife consolidated taxable income or consolidated LICTI, see 
Sec.  1.1502-21.
    (vi) Portion of nonlife consolidated net operating loss that is 
carried back to prior taxable years. The portion of the nonlife 
consolidated net operating loss that (absent an election to waive 
carrybacks) is carried back to the two preceding taxable years is the 
sum of the nonlife subgroup's farming loss (within the meaning of 
section 172(b)(1)(B)(ii)) and the amount of the subgroup's net operating 
loss that is attributable to nonlife insurance companies (as determined 
under Sec.  1.1502-21). For rules governing the absorption of net 
operating loss carrybacks, including limitations on the amount of net 
operating loss carrybacks that may be absorbed in prior taxable years, 
see Sec.  1.1502-21(b).
    (vii) Example. P, a holding company that is not an insurance 
company, owns all of the stock of S, a nonlife insurance company, and 
L1, a life insurance company. L1 owns all of the stock of L2, a life 
insurance company. Both L1 and L2 satisfy the eligibility requirements 
of Sec.  1.1502-47(b)(12). Each corporation uses the calendar year as 
its taxable year, and no corporation has incurred farming losses (within 
the meaning of section 172(b)(1)(B)(ii)). For 2021, the group first 
files a consolidated return for which the election under section 
1504(c)(2) is effective. P and S filed consolidated returns for 2019 and 
2020. In 2021, the P-S group sustains a nonlife consolidated net 
operating loss that is attributable entirely to S (see Sec.  1.1502-
21(b)). The election in 2021 under section 1504(c)(2) does not result 
under paragraph (d)(1) of this section in the creation of a new group or 
the termination of the P-S group. The loss is carried back to the 
consolidated return years 2019 and 2020 of P and S. Pursuant to Sec.  
1.1502-21(b), the loss may be used to offset S's income in 2019 and 2020 
without limitation, and the loss may be used to offset P's income in 
those years, subject to the limitation in section 172(a) (see Sec.  
1.1502-21(b)). The portion of the loss not absorbed in 2019 and 2020 may 
serve as a nonlife subgroup loss in 2021 that may set off the 
consolidated LICTI of L1 and L2 under paragraphs (e)(2) and (h) of this 
section.
    (3) Nonlife consolidated capital gain net income or loss--(i) In 
general. In applying Sec.  1.1502-22, the rules in this paragraph (f)(3) 
apply in determining for the nonlife subgroup the nonlife consolidated 
capital gain net income or loss and the portion of the nonlife net 
capital loss carryovers and carrybacks to the taxable year. In 
particular, the nonlife consolidated capital gain net income and nonlife 
consolidated net capital loss are determined under the principles of 
Sec.  1.1502-22 by treating the nonlife subgroup as the group.
    (ii) Additional principles. In applying Sec.  1.1502-22 to nonlife 
consolidated net capital loss carryovers and carrybacks, the principles 
set forth in paragraph (f)(2)(iii) through (v) of this section for 
applying Sec.  1.1502-21 to nonlife consolidated net operating loss 
carryovers and carrybacks also apply, without regard to the limitation 
in paragraph (f)(2)(vi) of this section.
    (iii) Special rules. The nonlife consolidated net capital loss is 
reduced, for purposes of determining the carryovers

[[Page 838]]

and carrybacks under Sec.  1.1502-22(b) by the lesser of:
    (A) The aggregate of the additional capital loss deductions allowed 
under section 832(c)(5), or
    (B) The nonlife consolidated taxable income computed without capital 
gains and losses.
    (g) Consolidated LICTI--(1) General rule. Consolidated LICTI is the 
consolidated taxable income of the life subgroup, computed under Sec.  
1.1502-11 as modified by this paragraph (g).
    (2) Life consolidated net operating loss deduction--(i) In general. 
In applying Sec.  1.1502-21, the rules in this paragraph (g)(2) apply in 
determining for the life subgroup the life net operating loss and the 
portion of the life net operating loss carryovers and carrybacks to the 
taxable year.
    (ii) Life CNOL. The life consolidated net operating loss is 
determined under Sec.  1.1502-21(e) by treating the life subgroup as the 
group.
    (iii) Carrybacks--(A) General rule. The portion of the life 
consolidated net operating loss for the life subgroup, if any, that is 
eligible to be carried back under Sec.  1.1502-21 is carried back to the 
appropriate years (whether consolidated or separate) before the life 
consolidated net operating loss may be used as a life subgroup loss 
under paragraphs (e)(1) and (j) of this section to set off nonlife 
consolidated taxable income in the year the loss arose. The election 
under section 172(b)(3) to relinquish the entire carryback period for 
the consolidated net operating loss of the life subgroup may be made by 
the agent for the group within the meaning of Sec.  1.1502-77.
    (B) Special rule for life consolidated net operating losses arising 
in 2018, 2019, or 2020. If a life consolidated net operating loss 
arising in a taxable year beginning after December 31, 2017, and before 
January 1, 2021, is carried back to a life insurance company taxable 
year beginning before January 1, 2018, then such life consolidated net 
operating loss is treated as an operations loss carryback (within the 
meaning of section 810, as in effect prior to its repeal) of such 
company to such taxable year.
    (iv) Subgroup rule. In determining the portion of the life 
consolidated net operating loss that is absorbed when the loss is 
carried back to a consolidated return year, Sec.  1.1502-21 is applied 
by treating the life subgroup as the group. Therefore, the absorption is 
determined without taking into account any nonlife subgroup losses that 
were previously reported on a consolidated return as setting off life 
consolidated taxable income for the year to which the life subgroup loss 
is carried back.
    (v) Carryovers. The portion of the life consolidated net operating 
loss that is not absorbed in a prior year as a carryback, or as a life 
subgroup loss that set off nonlife consolidated taxable income for the 
year the loss arose, constitutes a life carryover under this paragraph 
(g)(2) to reduce consolidated LICTI before that portion may constitute a 
life subgroup loss that sets off nonlife consolidated taxable income for 
that particular year. For limitations on the use of life carryovers to 
offset nonlife consolidated taxable income or consolidated LICTI, see 
Sec.  1.1502-21(b).
    (3) Life consolidated capital gain net income or loss--(i) 
[Reserved].
    (ii) Life consolidated net capital loss carryovers and carrybacks. 
The life consolidated net capital loss carryovers and carrybacks for the 
life subgroup are determined by applying the principles of Sec.  1.1502-
22 as modified by the following rules in this paragraph (g)(3)(ii):
    (A) Life consolidated net capital loss is first carried back (or 
apportioned to the life members for separate return years) to be 
absorbed by life consolidated capital gain net income without regard to 
any nonlife subgroup capital losses and before the life consolidated net 
capital loss may serve as a life subgroup capital loss that sets off 
nonlife consolidated capital gain net income in the year the life 
consolidated net capital loss arose.
    (B) If a life consolidated net capital loss is not carried back or 
is not a life subgroup loss that sets off nonlife consolidated capital 
gain net income in the year the life consolidated net capital loss 
arose, then it is carried over to the particular year under this 
paragraph (g)(3)(ii) first against life consolidated capital gain net 
income before it may serve as a life subgroup

[[Page 839]]

capital loss that sets off nonlife consolidated capital gain net income 
in that particular year.
    (h) Consolidated LICTI setoff by nonlife subgroup losses--(1) In 
general. The nonlife subgroup losses consist of the nonlife consolidated 
net operating loss and the nonlife consolidated net capital loss. Under 
paragraph (e)(2) of this section, consolidated LICTI is set off by the 
amounts of these two consolidated losses specified in paragraph (h)(2) 
of this section. The setoff is subject to the rules and limitations in 
paragraph (h)(3) of this section.
    (2) Amount of setoff--(i) Current year. Consolidated LICTI for the 
current taxable year is set off by the portion of the nonlife 
consolidated net operating loss and nonlife consolidated net capital 
loss arising in that year that cannot be carried back under paragraph 
(f) of this section to prior taxable years (whether consolidated or 
separate return years) of the nonlife subgroup.
    (ii) Carryovers. The portion of the offsettable nonlife consolidated 
net operating loss or nonlife consolidated net capital loss that has not 
been used as a nonlife subgroup loss setoff against consolidated LICTI 
in the year it arose may be carried over to succeeding taxable years 
under the principles of Sec.  1.1502-21 (relating to net operating loss 
deduction) or Sec.  1.1502-22 (as appropriate) (relating to net capital 
loss carryovers). However, in any particular succeeding year, the losses 
will be used under paragraph (f) of this section in computing nonlife 
consolidated taxable income before being used in that year as a nonlife 
subgroup loss that sets off consolidated LICTI. Additionally, the amount 
of consolidated LICTI that may be offset by nonlife consolidated net 
operating loss carryovers may be subject to limitation (see section 172 
and Sec.  1.1502-21).
    (3) Nonlife subgroup loss rules and limitations. The nonlife 
subgroup losses are subject to the following operating rules and 
limitations:
    (i) Separate return years. The carryovers in paragraph (h)(2)(ii) of 
this section may include net operating losses and net capital losses of 
the nonlife members arising in separate return years, that may be 
carried over to a succeeding year under the principles (including 
limitations) of Sec. Sec.  1.1502-21 and 1.1502-22. But see subdivision 
(ix) of this paragraph (h)(3).
    (ii) Capital loss. Nonlife consolidated net capital loss sets off 
consolidated LICTI only to the extent of life consolidated capital gain 
net income (as determined under paragraph (g)(4) of this section) and 
this setoff applies before any nonlife consolidated net operating loss 
sets off consolidated LICTI.
    (iii) Capital gain. Life consolidated capital gain net income is 
zero in any taxable year in which the life subgroup has a life 
consolidated net operating loss and, in any taxable year, it may not 
exceed consolidated LICTI.
    (iv) Ordering rule. Consolidated LICTI for a consolidated return 
year is set off by nonlife subgroup losses for that year before being 
set off (under paragraph (h)(2)(ii) of this section) by a carryover of a 
nonlife subgroup loss to that year. The amount of consolidated LICTI 
that may be offset by nonlife consolidated net operating loss carryovers 
may be subject to limitation (see section 172 and Sec.  1.1502-21).
    (v) Setoff at bottom line. The setoff of nonlife subgroup losses 
against consolidated LICTI does not affect life member deductions that 
depend in whole or in part on taxable income. Thus, the setoff does not 
affect the amount of consolidated LICTI for any for any taxable year but 
it merely constitutes an adjustment in arriving at the group's 
consolidated taxable income under paragraph (e) of this section.
    (vi) Ineligible nonlife member. (A) The offsetable nonlife 
consolidated net operating loss that arises in any consolidated return 
year (that may be set off against consolidated LICTI in the current 
taxable year or in a succeeding taxable year) is the amount computed 
under paragraph (f)(2)(ii) of this section reduced by the ineligible 
NOL. For purposes of this paragraph (h)(3), the ``ineligible NOL'' is in 
the year the loss arose the amount of the separate net operating loss 
(determined under Sec. Sec.  1.1502-21(b) of any nonlife member that is 
ineligible in that year (and not the portion of the nonlife consolidated 
net operating loss attributable under Sec. Sec.  1.1502-21(b) to such a 
member).

[[Page 840]]

    (B) The carryovers of offsetable nonlife net operating losses under 
paragraph (h)(2)(ii) of this section do not include an ineligible NOL 
arising in a consolidated return year or a loss attributable to an 
ineligible member arising in a separate return year. See section 
1503(c)(2). (C) For absorption within the nonlife subgroup of an 
ineligible NOL arising in a consolidated return year or a loss of an 
ineligible member arising in a separate return year which is not a 
separate return limitation year under paragraph (h)(3)(ix) of this 
section, see paragraph (h)(3)(vii) of this section.
    (vii) Absorption of ineligible NOL. (A) If all or a portion of a 
nonlife member's ineligible NOL (determined under paragraph 
(h)(3)(vi)(A) of this section) may be carried back or carried over under 
paragraph (f)(2) of this section to a particular consolidated return 
year of the nonlife subgroup (absorption year), then notwithstanding 
Sec.  1.1502-21(b), the amount carried to the absorption year will be 
absorbed by that member's contribution (to the extent thereof) to 
nonlife consolidated taxable income for that year, subject to the 
limitation in section 172(a).
    (B) For purposes of paragraph (h)(3)(vii)(A) of this section, a 
member's contribution to nonlife consolidated taxable income for an 
absorption year is the amount of such income (computed without the 
portion of the nonlife consolidated net operating loss deduction 
attributable to taxable years subsequent to the year the loss arose), 
minus such consolidated taxable income recomputed by excluding both that 
member's items of income and deductions for the absorption year. The 
deductions of the member include the prior application of this paragraph 
(h)(3)(vii) to the absorption of the nonlife consolidated net operating 
loss deduction for losses arising in taxable years prior to the 
particular loss year.
    (viii) Election to relinquish carryback. The offsetable nonlife 
consolidated net operating loss does not include the amount that could 
be carried back under paragraph (f)(2) of this section but for the 
election by the agent for the group (within the meaning of Sec.  1.1502-
77) under section 172(b)(3) to relinquish the carryback. See section 
1503(c)(1).
    (ix) Separate return limitation year. The offsetable nonlife 
consolidated net operating and capital loss carryovers do not include 
any losses attributable to a nonlife member that were sustained (A) in a 
separate return limitation year (determined without section 1504(b)(2)) 
of that member (or a predecessor), or (B) in a separate return year, in 
which an election was in effect under neither section 1504(c)(2) nor 
section 243(b)(3).
    (x) Percentage limitation. The offsetable nonlife consolidated net 
operating losses that may be set off against consolidated LICTI in a 
particular year may not exceed a percentage limitation. This limitation 
is the applicable percentage in section 1503(c)(1) of the lesser of two 
amounts.

The first amount is the sum of the offsetable nonlife consolidated net 
operating losses under paragraph (h)(2) of this section that may serve 
in the particular year (determined without this limitation) as a setoff 
against consolidated LICTI. The second amount is consolidated LICTI (as 
defined in paragraph (j) of this section) in the particular year reduced 
by any nonlife consolidated net capital loss that sets off consolidated 
LICTI in that year.
    (xi) Further limitation. Any offsetable nonlife consolidated net 
operating loss remaining after applying the percentage limitation that 
is carried over to a succeeding taxable year may not be set off against 
the consolidated LICTI attributable to a life member that was not an 
eligible life member in the year the loss arose. See section 1503(c)(2).
    (xii) Restoration rule. The carryback of a life consolidated net 
operating loss or life consolidated net capital loss under paragraph (g) 
of this section that reduces consolidated LICTI (or life consolidated 
capital gain net income) for a prior year may reduce the amount of 
nonlife subgroup losses that would offset consolidated LICTI in that 
prior year. Thus, that amount may be carried over under paragraph (f)(2) 
or (3) of this section from that prior year in determining nonlife 
consolidated taxable income in a succeeding year or serve as offsetable 
nonlife subgroup losses in a succeeding year.

[[Page 841]]

    (4) Examples. The following examples illustrate the principles of 
this paragraph (f). In the examples, L indicates a life company, S is a 
nonlife insurance company, another letter indicates a nonlife company 
that is not an insurance company, no company has farming losses (within 
the meaning of section 172(b)(1)(B)(ii)), and each corporation uses the 
calendar year as its taxable year.
    (i) Example 1. P owns all of the stock of L and S. S owns all of the 
stock of I, a nonlife member that is an ineligible corporation for 2021 
under paragraph (b)(13) of this section. For 2021, the group elects 
under section 1504(c)(2) to file a consolidated return. For 2021, assume 
that any nonlife consolidated net operating loss may not be carried back 
to a prior taxable year. Other facts are summarized in the following 
table.

------------------------------------------------------------------------
                                                                Separate
                                                                taxable
                                                                 income
                                                                 (loss)
------------------------------------------------------------------------
P............................................................      $100
S............................................................      (100)
I............................................................      (100)
                                                              ----------
    Nonlife consolidated net operating loss..................      (100)
------------------------------------------------------------------------

    Under paragraph (h)(3)(vi) of this section, P's separate income is 
considered to absorb the loss of S, an eligible member, first and the 
offsetable nonlife consolidated net operating loss is zero, that is, the 
consolidated net operating loss ($100) reduced by I's loss ($100). The 
consolidated net operating loss ($100) may be carried over, but since it 
is entirely attributable to I (an ineligible member that is not a 
nonlife insurance company) its use is subject to the restrictions in 
paragraph (h)(3)(vi) of this section and section 172(a). The result 
would be the same if the group contained two additional members, 
S1, an eligible member, and I1, an ineligible 
member, where S1 had a loss of ($100) and I1 had 
income of $100.
    (ii) Example 2. (A) The facts are the same as in paragraph (f)(4)(i) 
of this section, except that, for 2021, S's separate net operating loss 
is $200. Assume further that L's consolidated LICTI is $200. Under 
paragraph (f)(3)(vi) of this section, the offsettable nonlife 
consolidated net operating loss is $100 (the nonlife consolidated net 
operating loss computed under paragraph (f)(2)(ii) of this section 
($200), reduced by the separate net operating loss of I ($100)). The 
offsettable nonlife consolidated net operating loss that may be set off 
against consolidated LICTI in 2021 is $35 (35 percent of the lesser of 
the offsettable $100 or consolidated LICTI of $200). See section 
1503(c)(1) and paragraph (f)(3)(x) of this section. S carries over a 
loss of $65, and I carries over a loss of $100, to 2022 under paragraph 
(f)(2) of this section to be used against nonlife consolidated taxable 
income (consolidated net operating loss ($200) less amount used in 2021 
($35)). Under paragraph (f)(2)(ii) of this section, the offsettable 
nonlife consolidated net operating loss that may be carried to 2022 is 
$65 ($100 minus $35). The facts and results are summarized in the 
following table.

                                       Table 1 to Paragraph  (h)(4)(ii)(A)
                                                [Dollars omitted]
----------------------------------------------------------------------------------------------------------------
                                                       Facts        Offsettable        Limit        Unused Loss
                                                             (a)             (b)             (c)             (d)
----------------------------------------------------------------------------------------------------------------
1. P............................................             100  ..............
2. S............................................           (200)           (100)  ..............            (65)
3. I............................................           (100)  ..............  ..............           (100)
4. Nonlife Subgroup.............................           (200)           (100)           (100)           (165)
5. L............................................             200  ..............             200
6. 35% of lower of line 4(c) or 5(c)............  ..............  ..............              35
7. Unused offsettable loss......................  ..............  ..............  ..............            (65)
----------------------------------------------------------------------------------------------------------------

    (B) Accordingly, under paragraph (e) of this section, consolidated 
taxable income is $165 (line 5(a) minus line 6(c)).
    (iii) Example 3. The facts are the same as in paragraph (f)(4)(ii) 
of this section, with the following additions for 2022.

[[Page 842]]

The nonlife subgroup has nonlife consolidated taxable income of $50 (all 
of which is attributable to I) before the nonlife consolidated net 
operating loss deduction under paragraph (f)(2) of this section. 
Consolidated LICTI is $100. Under paragraph (f)(2) of this section, $50 
of the nonlife consolidated net operating loss carryover ($165) is used 
in 2022 and, under paragraph (f)(3)(vi) and (vii) of this section, the 
portion used in 2022 is attributable to I, the ineligible nonlife 
member. Accordingly, the offsettable nonlife consolidated net operating 
loss from 2021 under paragraph (f)(3)(ii) of this section is $65, the 
unused loss from 2021. The offsettable nonlife consolidated net 
operating loss in 2022 is $22.75 (35 percent of the lesser of the 
offsettable loss of $65 or consolidated LICTI of $100). Accordingly, 
under paragraph (e) of this section, consolidated taxable income is 
$77.25 (consolidated LICTI of $100 minus the offsettable loss of 
$22.75).
    (iv) Example 4. P owns all of the stock of S and L. For 2021, all 
corporations are eligible corporations, and the group elects under 
section 1504(c)(2) to file a consolidated return, the nonlife 
consolidated net operating loss is $100, and the nonlife consolidated 
net capital loss is $50. Assume that the losses may not be carried back 
and the capital losses are not attributable to built-in deductions under 
paragraph (h)(3)(ix) of this section. Other facts and the results are 
set forth in the following table:

------------------------------------------------------------------------
                                                             P-S     L
------------------------------------------------------------------------
1. Nonlife consolidated net operating loss...............  ($100)  .....
2. Nonlife consolidated capital loss.....................    (50)  .....
3. Consolidated LICTI....................................  ......   $100
4. Life consolidated capital gain net income included in   ......     50
 line 3..................................................
                                                          ==============
5. Offsetable:
  (a) 35% of lower of line (1) or line (3)-(4)...........  (17.5)  .....
  (b) Line 2.............................................    (50)  .....
                                                          --------------
  (c) Total..............................................  (67.5)  .....
6. Unused losses available to be carried over:
  (a) From line 1 (line 1 minus line 5 (a))..............  (82.5)  .....
  (b) From line 2 (line 2 minus line 5 (b))..............      0   .....
------------------------------------------------------------------------


Accordingly, under paragraph (e) of this section consolidated taxable 
income is $32.5, that is, line 3 minus line 5(c).

    (i) [Reserved]
    (j) Nonlife consolidated taxable income set off by life subgroup 
losses--(1) In general. The life subgroup losses consist of the life 
consolidated net operating loss and consolidated operations loss 
carryovers and the life consolidated net capital loss. Under paragraph 
(e)(1) of this section, nonlife consolidated taxable income is set off 
by the amounts of these two consolidated losses specified in paragraph 
(j)(2) of this section, subject to the rules and limitations in 
paragraph (j)(3) of this section.
    (2) Amount of setoff. The portion of the life consolidated net 
operating loss and consolidated operations loss carryovers or life 
consolidated net capital loss that may be set off against nonlife 
consolidated taxable income (determined under paragraph (f) of this 
section) is determined by applying the rules prescribed in paragraphs 
(h)(2) and (3) of this section in the following manner:
    (i) Substitute the term ``life'' for ``nonlife'', and vice versa.
    (ii) Substitute the term ``nonlife consolidated taxable income'' for 
``consolidated LICTI'', and vice versa.
    (iii) Substitute the term ``life consolidated net operating loss and 
consolidated operations loss carryovers'' for ``nonlife consolidated net 
operating loss'', and ``paragraph (g)'' for ``paragraph (f)''.
    (iv) Paragraphs (h)(3)(vi), (vii), (x), and (xi) of this section do 
not apply to a life consolidated net operating loss and consolidated 
operations loss carryovers.
    (v) The setoff of life subgroup losses against nonlife consolidated 
taxable income does not affect nonlife member deductions that depend in 
whole or in part on taxable income.
    (3) Examples. The following examples illustrate the principles of 
this paragraph (j). In the examples, L indicates a life company, S is a 
nonlife insurance company, another letter indicates a nonlife company 
that is not an insurance company, no company has farming losses (within 
the meaning of section 172(b)(1)(B)(ii)), and each corporation uses the 
calendar year as its taxable year.

[[Page 843]]

    (i) Example 1. P, S, L1 and L2 constitute a group that elects under 
section 1504(c)(2) to file a consolidated return for 2021. In 2021, the 
nonlife subgroup consolidated taxable income is $100 and there is $20 of 
nonlife consolidated net capital loss that cannot be carried back under 
paragraph (f) of this section to taxable years (whether consolidated or 
separate) preceding 2021. The nonlife subgroup has no carryover from 
years prior to 2021. The life consolidated net operating loss is $150, 
which under paragraph (g) of this section includes life consolidated 
capital gain net income of $25. Since life consolidated capital gain net 
income is zero for 2021 (see paragraph (h)(3)(iii) of this section), the 
nonlife capital loss offset is zero (see paragraph (h)(3)(ii) of this 
section). However, $100 of life consolidated net operating loss sets off 
the $100 nonlife consolidated taxable income in 2021. The life subgroup 
carries under paragraph (g)(2) of this section to 2022 $50 of the life 
consolidated net operating loss ($150 minus $100). The $50 carryover 
will be used in 2022 (subject to the limitation in section 172(a)) 
against life subgroup income before it may be used in 2022 to setoff 
nonlife consolidated taxable income.
    (ii) Example 2. The facts are the same as in paragraph (j)(3)(i) of 
this section, except that, for 2021, the nonlife consolidated taxable 
income is $150 (this amount is entirely attributable to S and includes 
nonlife consolidated capital gain net income of $50), consolidated LICTI 
is $200, and a life consolidated net capital loss is $50. The $50 life 
consolidated net capital loss sets off the $50 nonlife consolidated 
capital gain net income. Consolidated taxable income under paragraph (e) 
of this section is $300 (nonlife consolidated taxable income ($150) 
minus the setoff of the life consolidated net capital loss ($50), plus 
consolidated LICTI ($200)).
    (iii) Example 3. The facts are the same as in paragraph (j)(3)(ii) 
of this section, except that, for 2022, the nonlife consolidated net 
operating loss is $150. This entire amount is attributable to S; thus, 
it is eligible to be carried back to 2021 against nonlife consolidated 
taxable income under paragraph (f)(2) of this section and Sec.  1.1502-
21(b). If P, the agent for the group within the meaning of Sec.  1.1502-
77, does not elect to relinquish the carryback under section 172(b)(3), 
the entire $150 will be carried back, reducing 2021 nonlife consolidated 
taxable income to zero and nonlife consolidated capital gain net income 
to zero. Under paragraph (h)(3)(xii) of this section, the setoff in 2021 
of the nonlife consolidated capital gain net income ($50) by the life 
consolidated net capital loss ($50) is restored. Accordingly, the 2021 
life consolidated net capital loss may be carried over by the life 
subgroup to 2022. Under paragraph (e) of this section, after the 
carryback, consolidated taxable income for 2021 is $200 (nonlife 
consolidated taxable income ($0) plus consolidated LICTI ($200)).
    (iv) Example 4. The facts are the same as in paragraph (j)(3)(iii) 
of this section, except that P elects under section 172(b)(3) to 
relinquish the carryback of $150 arising in 2022. The setoff in Example 
2 is not restored. However, the offsettable nonlife consolidated net 
operating loss for 2022 (or that may be carried over from 2022) is zero. 
See paragraph (h)(3)(viii) of this section. Nevertheless, the $150 
nonlife consolidated net operating loss may be carried over to be used 
by the nonlife group.
    (v) Example 5. P owns all of the stock of S1 and of L1. On January 
1, 2017, L1 purchases all of the stock of L2. For 2021, the group elects 
under section 1504(c)(2) to file a consolidated return. For 2021, L1 is 
an eligible corporation under paragraph (b)(12) of this section but L2 
is ineligible. Thus, L1 but not L2 is a member for 2021. For 2021, L2 
sustains a net operating loss, which cannot be carried back (see section 
172(b)). For 2021, L2 is treated under paragraph (d)(6) of this section 
as a member of a controlled group of corporations under section 1563 
with P, S, and L1. For 2022, L2 is eligible and is included on the 
group's consolidated return. L2's net operating loss for 2021 that may 
be carried to 2022 is not treated under paragraph (b)(11) of this 
section as having been sustained in a separate return limitation year 
for purposes of computing consolidated LICTI of the L1-L2 life subgroup 
for 2022. Furthermore, the portion of L2's net operating loss not used 
under paragraph (g)(2) of this section against life subgroup income in

[[Page 844]]

2022 may be included in offsettable life consolidated net operating loss 
under paragraph (j)(2) and (h)(3)(i) of this section that reduces in 
2022 nonlife consolidated taxable income (subject to the limitation in 
section 172(a)) because L2's loss in 2021 was not sustained in a 
separate return limitation year under paragraph (j)(2) and (h)(3)(ix)(A) 
of this section or in a separate return year (2021) when an election was 
in effect under neither section 1504(c)(2) nor section 243(b)(3).
    (k) Preemption. The rules in this section preempt any inconsistent 
rules in other sections (Sec. Sec.  1.1502-0 through 1.1502-100) of the 
consolidated return regulations. For example, the rules in paragraph 
(h)(3)(vi) apply notwithstanding Sec.  1.1502-21.
    (l) Other consolidation principles. The fact that this section 
treats the life and nonlife members as separate groups in computing, 
respectively, consolidated LICTI (or life consolidated net operating 
loss) and nonlife consolidated taxable income (or loss) does not affect 
the usual rules in Sec. Sec.  1.1502-0 through 1.1502-100 unless this 
section provides otherwise. Thus, the usual rules in Sec.  1.1502-13 
(relating to intercompany transactions) apply to both the life and 
nonlife members by treating them as members of one affiliated group.
    (m) Filing requirements--(1) In general. To file a consolidated 
income tax return for a life-nonlife consolidated group, the common 
parent shall--
    (i) File the applicable consolidated corporate income tax return: a 
Form 1120-L, ``U.S. Life Insurance Company Income Tax Return,'' where 
the common parent is a life insurance company; a Form 1120-PC, ``U.S. 
Property and Casualty Insurance Company Income Tax Return,'' where the 
common parent is an insurance company, other than a life insurance 
company; or a Form 1120, ``U.S. Corporation Income Tax Return,'' where 
the common parent is any other type of corporation;
    (ii) Indicate clearly on the face of this return that such corporate 
tax return is a life-nonlife return;
    (iii) Show any set offs required by paragraphs (e), (h), and (j) of 
this section;
    (iv) Report separately the nonlife consolidated taxable income or 
loss, determined under paragraph (f) of this section, on a Form 1120 or 
1120-PC (whether filed by the common parent or as an attachment to the 
consolidated return), as the case may be, of all nonlife members of the 
consolidated group; and
    (v) Report separately the consolidated Life Insurance Company 
Taxable Income or life consolidated net operating loss, on a Form 1120-L 
(whether filed by the common parent or as an attachment to the 
consolidated return), of all life members of the consolidated group.
    (2) Cross reference. See Sec.  1.1502-75(j), regarding the inclusion 
in a corporate tax return of the required statements and schedules for 
subsidiaries.
    (n) Effective/applicability dates. The rules of this section apply 
to taxable years beginning after December 31, 2020. However, a taxpayer 
may choose to apply the rules of this section to taxable years beginning 
on or before December 31, 2020. If a taxpayer makes the choice described 
in the previous sentence, the taxpayer must apply those rules in their 
entirety and consistently with the provisions of subchapter L of the 
Internal Revenue Code applicable to the years at issue.

(Secs. 1502 and 7805 of the Internal Revenue Code of 1954 (68A Stat. 
637, 917; 26 U.S.C. 1502, 7805))

[T.D. 7877, 48 FR 11441, Mar. 18, 1983]

    Editorial Notes: 1. For Federal Register citations affecting Sec.  
1.1502-47, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.fdsys.gov.

    2. By T.D. 9927, 85 FR 67988, Oct. 27, 2020, Sec.  1.1502-47 was 
amended; however, a portion of the amendment could not be incorporated 
due to inaccurate amendatory instruction.



Sec.  1.1502-50  Consolidated section 250.

    (a) In general--(1) Scope. This section provides rules for applying 
section 250 and Sec. Sec.  1.250-1 through 1.250(b)-6 (the section 250 
regulations) to a member of a consolidated group (member). Paragraph (b) 
of this section provides rules for the determination of the amount of 
the deduction allowed to a member under section 250(a)(1). Paragraph (c) 
of this section provides rules governing the

[[Page 845]]

impact of intercompany transactions on the determination of a member's 
qualified business asset investment (QBAI) and the effect of 
intercompany transactions on the determination of a member's foreign-
derived deduction eligible income (FDDEI). Paragraph (d) of this section 
provides rules governing basis adjustments to member stock resulting 
from the application of paragraph (b)(1) of this section. Paragraph (e) 
of this section provides definitions. Paragraph (f) of this section 
provides examples illustrating the rules of this section. Paragraph (g) 
of this section provides an applicability date.
    (2) Overview. The rules of this section ensure that the aggregate 
amount of deductions allowed under section 250 to members appropriately 
reflects the income, expenses, gains, losses, and property of all 
members. Paragraph (b) of this section allocates the consolidated 
group's overall deduction amount under section 250 to each member on the 
basis of its contribution to the consolidated foreign-derived deduction 
eligible income (consolidated FDDEI) and consolidated global intangible 
low-taxed income (consolidated GILTI). The definitions in paragraph (e) 
of this section provide for the aggregation of the deduction eligible 
income (DEI), FDDEI, deemed tangible income return, and global 
intangible low-taxed income (GILTI) of all members in order to calculate 
the consolidated group's overall deduction amount under section 250.
    (b) Allowance of deduction--(1) In general. A member is allowed a 
deduction for a consolidated return year under section 250. See Sec.  
1.250(a)-1(b). The amount of the deduction is equal to the sum of--
    (i) The product of the consolidated FDII deduction amount and the 
member's FDII deduction allocation ratio; and
    (ii) The product of the consolidated GILTI deduction amount and the 
member's GILTI deduction allocation ratio.
    (2) Consolidated taxable income limitation. For purposes of applying 
the limitation described in Sec.  1.250(a)-1(b)(2) to the determination 
of the consolidated FDII deduction amount and the consolidated GILTI 
deduction amount of a consolidated group for a consolidated return 
year--
    (i) The consolidated foreign-derived intangible income (consolidated 
FDII) (if any) is reduced (but not below zero) by an amount which bears 
the same ratio to the consolidated section 250(a)(2) amount that such 
consolidated FDII bears to the sum of the consolidated FDII and the 
consolidated GILTI; and
    (ii) The consolidated GILTI (if any) is reduced (but not below zero) 
by the excess of the consolidated section 250(a)(2) amount over the 
reduction described in paragraph (b)(2)(i) of this section.
    (c) Impact of intercompany transactions--(1) Impact on qualified 
business asset investment determination--(i) In general. For purposes of 
determining a member's QBAI, the basis of specified tangible property 
does not include an amount equal to any gain or loss recognized with 
respect to such property by another member in an intercompany 
transaction (as defined in Sec.  1.1502-13(b)(1)) until the time that 
such gain or loss is no longer deferred under Sec.  1.1502-13. Thus, for 
example, if a selling member owns specified tangible property with an 
adjusted basis (within the meaning of section 1011) of $60x and an 
adjusted basis (for purposes of calculating QBAI) of $80x, and sells it 
for $50x to the purchasing member (and the intercompany loss remains 
deferred), the basis of such property for purposes of computing the 
purchasing member's QBAI is $80x.
    (ii) Partner-specific QBAI basis. A member's partner-specific QBAI 
basis (as defined in Sec.  1.250(b)-2(g)(7)) includes a basis adjustment 
under section 743(b) resulting from an intercompany transaction only at 
the time, and to the extent, gain or loss, if any, is recognized in the 
transaction and no longer deferred under Sec.  1.1502-13.
    (2) Impact on foreign-derived deduction eligible income 
characterization. For purposes of redetermining attributes of members 
from an intercompany transaction as FDDEI, see Sec.  1.1502-13(c)(1)(i) 
and (c)(7)(ii)(R) (Example 18).
    (d) Adjustments to the basis of a member. For adjustments to the 
basis of a member related to paragraph (b)(1) of this section, see Sec.  
1.1502-32(b)(3)(ii)(B).

[[Page 846]]

    (e) Definitions. The following definitions apply for purposes of 
this section.
    (1) Consolidated deduction eligible income (consolidated DEI). With 
respect to a consolidated group for a consolidated return year, the term 
consolidated deduction eligible income or consolidated DEI means the 
greater of the sum of the DEI (whether positive or negative) of all 
members or zero.
    (2) Consolidated deemed intangible income. With respect to a 
consolidated group for a consolidated return year, the term consolidated 
deemed intangible income means the excess (if any) of the consolidated 
DEI, over the consolidated deemed tangible income return.
    (3) Consolidated deemed tangible income return. With respect to a 
consolidated group for a consolidated return year, the term consolidated 
deemed tangible income return means the sum of the deemed tangible 
income return of all members.
    (4) Consolidated FDII deduction amount. With respect to a 
consolidated group for a consolidated return year, the term consolidated 
FDII deduction amount means the product of the FDII deduction rate and 
the consolidated FDII, as adjusted by paragraph (b)(2) of this section.
    (5) Consolidated foreign-derived deduction eligible income 
(consolidated FDDEI). With respect to a consolidated group for a 
consolidated return year, the term consolidated foreign-derived 
deduction eligible income or consolidated FDDEI means the greater of the 
sum of the FDDEI (whether positive or negative) of all members or zero.
    (6) Consolidated foreign-derived intangible income (consolidated 
FDII). With respect to a consolidated group for a consolidated return 
year, the term consolidated foreign-derived intangible income or 
consolidated FDII means the product of the consolidated deemed 
intangible income and the consolidated foreign-derived ratio.
    (7) Consolidated foreign-derived ratio. With respect to a 
consolidated group for a consolidated return year, the term consolidated 
foreign-derived ratio means the ratio (not to exceed one) of--
    (i) The consolidated FDDEI; to
    (ii) The consolidated DEI.
    (8) Consolidated GILTI deduction amount. With respect to a 
consolidated group for a consolidated return year, the term consolidated 
GILTI deduction amount means the product of the GILTI deduction rate and 
the sum of the consolidated GILTI, as adjusted by paragraph (b)(2) of 
this section, and the amounts treated as dividends received by the 
members under section 78 which are attributable to their GILTI for the 
consolidated return year.
    (9) Consolidated global intangible low-taxed income (consolidated 
GILTI). With respect to a consolidated group for a consolidated return 
year, the term consolidated global intangible low-taxed income or 
consolidated GILTI means the sum of the GILTI of all members.
    (10) Consolidated section 250(a)(2) amount. With respect to a 
consolidated group for a consolidated return year, the term consolidated 
section 250(a)(2) amount means the excess (if any) of the sum of the 
consolidated FDII and the consolidated GILTI (determined without regard 
to section 250(a)(2) and paragraph (b)(2) of this section), over the 
consolidated taxable income of the consolidated group (within the 
meaning of Sec.  1.1502-11).
    (11) Deduction eligible income (DEI). With respect to a member for a 
consolidated return year, the term deduction eligible income or DEI 
means the member's gross DEI for the year (within the meaning of Sec.  
1.250(b)-1(c)(15)) reduced (including below zero) by the deductions 
properly allocable to gross DEI for the year (as determined under Sec.  
1.250(b)-1(d)(2)).
    (12) Deemed tangible income return. With respect to a member for a 
consolidated return year, the term deemed tangible income return means 
an amount equal to 10 percent of the member's QBAI, as adjusted by 
paragraph (c)(1) of this section.
    (13) FDII deduction allocation ratio. With respect to a member for a 
consolidated return year, the term FDII deduction allocation ratio means 
the ratio of--
    (i) The member's positive FDDEI (if any); to
    (ii) The sum of the positive FDDEI of all members.
    (14) FDII deduction rate. The term FDII deduction rate means 37.5 
percent

[[Page 847]]

for consolidated return years beginning before January 1, 2026, and 
21.875 percent for consolidated return years beginning after December 
31, 2025.
    (15) Foreign-derived deduction eligible income (FDDEI). With respect 
to a member for a consolidated return year, the term foreign-derived 
deduction eligible income or FDDEI means the member's gross FDDEI for 
the year (within the meaning of Sec.  1.250(b)-1(c)(16)) reduced 
(including below zero) by the deductions properly allocable to gross 
FDDEI for the year (as determined under Sec.  1.250(b)-1(d)(2)).
    (16) GILTI deduction allocation ratio. With respect to a member for 
a consolidated return year, the term GILTI deduction allocation ratio 
means the ratio of--
    (i) The sum of the member's GILTI and the amount treated as a 
dividend received by the member under section 78 which is attributable 
to its GILTI for the consolidated return year; to
    (ii) The sum of consolidated GILTI and the amounts treated as 
dividends received by the members under section 78 which are 
attributable to their GILTI for the consolidated return year.
    (17) GILTI deduction rate. The term GILTI deduction rate means 50 
percent for consolidated return years beginning before January 1, 2026, 
and 37.5 percent for consolidated return years beginning after December 
31, 2025.
    (18) Global intangible low-taxed income (GILTI). With respect to a 
member for a consolidated return year, the term global intangible low-
taxed income or GILTI means the sum of the member's GILTI inclusion 
amount under Sec.  1.1502-51(b) and the member's distributive share of 
any domestic partnership's GILTI inclusion amount under Sec.  1.951A-
5(b)(2).
    (19) Qualified business asset investment (QBAI). The term qualified 
business asset investment or QBAI has the meaning provided in Sec.  
1.250(b)-2(b).
    (20) Specified tangible property. The term specified tangible 
property has the meaning provided in Sec.  1.250(b)-2(c)(1).
    (f) Examples. The following examples illustrate the rules of this 
section.
    (1) Example 1: Calculation of deduction attributable to FDII--(i) 
Facts. P is the common parent of the P group and owns all of the only 
class of stock of subsidiaries USS1 and USS2. The consolidated return 
year of all persons is the calendar year. In 2018, P has DEI of $400x, 
FDDEI of $0, and QBAI of $0; USS1 has DEI of $200x, FDDEI of $200x, and 
QBAI of $600x; and USS2 has DEI of -$100x, FDDEI of $100x, and QBAI of 
$400x. The P group has consolidated taxable income that is sufficient to 
make inapplicable the limitation in paragraph (b)(2) of this section. No 
member of the P group has GILTI.
    (ii) Analysis--(A) Consolidated DEI. Under paragraph (e)(1) of this 
section, the P group's consolidated DEI is $500x, the greater of the sum 
of the DEI (whether positive or negative) of all members ($400x + $200x-
$100x) or zero.
    (B) Consolidated FDDEI. Under paragraph (e)(5) of this section, the 
P group's consolidated FDDEI is $300x, the greater of the sum of the 
FDDEI (whether positive or negative) of all members ($0 + $200x + $100x) 
or zero.
    (C) Consolidated deemed tangible income return. Under paragraph 
(e)(12) of this section, a member's deemed tangible income return is 10 
percent of its QBAI. Therefore, P's deemed tangible income return is $0 
(0.10 x $0), USS1's deemed tangible income return is $60x (0.10 x 
$600x), and USS2's deemed tangible income return is $40x (0.10 x $400x). 
Under paragraph (e)(3) of this section, the P group's consolidated 
deemed tangible income return is $100x, the sum of the deemed tangible 
income return of all members ($0 + $60x + $40x).
    (D) Consolidated deemed intangible income. Under paragraph (e)(2) of 
this section, the P group's consolidated deemed intangible income is 
$400x, the excess of its consolidated DEI over its consolidated deemed 
tangible income return ($500x -$100x).
    (E) Consolidated FDII. Under paragraph (e)(7) of this section, the P 
group's consolidated foreign-derived ratio is 0.60, the ratio of its 
consolidated FDDEI to its consolidated DEI ($300x/$500x). Under 
paragraph (e)(6) of this section, the P group's consolidated FDII is 
$240x, the product of its consolidated deemed intangible income and its 
consolidated foreign-derived ratio ($400x x 0.60).
    (F) Consolidated FDII deduction amount. Under paragraph (e)(4) of 
this section, the P group's consolidated

[[Page 848]]

FDII deduction amount is $90x, the product of the FDII deduction rate 
and the consolidated FDII (0.375 x $240x).
    (G) Member's deduction attributable to consolidated FDII deduction 
amount. Under paragraph (b)(1) of this section, a member is allowed a 
deduction equal, in part, to the product of the consolidated FDII 
deduction amount of the consolidated group to which the member belongs 
and the member's FDII deduction allocation ratio. Under paragraph 
(e)(13) of this section, a member's FDII deduction allocation ratio is 
the ratio of its positive FDDEI to the sum of each member's positive 
FDDEI for such consolidated return year. As a result, the FDII deduction 
allocation ratios of P, USS1, and USS2 are 0 ($0/$300x), \2/3\ ($200x/
$300x), and \1/3\ ($100x/$300x), respectively. Therefore, P, USS1, and 
USS2 are permitted deductions under paragraph (b)(1) of this section in 
the amount of $0 (0 x $90x), $60x (\2/3\ x $90x), and $30x (\1/3\ x 
$90x), respectively.
    (2) Example 2: Limitation on consolidated foreign-derived deduction 
eligible income--(i) Facts. The facts are the same as in paragraph 
(f)(1)(i) of this section (the facts in Example 1), except that P's 
FDDEI is $300x.
    (ii) Analysis--(A) Consolidated DEI and consolidated deemed tangible 
income return. As in paragraphs (f)(1)(ii)(A) and (C) of this section 
(the analysis in Example 1), the P group's consolidated DEI is $500x and 
the P group's consolidated deemed tangible income return is $100x.
    (B) Consolidated FDDEI. Under paragraph (e)(5) of this section, the 
P group's consolidated FDDEI is $600x, the greater of the sum of the 
FDDEI (whether positive or negative) of all members ($300x + $200x + 
$100x) or zero.
    (C) Consolidated deemed intangible income and consolidated FDII. 
Under paragraph (e)(2) of this section, the P group's consolidated 
deemed intangible income is $400x ($500x - $100x). Under paragraph 
(e)(7) of this section, the P group's consolidated foreign-derived ratio 
is 1.00 ($600x/$500x, but not in excess of one). Under paragraph (e)(6) 
of this section, the P group's consolidated FDII is $400x ($400x x 
1.00).
    (D) Consolidated FDII deduction amount and member's deduction 
attributable to consolidated FDII deduction amount. Under paragraph 
(e)(4) of this section, the P group's consolidated FDII deduction amount 
is $150x (0.375 x $400x). Under paragraph (e)(13) of this section, the 
FDII deduction allocation ratios of P, USS1, and USS2 are \1/2\ ($300/
$600x), \1/3\ ($200x/$600x), and \1/6\ ($100x/$600x), respectively. 
Therefore, P, USS1, and USS2 are permitted deductions under paragraph 
(b)(1) of this section in the amounts of $75x (\1/2\ x $150x), $50x (\1/
3\ x $150x), and $25x (\1/6\ x $150x), respectively.
    (3) Example 3: Member with negative FDDEI--(i) Facts. The facts are 
the same as in paragraph (f)(1)(i) of this section (the facts in Example 
1), except that P's FDDEI is -$100x.
    (ii) Analysis--(A) Consolidated DEI and consolidated deemed tangible 
income return. As in paragraphs (f)(1)(ii)(A) and (C) of this section 
(the facts in Example 1), the P group's consolidated DEI is $500x and 
the P group's consolidated deemed tangible income return is $100x.
    (B) Consolidated FDDEI. Under paragraph (e)(5) of this section, the 
P group's consolidated FDDEI is $200x, the greater of the sum of the 
FDDEI (whether positive or negative) of all members (-$100x + $200x + 
$100x) or zero.
    (C) Consolidated deemed intangible income and consolidated FDII. 
Under paragraphs (e)(2) and (6) of this section, the P group's 
consolidated deemed intangible income is $400x ($500x -$100x), and the P 
group's consolidated FDII is $160x ($400x x ($200x/$500x)).
    (D) Consolidated FDII deduction amount and member's deduction 
attributable to consolidated FDII deduction amount. Under paragraph 
(e)(4) of this section, the P group's consolidated FDII deduction amount 
is $60x (0.375 x $160x). Under paragraph (e)(13) of this section, the 
FDII deduction allocation ratios of P, USS1, and USS2 are 0 ($0/$300x), 
\2/3\ ($200x/$300x), and \1/3\ ($100x/$300x), respectively. Therefore, 
P, USS1, and USS2 are permitted deductions under paragraph (b)(1) of 
this section in the amounts of $0 (0 x $60x), $40x (\2/3\ x $60x), and 
$20x (\1/3\ x $60x), respectively.
    (4) Example 4: Calculation of deduction attributable to GILTI--(i) 
Facts. The facts are the same as in paragraph

[[Page 849]]

(f)(1)(i) of this section (the facts in Example 1), except that USS1 
owns CFC1 and USS2 owns CFC2. USS1 and USS2 have GILTI of $65x and $20x, 
respectively, and amounts treated as dividends received under section 78 
attributable to their GILTI of $10x and $5x, respectively.
    (ii) Analysis--(A) Consolidated GILTI. Under paragraph (e)(9) of 
this section, the P group's consolidated GILTI is $85x, the sum of the 
GILTI of all members ($0 + $65x + $20x).
    (B) Consolidated GILTI deduction amount. Under paragraph (e)(8) of 
this section, the P group's consolidated GILTI deduction amount is $50x, 
the product of the GILTI deduction rate and the sum of its consolidated 
GILTI and the amounts treated as dividends received by the members under 
section 78 which are attributable to their GILTI for the consolidated 
return year (0.50 x ($85x + $10x + $5x)).
    (C) Member's deduction attributable to consolidated GILTI deduction 
amount. Under paragraph (b)(1) of this section, a member is allowed a 
deduction equal, in part, to the product of the consolidated GILTI 
deduction amount of the consolidated group to which the member belongs 
and the member's GILTI deduction allocation ratio. Under paragraph 
(e)(16) of this section, a member's GILTI deduction allocation ratio is 
the ratio of the sum of its GILTI and the amount treated as a dividend 
received by the member under section 78 which is attributable to its 
GILTI for the consolidated return year to the sum of the consolidated 
GILTI and the amounts treated as dividends received by the members under 
section 78 which are attributable to their GILTI for the consolidated 
return year. As a result, the GILTI deduction allocation ratios of P, 
USS1, and USS2 are 0 ($0/($85x + $10x + $5x)), \3/4\ (($65x + $10x)/
($85x + $10x + $5x)), and \1/4\ (($20x + $5x)/($85x + $10x + $5x)), 
respectively. Therefore, P, USS1, and USS2 are permitted deductions of 
$0 (0 x $50x), $37.50x (\3/4\ x $50x), and $12.50x (\1/4\ x $50x), 
respectively.
    (D) Member's deduction under section 250. Under paragraph (b)(1) of 
this section, a member is allowed a deduction equal to the sum of the 
member's deduction attributable to the consolidated FDII deduction 
amount and the member's deduction attributable to the consolidated GILTI 
deduction amount. As a result P, USS1, and USS2 are entitled to 
deductions under paragraph (b)(1) of this section of $0 ($0 + $0), 
$97.50x ($60x + $37.50x), and $42.50x ($30x + $12.50x), respectively.
    (5) Example 5: Taxable income limitation--(i) Facts. The facts are 
the same as in paragraph (f)(4)(i) of this section (the facts in Example 
4), except that the P group's consolidated taxable income (within the 
meaning of paragraph (e)(10) of this section) is $300x.
    (ii) Analysis--(A) Determination of whether the limitation described 
in paragraph (b)(2) of this section applies. Under paragraph (b)(2) of 
this section, in the case of a consolidated group with a consolidated 
section 250(a)(2) amount for a consolidated year, the amount of the 
consolidated FDII and the consolidated GILTI otherwise taken into 
account in the determination of the consolidated FDII deduction amount 
and the consolidated GILTI deduction amount are subject to reduction. As 
in paragraph (f)(1)(ii)(E) of this section (the facts in Example 1), the 
P group's consolidated FDII is $240x. As in paragraph (f)(4)(ii)(A) of 
this section (the analysis in Example 4), the P group's consolidated 
GILTI is $85x. The P group's consolidated taxable income is $300x. Under 
paragraph (e)(10) of this section, the P group's consolidated section 
250(a)(2) amount is $25x (($240x + $85x) - $300x), the excess of the sum 
of the consolidated FDII and the consolidated GILTI, over the P group's 
consolidated taxable income. Therefore, the limitation described in 
paragraph (b)(2) of this section applies.
    (B) Allocation of reduction. Under paragraph (b)(2)(i) of this 
section, the P group's consolidated FDII is reduced by an amount which 
bears the same ratio to the consolidated section 250(a)(2) amount as the 
consolidated FDII bears to the sum of the consolidated FDII and 
consolidated GILTI, and the P group's consolidated GILTI is reduced by 
the excess of the consolidated section 250(a)(2) amount over the 
reduction described in paragraph (b)(2)(i) of this section. Therefore, 
for purposes of determining the P group's consolidated FDII deduction 
amount and consolidated GILTI deduction amount, its

[[Page 850]]

consolidated FDII is reduced to $221.54x ($240x -($25x x ($240x/$325x))) 
and its consolidated GILTI is reduced to $78.46x ($85x -($25x -($25x x 
($240x/$325x)))).
    (C) Calculation of consolidated FDII deduction amount and 
consolidated GILTI deduction amount. Under paragraph (e)(4) of this 
section, the P group's consolidated FDII deduction amount is $83.08x 
($221.54x x 0.375). Under paragraph (e)(8) of this section, the P 
group's consolidated GILTI deduction amount is $46.73x (($78.46x + 10x + 
5x) x 0.50).
    (D) Member's deduction attributable to the consolidated FDII 
deduction amount. As in paragraph (f)(1)(ii)(G) of this section (the 
analysis in Example 1), the FDII deduction allocation ratios of P, USS1, 
and USS2 are 0, \2/3\, and \1/3\, respectively. Therefore, P, USS1, and 
USS2 are permitted deductions attributable to the consolidated FDII 
deduction amount of $0 (0 x $83.08x), $55.39x (\2/3\ x $83.08x), and 
$27.69x (\1/3\ x $83.08x), respectively.
    (E) Member's deduction attributable to the consolidated GILTI 
deduction amount. As in paragraph (f)(4)(ii)(C) of this section (the 
analysis in Example 4), the GILTI deduction allocation ratios of P, 
USS1, and USS2 are 0, \3/4\, and \1/4\, respectively. Therefore, P, 
USS1, and USS2 are permitted deductions attributable to the consolidated 
GILTI deduction amount of $0 (0 x $46.73x), $35.05x (\3/4\ x $46.73x), 
and $11.68x (\1/4\ x $46.73x), respectively.
    (F) Member's deduction pursuant section 250. Under paragraph (b)(1) 
of this section, a member is allowed a deduction equal to the sum of the 
member's deduction attributable to the consolidated FDII deduction 
amount and the member's deduction attributable to the consolidated GILTI 
deduction amount. As a result, P, USS1, and USS2 are entitled to 
deductions under paragraph (b)(1) of this section of $0 ($0 + $0), 
$90.44x ($55.39x + $35.05x), and $39.37 x ($27.69x + $11.68x), 
respectively.
    (g) Applicability date. This section applies to consolidated return 
years beginning on or after January 1, 2021. A taxpayer that chooses to 
apply the rules in Sec. Sec.  1.250(a)-1 and 1.250(b)-1 through 
1.250(b)-6 to taxable years beginning before January 1, 2021, pursuant 
to Sec.  1.250-1(b), must also apply the rules of this section in their 
entirety to consolidated return years beginning after December 31, 2017, 
and before January 1, 2021.

[T.D. 9901, 85 FR 43113, July 15, 2020]



Sec.  1.1502-51  Consolidated section 951A.

    (a) In general. This section provides rules for applying section 
951A to each member of a consolidated group (each, a member) that is a 
United States shareholder of any controlled foreign corporation. 
Paragraph (b) of this section describes the inclusion of the GILTI 
inclusion amount by a member of a consolidated group. Paragraphs (c) and 
(d) of this section are reserved. Paragraph (e) of this section provides 
definitions for purposes of this section. Paragraph (f) of this section 
provides examples illustrating the rules of this section. Paragraph (g) 
of this section provides an applicability date.
    (b) Calculation of the GILTI inclusion amount for a member of a 
consolidated group. Each member who is a United States shareholder of 
any controlled foreign corporation includes in gross income in the U.S. 
shareholder inclusion year the member's GILTI inclusion amount, if any, 
for the U.S. shareholder inclusion year. See section 951A(a) and Sec.  
1.951A-1(b). The GILTI inclusion amount of a member for a U.S. 
shareholder inclusion year is the excess (if any) of the member's net 
CFC tested income for the U.S. shareholder inclusion year, over the 
member's net deemed tangible income return for the U.S. shareholder 
inclusion year, determined using the definitions provided in paragraph 
(e) of this section. In addition, see Sec.  1.951A-1(e) (cross-
referencing Sec.  1.958-1(d)).
    (c)-(d) [Reserved]
    (e) Definitions. Any term used but not defined in this section has 
the meaning set forth in Sec. Sec.  1.951A-1 through 1.951A-6. In 
addition, the following definitions apply for purposes of this section.
    (1) Aggregate tested income. With respect to a member, the term 
aggregate tested income means the aggregate of the member's pro rata 
share (determined under Sec.  1.951A-1(d)(2)) of the tested income of 
each tested income CFC for a CFC inclusion year that ends with

[[Page 851]]

or within the U.S. shareholder inclusion year.
    (2) Aggregate tested loss. With respect to a member, the term 
aggregate tested loss means the aggregate of the member's pro rata share 
(determined under Sec.  1.951A-1(d)(4)) of the tested loss of each 
tested loss CFC for a CFC inclusion year that ends with or within the 
U.S. shareholder inclusion year.
    (3) Allocable share. The term allocable share means, with respect to 
a member that is a United States shareholder and a U.S. shareholder 
inclusion year--
    (i) With respect to consolidated QBAI, the product of the 
consolidated QBAI of the member's consolidated group and the member's 
GILTI allocation ratio.
    (ii) With respect to consolidated specified interest expense, the 
product of the consolidated specified interest expense of the member's 
consolidated group and the member's GILTI allocation ratio.
    (iii) With respect to consolidated tested loss, the product of the 
consolidated tested loss of the member's consolidated group and the 
member's GILTI allocation ratio.
    (4) Consolidated QBAI. With respect to a consolidated group, the 
term consolidated QBAI means the sum of each member's pro rata share 
(determined under Sec.  1.951A-1(d)(3)) of the qualified business asset 
investment of each tested income CFC for a CFC inclusion year that ends 
with or within the U.S. shareholder inclusion year.
    (5) Consolidated specified interest expense. With respect to a 
consolidated group, the term consolidated specified interest expense 
means the excess (if any) of--
    (i) The sum of each member's pro rata share (determined under Sec.  
1.951A-1(d)(5)) of the tested interest expense of each controlled 
foreign corporation for a CFC inclusion year that ends with or within 
the U.S. shareholder inclusion year, over
    (ii) The sum of each member's pro rata share (determined under Sec.  
1.951A-1(d)(6)) of the tested interest income of each controlled foreign 
corporation for a CFC inclusion year that ends with or within the U.S. 
shareholder inclusion year.
    (6) Consolidated tested income. With respect to a consolidated 
group, the term consolidated tested income means the sum of each 
member's aggregate tested income for the U.S. shareholder inclusion 
year.
    (7) Consolidated tested loss. With respect to a consolidated group, 
the term consolidated tested loss means the sum of each member's 
aggregate tested loss for the U.S. shareholder inclusion year.
    (8) Controlled foreign corporation. The term controlled foreign 
corporation has the meaning provided in Sec.  1.951A-1(f)(2).
    (9) Deemed tangible income return. With respect to a member, the 
term deemed tangible income return means 10 percent of the member's 
allocable share of the consolidated QBAI.
    (10) GILTI allocation ratio. With respect to a member, the term 
GILTI allocation ratio means the ratio of--
    (i) The aggregate tested income of the member for the U.S. 
shareholder inclusion year, to
    (ii) The consolidated tested income of the consolidated group of 
which the member is a member for the U.S. shareholder inclusion year.
    (11) GILTI inclusion amount. With respect to a member, the term 
GILTI inclusion amount has the meaning provided in paragraph (b) of this 
section.
    (12) Net CFC tested income. With respect to a member, the term net 
CFC tested income means the excess (if any)of--
    (i) The member's aggregate tested income, over
    (ii) The member's allocable share of the consolidated tested loss.
    (13) Net deemed tangible income return. With respect to a member, 
the term net deemed tangible income return means the excess (if any) of 
the member's deemed tangible income return over the member's allocable 
share of the consolidated specified interest expense.
    (14) through (16) [Reserved]
    (17) Qualified business asset investment. The term qualified 
business asset investment has the meaning provided in Sec.  1.951A-3(b).
    (18) Tested income. The term tested income has the meaning provided 
in Sec.  1.951A-2(b)(1).
    (19) Tested income CFC. The term tested income CFC has the meaning 
provided in Sec.  1.951A-2(b)(1).

[[Page 852]]

    (20) Tested interest expense. The term tested interest expense has 
the meaning provided in Sec.  1.951A-4(b)(1).
    (21) Tested interest income. The term tested interest income has the 
meaning provided in Sec.  1.951A-4(b)(2).
    (22) Tested loss. The term tested loss has the meaning provided in 
Sec.  1.951A-2(b)(2).
    (23) Tested loss CFC. The term tested loss CFC has the meaning 
provided in Sec.  1.951A-2(b)(2).
    (24) United States shareholder. The term United States shareholder 
has the meaning provided in Sec.  1.951A-1(f)(6).
    (25) U.S. shareholder inclusion year. The term U.S. shareholder 
inclusion year has the meaning provided in Sec.  1.951A-1(f)(7).
    (f) Examples. The following examples illustrate the rules of this 
section. For purposes of the examples in this section, unless otherwise 
stated: P is the common parent of the P consolidated group; P owns all 
of the single class of stock of subsidiaries USS1, USS2, and USS3, all 
of whom are members of the P consolidated group; CFC1, CFC2, CFC3, and 
CFC4 are all controlled foreign corporations (within the meaning of 
paragraph (e)(8) of this section); and the taxable year of all persons 
is the calendar year.
    (1) Example 1: Calculation of net CFC tested income within a 
consolidated group when all CFCs are wholly owned by a member--(i) 
Facts. USS1 owns all of the single class of stock of CFC1. USS2 owns all 
of the single class of stock of each of CFC2 and CFC3. USS3 owns all of 
the single class of stock of CFC4. In Year 1, CFC1 has tested loss of 
$100x, CFC2 has tested income of $200x, CFC3 has tested loss of $200x, 
and CFC4 has tested income of $600x. None of CFC1, CFC2, CFC3, or CFC4 
has qualified business asset investment in Year 1.
    (ii) Analysis--(A) Consolidated tested income and GILTI allocation 
ratio. USS1 has no aggregate tested income; USS2's aggregate tested 
income is $200x, its pro rata share (determined under Sec.  1.951A-
1(d)(2)) of CFC2's tested income; and USS3's aggregate tested income is 
$600x, its pro rata share (determined under Sec.  1.951A-1(d)(2)) of 
CFC4's tested income. Therefore, under paragraph (e)(6) of this section, 
the P consolidated group's consolidated tested income is $800x ($200x + 
$600x). As a result, the GILTI allocation ratios of USS1, USS2, and USS3 
are 0 ($0/$800x), 0.25 ($200x/$800x), and 0.75 ($600x/$800x), 
respectively.
    (B) Consolidated tested loss. Under paragraph (e)(7) of this 
section, the P consolidated group's consolidated tested loss is $300x 
($100x + $200x), the sum of USS1's aggregate tested loss, which is equal 
to its pro rata share (determined under Sec.  1.951A-1(d)(4)) of CFC1's 
tested loss ($100x), and USS2's aggregate tested loss, which is equal to 
its pro rata share (determined under Sec.  1.951A-1(d)(4)) of CFC3's 
tested loss ($200x). Under paragraph (e)(3)(iii) of this section, a 
member's allocable share of the consolidated tested loss is the product 
of the consolidated tested loss of the member's consolidated group and 
the member's GILTI allocation ratio. Therefore, the allocable shares of 
the consolidated tested loss of USS1, USS2, and USS3 are $0 (0 x $300x), 
$75x (0.25 x $300x), and $225x (0.75 x $300x), respectively.
    (C) Calculation of net CFC tested income. Under paragraph (e)(12) of 
this section, a member's net CFC tested income is the excess (if any) of 
the member's aggregate tested income over the member's allocable share 
of the consolidated tested loss. As a result, the net CFC tested income 
of USS1, USS2, and USS3 are $0 ($0-$0), $125x ($200x-$75x), and $375x 
($600x-$225x), respectively.
    (2) Example 2: Calculation of net CFC tested income within a 
consolidated group when ownership of a tested loss CFC is split between 
members--(i) Facts. The facts are the same as in paragraph (f)(1)(i) of 
this section (the facts in Example 1), except that USS2 and USS3 each 
own 50% of the single class of stock of CFC3.
    (ii) Analysis. As in paragraph (f)(1)(ii)(A) of this section 
(paragraph (A) of the analysis in Example 1), USS1 has no aggregate 
tested income and a GILTI allocation ratio of 0, USS2 has $200x of 
aggregate tested income and a GILTI allocation ratio of 0.25, and USS3 
has $600x of aggregate tested income and a GILTI allocation ratio of 
0.75. Additionally, the P consolidated group's consolidated tested loss 
is $300x (the aggregate of USS1's aggregate

[[Page 853]]

tested loss, which is equal to its pro rata share (determined under 
Sec.  1.951A-1(d)(4)) of CFC1's tested loss ($100x); USS2's aggregate 
tested loss, which is equal to its pro rata share (determined under 
Sec.  1.951A-1(d)(4)) of CFC3's tested loss ($100x); and USS3's 
aggregate tested loss, which is equal to its pro rata share (determined 
under Sec.  1.951A-1(d)(4)) of CFC3's tested loss ($100x)). As a result, 
under paragraph (e)(12) of this section, as in paragraph (f)(1)(ii)(C) 
of this section (paragraph (C) of the analysis in Example 1), the net 
CFC tested income of USS1, USS2, and USS3 are $0 ($0-$0), $125x ($200x-
$75x), and $375x ($600x-$225x), respectively.
    (3) Example 3: Calculation of GILTI inclusion amount--(i) Facts. The 
facts are the same as in paragraph (f)(1)(i) of this section (the facts 
in Example 1), except that CFC2 and CFC4 have qualified business asset 
investment of $500x and $2,000x, respectively, for Year 1. In Year 1, 
CFC1 and CFC4 each have tested interest expense (within the meaning of 
Sec.  1.951A-4(b)(1)) of $25x, and none of CFC1, CFC2, CFC3, and CFC4 
have tested interest income (within the meaning of Sec.  1.951A-
4(b)(2)). CFC1's tested loss of $100x and CFC4's tested income of $600x 
take into account the tested interest expense.
    (ii) Analysis--(A) GILTI allocation ratio. As in paragraph 
(f)(1)(ii)(A) of this section (paragraph (A) of the analysis in Example 
1), the GILTI allocation ratios of USS1, USS2, and USS3 are 0 ($0/
$800x), 0.25 ($200x/$800x), and 0.75 ($600x/$800x), respectively.
    (B) Consolidated QBAI. Under paragraph (e)(4) of this section, the P 
consolidated group's consolidated QBAI is $2,500x ($500x + $2,000x), the 
aggregate of USS2's pro rata share (determined under Sec.  1.951A-
1(d)(3)) of the qualified business asset investment of CFC2 and USS3's 
pro rata share (determined under Sec.  1.951A-1(d)(3)) of the qualified 
business asset investment of CFC4. Under paragraph (e)(3)(i) of this 
section, a member's allocable share of consolidated QBAI is the product 
of the consolidated QBAI of the member's consolidated group and the 
member's GILTI allocation ratio. Therefore, the allocable shares of the 
consolidated QBAI of each of USS1, USS2, and USS3 are $0 (0 x $2,500x), 
$625x (0.25 x $2,500x), and $1,875x (0.75 x $2,500x), respectively.
    (C) Consolidated specified interest expense--(1) Pro rata share of 
tested interest expense. USS1's pro rata share (determined under Sec.  
1.951A-1(d)(5)) of the tested interest expense of CFC1 is $25x, the 
amount by which the tested interest expense increases USS1's pro rata 
share of CFC1's tested loss (from $75x to $100x) for Year 1. USS3's pro 
rata share (determined under Sec.  1.951A-1(d)(5)) of the tested 
interest expense of CFC4 is also $25x, the amount by which the tested 
interest expense decreases USS3's pro rata share of CFC4's tested income 
(from $625x to $600x).
    (2) Consolidated specified interest expense. Under paragraph (e)(5) 
of this section, the P consolidated group's consolidated specified 
interest expense is $50x, the excess of the sum of each member's pro 
rata share of the tested interest expense of each controlled foreign 
corporation ($50x, $25x from USS1 + $25x from USS3), over the sum of 
each member's pro rata share of tested interest income ($0). Under 
paragraph (e)(3)(ii) of this section, a member's allocable share of 
consolidated specified interest expense is the product of the 
consolidated specified interest expense of the member's consolidated 
group and the member's GILTI allocation ratio. Therefore, the allocable 
shares of consolidated specified interest expense of USS1, USS2, and 
USS3 are $0 (0 x $50x), $12.50x (0.25 x $50x), and $37.50x (0.75 x 
$50x), respectively.
    (D) Calculation of deemed tangible income return. Under paragraph 
(e)(9) of this section, a member's deemed tangible income return means 
10 percent of the member's allocable share of the consolidated QBAI. As 
a result, the deemed tangible income returns of USS1, USS2, and USS3 are 
$0 (0.1 x $0), $62.50x (0.1 x $625x), and $187.50x (0.1 x $1,875x), 
respectively.
    (E) Calculation of net deemed tangible income return. Under 
paragraph (e)(13) of this section, a member's net deemed tangible income 
return means the excess (if any) of a member's deemed tangible income 
return over the member's allocable share of the consolidated specified 
interest expense. As a result, the net deemed tangible income returns of 
USS1, USS2, and USS3 are $0

[[Page 854]]

($0-$0), $50x ($62.50x-$12.50x), and $150x ($187.50x-$37.50x), 
respectively.
    (F) Calculation of GILTI inclusion amount. Under paragraph (b) of 
this section, a member's GILTI inclusion amount for a U.S. shareholder 
inclusion year is the excess (if any) of the member's net CFC tested 
income for the U.S. shareholder inclusion year, over the shareholder's 
net deemed tangible income return for the U.S. shareholder inclusion 
year. As described in paragraph (f)(1)(ii)(C) of this section (paragraph 
(C) of the analysis in Example 1), the net CFC tested income of USS1, 
USS2, and USS3 are $0, $125x, and $375x, respectively. As described in 
paragraph (f)(3)(ii)(E) of this section (paragraph (E) of the analysis 
in this example), the net deemed tangible income returns of USS1, USS2, 
and USS3 are $0, $50x, and $150x, respectively. As a result, under 
paragraph (b) of this section, the GILTI inclusion amounts of USS1, 
USS2, and USS3 are $0 ($0-$0), $75x ($125x-$50x), and $225x ($375x-
$150x), respectively.
    (g) Applicability date--(1) In general. Except as otherwise provided 
in this paragraph (g), this section applies to taxable years of United 
States shareholders for which the due date (without extensions) of the 
consolidated return is after June 21, 2019. However, a consolidated 
group may apply the rules of this section in their entirety to all 
taxable years of its members that are described in Sec.  1.951A-7(a). In 
such a case, the consolidated group must apply the rules of this section 
to all taxable years described in Sec.  1.951A-7(a) and with respect to 
all members.
    (2) [Reserved]

[T.D. 9866, 84 FR 29367, June 21, 2019, as amended by T.D. 9902, 85 FR 
44649, July 23, 2020; T.D. 9960, 87 FR 3656, Jan. 25, 2022]



Sec.  1.1502-55  Computation of alternative minimum tax of
consolidated groups.

    (a)-(h)(3) [Reserved]
    (h)(4) Separate return year minimum tax credit. (i)-(ii) [Reserved]
    (iii)(A) Limitation on portion of separate return year minimum tax 
credit arising in separate return limitation years. The aggregate of a 
member's minimum tax credits arising in SRLYs that are included in the 
consolidated minimum tax credits for all consolidated return years of 
the group may not exceed--
    (1) The aggregate for all consolidated return years of the member's 
contributions to the consolidated section 53(c) limitation for each 
consolidated return year; reduced by
    (2) The aggregate of the member's minimum tax credits arising and 
absorbed in all consolidated return years (whether or not absorbed by 
the member).
    (B) Computational rules--(1) Member's contribution to the 
consolidated section 53(c) limitation. Except as provided in the special 
rule of paragraph (h)(4)(iii)(B)(2) of this section, a member's 
contribution to the consolidated section 53(c) limitation for a 
consolidated return year equals the member's share of the consolidated 
net regular tax liability minus its share of consolidated tentative 
minimum tax. The group computes the member's shares by applying to the 
respective consolidated amounts the principles of section 1552 and the 
percentage method under Sec.  1.1502-33(d)(3), assuming a 100% 
allocation of any decreased tax liability. The group makes proper 
adjustments so that taxes and credits not taken into account in 
computing the limitation under section 53(c) are not taken into account 
in computing the member's share of the consolidated net regular tax, 
etc. (See, for example, the taxes described in section 26(b) that are 
disregarded in computing regular tax liability.)
    (2) Adjustment for year in which alternative minimum tax is paid. 
For a consolidated return year for which consolidated tentative minimum 
tax is greater than consolidated regular tax liability, the group 
reduces the member's share of the consolidated tentative minimum tax by 
the member's share of the consolidated alternative minimum tax for the 
year. The group determines the member's share of consolidated 
alternative minimum tax for a year using the same method it uses to 
determine the member's share of the consolidated minimum tax credits for 
the year.
    (3) Years included in computation. For purposes of computing the 
limitation under this paragraph (h)(4)(iii), the consolidated return 
years of the group

[[Page 855]]

include only those years, including the year to which a credit is 
carried, that the member has been continuously included in the group's 
consolidated return, but exclude any years after the year to which the 
credit is carried.
    (4) Subgroup principles. The SRLY subgroup principles under Sec.  
1.1502-21(c)(2) apply for purposes of this paragraph (h)(4)(iii). The 
predecessor and successor principles under Sec.  1.1502-21(f) also apply 
for purposes of this paragraph (h)(4)(iii).
    (5) Overlap with section 383. The principles under Sec.  1.1502-
21(g) apply for purposes of this paragraph (h)(4)(iii). For example, an 
overlap of this paragraph (h)(4)(iii) and the application of section 383 
with respect to a credit carryover occurs if a corporation becomes a 
member of a consolidated group (the SRLY event) within six months of the 
change date of an ownership change giving rise to a section 383 credit 
limitation with respect to that carryover (the section 383 event), with 
the result that the limitation of this paragraph (h)(4)(iii) does not 
apply. See Sec. Sec.  1.1502-21(g)(2)(ii)(A) and 1.383-1; see also Sec.  
1.1502-21(g)(4) (subgroup rules).
    (C) Effective date--(1) In general. This paragraph (h)(4)(iii) 
generally applies to consolidated return years for which the due date of 
the income tax return (without extensions) is after March 13, 1998. See 
Sec.  1.1502-3(d)(4) for an optional effective date rule (generally 
making this paragraph (h)(4)(iii) also applicable to a consolidated 
return year beginning on or after January 1, 1997, if the due date of 
the income tax return (without extensions) was on or before March 13, 
1998).
    (i) Contribution years. In general, a group does not take into 
account a consolidated taxable year for which the due date of the income 
tax return (without extensions) is on or before March 13, 1998, in 
determining a member's (or subgroup's) contributions to the consolidated 
section 53(c) limitation under this paragraph (h)(4)(iii). However, if a 
consolidated group chooses to apply the optional effective date rule, 
the consolidated group shall not take into account a consolidated 
taxable year beginning before January 1, 1997 in determining a member's 
(or subgroup's) contributions to the consolidated section 53(c) 
limitation under this paragraph (h)(4)(iii).
    (ii) Special subgroup rule. In the event that the principles of 
Sec.  1.1502-21(g)(1) do not apply to a particular credit carryover in 
the current group, then solely for purposes of applying this paragraph 
(h)(4)(iii) to determine the limitation with respect to that carryover 
and with respect to which the SRLY register (the aggregate of the 
member's or subgroup's contribution to consolidated section 53(c) 
limitation reduced by the aggregate of the member's or subgroup's 
minimum tax credits arising and absorbed in all consolidated return 
years) began in a taxable year for which the due date of the return is 
on or before May 25, 2000, the principles of Sec.  1.1502-21(c)(2) shall 
be applied without regard to the phrase ``or for a carryover that was 
subject to the overlap rule described in paragraph (g) of this section 
or Sec.  1.1502-15(g) with respect to another group (the former 
group).''
    (2) Overlap rule. Paragraph (h)(4)(iii)(B)(5) of this section 
(relating to overlap with section 383) applies to taxable years for 
which the due date (without extensions) of the consolidated return is 
after May 25, 2000. For purposes of paragraph (h)(4)(iii)(B)(5) of this 
section, only an ownership change to which section 383, as amended by 
the Tax Reform Act of 1986 (100 Stat. 2095), applies and which results 
in a section 383 credit limitation shall constitute a section 383 event. 
The optional effective date rule of Sec.  1.1502-3(d)(4) (generally 
making this paragraph (h)(4)(iii) also applicable to a consolidated 
return year beginning on or after January 1, 1997, if the due date of 
the income tax return (without extensions) was on or before March 13, 
1998) does not apply with respect to paragraph (h)(4)(iii)(B)(5) of this 
section (relating to the overlap rule).

[T.D. 8884, 65 FR 33759, May 25, 2000]



Sec.  1.1502-59A  Application of section 59A to consolidated groups.

    (a) Scope. This section provides rules for the application of 
section 59A and the regulations thereunder (the section 59A regulations) 
to consolidated groups and their members (as defined in Sec.  1.1502-
1(h) and (b), respectively). Rules in the section 59A regulations apply 
to

[[Page 856]]

consolidated groups except as modified in this section. Paragraph (b) of 
this section provides rules treating a consolidated group (rather than 
each member of the group) as a single taxpayer, and a single applicable 
taxpayer, as relevant, for certain purposes. Paragraph (c) of this 
section coordinates the application of the business interest stacking 
rule under Sec.  1.59A-3(c)(4) to consolidated groups. Paragraph (d) of 
this section addresses how the base erosion minimum tax amount is 
allocated among members of the consolidated group. Paragraph (e) of this 
section coordinates the application of this section and Sec.  1.1502-47. 
Paragraph (f) of this section sets forth definitions. Paragraph (g) of 
this section provides examples. Paragraph (h) of this section provides 
the applicability date.
    (b) Consolidated group as the applicable taxpayer--(1) In general. 
For purposes of determining whether the consolidated group is an 
applicable taxpayer (within the meaning of Sec.  1.59A-2(b)) and the 
amount of tax due pursuant to section 59A(a), all members of a 
consolidated group are treated as a single taxpayer. Thus, for example, 
members' deductions are aggregated in making the required computations 
under section 59A. In addition, to ensure that intercompany transactions 
(as defined in Sec.  1.1502-13(b)(1)(i)) do not affect the consolidated 
group's base erosion percentage or base erosion minimum tax amount, 
items resulting from intercompany transactions are not taken into 
account in making such computations under section 59A. For example, 
additional depreciation deductions resulting from intercompany asset 
sales are not taken into account for purposes of applying the base 
erosion percentage test under Sec.  1.59A-2(e).
    (2) Consolidated group as member of the aggregate group. The 
consolidated group is treated as a single member of an aggregate group 
for purposes of Sec.  1.59A-2(c).
    (3) Related party determination. For purposes of section 59A and the 
section 59A regulations, if a person is a related party with respect to 
any member of a consolidated group, that person is a related party of 
the group and of each of its members.
    (c) Coordination of section 59A(c)(3) and section 163(j) in a 
consolidated group--(1) Overview. This paragraph (c) provides rules 
regarding the application of Sec.  1.59A-3(c)(4) to a consolidated 
group's section 163(j) interest deduction. The classification rule in 
paragraph (c)(3) of this section addresses how to determine if, and to 
what extent, the group's section 163(j) interest deduction is a base 
erosion tax benefit. These regulations contain a single-entity 
classification rule with regard to the deduction of the consolidated 
group's aggregate current year business interest expense (``BIE''), but 
a separate-entity classification rule for the deduction of the 
consolidated group's disallowed BIE carryforwards. Paragraph (c)(3) of 
this section classifies the group's aggregate current year BIE 
deduction, in conformity with Sec.  1.59A-3(c)(4), as constituting 
domestic related current year BIE deduction, foreign related current 
year BIE deduction, or unrelated current year BIE deduction. The 
allocation rules in paragraph (c)(4) of this section then allocate to 
specific members of the group the domestic related current year BIE 
deduction, foreign related current year BIE deduction, and unrelated 
current year BIE deduction taken in the taxable year. Any member's 
current year BIE that is carried forward to the succeeding taxable year 
as a disallowed BIE carryforward is allocated a status as domestic 
related BIE carryforward, foreign related BIE carryforward, or unrelated 
BIE carryforward under paragraph (c)(5) of this section. The status of 
any disallowed BIE carryforward deducted by a member in a later year is 
classified on a separate-entity basis by the deducting member under 
paragraph (c)(3) of this section, based on the status allocated to the 
member's disallowed BIE carryforward under paragraph (c)(5) of this 
section. This paragraph (c) also provides rules regarding the 
consequences of the deconsolidation of a corporation that has been 
allocated a domestic related BIE carryforward status, a foreign related 
BIE carryforward status, or an unrelated BIE carryforward status; and 
the consolidation of a corporation with

[[Page 857]]

a disallowed BIE carryforward classified as from payments to a domestic 
related party, foreign related party, or unrelated party.
    (2) Absorption rule for the group's business interest expense. To 
determine the amount of the group's section 163(j) interest deduction, 
and to determine the year in which the member's business interest 
expense giving rise to the deduction was incurred or accrued, see 
Sec. Sec.  1.163(j)-4(d) and 1.163(j)-5(b)(3).
    (3) Classification of the group's section 163(j) interest 
deduction--(i) In general. Consistent with Sec.  1.59A-3(c)(4)(i) and 
paragraph (b) of this section, the classification rule of this paragraph 
(c)(3) determines whether the consolidated group's section 163(j) 
interest deduction is a base erosion tax benefit. To the extent the 
consolidated group's business interest expense is permitted as a 
deduction under section 163(j)(1) in a taxable year, the deduction is 
classified first as from business interest expense paid or accrued to a 
foreign related party and business interest expense paid or accrued to a 
domestic related party (on a pro-rata basis); any remaining deduction is 
treated as from business interest expense paid or accrued to an 
unrelated party.
    (ii) Year-by-year application of the classification rule. If the 
consolidated group's section 163(j) interest deduction in any taxable 
year is attributable to business interest expense paid or accrued in 
more than one taxable year (for example, the group deducts the group's 
aggregate current year BIE, the group's disallowed BIE carryforward from 
year 1, and the group's disallowed BIE carryforward from year 2), the 
classification rule in paragraph (c)(3)(i) of this section applies 
separately to each of those years, pursuant to paragraphs (c)(3)(iii) 
and (iv) of this section.
    (iii) Classification of current year BIE deductions. Current year 
BIE deductions are classified under the section 59A regulations and this 
paragraph (c) as if the consolidated group were a single taxpayer that 
had paid or accrued the group's aggregate current year BIE to domestic 
related parties, foreign related parties, and unrelated parties. The 
rules of paragraph (c)(4) of this section apply for allocating current 
year BIE deductions among members of the consolidated group. To the 
extent the consolidated group's aggregate current year BIE exceeds its 
section 163(j) limitation, the rules of paragraph (c)(5) of this section 
apply.
    (iv) Classification of deductions of disallowed BIE carryforwards. 
Each member of the group applies the classification rule in this 
paragraph (c)(3) to its deduction of any part of a disallowed BIE 
carryforward from a year, after the group applies paragraph (c)(5) of 
this section to the consolidated group's disallowed BIE carryforward 
from that year. Therefore, disallowed BIE carryforward that is actually 
deducted by a member is classified based on the status of the components 
of that carryforward, assigned pursuant to paragraph (c)(5) of this 
section.
    (4) Allocation of domestic related current year BIE deduction status 
and foreign related current year BIE deduction status among members of 
the consolidated group--(i) In general. This paragraph (c)(4) applies if 
the group has domestic related current year BIE deductions, foreign 
related current year BIE deductions, or both, as a result of the 
application of the classification rule in paragraph (c)(3) of this 
section. Under this paragraph (c)(4), the domestic related current year 
BIE, foreign related current year BIE, or both, that is treated as 
deducted in the current year are deemed to have been incurred pro-rata 
by all members that have current year BIE deduction in that year, 
regardless of which member or members actually incurred the current year 
BIE to a domestic related party or a foreign related party.
    (ii) Domestic related current year BIE deduction--(A) Amount of 
domestic related current year BIE deduction status allocable to a 
member. The amount of domestic related current year BIE deduction status 
that is allocated to a member is determined by multiplying the group's 
domestic related current year BIE deduction (determined pursuant to 
paragraph (c)(3) of this section) by the percentage of current year BIE 
deduction allocable to such member in that year.
    (B) Percentage of current year BIE deduction allocable to a member. 
The percentage of current year BIE deduction

[[Page 858]]

allocable to a member is equal to the amount of the member's current 
year BIE deduction divided by the amount of the group's aggregate 
current year BIE deduction.
    (iii) Amount of foreign related current year BIE deduction status 
allocable to a member. The amount of foreign related current year BIE 
deduction status that is allocated to a member is determined by 
multiplying the group's foreign related current year BIE deduction 
(determined pursuant to paragraph (c)(3) of this section) by the 
percentage of current year BIE deduction allocable to such member 
(defined in paragraph (c)(4)(ii)(B) of this section).
    (iv) Treatment of amounts as having unrelated current year BIE 
deduction status. To the extent the amount of a member's current year 
BIE that is absorbed under paragraph (c)(2) of this section exceeds the 
domestic related current year BIE deduction status and foreign related 
current year BIE deduction status allocated to the member under 
paragraph (c)(4)(ii) and (iii) of this section, such excess amount is 
treated as from payments or accruals to an unrelated party.
    (5) Allocation of domestic related BIE carryforward status and 
foreign related BIE carryforward status to members of the group--(i) In 
general. This paragraph (c)(5) applies in any year the consolidated 
group's aggregate current year BIE exceeds its section 163(j) 
limitation. After the application of paragraph (c)(4) of this section, 
any remaining domestic related current year BIE, foreign related current 
year BIE, and unrelated current year BIE is deemed to have been incurred 
pro-rata by members of the group pursuant to the rules in paragraph 
(c)(5)(ii), (iii), and (iv) of this section, regardless of which member 
or members actually incurred the business interest expense to a domestic 
related party, foreign related party, or unrelated party.
    (ii) Domestic related BIE carryforward--(A) Amount of domestic 
related BIE carryforward status allocable to a member. The amount of 
domestic related BIE carryforward status that is allocated to a member 
equals the group's domestic related BIE carryforward from that year 
multiplied by the percentage of disallowed BIE carryforward allocable to 
the member.
    (B) Percentage of disallowed BIE carryforward allocable to a member. 
The percentage of disallowed BIE carryforward allocable to a member for 
a taxable year equals the member's disallowed BIE carryforward from that 
year divided by the consolidated group's disallowed BIE carryforwards 
from that year.
    (iii) Amount of foreign related BIE carryforward status allocable to 
a member. The amount of foreign related BIE carryforward status that is 
allocated to a member equals the group's foreign related BIE 
carryforward from that year multiplied by the percentage of disallowed 
BIE carryforward allocable to the member (as defined in paragraph 
(c)(5)(ii)(B) of this section).
    (iv) Treatment of amounts as having unrelated BIE carryforward 
status. If a member's disallowed BIE carryforward for a year exceeds the 
amount of domestic related BIE carryforward status and foreign related 
BIE carryforward status that is allocated to the member pursuant to 
paragraphs (c)(5)(ii) and (iii) of this section, respectively, the 
excess carryforward amount is treated as from payments or accruals to an 
unrelated party.
    (v) Coordination with section 381. If a disallowed BIE carryforward 
is allocated a status as a domestic related BIE carryforward, foreign 
related BIE carryforward, or unrelated BIE carryforward under the 
allocation rule of paragraph (c)(5) of this section, the acquiring 
corporation in a transaction described in section 381(a) will succeed to 
and take into account the allocated status of the carryforward for 
purposes of section 59A. See Sec.  1.381(c)(20)-1.
    (6) Member deconsolidates from a consolidated group--(i) General 
rule. When a member deconsolidates from a group (the original group), 
the member's disallowed BIE carryforwards retain their allocated status, 
pursuant to paragraph (c)(5) of this section, as a domestic related BIE 
carryforward, foreign related BIE carryforward, or unrelated BIE 
carryforward (as applicable). Following the member's deconsolidation, 
the status of the disallowed BIE carryforwards of the remaining members 
is not redetermined.

[[Page 859]]

    (ii) Gross receipts exception. This paragraph (c)(6)(ii) applies if 
the original group had insufficient gross receipts to satisfy the gross 
receipts test under Sec.  1.59A-2(d) and thus was not an applicable 
taxpayer in the year in which the deconsolidating member's disallowed 
BIE carryforward was incurred. If this paragraph (c)(6)(ii) applies, the 
deconsolidating member may determine the status of its disallowed BIE 
carryforward from that year by applying the classification rule of Sec.  
1.59A-3(c)(4) solely to the interest payments or accruals of the 
deconsolidating member, rather than by applying Sec.  1.1502-59A(c)(3).
    (iii) Failure to substantiate. If the deconsolidating member fails 
to substantiate a disallowed BIE carryforward as a domestic related BIE 
carryforward, foreign related BIE carryforward, or unrelated BIE 
carryforward, then the disallowed BIE carryforward is treated as a 
foreign related BIE carryforward.
    (7) Corporation joins a consolidated group. If a corporation joins a 
consolidated group (the acquiring group), and that corporation was 
allocated a domestic related BIE carryforward status, foreign related 
BIE carryforward status, or unrelated BIE carryforward status pursuant 
to paragraph (c)(5) of this section from another consolidated group (the 
original group), or separately has a disallowed BIE carryforward that is 
classified as from payments or accruals to a domestic related party, 
foreign related party, or unrelated party, the status of the 
carryforward is taken into account in determining the acquiring group's 
base erosion tax benefit when the corporation's disallowed BIE 
carryforward is absorbed.
    (d) Allocation of the base erosion minimum tax amount to members of 
the consolidated group. For rules regarding the allocation of the base 
erosion minimum tax amount, see section 1552. Allocations under section 
1552 take into account the classification and allocation provisions of 
paragraphs (c)(3) through (5) of this section.
    (e) [Reserved]
    (f) Definitions. The following definitions apply for purposes of 
this section--
    (1) Aggregate current year BIE. The consolidated group's aggregate 
current year BIE is the aggregate of all members' current year BIE.
    (2) Aggregate current year BIE deduction. The consolidated group's 
aggregate current year BIE deduction is the aggregate of all members' 
current year BIE deductions.
    (3) Applicable taxpayer. The term applicable taxpayer has the 
meaning provided in Sec.  1.59A-2(b).
    (4) Base erosion minimum tax amount. The consolidated group's base 
erosion minimum tax amount is the tax imposed under section 59A.
    (5) Base erosion tax benefit. The term base erosion tax benefit has 
the meaning provided in Sec.  1.59A-3(c)(1).
    (6) Business interest expense. The term business interest expense, 
with respect to a member and a taxable year, has the meaning provided in 
Sec.  1.163(j)-1(b)(3), and with respect to a consolidated group and a 
taxable year, has the meaning provided in Sec.  1.163(j)-4(d)(2)(iii).
    (7) Consolidated group's disallowed BIE carryforwards. The term 
consolidated group's disallowed BIE carryforwards has the meaning 
provided in Sec.  1.163(j)-5(b)(3)(i).
    (8) Current year BIE. A member's current year BIE is the member's 
business interest expense that would be deductible in the current 
taxable year without regard to section 163(j) and that is not a 
disallowed business interest expense carryforward from a prior taxable 
year.
    (9) Current year BIE deduction. A member's current year BIE 
deduction is the member's current year BIE that is permitted as a 
deduction in the taxable year.
    (10) Domestic related BIE carryforward. The consolidated group's 
domestic related BIE carryforward for any taxable year is the excess of 
the group's domestic related current year BIE over the group's domestic 
related current year BIE deduction (if any).
    (11) Domestic related current year BIE. The consolidated group's 
domestic related current year BIE for any taxable year is the 
consolidated group's aggregate current year BIE paid or accrued to a 
domestic related party.

[[Page 860]]

    (12) Domestic related current year BIE deduction. The consolidated 
group's domestic related current year BIE deduction for any taxable year 
is the portion of the group's aggregate current year BIE deduction 
classified as from interest paid or accrued to a domestic related party 
under paragraph (c)(3) of this section.
    (13) Domestic related party. A domestic related party is a related 
party that is not a foreign related party and is not a member of the 
same consolidated group.
    (14) Disallowed BIE carryforward. The term disallowed BIE 
carryforward has the meaning provided in Sec.  1.163(j)-1(b)(11).
    (15) Foreign related BIE carryforward. The consolidated group's 
foreign related BIE carryforward for any taxable year, is the excess of 
the group's foreign related current year BIE over the group's foreign 
related current year BIE deduction (if any).
    (16) Foreign related current year BIE. The consolidated group's 
foreign related current year BIE for any taxable year is the 
consolidated group's aggregate current year BIE paid or accrued to a 
foreign related party.
    (17) Foreign related current year BIE deduction. The consolidated 
group's foreign related current year BIE deduction for any taxable year 
is the portion of the consolidated group's aggregate current year BIE 
deduction classified as from interest paid or accrued to a foreign 
related party under paragraph (c)(3) of this section.
    (18) Foreign related party. A foreign related party has the meaning 
provided in Sec.  1.59A-1(b)(12).
    (19) Related party. The term related party has the meaning provided 
in Sec.  1.59A-1(b)(17), but excludes members of the same consolidated 
group.
    (20) Section 163(j) interest deduction. The term section 163(j) 
interest deduction means, with respect to a taxable year, the amount of 
the consolidated group's business interest expense permitted as a 
deduction pursuant to Sec.  1.163(j)-5(b)(3) in the taxable year.
    (21) Section 163(j) limitation. The term section 163(j) limitation 
has the meaning provided in Sec.  1.163(j)-1(b)(36).
    (22) Unrelated BIE carryforward. The consolidated group's unrelated 
BIE carryforward for any taxable year is the excess of the group's 
unrelated current year BIE over the group's unrelated current year BIE 
deduction.
    (23) Unrelated current year BIE. The consolidated group's unrelated 
current year BIE for any taxable year is the consolidated group's 
aggregate current year BIE paid or accrued to an unrelated party.
    (24) Unrelated current year BIE deduction. The consolidated group's 
unrelated current year BIE deduction for any taxable year is the portion 
of the group's aggregate current year BIE deduction classified as from 
interest paid or accrued to an unrelated party under paragraph (c)(3) of 
this section.
    (25) Unrelated party. An unrelated party is a party that is not a 
related party.
    (g) Examples. The following examples illustrate the general 
application of this section. For purposes of the examples, a foreign 
corporation (FP) wholly owns domestic corporation (P), which in turn 
wholly owns S1 and S2. P, S1, and S2 are members of a consolidated 
group. The consolidated group is a calendar year taxpayer.
    (1) Example 1: Computation of the consolidated group's base erosion 
minimum tax amount. (i) The consolidated group is the applicable 
taxpayer--(A) Facts. The members have never engaged in intercompany 
transactions. For the 2019 taxable year, P, S1, and S2 were permitted 
the following amounts of deductions (within the meaning of section 
59A(c)(4)), $2,400x, $1,000x, and $2,600x; those deductions include base 
erosion tax benefits of $180x, $370x, and $230x. The group's 
consolidated taxable income for the year is $150x. In addition, the 
group satisfies the gross receipts test in Sec.  1.59A-2(d).
    (B) Analysis. Pursuant to paragraph (b) of this section, the 
receipts and deductions of P, S1, and S2 are aggregated for purposes of 
making the computations under section 59A. The group's base erosion 
percentage is 13% (($180x + $370x + $230x)/($2,400x + $1,000x + 
$2,600x)). The consolidated group is an applicable taxpayer under Sec.  
1.59A-2(b) because the group satisfies the gross receipts test and the 
group's base erosion percentage (13%) is higher than 3%. The 
consolidated group's modified

[[Page 861]]

taxable income is computed by adding back the members' base erosion tax 
benefits (and, when the consolidated group has consolidated net 
operating loss available for deduction, the consolidated net operating 
loss allowed multiplied by the base erosion percentage) to the 
consolidated taxable income, $930x ($150x + $180x + $370x + $230x). The 
group's base erosion minimum tax amount is then computed as 10 percent 
of the modified taxable income less the regular tax liability, $61.5x 
($930x x 10%-$150x x 21%).
    (ii) The consolidated group engages in intercompany transactions--
(A) Facts. The facts are the same as in paragraph (g)(1)(i)(A) of this 
section (the facts in Example 1(i)), except that S1 sold various 
inventory items to S2 during 2019. Such items are depreciable in the 
hands of S2 (but would not have been depreciable in the hands of S1) and 
continued to be owned by S2 during 2019.
    (B) Analysis. The result is the same as paragraph (g)(1)(i)(A) of 
this section (the facts in Example 1(i)). Pursuant to paragraph (b)(2) 
of this section, items resulting from the intercompany sale (for 
example, gross receipts, depreciation deductions) are not taken into 
account in computing the group's gross receipts under Sec.  1.59A-2(d) 
and base erosion percentage under Sec.  1.59A-2(e)(3).
    (2) Example 2: Business interest expense subject to section 163(j) 
and the group's domestic related current year BIE and foreign related 
current year BIE for the year equals its section 163(j) limitation--(i) 
Facts. During the current year (Year 1), P incurred $150x of business 
interest expense to domestic related parties; S1 incurred $150x of 
business interest expense to foreign related parties; and S2 incurred 
$150x of business interest expense to unrelated parties. The group's 
section 163(j) limitation for the year is $300x. After applying the 
rules in Sec.  1.163(j)-5(b)(3), the group deducts $150x of P's Year 1 
business interest expense, and $75x each of S1 and S2's Year 1 business 
interest expense. Assume the group is an applicable taxpayer for 
purposes of section 59A.
    (ii) Analysis--(A) Application of the absorption rule in paragraph 
(c)(2) of this section. Following the rules in section 163(j), the 
group's section 163(j) interest deduction for Year 1 is $300x, and the 
entire amount is from members' Year 1 business interest expense.
    (B) Application of the classification rule in paragraph (c)(3) of 
this section. Under paragraph (c)(3) of this section, the group's 
aggregate current year BIE deduction of $300x is first classified as 
payments or accruals to related parties (pro-rata among domestic related 
parties and foreign related parties), and second as payments or accruals 
to unrelated parties. For Year 1, the group has $150x of domestic 
related current year BIE and $150x of foreign related current year BIE, 
and the group's aggregate current year BIE deduction will be classified 
equally among the related party expenses. Therefore, $150x of the 
group's deduction is classified as domestic related current year BIE 
deduction and $150x is classified as a foreign related current year BIE 
deduction.
    (C) Application of the allocation rule in paragraph (c)(4) of this 
section. After the application of the classification rule in paragraph 
(c)(3) of this section, the group has $150x each of domestic related 
current year BIE deduction and foreign related current year BIE 
deduction from the group's aggregate current year BIE in Year 1. The 
domestic related current year BIE deduction and foreign related current 
year BIE deduction will be allocated to P, S1, and S2 based on each 
member's deduction of its Year 1 business interest expense.
    (1) Allocations to P. The percentage of current year BIE deduction 
attributable to P is 50% (P's deduction of its Year 1 current year BIE, 
$150x, divided by the group's aggregate current year BIE deduction for 
Year 1, $300x). Thus, the amount of domestic related current year BIE 
deduction status allocated to P is $75x (the group's domestic related 
current year BIE deduction, $150x, multiplied by the percentage of 
current year BIE deduction allocable to P, 50%); and the amount of 
foreign related current year BIE deduction status allocated to P is $75x 
(the group's foreign related current year BIE deduction, $150x, 
multiplied by the percentage of current year BIE deduction allocable to 
P, 50%).
    (2) Allocations to S1 and S2. The percentage of current year BIE 
deduction

[[Page 862]]

attributable to S1 is 25% (S1's deduction of its Year 1 current year 
BIE, $75x, divided by the group's aggregate current year BIE deduction 
for Year 1, $300x). Thus, the amount of domestic related current year 
BIE deduction status allocated to S1 is $37.5x (the group's domestic 
related current year BIE deduction, $150x, multiplied by the percentage 
of current year BIE deduction allocable to S1, 25%); and the amount of 
foreign related current year BIE deduction status allocated to S1 is 
$37.5x (the group's foreign related current year BIE deduction, $150x, 
multiplied by the percentage of current year BIE deduction allocable to 
S1, 25%). Because S2 also deducted $75 of its Year 1 current year BIE, 
S2's deductions are allocated the same pro-rata status as those of S1 
under this paragraph (f)(2)(ii)(C)(2).
    (D) Application of the allocation rule in paragraph (c)(5) of this 
section. Although the group will have disallowed BIE carryforwards after 
Year 1 (the group's aggregate current year BIE of $450x ($150x + $150x + 
$150x) exceeds the section 163(j) limitation of $300x), all of the 
domestic related current year BIE and foreign related current year BIE 
in Year 1 has been taken into account pursuant to the classification 
rule in paragraph (c)(3) of this section. Thus, under paragraph 
(c)(5)(iv) of this section, each member's disallowed BIE carryforward is 
treated as from payments or accruals to unrelated parties.
    (3) Example 3: Business interest expense subject to section 163(j)--
(i) The group's domestic related current year BIE and foreign related 
current year BIE for the year exceeds its section 163(j) limitation. (A) 
Facts. During the current year (Year 1), P incurred $60x of business 
interest expense to domestic related parties; S1 incurred $40x of 
business interest expense to foreign related parties; and S2 incurred 
$80x of business interest expense to unrelated parties. The group's 
section 163(j) limitation for the year is $60x. After applying the rules 
in Sec.  1.163(j)-5(b)(3), the group deducts $20x each of P, S1, and 
S2's current year business interest expense. Assume the group is an 
applicable taxpayer for purposes of section 59A.
    (B) Analysis--(1) Application of the absorption rule in paragraph 
(c)(2) of this section. Following the rules in section 163(j), the 
group's section 163(j) interest deduction is $60x, and the entire amount 
is from members' Year 1 business interest expense.
    (2) Application of the classification rule in paragraph (c)(3) of 
this section. Under paragraph (c)(3) of this section, the group's $60x 
of aggregate current year BIE deduction is first classified as payments 
or accruals to related parties (pro-rata among domestic related parties 
and foreign related parties), and second as payments or accruals from 
unrelated parties. The group's total related party interest expense in 
Year 1, $100x (sum of the group's Year 1 domestic related current year 
BIE, $60x, and the group's Year 1 foreign related current year BIE, 
$40x), exceeds the group's aggregate current year BIE deduction of $60x. 
Thus, the group's aggregate current year BIE deduction will be 
classified, pro-rata, as from payments or accruals to domestic related 
parties and foreign related parties. Of the group's aggregate current 
year BIE deduction in Year 1, $36x is classified as a domestic related 
current year BIE deduction (the group's aggregate current year BIE 
deduction, $60x, multiplied by the ratio of domestic related current 
year BIE over the group's total Year 1 related party interest expense 
($60x/($60x + $40x))); and $24x of the group's aggregate current year 
BIE deduction is classified as a foreign related current year BIE 
deduction (the group's section 163(j) interest deduction, $60x, 
multiplied by the ratio of foreign related current year BIE over the 
group's total Year 1 related party interest expense ($40x/($60x + 
$40x))).
    (3) Application of the allocation rule in paragraph (c)(4) of this 
section. After the application of the classification rule in paragraph 
(c)(3) of this section, the group has $36x of domestic related current 
year BIE deduction and $24x of foreign related current year BIE 
deduction from the group's aggregate current year BIE in Year 1. The 
domestic related current year BIE deduction and foreign related current 
year BIE deduction will be allocated to P, S1, and S2 based on each 
member's current year BIE deduction in Year 1.
    (i) Allocation of the group's domestic related current year BIE 
deduction status.

[[Page 863]]

Because each member is deducting $20x of its Year 1 business interest 
expense, all three members have the same percentage of current year BIE 
deduction attributable to them. The percentage of current year BIE 
deduction attributable to each of P, S1, and S2 is 33.33% (each member's 
current year BIE deduction in Year 1, $20x, divided by the group's 
aggregate current year BIE deduction for Year 1, $60x). Thus, the amount 
of domestic related current year BIE deduction status allocable to each 
member is $12x (the group's domestic related current year BIE deduction, 
$36x, multiplied by the percentage of current year BIE deduction 
allocable to each member, 33.33%).
    (ii) Allocations of the group's foreign related current year BIE 
deduction status. The amount of foreign related current year BIE 
deduction status allocable to each member is $8x (the group's foreign 
related current year BIE deduction, $24x, multiplied by the percentage 
of current year BIE deduction allocable to each member, 33.33%, as 
computed earlier in paragraph (f)(3) of this section (Example 3).
    (4) Application of the allocation rule in paragraph (c)(5) of this 
section. In Year 1 the group has $60x of domestic related current year 
BIE, of which $36x is deducted in the year (by operation of the 
classification rule). Therefore, the group has $24x of domestic related 
BIE carryforward. Similarly, the group has $40x of foreign related 
current year BIE in Year 1, of which $24x is deducted in the year. 
Therefore, the group has $16x of foreign related BIE carryforward. The 
$24x domestic related BIE carryforward status and $16x foreign related 
BIE carryforward status will be allocated to P, S1, and S2 in proportion 
to the amount of each member's disallowed BIE carryforward.
    (i) Allocation to P. The percentage of disallowed BIE carryforward 
allocable to P is 33.33% (P's Year 1 disallowed BIE carryforward, $40x 
($60x - $20x), divided by the group's Year 1 disallowed BIE 
carryforward, $120x ($60x + $40x + 80x - $60x)). Thus, the amount of 
domestic related BIE carryforward status allocated to P is $8x (the 
group's domestic related BIE carryforward, $24x, multiplied by the 
percentage of disallowed BIE carryforward allocable to P, 33.33%); and 
the amount of foreign related BIE carryforward status allocated to P is 
$5.33x (the group's foreign related BIE carryforward, $16x, multiplied 
by the percentage of disallowed BIE carryforward allocable to P, 
33.33%). Under paragraph (c)(5)(iv) of this section, P's disallowed BIE 
carryforward that has not been allocated a status as either a domestic 
related BIE carryforward or a foreign related BIE carryforward will be 
treated as interest paid or accrued to an unrelated party. Therefore, 
$26.67x ($40x P's disallowed BIE carryforward -$8x domestic related BIE 
carryforward status allocated to P -$5.33x foreign related BIE 
carryforward status allocated to P) is treated as interest paid or 
accrued to an unrelated party.
    (ii) Allocation to S1. The percentage of disallowed BIE carryforward 
allocable to S1 is 16.67% (S1's Year 1 disallowed BIE carryforward, $20x 
($40x - $20x), divided by the group's Year 1 disallowed BIE 
carryforward, $120x ($60x + $40x + 80x - $60x). Thus, the amount of 
domestic related BIE carryforward status allocated to S1 is $4x (the 
group's domestic related BIE carryforward, $24x, multiplied by the 
percentage of disallowed BIE carryforward allocable to S1, 16.67%); and 
the amount of foreign related BIE carryforward status allocated to S1 is 
$2.67x (the group's foreign related BIE carryforward, $16x, multiplied 
by the percentage of disallowed BIE carryforward allocable to S1, 
16.67%). Under paragraph (c)(5)(iv) of this section, S1's disallowed BIE 
that has not been allocated a status as either a domestic related BIE 
carryforward or a foreign related BIE carryforward will be treated as 
interest paid or accrued to an unrelated party. Therefore, $13.33x ($20x 
S1's disallowed BIE carryforward -$4x domestic related BIE carryforward 
status allocated to S1 - $2.67x foreign related BIE carryforward status 
allocated to S1) is treated as interest paid or accrued to an unrelated 
party.
    (iii) Allocation to S2. The percentage of disallowed BIE 
carryforward allocable to S2 is 50% (S2's Year 1 disallowed BIE 
carryforward, $60x ($80x - $20x), divided by the group's Year 1 
disallowed BIE carryforward, $120x ($60x + $40x + 80x - $60x). Thus, the 
amount of

[[Page 864]]

domestic related BIE carryforward status allocated to S2 is $12x (the 
group's domestic related BIE carryforward, $24x, multiplied by the 
percentage of disallowed BIE carryforward allocable to S2, 50%); and the 
amount of foreign related BIE carryforward status allocated to S2 is $8x 
(the group's foreign related BIE carryforward, $16x, multiplied by the 
percentage of disallowed BIE carryforward allocable to S2, 50%). Under 
paragraph (c)(5)(iv) of this section, S2's disallowed BIE that has not 
been allocated a status as either a domestic related BIE carryforward or 
a foreign related BIE carryforward will be treated as interest paid or 
accrued to an unrelated party. Therefore, $40x ($60x S2's disallowed BIE 
carryforward -$12x domestic related BIE carryforward status allocated to 
S2 - $8x foreign related BIE carryforward status allocated to S2) is 
treated as interest paid or accrued to an unrelated party.
    (ii) The group deducting its disallowed BIE carryforwards--(A) 
Facts. The facts are the same as in paragraph (g)(3)(i)(A) of this 
section (the facts in Example 3(i)), and in addition, none of the 
members incurs any business interest expense in Year 2. The group's 
section 163(j) limitation for Year 2 is $30x.
    (B) Analysis--(1) Application of the absorption rule in paragraph 
(c)(2) of this section. Following the rules in section 163(j), each 
member of the group is deducting $10x of its disallowed BIE carryforward 
from Year 1. Therefore, the group's section 163(j) deduction for Year 2 
is $30x.
    (2) Application of the classification rule in paragraph (c)(3) of 
this section. Under paragraph (c)(3)(iv) of this section, to the extent 
members are deducting their Year 1 disallowed BIE carryforward in Year 
2, the classification rule will apply to the deduction in Year 2 after 
the allocation rule in paragraph (c)(5) of this section has allocated 
the related and unrelated party status to the member's disallowed BIE 
carryforward in Year 1. The allocation required under paragraph (c)(5) 
of this section is described in paragraph (f)(3)(i)(B)(4) of this 
section.
    (i) Use of P's allocated domestic related BIE carryforward status 
and foreign related BIE carryforward status. P has $40x of Year 1 
disallowed BIE carryforward, and P was allocated $8x of domestic related 
BIE carryforward status and $5.33x of foreign related BIE carryforward 
status. In Year 2, P deducts $10x of its Year 1 disallowed BIE 
carryforward. Under the classification rule of paragraph (c)(3) of this 
section, P is treated as deducting pro-rata from its allocated status of 
domestic related BIE carryforward and foreign related BIE carryforward. 
Therefore, P is treated as deducting $6x of its allocated domestic 
related BIE carryforward ($10x x $8x/($8x + $5.33x)), and $4x of its 
allocated foreign related BIE carryforward ($10x x $5.33x/$8x + 
$5.33x)). After Year 2, P has remaining $30x of Year 1 disallowed BIE 
carryforward, of which $2x has a status of domestic related BIE 
carryforward, $1.33x has the status of foreign related BIE carryforward, 
and $26.67x of interest treated as paid or accrued to unrelated parties.
    (ii) Use of S1's allocated domestic related BIE carryforward status 
and foreign related BIE carryforward status. S1 has $20x of Year 1 
disallowed BIE carryforward, and S1 was allocated $4x of domestic 
related BIE carryforward status and $2.67x of foreign related BIE 
carryforward status. In Year 2, S2 deducts $10x of its Year 1 disallowed 
BIE carryforward. Because S2's deduction of its Year 1 disallowed BIE 
carryforward, $10x, exceeds its allocated domestic related BIE 
carryforward status ($4x) and foreign related BIE carryforward status 
($2.67x), all of the allocated related party status are used up. After 
Year 2, all of S1's Year 1 disallowed BIE carryforward, $10x, is treated 
as interest paid or accrued to an unrelated party.
    (iii) Use of S2's allocated domestic related BIE carryforward status 
and foreign related BIE carryforward status. S2 has $60x of Year 1 
disallowed BIE carryforward, and S2 was allocated $12x of domestic 
related BIE carryforward status and $8x of foreign related BIE 
carryforward status. In Year 2, S2 deducts $10x of its Year 1 disallowed 
BIE carryforward. Under the classification rule of paragraph (c)(3) of 
this section, S2 is treated as deducting $6x of its allocated domestic 
related BIE

[[Page 865]]

carryforward ($10x x $12x/($12x + $8x)), and $4x of its allocated 
foreign related BIE carryforward ($10x x $8x/$8x + $12x)). After Year 2, 
P has remaining $50x of Year 1 disallowed BIE carryforward, of which $6x 
has a status of domestic related BIE carryforward, $4x has the status of 
foreign related BIE carryforward, and $40x of interest treated as paid 
or accrued to unrelated parties.
    (h) Applicability date. This section applies to taxable years for 
which the original consolidated Federal income tax return is due 
(without extensions) after December 6, 2019.

[T.D. 9885, 84 FR 67039, Dec. 6, 2019; 85 FR 49595, Aug. 14, 2020, as 
amended by T.D 9910, 85 FR 64369, Oct. 9, 2020]



Sec.  1.1502-68  Additional first year depreciation deduction for 
property acquired and placed in service after September 27, 2017.

    (a) In general--(1) Overview. This section provides rules governing 
the availability of the additional first year depreciation deduction 
allowable under section 168(k) for qualified property that is acquired 
and placed in service after September 27, 2017, by a member of a 
consolidated group. Except as otherwise provided in paragraph (c) of 
this section, the rules in Sec.  1.168(k)-2 apply to members of a 
consolidated group in addition to the rules in this section. Paragraph 
(a)(2) of this section provides definitions of terms used in this 
section. Paragraph (b) of this section provides rules addressing the 
application of Sec.  1.168(k)-2(b)(3)(iii)(A)(1) (requiring that a 
taxpayer claiming the additional first year depreciation deduction for 
used property not previously have used the property) to members of a 
consolidated group. Paragraph (c) of this section provides rules 
addressing certain transfers of eligible property (as defined in 
paragraph (a)(2)(vii) of this section) between members of a consolidated 
group if the transferee member (as defined in paragraph (a)(2)(xii) of 
this section) leaves the group pursuant to the same series of related 
transactions. Paragraph (d) of this section provides examples 
illustrating the application of the rules of this section. Paragraph (e) 
of this section provides the applicability dates.
    (2) Definitions. The following definitions apply for purposes of 
this section.
    (i) Consolidated Asset Acquisition Rule. The term Consolidated Asset 
Acquisition Rule refers to the rule set forth in paragraph (c)(1)(i) of 
this section addressing certain intercompany transfers of eligible 
property.
    (ii) Consolidated Deemed Acquisition Rule. The term Consolidated 
Deemed Acquisition Rule refers to the rule set forth in paragraph 
(c)(2)(i) of this section addressing certain intercompany transfers of 
the stock of target (as defined in paragraph (a)(2)(xi) of this 
section).
    (iii) Deconsolidation date. The term deconsolidation date means the 
date on which a transferee member ceases to be a member of a 
consolidated group.
    (iv) Designated transaction. The term designated transaction has the 
meaning provided in paragraph (c)(4)(i) of this section.
    (v) Deemed replacement property. The term deemed replacement 
property means used property that is identical to (but is separate and 
distinct from) the eligible property that the transferee member or 
target is deemed to sell to an unrelated party under the Consolidated 
Asset Acquisition Rule or the Consolidated Deemed Acquisition Rule. For 
all Federal income tax purposes, the deemed purchase of deemed 
replacement property by the transferee member or target under paragraph 
(c)(1)(i)(B) or (c)(2)(i)(B) of this section, respectively, does not 
result in the basis in such property being determined, in whole or in 
part, by reference to the basis of other property held at any time by 
the transferee member or target. See section 179(d)(3) and Sec.  
1.168(k)-2(b)(3)(iii)(A)(3).
    (vi) Deemed sale amount. The term deemed sale amount means an amount 
equal to the transferee member's or the target's adjusted basis in the 
eligible property immediately before the transferee member or target is 
deemed to sell the property to an unrelated party under the Consolidated 
Asset Acquisition Rule or the Consolidated Deemed Acquisition Rule.
    (vii) Eligible property. The term eligible property means 
depreciable property (as defined in Sec.  1.168(b)-1(a)(1)) that meets 
the requirements in Sec.  1.168(k)-

[[Page 866]]

2(b)(2), determined without regard to Sec.  1.168(k)-2(b)(2)(ii)(C) 
(property subject to an election not to claim the additional first year 
depreciation for a class of property) except on the day after the 
deconsolidation date.
    (viii) Group Prior Use Rule. The term Group Prior Use Rule refers to 
the rule set forth in paragraph (b)(1) of this section addressing when a 
member of a consolidated group is attributed another member's 
depreciable interest in property.
    (ix) Lookback Period. The term lookback period means, with respect 
to a member of a consolidated group, the period that includes the five 
calendar years immediately prior to the current calendar year in which 
the property is placed in service by such member, as well as the portion 
of such current calendar year before the date on which the member placed 
the property in service (without taking into account the applicable 
convention).
    (x) Stock and Asset Acquisition Rule. The term Stock and Asset 
Acquisition Rule refers to the rule set forth in paragraph (b)(2) of 
this section addressing when a member of a consolidated group is 
attributed a new member's depreciable interest in property.
    (xi) Target. The term target means the member whose stock is 
transferred in a transaction that is subject to the Consolidated Deemed 
Acquisition Rule.
    (xii) Transferee member. The term transferee member means the member 
that acquires eligible property or target stock, respectively, in a 
transaction that is subject to the Consolidated Asset Acquisition Rule 
or the Consolidated Deemed Acquisition Rule.
    (xiii) Transferor member. The term transferor member means the 
member that transfers eligible property or target stock, respectively, 
in a transaction that is subject to the Consolidated Asset Acquisition 
Rule or the Consolidated Deemed Acquisition Rule.
    (b) Acquisitions of depreciable property by a member of a 
consolidated group--(1) General rule (Group Prior Use Rule). Solely for 
purposes of applying Sec.  1.168(k)-2(b)(3)(iii)(A)(1), if a member of a 
consolidated group acquires depreciable property in which the group had 
a depreciable interest at any time within the lookback period, the 
member is treated as having a depreciable interest in the property prior 
to the acquisition. For purposes of this paragraph (b)(1), a 
consolidated group is treated as having a depreciable interest in 
property during the time any current or previous member of the group had 
a depreciable interest in the property while a member of the group. For 
special rules that apply when a member of a consolidated group acquires 
depreciable property in an intercompany transaction (as defined in Sec.  
1.1502-13(b)(1)(i)) and then leaves the group pursuant to the same 
series of related transactions, see paragraph (c) of this section.
    (2) Certain acquisitions pursuant to a series of related 
transactions (Stock and Asset Acquisition Rule). Solely for purposes of 
applying Sec.  1.168(k)-2(b)(3)(iii)(A)(1), if a series of related 
transactions includes one or more transactions in which property is 
acquired by a member of a consolidated group, and one or more 
transactions in which a corporation that had a depreciable interest in 
the property (determined without regard to the application of the Group 
Prior Use Rule) within the lookback period becomes a member of the 
group, then the member that acquires the property is treated as having a 
depreciable interest in the property prior to the acquisition.
    (c) Certain intercompany transfers of eligible property followed by 
deconsolidation--(1) Acquisition of eligible property by a member that 
leaves the group--(i) General rule (Consolidated Asset Acquisition 
Rule). This paragraph (c)(1) applies to certain transactions pursuant to 
which one member of a consolidated group (transferee member) acquires 
from another member of the same consolidated group (transferor member) 
eligible property. Except as otherwise provided in paragraph (c)(3) or 
(4) of this section, if a transaction satisfies the requirements of 
paragraph (c)(1)(ii) of this section, then Sec.  1.168(k)-
2(b)(3)(iii)(C) (providing special rules when depreciable property is 
acquired as part of a series of related transactions) does not apply to 
the transaction, and for all Federal income tax purposes--
    (A) The transferee member is treated as selling the eligible 
property to an

[[Page 867]]

unrelated person on the day after the deconsolidation date in exchange 
for an amount of cash equal to the deemed sale amount; and
    (B) Immediately after the deemed sale in paragraph (c)(1)(i)(A) of 
this section, the transferee member is treated as purchasing deemed 
replacement property from an unrelated person for an amount of cash 
equal to the deemed sale amount.
    (ii) Requirements. A transaction satisfies the requirements of this 
paragraph (c)(1)(ii) if--
    (A) The transferee member's acquisition of the eligible property 
meets the requirements of Sec.  1.168(k)-2(b)(3)(iii)(A) without regard 
to section 179(d)(2)(A) or (B) and Sec.  1.179-4(c)(1)(ii) or (iii) or 
the Group Prior Use Rule;
    (B) As part of the same series of related transactions that includes 
the acquisition, the transferee member ceases to be a member of the 
consolidated group and ceases to be related, within the meaning of 
section 179(d)(2)(A) or (B) and Sec.  1.179-4(c)(1)(ii) or (iii), to the 
transferor member; and
    (C) The acquired eligible property continues to be eligible property 
on the deconsolidation date and the day after the deconsolidation date.
    (2) Deemed acquisition of eligible property pursuant to an election 
under section 338 or 336(e) by a member that leaves the group--(i) 
General rule (Consolidated Deemed Acquisition Rule). This paragraph 
(c)(2) applies to certain transactions pursuant to which a transferee 
member acquires from a transferor member the stock of another member of 
the same consolidated group that holds eligible property (target) in 
either a qualified stock purchase for which a section 338 election is 
made or a qualified stock disposition described in Sec.  1.336-2(b)(1) 
for which a section 336(e) election is made. Except as otherwise 
provided in paragraph (c)(3) or (4) of this section, if a transaction 
satisfies the requirements of paragraph (c)(2)(ii) of this section, then 
Sec.  1.168(k)-2(b)(3)(iii)(C) does not apply to the transaction, and 
for all Federal income tax purposes--
    (A) The target is treated as selling the eligible property to an 
unrelated person on the day after the deconsolidation date in exchange 
for an amount of cash equal to the deemed sale amount; and
    (B) Immediately after the deemed sale in paragraph (c)(2)(i)(A) of 
this section, the target is treated as purchasing deemed replacement 
property from an unrelated person for an amount of cash equal to the 
deemed sale amount.
    (ii) Requirements. A transaction satisfies the requirements of this 
paragraph (c)(2)(ii) if:
    (A) The target's acquisition of the eligible property meets the 
requirements of Sec.  1.168(k)-2(b)(3)(iii)(A) without regard to the 
Group Prior Use Rule;
    (B) As part of the same series of related transactions that includes 
the qualified stock purchase or qualified stock disposition, the 
transferee member and the target cease to be members of the transferor 
member's consolidated group and cease to be related, within the meaning 
of section 179(d)(2)(A) or (B) and Sec.  1.179-4(c)(1)(ii) or (iii), to 
the transferor member; and
    (C) The target's eligible property on the acquisition date (within 
the meaning of Sec.  1.338-2(c)(1)) or the disposition date (within the 
meaning of Sec.  1.336-1(b)(8)) continues to be eligible property on the 
deconsolidation date and the day after the deconsolidation date.
    (3) Disposition of depreciable property pursuant to the same series 
of related transactions. Paragraph (c)(1) of this section does not apply 
if, following the acquisition of eligible property, the transferee 
member disposes of such property pursuant to the same series of related 
transactions that includes the property acquisition. Paragraph (c)(2) of 
this section does not apply if, following the deemed acquisition of 
eligible property, the target disposes of such property pursuant to the 
same series of related transactions that includes the qualified stock 
purchase or qualified stock disposition. See Sec.  1.168(k)-
2(b)(3)(iii)(C) for rules regarding the transfer of property in a series 
of related transactions. See also Sec.  1.168(k)-2(g)(1) for rules 
regarding property placed in service and disposed of in the same taxable 
year. For purposes of this paragraph (c)(3), the deemed sale of eligible 
property by the transferee member or the target pursuant to paragraph 
(c)(1)(i)(A) or

[[Page 868]]

(c)(2)(i)(A) of this section is not treated as a ``disposition'' of such 
property.
    (4) Election to not apply paragraph (c)(1)(i) or (c)(2)(i) of this 
section--(i) In general. If a transaction satisfies the requirements of 
the Consolidated Asset Acquisition Rule or the Consolidated Deemed 
Acquisition Rule in paragraph (c)(1)(ii) or (c)(2)(ii) of this section, 
respectively, the transferee member or the target nonetheless may elect 
not to apply the Consolidated Asset Acquisition Rule or the Consolidated 
Deemed Acquisition Rule, respectively, to all eligible property that is 
acquired or deemed acquired in such transaction. If a transferee member 
or target makes an election under this paragraph (c)(4) with respect to 
any transaction (designated transaction), then--
    (A) The transferee member or target is deemed to have made such an 
election for all other transactions--
    (1) That satisfy the requirements of the Consolidated Asset 
Acquisition Rule or the Consolidated Deemed Acquisition Rule;
    (2) That are part of the same series of related transactions as the 
designated transaction; and
    (3) In which the transferee member or target either is the same 
transferee member or target as in the designated transaction or is 
related, within the meaning of section 179(d)(2)(A) or (B) and Sec.  
1.179-4(c)(1)(ii) or (iii), to the transferee member or target in the 
designated transaction immediately after the end of the series of 
related transactions; and
    (B) Any eligible property acquired or deemed acquired in the 
designated transaction and in any transactions described in paragraph 
(c)(4)(i)(A) of this section does not satisfy either the original use 
requirement or the used property acquisition requirements in Sec.  
1.168(k)-2(b)(3) and, thus, is not ``qualified property'' within the 
meaning of Sec.  1.168(k)-2(b)(1).
    (ii) Time and manner for making election--(A) Time to make election. 
An election under this paragraph (c)(4) must be made by the due date, 
including extensions, for the Federal tax return for the taxable year of 
the transferee member or target that begins on the day after the 
deconsolidation date.
    (B) Manner of making election. A transferee member or target, as 
applicable, makes the election under this paragraph (c)(4) by attaching 
a statement to its return for the taxable year that begins on the day 
after the deconsolidation date. The statement must describe the 
transaction(s) to which the Consolidated Asset Acquisition Rule or 
Consolidated Deemed Acquisition Rule otherwise would apply and state 
that the transferee member or the target, as applicable, is not claiming 
the additional first year depreciation deduction for any eligible 
property transferred in such transaction(s). If, at the time the 
election is made, the transferee member or the target is a member of a 
consolidated group, the statement is made by the agent for the group 
(within the meaning of Sec.  1.1502-77(a) and (c)) on behalf of the 
transferee member or the target and is attached to the consolidated 
return of the group for the taxable year of the group that includes the 
taxable year of the transferee member or target that begins on the day 
after the deconsolidation date.
    (C) Additional procedural guidance. The IRS may publish procedural 
guidance in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2)(ii)(b) of this chapter) that provides alternative 
procedures for complying with paragraph (c)(4)(ii)(A) or (B) of this 
section.
    (iii) Revocation of election. An election specified in this 
paragraph (c)(4), once made, may be revoked only by filing a request for 
a private letter ruling and obtaining the Commissioner of Internal 
Revenue's written consent to revoke the election. The Commissioner may 
grant a request to revoke the election if the taxpayer acted reasonably 
and in good faith, and the revocation will not prejudice the interests 
of the Government. See generally Sec.  301.9100-3 of this chapter. An 
election specified in this paragraph (c)(4) may not be revoked through a 
request under section 446(e) to change the taxpayer's method of 
accounting.
    (d) Examples. For purposes of the examples in this section, unless 
otherwise stated: Parent, S, B, Controlled, and T are members of a 
consolidated group of which Parent is the common parent (Parent group); 
Parent owns all

[[Page 869]]

of the only class of stock of each of S, B, Controlled, and T; X is the 
common parent of the X consolidated group (X group); no member of the X 
group is related, within the meaning of section 179(d)(2)(A) or (B) and 
Sec.  1.179-4(c)(1)(ii) or (iii) (Related), to any member of the Parent 
group; G and U are corporations that are not Related to each other or to 
any member of the Parent group or the X group; the Equipment in each 
example is eligible property; no member of the Parent group or the X 
group has had a depreciable interest in the Equipment within the 
lookback period; Sec.  1.168(k)-2(b)(3)(iii)(A)(1) is referred to as the 
No Prior Use Requirement; and Sec.  1.168(k)-2(b)(3)(iii)(A)(2) is 
referred to as the Unrelated Party Requirement. The rules of this 
section are illustrated by the following examples.
    (1) Example 1: Intercompany sale of eligible property--(i) Facts. S 
has a depreciable interest in Equipment 1. In 2018, S sells Equipment 
1 to B, and B places Equipment 1 in service in the same year.
    (ii) Analysis. B's acquisition of Equipment 1 does not satisfy 
either the No Prior Use Requirement or the Unrelated Party Requirement. 
Under the Group Prior Use Rule, B is treated as previously having a 
depreciable interest in Equipment 1 because B (a member of the Parent 
group) acquired Equipment 1 and S, while a member of the Parent group, 
had a depreciable interest in Equipment 1 within the lookback period. 
In addition, B acquires Equipment 1 from S, and B and S are Related at 
the time of the acquisition. Accordingly, B is not eligible to claim the 
additional first year depreciation deduction for Equipment 1 in 2018.
    (2) Example 2: Sale outside of the consolidated group followed by a 
reacquisition within the lookback period--(i) Facts. S has a depreciable 
interest in Equipment 2. In 2018, S sells Equipment 2 to G. In 2019, 
in an unrelated transaction, B acquires Equipment 2 from G and places 
it in service in the same year.
    (ii) Analysis. B's acquisition of Equipment 2 does not satisfy the 
No Prior Use Requirement as a result of the Group Prior Use Rule. 
Pursuant to the Group Prior Use Rule, B is treated as previously having 
a depreciable interest in Equipment 2 because B is a member of the 
Parent group and S, while a member of the Parent group, had a 
depreciable interest in Equipment 2 within the lookback period. Thus, B 
is not eligible to claim the additional first year depreciation 
deduction for Equipment 2 in 2019. The result would be the same if, 
after selling Equipment 2 to G, S had ceased to be a member of the 
Parent group prior to B's acquisition of Equipment 2.
    (iii) Sale outside of the consolidated group followed by a 
reacquisition beyond the lookback period. The facts are the same as in 
paragraph (d)(2)(i) of this section, except that B acquires Equipment 2 
and places it in service in 2024 instead of 2019. B's acquisition of 
Equipment 2 satisfies the No Prior Use Requirement. B would not be 
treated as previously having a depreciable interest in Equipment 2 
under the Group Prior Use Rule because the Parent group did not have a 
depreciable interest in Equipment 2 within the lookback period. 
Further, B itself did not have a prior depreciable interest in Equipment 
2 within the lookback period. Assuming all other requirements in Sec.  
1.168(k)-2 are satisfied, B is eligible to claim the additional first 
year depreciation deduction for Equipment 2 in 2024. The result would 
be the same if S, rather than B, acquired and placed in service 
Equipment 2 in 2024.
    (3) Example 3: Acquisition of eligible property by the consolidated 
group followed by a corporation with a prior depreciable interest 
joining the group as part of the same series of related transactions--
(i) Facts. G has a depreciable interest in Equipment 3. During 2018, G 
sells Equipment 3 to U. In a series of related transactions that does 
not include the 2018 sale, Parent acquires all of the stock of G in 
2019. Later in 2019, B purchases Equipment 3 from U and places it in 
service immediately thereafter.
    (ii) Analysis. B's acquisition of Equipment 3 does not satisfy the 
No Prior Use Requirement as a result of the Stock and Asset Acquisition 
Rule. In a series of related transactions, G became a member of the 
Parent group and B acquired Equipment 3. Because

[[Page 870]]

G had a depreciable interest in Equipment 3 within the lookback period, 
B is treated as having a depreciable interest in Equipment 3 under the 
Stock and Asset Acquisition Rule. Thus, B is not eligible to claim the 
additional first year depreciation deduction for Equipment 3 in 2019.
    (iii) B purchases Equipment 3 in 2024. The facts are the same as in 
paragraph (d)(3)(i) of this section, except that B acquires and places 
in service Equipment 3 in 2024 instead of 2019. B is not treated under 
the Stock and Asset Acquisition Rule as having a prior depreciable 
interest in Equipment 3 because G (which sold Equipment 3 to U in 
2018) did not have a depreciable interest in Equipment 3 within the 
lookback period. In addition, B is not treated under the Group Prior Use 
Rule as having a prior depreciable interest in Equipment 3 at the time 
of the purchase because neither G nor any other member of the Parent 
group had a depreciable interest in Equipment 3 while a member of the 
Parent group within the lookback period. Further, B itself did not have 
a depreciable interest in Equipment 3 within the lookback period. 
Accordingly, B's acquisition of Equipment 3 satisfies the No Prior Use 
Requirement. Assuming all other requirements in Sec.  1.168(k)-2 are 
satisfied, B is eligible to claim the additional first year depreciation 
deduction for Equipment 3 in 2024.
    (iv) No series of related transactions. The facts are the same as in 
paragraph (d)(3)(i) of this section, except that Parent's acquisition of 
the G stock and B's purchase of Equipment 3 are not part of the same 
series of related transactions. Because B's purchase of Equipment 3 and 
Parent's acquisition of the G stock did not occur pursuant to the same 
series of related transactions, the Stock and Asset Acquisition Rule 
does not apply. In addition, B is not treated under the Group Prior Use 
Rule as having a prior depreciable interest in Equipment 3 at the time 
of the purchase because neither G nor any other member of the Parent 
group had a depreciable interest in Equipment 3 while a member of the 
Parent group within the lookback period. Further, B itself did not have 
a depreciable interest in Equipment 3 within the lookback period. 
Accordingly, B's acquisition of Equipment 3 satisfies the No Prior Use 
Requirement. Assuming all other requirements in Sec.  1.168(k)-2 are 
satisfied, B is eligible to claim the additional first year depreciation 
deduction for Equipment 3 in 2019.
    (4) Example 4: Termination of the consolidated group--(i) Facts. S 
owns Equipment 4. In 2018, S sells Equipment 4 to U. In 2019, X 
acquires all of the stock of Parent in a transaction that causes the 
Parent group to terminate and Parent, B, and S to become members of the 
X group. In 2020, in a transaction that is not part of a series of 
related transactions, B purchases Equipment 4 from U and places it in 
service in the same year.
    (ii) Analysis. B's acquisition of Equipment 4 satisfies the No 
Prior Use Requirement. The Group Prior Use Rule does not apply to treat 
B as having a prior depreciable interest in Equipment 4 because B is a 
member of the X group and no member of the X group had a depreciable 
interest in Equipment 4 while a member of the X group within the 
lookback period. Further, B itself did not have a prior depreciable 
interest in Equipment 4 within the lookback period. Assuming all other 
requirements in Sec.  1.168(k)-2 are satisfied, B is eligible to claim 
the additional first year depreciation deduction for Equipment 4 in 
2020.
    (iii) S purchases Equipment 4 in 2020. The facts are the same as in 
paragraph (d)(4)(i) of this section, except that S rather than B 
purchases and places in service Equipment 4 in 2020. S's purchase of 
Equipment 4 does not satisfy the No Prior Use Requirement because S had 
a depreciable interest in Equipment 4 within the lookback period. Thus, 
S is not eligible to claim the additional first year depreciation 
deduction for Equipment 4 in 2020.
    (iv) Acquisitions are part of the same series of related 
transactions. The facts are the same as in paragraph (d)(4)(i) of this 
section, except that X's acquisition of the Parent stock and B's 
purchase of Equipment 4 are part of the same series of related 
transactions. Thus, pursuant to the same series of related transactions, 
S became a member of the X group and B (another member of the X group) 
acquired

[[Page 871]]

Equipment 4. Because S had a depreciable interest in Equipment 4 
within the lookback period, B is treated as having a depreciable 
interest in Equipment 4 under the Stock and Asset Acquisition Rule. As 
a result, B's acquisition of Equipment 4 does not satisfy the No Prior 
Use Requirement, and B is not eligible to claim the additional first 
year depreciation deduction for Equipment 4 in 2020.
    (5) Example 5: Intercompany sale of eligible property followed by 
sale of B stock as part of the same series of related transactions--(i) 
Facts. S has a depreciable interest in Equipment 5. On January 1, 2019, 
B purchases Equipment 5 from S and places it in service. On June 1, 
2019, as part of the same series of related transactions that includes 
B's purchase of Equipment 5, Parent sells all of the stock of B to X. 
Thus, B leaves the Parent group at the end of the day on June 1, 2019, 
and B is a member of the X group starting June 2, 2019. See Sec.  
1.1502-76(b). As of June 1, 2019, Equipment 5 remains eligible 
property.
    (ii) Analysis--(A) Application of the Consolidated Asset Acquisition 
Rule. B was a member of the Parent group when it acquired Equipment 5. 
Because S, another member of the Parent group, had a depreciable 
interest in Equipment 5 while a member of the group within the lookback 
period, B would be treated as having a prior depreciable interest in 
Equipment 5 under the Group Prior Use Rule and B's acquisition of 
Equipment 5 would not satisfy the No Prior Use Requirement. However, 
B's acquisition of Equipment 5 satisfies the requirements of the 
Consolidated Asset Acquisition Rule in paragraph (c)(1)(ii) of this 
section. First, B's acquisition of Equipment 5 meets the requirements 
of Sec.  1.168(k)-2(b)(3)(iii)(A) without regard to the related-party 
tests under section 179(d)(2)(A) or (B) and Sec.  1.179-4(c)(1)(ii) or 
(iii) or the Group Prior Use Rule. Second, as part of the same series of 
related transactions that includes B's acquisition of Equipment 5, B 
ceases to be a member of the Parent group and ceases to be Related to S. 
Third, Equipment 5 continues to be eligible property on the 
deconsolidation date (June 1, 2019).
    (B) Consequences of the Consolidated Asset Acquisition Rule. Under 
the Consolidated Asset Acquisition Rule, B is treated for all Federal 
income tax purposes as transferring Equipment 5 to an unrelated person 
on June 2, 2019, in exchange for an amount of cash equal to the deemed 
sale amount and, immediately thereafter, acquiring deemed replacement 
property (New Equipment 5) from an unrelated person for an amount of 
cash equal to the deemed sale amount. Accordingly, assuming all other 
requirements in Sec.  1.168(k)-2 are satisfied, B is eligible to claim 
the additional first year depreciation for an amount equal to the deemed 
sale amount for the taxable year in which it places New Equipment 5 in 
service.
    (iii) Distribution of B. The facts are the same as in paragraph 
(d)(5)(i) of this section, except that, on June 1, 2019, Parent 
distributes the stock of B to its shareholders (which are not Related to 
S) in a distribution that qualifies for nonrecognition under section 
355(a). Accordingly, the Consolidated Asset Acquisition Rule applies. As 
in paragraph (d)(5)(ii)(B) of this section, assuming all other 
requirements in Sec.  1.168(k)-2 are satisfied, B is eligible to claim 
the additional first year depreciation deduction for an amount equal to 
the deemed sale amount for the taxable year in which it places New 
Equipment 5 in service.
    (iv) Equipment 5 ceases to be eligible property. The facts are the 
same as in paragraph (d)(5)(i) of this section, except that, on June 1, 
2019, Equipment 5 is no longer eligible property. The Consolidated 
Asset Acquisition Rule does not apply because B's acquisition of 
Equipment 5 fails to satisfy the requirement in paragraph (c)(1)(ii)(C) 
of this section that the acquired eligible property continue to be 
eligible property on the deconsolidation date. Therefore, B's 
acquisition of Equipment 5 on January 1, 2019, fails to satisfy the No 
Prior Use Requirement. Under the Group Prior Use Rule, B is treated as 
having a prior depreciable interest in Equipment 5 because B is a 
member of the Parent group and S, while a member of the Parent group, 
had a depreciable interest in Equipment 5 within the lookback period. 
Accordingly, B is not eligible to claim

[[Page 872]]

the additional first year depreciation deduction with respect to 
Equipment 5 in 2019.
    (6) Example 6: Intercompany sale of member stock for which a section 
338(h)(10) election is made followed by sale of B stock as part of a 
series of related transactions--(i) Facts. S owns all of the stock of T, 
which has a depreciable interest in Equipment 6. On January 1, 2019, B 
purchases all of the T stock from S in a qualified stock purchase for 
which a section 338(h)(10) election is made. On June 1, 2019, as part of 
the same series of related transactions that includes B's purchase of 
the T stock, Parent sells all of the stock of B to X. Thus, B and T 
leave the Parent group at the end of the day on June 1, 2019, and B and 
T are members of the X group starting June 2, 2019. See Sec.  1.1502-
76(b). As of June 1, 2019, Equipment 6 remains eligible property.
    (ii) Analysis--(A) Section 338(h)(10) election. Pursuant to the 
section 338(h)(10) election, Old T is treated as transferring all of its 
assets, including Equipment 6, to an unrelated person in a single 
transaction in exchange for consideration at the close of the 
acquisition date (January 1, 2019), and New T is treated as acquiring 
all of its assets, including Equipment 6, from an unrelated person in 
exchange for consideration. Old T is deemed to liquidate following the 
deemed asset sale. See Sec.  1.338-1(a)(1).
    (B) Application of the Consolidated Deemed Acquisition Rule. New T 
was a member of the Parent group when New T acquired Equipment 6 from 
an unrelated person. Because Old T, another member of the Parent group, 
had a depreciable interest in Equipment 6 while a member of the group 
within the lookback period, New T would be treated as having a prior 
depreciable interest in Equipment 6 under the Group Prior Use Rule and 
New T's acquisition of Equipment 6 would not satisfy the No Prior Use 
Requirement. However, New T's acquisition of Equipment 6 satisfies the 
requirements of the Consolidated Deemed Acquisition Rule in paragraph 
(c)(2)(ii) of this section. First, New T's acquisition of Equipment 6 
meets the requirements of Sec.  1.168(k)-2(b)(3)(iii)(A) without regard 
to the Group Prior Use Rule. Second, as part of the same series of 
related transactions that includes B's qualified stock purchase of the T 
stock, B and New T cease to be members of the Parent group and cease to 
be Related to S. Third, Equipment 6 continues to be eligible property 
on the deconsolidation date (June 1, 2019).
    (C) Consequences of the Consolidated Deemed Acquisition Rule. Under 
the Consolidated Deemed Acquisition Rule, New T is treated for all 
Federal income tax purposes as transferring Equipment 6 to an unrelated 
person on June 2, 2019, in exchange for an amount of cash equal to the 
deemed sale amount and, immediately thereafter, acquiring deemed 
replacement property (New Equipment 6) from an unrelated person for an 
amount of cash equal to the deemed sale amount. Accordingly, assuming 
all other requirements in Sec.  1.168(k)-2 are satisfied, New T is 
eligible to claim the additional first year depreciation deduction for 
an amount equal to the deemed sale amount for the taxable year in which 
it places New Equipment 6 in service.
    (iii) T owns multiple assets. The facts are the same as in paragraph 
(d)(6)(i) of this section, except that, in addition to Equipment 6, T 
also owns Asset A (depreciable real estate that is not eligible 
property). With respect to Equipment 6, the results are the same as in 
paragraph (d)(6)(ii) of this section. However, the Consolidated Deemed 
Acquisition Rule does not apply to Asset A because it is not eligible 
property. Accordingly, New T is not treated as transferring Asset A to 
an unrelated person on June 2, 2019 and then, immediately thereafter, 
acquiring deemed replacement property for Asset A. If Equipment 6 had 
ceased to be eligible property as of June 1, 2019, the Consolidated 
Deemed Acquisition Rule also would not apply to Equipment 6.
    (7) Example 7: Section 355 transaction following a section 
338(h)(10) transaction pursuant to the same series of related 
transactions--(i) Facts. T has a depreciable interest in Equipment 7. 
On January 1, 2019, Parent contributes all of the stock of T to B in 
exchange for common and non-voting preferred stock of B and sells the 
non-voting preferred stock of B to U pursuant to a

[[Page 873]]

binding commitment entered into prior to the contribution (T Exchange). 
The non-voting preferred stock is not treated as ``stock'' for purposes 
of section 1504(a). See section 1504(a)(4). Parent and B jointly make an 
election under section 338(h)(10) with respect to the T Exchange. On 
June 1, 2019, as part of the same series of related transactions that 
includes the T Exchange, Parent contributes the stock of B and assets 
comprising an active trade or business (within the meaning of section 
355(b)) to Controlled in exchange for Controlled common stock and then 
distributes the Controlled common stock to Parent's shareholders in a 
distribution qualifying under section 355(a) (Controlled Distribution). 
In the Controlled Distribution, T and B cease to be Related to Parent. 
Equipment 7 remains eligible property on June 1, 2019.
    (ii) Section 338(h)(10) election. Immediately after the Controlled 
Distribution, Parent and B are not related as determined under section 
338(h)(3)(A)(iii). Further, B's basis in the T stock is not determined, 
in whole or in part, by reference to the adjusted basis of the T stock 
in the hands of Parent, and the stock is not acquired in an exchange to 
which section 351, 354, 355, or 356 applies. Accordingly, the T Exchange 
qualifies as a ``purchase'' within the meaning of section 338(h)(3). 
Pursuant to the section 338(h)(10) election, Old T is treated as 
transferring all of its assets, including Equipment 7, to an unrelated 
person in a single transaction in exchange for consideration at the 
close of the acquisition date (January 1, 2019), and New T is treated as 
acquiring all of its assets, including Equipment 7, from an unrelated 
person in exchange for consideration. Old T is deemed to liquidate 
following the deemed asset sale. See Sec.  1.338-1(a)(1).
    (iii) Application of the Consolidated Deemed Acquisition Rule. New T 
was a member of the Parent group when New T acquired Equipment 7 from 
an unrelated person. Because Old T, another member of the Parent group, 
had a depreciable interest in Equipment 7 while a member of the group 
within the lookback period, New T would be treated as having a prior 
depreciable interest in Equipment 7 under the Group Prior Use Rule and 
New T's acquisition of Equipment 7 would not satisfy the No Prior Use 
Requirement. However, New T's acquisition of Equipment 7 satisfies the 
requirements of the Consolidated Deemed Acquisition Rule in paragraph 
(c)(2)(ii) of this section. Thus, New T is treated for all Federal 
income tax purposes as transferring Equipment 7 to an unrelated person 
on June 2, 2019, in exchange for an amount of cash equal to the deemed 
sale amount and, immediately thereafter, acquiring deemed replacement 
property (New Equipment 7) from an unrelated person for an amount of 
cash equal to the deemed sale amount. Accordingly, assuming all other 
requirements in Sec.  1.168(k)-2 are satisfied, New T is eligible to 
claim the additional first year depreciation deduction for an amount 
equal to the deemed sale amount for the taxable year in which it places 
New Equipment 7 in service.
    (e) Applicability dates--(1) In general. Except as provided in 
paragraph (e)(2) of this section, this section applies to--
    (i) Depreciable property acquired after September 27, 2017, by the 
taxpayer and placed in service by the taxpayer during or after the 
taxpayer's taxable year that begins on or after January 1, 2021;
    (ii) A specified plant for which the taxpayer properly made an 
election to apply section 168(k)(5) and that is planted, or grafted to a 
plant that was previously planted, by the taxpayer during or after the 
taxpayer's taxable year that begins on or after January 1, 2021; and
    (iii) Components acquired or self-constructed after September 27, 
2017, of larger self-constructed property described in Sec.  1.168(k)-
2(c)(2) and placed in service by the taxpayer during or after the 
taxpayer's taxable year that begins on or after January 1, 2021.
    (2) Early application of this section and Sec.  1.168(k)-2--(i) In 
general. Subject to paragraphs (e)(2)(ii) and (iii) of this section, and 
provided that all members of a consolidated group consistently apply the 
same set of rules, a taxpayer may choose to apply both the rules of this 
section and the rules of Sec.  1.168(k)-2, in their entirety and in a 
consistent manner, to--

[[Page 874]]

    (A) Depreciable property acquired after September 27, 2017, by the 
taxpayer and placed in service by the taxpayer during a taxable year 
ending on or after September 28, 2017;
    (B) A specified plant for which the taxpayer properly made an 
election to apply section 168(k)(5) and that is planted, or grafted to a 
plant that was previously planted, after September 27, 2017, by the 
taxpayer during a taxable year ending on or after September 28, 2017; 
and
    (C) Components acquired or self-constructed after September 27, 
2017, of larger self-constructed property described in Sec.  1.168(k)-
2(c)(2) and placed in service by the taxpayer during a taxable year 
ending on or after September 28, 2017.
    (ii) Early application to certain transactions. In the case of 
property described in paragraph (e)(2)(i) of this section that is 
acquired in a transaction that satisfies the requirements of paragraph 
(c)(1)(ii) or (c)(2)(ii) of this section, the taxpayer may apply the 
rules of this section and the rules of Sec.  1.168(k)-2, in their 
entirety and in a consistent manner, to such property only if those 
rules are applied, in their entirety and in a consistent manner, by all 
parties to the transaction (including the transferor member, the 
transferee member, and the target, as applicable) and the consolidated 
groups of which they are members, for the taxable year(s) in which the 
transaction occurs and the taxable year(s) that includes the day after 
the deconsolidation date.
    (iii) Bound by early application. Once a taxpayer applies the rules 
of this section and the rules of Sec.  1.168(k)-2, in their entirety, 
for a taxable year, the taxpayer must continue to apply the rules of 
this section and the rules of Sec.  1.168(k)-2, in their entirety, for 
the taxpayer's subsequent taxable years.

[T.D. 9916, 85 FR 71765, Nov. 10, 2020]

                Administrative Provisions and Other Rules



Sec.  1.1502-75  Filing of consolidated returns.

    (a) Privilege of filing consolidated returns--(1) Exercise of 
privilege for first consolidated return year. A group which did not file 
a consolidated return for the immediately preceding taxable year may 
file a consolidated return in lieu of separate returns for the taxable 
year, provided that each corporation which has been a member during any 
part of the taxable year for which the consolidated return is to be 
filed consents (in the manner provided in paragraph (b) of this section) 
to the regulations under section 1502. If a group wishes to exercise its 
privilege of filing a consolidated return, such consolidated return must 
be filed not later than the last day prescribed by law (including 
extensions of time) for the filing of the common parent's return. Such 
consolidated return may not be withdrawn after such last day (but the 
group may change the basis of its return at any time prior to such last 
day).
    (2) Continued filing requirement. A group which filed (or was 
required to file) a consolidated return for the immediately preceding 
taxable year is required to file a consolidated return for the taxable 
year unless it has an election to discontinue filing consolidated 
returns under paragraph (c) of this section.
    (b) How consent for first consolidated year exercised--(1) General 
rule. The consent of a corporation referred to in paragraph (a)(1) of 
this section shall be made by such corporation joining in the making of 
the consolidated return for such year. A corporation shall be deemed to 
have joined in the making of such return for such year if it files a 
Form 1122 in the manner specified in paragraph (h)(2) of this section.
    (2) Consent under facts and circumstances. If a member of the group 
fails to file Form 1122, the Commissioner may under the facts and 
circumstances determine that such member has joined in the making of a 
consolidated return by such group. The following circumstances, among 
others, will be taken into account in making this determination:
    (i) Whether or not the income and deductions of the member were 
included in the consolidated return;
    (ii) Whether or not a separate return was filed by the member for 
that taxable year; and

[[Page 875]]

    (iii) Whether or not the member was included in the affiliations 
schedule, Form 851.

If the Commissioner determines that the member has joined in the making 
of the consolidated return, such member shall be treated as if it had 
filed a Form 1122 for such year for purposes of paragraph (h)(2) of this 
section.
    (3) Failure to consent due to mistake. If any member has failed to 
join in the making of a consolidated return under either subparagraph 
(1) or (2) of this paragraph, then the tax liability of each member of 
the group shall be determined on the basis of separate returns unless 
the common parent corporation establishes to the satisfaction of the 
Commissioner that the failure of such member to join in the making of 
the consolidated return was due to a mistake of law or fact, or to 
inadvertence. In such case, such member shall be treated as if it had 
filed a Form 1122 for such year for purposes of paragraph (h)(2) of this 
section, and thus joined in the making of the consolidated return for 
such year.
    (c) Election to discontinue filing consolidated returns--(1) Good 
cause--(i) In general. Notwithstanding that a consolidated return is 
required for a taxable year, the Commissioner, upon application by the 
common parent, may for good cause shown grant permission to a group to 
discontinue filing consolidated returns. Any such application shall be 
made to the Commissioner of Internal Revenue, Washington, DC 20224, and 
shall be made not later than the 90th day before the due date for the 
filing of the consolidated return (including extensions of time). In 
addition, if an amendment of the Code, or other law affecting the 
computation of tax liability, is enacted and the enactment is effective 
for a taxable year ending before or within 90 days after the date of 
enactment, then application for such a taxable year may be made not 
later than the 180th day after the date of enactment, and if the 
application is approved the permission to discontinue filing 
consolidated returns will apply to such taxable year notwithstanding 
that a consolidated return has already been filed for such year.
    (ii) Substantial adverse change in law affecting tax liability. 
Ordinarily, the Commissioner will grant a group permission to 
discontinue filing consolidated returns if the net result of all 
amendments to the Code or regulations with effective dates commencing 
within the taxable year has a substantial adverse effect on the 
consolidated tax liability of the group for such year relative to what 
the aggregate tax liability would be if the members of the group filed 
separate returns for such year. Thus, for example, assume P and S filed 
a consolidated return for the calendar year 1966 and that the provisions 
of the Code have been amended by a bill which was enacted by Congress in 
1966, but which is first effective for taxable years beginning on or 
after January 1, 1967. Assume further that P makes a timely application 
to discontinue filing consolidated returns. In order to determine 
whether the amendments have a substantial adverse effect on the 
consolidated tax liability for 1967, relative to what the aggregate tax 
liability would be if the members of the group filed separate returns 
for 1967, the difference between the tax liability of the group computed 
on a consolidated basis and taking into account the changes in the law 
effective for 1967 and the aggregate tax liability of the members of the 
group computed as if each such member filed separate returns for such 
year (also taking into account such changes) shall be compared with the 
difference between the tax liability of such group for 1967 computed on 
a consolidated basis without regard to the changes in the law effective 
in such year and the aggregate tax liability of the members of the group 
computed as if separate returns had been filed by such members for such 
year without regard to the changes in the law effective in such year.
    (iii) Other factors. In addition, the Commissioner will take into 
account other factors in determining whether good cause exists for 
granting permission to discontinue filing consolidated returns beginning 
with the taxable year, including:
    (a) Changes in law or circumstances, including changes which do not 
affect Federal income tax liability,

[[Page 876]]

    (b) Changes in law which are first effective in the taxable year and 
which result in a substantial reduction in the consolidated net 
operating loss (or consolidated unused investment credit) for such year 
relative to what the aggregate net operating losses (or investment 
credits) would be if the members of the group filed separate returns for 
such year, and
    (c) Changes in the Code or regulations which are effective prior to 
the taxable year but which first have a substantial adverse effect on 
the filing of a consolidated return relative to the filing of separate 
returns by members of the group in such year.
    (2) Discretion of Commissioner to grant blanket permission--(i) 
Permission to all groups. The Commissioner, in his discretion, may grant 
all groups permission to discontinue filing consolidated returns if any 
provision of the Code or regulations has been amended and such amendment 
is of the type which could have a substantial adverse effect on the 
filing of consolidated returns by substantially all groups, relative to 
the filing of separate returns. Ordinarily, the permission to 
discontinue shall apply with respect to the taxable year of each group 
which includes the effective date of such an amendment.
    (ii) Permission to a class of groups. The Commissioner, in his 
discretion, may grant a particular class of groups permission to 
discontinue filing consolidated returns if any provision of the Code or 
regulations has been amended and such amendment is of the type which 
could have a substantial adverse effect on the filing of consolidated 
returns by substantially all such groups relative to the filing of 
separate returns. Ordinarily, the permission to discontinue shall apply 
with respect to the taxable year of each group within the class which 
includes the effective date of such an amendment.
    (3) Time and manner for exercising election. If, under subparagraph 
(1) or (2) of this paragraph, a group has an election to discontinue 
filing consolidated returns for any taxable year and such group wishes 
to exercise such election, then the common parent must file a separate 
return for such year on or before the last day prescribed by law 
(including extensions of time) for the filing of the consolidated return 
for such year. See section 6081 (relating to extensions of time for 
filing returns).
    (d) When a group remains in existence--(1) General rule. A group 
remains in existence for a tax year if the common parent remains as the 
common parent and at least one subsidiary that was affiliated with it at 
the end of the prior year remains affiliated with it at the beginning of 
the year, whether or not one or more corporations have ceased to be 
subsidiaries at any time after the group was formed. Thus, for example, 
assume that corporation P acquires the sole outstanding share of stock 
of S on January 1, year 1, and that P and S file a consolidated return 
for the year 1 calendar year. On May 1, year 2, P acquires the sole 
outstanding share of stock of S1 and, on July 1, year 2, P sells the S 
share. The group (consisting originally of P and S) remains in existence 
in year 2 because P remained the common parent and, S, a subsidiary that 
was affiliated with P at the end of year 1, remained affiliated with P 
at the beginning of year 2.
    (2) Common parent no longer in existence--(i) Mere change in 
identity. For purposes of this paragraph, the common parent corporation 
shall remain as the common parent irrespective of a mere change in 
identity, form, or place of organization of such common parent 
corporation (see section 368(a)(1)(F)).
    (ii) Transfer of assets to subsidiary. The group shall be considered 
as remaining in existence notwithstanding that the common parent is no 
longer in existence if the members of the affiliated group succeed to 
and become the owners of substantially all of the assets of such former 
parent and there remains one or more chains of includible corporations 
connected through stock ownership with a common parent corporation which 
is an includible corporation and which was a member of the group prior 
to the date such former parent ceases to exist. For purposes of applying 
paragraph (f)(2)(i) of Sec.  1.1502-1 to separate return years ending on 
or before the date on which the former parent ceases to exist, such 
former parent, and not the new common parent, shall be considered to be 
the corporation described in such paragraph.

[[Page 877]]

    (iii) Taxable years. If a transfer of assets described in 
subdivision (ii) of this subparagraph is an acquisition to which section 
381(a) applies and if the group files a consolidated return for the 
taxable year in which the acquisition occurs, then for purposes of 
section 381:
    (a) The former common parent shall not close its taxable year merely 
because of the acquisition, and all taxable years of such former parent 
ending on or before the date of acquisition shall be treated as taxable 
years of the acquiring corporation, and
    (b) The corporation acquiring the assets shall close its taxable 
year as of the date of acquisition, and all taxable years of such 
corporation ending on or before the date of acquisition shall be treated 
as taxable years of the transferor corporation.
    (iv) Exception. With respect to acquisitions occurring before 
January 1, 1971, subdivision (iii) of this subparagraph shall not apply 
if the group, in its income tax return, treats the taxable year of the 
former common parent as having closed as of the date of acquisition.
    (3) Reverse acquisitions--(i) In general. If a corporation 
(hereinafter referred to as the ``first corporation'') or any member of 
a group of which the first corporation is the common parent acquires 
after October 1, 1965:
    (a) Stock of another corporation (hereinafter referred to as the 
second corporation), and as a result the second corporation becomes (or 
would become but for the application of this subparagraph) a member of a 
group of which the first corporation is the common parent, or
    (b) Substantially all the assets of the second corporation,


in exchange (in whole or in part) for stock of the first corporation, 
and the stockholders (immediately before the acquisition) of the second 
corporation, as a result of owning stock of the second corporation, own 
(immediately after the acquisition) more than 50 percent of the fair 
market value of the outstanding stock of the first corporation, then any 
group of which the first corporation was the common parent immediately 
before the acquisition shall cease to exist as of the date of 
acquisition, and any group of which the second corporation was the 
common parent immediately before the acquisition shall be treated as 
remaining in existence (with the first corporation becoming the common 
parent of the group). Thus, assume that corporations P and S comprised 
group PS (P being the common parent), that P was merged into corporation 
T (the common parent of a group composed of T and corporation U), and 
that the shareholders of P immediately before the merger, as a result of 
owning stock in P, own 90 percent of the fair market value of T's stock 
immediately after the merger. The group of which P was the common parent 
is treated as continuing in existence with T and U being added as 
members of the group, and T taking the place of P as the common parent.


For purposes of determining under (a) of this subdivision whether the 
second corporation becomes (or would become) a member of the group of 
which the first corporation is the common parent, and for purposes of 
determining whether the former stockholders of the second corporation 
own more than 50 percent of the outstanding stock of the first 
corporation, there shall be taken into account any acquisitions or 
redemptions of the stock of either corporation which are pursuant to a 
plan of acquisition described in (a) or (b) of this subdivision.
    (ii) Prior ownership of stock. For purposes of subdivision (i) of 
this subparagraph, if the first corporation, and any members of a group 
of which the first corporation is the common parent, have continuously 
owned for a period of at least 5 years ending on the date of the 
acquisition an aggregate of at least 25 percent of the fair market value 
of the outstanding stock of the second corporation, then the first 
corporation (and any subsidiary which owns stock of the second 
corporation immediately before the acquisition) shall, as a result of 
owning such stock, be treated as owning (immediately after the 
acquisition) a percentage of the fair market value of the first 
corporation's outstanding stock which bears the same ratio to (a) the 
percentage of the fair market value of all the stock of the second 
corporation owned immediately

[[Page 878]]

before the acquisition by the first corporation and its subsidiaries as 
(b) the fair market value of the total outstanding stock of the second 
corporation immediately before the acquisition bears to (c) the sum of 
(1) the fair market value, immediately before the acquisition, of the 
total outstanding stock of the first corporation, and (2) the fair 
market value, immediately before the acquisition, of the total 
outstanding stock of the second corporation (other than any such stock 
owned by the first corporation and any of its subsidiaries). For 
example, assume that corporation P owns stock in corporation T having a 
fair market value of $100,000, that P acquires the remaining stock of T 
from individuals in exchange for stock of P, that immediately before the 
acquisition the total outstanding stock of T had a fair market value of 
$150,000, and that immediately before the acquisition the total 
outstanding stock of P had a fair market value of $200,000. Assuming P 
owned at least 25 percent of the fair market value of T's stock for 5 
years, then for purposes of this subparagraph, P is treated as owning 
(immediately after the acquisition) 40 percent of the fair market value 
of its own outstanding stock, determined as follows:

             [$150,000/($200,000 + $50,000)] x 662/3% = 40%.

Thus, if the former individual stockholders of T own, immediately after 
the acquisition more than 10 percent of the fair market value of the 
outstanding stock of P as a result of owning stock of T, the group of 
which T was the common parent is treated as continuing in existence with 
P as the common parent, and the group of which P was the common parent 
before the acquisition ceases to exist.
    (iii) Election. The provisions of subdivision (ii) of this 
subparagraph shall not apply to any acquisition occurring in a taxable 
year ending after October 7, 1969, unless the first corporation elects 
to have such subdivision apply. The election shall be made by means of a 
statement, signed by any officer who is duly authorized to act on behalf 
of the first corporation, stating that the corporation elects to have 
the provisions of Sec.  1.1502-75(d)(3)(ii) apply and identifying the 
acquisition to which such provisions will apply. The statement shall be 
filed, on or before the due date (including extensions of time) of the 
return for the group's first consolidated return year ending after the 
date of the acquisition, with the internal revenue officer with whom 
such return is required to be filed.
    (iv) Transfer of assets to subsidiary. This subparagraph shall not 
apply to a transaction to which subparagraph (2)(ii) of this paragraph 
applies.
    (v) Taxable years. If, in a transaction described in subdivision (i) 
of this subparagraph, the first corporation files a consolidated return 
for the first taxable year ending after the date of acquisition, then:
    (a) The first corporation, and each corporation which, immediately 
before the acquisition, is a member of the group of which the first 
corporation is the common parent, shall close its taxable year as of the 
date of acquisition, and each such corporation shall, immediately after 
the acquisition, change to the taxable year of the second corporation, 
and
    (b) If the acquisition is a transaction described in section 
381(a)(2), then for purposes of section 381:
    (1) All taxable years ending on or before the date of acquisition, 
of the first corporation and each corporation which, immediately before 
the acquisition, is a member of the group of which the first corporation 
is the common parent, shall be treated as taxable years of the 
transferor corporation, and
    (2) The second corporation shall not close its taxable year merely 
because of such acquisition, and all taxable years ending on or before 
the date of acquisition, of the second corporation and each corporation 
which, immediately before the acquisition, is a member of any group of 
which the second corporation is the common parent, shall be treated as 
taxable years of the acquiring corporation.
    (vi) Exception. With respect to acquisitions occurring before April 
17, 1968, subdivision (v) of this subparagraph shall not apply if the 
parties to the

[[Page 879]]

transaction, in their income tax returns, treat subdivision (i) as not 
affecting the closing of taxable years or the operation of section 381.
    (4) [Reserved]
    (5) Coordination with section 833--(i) Election to continue old 
group. If, solely by reason of the enactment of section 833 (relating to 
certain Blue Cross or Blue Shield organizations and certain other health 
insurers), an organization to which section 833 applies (a ``section 833 
organization'') became the new common parent of an old group on January 
1, 1987, the old group may elect to continue in existence with that 
section 833 organization as its new common parent, provided all the old 
groups having the same section 833 organization as their new common 
parent elect to continue in existence. To revoke this election, see 
paragraph (d)(5)(x) of this section. To file as a new group, see 
paragraph (d)(5)(v) of this section.
    (ii) Old group. For purposes of this paragraph (d)(5), an old group 
is a group which, for its last taxable year ending in 1986, either filed 
a consolidated return or was eligible to (but did not) file a 
consolidated return.
    (iii) Manner of electing to continue--(A) Deemed election. If all 
the members of all the old groups having the same section 833 
organization as their new common parent are included for the first 
taxable year beginning after December 31, 1986, on the same consolidated 
(or amended consolidated) return and a Form 1122 was not filed, the old 
groups are deemed to have elected under paragraph (d)(5)(i) of this 
section to continue in existence.
    (B) Delayed election. If a deemed election to continue in existence 
was not made under paragraph (d)(5)(iii)(A) of this section, all the 
members of all the old groups having the same section 833 organization 
as their new common parent may make a delayed election under paragraph 
(d)(5)(i) of this section to continue in existence by:
    (1) Filing an appropriate consolidated (or amended consolidated) 
return or returns for each taxable year beginning after December 31, 
1986, (notwithstanding Sec.  1.1502-75(a)(1)) on or before January 3, 
1991, and
    (2) On the top of any such return prominently affixing a statement 
containing the following declaration: ``THIS RETURN'' (or, if 
applicable, ``AMENDED RETURN'') ``REFLECTS A DELAYED ELECTION TO 
CONTINUE UNDER Sec.  1.1502-75T(d)(5)(iii)(B)''. A delayed election to 
continue in existence automatically revokes a deemed election to file as 
a new group which was made under paragraph (d)(5)(vi) of this section.
    (iv) Effects of election to continue in existence. If an old group 
or groups elect to continue in existence under paragraph (d)(5)(i) of 
this section, the following rules apply:
    (A) Taxable years. Each member that filed returns other than on a 
calendar year basis shall close its taxable year on December 31, 1986, 
and change to a calendar year beginning on January 1, 1987. See section 
843 and Sec.  1.1502-76(a)(1).
    (B) Carryovers from separate return limitation years. For purposes 
of applying the separate return limitation year rules to carryovers from 
taxable years beginning before 1987 to taxable years beginning after 
1986, the following rules apply:
    (1) Any taxable year beginning before 1987 of a corporation that was 
not a member of an old group (including a section 833 organization) will 
be treated as a separate return limitation year;
    (2) Any taxable year beginning before 1987 of a corporation that was 
a member of an old group that, without regard to this section and the 
enactment of section 833, was a separate return limitation year will 
continue to be treated as a separate return limitation year;
    (3) Any taxable year beginning before 1987 of a member of an old 
group (other than a separate return limitation year described in 
paragraph (d)(5)(iv)(B)(2) of this section) will not be treated as a 
separate return limitation year with respect to any corporation that was 
a member of such group for each day of that taxable year; and
    (4) Any taxable year beginning before 1987 of a member of an old 
group will be treated as a separate return limitation year with respect 
to any corporation that was not a member of such group for each day of 
that taxable year (e.g., a corporation that was not a member of an old 
group, including a section 833

[[Page 880]]

organization, or a corporation that was a member of another old group).
    (C) Five-year rules for life-nonlife groups. Any life-nonlife 
election under section 1504(c)(2) in effect for an old group remains in 
effect. Any old group which was eligible to make a life-nonlife election 
will remain eligible to make the election. For purposes of section 
1503(c), a nonlife member is treated as ineligible under Sec.  1.1502-
47(d)(13) with respect to a life member, unless both were members of the 
same affiliated group (determined without regard to the exclusions in 
section 1504(b) (1) and (2)) for five taxable years immediately 
preceding the taxable year in which the loss arose. See paragraph 
(d)(5)(ix) of this section for a tacking rule.
    (v) Election to file as a new group. If, solely by reason of the 
enactment of section 833, a section 833 organization became the new 
common parent of an old group on January 1, 1987, the application of the 
five-year prohibition on reconsolidation in section 1504(a)(3)(A) to the 
old group is waived and the old group together with the new section 833 
organization common parent may elect to file as a new group provided 
that all includible corporations elect to file a consolidated (or 
amended consolidated) return as a new group for the first taxable year 
beginning after December 31, 1986. To revoke this election, see 
paragraph (d)(5)(x) of this section.
    (vi) Manner of electing to file as a new group--(A) Deemed election. 
The old group or groups and the section 833 organization are deemed to 
have elected under paragraph (d)(5)(v) of this section to file as a new 
group by filing, for the first taxable year beginning after December 31, 
1986, a Form 1122 and a consolidated (or amended consolidated) tax 
return.
    (B) Delayed election. If a deemed election to file as a new group 
was not made pursuant to paragraph (d)(5)(vi)(A) of this section, the 
old group or groups and the section 833 organization may make a delayed 
election under paragraph (d)(5)(v) of this section to file as a new 
group by
    (1) Filing an appropriate consolidated (or amended consolidated) 
return or returns for each taxable year beginning after December 31, 
1986 (notwithstanding Sec.  1.1502-75(a)(1)) on or before January 3, 
1991, and
    (2) On the top of any such return prominently affixing a statement 
containing the following declaration: ``THIS RETURN'' (or, if 
applicable, ``AMENDED RETURN'') ``REFLECTS A DELAYED ELECTION TO FILE AS 
A NEW GROUP UNDER Sec.  1.1502-75T (d)(5)(vi)(B)''. A delayed election 
to file as a new group automatically revokes any deemed election to 
continue in existence which was made under paragraph (d)(5)(iii) of this 
section.
    (vii) Effects of election to file as a new group. If an old group or 
groups elect to file as a new group under paragraph (d)(5)(v) of this 
section, the following rules apply:
    (A) Termination. Each old group is treated as if it terminated on 
January 1, 1987, and the termination is not treated as resulting from 
the acquisition by a nonmember of all of the stock of the common parent.
    (B) Taxable years. Each member that filed returns other than on a 
calendar year basis shall close its taxable year on December 31, 1986, 
and change to a calendar year beginning on January 1, 1987. See section 
843 and Sec.  1.1502-76(a)(1).
    (C) Separate return limitation year and life-nonlife groups. For 
purposes of Sec.  1.1502-1(f), sections 1503(c) and 1504(c), and Sec.  
1.1502-47, the group is treated as coming into existence as a new group 
on January 1, 1987. Thus, for example, paragraphs (d)(5)(iv) (B) and (C) 
of this section do not apply.
    (viii) Earnings and profits. All distributions after January 1, 1987 
by a corporation, whether or not such corporation was a member of an old 
group, to an existing Blue Cross or Blue Shield organization (as defined 
in section 833(c)(2)) out of earnings and profits accumulated before 
1987 are deemed made out of earnings and profits accumulated in pre-
affiliation years. See Sec.  1.1502-32(h)(5).
    (ix) Five-year tacking rules for certain life-nonlife groups. For 
purposes of applying Sec.  1.1502-47(d) (5) and (12) to any taxable year 
ending after 1986 to a corporation, whether or not the corporation was a 
member of an old group,

[[Page 881]]

    (A) The determination of whether the corporation was in existence 
and a member or tentatively treated as a member of a group, for taxable 
years ending before 1987, is made without regard to the exclusions under 
section 1504(b) (1) and (2) of any section 833 organization or life 
insurance company (as the case may be) and
    (B) A section 833 organization is not treated as having a change in 
tax character solely by reason of the loss of its tax-exempt status due 
to the enactment of section 833.

This paragraph (d)(5)(ix) does not apply if an election to file as a new 
group under paragraph (d)(5)(v) of this section is made.
    (x) Time to revoke elections made before September 5, 1990. An 
election by an old group to continue in existence or to file as a new 
group that was made (or deemed made) before September 5, 1990, may be 
revoked by filing an appropriate return (or returns) on or before 
January 3, 1991. For purposes of this paragraph (d)(5)(x), appropriate 
returns include separate returns filed by each member of the group or 
consolidated returns filed in accordance with a delayed election either 
under paragraph (d)(5)(iii)(B) or (vi)(B) of this section.
    (xi) Examples. The following examples illustrate this paragraph 
(d)(5). In these examples, each corporation uses the calendar year as 
its taxable year.

    Example 1. B is a section 833 organization. For several years, B has 
owned all of the outstanding stock of X, Y, and Z. X has owned all the 
outstanding stock of X1 throughout X1's existence 
and Y has owned all of the outstanding stock of Y1 throughout 
Y1's existence. For 1986 X and X1 filed a 
consolidated federal income tax return but Y and Y1 filed 
separate returns. Under paragraph (d)(5)(ii) of this section, X and 
X1 and Y and Y1 each constitute an old group 
because they either filed a consolidated return or were eligible to file 
a consolidated return for 1986. The X and Y groups may elect under 
paragraph (d)(5)(i) of this section to continue in existence. If they 
elect to continue, under paragraph (d)(5)(iv)(B) of this section, the 
separate return limitation year rules apply as follows: any taxable year 
of B or Z beginning before 1987 is treated as a separate return 
limitation year with respect to each other and to all other members of 
the group; any taxable year of X or X1 beginning before 1987 
is treated as a separate return limitation year with respect to B, Z, Y 
and Y1, but not with respect to each other; and any taxable 
year of Y or Y1 beginning before 1987 is treated as a 
separate return limitation year with respect to B, Z, X and 
X1, but not with respect to each other.
    Example 2. The facts are the same as in Example 1 except that B is 
owned by C, another section 833 organization. If the X and Y groups 
elect to continue, the results are the same as in Example 1, except 
that, under paragraph (d)(5)(iv)(B)(1) of this section, for purposes of 
applying the separate return limitation year rules, any taxable year of 
C beginning before 1987 is also treated as a separate return limitation 
year with respect to all other members of the group.
    Example 3. The facts are the same as in Example 1 except that Y 
purchased Y1 on January 1, 1985. If the X and Y groups elect 
to continue, the results are the same as in Example 1, except that, 
under paragraph (d)(5)(iv)(B)(2) of this section, for purposes of 
applying the separate return limitation year rules, any taxable year of 
Y1 beginning before 1985 is treated as a separate return 
limitation year with respect to Y as well as with respect to all other 
members of the group.
    Example 4. B, a section 833 organization, has owned all the stock of 
X since November 1984. X has owned all the stock of L, a life insurance 
company, throughout L's existence. In 1986, X and L properly filed a 
life-nonlife consolidated return. Under paragraph (d)(5)(i) of this 
section, the X group elects to continue in existence. Under paragraph 
(d)(5)(iv)(C) of this section, the life-nonlife election will remain in 
effect. However, losses of B which arise before 1990 cannot be used to 
offset the income of L. See section 1503(c)(2) and Sec.  1.1502-
47(d)(13) and paragraph (d)(5)(iv)(C) of this section. Under paragraph 
(d)(5)(iv)(B) of this section, the separate return limitation year rules 
apply as follows: any taxable year of B beginning before 1987 is treated 
as a separate return limitation year with respect to all other members 
of the group; and any taxable year of X or L beginning before 1987 is 
treated as a separate return limitation year with respect to B, but not 
with respect to each other.
    Example 5. The facts are the same as Example 4 except that, on 
January 1, 1984, B formed L1, a life insurance company. Under 
paragraph (d)(5)(ix) of this section and section 1504(c), the first year 
L1 is eligible to join in B's life-nonlife election is 1989.
    Example 6. The facts are the same as in Example 4 except that B and 
the X group elect under paragraph (d)(5)(v) of this section to file as a 
new group. The X group will be considered to have terminated under Sec.  
1.1502-75(d)(1) on December 31, 1986. X and L are each separately 
subject to the separate return limitation year rules of Sec.  1.1502-
1(f). The first year L and L1 are eligible to join the new 
group in a life-nonlife election is 1992 (five years after the new group 
is formed).

[[Page 882]]

See section 1504(c)(2) and paragraphs (d)(5)(vii)(C) and (ix) of this 
section.

    The provisions contained in this Treasury decision are needed to 
immediately amend the consolidated return regulations in response to 
changes made by section 1012 of the Tax Reform Act of 1986. It is 
therefore found impracticable and contrary to the public interest to 
issue this Treasury decision with notice and public procedure under 
section 553(b) of title 5 of the United States Code or subject to the 
effective date limitations of section 553(d) of title 5, United States 
Code.
    (e) Failure to include subsidiary. If a consolidated return is 
required for the taxable year under the provisions of paragraph (a)(2) 
of this section, the tax liability of all members of the group for such 
year shall be computed on a consolidated basis even though:
    (1) Separate returns are filed by one or more members of the group, 
or
    (2) There has been a failure to include in the consolidated return 
the income of any member of the group.

If subparagraph (1) of this paragraph applies, the amounts assessed or 
paid upon the basis of separate returns shall be considered as having 
been assessed or paid upon the basis of a consolidated return.
    (f) Inclusion of one or more corporations not members of the group--
(1) Method of determining tax liability. If a consolidated return 
includes the income of a corporation which was not a member of the group 
at any time during the consolidated return year, the tax liability of 
such corporation will be determined upon the basis of a separate return 
(or a consolidated return of another group, if paragraph (a)(2) or 
(b)(3) of this section applies), and the consolidated return will be 
considered as including only the income of the corporations which were 
members of the group during that taxable year. If a consolidated return 
includes the income of two or more corporations which were not members 
of the group but which constitute another group, the tax liability of 
such corporations will be computed in the same manner as if separate 
returns had been made by such corporations unless the Commissioner upon 
application approves the making of a consolidated return for the other 
group or unless under paragraph (a)(2) of this section a consolidated 
return is required for the other group.
    (2) Allocation of tax liability. In any case in which amounts have 
been assessed and paid upon the basis of a consolidated return and the 
tax liability of one or more of the corporations included in the 
consolidated return is to be computed in the manner described in 
subparagraph (1) of this paragraph, the amounts so paid shall be 
allocated between the group composed of the corporations properly 
included in the consolidated return and each of the corporations the tax 
liability of which is to be computed on a separate basis (or on the 
basis of a consolidated return of another group) in such manner as the 
corporations which were included in the consolidated return may, subject 
to the approval of the Commissioner, agree upon or in the absence of an 
agreement upon the method used in allocating the tax liability of the 
members of the group under the provisions of section 1552(a).
    (g) Computing periods of limitation--(1) Income incorrectly included 
in consolidated return. If:
    (i) A consolidated return is filed by a group for the taxable year, 
and
    (ii) The tax liability of a corporation whose income is included in 
such return must be computed on the basis of a separate return (or on 
the basis of a consolidated return with another group), then for the 
purpose of computing any period of limitation with respect to such 
separate return (or such other consolidated return), the filing of such 
consolidated return by the group shall be considered as the making of a 
return by such corporation.
    (2) Income incorrectly included in separate returns. If a 
consolidated return is required for the taxable year under the 
provisions of paragraph (a)(2) of this section, the filing of separate 
returns by the members of the group for such year shall not be 
considered as the making of a return for the purpose of computing any 
period of limitation with respect to such consolidated return unless 
there is attached to each such separate return a statement setting 
forth:

[[Page 883]]

    (i) The most recent taxable year of the member for which its income 
was included in a consolidated return, and
    (ii) The reasons for the group's belief that a consolidated return 
is not required for the taxable year.
    (h) Method of filing return and forms--(1) Consolidated return made 
by common parent corporation. The consolidated return shall be made on 
Form 1120 for the group by the common parent corporation. The 
consolidated return, with Form 851 (affiliations schedule) attached, 
shall be filed with the district director with whom the common parent 
would have filed a separate return.
    (2) Filing of Form 1122 for first year. If, under the provisions of 
paragraph (a)(1) of this section, a group wishes to file a consolidated 
return for a taxable year, then a Form 1122 (``Authorization and Consent 
of Subsidiary Corporation To Be Included in a Consolidated Income Tax 
Return'') must be executed by each subsidiary. For taxable years 
beginning before January 1, 2003, the executed Forms 1122 must be 
attached to the consolidated return for the taxable year. For taxable 
years beginning after December 31, 2002, the group must attach either 
executed Forms 1122 or unsigned copies of the completed Forms 1122 to 
the consolidated return. If the group submits unsigned Forms 1122 with 
its return, it must retain the signed originals in its records in the 
manner required by Sec.  1.6001-1(e). Form 1122 is not required for a 
taxable year if a consolidated return was filed (or was required to be 
filed) by the group for the immediately preceding taxable year.
    (3) Persons qualified to execute returns and forms. Each return or 
form required to be made or prepared by a corporation must be executed 
by the person authorized under section 6062 to execute returns of 
separate corporations.
    (i) [Reserved]
    (j) Statements and schedules for subsidiaries. The statement of 
gross income and deductions and the schedules required by the 
instructions on the return shall be prepared and filed in columnar form 
so that the details of the items of gross income, deductions, and 
credits for each member may be readily audited. Such statements and 
schedules shall include in columnar form a reconciliation of surplus for 
each corporation, and a reconciliation of consolidated surplus. 
Consolidated balance sheets as of the beginning and close of the taxable 
year of the group, taken from the books of the members, shall accompany 
the consolidated return and shall be prepared in a form similar to that 
required for reconciliation of surplus.
    (k) Cross-reference. See Sec.  1.338(h)(10)-1(d)(7) for special 
rules regarding filing consolidated returns when a section 338(h)(10) 
election is made for a target acquired from a selling consolidated 
group.
    (l) Effective/applicability dates. Paragraph (d)(1) of this section 
applies to taxable years for which the due date of the original return 
(without regard to extensions) is on or after September 17, 2008.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966]

    Editorial Note: For Federal Register citations affecting Sec.  
1.1502-75, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec.  1.1502-76  Taxable year of members of group.

    (a) Taxable year of members of group. The consolidated return of a 
group must be filed on the basis of the common parent's taxable year, 
and each subsidiary must adopt the common parent's annual accounting 
period for the first consolidated return year for which the subsidiary's 
income is includible in the consolidated return. If any member is on a 
52-53-week taxable year, the rule of the preceding sentence shall, with 
the advance consent of the Commissioner, be deemed satisfied if the 
taxable years of all members of the group end within the same 7-day 
period. Any request for such consent shall be filed with the 
Commissioner of Internal Revenue, Washington, DC 20224, not later than 
the 30th day before the due date (not including extensions of time) for 
the filing of the consolidated return.
    (b) Items included in the consolidated return--(1) General rules--
(i) In general. A consolidated return must include the common parent's 
items of income, gain, deduction, loss, and credit for the entire 
consolidated return year, and

[[Page 884]]

each subsidiary's items for the portion of the year for which it is a 
member. If the consolidated return includes the items of a corporation 
for only a portion of its tax year determined without taking this 
section into account, items for the portion of the year not included in 
the consolidated return must be included in a separate return (including 
the consolidated return of another group). The rules of this paragraph 
(b) must be applied to prevent the duplication or elimination of the 
corporation's items.
    (ii) The day a corporation becomes or ceases to be a member--(A) End 
of the day rule. (1) In general. If a corporation (S), other than one 
described in paragraph (b)(1)(ii)(A)(2) of this section, becomes or 
ceases to be a member during a consolidated return year, it becomes or 
ceases to be a member at the end of the day on which its status as a 
member changes, and its tax year ends for all Federal income tax 
purposes at the end of that day. Appropriate adjustments must be made if 
another provision of the Internal Revenue Code or the regulations 
thereunder contemplates the event occurring before or after S's change 
in status. For example, S's items restored under Sec.  1.1502-13 
immediately before it becomes a nonmember are taken into account in 
determining the basis of S's stock under Sec.  1.1502-32. On the other 
hand, if a section 338(g) election is made in connection with S becoming 
a member, the deemed asset sale under that section takes place before S 
becomes a member. See Sec.  1.338-10(a)(5) (deemed sale excluded from 
purchasing corporation's consolidated return.)
    (2) Special rule for former S corporations. If S becomes a member in 
a transaction other than in a qualified stock purchase for which an 
election under section 338(g) is made, and immediately before becoming a 
member an election under section 1362(a) was in effect, then S will 
become a member at the beginning of the day the termination of its S 
corporation election is effective. S's tax year ends for all Federal 
income tax purposes at the end of the preceding day. This paragraph 
(b)(1)(ii)(A)(2) applies to transactions occurring after November 10, 
1999.
    (B) Next day rule. If, on the day of S's change in status as a 
member, a transaction occurs that is properly allocable to the portion 
of S's day after the event resulting in the change, S and all persons 
related to S under section 267(b) immediately after the event must treat 
the transaction for all Federal income tax purposes as occurring at the 
beginning of the following day. A determination as to whether a 
transaction is properly allocable to the portion of S's day after the 
event will be respected if it is reasonable and consistently applied by 
all affected persons. In determining whether an allocation is 
reasonable, the following factors are among those to be considered--
    (1) Whether income, gain, deduction, loss, and credit are allocated 
inconsistently (e.g., to maximize a seller's stock basis adjustments 
under Sec.  1.1502-32);
    (2) If the item is from a transaction with respect to S stock, 
whether it reflects ownership of the stock before or after the event 
(e.g., if a member transfers encumbered land to nonmember S in exchange 
for additional S stock in a transaction to which section 351 applies and 
the exchange results in S becoming a member of the consolidated group, 
the applicability of section 357(c) to the exchange must be determined 
under Sec.  1.1502-80(d) by treating the exchange as occurring after the 
event; on the other hand, if S is a member but has a minority 
shareholder and becomes a nonmember as a result of its redemption of 
stock with appreciated property, S's gain under section 311 is treated 
as from a transaction occurring before the event);
    (3) Whether the allocation is inconsistent with other requirements 
under the Internal Revenue Code and regulations promulgated thereunder 
(e.g., if a section 338(g) election is made in connection with a group's 
acquisition of S, the deemed asset sale must take place before S becomes 
a member and S's gain or loss with respect to its assets must be taken 
into account by S as a nonmember (but see Sec.  1.338-1(d)), or if S 
realizes discharge of indebtedness income that is excluded from gross 
income under section 108(a) on the day it becomes a nonmember, the 
discharge of indebtedness income must be treated

[[Page 885]]

as realized by S as a member (see Sec.  1.1502-28(b)(11))); and
    (4) Whether other facts exist, such as a prearranged transaction or 
multiple changes in S's status, indicating that the transaction is not 
properly allocable to the portion of S's day after the event resulting 
in S's change.
    (C) Successor corporations. For purposes of this paragraph 
(b)(1)(ii), any reference to a corporation includes a reference to a 
successor or predecessor as the context may require. A corporation is a 
successor if the basis of its assets is determined, directly or 
indirectly, in whole or in part, by reference to the basis of the assets 
of another corporation (the predecessor). For example, if a member forms 
S, S is treated as a member from the beginning of its existence.
    (iii) Group structure changes. If the common parent ceases to be the 
common parent but the group remains in existence, adjustments must be 
made in accordance with the principles of Sec.  1.1502-75(d)(2) and (3).
    (2) Determination of items included in separate and consolidated 
returns--(i) In general. The returns for the years that end and begin 
with S becoming (or ceasing to be) a member are separate tax years for 
all Federal income tax purposes. The returns are subject to the rules of 
the Internal Revenue Code applicable to short periods, as if S ceased to 
exist on becoming a member (or first existed on becoming a nonmember). 
For example, cost recovery deductions under section 168 must be 
allocated for short periods. On the other hand, annualization under 
section 443 is not required of S solely because it has a short year as a 
result of becoming a member. (Similarly, section 443 applies with 
respect to a consolidated return only to the extent that the group's 
return is for a short period and section 443 applies without taking this 
paragraph (b) into account.)
    (ii) Ratable allocation of a year's items--(A) Application. Although 
the periods ending and beginning with S's change in status are different 
tax years, items (other than extraordinary items) may be ratably 
allocated between the periods if--
    (1) S is not required to change its annual accounting period or its 
method of accounting as a result of its change in status (e.g., because 
its stock is sold between consolidated groups that have the same annual 
accounting periods); and
    (2) An irrevocable ratable allocation election is made under 
paragraph (b)(2)(ii)(D) of this section.
    (B) General rule--(1) Allocation within original year. Under a 
ratable allocation election, paragraph (b)(2) of this section applies by 
allocating to each day of S's original year (S's tax year determined 
without taking this section into account) an equal portion of S's items 
taken into account in the original year, except that extraordinary items 
must be allocated to the day that they are taken into account. All 
persons affected by the election must take into account S's 
extraordinary items and the ratable allocation of S's remaining items in 
a manner consistent with the election.
    (2) Items to be allocated. Under ratable allocation, the items to be 
allocated and their timing, location, character, and source are 
generally determined by treating the original year as a single tax year, 
and the items are not subject to the rules of the Internal Revenue Code 
applicable to short periods (unless the original year is a short 
period). However, the years ending and beginning with S's change in 
status are treated as different tax years (and as short periods) with 
respect to any item carried to or from these years (e.g., a net 
operating loss carried under section 172) and with respect to the 
application of section 481.
    (3) Multiple applications. If this paragraph (b) applies more than 
once with respect to an original year, adjustments must be made in 
accordance with the principles of this paragraph (b). For example, if S 
becomes a member of two different consolidated groups during the same 
original year and ratable allocation is elected with respect to both 
groups, ratable allocation is generally determined for both groups by 
treating the original year as a single tax year; however, if ratable 
allocation is elected only with respect to the first group, the ratable 
allocation is determined by treating the

[[Page 886]]

original year as a short period that does not include the period that S 
is a member of the second group. Ratable allocation is not a method of 
accounting, and ratable allocation with respect to one application of 
this paragraph (b) to S does not require ratable allocation to be 
subsequently applied with respect to S.
    (C) Extraordinary items. An extraordinary item is--
    (1) Any item from the disposition or abandonment of a capital asset 
as defined in section 1221 (determined without the application of any 
other rules of law);
    (2) Any item from the disposition or abandonment of property used in 
a trade or business as defined in section 1231(b) (determined without 
the application of any holding period requirement);
    (3) Any item from the disposition or abandonment of an asset 
described in section 1221(1), (3), (4), or (5), if substantially all the 
assets in the same category from the same trade or business are disposed 
of or abandoned in one transaction (or series of related transactions);
    (4) Any item from assets disposed of in an applicable asset 
acquisition under section 1060(c);
    (5) Any item carried to or from any portion of the original year 
(e.g., a net operating loss carried under section 172), and any section 
481(a) adjustment;
    (6) The effects of any change in accounting method initiated by the 
filing of the appropriate form after S's change in status;
    (7) Any item from the discharge or retirement of indebtedness (e.g., 
cancellation of indebtedness income or a deduction for retirement at a 
premium);
    (8) Any item from the settlement of a tort or similar third-party 
liability;
    (9) Any compensation-related deduction in connection with S's change 
in status (including, for example, deductions from bonus, severance, and 
option cancellation payments made in connection with S's change in 
status);
    (10) Any dividend income from a nonmember that S controls within the 
meaning of section 304 at the time the dividend is taken into account;
    (11) Any deemed income inclusion from a foreign corporation, or any 
deferred tax amount on an excess distribution from a passive foreign 
investment company under section 1291;
    (12) Any interest expense allocable under section 172(h) to a 
corporate equity reduction transaction causing this paragraph (b) to 
apply;
    (13) Any credit, to the extent it arises from activities or items 
that are not ratably allocated (e.g., the rehabilitation credit under 
section 47, which is based on placement in service); and
    (14) Any item which, in the opinion of the Commissioner, would, if 
ratably allocated, result in a substantial distortion of income in any 
consolidated return or separate return in which the item is included.
    (D) Election--(1) Statement. The election to ratably allocate items 
under this paragraph (b)(2)(ii) must be made in a separate statement 
entitled, ``THIS IS AN ELECTION UNDER Sec.  1.1502-76(b)(2)(ii) TO 
RATABLY ALLOCATE THE YEAR'S ITEMS OF [INSERT NAME AND EMPLOYER 
IDENTIFICATION NUMBER OF THE MEMBER].'' The election must be filed by 
including a statement on or with the returns including the items for the 
years ending and beginning with S's change in status. If two or more 
members of the same consolidated group, as a consequence of the same 
plan or arrangement, cease to be members of that group and remain 
affiliated as members of another consolidated group, an election under 
this paragraph (b)(2)(ii)(D)(1) may be made only if it is made by each 
such member. Each statement must also indicate that an agreement, as 
described in paragraph (b)(2)(ii)(D)(2) of this section, has been 
entered into. Each party signing the agreement must retain either the 
original or a copy of the agreement as part of its records. See Sec.  
1.6001-1(e).
    (2) Agreement. For each election under this paragraph (b)(2)(ii), 
the member and the common parent of each affected group must sign and 
date an agreement. The agreement must--
    (i) Identify the extraordinary items, their amounts, and the 
separate or consolidated returns in which they are included;

[[Page 887]]

    (ii) Identify the aggregate amount to be ratably allocated, and the 
portion of the amount included in the separate and consolidated returns; 
and
    (iii) Include the name and employer identification number of the 
common parent (if any) of each group that must take the items into 
account.
    (iii) Ratable allocation of a month's items. If ratable allocation 
under paragraph (b)(2)(ii) of this section is not elected (e.g., because 
S is required to change its annual accounting period), this paragraph 
(b)(2)(iii) may be applied to ratably allocate only S's items taken into 
account in the month of its change in status, but only if the allocation 
is consistently applied by all affected persons. The ratable allocation 
is made by applying the principles of paragraph (b)(2)(ii) of this 
section under any reasonable method. For example, S may close its books 
both at the end of the preceding month and at the end of the month of 
the change, and allocate only its items (other than extraordinary items) 
from the month of the change. See paragraph (b)(1)(ii)(B) of this 
section for factors to be considered in determining whether the method 
is reasonable.
    (iv) Taxes. To the extent properly taken into account during the 
member's tax year (determined without the application of this paragraph 
(b)), Federal, state, local, and foreign taxes are allocated under 
paragraph (b)(2) of this section on the basis of the items or activities 
to which the taxes relate. Thus, income tax is allocated based on the 
inclusion of the income (determined under the principles of this 
paragraph (b)) to which the tax relates. For example, if a calendar-year 
domestic corporation has $100 of foreign source dividend income 
(determined in accordance with United States tax accounting principles 
but without taking this paragraph (b) into account) that is passive 
income for purposes of section 904, and $60 of the income is allocated 
under this paragraph (b) to the period of the calendar year after it 
becomes a member of a consolidated group, then 60% of the corporation's 
deemed paid foreign tax credit associated with its dividend income for 
the calendar year is taken into account in computing the group's passive 
basket consolidated foreign tax credit. Similarly, property taxes relate 
to the ownership of property and are allocated over the period that the 
property is owned. This paragraph (b)(2)(iv) applies without regard to 
any determination or allocation by another taxing jurisdiction.
    (v) Acquisition of S corporation. If a corporation is acquired in a 
transaction to which paragraph (b)(1)(ii)(A)(2) of this section applies, 
then paragraphs (b)(2)(ii) and (iii) of this section do not apply and 
items of income, gain, loss, deduction, and credit are assigned to each 
short taxable year on the basis of the corporation's normal method of 
accounting as determined under section 446. This paragraph (b)(2)(v) 
applies to transactions occurring after November 10, 1999.
    (vi) Passthrough entities--(A) In general. If S is a partner in a 
partnership or an owner of a similar interest with respect to which 
items of the entity are taken into account by S, S is treated, solely 
for purposes of determining the year to which the entity's items are 
allocated under paragraph (b)(2) of this section, as selling or 
exchanging its entire interest in the entity immediately before S's 
change in status.
    (B) Treatment as a conduit. For purposes of this paragraph (b)(2), 
if a member (together with other members) would be treated under section 
318(a)(2) as owning an aggregate of at least 50% of any stock owned by 
the passthrough entity, the method that is used to determine the 
inclusion of the entity's items in the consolidated or separate return 
must be the same method that is used to determine the inclusion of the 
member's items in the consolidated or separate return.
    (C) Exception for certain foreign entities. This paragraph (b)(2)(v) 
does not apply to any foreign corporation generating the deemed 
inclusion of income, or to any passive foreign investment company 
generating a deferred tax amount on an excess distribution under section 
1291.
    (3) Anti-avoidance rule. If any person acts with a principal purpose 
contrary to the purposes of this paragraph (b), to substantially reduce 
the Federal income tax liability of any person, adjustments must be made 
as necessary

[[Page 888]]

to carry out the purposes of this section.
    (4) Determination of due date for separate return. Paragraph (c) of 
this section contains rules for the filing of the separate return 
referred to in this paragraph (b). In applying paragraph (c) of this 
section, the due date for the filing of S's separate return shall also 
be determined without regard to the ending of the tax year under 
paragraph (b)(1)(ii) of this section or the deemed cessation of its 
existence under paragraph (b)(2)(i) of this section.
    (5) Examples. For purposes of the examples in this paragraph (b), 
unless otherwise stated, P and X are common parents of calendar-year 
consolidated groups, P owns all of the only class of T's stock, T owns 
no stock of lower-tier members, all persons use the accrual method of 
accounting, the facts set forth the only corporate activity, all 
transactions are between unrelated persons, tax liabilities are 
disregarded, and any election required under paragraph (b)(2) of this 
section is properly made. The principles of this paragraph (b) are 
illustrated by the following examples.

    Example 1. Items allocated between consolidated and separate 
returns. (a) Facts. P and S are the only members of the P group. P sells 
all of S's stock to individual A on June 30, and therefore S becomes a 
nonmember on July 1 of Year 2.
    (b) Analysis. Under paragraph (b)(1) of this section, the P group's 
consolidated return for Year 2 includes P's income for the entire tax 
year and S's income for the period from January 1 to June 30, and S must 
file a separate return for the period from July 1 to December 31.
    (c) Acquisition of another subsidiary before end of tax year. The 
facts are the same as in paragraph (a) of this Example 1, except that on 
July 31 P acquires all the stock of T (which filed a separate return for 
its year ending on November 30 of Year 1) and T therefore becomes a 
member on August 1 of Year 2. Under Sec.  1.1502-75(d) and paragraph 
(b)(1) of this section, the P group's consolidated return for Year 2 
includes P's income for the entire year, S's income from January 1 to 
June 30, and T's income from August 1 to December 31. S must file a 
separate return that includes its income from July 1 to December 31, and 
T must file a separate return that includes its income from December 1 
of Year 1 to July 31 of Year 2. (If P had acquired T after December 31, 
the P group that included S is a different group from the P group that 
includes T, and, for example, the P group that includes T must make a 
separate election under section 1501 and Sec.  1.1502-75 if consolidated 
returns are to be filed.)
    Example 2. Group structure change. (a) Facts. P owns all of the 
stock of S and T. Shortly after the beginning of Year 1, P merges into T 
in a reorganization described in section 368(a)(1)(A) (and in section 
368(a)(1)(D)), and P's shareholders receive T's stock in exchange for 
all of P's stock. The P group is treated under Sec.  1.1502-75(d)(2)(ii) 
as remaining in existence with T as its common parent.
    (b) Analysis. Under paragraph (b)(1) of this section, the P group's 
return must include the common parent's items for the entire 
consolidated return year and, if the common parent ceases to be the 
common parent but the group remains in existence, appropriate 
adjustments must be made. Consequently, although P did not exist for all 
of Year 1, P's items for the portion of Year 1 ending with the merger 
are treated as the items of the common parent that must be included in 
the P group's return for Year 1.
    (c) Reverse acquisition. Assume instead that X acquires all of P's 
assets in exchange for more than 50% of X's stock in a reorganization 
described in section 368(a)(1)(D). The reorganization constitutes a 
reverse acquisition under Sec.  1.1502-75(d)(3), with the X group 
terminating and the P group surviving with X as its common parent. 
Consequently, P's items for the portion of Year 1 ending with the 
acquisition are treated as the items of the common parent that must be 
included in the P group's return for Year 1, and X's items are treated 
for purposes of paragraph (b)(1) of this section as the items of a 
subsidiary included in the P group's return for the portion of Year 1 
for which X is a member.
    Example 3. Ratable allocation. (a) Facts. P sells all of T's stock 
to X, and T becomes a nonmember on July 1 of Year 1. T engages in the 
production and sale of merchandise throughout Year 1 and is required to 
use inventories. The sale is treated as causing T's tax year to end on 
June 30, and the periods beginning and ending with the sale are treated 
as two tax years for Federal income tax purposes.
    (b) Analysis. If ratable allocation under paragraph (b)(2)(ii) of 
this section is not elected, T must perform an inventory valuation as of 
the acquisition and also as of the end of Year 1. If ratable allocation 
is elected, T must perform an inventory valuation only as of the close 
of Year 1, and T's income from inventory is ratably allocated, along 
with T's other items that are not extraordinary items, between the P and 
X consolidated returns.
    (c) Merger into nonmember. Assume instead that T merges into a 
wholly owned subsidiary of X in a reorganization described in section 
368(a)(2)(D), and P receives 10% of X's

[[Page 889]]

stock in exchange for all of T's stock. Under paragraph (b)(2)(ii)(B) of 
this section, because T's tax year ends on June 30 under section 
381(b)(1), T's original year determined without taking paragraph (b) of 
this section into account also ends on June 30. Consequently, a ratable 
allocation under paragraph (b)(2)(ii) of this section is the same as an 
allocation based on closing the books.
    Example 4. Net operating loss. P sells all of T's stock to X, T 
becomes a nonmember on June 30 of Year 1, and ratable allocation under 
paragraph (b)(2)(ii) of this section is elected. Under ratable 
allocation, the X group has a $100 consolidated net operating loss for 
Year 1, all of which is attributable to T. However, because of 
extraordinary items, T has $100 of income for the portion of Year 1 that 
T is a member of the P group. Under paragraph (b)(2)(ii)(B)(2) of this 
section, T's loss may be carried back from the X group to the portion of 
Year 1 that T was a member of the P group. See also section 172 and 
Sec.  1.1502-21(b). Under paragraph (b)(2)(ii)(C)(5) of this section, 
any item carried to or from any portion of the original year is an 
extraordinary item, and the loss therefore is not taken into account 
again in determining the ratable allocation under paragraph (b)(2)(ii) 
of this section.
    Example 5. Employee benefit plans. (a) Facts. P sells all of T's 
stock to X, and T becomes a nonmember on June 30 of Year 1. On March 15 
of Year 2, T contributes $100 to its retirement plan, which is a 
qualified plan under section 401(a). T is not required to make quarterly 
contributions to the plan for Year 1 under section 412(m). The 
contribution is made on account of T's taxable period beginning on July 
1 of Year 1, and is deemed in accordance with section 404(a)(6) to have 
been made on the last day of T's taxable period beginning on July 1 of 
Year 1. Ratable allocation under paragraph (b)(2)(ii) of this section is 
not elected.
    (b) Analysis. Under paragraph (b) of this section, the sale is 
treated as causing T's tax year to end on June 30, and the period 
beginning on July 1 is treated as a separate annual accounting period 
for all Federal income tax purposes. T's income from January 1 to June 
30 is included in the P group's Year 1 return, and T's income from July 
1 to December 31 is included in the X group's Year 1 return. Thus, the 
$100 contribution is deductible by T for the period of Year 1 that it is 
a member of the X group, subject to the applicable limitations of 
section 404, if a contribution on the last day of that period would 
otherwise be deductible.
    (c) The facts are the same as in paragraph (a) of this Example 5, 
except that, in accordance with section 404(a)(6), $40 of the $100 
contribution is made on account of T's taxable period beginning on 
January 1 of Year 1 and is deemed to be made on the last day of T's 
taxable period beginning on January 1 of Year 1. The remaining $60 is 
made on account of T's taxable period beginning on July 1 of Year 1 and 
is deemed to be made on the last day of T's taxable period beginning on 
July 1 of Year 1. As in paragraph (b) of this Example 5, under paragraph 
(b) of this section, the sale is treated as causing T's tax year to end 
on June 30, and the period beginning on July 1 is treated as a separate 
annual accounting period for all Federal income tax purposes. The $40 
portion of the contribution is deductible by T for the period of Year 1 
that it is a member of the P group, subject to the applicable 
limitations of section 404 and provided that a $40 contribution on the 
last day of that period would otherwise be deductible for that period, 
and the $60 portion is deductible by T for the period of Year 1 that it 
is a member of the X group, subject to the same conditions.
    (d) Ratable allocation. The facts are the same as in paragraph (a) 
of this Example 5, except that P, T, and X elect ratable allocation 
under paragraph (b)(2)(ii) of this section and T's deduction for the 
retirement plan contribution is not an extraordinary item. T's deduction 
may be ratably allocated, subject to the applicable limitations of 
section 404, and is allowable only if a contribution on the last day of 
Year 1 otherwise would be deductible for any period in the year. (The 
results would be the same if S were an unaffiliated corporation when 
acquired by X, and the due date of its last separate return (including 
extensions) were before the pension contribution was made on March 15 of 
Year 2.)
    Example 6. Allocation of partnership items. (a) Facts. P sells all 
of T's stock to X, and T becomes a nonmember on June 30 of Year 1. T has 
a 10% interest in the capital and profits of a calendar-year 
partnership.
    (b) Analysis. Under paragraph (b)(2)(vi)(A) of this section, T is 
treated, solely for purposes of determining T's tax year in which the 
partnership's items are included, as selling or exchanging its entire 
interest in the partnership as of P's sale of T's stock. Thus, the 
deemed disposition is not taken into account under section 708, it does 
not result in gain or loss being recognized by T, and T's holding period 
is unaffected. However, under section 706(a), in determining T's income, 
T is required to include its distributive share of partnership items for 
the partnership's year ending within or with T's tax year. Under section 
706(c)(2), the partnership's tax year is treated as closing with respect 
to T for this purpose as of P's sale of T's stock. The allocation of T's 
distributive share of partnership items must be made under Sec.  1.706-
1(c)(2)(ii).
    (c) Controlled partnership. The facts are the same as in paragraph 
(a) of this Example 6, except that T has a 75% interest in the capital 
and profits of the partnership. Under paragraph (b)(2)(vi)(B) of this 
section, T's

[[Page 890]]

distributive share of the partnership items is treated as T's items for 
purposes of paragraph (b)(2) of this section. Thus, if ratable 
allocation under paragraph (b)(2)(ii) of this section is not elected, 
T's distributive share of the partnership's items must be determined 
under Sec.  1.706-1(c)(2)(ii) by an interim closing of the partnership's 
books. Similarly, if ratable allocation is elected for T's items that 
are not extraordinary items, T's distributive share of the partnership's 
nonextraordinary items must also be ratably allocated under Sec.  1.706-
1(c)(2)(ii).
    Example 7. Acquisition of S corporation. (a) Facts. Z is a small 
business corporation for which an election under section 1362(a) was in 
effect at all times since Year 1. At all times, Z had only 100 shares of 
stock outstanding, all of which were owned by individual A. On July 1 of 
Year 3, P acquired all of the Z stock. P does not make an election under 
section 338(g) with respect to its purchase of the Z stock.
    (b) Analysis. As a result of P's acquisition of the Z stock, Z's 
election under section 1362(a) terminates. See sections 1361(b)(1)(B) 
and 1362(d)(2). Z is required to join in the filing of the P 
consolidated return. See Sec.  1.1502-75. Z's tax year ends for all 
Federal income tax purposes on June 30 of Year 3. If no extension of 
time is sought, Z must file a separate return for the period from 
January 1 through June 30 of Year 3 on or before March 15 of Year 4. See 
paragraph (b)(4) of this section. Z will become a member of the P 
consolidated group as of July 1 of Year 3. See paragraph 
(b)(1)(ii)(A)(2) of this section. P group's Year 3 consolidated return 
will include Z's items from July 1 to December 31 of Year 3.

    (6) Effective date--(i) General rule. Except as provided in 
paragraphs (b)(1)(ii) (A)(2) and (b)(2)(v) of this section, this 
paragraph (b) applies to corporations becoming or ceasing to be members 
of consolidated groups on or after January 1, 1995.
    (ii) Prior law. For prior transactions, see prior regulations under 
section 1502 as in effect with respect to the transaction. See, e.g., 
Sec.  1.1502-76(b) and (d) as contained in the 26 CFR part 1 edition 
revised as of April 1, 1994. However, Sec.  1.1502-76(b)(5) and (6) as 
contained in the 26 CFR part 1 edition revised as of April 1, 1994 do 
not apply with respect to corporations becoming or ceasing to be members 
of consolidated groups on or after January 1, 1995. If both this 
paragraph (b) and prior law may apply to determine the inclusion of any 
amount in a return, appropriate adjustments must be made to prevent the 
omission or duplication of the amount.
    (c) Time for making separate returns for periods not included in 
consolidated return--(1) Consolidated return filed by due date for 
separate return. If the group has filed a consolidated return on or 
before the due date for the filing of a subsidiary's separate return 
(including extensions of time and determined without regard to any 
change of its taxable year required under paragraph (a) of this 
section), then the separate return for any portion of the subsidiary's 
taxable year for which its income is not included in the consolidated 
return of the group must be filed no later than the due date of such 
consolidated return (including extensions of time).
    (2) Consolidated return not filed by due date for separate return. 
If the group has not filed a consolidated return on or before the due 
date for the filing of a subsidiary corporation's separate return 
(including extensions of time and determined without regard to any 
change of its taxable year required under paragraph (a) of this 
section), then on or before such due date such subsidiary shall file a 
separate return either for the portion of its taxable year for which its 
income would not be included in a consolidated return if such a return 
were filed, or for its complete taxable year. However, if a separate 
return is filed for such portion of its taxable year and the group 
subsequently does not file a consolidated return, such subsidiary 
corporation shall file a substituted return for its complete taxable 
year not later than the due date (including extensions of time) 
prescribed for the filing of the common parent's return. On the other 
hand, if the return is filed for the subsidiary's complete taxable year 
and the group later files a consolidated return, such subsidiary must 
file an amended return not later than the due date (including extensions 
of time) for the filing of the consolidated return of the group. Such 
amended return shall be for that portion of such subsidiary's taxable 
year which is not included in the consolidated return. If, under this 
subparagraph, a substituted return must be filed, then the return 
previously filed shall not be considered a return within the meaning of 
section 6011. If, under

[[Page 891]]

this subparagraph, a substituted or amended return must be filed, then, 
for purposes of sections 6513(a) and 6601(a), the last date prescribed 
for payment of tax shall be the due date (not including extensions of 
time) for the filing of the subsidiary's separate return (determined 
without regard to this subparagraph and without regard to any change of 
its taxable year required under paragraph (a) of this section).
    (3) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example 1. Corporation P, which filed a separate return for the 
calendar year 1966, acquires all of the stock of corporation S as of the 
close of December 31, 1966. Corporation S reports its income on the 
basis of a fiscal year ending March 31. On June 15, 1967, the due date 
for the filing of a separate return by S (assuming no extensions of 
time), a consolidated return has not been filed for the group (P and S). 
On such date S may either file a return for the period April 1, 1966, 
through December 31, 1966, or it may file a return for the complete 
fiscal year ending March 31, 1967. If S files a return for the short 
period ending December 31, 1966, and if the group elects not to file a 
consolidated return for the calendar year 1967, S, on or before March 
15, 1968 (the due date of P's return, assuming no extensions of time), 
must file a substituted return for the complete fiscal year ending March 
31, 1967, in lieu of the return previously filed for the short period. 
Interest is computed from June 15, 1967. If, however, S files a return 
for the complete fiscal year ending March 31, 1967, and the group elects 
to file a consolidated return for the calendar year 1967, then S must 
file an amended return covering the period from April 1, 1966, through 
December 31, 1966, in lieu of the return previously filed for the 
complete fiscal year. Interest is computed from June 15, 1967.
    Example 2. Assume the same facts as in example (1) except that 
corporation P acquires all of the stock of corporation S at the close of 
September 30, 1967, and that P files a consolidated return for the group 
for 1967 on March 15, 1968 (not having obtained any extensions of time). 
Since a consolidated return has been filed on or before the due date 
(June 15, 1968) for the filing of the separate return for the taxable 
year ending March 31, 1968, the return of S for the short taxable year 
beginning April 1, 1967, and ending September 30, 1967, should be filed 
no later than March 15, 1968.
    (d) Effective/applicability date--(1) Taxable years of members of 
group effective date. (i) In general. Paragraph (a) of this section 
applies to any original consolidated Federal income tax return due 
(without extensions) after July 20, 2007.
    (ii) Prior law. For original consolidated Federal income tax returns 
due (without extensions) after April 25, 2006, and on or before July 20, 
2007, see Sec.  1.1502-76T as contained in 26 CFR part 1 in effect on 
April 1, 2007. For original consolidated Federal income tax returns due 
(without extensions) on or before April 25, 2006, see Sec.  1.1502-76 as 
contained in 26 CFR part 1 in effect on April 1, 2006.
    (2) Election to ratably allocate items effective date--(i) In 
general. Paragraph (b)(2)(ii)(D) of this section applies to any original 
consolidated Federal income tax return due (without extensions) after 
July 20, 2007.
    (ii) Prior law. For original consolidated Federal income tax returns 
due (without extensions) after May 30, 2006, and on or before July 20, 
2007, see Sec.  1.1502-76T as contained in 26 CFR part 1 in effect on 
April 1, 2007. For original consolidated Federal income tax returns due 
(without extensions) on or before May 30, 2006, see Sec.  1.1502-76 as 
contained in 26 CFR part 1 in effect on April 1, 2006.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966]

    Editorial Note: For Federal Register citations affecting Sec.  
1.1502-76, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec.  1.1502-77  Agent for the group.

    (a) Agent for the group--(1) Sole agent. Except as provided in 
paragraphs (e) and (f)(2) of this section, one entity (the agent) is the 
sole agent that is authorized to act in its own name regarding all 
matters relating to the federal income tax liability for the 
consolidated return year for each member of the group and any successor 
or transferee of a member (and any subsequent successors and transferees 
thereof). The identity of that agent is determined under the rules of 
paragraph (c) of this section.
    (2) Agent for each consolidated return year. Agency for the group is 
established for each consolidated return year and is not affected by the 
status or membership of the group in later years. Thus, subject to the 
rules of

[[Page 892]]

paragraph (c) of this section, the agent will generally remain agent for 
that consolidated return year regardless of whether one or more 
subsidiaries later cease to be members of the group, whether the group 
files a consolidated return for any subsequent year, whether the agent 
ceases to be the agent or a member of the group in any subsequent year, 
or whether the group continues pursuant to Sec.  1.1502-75(d) with a new 
common parent in any subsequent year.
    (3) Communications under this section. Any designation, 
notification, objection, request, or other communication made to or by 
the Commissioner pursuant to paragraphs (c) and (f)(2) of this section 
must be made in accordance with procedures prescribed by the 
Commissioner in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2)(ii) of this chapter), forms, instructions, or other 
appropriate guidance.
    (b) Definitions. The following definitions apply for purposes of 
this section only--
    (1) Successor. A successor is an individual or entity (including a 
disregarded entity as defined in paragraph (b)(3) of this section) that 
is primarily liable, pursuant to applicable law (including, for example, 
by operation of a state or federal merger statute), for the tax 
liability of a corporation that was a member of the group but is no 
longer in existence under applicable law. The determination of tax 
liability is made without regard to Sec.  1.1502-1(f)(4) or Sec.  
1.1502-6(a). (For inclusion of a successor in references to a subsidiary 
or member, see paragraph (b)(5)(iii) of this section.)
    (2) Entity. The term entity includes any corporation, limited 
liability company, or partnership formed under any state, federal, or 
foreign jurisdiction. The term entity includes a disregarded entity (as 
defined in paragraph (b)(3) of this section). The term entity does not 
include an entity that has terminated even if it is in a winding up 
period under the law under which it is organized.
    (3) Disregarded entity. The term disregarded entity includes any of 
the following types of entities that are disregarded as separate from 
their owners--
    (i) Qualified real estate investment trust subsidiaries (within the 
meaning of section 856(i)(2));
    (ii) Qualified subchapter S subsidiaries (within the meaning of 
section 1361(b)(3)(B)); and
    (iii) Eligible entities with a single owner (within the meaning of 
Sec.  301.7701-3 of this chapter).
    (4) Default successor. A successor to the agent is the default 
successor if it is an entity (whether domestic or foreign) that is the 
sole successor to the agent. A partnership is treated as a sole 
successor with primary liability notwithstanding that one or more 
partners may also be primarily liable by virtue of being partners.
    (5) Member or subsidiary. All references to a member or subsidiary 
for a consolidated return year include--
    (i) Each corporation that was a member of the group during any part 
of such year (except that any reference to a subsidiary does not include 
the common parent);
    (ii) Each corporation whose income was included in the consolidated 
return for such year, notwithstanding that the tax liability of such 
corporation should have been computed on the basis of a separate return, 
or as a member of another consolidated group, under the provisions of 
Sec.  1.1502-75; and
    (iii) Except as indicated otherwise, a successor of any of the 
foregoing corporations.
    (6) Completed year. A completed year is a consolidated return year 
that has ended, or will end at the time of the referenced event.
    (7) Current year. A current year is a consolidated return year that 
is not a completed year.
    (c) Identity of the agent--(1) In general. Except as otherwise 
provided in this section, the agent for a current year is the common 
parent and the agent for a completed year is the common parent at the 
close of the completed year or its default successor, if any. Except as 
specifically provided otherwise in this paragraph (c), any entity that 
is an agent pursuant to paragraph (c)(3) of this section (agent 
following group structure change), paragraph (c)(5) of this section 
(agent designated by agent terminating without default successor), 
paragraph (c)(6) of this section

[[Page 893]]

(agent designated by Commissioner), or paragraph (c)(7) of this section 
(agent designated by resigning agent), or any entity subsequently 
serving as agent following such agent, acts as an agent for and under 
the same terms and conditions that apply to a common parent. For 
example, such an agent would generally be able to designate an agent if 
it terminates without a default successor; however, an entity that 
became agent pursuant to a designation by the Commissioner under 
paragraphs (c)(6)(i)(A)(2), (3), or (4) of this section is not permitted 
to designate an agent if it terminates without a default successor. 
Other special rules described in this paragraph (c) apply.
    (2) Purported agent. If any entity files a consolidated return, or 
takes any other action related to the tax liability for the consolidated 
return year, purporting to be the agent but is subsequently determined 
not to have been the agent with respect to the claimed group, that 
entity is treated, to the extent necessary to avoid prejudice to the 
Commissioner, as if it were the agent.
    (3) New common parent after a group structure change. If the group 
continues in existence after a group structure change (as described in 
Sec.  1.1502-33(f)(1)), the former common parent is the agent until the 
group structure change, and the new common parent becomes the agent 
after the group structure change. Following the group structure change, 
the new common parent is the agent with respect to the entire current 
year (including the period before the group structure change) and the 
former common parent is no longer the agent for that year. However, 
actions taken by the former common parent as the agent before the group 
structure change are not nullified when the new common parent becomes 
the agent with respect to the entire consolidated return year. Following 
the group structure change, the new common parent continues as the agent 
for succeeding years subject to the rules of this section.
    (4) Notification by default successor--(i) In general. Failure to 
provide notice to the Commissioner pursuant to this paragraph (c)(4)(i) 
does not invalidate an entity's status as the default successor. 
However, until the Commissioner receives notification in writing that an 
entity is the default successor--
    (A) Any notice of deficiency or other communication mailed to the 
predecessor agent, even if no longer in existence, is considered as 
having been properly mailed to the agent; and
    (B) The Commissioner is not required to act on any communication 
(including, for example, a claim for refund) submitted on behalf of the 
group by any person (including the default successor) other than the 
predecessor agent.
    (ii) Conversions and continuances. For purposes of the notice 
requirements under paragraph (c)(4)(i) of this section, any entity that 
results from the agent's conversion or continuance by operation of state 
law and that qualifies as a default successor under paragraph (b)(4) of 
this section is treated as a default successor for purposes of the 
notice provisions of paragraph (c)(4)(i) of this section, even if 
applicable state or local law may treat the converted or continued 
entity as not ceasing to exist.
    (5) Designation by terminating agent--(i) In general. Prior to the 
termination of its existence without a default successor, an agent may 
designate an entity described in paragraph (c)(5)(ii) of this section to 
act as agent for any completed year. This designation is effective upon 
the termination of the designating agent's existence. However, this 
paragraph (c)(5) does not apply to, and no designation can be made by, 
an agent that was designated by the Commissioner under paragraphs 
(c)(6)(i)(A)(2), (3), or (4) of this section, or any successor of such 
an agent; in such a case, the terminating agent should request that the 
Commissioner designate an agent pursuant to paragraph (c)(6)(i)(B) of 
this section.
    (ii) Permissible agents--(A) The terminating agent may designate as 
agent a member of the group during any part of the completed year, or an 
entity (whether domestic or foreign) that is a successor of such a 
member, including an entity that will become a successor at the time the 
agent's existence terminates.

[[Page 894]]

    (B) The terminating agent may not designate as agent any entity that 
was previously replaced as agent by the Commissioner pursuant to 
paragraphs (c)(6)(i)(A)(2), (3), or (4) of this section, or any 
successor of such an agent. However, the terminating agent may submit a 
request pursuant to paragraph (c)(6)(i)(B) of this section that the 
Commissioner designate such an entity as agent.
    (iii) Notification of designation. The terminating agent must notify 
the Commissioner in writing of its designation of an entity as agent 
pursuant to paragraph (c)(5)(i) of this section and provide a statement 
executed by the designated entity acknowledging that it will serve as 
the agent for each specified completed year for which it is designated 
as the agent. If the designated entity was not itself a member of the 
group during any specified year (because it is a successor of a member), 
the notification must include a statement acknowledging that the 
designated entity is or will be primarily liable for the tax liability 
for the specified completed year as a successor of a member.
    (iv) Failure to designate an agent. If the agent terminates without 
a default successor, and no agent is designated pursuant to this 
paragraph (c)(5)--
    (A) Any notice of deficiency or other communication mailed to the 
agent, even if no longer in existence, is considered as having been 
properly mailed to the agent; and
    (B) The Commissioner is not required to act on any communication 
(including, for example, a claim for refund) submitted on behalf of the 
group by any person.
    (6) Designation by the Commissioner--(i) In general. The 
Commissioner has the authority to designate an entity to act as the 
agent under the circumstances prescribed in this paragraph (c)(6)(i). 
The designated agent for a completed year must be an entity described in 
paragraph (c)(5)(ii)(A) of this section when the designation becomes 
effective. The designated agent for a current year must be a member of 
the group when the designation becomes effective. If, pursuant to this 
paragraph (c)(6), the Commissioner replaces the common parent or another 
entity as the agent, the common parent or other entity, or any successor 
thereof, may not later act as the agent unless so designated by the 
Commissioner.
    (A) On Commissioner's own accord. With or without a request from any 
member of the group, the Commissioner may designate an entity to act as 
the agent if--
    (1) The agent's existence terminates, other than in a group 
structure change, without there being a default successor and without 
any designation made under paragraph (c)(5)(i) of this section;
    (2) An agent previously designated by the Commissioner is no longer 
a member of the group in the current year and does not have a default 
successor that is a member of the group;
    (3) The Commissioner believes that the agent or its default 
successor exists but such entity has either not timely responded to the 
Commissioner's notices (sent to the last known address on file for the 
entity or left at the usual place of business for such entity) or has 
failed to perform its obligations as agent as prescribed by the Internal 
Revenue Code (Code) or regulations promulgated thereunder; or
    (4) The agent is or becomes a foreign entity as a result of any 
action or transaction (including, for example, a continuance into a 
foreign jurisdiction or certain inversion transactions subject to 
section 7874 in which a foreign parent is treated as a domestic 
corporation).
    (B) Written request from any member. At the request of any member, 
in a circumstance not described in paragraph (c)(6)(i)(A) of this 
section, the Commissioner may, but is not required to, replace an agent 
previously designated under this paragraph (c)(6).
    (ii) Notification by Commissioner. The Commissioner will notify the 
designated entity in writing of the Commissioner's designation of the 
entity as agent pursuant to paragraph (c)(6)(i) of this section, and the 
designation will be effective as prescribed by the Commissioner. The 
designated entity should give notice of the designation by the 
Commissioner pursuant to paragraph (c)(6)(i) of this section to each 
member of the group during any part of the consolidated return year. 
However,

[[Page 895]]

a failure by the designated entity to notify any such member of the 
group does not invalidate the designation by the Commissioner.
    (iii) Term and effect of designation. Unless otherwise provided by 
the Commissioner in the designation, any agent designated by the 
Commissioner pursuant to paragraph (c)(6)(i) of this section (new agent) 
is the agent with respect to the entire consolidated return year for 
which it is designated and successive years, subject to the rules of 
this section. An agent immediately preceding a new agent (former agent) 
ceases to be the agent for a particular consolidated return year once 
the new agent has been designated for that year, but the designation of 
the new agent does not nullify actions taken on behalf of the group by 
the former agent while it was agent. If there is more than one new agent 
designated by the Commissioner for a consolidated return year, the new 
agent that is designated last in time by the Commissioner is the agent 
with respect to the entire consolidated return year. A designation 
pursuant to this paragraph (c)(6) is effective as prescribed by the 
Commissioner in such designation or the Internal Revenue Bulletin (see 
Sec.  601.601(d)(2)(ii) of this chapter), forms, instructions, or other 
appropriate guidance.
    (iv) Request by member of the group where agent previously 
designated by the Commissioner is no longer a member. If an agent at any 
time after it is designated as agent by the Commissioner pursuant to 
paragraph (c)(6)(i) of this section is no longer a member of the group 
for any current year, and its default successor, if any, is not a member 
of the group at that time, a member of the group, including the agent 
that will cease to be a member, should request, in writing, that the 
Commissioner designate a member of the group to be the new agent 
pursuant to paragraph (c)(6)(i)(A)(2) of this section. Until such a 
request is made--
    (A) Any notice of deficiency or other communication mailed to the 
agent, even if no longer a member, is considered as having been properly 
mailed to the agent; and
    (B) The Commissioner is not required to act on any communication 
(including, for example, a claim for refund) submitted on behalf of the 
group by any person.
    (7) Agent resigns--(i) In general. The agent may resign for a 
completed year if--
    (A) It provides written notice to the Commissioner that it no longer 
intends to be the agent for that completed year;
    (B) An entity described in paragraph (c)(5)(ii)(A) of this section 
consents, in writing, to be the agent with respect to that completed 
year;
    (C) Immediately after its resignation takes effect, the resigning 
agent will not be the agent for the current year; and
    (D) The Commissioner does not object to the agent's resignation.
    (ii) Notification by agent that replaces agent that resigns. If the 
Commissioner does not object to the agent's resignation, the agent that 
replaces the agent that resigns should give written notice that it is 
the new agent to each member of the group for any part of the completed 
year for which it is designated the agent.
    (8) Transactions under the Code. Notwithstanding section 338(a)(2), 
a target corporation for which an election is made under section 338 is 
not deemed to terminate for purposes of this section.
    (d) Examples of matters subject to agency. With respect to any 
consolidated return year for which it is the agent--
    (1) The agent makes any election (or similar choice of a permissible 
option) that is available to a subsidiary in the computation of its 
separate taxable income, and any change in an election (or similar 
choice of a permissible option) previously made by or for a subsidiary, 
including, for example, a request to change a subsidiary's method or 
period of accounting;
    (2) All correspondence concerning the income tax liability for the 
consolidated return year is carried on directly with the agent;
    (3) The agent files for all extensions of time, including extensions 
of time for payment of tax under section 6164, and any extension so 
filed is considered as having been filed by each member;

[[Page 896]]

    (4) The agent gives waivers, gives bonds, and executes closing 
agreements, offers in compromise, and all other documents, and any 
waiver or bond so given, or agreement, offer in compromise, or any other 
document so executed, is considered as having also been given or 
executed by each member;
    (5) The agent files claims for refund, and any refund is made 
directly to and in the name of the agent and discharges any liability of 
the Government to any member with respect to such refund;
    (6) The agent takes any action on behalf of a member of the group 
with respect to a foreign corporation including, for example, elections 
by, and changes to the method of accounting of, a controlled foreign 
corporation in accordance with Sec.  1.964-1(c)(3);
    (7) Notices of claim disallowance are mailed only to the agent, and 
the mailing to the agent is considered as a mailing to each member;
    (8) Notices of deficiencies are mailed only to the agent (except as 
provided in paragraph (f)(3) of this section), and the mailing to the 
agent is considered as a mailing to each member;
    (9) Notices of final partnership administrative adjustment under 
section 6223 with respect to any partnership in which a member of the 
group is a partner may be mailed to the agent, and, if so, the mailing 
to the agent is considered as a mailing to each member that is a partner 
entitled to receive such notice (for other rules regarding partnership 
proceedings, see paragraph (f)(2)(iii) of this section);
    (10) The agent files petitions and conducts proceedings before the 
United States Tax Court, and any such petition is considered as also 
having been filed by each member;
    (11) Any assessment of tax may be made in the name of the agent, and 
an assessment naming the agent is considered as an assessment with 
respect to each member; and
    (12) Notice and demand for payment of taxes is given only to the 
agent, and such notice and demand is considered as a notice and demand 
to each member.
    (e) Matters reserved to subsidiaries. Except as provided in this 
paragraph (e) and paragraph (f)(2) of this section, no subsidiary 
(unless it is or becomes an agent pursuant to paragraph (c) of this 
section) has authority to act for or to represent itself in any matter 
related to the tax liability for the consolidated return year. The 
following matters, however, are reserved exclusively to each 
subsidiary--
    (1) The making of the consent required by Sec.  1.1502-75(a)(1);
    (2) Any action with respect to the subsidiary's liability for a 
federal tax other than the income tax imposed by chapter 1 of the Code 
(including, for example, employment taxes under chapters 21 through 25 
of the Code, and miscellaneous excise taxes under chapters 31 through 47 
of the Code); and
    (3) The making of an election to be treated as a Domestic 
International Sales Corporation under Sec.  1.992-2.
    (f) Dealings with members--(1) Identifying members in notice of a 
lien. Notwithstanding any other provisions of this section, any notice 
of a lien, any levy, or any other proceeding to collect the amount of 
any assessment, after the assessment has been made, must name the entity 
from which such collection is to be made.
    (2) Direct dealing with a member--(i) Several liability. The 
Commissioner may, upon issuing to the agent written notice that 
expressly invokes the authority of this provision, deal directly with 
any member of the group with respect to its liability under Sec.  
1.1502-6 for the consolidated tax of the group, in which event such 
member has sole authority to act for itself with respect to that 
liability. However, if the Commissioner believes or has reason to 
believe that the existence of the agent has terminated without an agent 
being identified under this section, the Commissioner may, if the 
Commissioner deems it advisable, deal directly with any member with 
respect to that member's liability under Sec.  1.1502-6 without issuing 
notice to any other entity.
    (ii) Information requests. The Commissioner may, upon issuing to the 
agent written notice, request information relevant to the consolidated 
tax liability from any member of the group. However, if the Commissioner 
believes

[[Page 897]]

or has reason to believe that the existence of the agent has terminated 
without an agent being identified under this section, the Commissioner 
may request such information from any member of the group without 
issuing notice to any other entity.
    (iii) Members as partners in partnerships subject to the provisions 
of the Code. Except as otherwise provided in this paragraph (f)(2)(iii), 
the general rule of paragraph (a)(1) of this section applies so that the 
agent is the agent for any subsidiary member that for any part of the 
consolidated return year is a partner in a partnership subject to the 
provisions of sections 6221 through 6234 of the Code (as originally 
enacted by the Tax Equity and Fiscal Responsibility Act of 1982 and 
subsequently amended) and the accompanying regulations (TEFRA 
partnership). However--
    (A) Any subsidiary or any disregarded entity owned by a subsidiary 
that is designated as tax matters partner of a TEFRA partnership will 
act in its own name and perform its responsibilities under sections 6221 
through 6234 and the accompanying regulations without requiring any 
action by the agent (but see paragraph (d)(9) of this section regarding 
the mailing of a final partnership administrative adjustment to the 
agent); and
    (B) The Commissioner may at any time communicate directly with a 
subsidiary or a disregarded entity owned by a subsidiary that is a 
partner in a TEFRA partnership, without having to deal with each member 
separately pursuant to paragraph (f)(2)(i) of this section, whenever the 
Commissioner determines that such direct communication will facilitate 
the conduct of an examination, appeal, or settlement with respect to the 
partnership.
    (3) Copy of notice of deficiency to entity that has ceased to be a 
member of the group. A subsidiary that ceases to be a member of the 
group during or after a consolidated return year may file a written 
notice of that fact with the Commissioner and request a copy of any 
notice of deficiency with respect to the tax for a consolidated return 
year during which it was a member, or a copy of any notice and demand 
for payment of such deficiency, or both. Such filing does not limit the 
scope of the agency of the agent provided for in this section. Any 
failure by the Commissioner to comply with such request does not limit 
the subsidiary's tax liability under Sec.  1.1502-6.
    (g) Examples. Unless otherwise indicated, all entities are domestic 
and have a calendar year taxable year, and each of P, S, S-1, S-2, S-3, 
T, U, V, W, W-1, Y, Z, and Z-1 is a corporation. For none of the 
consolidated return years at issue does the Commissioner exercise the 
authority under paragraph (f)(2) of this section to deal with any member 
separately. Any surviving entity in a merger is either a successor as 
described in paragraph (b)(1) of this section, or a default successor as 
described in paragraph (b)(4) of this section, as the case may be. 
Except as otherwise indicated, no agent will be replaced under paragraph 
(c)(6) of this section or will resign under paragraph (c)(7) of this 
section, and all communications to and from the Commissioner are made in 
accordance with procedures prescribed by the Commissioner.

    Example 1. Disposition of all group members where the agent remains 
the agent. (i) Facts. As of January 1 of Year 1, P is the common parent 
and agent for the P consolidated group, consisting of P and its two 
subsidiaries, S and S-1. P files consolidated returns for the P group in 
Years 1 and 2. On December 31 of Year 1, P sells all the stock of S-1 to 
X. On December 31 of Year 2, P distributes all the stock of S to P's 
shareholders. P files a separate return for Year 3.
    (ii) Analysis. Although the consolidated group terminates after Year 
2 under Sec.  1.1502-75(d)(1) and P is no longer the common parent nor 
the agent for years after Year 2, P remains the agent for the P group 
for Years 1 and 2 under paragraph (a)(2) of this section. Accordingly, 
for as long as P remains in existence, P is the agent for the P group 
under paragraphs (a)(1) and (2) and (c)(1) of this section for Years 1 
and 2.
    Example 2. Acquisition of the agent by another group where the agent 
remains the agent. (i) Facts. The facts are the same as in Example 1, 
except on January 1 of Year 3, all of the outstanding stock of P is 
acquired by Y, which is the common parent and agent of the Y 
consolidated group. P thereafter joins in the Y group's consolidated 
return as a member of the Y group.
    (ii) Analysis. Although P is a member of the Y group in Year 3 and 
succeeding years, P remains the agent for the P group for Years 1 and 2 
under paragraph (a)(2) of this

[[Page 898]]

section. Accordingly, for as long as P remains in existence, P is the 
agent for the P group under paragraphs (a)(1) and (2) and (c)(1) of this 
section for Years 1 and 2.
    Example 3. Reverse triangular merger of the agent where the agent 
remains the agent. (i) Facts. As of January 1 of Year 1, P is the common 
parent and agent for the P consolidated group consisting of P and its 
two subsidiaries, S and S-1. P files consolidated returns for the P 
group in Years 1 and 2. On March 1 of Year 3, W-1, a subsidiary of W, 
merges into P in a reverse triangular merger qualifying as a 
reorganization under section 368(a)(1)(A) and (a)(2)(E). P survives the 
merger with W-1. The transaction constitutes a reverse acquisition under 
Sec.  1.1502-75(d)(3)(i) because P's shareholders receive more than 50 
percent of W's stock in exchange for all of P's stock. The transaction 
is therefore a group structure change as described in paragraph (c)(3) 
of this section.
    (ii) Analysis. Because the transaction constitutes a reverse 
acquisition that results in a group structure change, the P group is 
treated as remaining in existence with W as its common parent and agent. 
Under paragraphs (a)(1) and (2) and (c)(1) of this section, P remains 
the agent for the P group for Years 1 and 2 for as long as P remains in 
existence, even though the P group continues with W as its new common 
parent pursuant to Sec.  1.1502-75(d)(3)(i). Until the merger of W-1 and 
P on March 1 of Year 3, P is the agent for the P group for Year 3. From 
the time of that merger, W, as common parent of the P group, becomes the 
agent for the P group with respect to all of Year 3 (including the 
period through March 1) and succeeding consolidated return years. The 
actions taken by P before the merger as agent for the P group for Year 3 
are not nullified by the fact that W becomes the agent for all of Year 
3.
    Example 4. Reverse triangular merger of the agent--subsequent 
distribution of agent where the agent remains the agent. (i) Facts. The 
facts are the same as in Example 3, except that on April 1 of Year 4, in 
a transaction unrelated to the March 1, Year 3 reverse acquisition, P 
distributes the stock of its subsidiaries S and S-1 to W, and W then 
distributes the stock of P to the W shareholders.
    (ii) Analysis. Although P is no longer a member of the P group after 
the Year 4 distribution, P remains the agent for the P group under 
paragraphs (a)(1) and (2) and (c)(1) of this section for Years 1 and 2 
for as long as P remains in existence.
    Example 5. Agent Resigns. (i) Facts. The facts are the same as in 
Example 4, except that on August 1 of Year 4, P provides written notice 
to the Commissioner that it resigns as the agent for Years 1 and 2. 
Included with the written notice is a statement executed by either S or 
S-1 consenting to be the agent for the P group for Years 1 and 2.
    (ii) Analysis. Pursuant to paragraph (c)(7) of this section, because 
P is not the agent in Year 4, the current year, it will not be the agent 
immediately after its resignation takes effect. Accordingly, if the 
Commissioner does not object to P's resignation, P may resign with 
respect to Years 1 and 2, both of which are completed years, and either 
S or S-1, each an entity described in paragraph (c)(5)(ii)(A) of this 
section, can be the agent for the P group for Years 1 and 2 if it 
consents in writing. W cannot be the agent for the P group for Years 1 
and 2 because it is not an entity described in paragraph (c)(5)(ii)(A) 
of this section with respect to the P group for Years 1 and 2.
    Example 6. Qualified stock purchase and section 338 election where 
the agent remains the agent. (i) Facts. As of January 1 of Year 1, P is 
the common parent and agent for the P consolidated group consisting of P 
and its two subsidiaries, S and S-1. P files consolidated returns for 
the P group in Years 1 and 2. On March 31 of Year 2, V purchases the 
stock of P in a qualified stock purchase (within the meaning of section 
338(d)(3)), and V makes a timely election pursuant to section 338(g) 
with respect to P.
    (ii) Analysis. Although section 338(a)(2) provides that P is treated 
as a new corporation as of the beginning of the day after the 
acquisition date for purposes of subtitle A, paragraph (c)(8) of this 
section provides that P's existence is not deemed to terminate for 
purposes of this section notwithstanding the general rule of section 
338(a)(2). Accordingly, new P is the agent for the P group for Year 1 
and the period ending March 31 of Year 2 regardless of the election 
under section 338(g).
    Example 7. Change in the agent's federal income tax classification 
to a partnership and the resulting partnership continues as the agent. 
(i) Facts. P, a State M limited liability partnership with two partners 
that is formed on January 1 of Year 1, elects pursuant to Sec.  
301.7701-3(c) of this chapter to be an association taxable as a 
corporation for federal income tax purposes effective on the date of 
formation. P is the common parent and agent for the P consolidated group 
consisting of P and its two subsidiaries, S and S-1. P files 
consolidated returns for the P group in Years 1 through 6. On January 1 
of Year 7, P elects pursuant to Sec.  301.7701-3(c) of this chapter to 
be treated as a partnership. P remains in existence under applicable 
law.
    (ii) Analysis. The P group terminates and P is no longer the common 
parent of a consolidated group after its election to be treated as a 
partnership for federal income tax purposes. Because P remains in 
existence under applicable law, P is the agent for the P group under 
paragraphs (a)(1) and (2) and (c)(1) of this section for Years 1 through 
6. If P merged into a foreign partnership instead of

[[Page 899]]

converting to a partnership, the foreign partnership would be P's 
default successor and agent for the P group for Years 1 through 6. See 
paragraphs (b)(4) and (c)(1) of this section.
    Example 8. Forward triangular merger of agent--successor as default 
successor. (i) Facts. As of January 1 of Year 1, P is the common parent 
and agent for the P consolidated group consisting of P and its two 
subsidiaries, S and S-1. P files a consolidated return for the P group 
for Year 1. On January 1 of Year 3, P merges with and into Z-1, a 
subsidiary of Z, in a forward triangular merger qualifying as a 
reorganization under section 368(a)(1)(A) and (a)(2)(D). The transaction 
constitutes a reverse acquisition under Sec.  1.1502-75(d)(3)(i) 
resulting in a group structure change as described in paragraph (c)(3) 
of this section because P's shareholders receive more than 50 percent of 
Z's stock in exchange for all of P's stock. Z-1, the corporation that 
survives the merger and the successor of P, is the default successor for 
the P group for Years 1 and 2.
    (ii) Analysis. Although Z is the new common parent for the P group 
(which continues pursuant to Sec.  1.1502-75(d)(3)(i)) for consolidated 
return years after the merger, and, as a consequence, Z is the new agent 
as a result of this group structure change, P may not designate an agent 
for Years 1 or 2 because Z-1 is P's default successor and the agent for 
the P group for Years 1 and 2. Z-1 must file the P group's consolidated 
return for Year 2. See paragraphs (b)(4) and (c)(1) of this section.
    Example 9. Merger of the agent into a disregarded entity in exchange 
for stock of owner in a transaction qualifying as a reorganization under 
the Code where successor is the default successor. (i) Facts. As of 
January 1 of Year 1, P is the common parent and agent for the P 
consolidated group consisting of P and its two subsidiaries, S and S-1. 
P files a consolidated return for the P group in Year 1. On January 1 of 
Year 2, the shareholders of P form Y, a State M corporation. On the same 
date, Y forms Y-1, a State M limited liability company that is a 
disregarded entity (as defined in paragraph (b)(3) of this section) for 
federal income tax purposes, and P merges into Y-1 under State M law. In 
the merger, the P shareholders receive all of the Y stock. Y (through Y-
1) is treated as acquiring the assets of P in a transaction qualifying 
as a reorganization of P into Y under section 368(a)(1)(F), and the P 
group continues under Sec.  1.1502-75(d)(2) with Y as the common parent 
and, as a consequence, the transaction is treated as a group structure 
change as described in paragraph (c)(3) with Y as the P group's agent 
for Year 2. In Year 4, the Commissioner seeks to extend the period of 
limitations on assessment with respect to Year 1 of the P group. In Year 
5, the Commissioner seeks to extend the period of limitations on 
assessment with respect to Year 2 of the Y group (formerly the P group).
    (ii) Analysis. (A) Year 1 extension. As a result of the January 1, 
Year 2 merger, Y-1 is the default successor of P, and the agent for the 
P group for Year 1. See paragraphs (b)(4) and (c)(1) of this section. 
Therefore, Y-1 is the only party that can sign the extension with 
respect to the P group for Year 1.
    (B) Year 2 extension. Because the January 1, Year 2 merger qualified 
as a reorganization under section 368(a)(1)(F), the P group remains in 
existence with Y as the common parent. Therefore, Y, the common parent 
of the P group after the merger, is the P group's agent for all of Year 
2 (see paragraph (c)(3) of this section) and is the only party that can 
sign the extension with respect to the P group for that year and in 
succeeding years. See paragraphs (a)(1) and (2) and (c)(1) of this 
section.
    Example 10. Designation of agent where there is no default 
successor. (i) Facts. P is incorporated under the laws of State X. Fifty 
percent of its stock is owned at all times by A, an individual, and 50 
percent by BCD, a partnership. On January 1 of Year 1, P forms two 
subsidiaries, S and T, and becomes the common parent of the P group. P 
files consolidated returns for the P group beginning in Year 1 and is 
the agent for the P consolidated group beginning on January 1 of Year 1. 
On November 30 of Year 3, P dissolves under X law. Under X law, A and 
BCD are primarily liable for the federal income tax liability of 
dissolved corporation P. State X law allows the officers of a dissolved 
corporation to perform certain actions incident to the winding up of its 
affairs after its dissolution, including the filing of tax returns.
    (ii) Analysis. Upon P's dissolution, there is no default successor 
to P, pursuant to paragraph (b)(4) of this section, because there are 
two successors. Prior to its dissolution on November 30 of Year 3, 
pursuant to paragraph (c)(5)(i) of this section, P may designate an 
agent for the P group for Years 1 and 2 and the short taxable year 
ending on November 30 of Year 3, to be effective upon P's dissolution. P 
may designate S or T, pursuant to paragraph (c)(5)(ii)(A) of this 
section (because they are members of the former group), or BCD (because 
it is an entity that is a successor to P pursuant to paragraph (b)(1) of 
this section). P cannot designate A pursuant to paragraph (c)(5)(ii) of 
this section, because A is not an entity. Under paragraph (b)(2) of this 
section, the officers of P cannot designate an agent for the P group 
after P dissolves on November 30 of Year 3, notwithstanding the winding 
up provisions of State X law. Accordingly, P should designate an agent 
prior to its dissolution to ensure that there is an agent authorized to 
file the short Year 3 consolidated return. If P does not designate an 
agent prior to dissolution under paragraph (c)(5)(i) of this section,

[[Page 900]]

the Commissioner may designate an agent under paragraph (c)(6)(i)(A)(1) 
of this section from among S, T, or BCD, upon their request or 
otherwise. If any of S, T, A, or BCD realizes that P has dissolved 
without designating an agent, it should request, in writing, a 
designation of an agent by the Commissioner as soon as possible.
    Example 11. Commissioner designates a new agent. (i) Agent fails to 
fulfill its obligations. (A) Facts. P is the common parent and agent for 
the P consolidated group consisting of P and its two subsidiaries, S-1 
and S-2, each a State Y corporation. P files a consolidated return for 
the P group in Year 1. In Year 2, S-3, also a State Y corporation, joins 
the P group. The P group continues as a consolidated group in Years 2, 
3, and 4. As of Year 4, P has failed to file the P group consolidated 
returns for Years 2 and 3.
    (B) Analysis. (1) Scope of designation. Because P failed to perform 
its obligations as agent as prescribed by federal tax law, the 
Commissioner may, under the authority of paragraph (c)(6)(i)(A)(3) of 
this section, on his own accord, with or without a written request from 
a member, designate another entity described in paragraph (c)(6)(i) of 
this section to act as the agent for not just Years 2 and 3, but any of 
Years 1 through 4.
    (2) Year 1 designation. The Commissioner may designate either S-1 or 
S-2, both of which are entities described in paragraphs (c)(6)(i) and 
(c)(5)(ii)(A) of this section, to act as the agent for the P group for 
Year 1. Because S-3 was not a member of the group in Year 1, it is not 
an entity described in paragraphs (c)(6)(i) and (c)(5)(ii)(A) of this 
section for Year 1 and therefore cannot be the agent for Year 1. Unless 
otherwise provided in the designation, the designation of either S-1 or 
S-2 will also be effective for Years 2, 3, and 4 and all succeeding 
consolidated return years of the group.
    (3) Year 2 designation. The Commissioner may designate either S-1, 
S-2, or S-3, all of which are entities described in paragraph 
(c)(5)(ii)(A) of this section, to act as the agent for the P group for 
Year 2. Unless otherwise provided in the designation, the designation of 
either S-1, S-2, or S-3 will also be effective for Years 3 and 4 and all 
succeeding consolidated return years of the group.
    (4) Year 3 designation. The Commissioner may designate any of S-1, 
S-2, or S-3 as the agent for Year 3. Unless otherwise provided in the 
designation, the designation of either S-1, S-2, or S-3 will also be 
effective for Year 4 and all succeeding consolidated return years of the 
group.
    (5) Year 4 designation. The Commissioner may designate any of S-1, 
S-2, or S-3 as the agent for Year 4. Unless otherwise provided in the 
designation, the designation of either S-1, S-2, or S-3 will also be 
effective for all succeeding consolidated return years of the group.
    (ii) Member requests replacement of designated agent. (A) Facts. The 
facts are the same as in paragraph (i)(A) of this Example 11, except 
that in Year 4 the Commissioner designates S-1 as agent for Years 1 and 
succeeding years to replace P for P's failure to fulfill its 
obligations. After receiving notification that S-1 has been designated, 
S-3 submits a request in Year 4, pursuant to paragraph (c)(6)(i)(B) of 
this section, that the Commissioner designate S-2 as the agent because 
S-1 does not have ready access to the group's books and records, which 
are located in another state and are in the possession of S-2.
    (B) Analysis. In light of S-3's request, the Commissioner may, under 
the authority of paragraph (c)(6)(i)(B) of this section, designate 
either S-2 (for all or any years) or S-3 (for any year or years other 
than Year 1) as agent in lieu of the previously designated agent, S-1. 
However, notwithstanding S-3's request, the Commissioner is not required 
to replace S-1 as agent for any of the consolidated return years for 
which S-1 was designated.
    Example 12. Designated agent ceases to be a member of the group. (i) 
Facts. The facts are the same as in paragraph (ii)(A) of Example 11, 
except that in Year 4 no member requests that the Commissioner replace 
S-1, which accordingly continues to be the agent for the P group in Year 
5 pursuant to paragraph (c)(6)(iii) of this section. On May 2 of Year 5, 
S-1 converts under State Y law into S-1 LLC, a limited liability company 
that is an entity that is treated as a disregarded entity (as defined in 
paragraph (b)(3) of this section) and, as a consequence, is no longer a 
member of the P group after the conversion.
    (ii) Analysis for completed years. S-1 LLC, the disregarded entity 
resulting from the conversion, becomes S-1's default successor. As such, 
S-1 LLC is the agent for Years 1-4.
    (iii) Analysis for current and succeeding years. S-1 is an agent 
designated by the Commissioner pursuant to paragraph (c)(6)(i)(A)(3) of 
this section. Because S-1 is no longer a member of the P group after May 
2 of Year 5, S-1 is the agent for the P group for Year 5 only while it 
remains a member (see paragraphs (c)(6)(i) and (iii) of this section). 
According to paragraph (c)(6)(i) of this section, although S-1 LLC is S-
1's default successor, it is not a member of the group for the current 
year and therefore cannot be its agent. Furthermore, S-1 cannot 
designate an agent for Year 5 under paragraph (c)(5)(i) of this section 
because that paragraph pertains only to designations for completed years 
for which there is no default successor. In addition, S-1 cannot 
designate an agent for Year 5 under paragraph (c)(5)(i) of this section 
because S-1 was previously designated by the Commissioner under 
paragraph (c)(6)(i)(A)(3) of this section.

[[Page 901]]

    (iv) Member's notice to Commissioner for Commissioner to designate a 
member of the group for a current year. A member of the group in Year 5 
should request that the Commissioner designate, pursuant to paragraphs 
(c)(6)(i)(A)(2) and (c)(6)(iv) of this section, another member of the P 
group to be the agent of the group for Year 5. The Commissioner may 
then, pursuant to paragraph (c)(6)(i)(A)(2) of this section, designate 
either S-2, S-3, or P to be the agent for the P group and, once so 
designated, that member will be, effective on May 3 of Year 5, the agent 
for all of Year 5 and for succeeding years (subject to the rules of this 
section) pursuant to paragraph (c)(6)(iii) of this section. No actions 
taken by S-1 on behalf of the P group through May 2, Year 5, are 
nullified by the Commissioner's designation of another agent even though 
the agent so designated will be the agent for all of Year 5.
    Example 13. Fraudulent conveyance of assets. (i) Facts. As of 
January 1 of Year 1, P is the common parent and agent for the P 
consolidated group consisting of P and its two subsidiaries, S and S-1. 
On March 15 of Year 2, P files a consolidated return that includes the 
income of S and S-1 for Year 1. On December 1 of Year 2, S-1 transfers 
assets having a fair market value of $100x to U in exchange for $10x. 
This transfer of assets for less than fair market value constitutes a 
fraudulent conveyance under applicable state law. On March 1 of Year 5, 
P executes a waiver extending to December 31 of Year 6 the period of 
limitations on assessment with respect to the P group's Year 1 
consolidated return. On February 1 of Year 6, the Commissioner issues a 
notice of deficiency to P asserting a deficiency of $30x for the P 
group's Year 1 consolidated tax liability. P does not file a petition 
for redetermination in the Tax Court, and the Commissioner makes a 
timely assessment against the P group. P, S, and S-1 are all insolvent 
and are unable to pay the deficiency. On February 1 of Year 8, the 
Commissioner sends a notice of transferee liability to U, which does not 
file a petition in the Tax Court. On August 1 of Year 8, the 
Commissioner assesses the amount of the P group's deficiency against U. 
Under section 6901(c), the Commissioner may assess U's transferee 
liability within one year after the expiration of the period of 
limitations against the transferor, S-1. By operation of section 6213(a) 
and 6503(a), the issuance of the notice of deficiency to P and the 
expiration of the 90-day period for filing a petition in the Tax Court 
have the effect of further extending by 150 days the P group's 
limitations period on assessment from the previously extended date of 
December 31 of Year 6 to May 30 of Year 7.
    (ii) Analysis. Pursuant to paragraph (a)(1) of this section, the 
waiver executed by P on March 1 of Year 5 to extend the period of 
limitations on assessment to December 31 of Year 6 and the further 
extension of the P group's limitations period to May 30 of Year 7 (by 
operation of sections 6213(a) and 6503(a)) have the derivative effect of 
extending the period of limitations on assessment of U's transferee 
liability to May 30 of Year 8. By operation of section 6901(f), the 
issuance of the notice of transferee liability to U and the expiration 
of the 90-day period for filing a petition in the Tax Court have the 
effect of further extending the limitations period on assessment of U's 
liability as a transferee by 150 days, from May 30 of Year 8 to October 
27 of Year 8. Accordingly, the Commissioner may send a notice of 
transferee liability to U at any time on or before May 30 of Year 8 and 
assess the unpaid liability against U at any time on or before October 
27 of Year 8. The result would be the same even if S-1 ceased to exist 
before March 1 of Year 5, the date P executed the waiver.
    Example 14. Consent to extend the statute of limitations for a 
partnership where a member of the consolidated group is a partner of 
such partnership subject to the provisions of the Code and the tax 
matters partner is not a member of the group. (i) Facts. P is the common 
parent and agent for the P consolidated group consisting of P and its 
two subsidiaries, S and S-1. The P group has a November 30 fiscal year 
end and P files consolidated returns for the P group for the years 
ending November 30, Year 1 and November 30, Year 2. S-1 is a partner in 
the PRS partnership, which is subject to the provisions of sections 6221 
through 6234. PRS has a calendar year end and A, an individual, is the 
tax matters partner of the PRS partnership. PRS files a partnership 
return for the year ending December 31, Year 1. On January 10, Year 5, 
A, as the tax matters partner for the PRS partnership, executes a 
consent to extend the period for assessment of partnership items of PRS 
for all partners, and the Commissioner co-executes the consent on the 
same day for the year ending December 31, Year 1.
    (ii) Analysis. A's consent to extend the statute of limitations for 
the partnership items of PRS partnership for the year ending December 
31, Year 1, extends the statute of limitations with respect to the 
partnership items for all members of the P group, including P, S, and S-
1 for the consolidated return year ending November 30, Year 2. This is 
because S-1 is a partner in the PRS partnership for which A, the tax 
matters partner for the PRS partnership, consents, pursuant to section 
6229(b)(1)(B), to extend the statute of limitations for the year ending 
December 31, Year 1. However, under paragraph (f)(2)(iii) of this 
section, such agreement with respect to the statute of limitations for 
the PRS partnership for the year ending December 31, Year 1 does not 
obviate the need to obtain a consent from P, the agent for the P 
consolidated group, to extend the statute of limitations for the P 
consolidated group for the P

[[Page 902]]

group's consolidated return years ending November 30, Year 1 and 
November 30, Year 2 regarding any items other than partnership items or 
affected items of the PRS partnership.
    Example 15. Contacting subsidiary member in order to facilitate the 
conduct of an examination, appeal, or settlement where a member of the 
consolidated group is a partner of a partnership subject to the 
provisions of the Code. (i) Facts. P is the common parent and agent for 
the P consolidated group consisting of P and its two subsidiaries, S and 
S-1. The P group has a November 30 fiscal year end, and P files 
consolidated returns for the P group for the years ending November 30, 
Year 1 and November 30, Year 2. S-1 is a partner in the PRS partnership, 
which is subject to the provisions of sections 6221 through 6234. PRS 
has a calendar year end and A, an individual, is the tax matters partner 
of the PRS partnership. PRS files a partnership return for the year 
ending December 31, Year 1. The Commissioner, on January 10, Year 4, in 
the course of an examination of the PRS partnership for the year ending 
December 31, Year 1, seeks to obtain information in the course of that 
examination to resolve the audit.
    (ii) Analysis. Because the direct contact with a subsidiary member 
of a consolidated group that is a partner in a partnership subject to 
the provisions under sections 6221 through 6234 may facilitate the 
conduct of an examination, appeal, or settlement, the Commissioner, 
under paragraph (f)(2)(iii) of this section, may communicate directly 
with either S-1, P, or A regarding the PRS partnership without breaking 
agency pursuant to paragraph (f)(2)(i) of this section. However, if the 
Commissioner were instead seeking to execute a settlement agreement with 
respect to S-1 as a partner with respect to its liability as a partner 
in PRS partnership, P would need to execute such settlement agreement 
for all members of the group including the partner subsidiary.

    (h) Cross-reference. For further rules applicable to groups that 
include insolvent financial institutions, see Sec.  301.6402-7 of this 
chapter.
    (i) [Reserved]
    (j) Effective/applicability date--(1) In general. The rules of this 
section apply to consolidated return years beginning on or after April 
1, 2015. For prior years beginning before June 28, 2002, see Sec.  
1.1502-77A. For prior years beginning on or after June 28, 2002, and 
before April 1, 2015, see Sec.  1.1502-77B.
    (2) Application of this section to prior years. Notwithstanding 
paragraph (j)(1) of this section, an agent may apply the rules of 
paragraph (c)(7) of this section to resign as agent for a completed year 
that began before April 1, 2015.

[T.D. 9715, 80 FR 17318, Apr. 1, 2015, as amended at 80 FR 23237, Apr. 
27, 2015]



Sec.  1.1502-78  Tentative carryback adjustments.

    (a) General rule. If a group has a consolidated net operating loss, 
a consolidated net capital loss, or a consolidated unused business 
credit for any taxable year, then any application under section 6411 for 
a tentative carryback adjustment of the taxes for a consolidated return 
year or years preceding such year shall be made by the common parent 
corporation for the carryback year (or the agent determined under Sec.  
1.1502-77(c) or Sec.  1.1502-77B(d) for the carryback year) to the 
extent such loss or unused business credit is not apportioned to a 
corporation for a separate return year pursuant to Sec.  1.1502-21(b), 
1.1502-22(b), or 1.1502-79(c). In the case of the portion of a 
consolidated net operating loss or consolidated net capital loss or 
consolidated unused business credit to which the preceding sentence does 
not apply and that is to be carried back to a corporation that was not a 
member of a consolidated group in the carryback year, the corporation to 
which such loss or credit is attributable shall make any application 
under section 6411. In the case of a net capital loss or net operating 
loss or unused business credit arising in a separate return year that 
may be carried back to a consolidated return year, after taking into 
account the application of Sec.  1.1502-21(b)(3)(ii)(B) with respect to 
any net operating loss arising in another consolidated group, the common 
parent for the carryback year (or the agent determined under Sec.  
1.1502-77(c) or Sec.  1.1502-77B(d) for the carryback year) shall make 
any application under section 6411.
    (b) Special rules--(1) Payment of refund. Any refund allowable under 
an application referred to in paragraph (a) of this section shall be 
made directly to and in the name of the corporation filing the 
application, except that in all cases where a loss is deducted from the 
consolidated taxable income or a

[[Page 903]]

credit is allowed in computing the consolidated tax liability for a 
consolidated return year, any refund shall be made directly to and in 
the name of the common parent corporation for the carryback year (or the 
agent determined under Sec.  1.1502-77(c) or Sec.  1.1502-77B(d) for the 
carryback year). The payment of any such refund shall discharge any 
liability of the Government with respect to such refund.
    (2) Several liability. If a group filed a consolidated return for a 
taxable year for which there was an adjustment by reason of an 
application under section 6411, and if a deficiency is assessed against 
such group under section 6213(b)(3), then each member of such group 
shall be severally liable for such deficiency including any interest or 
penalty assessed in connection with such deficiency.
    (3) Groups that include insolvent financial institutions. For 
further rules applicable to groups that include insolvent financial 
institutions, see Sec.  301.6402-7 of this chapter.
    (c) Examples. The provisions of paragraphs (a) and (b) of this 
section may be illustrated by the following examples:

    Example 1. Corporations P, S, and S-1 filed a consolidated return 
for the calendar year 2003. P, S, and S-1 also filed a consolidated 
return for the calendar year 2006. The group incurred a consolidated net 
operating loss in 2006 attributable to S-1 which may be carried back to 
2003 as a consolidated net operating loss carryback. If a tentative 
carryback adjustment is desired, P, the common parent for the carryback 
year, must file an application under section 6411 and any refund will be 
made to P.
    Example 2. Assume the same facts as in example (1) except that P, S, 
and S-1 filed separate returns for the calendar year 2006, even though 
they were members of the same group for such year. P incurred a net 
operating loss in 1969 which may be carried back to 2003. If a tentative 
carryback adjustment is desired, P must file an application under 
section 6411 and any refund from such application will be made to P.
    Example 3. Corporations X, Y, and Z filed a consolidated return for 
the calendar year 2003. Z ceased to be a member of the group in 2004. Z 
filed a separate return for 2005 while X and Y filed a consolidated 
return for such year. The group incurred a consolidated net operating 
loss in 2005 attributable to Y, which may be carried back to 2003. Z 
also incurred a net operating loss for 2005 which may be carried back to 
2003. If a tentative carryback adjustment is claimed with respect to the 
consolidated net operating loss, X, the common parent, must file an 
application under section 6411. If a tentative carryback adjustment is 
desired with respect to Z's loss, X must file an application. Any 
refunds attributable to either application will be made to X. If an 
assessment is made under section 6213(b)(3) to recover an excessive 
tentative allowance made with respect to calendar year 2003, X, Y, and Z 
are severally liable for such assessment.
    Example 4. Corporations L and M filed a consolidated return for the 
calendar year 2003. Corporation N filed a separate return for such year. 
Later, N became a member of the group and filed a consolidated return 
with the group for the calendar year 2005. The group incurred a 
consolidated net operating loss in 2005 attributable to N which may be 
carried back to N's separate return for 2003. If a tentative carryback 
adjustment is desired, N must file an application under section 6411 and 
any refund will be made directly to N.

    (d) Adjustments of overpayments of estimated income tax. If a group 
paid its estimated income tax on a consolidated basis, then any 
application under section 6425 for an adjustment of overpayment of 
estimated income tax shall be made by the common parent corporation. If 
the members of a group paid estimated income taxes on a separate basis, 
then any application under section 6425 shall be made by the member of 
the group which claims an overpayment on a separate basis. Any refund 
allowable under an application under section 6425 shall be made directly 
to and in the name of the corporation filing the application.
    (e) Time for filing application--(1) General rule. The provisions of 
section 6411(a) apply to the filing of an application for a tentative 
carryback adjustment by a consolidated group.
    (2) Special rule for new members--(i) New member. A new member is a 
corporation that, in the preceding taxable year, did not qualify as a 
member, as defined in Sec.  1.1502-1(b), of the consolidated group that 
it now joins.
    (ii) End of taxable year. Solely for the purpose of complying with 
the twelve-month requirement for making an application for a tentative 
carryback adjustment under section 6411(a), the separate return year of 
a qualified new member shall be treated as ending on the same date as 
the end of the current

[[Page 904]]

taxable year of the consolidated group that the qualified new member 
joins.
    (iii) Qualified new member. A new member of a consolidated group 
qualifies for purposes of the provisions of this paragraph (e)(2) if, 
immediately prior to becoming a new member, either--
    (A) It was the common parent of a consolidated group; or
    (B) It was not required to join in the filing of a consolidated 
return.
    (iv) Examples. The provisions of this paragraph (e)(2) may be 
illustrated by the following examples:

    Example 1. Individual A owns 100 percent of the stock of X, a 
corporation that is not a member of a consolidated group and files 
separate tax returns on a calendar year basis. On January 31 of year 1, 
X becomes a member of the Y consolidated group, which also files returns 
on a calendar year basis. X is a qualified new member as defined in 
paragraph (e)(2)(iii)(B) of this section because, immediately prior to 
becoming a new member of the Y consolidated group, X was not required to 
join in the filing of a consolidated return. As a result of its becoming 
a new member of Group Y, X's separate return for the short taxable year 
(January 1 of year 1 through January 31 of year 1) is due September 15 
of year 2 (with extensions). See Sec.  1.1502-76(c). Group Y's 
consolidated return is also due September 15 of year 2 (with 
extensions). See Sec.  1.1502-76(c). Solely for the purpose of complying 
with the twelve-month requirement for making an application for a 
tentative carryback adjustment under section 6411(a), X's taxable year 
for the separate return year is treated as ending on December 31 of year 
1. X's application for a tentative carryback adjustment is therefore due 
on or before December 31 of year 2.

    Example 2. Assume the same facts as in Example 1 except that 
immediately prior to becoming a new member of Group Y, X was a member of 
the Z consolidated group. Because X was required to join in the filing 
of the consolidated return for Group Z, X is not a qualified new member 
as defined in paragraph (e)(2)(iii) of this section. X's items for the 
one-month period will be included in the consolidated return for Group 
Z. Group Z's application for a tentative carryback adjustment, if any, 
continues to be due within 12 months of the end of its taxable year, 
which is not affected by X's change in status as a new member of Group 
Y.

    (f) Effective date--(1) In general. This section applies to taxable 
years to which a loss or credit may be carried back and for which the 
due date (without extensions) of the original return is after June 28, 
2002, except that the provisions of paragraph (e)(2) apply for 
applications by new members of consolidated groups for tentative 
carryback adjustments resulting from net operating losses, net capital 
losses, or unused business credits arising in separate return years of 
new members that begin on or after January 1, 2001.
    (2) Prior law. For taxable years to which a loss or credit may be 
carried back and for which the due date (without extensions) of the 
original return is on or before June 28, 2002, see Sec.  1.1502-78 in 
effect prior to June 28, 2002, as contained in 26 CFR part 1 revised 
April 1, 2002.

[T.D. 6894, 31 FR 11794, Sept. 3, 1966, as amended by T.D. 7059, 35 FR 
14546, Sept. 17, 1970; T.D. 7246, 38 FR 767, Jan. 4, 1973; T.D. 8387, 56 
FR 67489, Dec. 31, 1991; T.D. 8446, 57 FR 53034, Nov. 6, 1992; T.D. 
8677, 61 FR 33324, June 27, 1996; T.D. 8823, 64 FR 36100, July 2, 1999; 
T.D. 8950, 66 FR 33463, June 22, 2001; T.D. 9002, 67 FR 43544, June 28, 
2002; 67 FR 77678, Dec. 19, 2002; T.D. 9715, 80 FR 17324, Apr. 1, 2015]



Sec.  1.1502-79  Separate return years.

    (a) Carryover and carryback of consolidated net operating losses to 
separate return years. For losses arising in consolidated return years 
beginning before January 1, 1997, see Sec.  1.1502-79A(a). For later 
years, see Sec.  1.1502-21(b).
    (b) Carryover and carryback of consolidated net capital loss to 
separate return years. For losses arising in consolidated return years 
beginning before January 1, 1997, see Sec.  1.1502-79A(b). For later 
years, see Sec.  1.1502-22(b).
    (c) Carryover and carryback of consolidated unused investment credit 
to separate return years--(1) In general. If a consolidated unused 
investment credit can be carried under the principles of section 46(b) 
and paragraph (b) of Sec.  1.1502-3 to a separate return year of a 
corporation (or could have been so carried if such corporation were in 
existence) which was a member of the group in the year in which such 
unused credit arose, then the portion of such consolidated unused credit 
attributable to such corporation (as determined under subparagraph (2) 
of this paragraph) shall be apportioned to such corporation (and any 
successor to such corporation in a transaction to which section 381(a) 
applies) under the principles

[[Page 905]]

of Sec.  1.1502-21(b) (or Sec. Sec.  1.1502-79A(a)(1) and (2), as 
appropriate) and shall be an investment credit carryover or carryback to 
such separate return year.
    (2) Portion of consolidated unused investment credit attributable to 
a member--(i) Investment credit carryback. In the case of a consolidated 
unused credit which is an investment credit carryback, the portion of 
such consolidated unused credit attributable to a member of the group is 
an amount equal to such consolidated unused credit multiplied by a 
fraction, the numerator of which is the credit earned of such member for 
the consolidated unused credit year, and the denominator of which is the 
consolidated credit earned for such unused credit year.
    (ii) Investment credit carryover. In the case of a consolidated 
unused credit which is an investment credit carryover, the portion of 
such consolidated unused credit attributable to a member of the group is 
an amount equal to such consolidated unused credit multiplied by a 
fraction, the numerator of which is the credit earned with respect to 
any section 38 property placed in service in the consolidated unused 
credit year and owned by such member (whether or not placed in service 
by such member) at the close of the last day as of which the taxable 
income of such member is included in a consolidated return filed by the 
group, and the denominator of which is the consolidated credit earned 
for such unused credit year.
    (d) Carryover and carryback of consolidated unused foreign tax--(1) 
In general. If a consolidated unused foreign tax can be carried under 
the principles of section 904(d) and paragraph (e) of Sec.  1.1502-4 to 
a separate return year of a corporation (or could have been so carried 
if such corporation were in existence) which was a member of the group 
in the year in which such unused foreign tax arose, then the portion of 
such consolidated unused foreign tax attributable to such corporation 
(as determined under subparagraph (2) of this paragraph) shall be 
apportioned to such corporation (and any successor to such corporation 
in a transaction to which section 381(a) applies) under the principles 
of Sec.  1.1502-21(b) (or Sec. Sec.  1.1502-79A(a)(1) and (2), as 
appropriate) and shall be deemed paid or accrued in such separate return 
year to the extent provided in section 904(d).
    (2) Portion of consolidated unused foreign tax attributable to a 
member. The portion of a consolidated unused foreign tax for any year 
attributable to a member of a group is an amount equal to such 
consolidated unused foreign tax multipled by a fraction, the numerator 
of which is the foreign taxes paid or accrued for such year (including 
those taxes deemed paid or accrued, other than by reason of section 
904(d)) to each foreign country or possession (or to all foreign 
countries or possessions if the overall limitation is effective) by such 
member, and the denominator of which is the aggregate of all such taxes 
paid or accrued for such year (including those taxes deemed paid or 
accrued, other than by reason of section 904(d)) to each such foreign 
country or possession (or to all foreign countries or possessions if the 
overall limitation is effective) by all the members of the group.
    (e) Carryover of consolidated excess charitable contributions to 
separate return years--(1) In general. If the consolidated excess 
charitable contributions for any taxable year can be carried under the 
principles of section 170(b)(2) and paragraph (b) of Sec.  1.1502-24 to 
a separate return year of a corporation (or could have been so carried 
if such corporation were in existence) which was a member of the group 
in the year in which such excess contributions arose, then the portion 
of such consolidated excess charitable contributions attributable to 
such corporation (as determined under subparagraph (2) of this 
paragraph) shall be apportioned to such corporation (and any successor 
to such corporation in a transaction to which section 381(a) applies) 
under the principles of Sec.  1.1502-21(b) (or Sec. Sec.  1.1502-
79A(a)(1) and (2), as appropriate) and shall be a charitable 
contribution carryover to such separate return year.
    (2) Portion of consolidated excess charitable contributions 
attributable to a member. The portion of the consolidated excess 
charitable contributions attributable to a member of a group is an

[[Page 906]]

amount equal to such consolidated excess contributions multiplied by a 
fraction, the numerator of which is the charitable contributions paid by 
such member for the taxable year, and the denominator of which is the 
aggregate of all such charitable contributions paid for such year by all 
the members of the group.
    (f) Disallowed business interest expense carryforwards. For the 
treatment of disallowed business interest expense carryforwards (as 
defined in Sec.  1.163(j)-1(b)(11)) of a member arising in a separate 
return limitation year, see Sec.  1.163(j)-5(d) and (f).

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7728, 45 FR 
72650, Nov. 3, 1980; T.D. 8294, 55 FR 9438, Mar. 14, 1990; T.D. 8319, 55 
FR 49038, Nov. 26, 1990; T.D. 8364, 56 FR 47402, Sept. 19, 1991; T.D. 
8597, 60 FR 36710, July 18, 1995; T.D. 8677, 61 FR 33324, 33325, 33334, 
June 27, 1996; T.D. 8823, 64 FR 36100, July 2, 1999; T.D. 9905, 85 FR 
56843, Sept. 14, 2020]



Sec.  1.1502-80  Applicability of other provisions of law.

    (a) In general--(1) Application of other provisions. The Internal 
Revenue Code (Code), or other law, shall be applicable to the group to 
the extent the regulations do not exclude its application. To the extent 
not excluded, other rules operate in addition to, and may be modified 
by, these regulations. Thus, for example, in a transaction to which 
section 381(a) applies, the acquiring corporation will succeed to the 
tax attributes described in section 381(c). Furthermore, sections 269 
and 482 apply for any consolidated return year. However, in a 
recognition transaction otherwise subject to section 1001, for example, 
the rules of section 1001 continue to apply, but may be modified by the 
intercompany transaction regulations under Sec.  1.1502-13.
    (2) No duplicative adjustments. Nothing in these regulations shall 
be interpreted or applied to require an adjustment, inclusion, or other 
item to the extent it would have the effect of duplicating any other 
adjustment, inclusion, or other item required under the Code or other 
rule of law, including other provisions of these regulations.
    (3) Application of single-entity principles. If two or more 
adjustments, inclusions, or other items are subject to paragraph (a)(2) 
of this section, the determination of which adjustment, inclusion, or 
other item is treated as applied or taken into account is made by taking 
into account the purposes of the provisions and applying single-entity 
principles as appropriate.
    (4) Effective/applicability dates. This paragraph (a) is applicable 
with respect to transactions and determinations on or after September 
17, 2008.
    (b) Non-applicability of section 304. Section 304 does not apply to 
any acquisition of stock of a corporation in an intercompany transaction 
or to any intercompany item from such transaction occurring on or after 
July 24, 1991.
    (c) Deferral of section 165--(1) General rule. Subsidiary stock is 
not treated as worthless under section 165 until immediately before the 
earlier of the time--
    (i) The stock is worthless within the meaning of Sec.  1.1502-
19(c)(1)(iii); or
    (ii) The subsidiary for any reason ceases to be a member of the 
group.
    (2) Cross reference. See Sec.  1.1502-36 for additional rules 
relating to worthlessness of subsidiary stock on or after September 17, 
2008.
    (3) Effective/applicability date. This paragraph (c) applies to 
taxable years for which the original consolidated Federal income tax 
return is due (without extensions) after July 18, 2007. However, 
taxpayers may apply this paragraph (c) to taxable years beginning on or 
after January 1, 1995.
    (d) Non-applicability of section 357(c)--(1) In general. Section 
357(c) does not apply to any transaction to which Sec.  1.1502-13, Sec.  
1.1502-13T, Sec.  1.1502-14, or Sec.  1.1502-14T applies, if it occurs 
in a consolidated return year beginning on or after January 1, 1995. For 
example, P, S, and T are members of a consolidated group, P owns all of 
the stock of S and T with bases of $30 and $20, respectively, S has a 
$30 basis in its assets and $40 of liabilities, and S merges into T in a 
transaction described in section 368(a)(1)(A) (and in section 
368(a)(1)(D)); section 357(c) does not apply to the merger, P's basis in 
T's stock increases to $50 ($30 plus $20), and T succeeds to S's $30 
basis in the assets transferred subject to the $40 liability. Similarly, 
if S instead transferred its

[[Page 907]]

assets and liabilities to a newly formed subsidiary in a transaction to 
which section 351 applies, section 357(c) does not apply and S's basis 
in the subsidiary's stock is a $10 excess loss account. This paragraph 
(d) does not apply to a transaction if the transferor or transferee 
becomes a nonmember as part of the same plan or arrangement. The 
transferor (or transferee) is treated as becoming a nonmember once it is 
no longer a member of a consolidated group that includes the transferee 
(or transferor). For purposes of this paragraph (d), any reference to a 
transferor or transferee includes, as the context may require, a 
reference to a successor or predecessor.
    (2) Prior period transactions. If, in a tax year beginning before 
January 1, 1995, a member's stock with an excess loss account is 
transferred in a transaction to which Sec.  1.1502-13, Sec.  1.1502-13T, 
Sec.  1.1502-14, or Sec.  1.1502-14T applies, paragraph (d)(1) of this 
section applies to the stock transfer to the extent that the income, 
gain, deduction, or loss (if any) is not taken into account in a tax 
year beginning before January 1, 1995. For example, if P, S, and T, are 
members of a consolidated group, T's stock has an excess loss account, 
and P transfers the T stock to S in 1993 in a transaction to which 
section 351 and Sec.  1.1502-13 apply, section 357(c) applies to the 
transfer only to the extent P's gain is taken into account in tax years 
beginning before January 1, 1995.
    (e) Non-applicability of section 163(e)(5). Section 163(e)(5) does 
not apply to any intercompany obligation (within the meaning of Sec.  
1.1502-13(g)) issued in a consolidated return year beginning on or after 
July 12, 1995.
    (f) Non-applicability of section 1031. Section 1031 does not apply 
to any intercompany transaction occurring in consolidated return years 
beginning on or after July 12, 1995.
    (g) Special rules for liquidations to which section 332 applies. 
Notwithstanding the general rule of section 381, if multiple members 
(distributee members) acquire assets of a corporation in a liquidation 
to which section 332 applies (regardless of whether any single member 
owns stock in the liquidating corporation meeting the requirements of 
section 1504(a)(2)), such members succeed to and take into account the 
items of the liquidating corporation (including items described in 
section 381(c), but excluding intercompany items under Sec.  1.1502-13) 
as provided in this paragraph (g) to the extent not otherwise prohibited 
by any applicable provision of law. This paragraph (g) does not apply to 
the intercompany items of the liquidating corporation. See Sec.  1.1502-
13(j)(2)(ii).
    (1) Income offset items and deferred income. Except as otherwise 
provided in this paragraph (g)(1), each distributee member succeeds to 
and takes into account the items of the liquidating corporation that 
could be used to offset the income of the group or any member (including 
deferred deductions, net operating loss carryovers, and capital loss 
carryovers) (income offset items) to the extent that such items would 
have been reflected in investment adjustments to the stock of the 
liquidating corporation owned by such distributee member under Sec.  
1.1502-32(c) if, immediately prior to the liquidation, any stock of the 
liquidating corporation owned by nonmembers had been redeemed and then 
such items had been taken into account. However, each distributee member 
succeeds to the full amount of any deferred deduction or deferred income 
item attributable to the particular property or business operations 
distributed to such distributee in the liquidation to the extent that 
such item is not taken into account in the determination of the income 
or loss of the liquidating corporation with regard to the liquidation 
under chapter 1 of the Internal Revenue Code (Code). If the liquidating 
corporation is not a member of the group at the time of the liquidation, 
the rules of this paragraph (g)(1) are applied as if the liquidating 
corporation had been a member of the group.
    (2) Accounting for deferred income items. Solely for the purpose of 
determining whether deferred income items of a liquidating corporation 
are taken into account under applicable principles of law as a result of 
a liquidation to which section 332 applies, the transfer of property to, 
and the assumption of liabilities by, a distributee member

[[Page 908]]

that does not own stock in the liquidating corporation meeting the 
requirements of section 1504(a)(2) without regard to the application of 
Sec.  1.1502-34 immediately prior to the liquidation is not treated as 
part of a transaction to which section 381(a) applies. In addition, 
section 332(a) does not apply in determining the recognition or 
nonrecognition of any income realized by the distributee member under 
applicable principles of law on account of consideration received (or 
deemed received) on the assumption of the liquidating corporation's 
obligation or liability attributable to any deferred income item.
    (3) Credits and earnings and profits. Each distributee member 
succeeds to and takes into account a percentage of each credit of the 
liquidating corporation equal to the value of the stock of the 
liquidating corporation owned by such distributee at the time of the 
liquidation divided by the total value of all the stock of the 
liquidating corporation owned by members of the group at the time of the 
liquidation. Except to the extent that the distributee member's earnings 
and profits already reflect the liquidating corporation's earnings and 
profits, each distributee member succeeds to and takes into account 
under the principles of Sec.  1.1502-32(c) the earnings and profits, or 
deficit in earnings and profits, of the liquidating corporation 
(determined after taking into account the amount of earnings and profits 
properly applicable to distributions to non-member shareholders under 
Sec.  1.381(c)(2)-1(c)(2)). If the liquidating corporation is not a 
member of the group at the time of the liquidation, the rules of this 
paragraph (g)(3) are applied as if the liquidating corporation had been 
a member of the group.
    (4) Other items. With regard to items to which neither paragraph 
(g)(1) nor (g)(3) of this section applies, a distributee member that, 
immediately prior to the liquidation, owns stock in the liquidating 
corporation meeting the requirements of section 1504(a)(2) without 
regard to the application of Sec.  1.1502-34 succeeds to the items of 
the liquidating corporation in accordance with section 381 and other 
applicable principles. A distributee member that, immediately prior to 
the liquidation, does not own stock in the liquidating corporation 
meeting the requirements of section 1504(a)(2) without regard to the 
application of Sec.  1.1502-34 succeeds to the items of the liquidating 
corporation to the extent that it would have succeeded to those items if 
it had purchased, in a taxable transaction, the assets or businesses of 
the liquidating corporation that it received in the liquidation and had 
assumed the liabilities that it assumed in the liquidation.
    (5) Determination of the items of a liquidating subsidiary. For 
purposes of this section, the items of a liquidating subsidiary include 
the amount of any consolidated tax attribute attributable to the 
liquidating subsidiary that is determined pursuant to the principles of 
Sec.  1.1502-21(b)(2)(iv). In addition, if the liquidating subsidiary is 
a member of a separate return limitation year subgroup, the amount of a 
tax attribute that arose in a separate return limitation year that is 
attributable to that member shall also be determined pursuant to the 
principles of Sec.  1.1502-21(b)(2)(iv).
    (6) Examples. The following examples illustrate the application of 
this paragraph (g):

    Example 1. Liquidation--80 percent distributee. (i) Facts. X has 
only common stock outstanding. On January 1 of year 1, X acquired 
equipment with a 10-year recovery period and elected to depreciate the 
equipment using the straight-line method of depreciation. On January 1 
of year 7, M1 and M2 own 80 percent and 20 percent, respectively, of X's 
stock. X is a domestic corporation but is not a member of the group that 
includes M1 and M2. On that date, X distributes all of its assets to M1 
and M2 in complete liquidation. The equipment is distributed to M1. 
Under section 334(b), M1's basis in the equipment is the same as it 
would be in X's hands. After computing its tax liability for the taxable 
year that includes the liquidation, X has net operating losses of $100, 
business credits of $40, and earnings and profits of $80.
    (ii) Succession to items described in section 381(c). (A) Losses. 
Under paragraph (g)(1) of this section, each distributee member succeeds 
to X's items that could be used to offset the income of the group or any 
member to the extent that such items would have been reflected in 
investment adjustments to the stock of X it owned under Sec.  1.1502-
32(c) if, immediately prior to the liquidation, such

[[Page 909]]

items had been taken into account. Accordingly, M1 and M2 succeed to $80 
and $20, respectively, of X's net operating loss.
    (B) Credits and earnings and profits. Under paragraph (g)(3) of this 
section, because, immediately prior to the liquidation, M1 and M2 hold 
80 percent and 20 percent, respectively, of the value of the stock of X, 
M1 and M2 succeed to $32 and $8, respectively, of X's $40 of business 
credits. In addition, because M1's and M2's earnings and profits do not 
reflect X's earnings and profits, X's earnings and profits are allocated 
to M1 and M2 under the principles of Sec.  1.1502-32(c). Therefore, M1 
and M2 succeed to $64 and $16, respectively, of X's earnings and 
profits.
    (C) Depreciation of equipment's basis. Under paragraph (g)(4) of 
this section, because M1 owns stock in X meeting the requirements of 
section 1504(a)(2) without regard to the application of Sec.  1.1502-34, 
M1 is required to continue to depreciate the equipment using the 
straight-line method of depreciation over the remaining recovery period 
of 4.5 years (assuming X used a half-year convention).
    Example 2. Liquidation-no 80 percent distributee. (i) Facts. The 
facts are the same as in Example 1 except that M1 and M2 own 60 percent 
and 40 percent, respectively, of X's stock. In addition, on January 1 of 
year 6, X entered into a long-term contract with Y, an unrelated party. 
The total contract price is $1000, and X estimates the total allocable 
contract costs to be $500. At the time of the liquidation, X had 
received $250 in progress payments under the contract and incurred costs 
of $125. X accounted for the contract under the percentage of completion 
method described in section 460(b). In the liquidation, M1 assumes X's 
contract obligations and rights.
    (ii) Succession to items described in section 381(c). (A) Losses. 
Under paragraph (g)(1) of this section, each distributee member succeeds 
to X's items that could be used to offset the income of the group or any 
member to the extent that such items would have been reflected in 
investment adjustments to the stock of X it owned under Sec.  1.1502-
32(c) if, immediately prior to the liquidation, such items had been 
taken into account. Accordingly, M1 and M2 succeed to $60 and $40, 
respectively, of X's net operating loss.
    (B) Credits and earnings and profits. Under paragraph (g)(3) of this 
section, because, immediately prior to the liquidation, M1 and M2 hold 
60 percent and 40 percent, respectively, of the value of the stock of X, 
M1 and M2 succeed to $24 and $16, respectively, of X's $40 of business 
credits. In addition, because M1's and M2's earnings and profits do not 
reflect X's earnings and profits, X's earnings and profits are allocated 
to M1 and M2 under the principles of Sec.  1.1502-32(c). Therefore, M1 
and M2 succeed to $48 and $32, respectively, of X's earnings and 
profits.
    (C) Depreciation of equipment's basis. Under section 334(a), M1's 
basis in the equipment is its fair market value at the time of the 
distribution. Pursuant to section 168(i)(7), to the extent that M1's 
basis in the equipment does not exceed X's adjusted basis in the 
equipment at the time of the transfer, M1 is required to continue to 
depreciate the equipment using the straight-line method of depreciation 
over the remaining recovery period of 4.5 years (assuming X used a half-
year convention). Any portion of M1's basis in the equipment that 
exceeds X's adjusted basis in the equipment at the time of the transfer 
is treated as being placed in service by M1 in the year of the transfer. 
Thus, M1 may choose any applicable depreciation method, recovery period, 
and convention under section 168 for such excess basis.
    (D) Method of accounting for long-term contract. Under paragraph 
(g)(4) of this section, M1 does not succeed to X's method of accounting 
for the contract. Rather, under Sec.  1.460-4(k)(2), M1 is treated as 
having entered into a new contract on the date of the liquidation. Under 
Sec.  1.460-4(k)(2)(iii), M1 must evaluate whether the new contract 
should be classified as a long-term contract within the meaning of Sec.  
1.460-1(b) and account for the contract under a permissible method of 
accounting.
    Example 3. Liquidation--deferred items. (i) Facts. X has only common 
stock outstanding, and M1 and M2 (who are members of the same group) own 
80 percent and 20 percent, respectively, of X's stock. X operates two 
divisions, each of which defers prepaid subscription income pursuant to 
an election under section 455. X distributes all of its assets in 
complete liquidation. M1 receives all of the assets of Division 1, 
including prepaid subscription income, and assumes X's liability to 
furnish or deliver the newspaper, magazine, or other periodical to which 
the prepaid subscription income received by M1 relates. M2 receives all 
of the assets of Division 2, including prepaid subscription income, and 
assumes X's liability to furnish or deliver the newspaper, magazine, or 
other periodical to which the prepaid subscription income received by M2 
relates.
    (ii) Acceleration of deferred income items and succession to other 
deferred items. Under paragraph (g)(1) of this section, M1 succeeds to 
the full amount of the deferred prepaid subscription income of X 
attributable to Division 1. Under applicable law, X does not recognize 
the deferred prepaid subscription income attributable to Division 1 
because X's liability to furnish or deliver the newspaper, magazine, or 
other periodical ends as a result of a transaction to which section 
381(a) applies. Under paragraph (g)(2) of this section, solely for 
purposes of determining

[[Page 910]]

whether the deferred income items of X attributable to Division 2 are 
taken into account as a result of the liquidation, the distribution of 
property to M2 is not treated as a transaction to which section 381(a) 
applies. Therefore, under applicable law, X's deferred prepaid 
subscription income attributable to Division 2 is taken into account in 
the determination of X's income or loss with regard to the liquidation. 
Further, under paragraph (g)(2) of this section, section 332(a) does not 
apply in determining the recognition or nonrecognition of any income 
that M2 realizes on account of consideration received (or deemed 
received) on its assumption of X's liability to furnish or deliver the 
newspaper, magazine, or other periodical to which the prepaid 
subscription income relates.

    (7) Effective/applicability date. This paragraph (g) applies to 
transactions occurring after April 14, 2008.
    (h) Non-applicability of section 362(e)(2)--(1) General rule. 
Section 362(e)(2) does not apply to any intercompany transaction 
occurring on or after September 17, 2008. Taxpayers may apply this 
paragraph (h) to intercompany transactions occurring on or after October 
22, 2004, and in such case, any election made under section 362(e)(2)(C) 
will have no effect. The purpose of this paragraph (h) is to facilitate 
the application of the consolidated return provisions addressing the 
duplication of loss between members of a consolidated group.
    (2) Anti-abuse rule--(i) General rule. If a taxpayer engages in a 
transaction to which section 362(e)(2) would apply but for the 
application of paragraph (h)(1) of this section, and acts with a view to 
prevent the consolidated return provisions from properly addressing loss 
duplication, appropriate adjustments will be made to clearly reflect the 
income of the group.
    (ii) Example. The following example illustrates the principle of the 
anti-abuse rule in this paragraph (h)(2).

    Example. (A) Facts. P, the common parent of a consolidated group, 
owns the four outstanding shares of S stock (Share 1 through Share 4) 
with an aggregate basis of $0 and value of $80. S owns Asset 1 with a 
basis of $0 and a value of $80. With a view to prevent the consolidated 
return provisions from addressing the duplication of loss, P transfers 
Asset 2 with a basis of $100 and a value of $20 to S in exchange for an 
additional share of S stock (Share 5) in a transaction to which section 
351 applies. P later sells Share 5 to X, an unrelated person, for $20 at 
a time when S's basis in Asset 2 was still $100. The sale is a transfer 
of a loss share and therefore subject to Sec.  1.1502-36.
    (B) Analysis. Although the sale would be subject to Sec.  1.1502-36, 
that section would not prevent the stock loss or reduce S's attributes 
(to prevent duplication of the stock loss) because neither Sec.  1.1502-
36(b) nor Sec.  1.1502-36(c) would adjust the basis of the transferred 
share (because there are no investment adjustments) and Sec.  1.1502-
36(d) would not reduce S's attributes (because S's aggregate inside loss 
is $0). However, because P acted with a view to prevent the consolidated 
return provisions from addressing the duplication of the loss on Asset 
2, P's transfer of Asset 2 to S is subject to the anti-abuse rule in 
this paragraph (h)(2). Accordingly, effective immediately before the 
transfer of Share 5 to X, either P's basis in Share 5 or S's basis in 
Asset 2 must be adjusted to reflect what it would have been had section 
362(e)(2) been applied at the time P transferred Asset 2 to S (taking 
into account the interim facts and circumstances). Accordingly, S must 
either reduce its basis in Asset 2 by $80 to $20 (eliminating the 
duplicated loss) or P must reduce its basis in Share 5 by $80 to $20 
(eliminating the duplicated loss).
    (C) Transfer of all S shares. Assume the same facts as those in 
paragraph (A) of this Example, except that P sells all five S shares to 
X. Although P's transfer of Asset 2 to S results in the duplication of 
an $80 loss, because all the shares are transferred, the transaction 
does not prevent the consolidated return provisions from properly 
addressing loss duplication. P's $80 duplicated loss is offset by an $80 
duplicated gain, and the group recognizes the offsetting stock gain and 
loss. Accordingly, this paragraph (h)(2) does not apply to P's transfer 
of Asset 2 to S.
    (i) [Reserved]
    (j) Special rules for application of section 951(a)(2)(B) to 
distributions to which section 959(b) applies--(1) Single United States 
shareholder treatment. In determining the amount described in section 
951(a)(2)(B) that is attributable to distributions to which section 
959(b) applies, members of a group are treated as a single United States 
shareholder (within the meaning of section 951(b) (or section 
953(c)(1)(A), if applicable)) for purposes of determining the part of 
the year during which such shareholder did not own (within the meaning 
of section 958(a)) the stock described in section 951(a)(2)(A). The 
purpose of this paragraph (j) is to facilitate the clear reflection of 
income of a consolidated group by ensuring that the location of

[[Page 911]]

ownership of stock of a foreign corporation within the group does not 
affect the amount of the group's income by reason of sections 
951(a)(1)(A) and 951A(a).
    (2) Examples. The following examples illustrate the application of 
paragraph (j)(1) of this section. For purposes of the examples in this 
paragraph (j)(2): M1 and M2 are members of a consolidated group of which 
P is the common parent (P group); each of CFC1, CFC2, and CFC3 is a 
controlled foreign corporation (within the meaning of section 957(a)) 
with the U.S. dollar as its functional currency (within the meaning of 
section 985); the taxable year of all entities is the calendar year for 
Federal income tax purposes; and a reference to stock owned means stock 
owned within the meaning of section 958(a). These examples do not 
address common law doctrines or other authorities that might apply to 
recast a transaction or to otherwise affect the tax treatment of a 
transaction.
    (i) Example 1: Intercompany transfer of stock of a controlled 
foreign corporation--(A) Facts. Throughout Year 1, M1 directly owns all 
the stock of CFC1, which directly owns all the stock of CFC2. In Year 1, 
CFC2 has $100x of subpart F income (as defined in section 952). M1's pro 
rata share of CFC2's subpart F income for Year 1 is $100x, which M1 
includes in its gross income under section 951(a)(1)(A). In Year 2, CFC2 
has $80x of subpart F income and distributes $80x to CFC1 (the CFC2 
Distribution). Section 959(b) applies to the entire CFC2 Distribution. 
On December 29, Year 2, M1 transfers all of its CFC1 stock to M2 in an 
exchange described in section 351(a). As a result, on December 31, Year 
2 (the last day of Year 2 on which CFC2 is a controlled foreign 
corporation), M2 owns 100% of the stock of CFC1, which owns 100% of the 
stock of CFC2.
    (B) Analysis. Under paragraph (j)(1) of this section, in determining 
the amount described in section 951(a)(2)(B) that is attributable to the 
CFC2 Distribution, all members of the P group are treated as a single 
United States shareholder for purposes of determining the part of Year 2 
during which such shareholder did not own the stock of CFC2. Thus, the 
ratio of the number of days in Year 2 that such United States 
shareholder did not own the stock of CFC2 to the total number of days in 
Year 2 is 0/365. The amount described in section 951(a)(2)(B) is $0, 
M2's pro rata share of CFC2's subpart F income for Year 2 is $80x ($80x-
$0), and M2 must include $80x in its gross income under section 
951(a)(1)(A).
    (ii) Example 2: Transfer of stock of a controlled foreign 
corporation between controlled foreign corporations--(A) Facts. The 
facts are the same as in paragraph (j)(2)(i)(A) of this section (the 
facts in Example 1), except that M1 does not transfer its CFC1 stock to 
M2. Additionally, throughout Year 1 and from January 1, Year 2, to 
December 29, Year 2, M2 directly owns all 90 shares of the only class of 
stock of CFC3. Further, on December 29, Year 2, CFC3 acquires all the 
CFC2 stock from CFC1 in exchange for 10 newly issued shares of the same 
class of CFC3 stock in a transaction described in section 368(a)(1)(B). 
As a result, on December 31, Year 2, M1 owns 10% of the stock of CFC2, 
and M2 owns 90% of the stock of CFC2.
    (B) Analysis. Under paragraph (j)(1) of this section, in determining 
the amount described in section 951(a)(2)(B) that is attributable to the 
portion of the CFC2 Distribution with respect to each of the CFC2 stock 
that M1 owns on December 31, Year 2, and the CFC2 stock that M2 owns on 
that day, all members of the P group are treated as a single United 
States shareholder for purposes of determining the part of Year 2 during 
which such shareholder did not own such stock. In each case, the ratio 
of the number of days in Year 2 that such United States shareholder did 
not own such stock to the total number of days in Year 2 is 0/365, and 
the amount described in section 951(a)(2)(B) is $0. M1's and M2's pro 
rata shares of CFC2's subpart F income for Year 2 are $8x ($8x-$0) and 
$72x ($72x-$0), respectively, and M1 and M2 must include $8x and $72x in 
gross income under section 951(a)(1)(A), respectively.
    (3) Applicability date. This paragraph (j) applies to taxable years 
for which

[[Page 912]]

the original consolidated Federal income tax return is due (without 
extensions) after February 23, 2023.

[T.D. 8402, 57 FR 9385, Mar. 18, 1992]

    Editorial Note: For Federal Register citations affecting Sec.  
1.1502-80, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec.  1.1502-81T  Alaska Native Corporations.

    (a) General Rule. The application of section 60(b)(5) of the Tax 
Reform Act of 1984 and section 1804(e)(4) of the Tax Reform Act of 1986 
(relating to Native Corporations established under the Alaska Native 
Claims Settlement Act (43 U.S.C. 1601 et seq.)) is limited to the use on 
a consolidated return of losses and credits of a Native Corporation, and 
of a corporation all of whose stock is owned directly by a Native 
Corporation, during any taxable year (beginning after the effective date 
of such sections and before 1992), or any part thereof, against the 
income and tax liability of a corporation affiliated with the Native 
Corporation. Thus, no other tax saving, tax benefit, or tax loss is 
intended to result from the application of section 60(b)(5) of the Tax 
Reform Act of 1984 and section 1804(e)(4) of the Tax Reform Act of 1986 
to any person (whether or not such person is a member of an affiliated 
group of which a Native Corporation is the common parent). In 
particular, except as approved by the Secretary, no positive adjustment 
under Sec.  1.1502-32(b) will be made with respect to the basis of stock 
of a corporation that is affiliated with a Native Corporation through 
application of section 60(b)(5) of the Tax Reform Act of 1984 and 
section 1804(e)(4) of the Tax Reform Act of 1986.
    (b) Effective Dates. This section applies to taxable years beginning 
after December 31, 1984.

[T.D. 8130, 52 FR 8448, Mar. 18, 1987, as amended by T.D. 8560, 59 FR 
41675, Aug. 15, 1994]



Sec.  1.1502-90  Table of contents.

    The following list contains the major headings in Sec. Sec.  1.1502-
91 through 1.1502-99:

      Sec.  1.1502-91 Application of section 382 with respect to a 
                           consolidated group.

    (a) Determination and effect of an ownership change.
    (1) In general.
    (2) Special rule for post-change year that includes the change date.
    (3) Cross-reference.
    (b) Definitions and nomenclature.
    (c) Loss group.
    (1) Defined.
    (2) Coordination with rule that ends separate tracking.
    (3) Example.
    (d) Loss subgroup.
    (1) Net operating loss carryovers.
    (2) Net unrealized built-in loss.
    (3) Loss subgroup parent.
    (4) Election to treat loss subgroup parent requirement as satisfied.
    (5) Principal purpose of avoiding a limitation.
    (6) Special rules.
    (7) Examples.
    (e) Pre-change consolidated attribute.
    (1) Defined.
    (2) Example.
    (f) Pre-change subgroup attribute.
    (1) Defined.
    (2) Example.
    (g) Net unrealized built-in gain and loss.
    (1) In general.
    (2) Members included.
    (i) Consolidated group with a net operating loss.
    (ii) Determination whether a consolidated group has a net unrealized 
built-in loss.
    (iii) Loss subgroup with net operating loss carryovers.
    (iv) Determination whether subgroup has a net unrealized built-in 
loss.
    (v) Separate determination of section 382 limitation for recognized 
built-in losses and net operating losses.
    (3) Coordination with rule that ends separate tracking.
    (4) Acquisitions of built-in gain or loss assets.
    (5) Indirect ownership.
    (6) Common parent not common parent for five years.
    (h) Recognized built-in gain or loss.
    (1) In general. [Reserved]
    (2) Disposition of stock or an intercompany obligation of a member.
    (3) Intercompany transactions.
    (4) Exchanged basis property.
    (i) [Reserved]
    (j) Predecessor and successor corporations.

  Sec.  1.1502-92 Ownership change of a loss group or a loss subgroup.

    (a) Scope.
    (b) Determination of an ownership change.
    (1) Parent change method.
    (i) Loss group.

[[Page 913]]

    (ii) Loss subgroup.
    (iii) Special rule if election regarding section 1504(a)(1) 
relationship is made.
    (2) Examples.
    (3) Special adjustments.
    (i) Common parent succeeded by a new common parent.
    (ii) Newly created loss subgroup parent.
    (iii) Examples.
    (4) End of separate tracking of certain losses.
    (c) Supplemental rules for determining ownership change.
    (1) Scope.
    (2) Cause for applying supplemental rule.
    (3) Operating rules.
    (4) Supplemental ownership change rules.
    (i) Additional testing dates for the common parent (or loss subgroup 
parent).
    (ii) Treatment of subsidiary stock as stock of the common parent (or 
loss subgroup parent).
    (iii) Different testing periods.
    (iv) Disaffiliation of a subsidiary.
    (v) Subsidiary stock acquired first.
    (vi) Anti-duplication rule.
    (5) Examples.
    (d) Testing period following ownership change under this section.
    (e) Information statements.
    (1) Common parent of a loss group.
    (2) Abbreviated statement with respect to loss subgroups.

Sec.  1.1502-93 Consolidated section 382 limitation (or subgroup section 
                            382 limitation).

    (a) Determination of the consolidated section 382 limitation (or 
subgroup section 382 limitation).
    (1) In general.
    (2) Coordination with apportionment rule.
    (b) Value of the loss group (or loss subgroup).
    (1) Stock value immediately before ownership change.
    (2) Adjustment to value.
    (i) In general.
    (ii) Anti-duplication.
    (3) Examples.
    (c) Recognized built-in gain of a loss group or loss subgroup.
    (1) In general.
    (2) Adjustments.
    (d) Continuity of business.
    (1) In general.
    (2) Example.
    (e) Limitations of losses under other rules.

   Sec.  1.1502-94 Coordination with section 382 and the regulations 
 thereunder when a corporation becomes a member of a consolidated group.

    (a) Scope.
    (1) In general.
    (2) Successor corporation as new loss member.
    (3) Coordination in the case of a loss subgroup.
    (4) End of separate tracking of certain losses.
    (5) Cross-reference.
    (b) Application of section 382 to a new loss member.
    (1) In general.
    (2) Adjustment to value.
    (3) Pre-change separate attribute defined.
    (4) Examples.
    (c) Built-in gains and losses.
    (d) Information statements.

Sec.  1.1502-95 Rules on ceasing to be a member of a consolidated group 
                           (or loss subgroup).

    (a) In general.
    (1) Consolidated group.
    (2) Election by common parent.
    (3) Coordination with Sec. Sec.  1.1502-91 through 1.1502-93.
    (b) Separate application of section 382 when a member leaves a 
consolidated group.
    (1) In general.
    (2) Effect of a prior ownership change of the group.
    (3) Application in the case of a loss subgroup.
    (4) Examples.
    (c) Apportionment of a consolidated section 382 limitation.
    (1) In general.
    (2) Amount which may be apportioned.
    (i) Consolidated section 382 limitation.
    (ii) Net unrealized built-in gain.
    (3) Effect of apportionment on the consolidated group.
    (i) Consolidated section 382 limitation.
    (ii) Net unrealized built-in gain.
    (4) Effect on corporations to which an apportionment is made.
    (i) Consolidated section 382 limitation.
    (ii) Net unrealized built-in gain.
    (5) Deemed apportionment when loss group terminates.
    (6) Appropriate adjustments when former member leaves during the 
year.
    (7) Examples.
    (d) Rules pertaining to ceasing to be a member of a loss subgroup.
    (1) In general.
    (2) Exceptions.
    (3) Examples.
    (e) Allocation of net unrealized built-in loss.
    (1) In general.
    (2) Amount of allocation.
    (i) In general.
    (ii) Transferred basis property and deferred gain or loss.
    (iii) Assets for which gain or loss has been recognized.
    (iv) Exchanged basis property.
    (v) Two or more members depart during the same year.
    (vi) Anti-abuse rule.

[[Page 914]]

    (3) Effect of the allocation on the consolidated group.
    (4) Effect on corporations to which the allocation is made.
    (5) Subgroup principles.
    (6) Apportionment of consolidated section 382 limitation (or 
subgroup section 382 limitation).
    (i) In general.
    (ii) Special rule for former members that become members of the same 
consolidated group.
    (7) Examples.
    (8) Reporting requirements.
    (i) Common parent.
    (ii) Former member.
    (iii) Exception.
    (f) Filing the election to apportion the section 382 limitation and 
net unrealized built-in gain.
    (1) Form of the election to apportion.
    (i) Statement.
    (ii) Agreement.
    (2) Signing the agreement.
    (3) Filing the election.
    (i) Filing by the common parent.
    (ii) Filing by the former member.
    (4) Revocation of election.
    (g) Effective/applicability date.

                  Sec.  1.1502-96 Miscellaneous rules.

    (a) End of separate tracking of losses.
    (1) Application.
    (2) Effect of end of separate tracking.
    (i) Net operating loss carryovers.
    (ii) Net unrealized built-in losses.
    (iii) Common parent not common parent for five years.
    (3) Continuing effect of end of separate tracking.
    (i) In general.
    (ii) Example.
    (4) Special rule for testing period.
    (5) Limits on effects of end of separate tracking.
    (b) Ownership change of subsidiary.
    (1) Ownership change of a subsidiary because of options or plan or 
arrangement.
    (2) Effect of the ownership change.
    (i) In general.
    (ii) Pre-change losses.
    (3) Coordination with Sec. Sec.  1.1502-91, 1.1502-92, and 1.1502-
94.
    (4) Example.
    (c) Continuing effect of an ownership change.
    (d) Losses reattributed under Sec.  1.1502-36(d)(6).
    (1) In general.
    (2) Deemed section 381(a) transaction.
    (3) Rules relating to owner shifts.
    (i) In general.
    (ii) Examples.
    (4) Rules relating to the section 382 limitation.
    (i) Reattributed loss is a pre-change separate attribute of a new 
loss member.
    (ii) Reattributed loss is a pre-change subgroup attribute.
    (iii) Potential application of section 382(l)(1).
    (iv) Duplication or omission of value.
    (v) Special rule for continuity of business requirement.
    (5) Election to reattribute section 382 limitation.
    (i) Effect of election.
    (ii) Examples.
    (e) Time and manner of making election under Sec.  1.1502-91(d)(4).
    (1) In general.
    (2) Election statement.

 Sec.  1.1502-97 Special rules under section 382 for members under the 
    jurisdiction of a court in a title 11 or similar case. [Reserved]

       Sec.  1.1502-98 Coordination with sections 383 and 163(j).

                    Sec.  1.1502-99 Effective dates.

    (a) Effective date.
    (b) Special rules.
    (1) Election to treat subgroup parent requirement as satisfied.
    (2) Principal purpose of avoiding a limitation.
    (3) Ceasing to be a member of a loss subgroup.
    (i) Ownership change of a loss subgroup.
    (ii) Expiration of 5-year period.
    (4) Reattribution of net operating loss carryovers under Sec.  
1.1502-36(d)(6).
    (5) Election to apportion net unrealized built-in gain.
    (c) Testing period may include a period beginning before June 25, 
1999.
    (1) In general.
    (2) Transition rule for net unrealized built-in losses.
    (d) Application to section 163(j).

[T.D. 8824, 64 FR 36128, July 2, 1999, as amended by T.D. 9304, 71 FR 
76907, Dec. 22, 2006; T.D. 9329, 72 FR 32805, June 14, 2007; T.D. 9424, 
73 FR 53986, Sept. 17, 2008; T.D. 9905, 85 FR 56843, Sept. 14, 2020]



Sec.  1.1502-91  Application of section 382 with respect to a 
consolidated group.

    (a) Determination and effect of an ownership change--(1) In general. 
This section and Sec. Sec.  1.1502-92 and 1.1502-93 set forth the rules 
for determining an ownership change under section 382 for members of 
consolidated groups and the section 382 limitations with respect to 
attributes described in paragraphs (e) and (f) of this section. These 
rules generally provide that an ownership change and the section 382 
limitation are determined with respect to these

[[Page 915]]

attributes for the group (or loss subgroup) on a single entity basis and 
not for its members separately. Following an ownership change of a loss 
group (or a loss subgroup) under Sec.  1.1502-92, the amount of 
consolidated taxable income for any post-change year which may be offset 
by pre-change consolidated attributes (or pre-change subgroup 
attributes) shall not exceed the consolidated section 382 limitation (or 
subgroup section 382 limitation) for such year as determined under Sec.  
1.1502-93.
    (2) Special rule for post-change year that includes the change date. 
If the post-change year includes the change date, section 382(b)(3)(A) 
is applied so that the consolidated section 382 limitation (or subgroup 
section 382 limitation) does not apply to the portion of consolidated 
taxable income that is allocable to the period in the year on or before 
the change date. See generally Sec.  1.382-6 (relating to the allocation 
of income and loss). The allocation of consolidated taxable income for 
the post-change year that includes the change date must be made before 
taking into account any consolidated net operating loss deduction (as 
defined in Sec.  1.1502-21(a)).
    (3) Cross-reference. See Sec. Sec.  1.1502-94 and 1.1502-95 for 
rules that apply section 382 to a corporation that becomes or ceases to 
be a member of a group or loss subgroup.
    (b) Definitions and nomenclature. For purposes of this section and 
Sec. Sec.  1.1502-92 through 1.1502-99, unless otherwise stated:
    (1) The definitions and nomenclature contained in section 382 and 
the regulations thereunder (including the nomenclature and assumptions 
relating to the examples in Sec.  1.382-2T(b)) and this section and 
Sec. Sec.  1.1502-92 through 1.1502-99 apply.
    (2) In all examples, all groups file consolidated returns, all 
corporations file their income tax returns on a calendar year basis, the 
only 5-percent shareholder of a corporation is a public group, the facts 
set forth the only owner shifts during the testing period, no election 
is made under paragraph (d)(4) of this section, and each asset of a 
corporation has a value equal to its adjusted basis.
    (3) As the context requires, references to Sec. Sec.  1.1502-91 
through 1.1502-96 include references to corresponding provisions of 
Sec. Sec.  1.1502-A through 1.1502-96A. For example, a reference to an 
ownership change under Sec.  1.1502-92 in Sec.  1.1502-95(b) can include 
a reference to an ownership change under Sec.  1.1502-92A.
    (c) Loss group--(1) Defined. A loss group is a consolidated group 
that--
    (i) Is entitled to use a net operating loss carryover to the taxable 
year that did not arise (and is not treated under Sec.  1.1502-21(c) as 
arising) in a SRLY;
    (ii) Has a consolidated net operating loss for the taxable year in 
which a testing date of the common parent occurs (determined by treating 
the common parent as a loss corporation); or
    (iii) Has a net unrealized built-in loss (determined under paragraph 
(g) of this section by treating the date on which the determination is 
made as though it were a change date).
    (2) Coordination with rule that ends separate tracking. A 
consolidated group may be a loss group because a member's losses that 
arose in (or are treated as arising in) a SRLY are treated as described 
in paragraph (c)(1)(i) of this section. See Sec.  1.1502-96(a).
    (3) Example. The following example illustrates the principles of 
this paragraph (c):

    Example. Loss group. (i) L and L1 file separate returns and each has 
a net operating loss carryover arising in Year 1 that is carried over to 
Year 2. A owns 40 shares and L owns 60 shares of the 100 outstanding 
shares of L1 stock. At the close of Year 1, L buys the 40 shares of L1 
stock from A. For Year 2, L and L1 file a consolidated return. The 
following is a graphic illustration of these facts:

[[Page 916]]

[GRAPHIC] [TIFF OMITTED] TR02JY99.000

    (ii) L and L1 become a loss group at the beginning of Year 2 because 
the group is entitled to use the Year 1 net operating loss carryover of 
L, the common parent, which did not arise (and is not treated under 
Sec.  1.1502-21(c) as arising) in a SRLY. See Sec.  1.1502-94 for rules 
relating to the application of section 382 with respect to L1's net 
operating loss

[[Page 917]]

carryover from Year 1 which did arise in a SRLY.

    (d) Loss subgroup--(1) Net operating loss carryovers. Two or more 
corporations that become members of a consolidated group (the current 
group) compose a loss subgroup if--
    (i) They were affiliated with each other in another group (the 
former group), whether or not the group was a consolidated group;
    (ii) They bear the relationship described in section 1504(a)(1) to 
each other through a loss subgroup parent immediately after they become 
members of the current group (or are deemed to bear that relationship as 
a result of an election described in paragraph (d)(4) of this section); 
and
    (iii) At least one of the members carries over a net operating loss 
that did not arise (and is not treated under Sec.  1.1502-21(c) as 
arising) in a SRLY with respect to the former group.
    (2) Net unrealized built-in loss. Two or more corporations that 
become members of a consolidated group compose a loss subgroup if they--
    (i) Have been continuously affiliated with each other for the 5 
consecutive year period ending immediately before they become members of 
the group;
    (ii) Bear the relationship described in section 1504(a)(1) to each 
other through a loss subgroup parent immediately after they become 
members of the current group (or are deemed to bear that relationship as 
a result of an election described in paragraph (d)(4) of this section); 
and
    (iii) Have a net unrealized built-in loss (determined under 
paragraph (g) of this section on the day they become members of the 
group by treating that day as though it were a change date).
    (3) Loss subgroup parent. A loss subgroup parent is the corporation 
that bears the same relationship to the other members of the loss 
subgroup as a common parent bears to the members of a group.
    (4) Election to treat loss subgroup parent requirement as 
satisfied--(i) In general. Solely for purposes of paragraphs (d)(1)(i) 
and (2)(ii) of this section, two or more corporations that become 
members of a consolidated group at the same time and that were 
affiliated with each other immediately before becoming members of the 
group are deemed to bear a section 1504(a)(1) relationship to each other 
immediately after they become members of the group if the common parent 
of that group makes an election under this paragraph (d)(4) with respect 
to those members. See Sec.  1.1502-96(e) for the time and manner of 
making the election.
    (ii) Members included. An election under this paragraph (d)(4) 
includes all corporations that become members of the current group at 
the same time and that were affiliated with each other immediately 
before they become members of the current group.
    (iii) Each member included treated as loss subgroup parent. If the 
members to which this election applies are a loss subgroup described in 
paragraph (d)(1) or (2) of this section, then each member is treated as 
a loss subgroup parent. See Sec.  1.1502-92(b)(1)(iii) for special rules 
relating to an ownership change of a loss subgroup if the election under 
this paragraph (d)(4) is made.
    (5) Principal purpose of avoiding a limitation. The corporations 
described in paragraphs (d)(1) or (2) of this section do not compose a 
loss subgroup if any one of them is formed, acquired, or availed of with 
a principal purpose of avoiding the application of, or increasing any 
limitation under, section 382. Instead, Sec.  1.1502-94 applies with 
respect to the attributes of each such corporation. Any member excluded 
from a loss subgroup, if excluded with a principal purpose of so 
avoiding or increasing any section 382 limitation, is treated as 
included in the loss subgroup. This paragraph (d)(5) does not apply 
solely because, in connection with becoming members of the group, the 
members of a group (or loss subgroup) are rearranged (or, in the case of 
the preceding sentence, are not rearranged) to bear a relationship to 
the other members described in section 1504(a)(1).
    (6) Special rules. See Sec.  1.1502-95(d) for rules concerning when 
a corporation ceases to be a member of a loss subgroup, and for certain 
exceptions that may apply if a member does not continue to satisfy the 
loss subgroup parent requirement within the current group. See also 
Sec.  1.1502-96(a) for a special rule regarding the end of separate 
tracking of SRLY losses of a member

[[Page 918]]

that has an ownership change or that has been a member of a group for at 
least 5 consecutive years.
    (7) Examples. The following examples illustrate the principles of 
this paragraph (d):

    Example 1. Loss subgroup. (i) P owns all the L stock and L owns all 
the L1 stock. The P group has a consolidated net operating loss arising 
in Year 1 that is carried to Year 2. On May 2, Year 2, P sells all the 
stock of L to A, and L and L1 thereafter file consolidated returns. A 
portion of the Year 1 consolidated net operating loss is apportioned 
under Sec.  1.1502-21(b) to each of L and L1, which they carry over to 
Year 2. The following is a graphic illustration of these facts:

[[Page 919]]

[GRAPHIC] [TIFF OMITTED] TR02JY99.001

    (ii) (a) L and L1 compose a loss subgroup within the meaning of 
paragraph (d)(1) of this section because--
    (A) They were affiliated with each other in the P group (the former 
group);
    (B) They bear a relationship described in section 1504(a)(1) to each 
other through a

[[Page 920]]

loss subgroup parent (L) immediately after they became members of the L 
group; and
    (C) At least one of the members (here, both L and L1) carries over a 
net operating loss to the L group (the current group) that did not arise 
in a SRLY with respect to the P group.
    (b) Under paragraph (d)(3) of this section, L is the loss subgroup 
parent of the L loss subgroup.
    Example 2. Loss subgroup--section 1504(a)(1) relationship. (i) P 
owns all the stock of L and L1. L owns all the stock of L2. L1 and L2 
own 40 percent and 60 percent of the stock of L3, respectively. The P 
group has a consolidated net operating loss arising in Year 1 that is 
carried over to Year 2. On May 22, Year 2, P sells all the stock of L 
and L1 to P1, the common parent of another consolidated group. The Year 
1 consolidated net operating loss is apportioned under Sec.  1.1502-
21(b), and each of L, L1, L2, and L3 carries over a portion of such loss 
to the first consolidated return year of the P1 group ending after the 
acquisition. The following is a graphic illustration of these facts:

[[Page 921]]

[GRAPHIC] [TIFF OMITTED] TR02JY99.002

    (ii) L and L2 compose a loss subgroup within the meaning of 
paragraph (d)(1) of this section. Neither L1 nor L3 is included in a 
loss subgroup because neither bears a relationship described in section 
1504(a)(1) through a loss subgroup parent to any other member of the 
former group immediately after becoming members of the P1 group.

[[Page 922]]

    Example 3. Loss subgroup--section 1504(a)(1) relationship. The facts 
are the same as in Example 2, except that the stock of L1 is transferred 
to L in connection with the sale of the L stock to P1. L, L1, L2, and L3 
compose a loss subgroup within the meaning of paragraph (d)(1) of this 
section because--
    (i) They were affiliated with each other in the P group (the former 
group);
    (ii) They bear a relationship described in section 1504(a)(1) to 
each other through a loss subgroup parent (L) immediately after they 
become members of the P1 group; and
    (iii) At least one of the members (here, each of L, L1, L2, and L3) 
carries over a net operating loss to the P1 group (the current group).
    Example 4. Loss subgroup--elective section 1504(a)(1) relationship. 
The facts are the same as in Example 2, except that P1 makes the 
election under paragraph (d)(4) of this section. The election includes 
L, L1, L2, and L3 (even though L and L2 would compose a loss subgroup 
without regard to the election) because they become members of the 
current group (the P1 group) at the same time and were affiliated with 
each other in the P group immediately before they became members of the 
P1 group. As a result of the election, L, L1, L2, and L3 are treated as 
satisfying the requirement that they bear the relationship described in 
section 1504(a)(1) to each other through a loss subgroup parent 
immediately after they become members of the P1 group. L, L1, L2, and L3 
compose a loss subgroup within the meaning of paragraph (d)(1) of this 
section.

    (e) Pre-change consolidated attribute--(1) Defined. A pre-change 
consolidated attribute of a loss group is--
    (i) Any loss described in paragraph (c)(1)(i) or (ii) of this 
section (relating to the definition of loss group) that is allocable to 
the period ending on or before the change date; and
    (ii) Any recognized built-in loss of the loss group.
    (2) Example--(i) Facts. The L group has a consolidated net operating 
loss arising in Year 1 that is carried over to Year 2. The L loss group 
has an ownership change at the beginning of Year 2.
    (ii) Analysis. The net operating loss carryover of the L loss group 
from Year 1 is a pre-change consolidated attribute because the L group 
was entitled to use the loss in Year 2 and therefore the loss was 
described in paragraph (c)(1)(i) of this section. Under paragraph 
(a)(2)(i) of this section, the amount of consolidated taxable income of 
the L group for Year 2 that may be offset by this loss carryover may not 
exceed the consolidated section 382 limitation of the L group for that 
year. See Sec.  1.1502-93 for rules relating to the computation of the 
consolidated section 382 limitation.
    (iii) Business interest expense. The facts are the same as in the 
Example in paragraph (e)(2)(i) of this section, except that, rather than 
a consolidated net operating loss, a member of the L group pays or 
accrues a business interest expense in Year 1 for which a deduction is 
disallowed in that year under section 163(j) and Sec.  1.163(j)-2(b). 
The disallowed business interest expense is carried over to Year 2 under 
section 163(j)(2) and Sec.  1.163(j)-2(c). Thus, the disallowed business 
interest expense carryforward is a pre-change loss. Under section 
163(j), the L loss group is entitled to deduct the carryforward in Year 
2; however, the amount of consolidated taxable income of the L group for 
Year 2 that may be offset by this carryforward may not exceed the 
consolidated section 382 limitation of the L group for that year. See 
Sec.  1.1502-98(b) (providing that Sec. Sec.  1.1502-91 through 1.1502-
96 apply section 382 to business interest expense, with appropriate 
adjustments).
    (f) Pre-change subgroup attribute--(1) Defined. A pre-change 
subgroup attribute of a loss subgroup is--
    (i) Any net operating loss carryover described in paragraph 
(d)(1)(iii) of this section (relating to the definition of loss 
subgroup); and
    (ii) Any recognized built-in loss of the loss subgroup.
    (2) Example. The following example illustrates the principle of this 
paragraph (f):

    Pre-change subgroup attribute. (i) P is the common parent of a 
consolidated group. P owns all the stock of L, and L owns all the stock 
of L1. L2 is not a member of an affiliated group, and has a net 
operating loss arising in Year 1 that is carried over to Year 2. On 
December 11, Year 2, L1 acquires all the stock of L2, causing an 
ownership change of L2. During Year 2, the P group has a consolidated 
net operating loss that is carried over to Year 3. On November 2, Year 
3, M acquires all the L stock from P. M, L, L1, and L2 thereafter file 
consolidated returns. All of the P group Year 2 consolidated net 
operating loss is apportioned under Sec.  1.1502-21(b) to L and L2, 
which they carry over to the M group.

[[Page 923]]

    (ii)(a) L, L1, and L2 compose a loss subgroup because--
    (1) They were affiliated with each other in the P group (the former 
group);
    (2) They bear a relationship described in section 1504(a)(1) to each 
other through a loss subgroup parent (L) immediately after they became 
members of the L group; and
    (3) At least one of the members (here, both L and L2) carries over a 
net operating loss to the M group (the current group) that is described 
in paragraph (d)(1)(iii) of this section.
    (b) For this purpose, L2's loss from Year 1 that was a SRLY loss 
with respect to the P group (the former group) is described in paragraph 
(d)(1)(iii) of this section because L2 had an ownership change on 
becoming a member of the P group (see Sec.  1.1502-96(a)) on December 
11, Year 2. Starting on December 12, Year 2, the P group no longer 
separately tracked owner shifts of the stock of L1 with respect to the 
Year 1 loss. M's acquisition results in an ownership change of L, and 
therefore the L loss subgroup under Sec.  1.1502-92(a)(2). See Sec.  
1.1502-93 for rules governing the computation of the subgroup section 
382 limitation.
    (iii) In the M group, L2's Year 1 loss continues to be subject to a 
section 382 limitation resulting from the ownership change that occurred 
on December 11, Year 2. See Sec.  1.1502-96(c).

    (g) Net unrealized built-in gain and loss--(1) In general. The 
determination whether a consolidated group (or loss subgroup) has a net 
unrealized built-in gain or loss under section 382(h)(3) is based on the 
aggregate amount of the separately computed net unrealized built-in 
gains or losses of each member that is included in the group (or loss 
subgroup) under paragraph (g)(2) of this section, including items of 
built-in income and deduction described in section 382(h)(6). Thus, for 
example, amounts deferred under section 267, or under Sec.  1.1502-13 
(other than amounts deferred with respect to the stock of a member (or 
an intercompany obligation) included in the group (or loss subgroup) 
under paragraph (g)(2) of this section) are built-in items. The 
threshold requirement under section 382(h)(3)(B) applies on an aggregate 
basis and not on a member-by-member basis. The separately computed 
amount of a member included in a group or loss subgroup does not include 
any unrealized built-in gain or loss on stock (including stock described 
in section 1504(a)(4) and Sec.  1.382-2T(f)(18)(ii) and (iii)) of 
another member included in the group or loss subgroup (or an 
intercompany obligation). However, a member of a group or loss subgroup 
includes in its separately computed amount the unrealized built-in gain 
or loss on stock (but not on an intercompany obligation) of another 
member not included in the group or loss subgroup. If a member is not 
included in the determination whether a group (or subgroup) has a net 
unrealized built-in loss under paragraph (g)(2)(ii) or (iv) of this 
section, that member is not included in the loss group or loss subgroup. 
See Sec.  1.1502-94(c) (relating to built-in gain or loss of a new loss 
member) and Sec.  1.1502-96(a) (relating to the end of separate tracking 
of certain losses).
    (2) Members included--(i) Consolidated group with a net operating 
loss. The members included in the determination whether a consolidated 
group described in paragraph (c)(1)(i) or (ii) of this section (relating 
to loss groups with net operating losses) has a net unrealized built-in 
gain are all members of the consolidated group on the day that the 
determination is made.
    (ii) Determination whether a consolidated group has a net unrealized 
built-in loss. The members included in the determination whether a 
consolidated group is a loss group described in paragraph (c)(1)(iii) of 
this section are--
    (A) The common parent and all other members that have been 
affiliated with the common parent for the 5 consecutive year period 
ending on the day that the determination is made;
    (B) Any other member that has a net unrealized built-in loss 
determined under paragraph (g)(1) of this section on the date that the 
determination is made, and that is neither a new loss member described 
in Sec.  1.1502-94(a)(1)(ii) nor a member of a loss subgroup described 
in paragraph (d)(2) of this section;
    (C) Any new loss member described in Sec.  1.1502-94(a)(1)(ii) that 
has a net unrealized built-in gain determined under paragraph (g)(1) of 
this section on the day that the determination is made; and
    (D) The members of a loss subgroup described in paragraph (d)(2) of 
this section if the members of the subgroup

[[Page 924]]

have, in the aggregate, a net unrealized built-in gain on the day that 
the determination is made.
    (iii) Loss subgroup with net operating loss carryovers. The members 
included in the determination whether a loss subgroup described in 
paragraph (d)(1) of this section (relating to loss subgroups with net 
operating loss carryovers) has a net unrealized built-in gain are all 
members of the loss subgroup on the day that the determination is made.
    (iv) Determination whether subgroup has a net unrealized built-in 
loss. The members included in the determination whether a subgroup has a 
net unrealized built-in loss are those members described in paragraphs 
(d)(2)(i) and (ii) of this section.
    (v) Separate determination of section 382 limitation for recognized 
built-in losses and net operating losses. In determining whether a loss 
group described in paragraph (c)(1)(i) or (ii) of this section (relating 
to loss groups that have net operating loss carryovers) has a net 
unrealized built-in gain which, if recognized, increases the 
consolidated section 382 limitation, the group includes, under paragraph 
(g)(2)(i) of this section, all of its members on the day the 
determination is made. Under paragraph (g)(2)(ii) of this section, 
however, for purposes of determining whether a group has a net 
unrealized built-in loss described in paragraph (c)(1)(iii) of this 
section, not all members of the consolidated group may be included. 
Thus, a consolidated group may have recognized built-in gains that 
increase the amount of consolidated taxable income that may be offset by 
its pre-change net operating loss carryovers that did not arise (and are 
not treated as arising) in a SRLY, and also may have recognized built-in 
losses the absorption of which is limited. Similar results may obtain 
for loss subgroups under paragraphs (g)(2)(iii) and (iv) of this 
section. See Sec.  1.1502-93(c)(2) for rules prohibiting the use of 
recognized built-in gains to increase the amount of consolidated taxable 
income that can be offset by recognized built-in losses.
    (3) Coordination with rule that ends separate tracking. See Sec.  
1.1502-96(a) for special rules relating to members (or loss subgroups) 
that have an ownership change within six months before, on, or after 
becoming a member of the group.
    (4) Acquisitions of built-in gain or loss assets. A member of a 
consolidated group (or loss subgroup) may not, in determining its 
separately computed net unrealized built-in gain or loss, include any 
gain or loss with respect to assets acquired with a principal purpose to 
affect the amount of its net unrealized built-in gain or loss. A group 
(or loss subgroup) may not, in determining its net unrealized built-in 
gain or loss, include any gain or loss of a member acquired with a 
principal purpose to affect the amount of its net unrealized built-in 
gain or loss.
    (5) Indirect ownership. A member's separately computed net 
unrealized built-in gain or loss is adjusted to the extent necessary to 
prevent any duplication of unrealized gain or loss attributable to the 
member's indirect ownership interest in another member through a 
nonmember if the member has a 5-percent or greater ownership interest in 
the nonmember.
    (6) Common parent not common parent for five years. If the common 
parent has become the common parent of an existing group within the 
previous 5 year period in a transaction described in Sec.  1.1502-
75(d)(2)(ii) or (3), appropriate adjustments must be made in applying 
paragraph (g)(2)(ii)(A) of this section so that corporations that have 
not been members of the group for five years are not included. In such a 
case, references to the common parent in paragraph (g)(2)(ii)(A) of this 
section are to the former common parent. Thus, members of the group 
remaining in existence (including the new common parent) that have not 
been affiliated with the former common parent (or that have not been 
members of that group) for the five consecutive year period ending on 
the day that the determination is made are not included under paragraph 
(g)(2)(ii)(A) of this section. See, however, Sec.  1.1502-96(a)(2) for 
special rules relating to members (or loss subgroups) that have an 
ownership change within six months before, on, or after the time that 
the member becomes a member of the group.
    (h) Recognized built-in gain or loss--(1) In general. [Reserved]

[[Page 925]]

    (2) Disposition of stock or an intercompany obligation of a member. 
Gain or loss recognized by a member on the disposition of stock 
(including stock described in section 1504(a)(4) and Sec.  1.382-
2T(f)(18)(ii) and (iii)) of another member is treated as a recognized 
gain or loss for purposes of section 382(h)(2) (unless disallowed) even 
though gain or loss on such stock was not included in the determination 
of a net unrealized built-in gain or loss under paragraph (g)(1) of this 
section. Gain or loss recognized by a member with respect to an 
intercompany obligation is treated as recognized gain or loss only to 
the extent (if any) the transaction gives rise to aggregate income or 
loss within the consolidated group. The first sentence of this paragraph 
(h)(2) is applicable on or after September 17, 2008.
    (3) Intercompany transactions. Gain or loss that is deferred under 
provisions such as section 267 and Sec.  1.1502-13 is treated as 
recognized built-in gain or loss only to the extent taken into account 
by the group during the recognition period. See also Sec.  1.1502-
13(c)(7) Example 10.
    (4) Exchanged basis property. If the adjusted basis of any asset is 
determined, directly or indirectly, in whole or in part, by reference to 
the adjusted basis of another asset held by the member at the beginning 
of the recognition period, the asset is treated, with appropriate 
adjustments, as held by the member at the beginning of the recognition 
period.
    (i) [Reserved]
    (j) Predecessor and successor corporations. A reference in this 
section and Sec. Sec.  1.1502-92 through 1.1502-99 to a corporation, 
member, common parent, loss subgroup parent, or subsidiary includes, as 
the context may require, a reference to a predecessor or successor 
corporation as defined in Sec.  1.1502-1(f)(4). For example, the 
determination whether a successor satisfies the continuous affiliation 
requirement of paragraph (d)(2)(i) or (g)(2)(ii) of this section is made 
by reference to its predecessor.

[T.D. 8824, 64 FR 36129, July 2, 1999, as amended by T.D. 9048, 68 FR 
12291, Mar. 14, 2003; T.D. 9187, 70 FR 10326, Mar. 3, 2005; T.D. 9254, 
71 FR 13018, Mar. 14, 2006; T.D. 9424, 73 FR 53984, Sept. 17, 2008; T.D. 
9905, 85 FR 56844, Sept. 14, 2020]



Sec.  1.1502-92  Ownership change of a loss group or a loss subgroup.

    (a) Scope. This section provides rules for determining if there is 
an ownership change for purposes of section 382 with respect to a loss 
group or a loss subgroup. See Sec.  1.1502-94 for special rules for 
determining if there is an ownership change with respect to a new loss 
member and Sec.  1.1502-96(b) for special rules for determining if there 
is an ownership change of a subsidiary.
    (b) Determination of an ownership change--(1) Parent change method--
(i) Loss group. A loss group has an ownership change if the loss group's 
common parent has an ownership change under section 382 and the 
regulations thereunder. Solely for purposes of determining whether the 
common parent has an ownership change--
    (A) The losses described in Sec.  1.1502-91(c) are treated as net 
operating losses (or a net unrealized built-in loss) of the common 
parent; and
    (B) The common parent determines the earliest day that its testing 
period can begin by reference to only the attributes that make the group 
a loss group under Sec.  1.1502-91(c).
    (ii) Loss subgroup. A loss subgroup has an ownership change if the 
loss subgroup parent has an ownership change under section 382 and the 
regulations thereunder. The principles of Sec.  1.1502-95(b) (relating 
to ceasing to be a member of a consolidated group) apply in determining 
whether the loss subgroup parent has an ownership change. Solely for 
purposes of determining whether the loss subgroup parent has an 
ownership change--
    (A) The losses described in Sec.  1.1502-91(d) are treated as net 
operating losses (or a net unrealized built-in loss) of the loss 
subgroup parent;
    (B) The day that the members of the loss subgroup become members of 
the group (or a loss subgroup) is treated as a testing date within the 
meaning of Sec.  1.382-2(a)(4); and
    (C) The loss subgroup parent determines the earliest day that its 
testing period can begin under Sec.  1.382-2T(d)(3) by reference to only 
the attributes that make the members a loss subgroup under Sec.  1.1502-
91(d).
    (iii) Special rule if election regarding section 1504(a)(1) 
relationship is made--

[[Page 926]]

(A) Ownership change of deemed loss subgroup parent is an ownership 
change of loss subgroup. If the common parent makes an election under 
Sec.  1.1502-91(d)(4), each of the members in the loss subgroup is 
treated as the loss subgroup parent for purposes of determining whether 
the loss subgroup has an ownership change under section 382 and the 
regulations thereunder on or after the day the members become members of 
the group.
    (B) Exception. Paragraph (b)(1)(iii)(A) of this section does not 
apply to cause an ownership change of a loss subgroup if a deemed loss 
subgroup parent has an ownership change upon (or after) ceasing to be a 
member of the current group.
    (2) Examples. The following examples illustrate the principles of 
this paragraph (b):

    Example 1. Loss group--ownership change of the common parent. (i) A 
owns all the L stock. L owns 80 percent and B owns 20 percent of the L1 
stock. For Year 1, the L group has a consolidated net operating loss 
that resulted from the operations of L1 and that is carried over to Year 
2. The value of the L stock is $1000. The total value of the L1 stock is 
$600 and the value of the L1 stock held by B is $120. The L group is a 
loss group under Sec.  1.1502-91(c)(1) because it is entitled to use its 
net operating loss carryover from Year 1. On August 15, Year 2, A sells 
51 percent of the L stock to C. The following is a graphic illustration 
of these facts:

[[Page 927]]

[GRAPHIC] [TIFF OMITTED] TR02JY99.003

    (ii) Under paragraph (b)(1)(i) of this section, section 382 and the 
regulations thereunder are applied to L to determine whether it (and 
therefore the L loss group) has an ownership change with respect to its 
net operating loss carryover from Year 1 attributable to L1 on August 
15, Year 2. The sale of the L stock to C causes an ownership change of L 
under Sec.  1.382-2T and of the L loss group under paragraph (b)(1)(i) 
of this section. The amount of consolidated taxable income of the L loss 
group for any post-change taxable year that may be offset by its pre-
change consolidated attributes (that is, the net operating loss 
carryover from Year 1 attributable to L1) may not exceed the 
consolidated section 382 limitation for the L loss group for the taxable 
year.
    Example 2. Loss group--owner shifts of subsidiaries disregarded. (i) 
The facts are the same as in Example 1, except that on August 15, Year 
2, A sells only 49 percent of the L stock to C and, on December 12, Year 
3, in an unrelated transaction, B sells the 20 percent of the L1 stock 
to D. A's sale of the L stock to C does not cause an ownership change of 
L under Sec.  1.382-2T nor of the L loss group under paragraph (b)(1)(i) 
of this section. The following is a graphic illustration of these facts:

[[Page 928]]

[GRAPHIC] [TIFF OMITTED] TR02JY99.004

    (ii) B's subsequent sale of L1 stock is not taken into account for 
purposes of determining whether the L loss group has an ownership change 
under paragraph (b)(1)(i) of this section, and, accordingly, there is no 
ownership change of the L loss group. See paragraph (c) of this section, 
however, for a supplemental ownership change method that would apply to 
cause an ownership change if the purchases by C and D were pursuant to a 
plan or arrangement and certain other conditions are satisfied.
    Example 3. Loss subgroup--ownership change of loss subgroup parent 
controls. (i) P owns all the L stock. L owns 80 percent and A owns 20 
percent of the L1 stock. The P group has a consolidated net operating 
loss arising in Year 1 that is carried over to Year 2. On September 9, 
Year 2, P sells 51 percent of the L stock to B, and L1 is apportioned a 
portion of the Year 1 consolidated net operating loss under Sec.  
1.1502-21(b), which it carries over to its next taxable year. L and L1 
file a consolidated return for their first taxable year ending after the 
sale to B. The following is a graphic illustration of these facts:

[[Page 929]]

[GRAPHIC] [TIFF OMITTED] TR02JY99.005

    (ii) Under Sec.  1.1502-91(d)(1), L and L1 compose a loss subgroup 
on September 9, Year 2, the day that they become members of the L group. 
Under paragraph (b)(1)(ii) of this section, section 382 and the 
regulations thereunder are applied to L to determine whether it (and 
therefore the L loss subgroup) has an ownership change with respect to 
the portion

[[Page 930]]

of the Year 1 consolidated net operating loss that is apportioned to L1 
on September 9, Year 2. L has an ownership change resulting from P's 
sale of 51 percent of the L stock to A. Therefore, the L loss subgroup 
has an ownership change with respect to that loss.
    Example 4. Loss group and loss subgroup--contemporaneous ownership 
changes. (i) A owns all the stock of corporation M, M owns 35 percent 
and B owns 65 percent of the L stock, and L owns all the L1 stock. The L 
group has a consolidated net operating loss arising in Year 1 that is 
carried over to Year 2. On May 19, Year 2, B sells 45 percent of the L 
stock to M for cash. M, L, and L1 thereafter file consolidated returns. 
L and L1 are each apportioned a portion of the Year 1 consolidated net 
operating loss, which they carry over to the M group's Year 2 and Year 3 
consolidated return years. The M group has a consolidated net operating 
loss arising in Year 2 that is carried over to Year 3. On June 9, Year 
3, A sells 70 percent of the M stock to C. The following is a graphic 
illustration of these facts:

[[Page 931]]

[GRAPHIC] [TIFF OMITTED] TR02JY99.006

    (ii) Under Sec.  1.1502-91(d)(1), L and L1 compose a loss subgroup 
on May 19, Year 2, the day they become members of the M group. Under 
paragraph (b)(1)(ii) of this section, section 382 and the regulations 
thereunder are applied to L to determine whether L (and therefore the L 
loss subgroup) has an ownership change with respect to the loss

[[Page 932]]

carryovers from Year 1 on May 19, Year 2, a testing date because of B's 
sale of L stock to M. The sale of L stock to M results in only a 45 
percentage point increase in A's ownership of L stock. Thus, there is no 
ownership change of L (or the L loss subgroup) with respect to those 
loss carryovers under paragraph (b)(1)(ii) of this section on that day.
    (iii) June 9, Year 3, is also a testing date with respect to the L 
loss subgroup because of A's sale of M stock to C. The sale results in a 
56 percentage point increase in C's ownership of L stock, and L has an 
ownership change. Therefore, the L loss subgroup has an ownership change 
on that day with respect to the loss carryovers from Year 1.
    (iv) Paragraph (b)(1)(i) of this section requires that section 382 
and the regulations thereunder be applied to M to determine whether M 
(and therefore the M loss group) has an ownership change with respect to 
the net operating loss carryover from Year 2 on June 9, Year 3, a 
testing date because of A's sale of M stock to C. The sale results in a 
70 percentage point increase in C's ownership of M stock, and M has an 
ownership change. Therefore, the M loss group has an ownership change on 
that day with respect to that loss carryover.
    Example 5. Deemed subgroup parent. (i) P owns all the stock of L and 
L1 and 80 percent of the stock of T. A owns the remaining 20 percent of 
the stock of T. L1 owns all the stock of L2. P1, which owns 60 percent 
of the stock of P, acquires, at the beginning of Year 2, the T, L, and 
L1 stock owned by P, and T, L, L1, and L2 become members of the P1 
group. The P group has a consolidated net operating loss arising in Year 
1 that is carried over to Year 2. L, L1, and L2 are each apportioned a 
portion of the Year 1 consolidated net operating loss under Sec.  
1.1502-21(b), which they carry over to the P1 group's Year 2 and Year 3 
consolidated return years. P1 makes the election described in Sec.  
1.1502-91(d)(4) to treat T, L, L1 and L2 as meeting the section 
1504(a)(1) requirement of Sec.  1.1502-91(d)(1)(ii). As a result of the 
election, T, L, L1 and L2 compose a loss subgroup and T, L, L1, and L2 
are each treated as the loss subgroup parent for purposes of this 
paragraph (b). Because of P1's indirect ownership of T, L, L1, and L2 
prior to P1's acquisition of the T, L, and L1 stock, P1's acquisition 
does not cause an ownership change of the loss subgroup.
    (ii) On February 2, Year 3, L1 sells all of the stock of L2 to B. 
Although L2 is treated as a loss subgroup parent, the determination 
whether the loss subgroup comprised of T, L, and L1 has an ownership 
change under this paragraph (b) is made without regard to the sale of L2 
because L2's ownership change occurred upon ceasing to be a member of 
the P1 group. See Sec.  1.1502-95(b) to determine the application of 
section 382 to L2 when L2 ceases to be a member of the P1 group and the 
T, L, L1 and L2 loss subgroup.
    (iii) On March 26, Year 3, A sells her 20 percent minority stock 
interest in T to C . C's purchase, together with the 32 percentage point 
owner shift effected by P1's acquisition of the T stock at the beginning 
of Year 2, causes an ownership change of T, and therefore of the loss 
subgroup comprised of T, L, and L1.

    (3) Special adjustments--(i) Common parent succeeded by a new common 
parent. For purposes of determining if a loss group has an ownership 
change, if the common parent of a loss group is succeeded or acquired by 
a new common parent and the loss group remains in existence, the new 
common parent is treated as a continuation of the former common parent 
with appropriate adjustments to take into account shifts in ownership of 
the former common parent during the testing period (including shifts 
that occur incident to the common parent's becoming the former common 
parent). A new common parent may be a continuation of the former common 
parent even if, under Sec.  1.1502-91(g)(2)(ii), the new common parent 
is not included in determining whether the group has a net unrealized 
built-in loss.
    (ii) Newly created loss subgroup parent. For purposes of determining 
if a loss subgroup has an ownership change, if the member that is the 
loss subgroup parent has not been the loss subgroup parent for at least 
3 years as of a testing date, appropriate adjustments must be made to 
take into account owner shifts of members of the loss subgroup so that 
the structure of the loss subgroup does not have the effect of avoiding 
an ownership change under section 382. (See paragraph (b)(3)(iii), 
Example 3 of this section.)
    (iii) Examples. The following examples illustrate the principles of 
this paragraph (b)(3):

    Example 1. New common parent acquires old common parent. (i) A, who 
owns all the L stock, sells 30 percent of the L stock to B on August 26, 
Year 1. L owns all the L1 stock. The L group has a consolidated net 
operating loss arising in Year 1 that is carried over to Year 3. On July 
16, Year 2, A and B transfer their L stock to a newly created holding 
company, HC, in exchange for 70 percent and 30 percent, respectively, of 
the HC stock. HC, L, and L1 thereafter file consolidated returns. Under 
the principles of Sec.  1.1502-75(d),

[[Page 933]]

the L loss group is treated as remaining in existence, with HC taking 
the place of L as the new common parent of the loss group. The following 
is a graphic illustration of these facts:
[GRAPHIC] [TIFF OMITTED] TR02JY99.007


[[Page 934]]


    (ii) On November 11, Year 3, A sells 25 percent of the HC stock to 
B. For purposes of determining if the L loss group has an ownership 
change under paragraph (b)(1)(i) of this section on November 11, Year 3, 
HC is treated as a continuation of L under paragraph (b)(4)(i) of this 
section because it acquired L and became the common parent without 
terminating the L loss group. Accordingly, HC's testing period commences 
on January 1, Year 1, the first day of the taxable year of the L loss 
group in which the consolidated net operating loss that is carried over 
to Year 3 arose (see Sec.  1.382-2T(d)(3)(i)). Immediately after the 
close of November 11, Year 3, B's percentage ownership interest in the 
common parent of the loss group (HC) has increased by 55 percentage 
points over its lowest percentage ownership during the testing period 
(zero percent). Accordingly, HC and the L loss group have an ownership 
change on that day.
    Example 2. New common parent in case in which common parent ceases 
to exist. (i) A, B, and C each own one-third of the L stock. L owns all 
the L1 stock. The L group has a consolidated net operating loss arising 
in Year 2 that is carried over to Year 3. On November 22, Year 3, L is 
merged into P, a corporation owned by D, and L1 thereafter files 
consolidated returns with P. A, B, and C, as a result of owning stock of 
L, own 90 percent of P's stock after the merger. D owns the remaining 10 
percent of P's stock. The merger of L into P qualifies as a reverse 
acquisition of the L group under Sec.  1.1502-75(d)(3)(i), and the L 
loss group is treated as remaining in existence, with P taking the place 
of L as the new common parent of the L group. The following is a graphic 
illustration of these facts:

[[Page 935]]

[GRAPHIC] [TIFF OMITTED] TR02JY99.008

    (ii) For purposes of determining if the L loss group has an 
ownership change on November 22, Year 3, the day of the merger, P is 
treated as a continuation of L so that the testing period for P begins 
on January 1, Year 2, the first day of the taxable year of the L loss 
group in which the consolidated net operating loss that is carried over 
to

[[Page 936]]

Year 3 arose. Immediately after the close of November 22, Year 3, D is 
the only 5-percent shareholder that has increased his ownership interest 
in P during the testing period (from zero to 10 percentage points).
    (iii) The facts are the same as in paragraph (i) of this Example 2, 
except that A has held 23\1/3\ shares (23\1/3\ percent) of L's stock for 
five years, and A purchased an additional 10 shares of L stock from E 
two years before the merger. Immediately after the close of the day of 
the merger (a testing date), A's ownership interest in P, the common 
parent of the L loss group, has increased by 6\2/3\ percentage points 
over A's lowest percentage ownership during the testing period (23\1/3\ 
percent to 30 percent).
    (iv) The facts are the same as in (i) of this Example 2, except that 
P has a net operating loss arising in Year 1 that is carried to the 
first consolidated return year ending after the day of the merger. 
Solely for purposes of determining whether the L loss group has an 
ownership change under paragraph (b)(1)(i) of this section, the testing 
period for P commences on January 1, Year 2. P does not determine the 
earliest day for its testing period by reference to its net operating 
loss carryover from Year 1, which Sec. Sec.  1.1502-1(f)(3) and 1.1502-
75(d)(3)(i) treat as arising in a SRLY. See Sec.  1.1502-94 to determine 
the application of section 382 with respect to P's net operating loss 
carryover.
    Example 3. Newly acquired loss subgroup parent. (i) P owns all the L 
stock and L owns all the L1 stock. The P group has a consolidated net 
operating loss arising in Year 1 that is carried over to Year 3. On 
January 19, Year 2, L issues a 20 percent stock interest to B. On 
February 5, Year 3, P contributes its L stock to a newly formed 
subsidiary, HC, in exchange for all the HC stock, and distributes the HC 
stock to its sole shareholder A. HC, L, and L1 thereafter file 
consolidated returns. A portion of the P group's Year 1 consolidated net 
operating loss is apportioned to L and L1 under Sec.  1.1502-21(b) and 
is carried over to the HC group's year ending after February 5, Year 3. 
HC, L, and L1 compose a loss subgroup within the meaning of Sec.  
1.1502-91(d) with respect to the net operating loss carryovers from Year 
1. The following is a graphic illustration of these facts:

[[Page 937]]

[GRAPHIC] [TIFF OMITTED] TR02JY99.009

    (ii) February 5, Year 3, is a testing date for HC as the loss 
subgroup parent with respect to the net operating loss carryovers of L 
and L1 from Year 1. See paragraph (b)(1)(ii)(B) of this section. For 
purposes of determining whether HC has an ownership change on the 
testing date, appropriate adjustments must be made with respect to the 
changes in the

[[Page 938]]

percentage ownership of the stock of HC because HC was not the loss 
subgroup parent for at least 3 years prior to the day on which it became 
a member of the HC loss subgroup (a testing date). The appropriate 
adjustments include adjustments so that HC succeeds to the owner shifts 
of other members of the former group. Thus, HC succeeds to the owner 
shift of L that resulted from the sale of the 20 percent interest to B 
in determining whether the HC loss subgroup has an ownership change on 
February 5, Year 3, and on any subsequent testing date that includes 
January 19, Year 2.

    (4) End of separate tracking of certain losses. If Sec.  1.1502-
96(a) (relating to the end of separate tracking of attributes) applies 
to a loss subgroup, then, while one or more members that were included 
in the loss subgroup remain members of the consolidated group, there is 
an ownership change with respect to their attributes described in Sec.  
1.1502-96(a)(2) only if the consolidated group is a loss group and has 
an ownership change under paragraph (b)(1)(i) of this section (or such a 
member has an ownership change under Sec.  1.1502-96(b) (relating to 
ownership changes of subsidiaries)). If, however, the loss subgroup has 
had an ownership change before Sec.  1.1502-96(a) applies, see Sec.  
1.1502-96(c) for the continuing application of the subgroup's section 
382 limitation with respect to its pre-change subgroup attributes.
    (c) Supplemental rules for determining ownership change--
    (1) Scope. This paragraph (c) contains a supplemental rule for 
determining whether there is an ownership change of a loss group (or 
loss subgroup). It applies in addition to, and not instead of, the rules 
of paragraph (b) of this section. Thus, for example, if the common 
parent of the loss group has an ownership change under paragraph (b) of 
this section, the loss group has an ownership change even if, by 
applying this paragraph (c), the common parent would not have an 
ownership change. This paragraph (c) does not apply in determining an 
ownership change of a loss subgroup for which an election under Sec.  
1.1502-91(d)(4) is made.
    (2) Cause for applying supplemental rule. This paragraph (c) applies 
to a loss group (or loss subgroup) if--
    (i) Any 5-percent shareholder of the common parent (or loss subgroup 
parent) increases its percentage ownership interest in the stock of 
both--
    (A) A subsidiary of the loss group (or loss subgroup) other than by 
a direct or indirect acquisition of stock of the common parent (or loss 
subgroup parent); and
    (B) The common parent (or loss subgroup parent);
    (ii) Those increases occur within a 3 year period ending on any day 
of a consolidated return year or, if shorter, the period beginning on 
the first day following the most recent ownership change of the loss 
group (or loss subgroup); and
    (iii) Either--
    (A) The common parent (or loss subgroup parent) has actual knowledge 
of the increase in the 5-percent shareholder's ownership interest in the 
stock of the subsidiary (or has actual knowledge of the plan or 
arrangement described in paragraph (c)(3)(i) of this section) before the 
date that the group's income tax return is filed for the taxable year 
that includes the date of that increase; or
    (B) At any time during the period described in paragraph (c)(2)(ii) 
of this section, the 5-percent shareholder of the common parent is also 
a 5-percent shareholder of the subsidiary (determined without regard to 
paragraph (c)(3)(i) of this section) whose percentage increase in the 
ownership of the stock of the subsidiary would be taken into account in 
determining if the subsidiary has an ownership change (determined as if 
the subsidiary was a loss corporation and applying the principles of 
Sec.  1.382-2T(k), including the principles relating to duty to 
inquire).
    (3) Operating rules. Solely for purposes of this paragraph (c)--
    (i) A 5-percent shareholder of the common parent (or loss subgroup 
parent) is treated as increasing its ownership interest in the stock of 
a subsidiary to the extent, if any, that another person or persons 
increases its percentage ownership interest in the stock of a subsidiary 
pursuant to a plan or arrangement under which the 5-percent shareholder 
increases its percentage ownership interest in the common parent (or 
loss subgroup parent);
    (ii) The rules in section 382(l)(3) and Sec. Sec.  1.382-2T(h) and 
1.382-4(d) (relating to

[[Page 939]]

constructive ownership) apply with respect to the stock of the 
subsidiary by treating such stock as stock of a loss corporation; and
    (iii) In the case of a loss subgroup, a subsidiary includes any 
member of the loss subgroup other than the loss subgroup parent. (A loss 
subgroup parent is, however, a subsidiary of the loss group of which it 
is a member.)
    (4) Supplemental ownership change rules. The determination whether 
the common parent (or loss subgroup parent) has an ownership change is 
made by applying paragraph (b)(1) of this section as modified by the 
following additional rules:
    (i) Additional testing dates for the common parent (or loss subgroup 
parent). A testing date for the common parent (or loss subgroup parent) 
also includes--
    (A) Each day on which there is an increase in the percentage 
ownership of stock of a subsidiary as described in paragraph (c)(2) of 
this section; and
    (B) The first day of the first consolidated return year for which 
the group is a loss group (or the members compose a loss subgroup).
    (ii) Treatment of subsidiary stock as stock of the common parent (or 
loss subgroup parent). The common parent (or loss subgroup parent) is 
treated as though it had issued to the person acquiring (or deemed to 
acquire) the subsidiary stock an amount of its own stock (by value) that 
equals the value of the subsidiary stock represented by the percentage 
increase in that person's ownership of the subsidiary (determined on a 
separate entity basis). Similar principles apply if the increase in 
percentage ownership interest is effected by a redemption or similar 
transaction.
    (iii) Different testing periods. Stock treated as issued under 
paragraph (c)(4)(ii) of this section on a testing date is not treated as 
so issued for purposes of applying the ownership change rules of this 
paragraph (c) and paragraph (b)(1) of this section in a testing period 
that does not include that testing date.
    (iv) Disaffiliation of a subsidiary. If a deemed issuance of stock 
under paragraph (c)(4)(ii) of this section would not cause the loss 
group (or loss subgroup) to have an ownership change before the day (if 
any) on which the subsidiary ceases to be a member of the loss group (or 
subgroup), then paragraph (c)(4) of this section shall not apply.
    (v) Subsidiary stock acquired first. If an increase of subsidiary 
stock described in paragraph (c)(2)(i)(A) of this section occurs before 
the date that the 5-percent shareholder increases its percentage 
ownership interest in the stock of the common parent (or loss subgroup 
parent), then the deemed issuance of stock is treated as occurring on 
that later date, but in an amount equal to the value of the subsidiary 
stock on the date it was acquired.
    (vi) Anti-duplication rule. If two or more 5-percent shareholders 
are treated as increasing their percentage ownership interests pursuant 
to the same plan or arrangement described in paragraph (c)(3)(i) of this 
section, appropriate adjustments must be made so that the amount of 
stock treated as issued is not taken into account more than once.
    (5) Examples. The following examples illustrate the principles of 
this paragraph (c):

    Example 1. Stock of the common parent under supplemental rules. (i) 
A owns all the L stock. L is not a member of an affiliated group and has 
a net operating loss carryover arising in Year 1 that is carried over to 
Year 6. On September 20, Year 6, L transfers all of its assets and 
liabilities to a newly created subsidiary, S, in exchange for S stock. L 
and S thereafter file consolidated returns. On November 23, Year 6, B 
contributes cash to L in exchange for a 45 percent ownership interest in 
L and contributes cash to S for a 20 percent ownership interest in S.
    (ii) During the 3 year period ending on November 23, Year 6, B is a 
5% shareholder of L and of S that increases its ownership interest in L 
and S during that period. Under paragraph (c)(4)(ii) of this section, 
the determination whether L (the common parent of a loss group) has an 
ownership change on November 23, Year 6 (or, subject to paragraph 
(c)(4)(iv) of this section, on any testing date in the testing period 
which includes November 23, Year 6), is made by applying paragraph 
(b)(1)(i) of this section and by treating the value of B's 20 percent 
ownership interest in S as if it were L stock issued to B. Because B is 
a 5% shareholder of both L and S during the 3 year period ending on 
November 23, Year 6, and B's increase in its percentage ownership in the 
stock of S would be taken into account in determining if S (if it were a 
loss corporation) had an ownership change,

[[Page 940]]

it is not relevant whether L has actual knowledge of B's acquisition of 
S stock.
    Example 2. Plan or arrangement--public offering of subsidiary stock. 
(i) A owns all the stock of L and L owns all the stock of L1. The L 
group has a consolidated net operating loss arising in Year 1 that 
resulted from the operations of L1 and that is carried over to Year 2. 
On October 7, Year 2, A sells 49 percent of the L stock to B. As part of 
a plan that includes the sale of L stock, A causes a public offering of 
L1 stock on November 6, Year 2. L has actual knowledge of the plan. The 
following is a graphic illustration of these facts:

[[Page 941]]

[GRAPHIC] [TIFF OMITTED] TR02JY99.010

    (ii) A's sale of the L stock to B does not cause an ownership change 
of the L loss group on October 7, Year 2, under the rules of Sec.  
1.382-2T and paragraph (b)(1)(i) of this section.
    (iii) Because the issuance of L1 stock to the public occurs as part 
of the same plan as

[[Page 942]]

B's acquisition of L stock, and L has knowledge of the plan, paragraph 
(c)(4) of this section applies to determine whether the L loss group has 
an ownership change on November 6, Year 2 (or, subject to paragraph 
(c)(4)(iv) of this section, on any testing date for which the testing 
period includes November 6, Year 2).

    (d) Testing period following ownership change under this section. If 
a loss group (or a loss subgroup) has had an ownership change under this 
section, the testing period for determining a subsequent ownership 
change with respect to pre-change consolidated attributes (or pre-change 
subgroup attributes) begins no earlier than the first day following the 
loss group's (or loss subgroup's) most recent change date.
    (e) Information statements--(1) Common parent of a loss group. The 
common parent of a loss group must file the information statement 
required by Sec.  1.382-11(a) for a consolidated return year because of 
any owner shift, equity structure shift, or other transaction described 
in Sec.  1.382-2T(a)(2)(i)--
    (i) With respect to the common parent and with respect to any 
subsidiary stock subject to paragraph (c) of this section; and
    (ii) With respect to an ownership change described in Sec.  1.1502-
96(b) (relating to ownership changes of subsidiaries).
    (2) Abbreviated statement with respect to loss subgroups. The common 
parent of a consolidated group that has a loss subgroup during a 
consolidated return year must file the information statement required by 
Sec.  1.382-11(a) because of any owner shift, equity structure shift, or 
other transaction described in Sec.  1.382-2T(a)(2)(i) with respect to 
the loss subgroup parent and with respect to any subsidiary stock 
subject to paragraph (c) of this section. Instead of filing a separate 
statement for each loss subgroup parent, the common parent (which is 
treated as a loss corporation) may file the single statement described 
in paragraph (e)(1) of this section. In addition to the information 
concerning stock ownership of the common parent, the single statement 
must identify each loss subgroup parent and state which loss subgroups, 
if any, have had ownership changes during the consolidated return year. 
The loss subgroup parent is, however, still required to maintain the 
records necessary to determine if the loss subgroup has an ownership 
change. This paragraph (e)(2) applies with respect to the attributes of 
a loss subgroup until, under Sec.  1.1502-96(a), the attributes are no 
longer treated as described in Sec.  1.1502-91(d) (relating to the 
definition of loss subgroup). After that time, the information statement 
described in paragraph (e)(1) of this section must be filed with respect 
to those attributes.

[T.D. 8824, 64 FR 36137, July 2, 1999, as amended by T.D. 9264, 71 FR 
30608, May 30, 2006; T.D. 9329, 72 FR 32807, June 14, 2007]



Sec.  1.1502-93  Consolidated section 382 limitation
(or subgroup section 382 limitation).

    (a) Determination of the consolidated section 382 limitation (or 
subgroup section 382 limitation)--(1) In general. Following an ownership 
change, the consolidated section 382 limitation (or subgroup section 382 
limitation) for any post-change year is an amount equal to the value of 
the loss group (or loss subgroup), as defined in paragraph (b) of this 
section, multiplied by the long-term tax-exempt rate that applies with 
respect to the ownership change, and adjusted as required by section 382 
and the regulations thereunder. See, for example, section 382(b)(2) 
(relating to the carryforward of unused section 382 limitation), section 
382(b)(3)(B) (relating to the section 382 limitation for the post-change 
year that includes the change date), section 382(h) (relating to 
recognized built-in gains and section 338 gains), and section 382(m)(2) 
(relating to short taxable years). For special rules relating to the 
recognized built-in gains of a loss group (or loss subgroup), see 
paragraph (c)(2) of this section.
    (2) Coordination with apportionment rule. For special rules relating 
to apportionment of a consolidated section 382 limitation (or a subgroup 
section 382 limitation) or net unrealized built-in gain when one or more 
corporations cease to be members of a loss group (or a loss subgroup) 
and to aggregation of amounts so apportioned, see Sec.  1.1502-95(c).
    (b) Value of the loss group (or loss subgroup)--(1) Stock value 
immediately before ownership change. Subject to any adjustment under 
paragraph (b)(2) of

[[Page 943]]

this section, the value of the loss group (or loss subgroup) is the 
value, immediately before the ownership change, of the stock of each 
member, other than stock that is owned directly or indirectly by another 
member. For this purpose--
    (i) Ownership is determined under Sec.  1.382-2T;
    (ii) A member is considered to indirectly own stock of another 
member through a nonmember only if the member has a 5-percent or greater 
ownership interest in the nonmember; and
    (iii) Stock includes stock described in section 1504(a)(4) and Sec.  
1.382-2T(f)(18)(ii) and (iii).
    (2) Adjustment to value--(i) In general. The value of the loss group 
(or loss subgroup), as determined under paragraph (b)(1) of this 
section, is adjusted under any rule in section 382 or the regulations 
thereunder requiring an adjustment to such value for purposes of 
computing the amount of the section 382 limitation. See, for example, 
section 382(e)(2) (redemptions and corporate contractions), section 
382(l)(1) (certain capital contributions) and section 382(l)(4) 
(ownership of substantial nonbusiness assets). For purposes of section 
382(e)(2), redemptions and corporate contractions that do not effect a 
transfer of value outside of the loss group (or loss subgroup) are 
disregarded. For purposes of section 382(l)(1), capital contributions 
between members of the loss group (or loss subgroup) (or a contribution 
of stock to a member made solely to satisfy the loss subgroup parent 
requirement of paragraph (d)(1)(ii) or (2)(ii) of this section), are not 
taken into account. Also, the substantial nonbusiness asset test of 
section 382(l)(4) is applied on a group (or subgroup) basis, and is not 
applied separately to its members.
    (ii) Anti-duplication. Appropriate adjustments must be made to the 
extent necessary to prevent any duplication of the value of the stock of 
a member, even though corporations that do not file consolidated returns 
may not be required to make such an adjustment. In making these 
adjustments, the group (or loss subgroup) may apply the principles of 
Sec.  1.382-8 (relating to controlled groups of corporations) in 
determining the value of a loss group (or loss subgroup) even if that 
section would not apply if separate returns were filed. Also, the 
principles of Sec.  1.382-5(d) (relating to successive ownership changes 
and absorption of a section 382 limitation) may apply to adjust the 
consolidated section 382 limitation (or subgroup section 382 limitation) 
of a loss group (or loss subgroup) to avoid a duplication of value if 
there are simultaneous (rather than successive) ownership changes.
    (3) Examples. The following examples illustrate the principles of 
this paragraph (b):

    Example 1. Basic case. (i) L, L1, and L2 compose a loss group. L has 
outstanding common stock, the value of which is $100. L1 has outstanding 
common stock and preferred stock that is described in section 
1504(a)(4). L owns 90 percent of the L1 common stock, and A owns the 
remaining 10 percent of the L1 common stock plus all the preferred 
stock. The value of the L1 common stock is $40, and the value of the L1 
preferred stock is $30. L2 has outstanding common stock, 50 percent of 
which is owned by L and 50 percent by L1. The L group has an ownership 
change. The following is a graphic illustration of these facts:

[[Page 944]]

[GRAPHIC] [TIFF OMITTED] TR02JY99.011

    (ii) Under paragraph (b)(1) of this section, the L group does not 
include the value of the stock of any member that is owned directly or 
indirectly by another member in computing its consolidated section 382 
limitation. Accordingly, the value of the stock of the loss group is 
$134, the sum of the value of--
    (a) The common stock of L ($100);
    (b) The 10 percent of the L1 common stock ($4) owned by A; and
    (c) The L1 preferred stock ($30) owned by A.
    Example 2. Indirect ownership. (i) L and L1 compose a consolidated 
group. L's stock has a value of $100. L owns 80 shares (worth $80) and 
corporation M owns 20 shares (worth $20) of the L1 stock. L also owns 79 
percent of the stock of corporation M. The L group has an ownership 
change. The following is a graphic illustration of these facts:

[[Page 945]]

[GRAPHIC] [TIFF OMITTED] TR02JY99.012

    (ii) Under paragraph (b)(1) of this section, because of L's more 
than 5 percent ownership interest in M, a nonmember, L is considered to 
indirectly own 15.8 shares of the L1 stock held by M (79% x 20 shares). 
The value of the L loss group is $104.20, the sum of the values of--
    (a) The L stock ($100); and
    (b) The L1 stock not owned directly or indirectly by L (21% x $20, 
or $4.20).

    (c) Recognized built-in gain of a loss group or loss subgroup--(1) 
In general. If a loss group (or loss subgroup) has a net unrealized 
built-in gain, any recognized built-in gain of the loss group (or loss 
subgroup) is taken into account under section 382(h) in determining the 
consolidated section 382 limitation (or subgroup section 382 
limitation).
    (2) Adjustments. Appropriate adjustments must be made so that any 
recognized built-in gain of a member that increases more than one 
section 382 limitation (whether consolidated, subgroup, or separate) 
does not effect a duplication in the amount of consolidated taxable 
income that can be offset by pre-change net operating losses. For 
example, a consolidated section 382 limitation that is increased by 
recognized built-in gains is reduced to the extent that pre-change net 
operating losses of a loss subgroup absorb additional consolidated 
taxable income because the same recognized built-in gains caused an 
increase in that loss subgroup's section 382 limitation. In addition, 
recognized built-in gain may not increase the amount of consolidated 
taxable income that can be offset by recognized built-in losses.
    (d) Continuity of business--(1) In general. A loss group (or a loss 
subgroup) is treated as a single entity for purposes of determining 
whether it satisfies the continuity of business enterprise requirement 
of section 382(c)(1).
    (2) Example. The following example illustrates the principle of this 
paragraph (d):

    Example. Continuity of business enterprise. L owns all the stock of 
two subsidiaries, L1 and L2. The L group has an ownership change. It has 
pre-change consolidated attributes attributable to L2. Each of the 
members has historically conducted a separate line of business. Each 
line of business is approximately equal in value. One year after the 
ownership change, L discontinues its separate business and the business 
of L2. The separate business of L1 is continued for the remainder of the 
2 year period following the ownership change. The continuity of business 
enterprise requirement of section 382(c)(1) is met even though the 
separate businesses of L and L2 are discontinued.

    (e) Limitations of losses under other rules. If a section 382 
limitation for a

[[Page 946]]

post-change year exceeds the consolidated taxable income that may be 
offset by pre-change attributes for any reason, including the 
application of the limitation of Sec.  1.1502-21(c), the amount of the 
excess is carried forward under section 382(b)(2) (relating to the 
carryforward of unused section 382 limitation).

[T.D. 8824, 64 FR 36153, July 2, 1999]



Sec.  1.1502-94  Coordination with section 382 and the regulations 
thereunder when a corporation becomes a member of a consolidated
group.

    (a) Scope--(1) In general. This section applies section 382 and the 
regulations thereunder to a corporation that is a new loss member of a 
consolidated group. A corporation is a new loss member if it--
    (i) Carries over a net operating loss that arose (or is treated 
under Sec.  1.1502-21(c) as arising) in a SRLY with respect to the 
current group, and that is not described in Sec.  1.1502-91(d)(1); or
    (ii) Has a net unrealized built-in loss (determined under paragraph 
(c) of this section immediately before it becomes a member of the 
current group by treating that day as a change date) that is not taken 
into account under Sec.  1.1502-91(d)(2) in determining whether two or 
more corporations compose a loss subgroup.
    (2) Successor corporation as new loss member. A new loss member also 
includes any successor to a corporation that has a net operating loss 
carryover arising in a SRLY and that is treated as remaining in 
existence under Sec.  1.382-2(a)(1)(ii) following a transaction 
described in section 381(a).
    (3) Coordination in the case of a loss subgroup. For rules regarding 
the determination of whether there is an ownership change of a loss 
subgroup with respect to a net operating loss or a net unrealized built-
in loss described in Sec.  1.1502-91(d) (relating to the definition of 
loss subgroup) and the computation of a subgroup section 382 limitation 
following such an ownership change, see Sec. Sec.  1.1502-92 and 1.1502-
93.
    (4) End of separate tracking of certain losses. If Sec.  1.1502-
96(a) (relating to the end of separate tracking of attributes) applies 
to a new loss member, then, while that member remains a member of the 
consolidated group, there is an ownership change with respect to its 
attributes described in Sec.  1.1502-96(a)(2) only if the consolidated 
group is a loss group and has an ownership change under Sec.  1.1502-
92(b)(1)(i) (or that member has an ownership change under Sec.  1.1502-
96(b) (relating to ownership changes of subsidiaries)). If, however, the 
new loss member has had an ownership change before Sec.  1.1502-96(a) 
applies, see Sec.  1.1502-96(c) for the continuing application of the 
section 382 limitation with respect to the member's pre-change losses.
    (5) Cross-reference. See section 382(a) and Sec.  1.1502-96(c) for 
the continuing effect of an ownership change after a corporation becomes 
or ceases to be a member.
    (b) Application of section 382 to a new loss member--(1) In general. 
Section 382 and the regulations thereunder apply to a new loss member to 
determine, on a separate entity basis, whether and to what extent a 
section 382 limitation applies to limit the amount of consolidated 
taxable income that may be offset by the new loss member's pre-change 
separate attributes. For example, if an ownership change with respect to 
the new loss member occurs under section 382 and the regulations 
thereunder, the amount of consolidated taxable income for any post-
change year that may be offset by the new loss member's pre-change 
separate attributes shall not exceed the section 382 limitation as 
determined separately under section 382(b) with respect to that member 
for such year. If the post-change year includes the change date, section 
382(b)(3)(A) is applied so that the section 382 limitation of the new 
loss member does not apply to the portion of the taxable income for such 
year that is allocable to the period in such year on or before the 
change date. See generally Sec.  1.382-6 (relating to the allocation of 
income and loss).
    (2) Adjustment to value. Appropriate adjustments must be made to the 
extent necessary to prevent any duplication of the value of the stock of 
a member, even though corporations that do not file consolidated returns 
may not be required to make such an adjustment. For example, the 
principles of

[[Page 947]]

Sec.  1.1502-93(b)(2)(ii) (relating to adjustments to value) apply in 
determining the value of a new loss member.
    (3) Pre-change separate attribute defined. A pre-change separate 
attribute of a new loss member is--
    (i) Any net operating loss carryover of the new loss member 
described in paragraph (a)(1) of this section; and
    (ii) Any recognized built-in loss of the new loss member.
    (4) Examples. The following examples illustrate the principles of 
this paragraph (b):

    Example 1. Basic case. (i) A and P each own 50 percent of the L 
stock. On December 19, Year 6, P purchases 30 percent of the L stock 
from A for cash. L has net operating losses arising in Year 1 and Year 2 
that it carries over to Year 6 and Year 7. The following is a graphic 
illustration of these facts:

[[Page 948]]

[GRAPHIC] [TIFF OMITTED] TR02JY99.013

    (ii) L is a new loss member because it has net operating loss 
carryovers that arose in a SRLY with respect to the P group and L is not 
a member of a loss subgroup under Sec.  1.1502-91(d). Under section 382 
and the regulations thereunder, L is a loss corporation on December 19, 
Year 6, that day is a testing

[[Page 949]]

date for L, and the testing period for L commences on December 20, Year 
3.
    (iii) P's purchase of L stock does not cause an ownership change of 
L on December 19, Year 6, with respect to the net operating loss 
carryovers from Year 1 and Year 2 under section 382 and Sec.  1.382-2T. 
The use of the loss carryovers, however, is subject to limitation under 
Sec.  1.1502-21(c).
    Example 2. Multiple new loss members. (i) The facts are the same as 
in Example 1, and, on December 31, Year 6, L purchases all the stock of 
L1 from B for cash. L1 has a net operating loss of $40 arising in Year 3 
that it carries over to Year 7. The following is a graphic illustration 
of these facts:

[[Page 950]]

[GRAPHIC] [TIFF OMITTED] TR02JY99.014

    (ii) L1 is a new loss member because it has a net operating loss 
carryover from Year 3 that arose in a SRLY with respect to the P group 
and L1 is not a member of a loss subgroup under Sec.  1.1502-91(d)(1).

[[Page 951]]

    (iii) L's purchase of all the stock of L1 causes an ownership change 
of L1 on December 31, Year 6, under section 382 and Sec.  1.382-2T. 
Accordingly, a section 382 limitation based on the value of the L1 stock 
immediately before the ownership change limits the amount of 
consolidated taxable income of the P group for any post-change year that 
may be offset by L1's loss from Year 3.
    (iv) L1's ownership change upon becoming a member of the P group is 
an ownership change described in Sec.  1.1502-96(a). Thus, starting on 
January 1, Year 7, the P group no longer separately tracks owner shifts 
of the stock of L1 with respect to L1's loss from Year 3, and the P 
group is a loss group because L1's Year 3 loss is treated as a loss 
described in Sec.  1.1502-91(c).
    Example 3. Ownership changes of new loss members. (i) The facts are 
the same as in Example 2, and, on July 30, Year 7, C purchases all the 
stock of P for cash.
    (ii) L is a new loss member on July 30, Year 7, because its Year 1 
and Year 2 losses arose in SRLYs with respect to the P group and it is 
not a member of a loss subgroup under Sec.  1.1502-91(d)(1). The testing 
period for L commences on August 1, Year 4. C's purchase of all the P 
stock causes an ownership change of L on July 30, Year 7, under section 
382 and Sec.  1.382-2T with respect to its Year 1 and Year 2 losses. 
Accordingly, a section 382 limitation based on the value of the L stock 
immediately before the ownership change limits the amount of 
consolidated taxable income of the P group for any post-change year that 
may be offset by L's Year 1 and Year 2 losses. See Sec.  1.1502-21(c) 
for rules relating to an additional limitation.
    (iii) The P group is a loss group on July 30, Year 7, because it is 
entitled to use L1's loss from Year 3, and such loss is no longer 
treated as a loss of a new loss member starting the day after L1's 
ownership change on December 31, Year 6. See Sec. Sec.  1.1502-96(a) and 
1.1502-91(c)(2). C's purchase of all the P stock causes an ownership 
change of P, and therefore the P loss group, on July 30, Year 7, with 
respect to L1's Year 3 loss. Accordingly, a consolidated section 382 
limitation based on the value of the P stock immediately before the 
ownership change limits the amount of consolidated taxable income of the 
P group for any post-change year that may be offset by L1's Year 3 loss.

    (c) Built-in gains and losses. As the context may require, the 
principles of Sec. Sec.  1.1502-91(g) and (h) and 1.1502-93(c) (relating 
to built-in gains and losses) apply to a new loss member on a separate 
entity basis. See Sec.  1.1502-91(g)(4). See Sec.  1.1502-13 (including 
Example 10 of Sec.  1.1502-13(c)(7)) for rules relating to the treatment 
of intercompany transactions.
    (d) Information statements. The common parent of a consolidated 
group that has a new loss member subject to paragraph (b)(1) of this 
section during a consolidated return year must file the information 
statement required by Sec.  1.382-11(a) because of any owner shift, 
equity structure shift, or other transaction described in Sec.  1.382-
2T(a)(2)(i). Instead of filing a separate statement for each new loss 
member, the common parent may file a single statement described in Sec.  
1.382-11(a) with respect to the stock ownership of the common parent 
(which is treated as a loss corporation). In addition to the information 
concerning stock ownership of the common parent, the single statement 
must identify each new loss member and state which new loss members, if 
any, have had ownership changes during the consolidated return year. The 
new loss member is, however, required to maintain the records necessary 
to determine if it has an ownership change. This paragraph (d) applies 
with respect to the attributes of a new loss member until an event 
occurs which ends separate tracking under Sec.  1.1502-96(a). After that 
time, the information statement described in Sec.  1.1502-92(e)(1) must 
be filed with respect to these attributes.

[T.D. 8824, 64 FR 36155, July 2, 1999, as amended by T.D. 9264, 71 FR 
30608, May 30, 2006; T.D. 9329, 72 FR 32807, June 14, 2007]



Sec.  1.1502-95  Rules on ceasing to be a member of a consolidated 
group (or loss subgroup).

    (a) In general--(1) Consolidated group. This section provides rules 
for applying section 382 on or after the day that a member ceases to be 
a member of a consolidated group (or loss subgroup). The rules concern 
how to determine whether an ownership change occurs with respect to 
losses of the member, and how a consolidated section 382 limitation (or 
subgroup section 382 limitation) and a loss group's (or loss subgroup's) 
net unrealized built-in gain or loss is apportioned to the member. As 
the context requires, a reference in this section to a loss group, a 
member, or a corporation also includes a reference to a loss subgroup, 
and a reference to a consolidated section 382 limitation also

[[Page 952]]

includes a reference to a subgroup section 382 limitation.
    (2) Election by common parent. Only the common parent (not the loss 
subgroup parent) may make the election under paragraph (c) of this 
section to apportion a consolidated section 382 limitation (or subgroup 
section 382 limitation) or a loss group's (or loss subgroup's) net 
unrealized built-in gain.
    (3) Coordination with Sec. Sec.  1.1502-91 through 1.1502-93. For 
rules regarding the determination of whether there is an ownership 
change of a loss subgroup and the computation of a subgroup section 382 
limitation following such an ownership change, see Sec. Sec.  1.1502-91 
through 1.1502-93.
    (b) Separate application of section 382 when a member leaves a 
consolidated group--(1) In general. Except as provided in Sec. Sec.  
1.1502-91 through 1.1502-93 (relating to rules applicable to loss groups 
and loss subgroups), section 382 and the regulations thereunder apply to 
a corporation on a separate entity basis after it ceases to be a member 
of a consolidated group (or loss subgroup). Solely for purposes of 
determining whether a corporation has an ownership change--
    (i) Any portion of a consolidated net operating loss that is 
apportioned to the corporation under Sec.  1.1502-21(b) is treated as a 
net operating loss of the corporation beginning on the first day of the 
taxable year in which the loss arose;
    (ii) The testing period may include the period during which (or 
before which) the corporation was a member of the group (or loss 
subgroup); and
    (iii) Except to the extent provided in Sec.  1.1502-96(d) (relating 
to reattributed losses), the day it ceases to be a member of a 
consolidated group is treated as a testing date of the corporation 
within the meaning of Sec.  1.382-2(a)(4).
    (2) Effect of a prior ownership change of the group. If a loss group 
has had an ownership change under Sec.  1.1502-92 before a corporation 
ceases to be a member of a consolidated group (the former member)--
    (i) Any pre-change consolidated attribute that is subject to a 
consolidated section 382 limitation continues to be treated as a pre-
change loss with respect to the former member after it is apportioned to 
the former member and, if any net unrealized built-in loss is allocated 
to the former member under paragraph (e) of this section, any recognized 
built-in loss of the former member is a pre-change loss of the member;
    (ii) The section 382 limitation with respect to such pre-change 
attribute is zero unless the common parent, under paragraph (c) of this 
section, apportions to the former member all or part of the consolidated 
section 382 limitation applicable to such attribute. The limitation 
applicable to a pre-change attribute other than a recognized built-in 
loss may be increased to the extent that the common parent has 
apportioned all or part of the loss group's net unrealized built-in gain 
to the former member, and the former member recognizes built-in gain 
during the recognition period;
    (iii) The testing period for determining a subsequent ownership 
change with respect to such pre-change attribute (or such net unrealized 
built-in loss, if any) begins no earlier than the first day following 
the loss group's most recent change date; and
    (iv) As generally provided under section 382, an ownership change of 
the former member that occurs on or after the day it ceases to be a 
member of a loss group may result in an additional, lesser limitation 
amount with respect to such losses.
    (3) Application in the case of a loss subgroup. If two or more 
former members are included in the same loss subgroup immediately after 
they cease to be members of a consolidated group, the principles of 
paragraphs (b), (c) and (e) of this section apply to the loss subgroup. 
Therefore, for example, an apportionment by the common parent under 
paragraph (c) of this section is made to the loss subgroup rather than 
separately to its members. If the common parent of the consolidated 
group apportions all or part of a limitation (or net unrealized built-in 
gain) separately to one or more former members that are included in a 
loss subgroup because the common parent of the acquiring group makes an 
election under Sec.  1.1502-91(d)(4) with respect to those members, the 
aggregate of those separate amounts is treated as the amount

[[Page 953]]

apportioned to the loss subgroup. Such separate apportionment may occur, 
for example, because the election under Sec.  1.1502-91(d)(4) has not 
been filed at the time that the election of apportionment is made under 
paragraph (f) of this section.
    (4) Examples. The following examples illustrate the principles of 
this paragraph (b):
    (i) Example 1: Treatment of departing member as a separate 
corporation throughout the testing period. (A) A owns all the L stock. L 
owns all the stock of L1 and L2. The L group has a consolidated net 
operating loss arising in Year 1 that is carried over to Year 3. On 
January 12, Year 2, A sells 30 percent of the L stock to B. On February 
7, Year 3, L sells 40 percent of the L2 stock to C, and L2 ceases to be 
a member of the group. A portion of the Year 1 consolidated net 
operating loss is apportioned to L2 under Sec.  1.1502-21(b) and is 
carried to L2's first separate return year, which ends December 31, Year 
3. The following is a graphic illustration of these facts:

[[Page 954]]

[GRAPHIC] [TIFF OMITTED] TR02JY99.015

    (B) Under paragraph (b)(1) of this section, L2 is a loss corporation 
on February 7, Year 3. Under paragraph (b)(1)(iii) of this section, 
February 7, Year 3, is a testing date. Under paragraph (b)(1)(ii) of 
this section, the testing period for L2 with respect to this testing 
date commences on January 1,

[[Page 955]]

Year 1, the first day of the taxable year in which the portion of the 
consolidated net operating loss apportioned to L2 arose. Therefore, in 
determining whether L2 has an ownership change on February 7, Year 3, 
B's purchase of 30 percent of the L stock and C's purchase of 40 percent 
of the L2 stock are each owner shifts. L2 has an ownership change under 
section 382(g) and Sec.  1.382-2T because B and C have increased their 
ownership interests in L2 by 18 and 40 percentage points, respectively, 
during the testing period.
    (ii) Example 2: Effect of prior ownership change of loss group. (A) 
L owns all the L1 stock and L1 owns all the L2 stock. The L loss group 
had an ownership change under Sec.  1.1502-92 in Year 2 with respect to 
a consolidated net operating loss arising in Year 1 and carried over to 
Year 2 and Year 3. The consolidated section 382 limitation computed 
solely on the basis of the value of the stock of L is $100. On December 
31, Year 2, L1 sells 25 percent of the stock of L2 to B. L2 is 
apportioned a portion of the Year 1 consolidated net operating loss 
which it carries over to its first separate return year ending after 
December 31, Year 2. L2's separate section 382 limitation with respect 
to this loss is zero unless L elects to apportion all or a part of the 
consolidated section 382 limitation to L2. (See paragraph (c) of this 
section for rules regarding the apportionment of a consolidated section 
382 limitation.) L apportions $50 of the consolidated section 382 
limitation to L2, and the remaining $50 of the consolidated section 382 
limitation stays with the loss group composed of L and L1.
    (B) On December 31, Year 3, L1 sells its remaining 75 percent stock 
interest in L2 to C, resulting in an ownership change of L2. L2's 
section 382 limitation computed on the change date with respect to the 
value of its stock is $30. Accordingly, L2's section 382 limitation for 
post-change years ending after December 31, Year 3, with respect to its 
pre-change losses, including the consolidated net operating losses 
apportioned to it from the L group, is $30, adjusted for a short taxable 
year, carryforward of unused limitation, or any other adjustment 
required under section 382. The analysis would be similar if the L loss 
group had an ownership change under Sec.  1.1502-92 in Year 2 with 
respect to disallowed business interest expense paid or accrued by L2 in 
Year 1 and carried forward under section 163(j)(2) to Year 2 and Year 3. 
See Sec.  1.1502-98(b) (providing that Sec. Sec.  1.1502-91 through 
1.1502-96 apply section 382 to business interest expense, with 
appropriate adjustments).
    (c) Apportionment of a consolidated section 382 limitation--(1) In 
general. The common parent may elect to apportion all or any part of a 
consolidated section 382 limitation to a former member (or loss 
subgroup). The common parent also may elect to apportion all or any part 
of the loss group's net unrealized built-in gain to a former member (or 
loss subgroup).
    (2) Amount which may be apportioned--(i) Consolidated section 382 
limitation. The common parent may apportion all or part of each element 
of the consolidated section 382 limitation determined under Sec.  
1.1502-93. For this purpose, the consolidated section 382 limitation 
consists of two elements--
    (A) The value element, which is the element of the limitation 
determined under section 382(b)(1) (relating to value multiplied by the 
long-term tax-exempt rate) without regard to such adjustments as those 
described in section 382(b)(2) (relating to the carryforward of unused 
section 382 limitation), section 382(b)(3)(B)(relating to the section 
382 limitation for the post-change year that includes the change date), 
section 382(h)(relating to built-in gains and section 338 gains), and 
section 382(m)(2)(relating to short taxable years); and
    (B) The adjustment element, which is so much (if any) of the 
limitation for the taxable year during which the former member ceases to 
be a member of the consolidated group that is attributable to a 
carryover of unused limitation under section 382(b)(2) or to recognized 
built-in gains under 382(h).
    (ii) Net unrealized built-in gain. The aggregate amount of the loss 
group's net unrealized built-in gain that may be apportioned to one or 
more former members that cease to be members during the same 
consolidated return year cannot exceed the loss group's excess, 
immediately after the close of

[[Page 956]]

that year, of net unrealized built-in gain over recognized built-in 
gain, determined under section 382(h)(1)(A)(ii) (relating to a 
limitation on recognized built-in gain). For this purpose, net 
unrealized built-in gain apportioned to former members in prior 
consolidated return years is treated as recognized built-in gain in 
those years.
    (3) Effect of apportionment on the consolidated group--(i) 
Consolidated section 382 limitation. The value element of the 
consolidated section 382 limitation for any post-change year ending 
after the day that a former member (or loss subgroup) ceases to be a 
member(s) is reduced to the extent that it is apportioned under this 
paragraph (c). The consolidated section 382 limitation for the post-
change year in which the former member (or loss subgroup) ceases to be a 
member(s) is also reduced to the extent that the adjustment element for 
that year is apportioned under this paragraph (c).
    (ii) Net unrealized built-in gain. The amount of the loss group's 
net unrealized built-in gain that is apportioned to the former member 
(or loss subgroup) is treated as recognized built-in gain for a prior 
taxable year ending in the recognition period for purposes of applying 
the limitation of section 382(h)(1)(A)(ii) to the loss group's 
recognition period taxable years beginning after the consolidated return 
year in which the former member (or loss subgroup) ceases to be a 
member.
    (4) Effect on corporations to which an apportionment is made--(i) 
Consolidated section 382 limitation. The amount of the value element 
that is apportioned to a former member (or loss subgroup) is treated as 
the amount determined under section 382(b)(1) for purposes of 
determining the amount of that corporation's (or loss subgroup's) 
section 382 limitation for any taxable year ending after the former 
member (or loss subgroup) ceases to be a member(s). Appropriate 
adjustments must be made to the limitation based on the value element so 
apportioned for a short taxable year, carryforward of unused limitation, 
or any other adjustment required under section 382. The adjustment 
element apportioned to a former member (or loss subgroup) is treated as 
an adjustment under section 382(b)(2) or section 382(h), as appropriate, 
for the first taxable year after the member (or members) ceases to be a 
member (or members).
    (ii) Net unrealized built-in gain. For purposes of determining the 
amount by which the former member's (or loss subgroup's) section 382 
limitation for any taxable year beginning after the former member (or 
loss subgroup) ceases to be a member(s) is increased by its recognized 
built-in gain--
    (A) The amount of net unrealized built-in gain apportioned to a 
former member (or loss subgroup) is treated as if it were an amount of 
net unrealized built-in gain determined under section 
382(h)(1)(A)(i)(without regard to the threshold of section 382(h)(3)(B)) 
with respect to such member or loss subgroup, and that amount is not 
reduced under section 382(h)(1)(A)(ii) by the loss group's recognized 
built-in gain;
    (B) The former member's (or loss subgroup's) 5 year recognition 
period begins on the loss group's change date;
    (C) In applying section 382(h)(1)(A)(ii), the former member (or loss 
subgroup) takes into account only its prior taxable years that begin 
after it ceases to be a member of the loss group; and
    (D) The former member's (or loss subgroup's) recognized built-in 
gain on the disposition of an asset is determined under section 
382(h)(2)(A), treating references to the change date in that section as 
references to the loss group's change date.
    (5) Deemed apportionment when loss group terminates. If a loss group 
terminates, to the extent the consolidated section 382 limitation or net 
unrealized built-in gain is not apportioned under paragraph (c)(1) of 
this section, the consolidated section 382 limitation or net unrealized 
built-in gain is deemed to be apportioned to the loss subgroup that 
includes the common parent, or, if there is no loss subgroup that 
includes the common parent immediately after the loss group terminates, 
to the common parent. A loss group terminates on the first day of the 
first taxable year that is a separate return year with respect to each 
member of the former loss group.
    (6) Appropriate adjustments when former member leaves during the 
year.

[[Page 957]]

Appropriate adjustments are made to the consolidated section 382 
limitation for the consolidated return year during which the former 
member (or loss subgroup) ceases to be a member(s) to reflect the 
inclusion of the former member in the loss group for a portion of that 
year.
    (7) Examples. The following examples illustrate the principles of 
this paragraph (c):

    Example 1. Consequence of apportionment. (i) L owns all the L1 stock 
and L1 owns all the L2 stock. The L group has a $200 consolidated net 
operating loss arising in Year 1 that is carried over to Year 2. At the 
close of December 31, Year 1, the group has an ownership change under 
Sec.  1.1502-92. The ownership change results in a consolidated section 
382 limitation of $10 based on the value of the stock of the group. On 
August 29, Year 2, L1 sells 30 percent of the stock of L2 to A. L2 is 
apportioned $90 of the group's $200 consolidated net operating loss 
under Sec.  1.1502-21(b). L, the common parent, elects to apportion $6 
of the consolidated section 382 limitation to L2. The following is a 
graphic illustration of these facts:
[GRAPHIC] [TIFF OMITTED] TR02JY99.016

    (ii) For its separate return years ending after December 31, Year 2, 
L2's section 382 limitation with respect to the $90 of the group's net 
operating loss apportioned to it is $6, adjusted, as appropriate, for 
any short taxable year, unused section 382 limitation, or other 
adjustment. For its consolidated return year ending December 31, Year 2 
the L group's consolidated section 382 limitation with respect to the 
remaining $110 of pre-change consolidated attribute is $4 ($10 minus the 
$6 value element apportioned to L2), adjusted, as appropriate, for any 
short taxable year, unused section 382 limitation, or other adjustment.
    (iii) For the L group's consolidated return year ending December 31, 
Year 2, the value element of its consolidated section 382 limitation is 
increased by $4 (rounded to the nearest dollar), to account for the 
period during which L2 was a member of the L group ($6, the consolidated 
section 382 limitation apportioned to L2, times 241/365, the ratio of 
the number of days during Year 2 that L2 is a member of the group to the 
number of days in the group's consolidated return year). See paragraph 
(c)(6) of this section. Therefore, the value element of the consolidated 
section 382 limitation for Year 2

[[Page 958]]

of the L group is $8 (rounded to the nearest dollar).
    (iv) The section 382 limitation for L2's short taxable year ending 
December 31, Year 2, is $2 (rounded to the nearest dollar), which is the 
amount that bears the same relationship to $6, the value element of the 
consolidated section 382 limitation apportioned to L2, as the number of 
days during that short taxable year, 124 days, bears to 365. See Sec.  
1.382-5(c).
    Example 2. Consequence of no apportionment. The facts are the same 
as in Example 1, except that L does not elect to apportion any portion 
of the consolidated section 382 limitation to L2. For its separate 
return years ending after August 29, Year 2, L2's section 382 limitation 
with respect to the $90 of the group's pre-change consolidated attribute 
apportioned to L2 is zero under paragraph (b)(2)(ii) of this section. 
Thus, the $90 consolidated net operating loss apportioned to L2 cannot 
offset L2's taxable income in any of its separate return years ending 
after August 29, Year 2. For its consolidated return years ending after 
August 29, Year 2, the L group's consolidated section 382 limitation 
with respect to the remaining $110 of pre-change consolidated attribute 
is $10, adjusted, as appropriate, for any short taxable year, unused 
section 382 limitation, or other adjustment.
    Example 3. Apportionment of adjustment element. The facts are the 
same as in Example 1, except that L2 ceases to be a member of the L 
group on August 29, Year 3, and the L group has a $4 carryforward of an 
unused consolidated section 382 limitation (under section 382(b)(2)) to 
the Year 3 consolidated return year. The carryover of unused limitation 
increases the consolidated section 382 limitation for the Year 3 
consolidated return year from $10 to $14. L may elect to apportion all 
or any portion of the $10 value element and all or any portion of the $4 
adjustment element to L2.

    (d) Rules pertaining to ceasing to be a member of a loss subgroup--
(1) In general. A corporation ceases to be a member of a loss subgroup 
on the earlier of--
    (i) The first day of the first taxable year for which it files a 
separate return; or
    (ii) The first day that it ceases to bear a relationship described 
in section 1504(a)(1) to the loss subgroup parent (treating for this 
purpose the loss subgroup parent as the common parent described in 
section 1504(a)(1)(A)).
    (2) Exceptions. Paragraph (d)(1)(ii) of this section does not apply 
to a member of a loss subgroup while that member remains a member of the 
current group--
    (i) If an election under Sec.  1.1502-91(d)(4)(relating to treating 
the subgroup parent requirement as satisfied) applies to the members of 
the loss subgroup;
    (ii) Starting on the day after the change date (but not earlier than 
the date the loss subgroup becomes a member of the group), if there is 
an ownership change of the loss subgroup within six months before, on, 
or after becoming members of the group; or
    (iii) Starting the day after the period of 5 consecutive years 
following the day that the loss subgroup become members of the group 
during which the loss subgroup has not had an ownership change.
    (3) Examples. The principles of this paragraph (d) are illustrated 
by the following examples:

    Example 1. Basic case. (i) P owns all the L stock, L owns all the L1 
stock and L1 owns all the L2 stock. The P group has a consolidated net 
operating loss arising in Year 1 that is carried over to Year 2. On 
December 11, Year 2, P sells all the stock of L to corporation M. Each 
of L, L1, and L2 is apportioned a portion of the Year 1 consolidated net 
operating loss, and thereafter each joins with M in filing consolidated 
returns. Under Sec.  1.1502-92, the L loss subgroup has an ownership 
change on December 11, Year 2. The L loss subgroup has a subgroup 
section 382 limitation of $100. The following is a graphic illustration 
of these facts:

[[Page 959]]

[GRAPHIC] [TIFF OMITTED] TR02JY99.017

    (ii) On May 22, Year 3, L1 sells 40 percent of the L2 stock to A. L2 
carries over a portion of the P group's net operating loss from Year 1 
to its separate return year ending December 31, Year 3. Under paragraph 
(d)(1) of this section, L2 ceases to be a member of the L loss subgroup 
on May 22, Year 3, which is both (1) the first day of the first taxable 
year

[[Page 960]]

for which it files a separate return and (2) the day it ceases to bear a 
relationship described in section 1504(a)(1) to the loss subgroup 
parent, L. The net operating loss of L2 that is carried over from the P 
group is treated as a pre-change loss of L2 for its separate return 
years ending after May 22, Year 3. Under paragraphs (a)(2) and (b)(2) of 
this section, the separate section 382 limitation with respect to this 
loss is zero unless M elects to apportion all or a part of the subgroup 
section 382 limitation of the L loss subgroup to L2.
    Example 2. Formation of a new loss subgroup. The facts are the same 
as in Example 1, except that A purchases 40 percent of the L1 stock from 
L rather than purchasing L2 stock from L1. L1 and L2 file a consolidated 
return for their first taxable year ending after May 22, Year 3, and 
each of L1 and L2 carries over a part of the net operating loss of the P 
group that arose in Year 1. Under paragraph (d)(1) of this section, L1 
and L2 cease to be members of the L loss subgroup on May 22, Year 3. The 
net operating losses carried over from the P group are treated as pre-
change subgroup attributes of the loss subgroup composed of L1 and L2. 
The subgroup section 382 limitation with respect to those losses is zero 
unless M elects to apportion all or part of the subgroup section 382 
limitation of the L loss subgroup to the L1 loss subgroup. The following 
is a graphic illustration of these facts:

[[Page 961]]

[GRAPHIC] [TIFF OMITTED] TR02JY99.018

    Example 3. Ownership change upon becoming members of the group. (i) 
A owns all the stock of P, and P owns all the stock of L1 and L2. The P 
group has a consolidated net operating loss arising in Year 1 that is 
carried over to Year 3 and Year 4. Corporation M acquires all the stock 
of P on November 11, Year 3, and P, L1, and L2 thereafter file 
consolidated

[[Page 962]]

returns with M. M's acquisition results in an ownership change of the P 
loss subgroup under Sec.  1.1502-92(b)(1)(ii).
    (ii) P distributes the L2 stock to M on October 7, Year 4, and L2 
ceases to bear the relationship described in section 1504(a)(1) to P, 
the P loss subgroup parent. However, under paragraph (d)(2) of this 
section, L2 does not cease to be a member of the P loss subgroup because 
the P loss subgroup had an ownership change upon becoming members of the 
M group and L2 remains in the M group.
    Example 4. Ceasing to bear a section 1504 (a)(1) to the loss 
subgroup parent. (i) A owns all the stock of P, and P owns all the stock 
of L1 and L2. The P group has a consolidated net operating loss arising 
in Year 1 that is carried over to Year 7. At the close of Year 2, X 
acquires all of the stock of P, causing an ownership change of the loss 
subgroup composed of P, L1 and L2 under Sec.  1.1502-92(b)(1)(ii). In 
Year 4, M, which is owned by the same person that owns X, acquires all 
of the stock of P, and the M acquisition does not cause a second 
ownership change of the P loss subgroup.
    (ii) P distributes the L2 stock to M on February 3, Year 6 (less 
than 5 years after the P loss subgroup became members of the M group) 
and L2 ceases to bear the relationship described in section 1504(a)(1) 
to P, the loss subgroup parent. Thus, the section 382 limitation from 
the Year 2 ownership change that applies with respect to the pre-change 
attributes attributable to L2 is zero except to the extent M elects to 
apportion all or part of the P loss subgroup section 382 limitation to 
L2.
    Example 5. Relationship through a successor. The facts are the same 
as in Example 3, except that M's acquisition of the P stock does not 
result in an ownership change of the P loss subgroup, and, instead of 
P's distributing the stock of L2, L2 merges into L1 on October 7, Year 
4. L1 (as successor to L2 in the merger within the meaning of Sec.  
1.1502-1(f)(4)) continues to bear a relationship described in section 
1504(a)(1) to P, the loss subgroup parent. Thus, L2 does not cease to be 
a member of the P loss subgroup as a result of the merger.
    Example 6. Reattribution of net operating loss carryover under Sec.  
1.1502-36(d)(6). The facts are the same as in Example 3, except that, 
instead of distributing the L2 stock to M, P sells that stock to B, and, 
under Sec.  1.1502-36(d)(6), M reattributes $10 of L2's net operating 
loss carryover to itself. Under Sec.  1.1502-36(d)(6)(iv)(A), M succeeds 
to the reattributed loss as if the loss were succeeded to in a 
transaction to which section 381(a) applies. M, as successor to L2, does 
not cease to be a member of the P loss subgroup.

    (e) Allocation of net unrealized built-in loss--(1) In general. This 
paragraph (e) provides rules for the allocation of a loss group's (or 
loss subgroup's) net unrealized built-in loss if a member ceases to be a 
member of a loss group (or loss subgroup). This paragraph (e) applies 
if--
    (i) A loss group (or loss subgroup) has a net unrealized built-in 
loss on a change date; and
    (ii) Immediately after the close of the consolidated return year in 
which the departing member ceases to be a member, the amount of the loss 
group's (or loss subgroup's) excess of net unrealized built-in loss over 
recognized built-in loss, determined under section 382(h)(1)(B)(ii) 
(relating to a limitation on recognized built-in loss), is greater than 
zero. (The amount of such excess is referred to as the remaining NUBIL 
balance.) In applying section 382(h)(1)(B)(ii) for this purpose, net 
unrealized built-in loss allocated to departing members in prior 
consolidated return years is treated as recognized built-in loss in 
those years.
    (2) Amount of allocation--(i) In general. The amount of net 
unrealized built-in loss allocated to a departing member is equal to the 
remaining NUBIL balance, multiplied by a fraction. The numerator of the 
fraction is the amount of the built-in loss, taken into account on the 
change date under Sec.  1.1502-91(g), in the assets held by the 
departing member immediately after the member ceases to be a member of 
the loss group (or loss subgroup). The denominator of the fraction is 
the sum of the numerator, plus the amount of the built-in loss, taken 
into account under Sec.  1.1502-91(g) on the change date, in the assets 
held by the loss group (or loss subgroup) immediately after the close of 
the taxable year in which the departing member ceases to be a member. 
(Fluctuations in value of the assets between the change date and the 
date that the member ceases to be a member of the group (or loss 
subgroup), or the close of the taxable year in which the member ceases 
to be a member of the loss group, are disregarded.) Because the amount 
of built-in loss on the change date with respect to a departing member's 
assets is taken into account (rather than that member's separately 
computed net unrealized built-in loss

[[Page 963]]

on the change date), a departing member can be apportioned all or part 
of the loss group's net unrealized built-in loss, even if the departing 
member had a separately computed net unrealized built-in gain on the 
change date. Amounts taken into account under section 382(h)(6)(C) 
(relating to certain deduction items) are treated as if they were assets 
in determining the numerator and denominator of the fraction.
    (ii) Transferred basis property and deferred gain or loss. For 
purposes of paragraph (b)(2)(i) of this section, assets held by the 
departing member immediately after it ceases to be a member of the group 
(or by other members immediately after the close of the taxable year) 
include--
    (A) Assets held at that time that are transferred basis property 
that was held by any member of the group (or loss subgroup) on the 
change date; and
    (B) Assets held at that time by any member of the consolidated group 
with respect to which gain or loss of the group member or loss subgroup 
member at issue has been deferred in an intercompany transaction and has 
not been taken into account.
    (iii) Assets for which gain or loss has been recognized. For 
purposes of paragraph (b)(2)(i) of this section, assets held by the 
departing member immediately after it ceases to be a member of the group 
(or by other members immediately after the close of the taxable year) do 
not include assets with respect to which gain or loss has previously 
been recognized and taken into account during the recognition period 
(including gain or loss recognized in an intercompany transaction and 
taken into account immediately before the member leaves the group). 
Appropriate adjustments must be made if gain or loss on an asset has 
been only partially recognized and taken into account.
    (iv) Exchanged basis property. The rules of Sec.  1.1502-91(h) apply 
for purposes of this paragraph (e) (disregarding stock received from the 
departing member or another member that is a member immediately after 
the close of the taxable year).
    (v) Two or more members depart during the same year. If two or more 
members cease to be members during the same consolidated return year, 
appropriate adjustments must be made to the denominator of the fraction 
for each departing member by treating the other departing members as if 
they had not ceased to be members during that year and as if the assets 
held by those other departing members immediately after they cease to be 
members of the group (or loss subgroup) are assets held by the group 
immediately after the close of the taxable year.
    (vi) Anti-abuse rule. If assets are transferred between members or a 
member ceases to be a member with a principal purpose of causing or 
affecting the allocation of amounts under this paragraph (e), 
appropriate adjustments must be made to eliminate any benefit of such 
acquisition, disposition, or allocation.
    (3) Effect of allocation on the consolidated group. The amount of 
the net unrealized built-in loss that is allocated to the former member 
is treated as recognized built-in loss for a prior taxable year ending 
in the recognition period for purposes applying the limitation of 
section 382(h)(1)(B)(ii) to a loss group's (or loss subgroup's) 
recognition period taxable years beginning after the consolidated return 
year in which the former member ceases to be a member.
    (4) Effect on corporations to which the allocation is made. For 
purposes of determining the amount of the former member's recognized 
built-in losses in any taxable year beginning after the former member 
ceases to be a member--
    (i) The amount of the loss group's (or loss subgroup's) net 
unrealized built-in loss that is allocated to the former member is 
treated as if it were an amount of net unrealized built-in loss 
determined under section 382(h)(1)(B)(i)(without regard to the threshold 
of section 382(h)(3)(B)) with respect to such member or loss subgroup, 
and that amount is not reduced under section 382(h)(1)(B)(ii) by the 
loss group's (or loss subgroup's) recognized built-in losses;
    (ii) The former member's 5 year recognition period begins on the 
loss group's (or loss subgroup's) change date;
    (iii) In applying section 382(h)(1)(B)(ii), the former member

[[Page 964]]

takes into account only its prior taxable years that begin after it 
ceases to be a member of the loss group (or loss subgroup); and
    (iv) The former member's recognized built-in loss on the disposition 
of an asset is determined under section 382(h)(2)(B), treating 
references to the change date in that section as references to the loss 
group's (or loss subgroup's) change date.
    (5) Subgroup principles. If two or more former members are members 
of the same consolidated group (the second group) immediately after they 
cease to be members of the current group, the principles of paragraphs 
(e)(1), (2) and (4) of this section apply to those former members on an 
aggregate basis. Thus, for example, the amount of net unrealized built-
in loss allocated to those members is based on the assets held by those 
members immediately after they cease to be members of the current group 
and the limitation of section 382(h)(1)(B)(ii) on recognized built-in 
losses is applied by taking into account the aggregate amount of net 
unrealized built-in loss allocated to the former members and the 
aggregate recognized losses of those members in taxable years beginning 
after they cease to be members of the current group. If one or more of 
such members cease to be members of the second group, the principles of 
this paragraph (e) are applied with respect to those members to allocate 
to them all or part of any remaining unrecognized amount of net 
unrealized built-in loss allocated to the members that became members of 
the second group.
    (6) Apportionment of consolidated section 382 limitation (or 
subgroup section 382 limitation)--(i) In general. For rules relating to 
the apportionment of a consolidated section 382 limitation (or subgroup 
section 382 limitation) to a former member, see paragraph (c) of this 
section.
    (ii) Special rule for former members that become members of the same 
consolidated group. If recognized built-in losses of one or more former 
members would be subject to a consolidated section 382 limitation (or 
subgroup section 382 limitation) if recognized immediately before the 
member (or members) cease to be members of the group, an apportionment 
of that limitation may be made, under paragraph (c) of this section, to 
a loss subgroup that includes such member (or members), and the 
recognized built-in losses (if any) of that member (or members) will be 
subject to that apportioned limitation. If two or more of such former 
members are not included in a loss subgroup immediately after they cease 
to be members of the group (for example, because they do not have net 
operating loss carryovers or, in the aggregate, a net unrealized built-
in loss), but are members of the same consolidated group, an 
apportionment of the consolidated section 382 limitation (or subgroup 
section 382 limitation) may be made to them as if they were a loss 
subgroup.
    (7) Examples. The following examples illustrate the principles of 
this paragraph (e):

    Example 1. Basic allocation case. (i) P owns all of the stock of L1 
and L2. On September 4, Year 1, A purchases all of the P stock, causing 
an ownership change of the P group. On that date P has two assets (other 
than the L1 and L2 stock), asset 1 with an adjusted basis of $40 and a 
fair market value of $15 and asset 2 with an adjusted basis of $50 and a 
fair market value of $100. L1 has two assets, asset 3 , with a fair 
market value of $50 and an adjusted basis of $100, and asset 4, with an 
adjusted basis of $125 and a fair market value of $75. L2 has two 
assets, asset 5, with a fair market value of $150 and an adjusted basis 
of $100, and asset 6, with an adjusted basis of $90 and a fair market 
value of $40. Thus, the P loss group has a net unrealized built-in loss 
of $75.
    (ii) On March 19, Year 3, P sells all of the L2 stock to M. At that 
time, asset 5, which has appreciated in value, has a fair market value 
of $250 and an adjusted basis of $100. Asset 6, which has declined in 
value, has an adjusted basis of $90 and a fair market value of $10.
    (iii) On April 8, Year 3, P sells asset 1, and has a recognized 
built-in loss of $25 that is subject to the P group's section 382 
limitation. On November 11, Year 4, L2 sells asset 6 for its then fair 
market value, $10, recognizing a loss of $80. On June 3, Year 5, L1 
sells asset 4, recognizing a loss of $50.
    (iv) Immediately after the close of Year 3, the P loss group's 
remaining NUBIL balance is $50 ($75 net unrealized built-in loss reduced 
by the $25 recognized built-in loss of P). The portion of the remaining 
NUBIL balance that is allocated to L2 is $17 (rounded to the nearest 
dollar). Seventeen dollars is the

[[Page 965]]

product obtained by multiplying $50 (the remaining NUBIL balance) by 
$50/$150. The numerator of the fraction ($50) is the amount of built-in 
loss in asset 6, taken into account on the change date under Sec.  
1.1502-91(g). The denominator ($150) is the sum of the numerator ($50) 
and the amount of built-in loss in assets 3 and 4, taken into account on 
the change date under Sec.  1.1502-91(g) ($100). The built-in loss in 
asset 1 is not included in the denominator of the fraction because it is 
not held by the P group immediately after the close of Year 3.
    (v) Seventeen dollars of L2's $80 loss on the sale of asset 6 is a 
recognized built-in loss and subject to a section 382 limitation of 
zero, unless P apportions some or all of the P group's consolidated 
section 382 limitation to L2 (adjusted for a short taxable year, 
carryover of unused limitation, or any other adjustment required under 
section 382).
    (vi) Thirty-three dollars of L1's $50 loss on the sale of asset 4 is 
subject to the P group's consolidated section 382 limitation, reduced by 
the amount of such limitation apportioned to L2, and adjusted for any 
short taxable year, a carryforward of unused limitation, or other 
adjustment. (In applying section 382(h)(1)(B)(ii) with respect to Year 
5, the P group's net unrealized built-in loss is reduced by P's $25 
recognized built-in loss in Year 3 and the $17 of net unrealized built-
in loss allocated to L2, thus limiting the P group's recognized built-in 
loss in Year 5 to $33.)
    Example 2. Two members depart in the same year. The facts are the 
same as in Example 1, except that P sells all of the stock of L1 to C on 
November 1, Year 3. The amount of net unrealized built-in loss 
apportioned to L2 (rounded to the nearest dollar) is $17 ($50 remaining 
NUBIL balance x $50/$150). The amount of net unrealized built-in loss 
apportioned to L1 (rounded to the nearest dollar) is $33 ($50 remaining 
NUBIL balance x $100/$150).

    (8) Reporting requirements--(i) Common Parent. Except as provided in 
paragraph (e)(8)(iii) of this section, if a net unrealized built-in loss 
is allocated under paragraph (e) of this section, the common parent must 
include a statement entitled, ``STATEMENT OF NET UNREALIZED BUILT-IN 
LOSS ALLOCATION PURSUANT TO Sec.  1.1502-95(e),'' on or with its income 
tax return for the taxable year in which the former member(s) (or a new 
loss subgroup that includes that member) ceases to be a member. The 
statement must include--
    (A) The name and employer identification number of the departing 
member;
    (B) The amount of the remaining NUBIL balance for the taxable year 
in which the member departs;
    (C) The amount of the net unrealized built-in loss allocated to the 
departing member; and
    (D) A representation that the common parent has delivered a copy of 
the statement to the former member (or the common parent of the group of 
which the former member is a member) on or before the day the group 
files its income tax return for the consolidated return year that the 
former member ceases to be a member.
    (ii) Former member. Except as provided in paragraph (e)(8)(iii) of 
this section, the former member must include a statement on or with its 
first income tax return (or the first return in which the former member 
joins) that is filed after the close of the consolidated return year of 
the group of which the former member (or a new loss subgroup that 
includes that member) ceases to be a member. The statement will be 
identical to the statement filed by the common parent under paragraph 
(e)(8)(i) of this section except that instead of including the 
information described in paragraph (e)(8)(i)(A) of this section the 
former member must provide the name, employer identification number and 
tax year of the former common parent, and instead of the representation 
described in paragraph (e)(8)(i)(D) of this section the former member 
must represent that it has received and retained the copy of the 
statement delivered by the common parent as part of its records. See 
Sec.  1.6001-1(e).
    (iii) Exception. This paragraph (e)(8) does not apply if the 
required information (other than the amount of the remaining NUBIL 
balance) is included in a statement of election under paragraph (f) of 
this section (relating to apportioning a section 382 limitation).
    (f) Filing the election to apportion the section 382 limitation and 
net unrealized built-in gain--(1) Form of the election to apportion--(i) 
Statement. An election under paragraph (c) of this section must be made 
in the form set forth in this paragraph (f)(1)(i). The election must be 
made by the common parent and the party described in paragraph (f)(2) of 
this section. It must be filed in

[[Page 966]]

accordance with paragraph (f)(3) of this section and be entitled, ``THIS 
IS AN ELECTION UNDER Sec.  1.1502-95 TO APPORTION ALL OR PART OF THE 
[INSERT THE CONSOLIDATED SECTION 382 LIMITATION, THE SUBGROUP SECTION 
382 LIMITATION, THE LOSS GROUP'S NET UNREALIZED BUILT-IN GAIN, OR THE 
LOSS SUBGROUP'S NET UNREALIZED BUILT-IN GAIN, AS APPROPRIATE] IN THE 
AMOUNT OF [INSERT THE AMOUNT OF THE LOSS LIMITATION OR NET UNREALIZED 
BUILT-IN GAIN] TO [INSERT NAME(S) AND EMPLOYER IDENTIFICATION NUMBER(S) 
OF THE CORPORATION (OR THE CORPORATIONS THAT COMPOSE A NEW LOSS 
SUBGROUP) TO WHICH ALLOCATION IS MADE].'' The statement must also 
indicate that an agreement, as described in paragraph (f)(1)(ii) of this 
section, has been entered into.
    (ii) Agreement. Both the common parent and the party described in 
paragraph (f)(2) of this section must sign and date the agreement. The 
agreement must include, as appropriate--
    (A) The date of the ownership change that resulted in the 
consolidated section 382 limitation (or subgroup section 382 limitation) 
or the loss group's (or loss subgroup's) net unrealized built-in gain;
    (B) The amount of the departing member's (or loss subgroup's) pre-
change net operating loss carryovers and the taxable years in which they 
arose that will be subject to the limitation that is being apportioned 
to that member (or loss subgroup);
    (C) The amount of any net unrealized built-in loss allocated to the 
departing member (or loss subgroup) under paragraph (e) of this section, 
which, if recognized, can be a pre-change attribute subject to the 
limitation that is being apportioned;
    (D) If a consolidated section 382 limitation (or subgroup section 
382 limitation) is being apportioned, the amount of the consolidated 
section 382 limitation (or subgroup section 382 limitation) for the 
taxable year during which the former member (or new loss subgroup) 
ceases to be a member of the consolidated group (determined without 
regard to any apportionment under this section);
    (E) If any net unrealized built-in gain is being apportioned, the 
amount of the loss group's (or loss subgroup's) net unrealized built-in 
gain (as determined under paragraph (c)(2)(ii) of this section) that may 
be apportioned to members that ceased to be members during the 
consolidated return year;
    (F) The amount of the value element and adjustment element of the 
consolidated section 382 limitation (or subgroup section 382 limitation) 
that is apportioned to the former member (or new loss subgroup) pursuant 
to paragraph (c) of this section;
    (G) The amount of the loss group's (or loss subgroup's) net 
unrealized built-in gain that is apportioned to the former member (or 
new loss subgroup) pursuant to paragraph (c) of this section;
    (H) If the former member is allocated any net unrealized built-in 
loss under paragraph (e) of this section, the amount of any adjustment 
element apportioned to the former member that is attributable to 
recognized built-in gains (determined in a manner that will enable both 
the group and the former member to apply the principles of Sec.  1.1502-
93(c)); and
    (1) The name and employer identification number of the common parent 
making the apportionment.
    (2) Signing the agreement. The agreement must be signed by both the 
common parent and the former member (or, in the case of a loss subgroup, 
the common parent and the loss subgroup parent) by persons authorized to 
sign their respective income tax returns. If the allocation is made to a 
loss subgroup for which an election under Sec.  1.1502-91(d)(4) is made, 
and not separately to its members, the agreement under this paragraph 
(f) must be signed by the common parent and any member of the new loss 
subgroup by persons authorized to sign their respective income tax 
returns. Each party signing the agreement must retain either the 
original or a copy of the agreement as part of its records. See Sec.  
1.6001-1(e).
    (3) Filing of the election--(i) Filing by the common parent. The 
election must be filed by the common parent of the group that is 
apportioning the consolidated section 382 limitation (or the subgroup 
section 382 limitation) or the

[[Page 967]]

loss group's net unrealized built-in gain (or loss subgroup's net 
unrealized built-in gain) by including the statement on or with its 
income tax return for the taxable year in which the former member (or 
new loss subgroup) ceases to be a member.
    (ii) Filing by the former member. An identical statement must be 
included on or with the first return of the former member (or the first 
return in which the former member, or the members of a new loss 
subgroup, join) that is filed after the close of the consolidated return 
year of the group of which the former member (or the members of a new 
loss subgroup) ceases to be a member.
    (4) Revocation of election. An election statement made under 
paragraph (c) of this section is revocable only with the consent of the 
Commissioner.
    (g) Effective/applicability date. Paragraphs (e)(8) and (f) of this 
section apply to any original consolidated Federal income tax return due 
(without extensions) after June 14, 2007. For original consolidated 
Federal income tax returns due (without extensions) after May 30, 2006, 
and on or before June 14, 2007, see Sec.  1.1502-95T as contained in 26 
CFR part 1 in effect on April 1, 2007. For original consolidated Federal 
income tax returns due (without extensions) on or before May 30, 2006, 
see Sec.  1.1502-95 as contained in 26 CFR part 1 in effect on April 1, 
2006.

[T.D. 8824, 64 FR 36159, July 2, 1999, as amended by T.D. 9264, 71 FR 
30604, 30608, May 30, 2006; T.D. 9329, 72 FR 32805, 32807, June 14, 
2007; T.D. 9424, 73 FR 53985, Sept. 17, 2008; T.D. 9905, 85 FR 56844, 
Sept. 14, 2020]



Sec.  1.1502-96  Miscellaneous rules.

    (a) End of separate tracking of losses--(1) Application. This 
paragraph (a) applies to a member (or a loss subgroup) with a net 
operating loss carryover that arose (or is treated under Sec.  1.1502-
21(c) as arising) in a SRLY, or a member (or loss subgroup) with a net 
unrealized built-in loss determined at the time that the member (or loss 
subgroup) becomes a member of the consolidated group if there is--
    (i) An ownership change of the member (or loss subgroup) within six 
months before, on, or after becoming a member of the group; or
    (ii) A period of 5 consecutive years following the day that the 
member (or loss subgroup) becomes a member of a group during which the 
member (or loss subgroup) has not had an ownership change.
    (2) Effect of end of separate tracking--(i) Net operating loss 
carryovers. If this paragraph (a) applies with respect to a member (or 
loss subgroup) with a net operating loss carryover, then, starting on 
the day after the earlier of the change date (but not earlier than the 
day the member (or loss subgroup) becomes a member of the consolidated 
group) or the last day of the 5 consecutive year period described in 
paragraph (a)(1)(ii) of this section, such loss carryover is treated as 
described in Sec.  1.1502-91(c)(1)(i). The preceding sentence also 
applies for purposes of determining whether there is an ownership change 
with respect to such loss carryover following such change date or 5 
consecutive year period. Thus, for example, starting the day after the 
change date (but not earlier than the day the member (or loss subgroup) 
becomes a member of the consolidated group) or the end of the 5 
consecutive year period--
    (A) The consolidated group which includes the new loss member or 
loss subgroup is no longer required to separately track owner shifts of 
the stock of the new loss member or subgroup parent to determine if an 
ownership change occurs with respect to the loss carryover of the new 
loss member or members included in the loss subgroup;
    (B) The group is a loss group because the member's loss carryover is 
treated as a loss described in Sec.  1.1502-91(c)(1)(i);
    (C) There is an ownership change with respect to such loss carryover 
only if the group has an ownership change; and
    (D) If the group has an ownership change, such loss carryover is a 
pre-change consolidated attribute subject to the loss group's 
consolidated section 382 limitation.
    (ii) Net unrealized built-in losses. If this paragraph (a) applies 
with respect to a new loss member described in Sec.  1.1502-94(a)(1)(ii) 
(or a loss subgroup described in Sec.  1.1502-91(d)(2)) then, starting 
on the day after the earlier of the change date (but not earlier than

[[Page 968]]

the day the member (or loss subgroup) becomes a member of the group) or 
the last day of the 5 consecutive year period described in paragraph 
(a)(1)(ii) of this section, the member (or members of the loss subgroup) 
are treated, for purposes of applying Sec.  1.1502-91(g)(2)(ii), as if 
they have been affiliated with the common parent for 5 consecutive 
years. Starting on that day, the member's (or the members of the loss 
subgroup's) separately computed net unrealized built-in loss is included 
in the determination whether the group has a net unrealized built-in 
loss, and there is an ownership change with respect to the member's 
separately computed net unrealized built-in loss only if the group 
(including the member) has a net unrealized built-in loss and has an 
ownership change. Thus, for example, starting the day after the change 
date (but not earlier than the day the member (or loss subgroup) becomes 
a member of the consolidated group), or the end of the 5 consecutive 
period
    (A) The consolidated group which includes the new loss member or 
loss subgroup is no longer required to separately track owner shifts of 
the stock of the new loss member or subgroup parent to determine if an 
ownership change occurs with respect to the net unrealized built-in loss 
of the new loss member or members of the loss subgroup;
    (B) The group includes the member's (or the loss subgroup members') 
separately computed net unrealized built-in loss in determining whether 
it is a loss group under Sec.  1.1502-91(c)(1)(iii);
    (C) There is an ownership change with respect to such net unrealized 
built-in loss only if the group is a loss group and has an ownership 
change; and
    (D) If the group has an ownership change, the member's separately 
computed net unrealized built-in loss and its assets are taken into 
account in determining the group's pre-change consolidated attributes 
described in Sec.  1.1502-91(e)(1) (relating to recognized built-in 
losses) that are subject to the group's consolidated section 382 
limitation.
    (iii) Common parent not common parent for five years. If the common 
parent has become the common parent of an existing group within the 
previous 5-year period in a transaction described in Sec.  1.1502-
75(d)(2)(ii) or (3), appropriate adjustments must be made in applying 
paragraphs (a)(2)(ii) and (3) of this section. In such a case, as the 
context requires, references to the common parent are to the former 
common parent.
    (3) Continuing effect of end of separate tracking--(i) In general. 
As the context may require, a current group determines which of its 
members are included in a loss subgroup on any testing date by taking 
into account the application of this section in the former group. See 
the example in Sec.  1.1502-91(f)(2). For this purpose, corporations 
that are treated under paragraph (a)(2)(ii) of this section as having 
been affiliated with the common parent of the former group for 5 
consecutive years are also treated as having been affiliated with any 
other members that have been (or are treated as having been) affiliated 
with the common parent. The corporations are treated as having been 
affiliated with such other members for the same period of time that 
those members have been (or are treated as having been) affiliated with 
the common parent. If two or more corporations become members of the 
group at the same time, but paragraph (a)(1) of this section does not 
apply to every such corporation, then immediately after the corporations 
become members of the group, the corporations to which paragraph (a)(1) 
of this section applied are treated as not having been previously 
affiliated, for purposes of applying this paragraph (a)(3), with the 
corporations to which paragraph (a)(2)(ii) of this section did not 
apply.
    (ii) Example. The following example illustrates the principles of 
this paragraph (a)(3):

    Example. (i) L has owned all the stock of L1 for three years. At the 
close of December 31, Year 1, the M group purchases all the L stock, and 
L and L1 become members of the M group. Other than the stock of L1, L 
has one asset (the L loss asset) with a net unrealized built-in loss of 
$200 on this date. L1 has one asset with a net unrealized built-in gain 
of $50 (the L1 gain asset). L and L1 do not compose a loss subgroup 
because they do not meet the five year affiliation requirement of Sec.  
1.1502-91(d)(2)(i). L is a new loss member, and M's purchase of L causes 
an

[[Page 969]]

ownership change of L. At the close of December 31, Year 4, at a time 
when L1 has been affiliated with the M group for three years and has 
been affiliated with L for six years, the S group purchases all the M 
stock. On this date, the L loss asset has a net unrealized built-in loss 
of $300, the L1 gain asset has a net unrealized built-in gain of $80, 
and M, the common parent of the M group, has one asset with a net 
unrealized built-in gain of $200.
    (ii) Paragraph (a)(1) of this section applies to L because L is a 
new loss member described in Sec.  1.1502-94(a)(1)(ii) that has an 
ownership change upon becoming a member of the M group on December 31, 
Year 1. Accordingly, L is treated as having been affiliated with M for 5 
consecutive years, and the L loss asset with a net unrealized built-in 
loss of $300 is included in the determination whether the M group has a 
net unrealized built-in loss.
    (iii) The S group determines which of its members are included in a 
loss subgroup by taking into account application of paragraph (a) of 
this section in the M group. For this purpose, application of paragraph 
(a) of this section causes L to be treated as having been affiliated 
with M (or as having been a member of the M group) for 5 consecutive 
years as of January 1, Year 2. Therefore, the S group includes L in the 
determination whether the M subgroup acquired by S on December 31, Year 
4, has a net unrealized built-in loss.
    (iv) Because paragraph (a)(1) of this section applied to L when L 
became a member of the M group, but did not apply to L1, L is treated as 
not having been affiliated with L1 before L and L1 joined the M group. 
Also, L1 is not included in the determination whether the M subgroup has 
a net unrealized built-in loss because L1 has not been continuously 
affiliated with members of the M group for the five consecutive year 
period ending immediately before they become members of the S group. See 
Sec.  1.1502-91(g)(2).

    (4) Special rule for testing period. For purposes of determining the 
beginning of the testing period for a loss group, the member's (or loss 
subgroup's) net operating loss carryovers (or net unrealized built-in 
loss) described in paragraph (a)(2) of this section are considered to 
arise--
    (i) In a case described in paragraph (a)(1)(i) of this section, in a 
taxable year that begins not earlier than the later of the day following 
the change date or the day that the member becomes a member of the 
group; and
    (ii) In a case described in paragraph (a)(1)(ii) of this section, in 
a taxable year that begins 3 years before the end of the 5 consecutive 
year period.
    (5) Limits on effects of end of separate tracking. The rule 
contained in this paragraph (a) applies solely for purposes of 
Sec. Sec.  1.1502-91 through 1.1502-95 and this section (other than 
paragraph (b)(2)(ii)(B) of this section (relating to the definition of 
pre-change attributes of a subsidiary)) and Sec.  1.1502-98, and not for 
purposes of other provisions of the consolidated return regulations. 
However, the rule contained in this paragraph (a) does apply in 
Sec. Sec.  1.1502-15(g), 1.1502-21(g) and 1.1502-22(g) for purposes of 
determining the composition of loss subgroups defined in Sec.  1.1502-
91(d). See also paragraph (c) of this section for the continuing effect 
of an ownership change with respect to pre-change attributes.
    (b) Ownership change of subsidiary--(1) Ownership change of a 
subsidiary because of options or plan or arrangement. Notwithstanding 
Sec.  1.1502-92, a subsidiary may have an ownership change for purposes 
of section 382 with respect to its attributes which a group or loss 
subgroup includes in making a determination under Sec.  1.1502-91(c)(1) 
(relating to the definition of loss group) or Sec.  1.1502-91(d) 
(relating to the definition of loss subgroup). The subsidiary has such 
an ownership change if it has an ownership change under the principles 
of Sec.  1.1502-95(b) and section 382 and the regulations thereunder 
(determined on a separate entity basis by treating the subsidiary as not 
being a member of a consolidated group) in the event of--
    (i) The deemed exercise under Sec.  1.382-4(d) of an option or 
options (other than an option with respect to stock of the common 
parent) held by a person (or persons acting pursuant to a plan or 
arrangement) to acquire more than 20 percent of the stock of the 
subsidiary; or
    (ii) An increase by 1 or more 5-percent shareholders, acting 
pursuant to a plan or arrangement to avoid an ownership change of a 
subsidiary, in their percentage ownership interest in the subsidiary by 
more than 50 percentage points during the testing period of the 
subsidiary through the acquisition (or deemed acquisition pursuant to 
Sec.  1.382-4(d)) of ownership interests in the subsidiary and in 
higher-tier members with respect to the subsidiary.

[[Page 970]]

    (2) Effect of the ownership change--(i) In general. If a subsidiary 
has an ownership change under paragraph (b)(1) of this section, the 
amount of consolidated taxable income for any post-change year that may 
be offset by the pre-change losses of the subsidiary shall not exceed 
the section 382 limitation for the subsidiary. For purposes of this 
limitation, the value of the subsidiary is determined solely by 
reference to the value of the subsidiary's stock.
    (ii) Pre-change losses. The pre-change losses of a subsidiary are--
    (A) Its allocable part of any consolidated net operating loss which 
is attributable to it under Sec.  1.1502-21(b) (determined on the last 
day of the consolidated return year that includes the change date) that 
is not carried back and absorbed in a taxable year prior to the year 
including the change date;
    (B) Its net operating loss carryovers that arose (or are treated 
under Sec.  1.1502-21(c) as having arisen) in a SRLY; and
    (C) Its recognized built-in loss with respect to its separately 
computed net unrealized built-in loss, if any, determined on the change 
date.
    (3) Coordination with Sec. Sec.  1.1502-91, 1.1502-92, and 1.1502-
94. If an increase in percentage ownership interest causes an ownership 
change with respect to an attribute under this paragraph (b) and under 
Sec.  1.1502-92 on the same day, the ownership change is considered to 
occur only under Sec.  1.1502-92 and not under this paragraph (b). See 
Sec.  1.1502-94 for anti-duplication rules relating to value.
    (4) Example. The following example illustrates paragraph (b)(1)(ii) 
of this section:

    Example. Plan to avoid an ownership change of a subsidiary. (i) L 
owns all the stock of L1, L1 owns all the stock of L2, L2 owns all the 
stock of L3, and L3 owns all the stock of L4. The L group has a 
consolidated net operating loss arising in Year 1 that is carried over 
to Year 2. L has assets other than its L1 stock with a value of $900. 
L1, L2, and L3 own no assets other than their L2, L3, and L4 stock. L4 
has assets with a value of $100. During Year 2, A, B, C, and D, acting 
pursuant to a plan to avoid an ownership change of L4, acquire the 
following ownership interests in the members of the L loss group: (A) on 
September 11, Year 2, A acquires 20 percent of the L1 stock from L and B 
acquires 20 percent of the L2 stock from L1; and (B) on September 20, 
Year 2, C acquires 20 percent of the stock of L3 from L2 and D acquires 
20 percent of the stock of L4 from L3.
    (ii) The acquisitions by A, B, C, and D pursuant to the plan have 
increased their respective percentage ownership interests in L4 by 
approximately 10, 13, 16, and 20 percentage points, for a total of 
approximately 59 percentage points during the testing period. This more 
than 50 percentage point increase in the percentage ownership interest 
in L4 causes an ownership change of L4 under paragraph (b)(2) of this 
section.

    (c) Continuing effect of an ownership change. A loss corporation (or 
loss subgroup) that is subject to a limitation under section 382 with 
respect to its pre-change losses continues to be subject to the 
limitation regardless of whether it becomes a member or ceases to be a 
member of a consolidated group. See Sec.  1.382-5(d) (relating to 
successive ownership changes and absorption of a section 382 
limitation).
    (d) Losses reattributed under Sec.  1.1502-36(d)(6)--(1) In general. 
This paragraph (d) contains rules relating to net operating carryovers, 
capital loss carryovers, and deferred deductions (collectively, loss or 
losses) that are reattributed to the common parent under Sec.  1.1502-
36(d)(6). References in this paragraph (d) to a subsidiary are 
references to the subsidiary (or lower-tier subsidiary) whose loss is 
reattributed to the common parent.
    (2) Deemed section 381(a) transaction. Under Sec.  1.1502-
36(d)(6)(iv)(A), the common parent succeeds to the reattributed losses 
as if the losses were succeeded to in a transaction to which section 
381(a) applies. In general, Sec. Sec.  1.1502-91 through 1.1502-95, this 
section, and Sec.  1.1502-98 are applied to the reattributed losses in 
accordance with that characterization. See generally, Sec.  1.382-
2(a)(1)(ii) (relating to distributor or transferor loss corporations in 
transactions under section 381), Sec.  1.1502-1(f)(4) (relating to the 
definition of predecessor and successor) and Sec.  1.1502-91(j) 
(relating to predecessor and successor corporations). For example, if 
the reattributed loss is a pre-change attribute subject to a section 382 
limitation, it remains subject to that limitation following the 
reattribution. In certain cases, the limitation applicable

[[Page 971]]

to the reattributed loss is zero unless the common parent apportions all 
or part of the limitation to itself. (See paragraph (d)(4) of this 
section.)
    (3) Rules relating to owner shifts--(i) In general. Any owner shift 
of the subsidiary (including any deemed owner shift resulting from 
section 382(g)(4)(D) or 382(l)(3)) in connection with the disposition of 
the stock of the subsidiary is not taken into account in determining 
whether there is an ownership change with respect to the reattributed 
loss. However, any owner shift with respect to the successor corporation 
that is treated as continuing in existence under Sec.  1.382-2(a)(1)(ii) 
must be taken into account for such purpose if such owner shift is 
effected by the reattribution and an owner shift of the stock of the 
subsidiary not held directly or indirectly by the common parent would 
have been taken into account if such shift had occurred immediately 
before the reattribution. See paragraph (d)(3)(ii) Example 2 of this 
section.
    (ii) Examples. The following examples illustrate the principles of 
this paragraph (d)(3):

    Example 1. No owner shift for reattributed loss. (i) Facts. P, the 
common parent of a consolidated group, owns 60% of the stock of L, and B 
owns the remaining 40%. L has a net operating loss carryover of $100 
from year 1 that it carries over to years 2, 3, and 4. At the beginning 
of year 2, P purchases 40% of the L stock from B, which does not cause 
an ownership change of L. On December 31, year 3, P sells all of the L 
stock to M. Pursuant to Sec.  1.1502-36(d)(6), P reattributes $10 of L's 
$100 net operating loss carryover to itself, and L carries $90 of its 
net operating loss carryover to its year 4.
    (ii) Analysis. The sale of the L stock to M does not cause an owner 
shift that is taken into account in determining if there is an ownership 
change with respect to the $10 reattributed loss. Following the 
reattribution, Sec.  1.1502-94(b) continues to apply to determine if 
there is an ownership change with respect to the $10 reattributed loss, 
until, under paragraph (a) of this section, the loss is treated as 
described in Sec.  1.1502-91(c)(1)(i). In applying Sec.  1.1502-94(b), 
the 40 percentage point increase by the P shareholders prior to the 
reattribution is taken into account. The sale of the L stock to M does 
cause an ownership change of L with respect to the $90 of its net 
operating loss that it carries over to year 4.
    Example 2. Owner shift for reattributed loss. The facts are the same 
as in Example 1, except that P only purchases 20% of the L stock from B 
and sells 80% of the L stock to M. L is a new loss member, and, under 
Sec.  1.1502-94(b)(1), an owner shift of the stock of L not held 
directly or indirectly by the common parent (the 20% of L stock still 
held by B) would have been taken into account if such shift had occurred 
immediately before the reattribution. Following the reattribution, Sec.  
1.1502-94(b) continues to apply to determine if there is an ownership 
change with respect to the $10 reattributed loss, until, under paragraph 
(a) of this section, the loss is treated as described in Sec.  1.1502-
91(c)(1)(i). With respect to the $10 reattributed loss, the P 
shareholders have increased their percentage ownership interest by 40 
percentage points. The P shareholders have increased their ownership 
interests by 20 percentage points as a result of P's purchase of stock 
from B, and, under Sec.  1.382-2(a)(1)(ii), are treated as increasing 
their interests by an additional 20 percentage points as a result of the 
reattribution. (The acquisition of the L stock by M does not, however, 
effect an owner shift for the $10 of reattributed loss.) The sale of the 
L stock to M causes an ownership change of L with respect to the $90 of 
net operating loss that L carries over to Year 4.

    (4) Rules relating to the section 382 limitation--(i) Reattributed 
loss is a pre-change separate attribute of a new loss member. If the 
reattributed loss is a pre-change separate attribute of a new loss 
member that is subject to a separate section 382 limitation prior to the 
disposition of subsidiary stock, the common parent's limitation with 
respect to that loss is zero, except to the extent that the common 
parent apportions to itself, under paragraph (d)(5) of this section, all 
or part of such limitation. A separate section 382 limitation is the 
limitation described in Sec.  1.1502-94(b) that applies to a pre-change 
separate attribute.
    (ii) Reattributed loss is a pre-change subgroup attribute. If the 
reattributed loss is a pre-change subgroup attribute subject to a 
subgroup section 382 limitation prior to the disposition of subsidiary 
stock, and, immediately after the reattribution, the common parent is 
not a member of the loss subgroup, the section 382 limitation with 
respect to that loss is zero, except to the extent that the common 
parent apportions to itself, under paragraph (d)(5) of this section, all 
or part of the subgroup section 382 limitation. See, however,

[[Page 972]]

Sec.  1.1502-95(d)(3) Example 6, for an illustration of a case where the 
common parent, as successor to the subsidiary, is a member of the loss 
subgroup immediately after the reattribution.
    (iii) Potential application of section 382(l)(1). In general, the 
value of the stock of the common parent is used to determine the section 
382 limitation for an ownership change with respect to the reattributed 
loss that occurs at the time of, or after, the reattribution. For 
example, if the loss is a pre-change consolidated attribute, the value 
of the stock of the common parent is used to determine the section 382 
limitation, and no adjustment to that value is required because of the 
deemed section 381(a) transaction. However, if the loss is a pre-change 
separate attribute of a new loss member (or is a pre-change attribute of 
a loss subgroup member and the common parent was not the loss subgroup 
parent immediately before the reattribution), the deemed section 381(a) 
transaction is considered to constitute a capital contribution with 
respect to the new loss member (or loss subgroup member) for purposes of 
section 382(l)(1). Accordingly, if that section applies because the 
deemed capital contribution is (or is considered under section 
382(l)(1)(B) to be) part of a plan described in section 382(l)(1)(A), 
the value of the stock of the common parent after the deemed section 
381(a) transaction must be adjusted to reflect the capital contribution. 
Ordinarily, this will require the value of the stock of the common 
parent to be reduced to an amount that represents the value of the stock 
of the subsidiary (or loss subgroup of which the subsidiary was a 
member) when the reattribution occurred.
    (iv) Duplication or omission of value. In determining any section 
382 limitation with respect to the reattributed loss and with respect to 
other pre-change losses, appropriate adjustments must be made so that 
value is not improperly omitted or duplicated as a result of the 
reattribution. For example, if the subsidiary has an ownership change 
upon its departure, and the common parent (as successor) has an 
ownership change with respect to the reattributed pre-change separate 
attribute upon its reattribution under paragraph (d)(3)(i) of this 
section, proper adjustments must be made so that the value of the 
subsidiary is not taken into account more than once in determining the 
section 382 limitation for the reattributed loss and the loss that is 
not reattributed.
    (v) Special rule for continuity of business requirement. If the 
reattributed loss is a pre-change attribute of new loss member and the 
reattribution occurs within the two-year period beginning on the change 
date, then, starting immediately after the reattribution, the continuity 
of business requirement of section 382(c)(1) is applied with respect to 
the business enterprise of the common parent. Similar principles apply 
if the reattributed loss is a pre-change subgroup attribute and, on the 
day after the reattribution, the common parent is not a member of the 
loss subgroup.
    (5) Election to reattribute section 382 limitation--(i) Effect of 
election. The common parent may elect to apportion to itself all or part 
of any separate section 382 limitation or subgroup section 382 
limitation to which the loss is subject immediately before the 
reattribution. However, no net unrealized built-in gain of the member 
(or loss subgroup) whose loss is reattributed can be apportioned to the 
common parent. The principles of Sec.  1.1502-95(c) apply to the 
apportionment, treating, as the context requires, references to the 
former member as references to the common parent, and references to the 
consolidated section 382 limitation as references to the separate 
section 382 limitation (or subgroup section 382 limitation) that is 
being apportioned. Thus, for example, the common parent can reattribute 
to itself all or part of the value element or adjustment element of the 
limitation, and any part of such element that is apportioned requires a 
corresponding reduction in such element of the separate section 382 
limitation of the subsidiary whose loss is reattributed (or in the 
subgroup section 382 limitation if the reattributed loss is a pre-change 
subgroup attribute). Appropriate adjustments must be made to the 
separate section 382 limitation (or subgroup section 382 limitation) for 
the consolidated return year in which the reattribution is made

[[Page 973]]

to reflect that the reattributed loss is an attribute acquired by the 
common parent during the year in a transaction to which section 381(a) 
applies. The election is made by the common parent as part of the 
election to reattribute the loss. See Sec.  1.1502-36(e)(5)(x) for the 
time and manner of making the election.
    (ii) Examples. The following examples illustrate the principles of 
this paragraph (d)(5):

    Example 1. Consequence of apportionment. (i) Facts. P, the common 
parent of a consolidated group, purchases all of the stock of L on 
December 31, year 1. L carries over a net operating loss arising in year 
1 to each of the next 5 taxable years. The purchase of the L stock 
causes an ownership change of L, and results in a separate section 382 
limitation of $10 for L's net operating loss carryover based on the 
value of the L stock. On July 2, year 3, P sells 30% of the L stock to 
A. Under Sec.  1.1502-36(d)(6), P elects to reattribute to itself $110 
of L's $200 net operating loss carryover. P also elects to apportion to 
itself $6 of the $10 value element of the separate section 382 
limitation.
    (ii) Analysis. (A) P's separate section 382 limitation. For the 
consolidated return years ending after December 31, year 3, P's separate 
section 382 limitation with respect to the reattributed net operating 
loss carryover is $6, adjusted as appropriate for any short taxable 
year, unused section 382 limitation, or other adjustment. For the P 
group's consolidated return year ending December 31, year 3, the 
separate section 382 limitation for L's net operating loss carryover is 
$8, the sum of $5 and $3. Five dollars of the limitation is the amount 
that bears the same relationship to $10 as the number of days in the 
period ending with the deemed section 381(a) transaction, 183 days, 
bears to 365. Three dollars of the limitation is the amount that bears 
the same relationship to $6 as the number of days in the period between 
July 3 and December 31, 182, bears to 365.
    (B) L's separate section 382 limitation. For L's taxable years 
ending after December 31, year 3, L's separate section 382 limitation 
for its $90 of net operating loss carryover that was not reattributed to 
P is $4, adjusted as appropriate for any short taxable year, unused 
section 382 limitation, or other adjustment. For L's short taxable year 
ending December 31, year 3, the section 382 limitation for its $90 of 
net operating loss carryover is $2, the amount that bears the same 
relationship to $4 (the portion of the value element that was not 
apportioned to P), as the number of days during the short taxable year, 
182 days, bears to 365. See Sec.  1.382-5(c).
    Example 2. No apportionment required for consolidated pre-change 
attribute. (i) Facts. P, the common parent of a consolidated group, 
forms L. For year 1, L has an operating loss of $70 that is not absorbed 
and is included in the group's consolidated net operating loss that is 
carried over to subsequent years. On January 1 of year 3, A buys all of 
the P stock and the P group has an ownership change. The consolidated 
section 382 limitation based on the value of the P stock is $10.
    (ii) Analysis. On April 13 of year 4, P sells all of the stock of L 
to B and, under Sec.  1.1502-36(d)(6), elects to reattribute to itself 
$45 of L's net operating loss carryover. Following the reattribution, 
the $45 portion of the year 1 net operating loss carryover retains its 
character as a pre-change consolidated attribute, and remains subject to 
so much of the $10 consolidated section 382 limitation as P does not 
elect to apportion to L under Sec.  1.1502-95(c).

    (e) Time and manner of making election under Sec.  1.1502-91(d)(4)--
(1) In general. This paragraph (e) prescribes the time and manner of 
making the election under Sec.  1.1502-91(d)(4), relating to treating 
two or more corporations as treating the section 1504(a)(1) requirement 
of Sec.  1.1502-91(d)(1)(ii) and (d)(2)(ii) as satisfied.
    (2) Election statement. An election under Sec.  1.1502-91(d)(4) must 
be made by the common parent. The election must be made in the form of 
the following statement: ``THIS IS AN ELECTION UNDER Sec.  1.1502-
91(d)(4) TO TREAT THE FOLLOWING CORPORATIONS AS MEETING THE REQUIREMENTS 
OF Sec.  1.1502-91 (d)(1)(ii) AND (d)(2)(ii) IMMEDIATELY AFTER THEY 
BECAME MEMBERS OF THE GROUP.'' [List separately the name of each 
corporation, its E.I.N., and the date that it became a member of the 
group]. If separate elections are being made for corporations that 
became members at different times or that were acquired from different 
affiliated groups, provide a separate statement and list for each 
election.
    (3) The election statement must be filed by the common parent with 
its income tax return for the consolidated return year in which the 
members with respect to which the election is made become members of the 
group. Such election must be filed on or before the due date for such 
income tax return, including extensions.

[[Page 974]]

    (4) An election made under this paragraph (e) is irrevocable.

[T.D. 8824, 64 FR 36170, July 2, 1999, as amended by T.D. 9424, 73 FR 
53985, Sept. 17, 2008]



Sec.  1.1502-97  Special rules under section 382 for members under 
the jurisdiction of a court in a title 11 or similar case. [Reserved]



Sec.  1.1502-98  Coordination with sections 383 and 163(j).

    (a) Coordination with section 383. The rules contained in Sec. Sec.  
1.1502-91 through 1.1502-96 also apply for purposes of section 383, with 
appropriate adjustments to reflect that section 383 applies to credits 
and net capital losses. For example, subgroups with respect to the 
carryover of general business credits, minimum tax credits, unused 
foreign tax, and net capital loss are determined by applying the 
principles of Sec.  1.1502-91(d)(1). Similarly, in the case of net 
capital losses, general business credits, and excess foreign taxes that 
are pre-change attributes, Sec.  1.383-1 applies the principles of 
Sec. Sec.  1.1502-91 through 1.1502-96. For example, if a loss group has 
an ownership change under Sec.  1.1502-92 and has a carryover of unused 
general business credits from a pre-change consolidated return year to a 
post-change consolidated return year, the amount of the group's regular 
tax liability for the post-change year that can be offset by the 
carryover cannot exceed the consolidated section 383 credit limitation 
for that post-change year, determined by applying the principles of 
Sec. Sec.  1.383-1(c)(6) and 1.1502-93 (relating to the computation of 
the consolidated section 382 limitation).
    (b) Application to section 163(j)--(1) In general. The regulations 
in this part under sections 163(j), 382, and 383 of the Code contain 
rules governing the application of section 382 to interest expense 
governed by section 163(j) and the regulations in this part under 
section 163(j) of the Code. See, for example, Sec. Sec.  1.163(j)-11(c), 
1.382-2, 1.382-6, 1.382-7, and 1.383-1. The rules contained in 
Sec. Sec.  1.1502-91 through 1.1502-96 apply these rules to members of a 
consolidated group, or corporations that join or leave a consolidated 
group, with appropriate adjustments. For example, for purposes of 
Sec. Sec.  1.1502-91 through 1.1502-96, the term loss group includes a 
consolidated group in which any member is entitled to use a disallowed 
business interest expense carryforward, as defined in Sec.  1.163(j)-
1(b)(11), that did not arise, and is not treated as arising, in a SRLY 
with regard to that group. Additionally, a reference to net operating 
loss carryovers in Sec. Sec.  1.1502-91 through 1.1502-96 generally 
includes a reference to disallowed business interest expense 
carryforwards. References to a loss or losses in Sec. Sec.  1.1502-91 
through 1.1502-96 include references to disallowed business interest 
expense carryforwards or section 382 disallowed business interest 
carryforwards, within the meaning of Sec.  1.382-2(a)(7), as 
appropriate.
    (2) Appropriate adjustments. For purposes of applying the rules in 
Sec. Sec.  1.1502-91 through 1.1502-96 to current-year business interest 
expense (as defined in Sec.  1.163(j)-1(b)(9)), disallowed business 
interest expense carryforwards, and section 382 disallowed business 
interest carryforwards, appropriate adjustments are required.

[T.D. 8824, 64 FR 36174, July 2, 1999, as amended by T.D. 8884, 65 FR 
33760, May 25, 2000; T.D. 9905, 85 FR 56844, Sept. 14, 2020]



Sec.  1.1502-99  Effective/applicability dates.

    (a) In general. Except as provided in paragraphs (b) and (c) of this 
section, Sec. Sec.  1.1502-91 through 1.1502-96 and Sec.  1.1502-98 
apply to any testing date on or after June 25, 1999. Sections 1.1502-94 
through 1.1502-96 also apply to a corporation that becomes a member of a 
group or ceases to be a member of a group (or loss subgroup) on any date 
on or after June 25, 1999.
    (b) Special rules--(1) Election to treat subgroup parent requirement 
as satisfied. Section 1.1502-91(d)(4), Sec.  1.1502-91(d)(7), Example 4, 
Sec.  1.1502-92(b)(1)(iii), Sec.  1.1502-92(b)(2), Example 5, the last 
two sentences of Sec.  1.1502-95(b)(3), Sec.  1.1502-95(d)(2)(i), and 
Sec.  1.1502-96(e)(all of which relate to the election under Sec.  
1.1502-91(d)(4) to treat the loss subgroup parent requirement as 
satisfied) apply to corporations that become members of a consolidated 
group in taxable years for which the due date of the income tax return 
(without extensions) is after June 25, 1999.

[[Page 975]]

    (2) Principal purpose of avoiding a limitation. The third sentence 
of Sec.  1.1502-91(d)(5) (relating to members excluded from a loss 
subgroup) applies to corporations that become members of a consolidated 
group on or after June 25, 1999.
    (3) Ceasing to be a member of a loss subgroup--(i) Ownership change 
of a loss subgroup. Section 1.1502-95(d)(2)(ii) and Sec.  1.1502-
95(d)(3), Example 3 apply to corporations that cease to bear a 
relationship described in section 1504(a)(1) to a loss subgroup parent 
in taxable years for which the due date of the income tax return 
(without extensions) is after June 25, 1999.
    (ii) Expiration of 5-year period. Section 1.1502-95(d)(2)(iii) 
applies with respect to the day after the last day of any 5 consecutive 
year period described in that section that ends in a taxable year for 
which the due date of the income tax return (without extensions) is 
after June 25, 1999.
    (4) Reattribution of losses under Sec.  1.1502-36(d)(6). Section 
1.1502-96(d) applies to reattributions of net operating loss carryovers, 
capital loss carryovers, and deferred deductions in connection with a 
transfer of stock to which Sec.  1.1502-36 applies, and the election 
under Sec.  1.1502-96(d)(5) (relating to an election to reattribute 
section 382 limitation) can be made with an election under Sec.  1.1502-
36(d)(6) to reattribute a loss to the common parent that is filed at the 
time and in the manner provided in Sec.  1.1502-36(e)(5)(x).
    (5) Election to apportion net unrealized built-in gain. In the case 
of corporations that cease to be members of a loss group (or loss 
subgroup) before June 25, 1999 in a taxable year for which the due date 
of the income tax return (without extensions) is after June 25, 1999, 
Sec.  1.1502-95(a), (b), (c), and (f) apply to those corporations if the 
common parent makes the election described in the second sentence of 
paragraph (c)(1) of Sec.  1.1502-95 in the time and manner prescribed in 
paragraph (f) of Sec.  1.1502-95.
    (c) Testing period may include a period beginning before June 25, 
1999--
    (1) In general. A testing period for purposes of Sec. Sec.  1.1502-
91 through 1.1502-96 and 1.1502-98 may include a period beginning before 
June 25, 1999. Thus, for example, in applying Sec.  1.1502-
92(b)(1)(i)(relating to the determination of an ownership change of a 
loss group), the determination of the lowest percentage of ownership 
interest of any 5-percent shareholder of the common parent during a 
testing period ending on a testing date occurring on or after June 25, 
1999 takes into account the period beginning before June 25, 1999, 
except to the extent that the period is more than 3 years before the 
testing date or is otherwise before the beginning of the testing period. 
See Sec.  1.1502-92(b)(1).
    (2) Transition rule for net unrealized built-in loss. A loss group 
(or loss subgroup) that has a net unrealized built-in loss on a testing 
date on or after June 25, 1999 may apply Sec.  1.1502-91A(g) (and Sec.  
1.1502-96A(a) as it relates to Sec.  1.1502-91A(g)) for the period 
ending on the day before June 25, 1999 to determine under Sec.  1.382-
2T(d)(ii)(A) the earliest date that its testing period begins (treating 
the day before June 25, 1999 as the end of a taxable year.) Thus, for 
example, if a consolidated group with no net operating losses has a net 
unrealized built-in loss determined under Sec.  1.1502-91(g) on a 
testing date after June 25, 1999, but, under Sec.  1.1502-91A(g), does 
not have a net unrealized built-in loss for the period ending on the day 
before June 25, 1999, the group's testing period begins no earlier than 
June 25, 1999.
    (d) Application to section 163(j)--(1) Sections 1.382-2 and 1.382-5. 
To the extent the rules of Sec. Sec.  1.1502-91 through 1.1502-99 
effectuate the rules of Sec. Sec.  1.382-2 and 1.382-5, the provisions 
apply with respect to ownership changes occurring on or after November 
13, 2020. For loss corporations that have ownership changes occurring 
before November 13, 2020, see Sec. Sec.  1.1502-91 through 1.1502-99 as 
contained in 26 CFR part 1, revised April 1, 2019. However, taxpayers 
and their related parties, within the meaning of sections 267(b) and 
707(b)(1), may choose to apply the rules of Sec. Sec.  1.1502-91 through 
1.1502-99 to the extent they apply the rules of Sec. Sec.  1.382-2 and 
1.382-5, to ownership changes occurring during a taxable year beginning 
after December 31, 2017, as well as consistently applying the rules of 
the Sec. Sec.  1.1502-91 through 1.1502-99 (to the extent they 
effectuate the rules of Sec. Sec.  1.382-6 and 1.383-

[[Page 976]]

1), the section 163(j) regulations (as defined in Sec.  1.163(j)-
1(b)(37)), and, if applicable, Sec. Sec.  1.263A-9, 1.263A-15, 
1.381(c)(20)-1, 1.382-7, 1.469-9, 1.469-11, 1.704-1, 1.882-5, 1.1362-3, 
1.1368-1, 1.1377-1, 1.1502-13, 1.1502-21, 1.1502-79, and 1.1504-4, to 
that taxable year.
    (2) Sections 1.382-6 and 1.383-1. To the extent the rules of 
Sec. Sec.  1.1502-91 through 1.1502-98 effectuate the rules of 
Sec. Sec.  1.382-6 and 1.383-1, the provisions apply with respect to 
ownership changes occurring during a taxable year beginning on or after 
November 13, 2020. For the application of these rules to an ownership 
change with respect to an ownership change occurring during a taxable 
year beginning before November 13, 2020, see Sec. Sec.  1.1502-91 
through 1.1502-99 as contained in 26 CFR part 1, revised April 1, 2019. 
However, taxpayers and their related parties, within the meaning of 
sections 267(b) and 707(b)(1), may choose to apply the rules of 
Sec. Sec.  1.1502-91 through 1.1502-99 (to the extent that those rules 
effectuate the rules of Sec. Sec.  1.382-6 and 1.383-1), to ownership 
changes occurring during a taxable year beginning after December 31, 
2017, so long as the taxpayers and their related parties consistently 
apply the rules of 1.1502-91 through 1.1502-99 (to the extent that those 
rules effectuate the rules of Sec. Sec.  1.382-2 and 1.382-5), the 
section 163(j) regulations (as defined in Sec.  1.163(j)-1(b)(37)), and, 
if applicable, Sec. Sec.  1.263A-9, 1.263A-15, 1.381(c)(20)-1, 1.382-7, 
1.469-9, 1.469-11, 1.704-1, 1.882-5, 1.1362-3, 1.1368-1, 1.1377-1, 
1.1502-13, 1.1502-21, 1.1502-36, 1.1502-79, and 1.1504-4, to a taxable 
year beginning after December 31, 2017.

[T.D. 8824, 64 FR 36174, July 2, 1999, as amended by T.D. 9424, 73 FR 
53986, Sept. 17, 2008; T.D. 9905, 85 FR 56844, Sept. 14, 2020]



Sec.  1.1502-100  Corporations exempt from tax.

    (a) In general--(1) Computation of tax liability. The tax liability 
for a consolidated return year of a group of two or more corporations 
described in section 1504(e) which are exempt from taxation under 
section 501 (hereinafter referred to in this section as ``exempt 
group'') shall be determined on a consolidated basis by applying the 
provisions of subchapter F of chapter 1 of the code in the manner 
provided in this section. See section 1504(e) for tax-exempt 
corporations eligible to file a consolidated return.
    (2) Applicability of other consolidated return provisions. The 
provisions of Sec.  1.1502-1 through Sec.  1.1502-80 shall be applicable 
to an exempt group to the extent they are not inconsistent with the 
provisions of this section or the provisions of subchapter F of chapter 
1 of the Code. For purposes of applying the provisions of Sec.  1.1502-1 
through Sec.  1.1502-80 to an exempt group, the following substitutions 
shall be made:
    (i) The term ``exempt group'' shall be substituted for the term 
``group'',
    (ii) The terms ``unrelated business taxable income'', ``separate 
unrelated business taxable income'', and ``consolidated unrelated 
business taxable income'' shall be substituted for the terms ``taxable 
income'', ``separate taxable income'', and ``consolidated taxable 
income'', and
    (iii) The term ``consolidated liability for tax determined under 
Sec.  1.1502-2'' (or an equivalent term) shall mean the consolidated 
liability for tax of an exempt group determined under paragraph (b) of 
this section.
    (b) The tax liability for a consolidated return year of an exempt 
group is the tax imposed by section 511(a) on the consolidated unrelated 
taxable income for the year (determined under paragraph (c) of this 
section), and by allowing the credits provided in Sec.  1.1502-2(b).
    (c) Consolidated unrelated business taxable income. The consolidated 
unrelated business taxable income for a consolidated return year shall 
be determined by taking into account:
    (1) The separate unrelated business taxable income of each member of 
the exempt group (determined under paragraph (d) of this section);
    (2) Any consolidated net operating loss deduction (determined under 
Sec.  1.1502-21A or 1.1502-21 (as appropriate) subject to the 
limitations provided in section 512(b)(6);
    (3) Any consolidated charitable contribution deduction (determined 
under Sec.  1.1502-24) subject to the limitations provided in section 
512(b)(10); and
    (4) Any consolidated net gain or net loss from the disposition of 
debt-financed property (as defined in section

[[Page 977]]

514(b)) taken into account as provided by section 514(a), or from the 
cutting of timber to which section 631 applies.
    (d) Separate unrelated business taxable income. The separate 
unrelated business taxable income of a member of an exempt group shall 
be computed in accordance with the provisions of section 512 covering 
the determination of unrelated business taxable income of separate 
corporations, except that:
    (1) The provisions of paragraphs (a) through (k) and (o) of Sec.  
1.1502-12 shall apply; and
    (2) No charitable contributions deduction shall be taken into 
account under section 512(b)(10).

See sections 511(c) and 512(a)(3)(C) for special rules applicable to 
organizations described in section 501(c)(2).

[T.D. 7595, 44 FR 10382, Feb. 20, 1979, as amended by T.D. 8677, 61 FR 
33325, June 27, 1996; T.D. 8823, 64 FR 36101, July 2, 1999; T.D. 9885, 
84 FR 67044, Dec. 6, 2019]



Sec.  1.1503-1  Computation and payment of tax.

    (a) General rule. In any case in which a consolidated return is 
filed or required to be filed, the tax shall be determined, computed, 
assessed, collected, and adjusted in accordance with the regulations 
prescribed under section 1502 promulgated prior to the last date 
prescribed by law for the filing of such return.
    (b) Limitation. If the affiliated group includes one or more Western 
Hemisphere trade corporations (as defined in section 921) or one or more 
regulated public utilities (as defined in section 1503 (c)), the 
increase in tax described in section 1503 (a) shall be applied in a 
manner provided in the regulations under section 1502.

[T.D. 6500, 25 FR 12105, Nov. 26, 1960, as amended by T.D. 7244, 37 FR 
28897, Dec. 30, 1972]



Sec.  1.1503-2  Dual consolidated loss.

    (a) Purpose and scope. This section provides rules for the 
application of section 1503(d), concerning the determination and use of 
dual consolidated losses. Paragraph (b) of this section provides a 
general rule prohibiting a dual consolidated loss from offsetting the 
taxable income of a domestic affiliate. Paragraph (c) of this section 
provides definitions of the terms used in this section. Paragraph (d) of 
this section provides rules for calculating the amount of a dual 
consolidated loss and for adjusting the basis of stock of a dual 
resident corporation. Paragraph (e) of this section contains an anti-
avoidance provision. Paragraph (f) of this section applies the rules of 
paragraph (d) of this section to the computation of foreign tax credit 
limitations. Paragraph (g) of this section provides certain exceptions 
to the limitation rule of paragraph (b) of this section. Finally, 
paragraph (h) of this section provides the effective date of the 
regulations and a provision for the retroactive application of the 
regulations to qualifying taxpayers.
    (b) In general--(1) Limitation on the use of a dual consolidated 
loss to offset income of a domestic affiliate. Except as otherwise 
provided in this section, a dual consolidated loss of a dual resident 
corporation cannot offset the taxable income of any domestic affiliate 
in the taxable year in which the loss is recognized or in any other 
taxable year, regardless of whether the loss offsets income of another 
person under the income tax laws of a foreign country and regardless of 
whether the income that the loss may offset in the foreign country is, 
has been, or will be subject to tax in the United States. Pursuant to 
paragraph (c) (1) and (2) of this section, the same limitation shall 
apply to a dual consolidated loss of a separate unit of a domestic 
corporation as if the separate unit were a wholly owned subsidiary of 
such corporation.
    (2) Limitation on the use of a dual consolidated loss to offset 
income of a successor-in-interest. A dual consolidated loss of a dual 
resident corporation also cannot be used to offset the taxable income of 
another corporation by means of a transaction in which the other 
corporation succeeds to the tax attributes of the dual resident 
corporation under section 381 of the Code. Similarly, a dual 
consolidated loss of a separate unit of a domestic corporation cannot be 
used to offset income of the domestic corporation following the 
termination, liquidation, sale, or other disposition of the separate 
unit. However, if a dual resident corporation transfers its assets to 
another corporation in a

[[Page 978]]

transaction subject to section 381, and the acquiring corporation is a 
dual resident corporation of the same foreign country of which the 
transferor dual resident corporation is a resident, or a domestic 
corporation that carries on the business activities of the transferor 
dual resident corporation as a separate unit, then income generated by 
the transferee dual resident corporation, or separate unit, may be 
offset by the carryover losses of the transferor dual resident 
corporation. In addition, if a domestic corporation transfers a separate 
unit to another domestic corporation in a transaction subject to section 
381, the income generated by the separate unit following the transfer 
may be offset by the carryover losses of the separate unit.
    (3) Application of rules to multiple tiers of separate units. If a 
separate unit of a domestic corporation is owned indirectly through 
another separate unit, the principles of paragraph (b) (1) and (2) of 
this section shall apply as if the upper-tier separate unit were a 
subsidiary of the domestic corporation and the lower-tier separate unit 
were a lower-tier subsidiary.
    (4) Examples. The following examples illustrate the application of 
this paragraph (b).

    Example 1. P, a domestic corporation, owns all of the outstanding 
stock of DRC, a domestic corporation. P and DRC file a consolidated U.S. 
income tax return. DRC is managed and controlled in Country W, a country 
that determines the tax residence of corporations according to their 
place of management and control. Therefore, DRC is a dual resident 
corporation and any net operating loss it incurs is a dual consolidated 
loss. In Years 1 through 3, DRC incurs dual consolidated losses. Under 
this paragraph (b), the dual consolidated losses may not be used to 
offset P's income on the group's consolidated U.S. income tax return. At 
the end of Year 3, DRC sells all of its assets and discontinues its 
business operations. DRC is then liquidated into P, pursuant to the 
provisions of section 332. Normally, under section 381, P would succeed 
to, and be permitted to utilize, DRC's net operating loss carryovers. 
However, this paragraph (b) prohibits the dual consolidated losses of 
DRC from reducing P's income for U.S. tax purposes. Therefore, DRC's net 
operating loss carryovers will not be available to offset P's income.
    Example 2. The facts are the same as in Example 1, except that DRC 
does not sell its assets and, following the liquidation of DRC, P 
continues to operate DRC's business as a separate unit (e.g., a branch). 
DRC's loss carryovers are available to offset P's income generated by 
the assets previously owned by DRC and now held by the separate unit.

    (c) Definitions. The following definitions shall apply for purposes 
of this section.
    (1) Domestic corporation. The term ``domestic corporation'' has the 
meaning assigned to it by section 7701(a) (3) and (4). The term also 
includes any corporation otherwise treated as a domestic corporation by 
the Code, including, but not limited to, sections 269B, 953(d), and 1504 
(d). For purposes of this section, any separate unit of a domestic 
corporation, as defined in paragraph (c) (3) and (4) of this section, 
shall be treated as a separate domestic corporation.
    (2) Dual resident corporation. A dual resident corporation is a 
domestic corporation that is subject to the income tax of a foreign 
country on its worldwide income or on a residence basis. A corporation 
is taxed on a residence basis if it is taxed as a resident under the 
laws of the foreign country. An S corporation, as defined in section 
1361, is not a dual resident corporation. For purposes of this section, 
any separate unit of a domestic corporation, as defined in paragraph (c) 
(3) and (4) of this section, shall be treated as a dual resident 
corporation. Unless otherwise indicated, any reference in this section 
to a dual resident corporation refers also to a separate unit.
    (3) Separate unit--(i) The term ``separate unit'' shall mean any of 
the following:
    (A) A foreign branch, as defined in Sec.  1.367(a)-6T(g) (or a 
successor regulation), that is owned either directly by a domestic 
corporation or indirectly by a domestic corporation through ownership of 
a partnership or trust interest (regardless of whether the partnership 
or trust is a United States person);
    (B) an interest in a partnership; or
    (C) an interest in a trust.
    (ii) If two or more foreign branches located in the same foreign 
country are owned by a single domestic corporation and the losses of 
each branch are made available to offset the income of the other 
branches under the tax laws of

[[Page 979]]

the foreign country, within the meaning of paragraph (c)(15)(ii) of this 
section, then the branches shall be treated as one separate unit.
    (4) Hybrid entity separate unit. The term ``separate unit'' includes 
an interest in an entity that is not taxable as an association for U.S. 
income tax purposes but is subject to income tax in a foreign country as 
a corporation (or otherwise at the entity level) either on its worldwide 
income or on a residence basis.
    (5) Dual consolidated loss--(i) In general. The term ``dual 
consolidated loss'' means the net operating loss (as defined in section 
172(c) and the regulations thereunder) of a domestic corporation 
incurred in a year in which the corporation is dual resident 
corporation. The dual consolidated loss shall be computed under 
paragraph (d)(1) of this section. The fact that a particular item taken 
into account in computing a dual resident corporation's net operating 
loss is not taken into account in computing income subject to a foreign 
country's income tax shall not cause such item to be excluded from the 
calculation of the dual consolidated loss.
    (ii) Exceptions. A dual consolidated loss shall not include the 
following--
    (A) A net operating loss incurred by a dual resident corporation in 
a foreign country whose income tax laws--
    (1) Do not permit the dual resident corporation to use its losses, 
expenses or deductions to offset the income of any other person that is 
recognized in the same taxable year in which the losses, expenses or 
deductions are incurred; and
    (2) Do not permit the losses, expenses or deductions of the dual 
resident corporation to be carried over or back to be used, by any 
means, to offset the income of any other person in other taxable years; 
or
    (B) A net operating loss incurred during that portion of the taxable 
year prior to the date on which the domestic corporation becomes a dual 
resident corporation or subsequent to the date on which the domestic 
corporation ceases to be a dual resident corporation. For purposes of 
determining the amount of the net operating loss incurred in that 
portion of the taxable year prior to the date on which the domestic 
corporation becomes a dual resident corporation or subsequent to the 
date on which the domestic corporation ceases to be a dual resident 
corporation, in no event shall more than the aggregate of the equal 
daily portion of the net operating loss commensurate with the portion of 
the taxable year during which the domestic corporation was not a dual 
resident corporation be allocated to that portion of the taxable year in 
which the domestic corporation was not a dual resident corporation.
    (iii) Dual consolidated losses of separate units that are 
partnership interests, including interests in hybrid entities. 
[Reserved]
    (6) Subject to tax. For purposes of determining whether a domestic 
corporation is subject to the income tax of a foreign country on its 
income, the fact that the corporation has no actual income tax liability 
to the foreign country for a particular taxable year shall not be taken 
into account.
    (7) Foreign country. For purposes of this section, possessions of 
the United States shall be considered foreign countries.
    (8) Consolidated group. The term ``consolidated group'' means an 
affiliated group, as defined in section 1504(a), with which a dual 
resident corporation or domestic owner files a consolidated U.S. income 
tax return.
    (9) Domestic owner. The term ``domestic owner'' means a domestic 
corporation that owns one or more separate units.
    (10) Affiliated dual resident corporation or affiliated domestic 
owner. The term ``affiliated dual resident corporation'' or ``affiliated 
domestic owner'' means a dual resident corporation or domestic owner 
that is a member of a consolidated group.
    (11) Unaffiliated dual resident corporation or unaffiliated domestic 
owner. The term ``unaffiliated dual resident corporation'' or 
``unaffiliated domestic owner'' means a dual resident corporation or 
domestic owner that is an unaffiliated domestic corporation.
    (12) Successor-in-interest. The term ``successor-in-interest'' means 
an acquiring corporation that succeeds to

[[Page 980]]

the tax attributes of an acquired corporation by means of a transaction 
subject to section 381.
    (13) Domestic affiliate. The term ``domestic affiliate'' means any 
member of an affiliated group, without regard to the exceptions 
contained in section 1504(b) (other than section 1504(b)(3)) relating to 
includible corporations.
    (14) Unaffiliated domestic corporation. The term ``unaffiliated 
domestic corporation'' means a domestic corporation that is not a member 
of an affiliated group.
    (15) Use of loss to offset income of a domestic affiliate or another 
person--(i) A dual consolidated loss shall be deemed to offset income of 
a domestic affiliate in the year it is included in the computation of 
the consolidated taxable income of a consolidated group. The fact that 
no tax benefit results from the inclusion of the dual consolidated loss 
in the computation of the group's consolidated taxable income in the 
taxable year shall not be taken into account.
    (ii) Except as provided in paragraph (c)(15)(iii) of this section, a 
loss, expense, or deduction taken into account in computing a dual 
consolidated loss shall be deemed to offset income of another person 
under the income tax laws of a foreign country in the year it is made 
available for such offset. The fact that the other person does not have 
sufficient income in that year to benefit from such an offset shall not 
be taken into account. However, where the laws of a foreign country 
provide an election that would enable a dual resident corporation or 
separate unit to use its losses, expenses, or deductions to offset 
income of another person, the losses, expenses, or deductions shall be 
considered to offset such income only if the election is made.
    (iii) The losses, expenses, or deductions taken into account in 
computing a dual resident corporation's or separate unit's dual 
consolidated loss shall not be deemed to offset income of another person 
under the income tax laws of a foreign country for purposes of this 
section, if under the laws of the foreign country the losses, expenses, 
or deductions of the dual resident corporation or separate unit are used 
to offset the income of another dual resident corporation or separate 
unit within the same consolidated group (or income of another separate 
unit that is owned by the unaffiliated domestic owner of the first 
separate unit). If the losses, expenses, or deductions of a dual 
resident corporation or separate unit are made available under the laws 
of a foreign country to offset the income of other dual resident 
corporations or separate units within the same consolidated group (or 
other separate units owned by the unaffiliated domestic owner of the 
first separate unit), as well as the income of another person, and the 
laws of the foreign country do not provide applicable rules for 
determining which person's income is offset by the losses, expenses, or 
deductions, then for purposes of this section, the losses, expenses or 
deductions shall be deemed to offset the income of the other dual 
resident corporations or separate units, to the extent of such income, 
before being considered to offset the income of the other person.
    (iv) Except to the extent paragraph (g)(1) of this section applies, 
where the income tax laws of a foreign country deny the use of losses, 
expenses, or deductions of a dual resident corporation to offset the 
income of another person because the dual resident corporation is also 
subject to income taxation by another country on its worldwide income or 
on a residence basis, the dual resident corporation shall be treated as 
if it actually had offset its dual consolidated loss against the income 
of another person in such foreign country.
    (16) Examples. The following examples illustrate this paragraph (c).

    Example 1. X, a member of a consolidated group, conducts business 
through a branch in Country Y. Under Country Y's income tax laws, the 
branch is taxed as a permanent establishment and its losses may be used 
under the Country Y form of consolidation to offset the income of Z, a 
Country Y affiliate of X. In Year 1, the branch of X incurs an overall 
loss that would be treated as a net operating loss if the branch were a 
separate domestic corporation. Under paragraph (c)(3) of this section, 
the branch of X is treated as a separate domestic corporation and a dual 
resident corporation. Thus, under paragraph (c)(5), its loss constitutes 
a dual consolidated loss. Unless X qualifies for an exception under 
paragraph (g) of this section, paragraph (b) of this section precludes 
the use of the branch's loss to offset any income of X

[[Page 981]]

not derived from the branch operations or any income of a domestic 
affiliate of X.
    Example 2. A and B are members of a consolidated group. FC is a 
Country X corporation that is wholly owned by B. A and B organize a 
partnership, P, under the laws of Country X. P conducts business in 
Country X and its business activity constitutes a foreign branch within 
the meaning of paragraph (c)(3)(i)(A) of this section. P also earns U.S. 
source income that is unconnected with the branch operations and, 
therefore, is not subject to tax by Country X. Under the laws of Country 
X, the branch can consolidate with FC. The interests in P held by A and 
B are each treated as a dual resident corporation. The branch is also 
treated as a separate dual resident corporation. Unless an exception 
under paragraph (g) of this section applies, any dual consolidated loss 
incurred by P's branch cannot offset the U.S. source income earned by P 
or any other income of A or B.
    Example 3. X is classified as a partnership for U.S. income tax 
purposes. A, B, and C are the sole partners of X. A and B are domestic 
corporations and C is a Country Y corporation. For U.S. income tax 
purposes, each partner has an equal interest in each item of partnership 
profit or loss. Under Country Y's law, X is classified as a corporation 
and its income and losses may be used under the Country Y form of 
consolidation to offset the income of companies that are affiliates of 
X. Under paragraph (c)(3) and (4) of this section, the partnership 
interests held by A and B are treated as separate domestic corporations 
and as dual resident corporations. Unless an exception under paragraph 
(g) of this section applies, losses allocated to A and B can only be 
used to offset profits of X allocated to A and B, respectively.
    Example 4. P, a domestic corporation, files a consolidated U.S. 
income tax return with its two wholly-owned domestic subsidiaries, DRC1 
and DRC2. Each subsidiary is also treated as a Country Y resident for 
Country Y tax purposes. Thus, DRC1 and DRC2 are dual resident 
corporations. DRC1 owns FC, a Country Y corporation. Country Y's tax 
laws permit affiliated resident corporations to file a form of 
consolidated return. In Year 1, DRC1 incurs a $200 net operating loss 
for both U.S. and Country Y tax purposes, while DRC2 recognizes $200 of 
income under the tax laws of each country. FC also earns $200 of income 
for Country Y tax purposes. DRC1, DRC2, and FC file a Country Y 
consolidated return. However, Country Y has no applicable rules for 
determining which income is offset by DRC1's $200 loss. Under paragraph 
(c)(15)(iii) of this section, the loss shall be treated as offsetting 
DRC2's $200 of income. Because DRC1 and DRC2 are members of the same 
consolidated group, for purposes of this section, the offset of DRC1's 
loss against the income of DRC2 is not considered a use of the loss 
against the income of another person under the laws of a foreign 
country.
    Example 5. DRC, a domestic corporation, files a consolidated U.S. 
income tax return with its parent, P. DRC is also subject to tax in 
Country Y on its worldwide income. Therefore, DRC is a dual resident 
corporation and any net operating loss incurred by DRC is a dual 
consolidated loss. Country Y's tax laws permit corporations that are 
subject to tax on their worldwide income to use the Country Y form of 
consolidation, thus enabling eligible corporations to use their losses 
to offset income of affiliates. However, to prevent corporations like 
DRC from offsetting losses against income of affiliates in Country Y and 
then again offsetting the losses against income of foreign affiliates 
under the tax laws of another country, Country Y prevents a corporation 
that is also subject to the income tax of another country on its 
worldwide income or on a residence basis from using the Country Y form 
of consolidation. There is no agreement, as described in paragraph 
(g)(1) of this section, between the United States and Country Y. Because 
of Country Y's statute, DRC will be treated as having actually offset 
its losses against the income of affiliates in Country Y under paragraph 
(c)(15)(iv) of this section. Therefore, DRC will not be able to file an 
agreement described in paragraph (g)(2) of this section and offset its 
losses against the income of P or any other domestic affiliate.

    (d) Special rules for accounting for dual consolidated losses--(1) 
Determination of amount of dual consolidated loss--(i) Dual resident 
corporation that is a member of a consolidated group. For purposes of 
determining whether a dual resident corporation that is a member of a 
consolidated group has a dual consolidated loss for the taxable year, 
the dual resident corporation shall compute its taxable income (or loss) 
in accordance with the rules set forth in the regulations under section 
1502 governing the computation of consolidated taxable income, taking 
into account only the dual resident corporation's items of income, gain, 
deduction, and loss for the year. However, for purposes of this 
computation, the following items shall not be taken into account:
    (A) Any net capital loss of the dual resident corporation; and
    (B) Any carryover or carryback losses.
    (ii) Dual resident corporation that is a separate unit of a domestic 
corporation. For purposes of determining whether a separate unit has a 
dual consolidated loss for the taxable year, the separate

[[Page 982]]

unit shall compute its taxable income (or loss) as if it were a separate 
domestic corporation and a dual resident corporation in accordance with 
the provisions of paragraph (d)(1)(i) of this section, using only those 
items of income, expense, deduction, and loss that are otherwise 
attributable to such separate unit.
    (2) Effect of a dual consolidated loss. For any taxable year in 
which a dual resident corporation or separate unit has a dual 
consolidated loss to which paragraph (b) of this section applies, the 
following rules shall apply.
    (i) If the dual resident corporation is a member of a consolidated 
group, the group shall compute its consolidated taxable income without 
taking into account the items of income, loss, or deduction taken into 
account in computing the dual consolidated loss. The dual consolidated 
loss may be carried over or back for use in other taxable years as a 
separate net operating loss carryover or carryback of the dual resident 
corporation arising in the year incurred. It shall be treated as a loss 
incurred by the dual resident corporation in a separate return 
limitation year and (without regard to whether the dual resident 
corporation is a common parent) shall be subject to all of the 
limitations of Sec. Sec.  1.1502-21A(c) or 1.1502-21(c), as appropriate 
(relating to limitations on net operating loss carryovers and carrybacks 
from separate return limitation years).
    (ii) The unaffiliated domestic owner of a separate unit, or the 
consolidated group of an affiliated domestic owner, shall compute its 
taxable income without taking into account the items of income, loss or 
deduction taken into account in computing the separate unit's dual 
consolidated loss. The dual consolidated loss shall be treated as a loss 
incurred by a separate corporation and its use shall be subject to all 
of the limitations of Sec. Sec.  1.1502-21A(c) or 1.1502-21(c), as 
appropriate, as if the separate unit were filing a consolidated return 
with the unaffiliated domestic owner or with the consolidated group of 
the affiliated domestic owner.
    (3) Basis adjustments for dual consolidated losses--(i) Dual 
resident corporation that is a member of an affiliated group. When a 
dual resident corporation is a member of a consolidated group, each 
other member owning stock in the dual resident corporation shall adjust 
the basis of the stock in the following manner.
    (A) Positive adjustments. Positive adjustments shall be made in 
accordance with the principles of Sec.  1.1502-32(b)(1), except that 
there shall be no positive adjustment under Sec.  1.1502-32(b)(1)(ii) 
for any amount of the dual consolidated loss that is not absorbed as a 
result of the application of paragraph (b) of this section. In addition, 
there shall be no positive adjustment for any amount included in income 
pursuant to paragraph (g)(2)(vii) of this section.
    (B) Negative adjustments. Negative adjustments shall be made in 
accordance with the principles of Sec.  1.1502-32(b)(2), except that 
there shall be no negative adjustment under Sec.  1.1502-32(b)(2)(ii) 
for the amount of the dual consolidated loss subject to paragraph (b) of 
this section that is absorbed in a carryover year.
    (ii) Dual resident corporation that is a separate unit arising from 
an interest in a partnership. Where a separate unit is an interest in a 
partnership, the domestic owner shall adjust its basis in the separate 
unit in accordance with section 705, except that no increase in basis 
shall be permitted for any amount included as income pursuant to 
paragraph (g)(2)(vii) of this section.
    (4) Examples. The following examples illustrate this paragraph (d).

    Example 1. (i) P, S1, S2, and T are domestic corporations. P owns 
all of the stock of S1 and S2. S2 owns all of the stock of T. T is a 
resident of Country FC for Country FC income tax purposes. Therefore, T 
is a dual resident corporation. P, S1, S2, and T file a consolidated 
U.S. income tax return. X and Y are corporations that are not members of 
the consolidated group.
    (ii) At the beginning of Year 1, P has a basis of $1000 in the stock 
of S2. S2 has a $500 basis in the stock of T.
    (iii) In Year 1, T incurs interest expense in the amount of $100. In 
addition, T sells a noncapital asset, u, in which it has a basis of $10, 
to S1 for $50. T also sells a noncapital asset, v, in which it has a 
basis of $200, to S1 for $100. The sales of u and v are intercompany 
transactions described in Sec.  1.1502-13. T also sells a capital asset, 
z, in which it has a basis of $180, to Y for $90. In Year 1, S1 earns 
$200 of separate taxable income, calculated in accordance with Sec.  
1.1502-12, as well as $90

[[Page 983]]

of capital gain from a sale of an asset to X. P and S2 have no items of 
income, loss, or deduction for Year 1.
    (iv) In Year 1, T has a dual consolidated loss of $100 (attributable 
to its interest expense). T's $90 capital loss is not included in the 
computation of the dual consolidated loss. Instead, T's capital loss is 
included in the computation of the consolidated group's capital gain net 
income under Sec.  1.1502-22(c) and is used to offset S1's $90 capital 
gain.
    (v) No elective agreement, as described in paragraph (g)(1) of this 
section, exists between the United States and Country FC. For Country FC 
tax purposes, T's $100 loss is offset against the income of a Country FC 
affiliate. Therefore, T is not eligible for the exception provided in 
paragraph (g)(2) of this section.
    (vi) Because T has a dual consolidated loss for the year, the 
consolidated taxable income of the consolidated group is calculated 
without regard to T's items of income, loss or deduction taken into 
account in computing the dual consolidated loss. Therefore, the 
consolidated taxable income of the consolidated group is $200 (the sum 
of $200 of separate taxable income earned by S1 plus $90 of capital gain 
earned by S1 minus $90 of capital loss incurred by T). The $40 gain 
recognized by T upon the sale of item u to S1 and the $100 loss 
recognized by T upon the sale of item v to S1 are deferred pursuant to 
Sec.  1.1502-13(c)(1).
    (vii) S2 may not make the positive adjustment provided for in Sec.  
1.1502-32(b)(1)(ii) to its basis in the stock of T for the $100 dual 
consolidated loss incurred by T. In addition, no positive adjustment in 
the basis of the stock is required for T's $90 capital loss because the 
loss has been absorbed by the consolidated group. S2, however, must make 
the negative adjustment provided for in Sec.  1.1502-32(b)(2)(i) for its 
allocable part of T's deficit in earnings and profits for the taxable 
year attributable to both T's $100 dual consolidated loss and T's $90 
capital loss. Thus, as provided in Sec.  1.1502-32(e)(1), S2 must make a 
$190 net negative adjustment to its basis in the stock of T, reducing 
its basis to $310. As provided in Sec.  1.1502-33(c)(4)(ii)(a), S2's 
earnings and profits for Year 1 will reflect S2's decrease in its basis 
in T stock for the taxable year. Since S2 has no other earnings and 
profits for the taxable year, S2 has a $190 deficit in earnings and 
profits for the year. As provided in Sec.  1.1502-32(b)(2)(i), P must 
make a negative adjustment to its basis in the stock of S2 for its 
allocable part of S2's deficit in earnings and profits for the taxable 
year. Thus, P must make a $190 net negative adjustment to its basis in 
S2 stock, reducing its basis to $810.
    Example 2. (i) The facts are the same as in Example 1, except that 
in Year 2, S1 sells items u and v to X for no gain or loss. The 
disposition of items u and v outside of the consolidated group restores 
the deferred loss and gain to T. T also incurs $100 of interest expense 
in Year 2. In addition, T sells a noncapital asset, r, in which it has a 
basis of $100, to Y for $300. P and S2 have no items of income, loss, or 
deduction for Year 2.
    (ii) T has $40 of separate taxable income in Year 2, computed as 
follows:

 ($100)  interest expense
 ($100)  sale of item v to S1
   $ 40  sale of item u to S1
   $200  sale of item r to Y
--------
   $ 40
 

    Thus, T has no dual consolidated loss for the year.
    (iii) Since T does not have a dual consolidated loss for the taxable 
year, the group's consolidated taxable income is calculated in 
accordance with the general rule of Sec.  1.1502-11 and not in 
accordance with paragraph (d)(2) of this section. T is the only member 
of the consolidated group that has any income or loss for the taxable 
year. Thus, the consolidated taxable income of the group, computed 
without regard to T's dual consolidated loss carryover, is $40.
    (iv) As provided by Sec.  1.1502-21A(c), the amount of the dual 
consolidated loss arising in Year 1 that is included in the group's 
consolidated net operating loss deduction for Year 2 is $40 (that is, 
the consolidated taxable income computed without regard to the 
consolidated net operating loss deduction minus such consolidated 
taxable income recomputed by excluding the items of income and deduction 
of T). Thus, the group has no consolidated taxable income for the year.
    (v) S2 must make the positive adjustment provided for in Sec.  
1.502-32(b)(1)(i) to its basis in T stock for its allocable part of T's 
undistributed earnings and profits for the taxable year. S2 cannot make 
the negative adjustment provided for in Sec.  1.1502-32(b)(2)(ii) for 
the dual consolidated loss of T incurred in Year 1 and absorbed in Year 
2. Thus, as provided in Sec.  1.1502-32(e)(2), S2 must make a $40 net 
positive adjustment to its basis in T stock, increasing its basis to 
$350. As provided in Sec.  1.1502-33(c)(4)(ii)(a), S2's earnings and 
profits for Year 2 will reflect S2's increase in its basis in T stock 
for the taxable year. Since S2 has no other earnings and profits for the 
taxable year, S2 has $40 of earnings and profits for the year. As 
provided in Sec.  1.1502-32(b)(1)(i), P must make a positive adjustment 
to its basis in the stock of S2 for its allocable part of the 
undistributed earnings and profits of S2 for the taxable year. Thus, P 
must make a $40 net positive adjustment to its basis in S2 stock, 
increasing its basis to $850.

    (e) Special rule for use of dual consolidated loss to offset tainted 
income--(1) In general. The dual consolidated loss of any dual resident 
corporation that

[[Page 984]]

ceases to be a dual resident corporation shall not be used to offset 
income of such corporation to the extent that such income is tainted 
income, as defined in paragraph (e)(2) of this section.
    (2) Tainted income defined. Tainted income is any income derived 
from tainted assets, as defined in paragraph (e)(3) of this section, 
beginning on the date such assets are acquired by the dual resident 
corporation. In the absence of evidence establishing the actual amount 
of income that is attributable to the tainted assets, the portion of a 
corporation's income in a particular taxable year that is treated as 
tainted income shall be an amount equal to the corporation's taxable 
income for the year multiplied by a fraction, the numerator of which is 
the fair market value of the tainted asset at the end of the taxable 
year and the denominator of which is the fair market value of the total 
assets owned by the corporation at the end of the taxable year. 
Documentation submitted to establish the actual amount of income that is 
attributable to the tainted assets must be attached to the consolidated 
group's or unaffiliated dual resident corporation's timely filed tax 
return for the taxable year in which the income is recognized.
    (3) Tainted assets defined. Tainted assets are any asset acquired by 
a dual resident corporation in a non-recognition transaction, as defined 
in section 7701(a)(45), or any assets otherwise transferred to the 
corporation as a contribution to capital, at any time during the three 
taxable years immediately preceding the taxable year in which the 
corporation ceases to be a dual resident corporation or at any time 
thereafter. Tainted assets shall not include assets that were acquired 
by such dual resident corporation on or before December 31, 1986.
    (4) Exceptions. Income derived from assets acquired by a dual 
resident corporation shall not be subject to the limitation described in 
paragraph (e)(1) of this section, if--
    (i) For the taxable year in which the assets were acquired, the 
corporation did not have a dual consolidated loss (or a carry forward of 
a dual consolidated loss to such year); or
    (ii) The assets were acquired as replacement property in the 
ordinary course of business.
    (f) Computation of foreign tax credit limitations. If a dual 
resident corporation or separate unit is subject to paragraph (d)(2) of 
this section, the consolidated group or unaffiliated domestic owner 
shall compute its foreign tax credit limitation by applying the 
limitations of paragraph (d)(2). Thus, the dual consolidated loss is not 
taken into account until the year in which it is absorbed.
    (g) Exception--(1) Elective agreement in place between the United 
States and a foreign country. Paragraph (b) of this section shall not 
apply to a dual consolidated loss to the extent the dual resident 
corporation, or domestic owner of a separate unit, elects to deduct the 
loss in the United States pursuant to an agreement entered into between 
the United States and a foreign country that puts into place an elective 
procedure through which losses offset income in only one country.
    (2) Elective relief provision--(i) In general. Paragraph (b) of this 
section shall not apply to a dual consolidated loss if the consolidated 
group, unaffiliated dual resident corporation, or unaffiliated domestic 
owner elects to be bound by the provisions of this paragraph (g)(2). In 
order to elect relief under this paragraph (g)(2), the consolidated 
group, unaffiliated dual resident corporation, or unaffiliated domestic 
owner must attach to its timely filed (including extensions) U.S. income 
tax return for the taxable year in which the dual consolidated loss is 
incurred an agreement described in paragraph (g)(2)(i)(A) of this 
section. The agreement must be signed under penalties of perjury by the 
person who signs the return. For taxable years beginning after December 
31, 2002, the agreement attached to the income tax return of the 
consolidated group, unaffiliated dual resident corporation or 
unaffiliated domestic owner pursuant to the preceding sentence may be an 
unsigned copy. If an unsigned copy is attached to the return, the 
consolidated group, unaffiliated dual resident corporation, or 
unaffiliated domestic owner must retain the original in its records in 
the manner specified by Sec.  1.6001-1(e). The

[[Page 985]]

agreement must include the following items, in paragraphs labeled to 
correspond with the items set forth in paragraph (g)(2)(i)(A) through 
(F) of this section.
    (A) A statement that the document submitted is an election and an 
agreement under the provisions of paragraph (g)(2) of this section.
    (B) The name, address, identifying number, and place and date of 
incorporation of the dual resident corporation, and the country or 
countries that tax the dual resident corporation on its worldwide income 
or on a residence basis, or, in the case of a separate unit, 
identification of the separate unit, including the name under which it 
conducts business, its principal activity, and the country in which its 
principal place of business is located.
    (C) An agreement by the consolidated group, unaffiliated dual 
resident corporation, or unaffiliated domestic owner to comply with all 
of the provisions of Sec.  1.1503-2(g)(2)(iii)-(vii).
    (D) A statement of the amount of the dual consolidated loss covered 
by the agreement.
    (E) A certification that no portion of the dual resident 
corporation's or separate unit's losses, expenses, or deductions taken 
into account in computing the dual consolidated loss has been, or will 
be, used to offset the income of any other person under the income tax 
laws of a foreign country.
    (F) A certification that arrangements have been made to ensure that 
no portion of the dual consolidated loss will be used to offset the 
income of another person under the laws of a foreign country and that 
the consolidated group, unaffiliated dual resident corporation, or 
unaffiliated domestic owner will be informed of any such foreign use of 
any portion of the dual consolidated loss.
    (ii) Consistency rule. (A) If any loss, expense, or deduction taken 
into account in computing the dual consolidated loss of a dual resident 
corporation or separate unit is used under the laws of a foreign country 
to offset the income of another person, then the following other dual 
consolidated losses (if any) shall be treated as also having been used 
to offset income of another person under the laws of such foreign 
country, but only if the income tax laws of the foreign country permit 
any loss, expense, or deduction taken into account in computing the 
other dual consolidated loss to be used to offset the income of another 
person in the same taxable year;
    (1) Any dual consolidated loss of a dual resident corporation that 
is a member of the same consolidated group of which the first dual 
resident corporation or domestic owner is a member, if any loss, 
expense, or deduction taken into account in computing such dual 
consolidated loss is recognized under the income tax laws of such 
country in the same taxable year; and
    (2) Any dual consolidated loss of a separate unit that is owned by 
the same domestic owner that owns the first separate unit, or that is 
owned by any member of the same consolidated group of which the first 
dual resident corporation or domestic owner is a member, if any loss, 
expense, or deduction taken into account in computing such dual 
consolidated loss is recognized under the income tax laws of such 
country in the same taxable year.
    (B) The following examples illustrate the application of this 
paragraph (g)(2)(ii).

    Example 1. P, a domestic corporation, owns A and B, which are 
domestic corporations, and C, a Country X corporation. A is subject to 
the income tax laws of Country X on a residence basis and, thus, is a 
dual resident corporation. B conducts business in Country X through a 
branch, which is a separate unit under paragraph (c)(3) of this section. 
The income tax laws of Country X permit branches of foreign corporations 
to elect to file consolidated returns with Country X affiliates. In Year 
1, A incurs a dual consolidated loss, which is used to offset the income 
of C under the Country X form of consolidation. The branch of B also 
incurs a net operating loss. However, B elects not to use the loss on a 
Country X consolidated return to offset the income of foreign 
affiliates. The use of A's loss to offset the income of C in Country X 
will cause the separate unit of B to be treated as if it too had used 
its dual consolidated loss to offset the income of an affiliate in 
Country X. Therefore, an election and agreement under this paragraph 
(g)(2) cannot be made with respect to the separate unit's dual 
consolidated loss.
    Example 2. The facts are the same as in Example 1, except that the 
income tax laws of Country X do not permit branches of foreign

[[Page 986]]

corporations to file consolidated income tax returns with Country X 
affiliates. Therefore, an election and agreement described in this 
paragraph (g)(2) may be made for the dual consolidated loss incurred by 
the separate unit of B.

    (iii) Triggering events requiring the recapture of dual consolidated 
losses. (A) The consolidated group, unaffiliated dual resident 
corporation, or unaffiliated domestic owner must agree that, if there is 
a triggering event described in this paragraph (g)(2)(iii), and no 
exception applies under paragraph (g)(2)(iv) of this section, the 
consolidated group, unaffiliated dual resident corporation, or 
unaffiliated domestic owner will recapture and report as income the 
amount of the dual consolidated loss provided in paragraph (g)(2)(vii) 
of this section on its tax return for the taxable year in which the 
triggering event occurs (or, when the triggering event is a use of the 
loss for foreign purposes, the taxable year that includes the last day 
of the foreign tax year during which such use occurs). In addition, the 
consolidated group, unaffiliated dual resident corporation, or 
unaffiliated domestic owner must pay any applicable interest charge 
required by paragraph (g)(2)(vii) of this section. For purposes of this 
section, any of the following events shall constitute a triggering 
event:
    (1) In any taxable year up to and including the 15th taxable year 
following the year in which the dual consolidated loss that is the 
subject of the agreement filed under this paragraph (g)(2) was incurred, 
any portion of the losses, expenses, or deductions taken into account in 
computing the dual consolidated loss is used by any means to offset the 
income of any other person under the income tax laws of a foreign 
country;
    (2) An affiliated dual resident corporation or affiliated domestic 
owner ceases to be a member of the consolidated group that filed the 
election. For purposes of this paragraph (g)(2)(iii)(A)(2), a dual 
resident corporation or domestic owner shall be considered to cease to 
be a member of the consolidated group if it is no longer a member of the 
group within the meaning of Sec.  1.1502-1(b), or if the group ceases to 
exist because the common parent is no longer in existence or is no 
longer a common parent or the group no longer files on the basis of a 
consolidated return. Such disaffiliation, however, shall not constitute 
a triggering event if the taxpayer demonstrates, to the satisfaction of 
the Commissioner, that the dual resident corporation's or separate 
unit's losses, expenses, or deductions cannot be used to offset income 
of another person under the laws of a foreign country at any time after 
the affiliated dual resident corporation or affiliated domestic owner 
ceases to be a member of the consolidated group;
    (3) An unaffiliated dual resident corporation or unaffiliated 
domestic owner becomes a member of a consolidated group. Such 
affiliation of the dual resident corporation or domestic owner, however, 
shall not constitute a triggering event if the taxpayer demonstrates, to 
the satisfaction of the Commissioner, that the losses, expenses, or 
deductions of the dual resident corporation or separate unit cannot be 
used to offset the income of another person under the laws of a foreign 
country at any time after the dual resident corporation or domestic 
owner becomes a member of the consolidated group.
    (4) A dual resident corporation transfers assets in a transaction 
that results, under the laws of a foreign country, in a carryover of its 
losses, expenses, or deductions. For purposes of this paragraph 
(g)(2)(iii)(A)(4), a transfer, either in a single transaction or a 
series of transactions within a twelve-month period, of 50% or more of 
the dual resident corporation's assets (measured by the fair market 
value of the assets at the time of such transfer (or for multiple 
transactions, at the time of the first transfer)) shall be deemed a 
triggering event, unless the taxpayer demonstrates, to the satisfaction 
of the Commissioner, that the transfer of assets did not result in a 
carryover under foreign law of the dual resident corporation's losses, 
expenses, or deductions to the transferee of the assets;
    (5) A domestic owner of a separate unit transfers assets of the 
separate unit in a transaction that results, under the laws of a foreign 
country, in a carryover of the separate unit's

[[Page 987]]

losses, expenses, or deductions. For purposes of this paragraph 
(g)(2)(iii)(A)(5), a transfer, either in a single transaction or a 
series of transactions over a twelve-month period, of 50% or more of the 
separate unit's assets (measured by the fair market value of the assets 
at the time of the transfer (or for multiple transfers, at the time of 
the first transfer)), shall be deemed a triggering event, unless the 
taxpayer demonstrates, to the satisfaction of the Commissioner, that the 
transfer of assets did not result in a carryover under foreign law of 
the separate unit's losses, expenses, or deductions to the transferee of 
the assets;
    (6) An unaffiliated dual resident corporation or unaffiliated 
domestic owner becomes a foreign corporation by means of a transaction 
(e.g., a reorganization) that, for foreign tax purposes, is not treated 
as involving a transfer of assets (and carryover of losses) to a new 
entity. Such a transaction, however, shall not constitute a triggering 
event if the taxpayer demonstrates, to the satisfaction of the 
Commissioner, that the dual resident corporation's or separate unit's 
losses, expenses, or deductions cannot be used to offset income of 
another person under the laws of the foreign country at any time after 
the unaffiliated dual resident corporation or unaffiliated domestic 
owner becomes a foreign corporation.
    (7) A domestic owner of a separate unit, either in a single 
transaction or a series of transactions within a twelve-month period, 
sells, or otherwise disposes of, 50% or more of the interest in the 
separate unit (measured by voting power or value) owned by the domestic 
owner on the last day of the taxable year in which the dual consolidated 
loss was incurred. For purposes of this paragraph (g)(2)(iii)(A)(7), the 
domestic owner shall be deemed to have disposed of its entire interest 
in a hybrid entity separate unit if such hybrid entity becomes 
classified as a foreign corporation for U.S. tax purposes. The 
disposition of 50% or more of the interest in a separate unit, however, 
shall not constitute a triggering event if the taxpayer demonstrates, to 
the satisfaction of the Commissioner, that the losses, expenses, or 
deductions of the separate unit cannot be used to offset income of 
another person under the laws of the foreign country at any time after 
the disposition of the interest in the separate unit; or
    (8) The consolidated group, unaffiliated dual resident corporation, 
or unaffiliated domestic owner fails to file a certification required 
under paragraph (g)(2)(vi)(B) of this section.
    (B) A taxpayer wishing to rebut the presumption of a triggering 
event described in paragraphs (g)(2)(iii)(A)(2) through (7) of this 
section, by demonstrating that the losses, expenses, or deductions of 
the dual resident corporation or separate unit cannot be carried over or 
otherwise used under the laws of the foreign country, must attach 
documents demonstrating such facts to its timely filed U.S. income tax 
return for the year in which the presumed triggering event occurs.
    (C) The following example illustrates this paragraph (g)(2)(iii).

    Example. DRC, a domestic corporation, is a member of CG, a 
consolidated group. DRC is a resident Country Y for Country Y income tax 
purposes. Therefore, DRC is a dual resident corporation. In Year 1, DRC 
incurs a dual consolidated loss of $100. CG files an agreement described 
in paragraph (g)(2) of this section and, thus, the $100 dual 
consolidated loss is included in the computation of CG's consolidated 
taxable income. In Year 6, all of the stock of DRC is sold to P, a 
domestic corporation that is a member of NG, another consolidated group. 
The sale of DRC to P is a triggering event under paragraph 
(g)(2)(iii)(A) of this section, requiring the recapture of the dual 
consolidated loss. However, the laws of Country Y provide for a five-
year carryover period for losses. At the time of DRC's disaffiliation 
from CG, the losses, expenses and deductions that were included in the 
computation of the dual consolidated loss had expired for Country Y 
purposes. Therefore, upon adequate documentation that the losses, 
expenses, or deductions have expired for Country Y purposes, CG can 
rebut the presumption that a triggering event has occurred.

    (iv) Exceptions--(A) Acquisition by a member of the consolidated 
group. The following events shall not constitute triggering events, 
requiring the recapture of the dual consolidated loss under paragraph 
(g)(2)(vii) of this section:
    (1) An affiliated dual resident corporation or affiliated domestic 
owner

[[Page 988]]

ceases to be a member of a consolidated group solely by reason of a 
transaction in which a member of the same consolidated group succeeds to 
the tax attributes of the dual resident corporation or domestic owner 
under the provisions of section 381;
    (2) Assets of an affiliated dual resident corporation or assets of a 
separate unit of an affiliated domestic owner are acquired by a member 
of its consolidated group in any other transaction; or
    (3) An affiliated domestic owner of a separate unit transfers its 
interest in the separate unit to another member of its consolidated 
group.
    (B) Acquisition by an unaffiliated domestic corporation or a new 
consolidated group--(1) If all the requirements of paragraph 
(g)(2)(iv)(B)(3) of this section are met, the following events shall not 
constitute triggering events requiring the recapture of the dual 
consolidated loss under paragraph (g)(2)(vii) of this section:
    (i) An affiliated dual resident corporation or affiliated domestic 
owner becomes an unaffiliated domestic corporation or a member of a new 
consolidated group (other than in a transaction described in paragraph 
(g)(2)(iv)(B)(2)(ii) of this section);
    (ii) Assets of a dual resident corporation or a separate unit are 
acquired by an unaffiliated domestic corporation or a member of a new 
consolidated group; or
    (iii) A domestic owner of a separate unit transfers its interest in 
the separate unit to an unaffiliated domestic corporation or to a member 
of a new consolidated group.
    (2) If the requirements of paragraph (g)(2)(iv)(B)(3)(iii) of this 
section are met, the following events shall not constitute triggering 
events requiring the recapture of the dual consolidated loss under 
paragraph (g)(2)(vii) of this section--
    (i) An unaffiliated dual resident corporation or unaffiliated 
domestic owner becomes a member of a consolidated group;
    (ii) A consolidated group that filed an agreement under this 
paragraph (g)(2) ceases to exist as a result of a transaction described 
in Sec.  1.1502-13(j)(5)(i) (other than a transaction in which any 
member of the terminating group, or the successor-in-interest of such 
member, is not a member of the surviving group immediately after the 
terminating group ceases to exist).
    (3) If the following requirements (as applicable) are satisfied, the 
events listed in paragraphs (g)(2)(iv)(B)(1) and (2) of this section 
shall not constitute triggering events requiring recapture under 
paragraph (g)(2)(vii) of this section.
    (i) The consolidated group, unaffiliated dual resident corporation, 
or unaffiliated domestic owner that filed the agreement under this 
paragraph (g)(2) and the unaffiliated domestic corporation or new 
consolidated group must enter into a closing agreement with the Internal 
Revenue Service providing that the consolidated group, unaffiliated dual 
resident corporation, or unaffiliated domestic owner and the 
unaffiliated domestic corporation or new consolidated group will be 
jointly and severally liable for the total amount of the recapture of 
dual consolidated loss and interest charge required in paragraph 
(g)(2)(vii) of this section, if there is a triggering event described in 
paragraph (g)(2)(iii) of this section;
    (ii) The unaffiliated domestic corporation or new consolidated group 
must agree to treat any potential recapture amount under paragraph 
(g)(2)(vii) of this section as unrealized built-in gain for purposes of 
section 384(a), subject to any applicable exceptions thereunder;
    (iii) The unaffiliated domestic corporation or new consolidated 
group must file, with its timely filed (including extensions) income tax 
return for the taxable year in which the event described in paragraph 
(g)(2)(iv)(B)(1) or (2) of this section occurs, an agreement described 
in paragraph (g)(2)(i) of this section (new (g)(2)(i) agreement), 
whereby it assumes the same obligations with respect to the dual 
consolidated loss as the corporation or consolidated group that filed 
the original (g)(2)(i) agreement with respect to that loss. The new 
(g)(2)(i) agreement must be signed under penalties of perjury by the 
person who signs the return and must include a reference to this 
paragraph (g)(2)(iv)(B)(3)(iii). For taxable years beginning after 
December 31,

[[Page 989]]

2002, the agreement attached to the return pursuant to the preceding 
sentence may be an unsigned copy. If an unsigned copy is attached to the 
return, the corporation or consolidated group must retain the original 
in its records in the manner specified by Sec.  1.6001-1(e).
    (C) Subsequent triggering events. Any triggering event described in 
paragraph (g)(2)(iii) of this section that occurs subsequent to one of 
the transactions described in paragraph (g)(2)(iv) (A) or (B) of this 
section and does not fall within the exceptions provided in paragraph 
(g)(2)(iv) (A) or (B) of this section shall require recapture under 
paragraph (g)(2)(vii) of this section.
    (D) Example. The following example illustrates the application of 
paragraph (g)(2)(iv)(B)(2)(ii) of this section:

    Example. (i) Facts. C is the common parent of a consolidated group 
(the C Group) that includes DRC, a domestic corporation. DRC is a dual 
resident corporation and incurs a dual consolidated loss in its taxable 
year ending December 31, Year 1. The C Group elects to be bound by the 
provisions of this paragraph (g)(2) with respect to the Year 1 dual 
consolidated loss. No member of the C Group incurs a dual consolidated 
loss in Year 2. On December 31, Year 2, stock of C is acquired by D in a 
transaction described in Sec.  1.1502-13(j)(5)(i). As a result of the 
acquisition, all the C Group members, including DRC, become members of a 
consolidated group of which D is the common parent (the D Group).
    (ii) Acquisition not a triggering event. Under paragraph 
(g)(2)(iv)(B)(2)(ii) of this section, the acquisition by D of the C 
Group is not an event requiring the recapture of the Year 1 dual 
consolidated loss of DRC, or the payment of an interest charge, as 
described in paragraph (g)(2)(vii) of this section, provided that the D 
Group files the new (g)(2)(i) agreement described in paragraph 
(g)(2)(iv)(B)(3)(iii) of this section.
    (iii) Subsequent event. A triggering event occurs on December 31, 
Year 3, that requires recapture by the D Group of the dual consolidated 
loss that DRC incurred in Year 1, as well as the payment of an interest 
charge, as provided in paragraph (g)(2)(vii) of this section. Each 
member of the D Group, including DRC and the other former members of the 
C Group, is severally liable for the additional tax (and the interest 
charge) due upon the recapture of the dual consolidated loss of DRC.

    (v) Ordering rules for determining the foreign use of losses. If the 
laws of a foreign country provide for the use of losses of a dual 
resident corporation to offset the income of another person but do not 
provide applicable rules for determining the order in which such losses 
are used to offset the income of another person in a taxable year, then 
for purposes of this section, the following rules shall govern:
    (A) If under the laws of the foreign country the dual resident 
corporation has losses from different taxable years, the dual resident 
corporation shall be deemed to use first the losses from the earliest 
taxable year from which a loss may be carried forward or back for 
foreign law purposes.
    (B) Any net loss, or income, that the dual resident corporation has 
in a taxable year shall first be used to offset net income, or loss, 
recognized by affiliates of the dual resident corporation in the same 
taxable year before any carryover of the dual resident corporation's 
losses is considered to be used to offset any income from the taxable 
year.
    (C) Where different losses, expenses, or deductions (e.g., capital 
losses and ordinary losses) of a dual resident corporation incurred in 
the same taxable year are available to offset the income of another 
person, the different losses shall be deemed to offset such income on a 
pro rata basis.

    Example. DRC, a domestic corporation, is taxed as a resident under 
the tax laws of Country Y. Therefore, DRC is a dual resident 
corporation. FA is a Country Y affiliate of DRC. Country Y's tax laws 
permit affiliated corporations to file a form of consolidated return. In 
Year 1, DRC incurs a capital loss of $80 which, for Country Y purposes, 
offsets completely $30 of capital gain recognized by FA. Neither 
corporation has any other taxable income or loss for the year. In Year 1 
(and in other years), DRC recognizes the same amount of income for U.S. 
purposes as it does for Country Y purposes. Under paragraph (d)(1)(i) of 
this section, however, DRC's $80 capital loss is not a dual consolidated 
loss. In Year 2, DRC incurs a net operating loss of $100, while FA 
incurs a net operating loss of $50. DRC's $100 loss is a dual 
consolidated loss. Since the dual consolidated loss is not used to 
offset the income of another person under Country Y law, DRC is 
permitted to file an agreement described in this paragraph (g)(2). In 
Year 3, DRC has a net operating loss of $10 and FA has capital gains of 
$60. For Country Y purposes, DRC's $10 net operating loss is used to 
offset $10 of FA's $60

[[Page 990]]

capital gain. DRC's $10 loss is a dual consolidated loss. Because the 
loss is used to offset FA's income, DRC will not be able to file an 
agreement under this paragraph (g)(2) with respect to the loss. Country 
Y permits FA's remaining $50 of Year 3 income to be offset by carryover 
losses. However, Country Y has no applicable rules for determining which 
carryover losses from Years 1 and 2 are used to offset such income. 
Under the ordering rules of paragraph (g)(2)(v)(A) of this section, none 
of DRC's $100 Year 2 loss will be deemed to offset FA's remaining $50 of 
Year 3 income. Instead, the $50 of capital loss carryover from Year 1 
will be considered to offset the income.

    (vi) Reporting requirements--(A) In general. The consolidated group, 
unaffiliated dual resident corporation, or unaffiliated domestic owner 
must answer the applicable questions regarding dual consolidated losses 
on its U.S. income tax return filed for the year in which the dual 
consolidated loss is incurred and for each of the following fifteen 
taxable years.
    (B) Annual certification. Except as provided in Sec.  1.1503-
2(g)(2)(vi)(C), until and unless Form 1120 or the Schedules thereto 
contain questions pertaining to dual consolidated losses, the 
consolidated group, unaffiliated dual resident corporation, or 
unaffiliated domestic owner must file with its income tax return for 
each of the 15 taxable years following the taxable year in which the 
dual consolidated loss is incurred a certification that the losses, 
expenses, or deductions that make up the dual consolidated loss have not 
been used to offset the income of another person under the tax laws of a 
foreign country. For taxable years beginning before January 1, 2003, the 
annual certification must be signed under penalties of perjury by a 
person authorized to sign the agreement described in Sec.  1.1503-
2(g)(2)(i). For taxable years beginning after December 31, 2002, the 
certification is verified by signing the return with which the 
certification is filed. The certification for a taxable year must 
identify the dual consolidated loss to which it pertains by setting 
forth the taxpayer's year in which the loss was incurred and the amount 
of such loss. In addition, the certification must warrant that 
arrangements have been made to ensure that the loss will not be used to 
offset the income of another person under the laws of a foreign country 
and that the taxpayer will be informed of any such foreign use of any 
portion of the loss. If dual consolidated losses of more than one 
taxable year are subject to the rules of this paragraph (g)(2)(vi)(B), 
the certifications for those years may be combined in a single document 
but each dual consolidated loss must be separately identified.
    (C) Exception. A consolidated group or unaffiliated domestic owner 
is not required to file annual certifications under paragraph 
(g)(2)(vi)(B) of this section with respect to a dual consolidated loss 
of any separate unit other than a hybrid entity separate unit.
    (vii) Recapture of loss and interest charge--(A) Presumptive rule--
(1) Amount of recapture. Except as otherwise provided in this paragraph 
(g)(2)(vii), upon the occurrence of a triggering event described in 
paragraph (g)(2)(iii) of this section, the taxpayer shall recapture and 
report as gross income the total amount of the dual consolidated loss to 
which the triggering event applies on its income tax return for the 
taxable year in which the triggering event occurs (or, when the 
triggering event is a use of the loss for foreign tax purposes, the 
taxable year that includes the last day of the foreign tax year during 
which such use occurs).
    (2) Interest charge. In connection with the recapture, the taxpayer 
shall pay an interest charge. Except as otherwise provided in this 
paragraph (g)(2)(vii), such interest shall be determined under the rules 
of section 6601(a) as if the additional tax owed as a result of the 
recapture had accrued and been due and owing for the taxable year in 
which the losses, expenses, or deductions taken into account in 
computing the dual consolidated loss gave rise to a tax benefit for U.S. 
income tax purposes. For purposes of this paragraph (g)(2)(vii)(A)(2), a 
tax benefit shall be considered to have arisen in a taxable year in 
which such losses, expenses or deductions reduced U.S. taxable income.
    (B) Rebuttal of presumptive rule--(1) Amount of recapture. The 
amount of dual consolidated loss that must be recaptured under this 
paragraph

[[Page 991]]

(g)(2)(vii) may be reduced if the taxpayer demonstrates, to the 
satisfaction of the Commissioner, the offset permitted by this paragraph 
(g)(2)(vii)(B). The reduction in the amount of recapture is the amount 
by which the dual consolidated loss would have offset other taxable 
income reported on a timely filed U.S. income tax return for any taxable 
year up to and including the year of the triggering event if such loss 
had been subject to the restrictions of paragraph (b) of this section 
(and therefore had been subject to the separate return limitation year 
restrictions of Sec. Sec.  1.1502-21A(c) or 1.1502-21(c) (as 
appropriate) commencing in the taxable year in which the loss was 
incurred. A taxpayer utilizing this rebuttal rule must attach to its 
timely filed U.S. income tax return a separate accounting showing that 
the income for each year that offsets the dual resident corporation's or 
separate unit's recapture amount is attributable only to the dual 
resident corporation or separate unit.
    (2) Interest charge. The interest charge imposed under this 
paragraph (g)(2)(vii) may be appropriately reduced if the taxpayer 
demonstrates, to the satisfaction of the Commissioner, that the net 
interest owed would have been less than that provided in paragraph 
(g)(2)(vii)(A)(2) of this section if the taxpayer had filed an amended 
return for the year in which the loss was incurred, and for any other 
affected years up to and including the year of recapture, treating the 
dual consolidated loss as a loss subject to the restrictions of 
paragraph (b) of this section (and therefore subject to the separate 
return limitation year restrictions of Sec. Sec.  1.1502-21A(c) or 
1.1502-21(c) (as appropriate). A taxpayer utilizing this rebuttal rule 
must attach to its timely filed U.S. income tax return a computation 
demonstrating the reduction in the net interest owed as a result of 
treating the dual consolidated loss as a loss subject to the 
restrictions of paragraph (b) of this section.
    (C) Computation of taxable income in year of recapture--(1) 
Presumptive rule. Except as otherwise provided in paragraph 
(g)(2)(vii)(C)(2) of this section, for purposes of computing the taxable 
income for the year of recapture, no current, carryover or carryback 
losses of the dual resident corporation or separate unit, of other 
members of the consolidated group, or of the domestic owner that are not 
attributable to the separate unit, may offset and absorb the recapture 
amount.
    (2) Rebuttal of presumptive rule. The recapture amount included in 
gross income may be offset and absorbed by that portion of the 
taxpayer's (consolidated or separate) net operating loss carryover that 
is attributable to the dual consolidated loss being recaptured, if the 
taxpayer demonstrates, to the satisfaction of the Commissioner, the 
amount of such portion of the carryover. A taxpayer utilizing this 
rebuttal rule must attach to its timely filed U.S. income tax return a 
computation demonstrating the amount of net operating loss carryover 
that, under this paragraph (g)(2)(vii)(C)(2), may absorb the recapture 
amount included in gross income.
    (D) Character and source of recapture income. The amount recaptured 
under this paragraph (g)(2)(vii) shall be treated as ordinary income in 
the year of recapture. The amount recaptured shall be treated as income 
having the same source and falling within the same separate category for 
purposes of section 904 as the dual consolidated loss being recaptured.
    (E) Reconstituted net operating loss. Commencing in the taxable year 
immediately following the year in which the dual consolidated loss is 
recaptured, the dual resident corporation or separate unit shall be 
treated as having a net operating loss in an amount equal to the amount 
actually recaptured under paragraph (g)(2)(vii) (A) or (B) of this 
section. This reconstituted net operating loss shall be subject to the 
restrictions of paragraph (b) of this section (and therefore, the 
separate return limitation year restrictions of Sec. Sec.  1.1502-21A(c) 
or 1.1502-21T(c) (as appropriate). The net operating loss shall be 
available only for carryover, under section 172(b), to taxable years 
following the taxable year of recapture. For purposes of determining the 
remaining carryover period, the loss shall be treated as if it had been 
recognized in the taxable year in which the dual consolidated

[[Page 992]]

loss that is the basis of the recapture amount was incurred.
    (F) Consequences of failing to comply with recapture provisions--(1) 
In general. If the taxpayer fails to comply with the recapture 
provisions of this paragraph (g)(2)(vii) upon the occurrence of a 
triggering event, then the dual resident corporation or separate unit 
that incurred the dual consolidated loss (or a successor-in-interest) 
shall not be eligible for the relief provided in paragraph (g)(2) of 
this section with respect to any dual consolidated losses incurred in 
the five taxable years beginning with the taxable year in which 
recapture is required.
    (2) Exceptions. In the case of a triggering event other than a use 
of the losses, expenses, or deductions taken into account in computing 
the dual consolidated loss to offset income of another person under the 
income tax laws of a foreign country, this rule shall not apply in the 
following circumstances:
    (i) The failure to recapture is due to reasonable cause; or
    (ii) A taxpayer seeking to rebut the presumption of a triggering 
event satisfies the filing requirements of paragraph (g)(2)(iii)(B) of 
this section.
    (G) Examples. The following examples illustrate this paragraph 
(g)(2)(vii).

    Example 1. P, a domestic corporation, files a consolidated return 
with DRC, a dual resident corporation. In Year 1, DRC incurs a dual 
consolidated loss of $100 and P earns $100. P files an agreement under 
this paragraph (g)(2). Therefore, the consolidated group is permitted to 
offset P's $100 of income with DRC's $100 loss. In Year 2, DRC earns 
$30, which is completely offset by a $30 net operating loss incurred by 
P. In Year 3, DRC earns income of $25 while P recognizes no income or 
loss. In addition, there is a triggering event in Year 3. Therefore, 
under the presumptive rule of paragraph (g)(2)(vii)(A) of this section, 
DRC must recapture $100. However, the $100 recapture amount may be 
reduced by $25 (the amount by which the dual consolidated loss would 
have offset other taxable income if it had been subject to the separate 
return limitation year restrictions from Year 1) upon adequate 
documentation of such offset under paragraph (g)(2)(vii)(B)(1) of this 
section. Commencing in Year 4, the $100 (or $75) recapture amount is 
treated as a loss incurred by DRC in a separate return limitation year, 
subject to the restrictions of Sec. Sec.  1.1502-21A(c) or 1.1502-21(c), 
as appropriate. The carryover period of the loss, for purposes of 
section 172(b), will start from Year 1, when the dual consolidated loss 
was incurred.
    Example 2. The facts are the same as in Example 1, except that in 
Year 2, DRC earns $75 and P earns $50. In Year 3, DRC earns $25 while P 
earns $30. A triggering event occurs in Year 3. The $100 presumptive 
amount of recapture can be reduced to zero by the $75 and $25 earned by 
DRC in Years 2 and 3, respectively, upon adequate documentation of such 
offset under paragraph (g)(2)(vii)(B)(1) of this section. Nevertheless, 
an interest charge will be owed. Under the presumptive rule of paragraph 
(g)(2)(vii)(A)(2) of this section, interest will be charged on the 
additional tax owed on the $100 of recapture income as if the tax had 
accrued in Year 1 (the year in which the dual consolidated loss reduced 
the income of P). However, the net interest will be reduced to the 
amount that would have been owed if the consolidated group had filed 
amended returns, treating the dual consolidated loss as a loss subject 
to the separate return limitation year restrictions of Sec.  1.1502-
21A(c) or 1.1502-21(c), as appropriate, upon adequate documentation of 
such reduction of interest under paragraph (g)(2)(vii)(B)(2) of this 
section.
    Example 3. P, a domestic corporation, owns DRC, a domestic 
corporation that is subject to the income tax laws of Country Z on a 
residence basis. DRC owns FE, a Country Z corporation. In Year 1, DRC 
incurs a net operating loss for U.S. tax purposes. Under the tax laws of 
Country Z, the loss is not recognized until Year 3. The Year 1 net 
operating loss is a dual consolidated loss under paragraph (c)(5) of 
this section. The consolidated group elects relief under paragraph 
(g)(2) of this section by filing the appropriate agreement and uses the 
dual consolidated loss on its U.S. income tax return. In Year 3, the 
dual consolidated loss is used under the laws of Country Z to offset the 
income of FE, which is a triggering event under paragraph (g)(2)(iii) of 
this section. However, the consolidated group does not recapture the 
dual consolidated loss. The consolidated group's failure to comply with 
the recapture provisions of this paragraph (g)(2)(vii) prevents DRC from 
being eligible for the relief provided under paragraph (g)(2) of this 
section for any dual consolidated losses incurred in Years 3 through 7, 
inclusive.

    (h) Effective date--(1) In general. These regulations are effective 
for taxable years beginning on or after October 1, 1992. Section 1.1503-
2A is effective for taxable years beginning after December 31, 1986, and 
before October 1, 1992.

[[Page 993]]

Paragraph (g)(2)(iv)(B)(2) of this section shall apply with respect to 
transactions otherwise constituting triggering events occurring on or 
after January 1, 2002.
    (2) Taxpayers that have filed for relief under Sec.  1.1503-2A--(i) 
In general. Except as provided in paragraph (h)(ii)(b) of this section, 
taxpayers that have filed agreements described in Sec.  1.1503-2A(c)(3) 
or certifications described in Sec.  1.1503-2A(d)(3) shall continue to 
be subject to the provisions of such agreements or certifications, 
including the amended return or recapture requirements applicable in the 
event of a triggering event, for the remaining term of such agreements 
or certifications.
    (ii) Special transition rule. A taxpayer that has filed an agreement 
described in Sec.  1.1503-2A(c)(3) or a certification described in Sec.  
1.1503-2A(d)(3) and that is in compliance with the provisions of Sec.  
1.1503-2A may elect to replace such agreement or certification with an 
agreement described in paragraph (g)(2)(i) of this section. However, a 
taxpayer making this election must replace all agreements and 
certifications filed under Sec.  1.1503-2A. If the taxpayer is a 
consolidated group, the election must be made with respect to all dual 
resident corporations or separate units within the group. Likewise, if 
the taxpayer is an unaffiliated domestic owner, the election must be 
made with respect to all separate units of the domestic owner. The 
taxpayer must file the replacement agreement with its timely filed 
income tax return for its first taxable year commencing on or after 
October 1, 1992, stating that such agreement is a replacement for the 
agreement filed under Sec.  1.1503-2A(c)(3) or the certification filed 
under Sec.  1.1503-2A(d)(3) and identifying the taxable year for which 
the original agreement or certification was filed. A single agreement 
described in paragraph (g)(2)(i) of this section may be filed to replace 
more than one agreement or certification filed under Sec.  1.1503-2A; 
however, each dual consolidated loss must be separately identified. A 
taxpayer may also elect to apply Sec.  1.1503-2 for all open years, with 
respect to agreements filed under Sec.  1.1503-2A(c)(3) or 
certifications filed under Sec.  1.1503-2A(d)(3), in cases where the 
agreement or certification is no longer in effect and the taxpayer has 
complied with the provisions of Sec.  1.1503-2A. For example, a taxpayer 
may have had a triggering event under Sec.  1.1503-2A that is not a 
triggering event under Sec.  1.1503-2. If the taxpayer fully complied 
with the requirements of the agreement entered into under Sec.  1.1503-
2A(c)(3) and filed amended U.S. income tax returns within the time 
required under Sec.  1.1503-2A(c)(3), the taxpayer may file amended U.S. 
income tax returns consistent with the position that the earlier 
triggering event is no longer a triggering event.
    (3) Taxpayers that are in compliance with Sec.  1.1503-2A but have 
not filed for relief thereunder. A taxpayer that is in compliance with 
the provisions of Sec.  1.1503-2A but has not filed an agreement 
described in Sec.  1.1503-2A(c)(3) or a certification described in Sec.  
1.1503-2A(d)(3) may elect to have the provisions of Sec.  1.1503-2 apply 
for any open year. In particular, a taxpayer may elect to apply the 
provisions of Sec.  1.1503-2 in a case where the dual consolidated loss 
has been subjected to the separate return limitation year restrictions 
of Sec.  1.1502-21A(c) or 1.1502-21(c) (as appropriate) but the losses, 
expenses, or deductions taken into account in computing the dual 
consolidated loss have not been used to offset the income of another 
person for foreign tax purposes. However, if a taxpayer is a 
consolidated group, the election must be made with respect to all dual 
resident corporations or separate units within the group. Likewise, if 
the taxpayer is an unaffiliated domestic owner, the election must be 
made with respect to all separate units of the domestic owner.

[T.D. 8434, 57 FR 41084, Sept. 9, 1992; 57 FR 48722, Oct. 28, 1992; 57 
FR 57280, Dec. 3, 1992; 58 FR 13413, Mar. 11, 1993, as amended by T.D. 
8597, 60 FR 36680, July 18, 1995; T.D. 8677, 61 FR 33325, June 27, 1996; 
T.D. 8823, 64 FR 36101, July 2, 1999; T.D. 9084, 68 FR 44617, July 30, 
2003; T.D. 9100, 68 FR 70707, Dec. 19, 2003; T.D. 9300, 71 FR 71044, 
Dec. 8, 2006]



Sec.  1.1503(d)-0  Table of contents.

    This section lists the captions contained in Sec. Sec.  1.1503(d)-1 
through 1.1503(d)-8.

[[Page 994]]

   Sec.  1.1503(d)-1 Definitions and special rules for filings under 
                            section 1503(d).

    (a) In general.
    (b) Definitions.
    (1) Domestic corporation.
    (2) Dual resident corporation.
    (3) Hybrid entity.
    (4) Separate unit.
    (i) In general.
    (ii) Separate unit combination rule.
    (iii) Business operations that do not constitute a permanent 
establishment.
    (iv) Foreign branch separate units held by dual resident 
corporations or hybrid entities in the same foreign country.
    (5) Dual consolidated loss.
    (6) Subject to tax.
    (7) Foreign country.
    (8) Consolidated group.
    (9) Domestic owner.
    (10) Affiliated dual resident corporation and affiliated domestic 
owner.
    (11) Unaffiliated dual resident corporation, unaffiliated domestic 
corporation, and unaffiliated domestic owner.
    (12) Domestic affiliate.
    (13) Domestic use.
    (14) Foreign use.
    (15) Grantor trust.
    (16) Transparent entity.
    (i) In general.
    (ii) Example.
    (17) Disregarded entity.
    (18) Partnership.
    (19) Indirectly.
    (20) Certification period.
    (c) Special rules for filings under section 1503(d).
    (1) Reasonable cause exception.
    (2) Requirements for reasonable cause relief.
    (i) Time of submission.
    (ii) Notice requirement.
    (3) Signature requirement.

                     Sec.  1.1503(d)-2 Domestic use.

                     Sec.  1.1503(d)-3 Foreign use.

    (a) Foreign use.
    (1) In general.
    (2) Indirect use.
    (i) General rule.
    (ii) Exception.
    (iii) Examples.
    (3) Deemed use.
    (b) Available for use.
    (c) Exceptions.
    (1) In general.
    (2) Election or merger required to enable foreign use.
    (3) Presumed use where no foreign country rule for determining use.
    (4) Certain interests in partnerships or grantor trusts.
    (i) General rule.
    (ii) Combined separate unit.
    (iii) Reduction in interest.
    (5) De minimis reduction of an interest in a separate unit.
    (i) General rule.
    (ii) Limitations.
    (iii) Reduction in interest.
    (iv) Examples and coordination with exceptions to other triggering 
events.
    (6) Certain asset basis carryovers.
    (7) Assumption of certain liabilities.
    (i) In general.
    (ii) Ordinary course limitation.
    (8) Multiple-party events.
    (9) Additional guidance.
    (d) Ordering rules for determining the foreign use of losses.
    (e) Mirror legislation rule.
    (1) In general.
    (2) Stand-alone exception.
    (i) In general.
    (ii) Stand-alone domestic use agreement.
    (iii) Termination of stand-alone domestic use agreement.

 Sec.  1.1503(d)-4 Domestic use limitation and related operating rules.

    (a) Scope.
    (b) Limitation on domestic use of a dual consolidated loss.
    (c) Effect of a dual consolidated loss on a consolidated group, 
unaffiliated dual resident corporation, or unaffiliated domestic owner.
    (1) Dual resident corporation.
    (2) Separate unit.
    (3) SRLY limitation.
    (4) Items of a dual consolidated loss used in other taxable years.
    (5) Reconstituted net operating losses.
    (d) Elimination of a dual consolidated loss after certain 
transactions.
    (1) General rule.
    (i) Transactions described in section 381(a).
    (ii) Cessation of separate unit status.
    (2) Exceptions.
    (i) Certain section 368(a)(1)(F) reorganizations.
    (ii) Acquisition of a dual resident corporation by another dual 
resident corporation.
    (iii) Acquisition of a separate unit by a domestic corporation.
    (A) Acquisition by a corporation that is not a member of the same 
consolidated group.
    (B) Acquisition by a member of the same consolidated group.
    (iv) Special rules for foreign insurance companies.
    (e) Special rule denying the use of a dual consolidated loss to 
offset tainted income.
    (1) In general.
    (2) Tainted income.
    (i) Definition.
    (ii) Income presumed to be derived from holding tainted assets.
    (3) Tainted assets defined.
    (4) Exceptions.

[[Page 995]]

    (f) Computation of foreign tax credit limitation.

      Sec.  1.1503(d)-5 Attribution of items and basis adjustments.

    (a) In general.
    (b) Determination of amount of income or dual consolidated loss of a 
dual resident corporation.
    (1) In general.
    (2) Exceptions.
    (c) Determination of amount of income or dual consolidated loss 
attributable to a separate unit, and income or loss attributable to an 
interest in a transparent entity.
    (1) In general.
    (i) Scope and purpose.
    (ii) Only items of domestic owner taken into account.
    (iii) Separate application.
    (2) Foreign branch separate unit.
    (i) In general.
    (ii) Principles of Sec.  1.882-5.
    (iii) Exception where foreign country attributes interest expense 
solely by reference to books and records.
    (3) Hybrid entity separate unit and an interest in a transparent 
entity.
    (i) General rule.
    (ii) Interests in certain disregarded entities, partnerships, and 
grantor trusts owned by a hybrid entity or transparent entity.
    (4) Special rules.
    (i) Allocation of items between certain tiered separate units and 
interests in transparent entities.
    (A) Foreign branch separate unit.
    (B) Hybrid entity separate unit or interest in a transparent entity.
    (ii) Combined separate unit.
    (iii) Gain or loss on the direct or indirect disposition of a 
separate unit or an interest in a transparent entity.
    (A) In general.
    (B) Multiple separate units or interests in transparent entities.
    (iv) Inclusions on stock.
    (v) Foreign currency gain or loss recognized under section 987.
    (vi) Recapture of dual consolidated loss.
    (d) Foreign tax treatment disregarded.
    (e) Items generated or incurred while a dual resident corporation, a 
separate unit, or a transparent entity.
    (f) Assets and liabilities of a separate unit or an interest in a 
transparent entity.
    (g) Basis adjustments.
    (1) Affiliated dual resident corporation or affiliated domestic 
owner.
    (2) Interests in hybrid entities that are partnerships or interests 
in partnerships through which a separate unit is owned indirectly.
    (i) Scope.
    (ii) Determination of basis of partner's interest.
    (3) Combined separate units.

    Sec.  1.1503(d)-6 Exceptions to the domestic use limitation rule.

    (a) In general.
    (1) Scope and purpose.
    (2) Absence of foreign affiliate or foreign consolidation regime.
    (3) Foreign insurance companies treated as domestic corporations.
    (b) Elective agreement in place between the United States and a 
foreign country.
    (1) In general.
    (2) Application to combined separate units.
    (c) No possibility of foreign use.
    (1) In general.
    (2) Statement.
    (d) Domestic use election.
    (1) In general.
    (2) No domestic use election available if there is a triggering 
event in the year the dual consolidated loss is incurred.
    (e) Triggering events requiring the recapture of a dual consolidated 
loss.
    (1) Events.
    (i) Foreign use.
    (ii) Disaffiliation.
    (iii) Affiliation.
    (iv) Transfer of assets.
    (v) Transfer of an interest in a separate unit.
    (vi) Conversion to a foreign corporation.
    (vii) Conversion to a regulated investment company, a real estate 
investment trust, or an S corporation.
    (viii) Failure to certify.
    (ix) Cessation of stand-alone status.
    (2) Rebuttal.
    (i) General rule.
    (ii) Certain asset transfers.
    (iii) Reporting.
    (iv) Examples.
    (f) Triggering event exceptions.
    (1) Continuing ownership of assets or interests.
    (i) Disaffiliation as a result of a transaction described in section 
381.
    (ii) Continuing ownership by consolidated group.
    (iii) Continuing ownership by unaffiliated dual resident corporation 
or unaffiliated domestic owner.
    (2) Transactions requiring a new domestic use agreement.
    (i) Multiple-party events.
    (ii) Events resulting in a single consolidated group.
    (iii) Requirements.
    (A) New domestic use agreement.
    (B) Statement filed by original elector.
    (3) Certain transfers qualifying for the de minimis exception to 
foreign use.
    (4) Deemed transactions as a result of certain transfers that do not 
result in a foreign use.
    (5) Compulsory transfers.
    (6) Subsequent triggering events.
    (g) Annual certification reporting requirement.

[[Page 996]]

    (h) Recapture of dual consolidated loss and interest charge.
    (1) Presumptive rules.
    (i) Amount of recapture.
    (ii) Interest charge.
    (2) Reduction of presumptive recapture amount and presumptive 
interest charge.
    (i) Amount of recapture.
    (ii) Interest charge.
    (3) Rules regarding multiple-party event exceptions to triggering 
events.
    (i) Scope.
    (ii) Original elector and prior subsequent electors not subject to 
recapture or interest charge.
    (iii) Recapture tax amount and required statement.
    (A) In general.
    (B) Recapture tax amount.
    (iv) Tax assessment and collection procedures.
    (A) In general.
    (B) Collection from original elector and prior subsequent electors; 
joint and several liability.
    (C) Allocation of partial payments of tax.
    (D) Refund.
    (v) Definition of income tax liability.
    (vi) Example.
    (4) Computation of taxable income in year of recapture.
    (i) Presumptive rule.
    (ii) Exception to presumptive rule.
    (5) Character and source of recapture income.
    (6) Reconstituted net operating loss.
    (i) General rule.
    (ii) Exception.
    (iii) Special rule for recapture following multiple-party event 
exception to a triggering event.
    (i) [Reserved]
    (j) Termination of domestic use agreement and annual certifications.
    (1) Rebuttals, exceptions to triggering events, and recapture.
    (2) Termination of ability for foreign use.
    (i) In general.
    (ii) Statement.
    (3) Agreements filed in connection with stand-alone exception.

                       Sec.  1.1503(d)-7 Examples.

    (a) In general.
    (b) Presumed facts for examples.
    (c) Examples.

                   Sec.  1.1503(d)-8 Effective dates.

    (a) General rule.
    (b) Special rules.
    (1) Reduction of term of agreements filed under Sec. Sec.  1.1503-
2A(c)(3), 1.1503-2A(d)(3), 1.1503-2(g)(2)(i), or 1.1503-2T(g)(2)(i).
    (2) Reduction of term of agreements filed under Sec. Sec.  1.1503-
2(g)(2)(iv)(B)(2)(i) (1992), 1.1503-2(g)(2)(iv)(B)(3)(i), or Rev. Proc. 
2000-42.
    (3) Relief for untimely filings.
    (i) General rule.
    (ii) Closing agreements.
    (iii) Pending requests for relief.
    (4) Multiple-party event exception to triggering events.
    (5) Basis adjustment rules.

[T.D. 9315, 72 FR 12914, Mar. 19, 2007; 72 FR 20424, Apr. 23, 2007]



Sec.  1.1503(d)-1  Definitions and special rules for filings under 
section 1503(d).

    (a) In general. This section and Sec. Sec.  1.1503(d)-2 through 
1.1503(d)-8 provide rules concerning the determination and use of dual 
consolidated losses pursuant to section 1503(d). Paragraph (b) of this 
section provides definitions that apply for purposes of this section and 
Sec. Sec.  1.1503(d)-2 through 1.1503(d)-8. Paragraph (c) of this 
section provides a reasonable cause exception and a signature 
requirement for filings.
    (b) Definitions. The following definitions apply for purposes of 
this section and Sec. Sec.  1.1503(d)-2 through 1.1503(d)-8:
    (1) Domestic corporation means an entity classified as a domestic 
corporation under section 7701(a)(3) and (4) or otherwise treated as a 
domestic corporation by the Internal Revenue Code, including, but not 
limited to, sections 269B, 953(d), 1504(d), and 7874. However, solely 
for purposes of section 1503(d), the term domestic corporation shall not 
include a regulated investment company as defined in section 851, a real 
estate investment trust as defined in section 856, or an S corporation 
as defined in section 1361.
    (2) Dual resident corporation means--
    (i) A domestic corporation that is subject to an income tax of a 
foreign country on its worldwide income or on a residence basis. A 
corporation is taxed on a residence basis if it is taxed as a resident 
under the laws of the foreign country;
    (ii) A foreign insurance company that makes an election to be 
treated as a domestic corporation pursuant to section 953(d) and is 
treated as a member of an affiliated group for purposes of chapter 6, 
even if such company is not subject to an income tax of a foreign 
country on its worldwide income or on a residence basis. See section 
953(d)(3); and

[[Page 997]]

    (iii) A domestic consenting corporation (as defined in Sec.  
301.7701-3(c)(3)(i) of this chapter), as provided in paragraph (c)(1) of 
this section. See Sec.  1.1503(d)-7(c)(41) for an example illustrating 
the application of section 1503(d) to a domestic consenting corporation.
    (3) Hybrid entity means an entity that is not taxable as an 
association for Federal tax purposes, but is subject to an income tax of 
a foreign country as a corporation (or otherwise at the entity level) 
either on its worldwide income or on a residence basis.
    (4) Separate unit--(i) In general. The term separate unit means 
either of the following that is carried on or owned, as applicable, 
directly or indirectly, by a domestic corporation (including a dual 
resident corporation):
    (A) Except to the extent provided in paragraph (b)(4)(iii) of this 
section, a business operation outside the United States that, if carried 
on by a U.S. person, would constitute a foreign branch as defined in 
Sec.  1.367(a)-6T(g)(1) (foreign branch separate unit).
    (B) An interest in a hybrid entity (hybrid entity separate unit).
    (ii) Separate unit combination rule. Except as otherwise provided in 
this paragraph, if a domestic owner, or two or more domestic owners that 
are members of the same consolidated group, have two or more separate 
units (individual separate units), then all such individual separate 
units that are located (in the case of a foreign branch separate unit) 
or subject to an income tax either on their worldwide income or on a 
residence basis (in the case of a hybrid entity an interest in which is 
a hybrid entity separate unit) in the same foreign country shall be 
treated as one separate unit (combined separate unit). See Sec.  
1.1503(d)-7(c) Example 1. Separate units of a foreign insurance company 
that is a dual resident corporation under paragraph (b)(2)(ii) of this 
section, however, shall not be combined with separate units of any other 
domestic corporation. Except as specifically provided in this section or 
Sec. Sec.  1.1503(d)-2 through 1.1503(d)-8, any individual separate unit 
composing a combined separate unit loses its character as an individual 
separate unit.
    (iii) Business operations that do not constitute a permanent 
establishment. A business operation carried on by a domestic corporation 
that is not a dual resident corporation shall not constitute a foreign 
branch separate unit, provided the business operation:
    (A) Is not carried on indirectly through a hybrid entity or a 
transparent entity; and
    (B) Is conducted in a country with which the United States has 
entered into an income tax convention and is not treated as a permanent 
establishment pursuant to that convention, or is not otherwise subject 
to tax on a net basis under that convention. See Sec.  1.1503(d)-7(c) 
Example 2.
    (iv) Foreign branch separate units held by dual resident 
corporations or hybrid entities in the same foreign country. A foreign 
branch separate unit may be owned by a dual resident corporation, or 
through a hybrid entity (an interest in which is a separate unit), even 
where the foreign branch is located in the same foreign country that 
subjects such dual resident corporation or hybrid entity to tax on its 
worldwide income or on a residence basis. But see the rule under 
paragraph (b)(4)(ii) of this section that combines certain same-country 
hybrid entity separate units and foreign branch separate units. See also 
Sec.  1.1503(d)-7(c) Example 1.
    (5) Dual consolidated loss means--
    (i) In the case of a dual resident corporation, and except to the 
extent provided in Sec.  1.1503(d)-5(b), the net operating loss (as 
defined in section 172(c) and the related regulations) incurred in a 
year in which the corporation is a dual resident corporation; and
    (ii) In the case of a separate unit, the net loss attributable to 
the separate unit under Sec.  1.1503(d)-5(c) through (e).
    (6) Subject to tax. For purposes of determining whether a domestic 
corporation or another entity is subject to an income tax of a foreign 
country on its income, the fact that it has no actual income tax 
liability to the foreign country for a particular taxable year shall not 
be taken into account.
    (7) Foreign country includes any possession of the United States.
    (8) Consolidated group has the meaning provided in Sec.  1.1502-
1(h).
    (9) Domestic owner means--
    (i) A domestic corporation (including a dual resident corporation) 
that has

[[Page 998]]

one or more separate units or interests in a transparent entity; and
    (ii) In the case of a combined separate unit, a domestic corporation 
(including a dual resident corporation) that has one or more individual 
separate units that are treated as part of the combined separate unit 
under paragraph (b)(4)(ii) of this section.
    (10) Affiliated dual resident corporation and affiliated domestic 
owner mean a dual resident corporation and a domestic owner, 
respectively, that is a member of a consolidated group.
    (11) Unaffiliated dual resident corporation, unaffiliated domestic 
corporation, and unaffiliated domestic owner mean a dual resident 
corporation, domestic corporation, and domestic owner, respectively, 
that is not a member of a consolidated group.
    (12) Domestic affiliate means--
    (i) A member of an affiliated group, without regard to the 
exceptions contained in section 1504(b) (other than section 1504(b)(3)) 
relating to includible corporations;
    (ii) A domestic owner;
    (iii) A separate unit; or
    (iv) An interest in a transparent entity, as defined in paragraph 
(b)(16) of this section.
    (13) Domestic use. See Sec.  1.1503(d)-2.
    (14) Foreign use. See Sec.  1.1503(d)-3.
    (15) Grantor trust means a trust, any portion of which is treated as 
being owned by the grantor or another person under subpart E of 
subchapter J of this chapter.
    (16) Transparent entity--(i) In general. The term transparent entity 
means an entity described in this paragraph (b)(16) where all or a 
portion of its interests are owned, directly or indirectly, by a 
domestic corporation. An entity is described in this paragraph (b)(16) 
if the entity--
    (A) Is not taxable as an association for Federal tax purposes;
    (B) Is not subject to income tax in a foreign country as a 
corporation (or otherwise at the entity level) either on its worldwide 
income or on a residence basis; and
    (C) Is not a pass-through entity under the laws of the applicable 
foreign country. For purposes of applying the preceding sentence, the 
applicable foreign country is the foreign country in which the relevant 
foreign branch separate unit is located, or the foreign country that 
subjects the relevant hybrid entity (an interest in which is a separate 
unit) or dual resident corporation to an income tax either on its 
worldwide income or on a residence basis.
    (ii) Example. A U.S. limited liability company (LLC) does not elect 
to be taxed as an association for Federal tax purposes and is not 
subject to income tax in a foreign country as a corporation (or 
otherwise at the entity level) either on its worldwide income or on a 
residence basis. The LLC is owned by a hybrid entity (an interest in 
which is a separate unit) that is the relevant hybrid entity. Provided 
the LLC is not treated as a pass-through entity by the applicable 
foreign country that subjects the relevant hybrid entity to an income 
tax either on its worldwide income or on a residence basis, the LLC 
would qualify as a transparent entity. See also Sec.  1.1503(d)-7(c) 
Example 26.
    (17) Disregarded entity means an entity that is disregarded as an 
entity separate from its owner, under Sec. Sec.  301.7701-1 through 
301.7701-3 of this chapter, for Federal tax purposes.
    (18) Partnership means an entity that is classified as a 
partnership, under Sec. Sec.  301.7701-1 through 301.7701-3 of this 
chapter, for Federal tax purposes.
    (19) Indirectly, when used in reference to ownership, means 
ownership through a partnership, a disregarded entity, or a grantor 
trust, regardless of whether the partnership, disregarded entity, or 
grantor trust is a U.S. person.
    (20) Certification period means the period of time up to and 
including the fifth taxable year following the year in which the dual 
consolidated loss that is the subject of a domestic use agreement (as 
described in Sec.  1.1503(d)-6(d)(1)) was incurred.
    (c) Treatment of domestic consenting corporation as a dual resident 
corporation--(1) Rule. A domestic consenting corporation is treated as a 
dual resident corporation under paragraph (b)(2)(iii) of this section 
for a taxable year if, on any day during the taxable year, the following 
requirements are satisfied:
    (i) Under the tax law of a foreign country where a specified foreign 
tax

[[Page 999]]

resident is tax resident, the specified foreign tax resident derives or 
incurs (or would derive or incur) items of income, gain, deduction, or 
loss of the domestic consenting corporation (because, for example, the 
domestic consenting corporation is fiscally transparent under such tax 
law).
    (ii) The specified foreign tax resident bears a relationship to the 
domestic consenting corporation that is described in section 267(b) or 
707(b). See Sec.  1.1503(d)-7(c)(41) for an example illustrating the 
application of paragraph (c) of this section.
    (2) Definitions. The following definitions apply for purposes of 
this paragraph (c).
    (i) The term fiscally transparent means, with respect to a domestic 
consenting corporation or an intermediate entity, fiscally transparent 
as determined under the principles of Sec.  1.894-1(d)(3)(ii) and (iii), 
without regard to whether a specified foreign tax resident is a resident 
of a country that has an income tax treaty with the United States.
    (ii) The term specified foreign tax resident means a body corporate 
or other entity or body of persons liable to tax under the tax law of a 
foreign country as a resident.
    (d) Special rules for filings under section 1503(d)--(1) Reasonable 
cause exception. A person that is permitted or required to file an 
election, agreement, statement, rebuttal, computation, or other 
information pursuant to section 1503(d) and these regulations, that 
fails to make such filing in a timely manner, shall be considered to 
have satisfied the timeliness requirement with respect to such filing if 
the person is able to demonstrate, to the Area Director, Field 
Examination, Small Business/Self Employed or the Director of Field 
Operations, Large and Mid-Size Business (Director) having jurisdiction 
of the taxpayer's tax return for the taxable year, that such failure was 
due to reasonable cause and not willful neglect. In determining whether 
the taxpayer has reasonable cause, the Director shall consider whether 
the taxpayer acted reasonably and in good faith. In general, the 
taxpayer must demonstrate that it exercised ordinary care and prudence 
in meeting its tax obligations but nonetheless did not comply with the 
prescribed duty within the prescribed time. Whether the taxpayer acted 
reasonably and in good faith will be determined after considering all 
the facts and circumstances. The Director shall notify the person in 
writing within 120 days of the filing if it is determined that the 
failure to comply was not due to reasonable cause, or if additional time 
will be needed to make such determination. For this purpose, the 120-day 
period shall begin on the date the taxpayer is notified in writing that 
the request has been received and assigned for review. If, once such 
period commences, the taxpayer is not again notified within 120 days, 
then the taxpayer shall be deemed to have established reasonable cause. 
The reasonable cause exception of this paragraph (d) shall only apply 
if, once the person becomes aware of its failure to file the election, 
agreement, statement, rebuttal, computation or other information in a 
timely manner, the person complies with the requirements of paragraph 
(d)(2) of this section.
    (2) Requirements for reasonable cause relief--(i) Time of 
submission. Requests for reasonable cause relief will only be considered 
if once the person becomes aware of the failure to file the election, 
agreement, statement, rebuttal, computation or other information, the 
person attaches all the documents that should have been filed, as well 
as a written statement setting forth the reasons for the failure to 
timely comply, to an amended return that amends the return to which the 
documents should have been attached pursuant to the rules of section 
1503(d) and these regulations.
    (ii) Notice requirement. In addition to the requirements of 
paragraph (d)(2)(i) of this section, the taxpayer must provide a copy of 
the amended return and all required attachments to the Director as 
follows:
    (A) If the taxpayer is under examination for any taxable year when 
the taxpayer requests relief, the taxpayer must provide a copy of the 
amended return and attachments to the personnel conducting the 
examination.
    (B) If the taxpayer is not under examination for any taxable year 
when

[[Page 1000]]

the taxpayer requests relief, the taxpayer must provide a copy of the 
amended return and attachments to the Director having jurisdiction of 
the taxpayer's return.
    (3) Signature requirement. When an election, agreement, statement, 
rebuttal, computation, or other information is required pursuant to 
section 1503(d) and these regulations to be attached to and filed by the 
due date (including extensions) of a U.S. tax return and signed under 
penalties of perjury by the person who signs the return, the attachment 
and filing of an unsigned copy is considered to satisfy such 
requirement, provided the taxpayer retains the original in its records 
in the manner specified by Sec.  1.6001-1(e).

[T.D. 9315, 72 FR 12914, Mar. 19, 2007, as amended by T.D. 9896, 85 FR 
19855, Apr. 8, 2020]



Sec.  1.1503(d)-2  Domestic use.

    A domestic use of a dual consolidated loss shall be deemed to occur 
when the dual consolidated loss is made available to offset, directly or 
indirectly, the income of a domestic affiliate (other than the dual 
resident corporation or separate unit that, in each case, incurred the 
dual consolidated loss) in the taxable year in which the dual 
consolidated loss is recognized, or in any other taxable year, 
regardless of whether the dual consolidated loss offsets income under 
the income tax laws of a foreign country and regardless of whether any 
income that the dual consolidated loss may offset in the foreign country 
is, has been, or will be subject to tax in the United States. A domestic 
use shall be deemed to occur in the year the dual consolidated loss is 
included in the computation of the taxable income of a consolidated 
group, unaffiliated dual resident corporation, or an unaffiliated 
domestic owner, as applicable, even if no tax benefit results from such 
inclusion in that year. See Sec.  1.1503(d)-7(c) Examples 2 through 4.

[T.D. 9315, 72 FR 12914, Mar. 19, 2007]



Sec.  1.1503(d)-3  Foreign use.

    (a) Foreign use--(1) In general. Except as provided in paragraph (c) 
of this section, a foreign use of a dual consolidated loss shall be 
deemed to occur when any portion of a deduction or loss taken into 
account in computing the dual consolidated loss is made available under 
the income tax laws of a foreign country to offset or reduce, directly 
or indirectly, any item that is recognized as income or gain under such 
laws and that is, or would be, considered under U.S. tax principles to 
be an item of--
    (i) A foreign corporation as defined in section 7701(a)(3) and 
(a)(5); or
    (ii) A direct or indirect owner of an interest in a hybrid entity, 
provided such interest is not a separate unit. See Sec.  1.1503(d)-7(c) 
Examples 5 through 10 and 37.
    (2) Indirect use--(i) General rule. Except to the extent provided in 
paragraph (a)(2)(ii) of this section, an item of deduction or loss shall 
be deemed to be made available indirectly if--
    (A) One or more items are taken into account as deductions or losses 
for foreign tax purposes, but do not give rise to corresponding items of 
income or gain for U.S. tax purposes; and
    (B) The item or items described in paragraph (a)(2)(i)(A) of this 
section have the effect of making an item of deduction or loss composing 
the dual consolidated loss available for a foreign use as described in 
paragraph (a)(1) of this section.
    (ii) Exception. The general rule provided in paragraph (a)(2)(i) of 
this section shall not apply if the consolidated group, unaffiliated 
domestic owner, or unaffiliated dual resident corporation demonstrates, 
to the satisfaction of the Commissioner, that the item or items 
described in paragraph (a)(2)(i)(A) of this section that gave rise to 
the indirect foreign use--
    (A) Were not incurred, or taken into account, with a principal 
purpose of avoiding the provisions of section 1503(d). For purposes of 
this paragraph (a)(2)(ii), an item incurred or taken into account as 
interest for foreign tax purposes, but disregarded for U.S. tax 
purposes, shall be deemed to have been incurred, or taken into account, 
with a principal purpose of avoiding the provisions of section 1503(d). 
Similarly, for purposes of this paragraph (a)(2)(ii), an item incurred 
or taken into account as the result of an instrument that is treated as 
debt for foreign tax purposes

[[Page 1001]]

and equity for U.S. tax purposes, shall be deemed to have been incurred, 
or taken into account, with a principal purpose of avoiding the 
provisions of section 1503(d); and
    (B) Were incurred, or taken into account, in the ordinary course of 
the dual resident corporation's or separate unit's trade or business.
    (iii) Examples. See Sec.  1.1503(d)-7(c) Examples 6 through 8.
    (3) Deemed use. See paragraph (e) of this section for a deemed 
foreign use pursuant to the mirror legislation rule.
    (b) Available for use. A foreign use shall be deemed to occur in the 
year in which any portion of a deduction or loss taken into account in 
computing the dual consolidated loss is made available for an offset 
described in paragraph (a) of this section, regardless of whether it 
actually offsets or reduces any items of income or gain under the income 
tax laws of the foreign country in such year, and regardless of whether 
any of the items that may be so offset or reduced are regarded as income 
under U.S. tax principles.
    (c) Exceptions--(1) In general. Paragraphs (c)(2) through (9) of 
this section provide exceptions to the general definition of foreign use 
set forth in paragraphs (a) and (b) of this section. These exceptions 
only apply to a foreign use that occurs solely as a result of the 
conditions or circumstances described therein, and do not apply if a 
foreign use occurs in any other case or by any other means. For example, 
the exception under paragraph (c)(4) of this section (regarding certain 
interests in partnerships or grantor trusts) shall not apply where the 
item of deduction or loss is made available through a foreign 
consolidation regime (or similar method). In addition, these exceptions 
do not apply when attempting to demonstrate that no foreign use of a 
dual consolidated loss can occur in any other year by any means under 
Sec.  1.1503(d)-6(c), (e)(2)(i), or (j)(2). But see Sec.  1.1503(d)-
6(e)(2)(ii), which takes into account the exception under paragraph 
(c)(7) of this section for purposes of rebutting certain asset 
transfers.
    (2) Election or merger required to enable foreign use. Where the 
laws of a foreign country provide an election that would enable a 
foreign use, a foreign use shall be considered to occur only if the 
election is made. Similarly, where the laws of a foreign country would 
enable a foreign use through a sale, merger, or similar transaction, a 
foreign use shall be considered to occur only if the sale, merger, or 
similar transaction occurs.
    (3) Presumed use where no foreign country rule for determining use. 
This paragraph (c)(3) applies if the losses or deductions composing the 
dual consolidated loss are made available under the laws of a foreign 
country both to offset income that would constitute a foreign use and to 
offset income that would not constitute a foreign use, and the laws of 
the foreign country do not provide applicable rules for determining 
which income is offset by the losses or deductions. In such a case, the 
losses or deductions shall be deemed to be made available to offset the 
income that does not constitute a foreign use, to the extent of such 
income, before being considered to be made available to offset the 
income that does constitute a foreign use. See Sec.  1.1503(d)-7(c) 
Example 11.
    (4) Certain interests in partnerships or grantor trusts--(i) General 
rule. Except to the extent provided in paragraph (c)(4)(iii) of this 
section, this paragraph (c)(4)(i) applies to a dual consolidated loss 
attributable to an interest in a hybrid entity partnership or a hybrid 
entity grantor trust, or to a separate unit owned indirectly through a 
partnership or grantor trust. In such a case, a foreign use will not be 
considered to occur if the foreign use is solely the result of another 
person's ownership of an interest in the partnership or grantor trust, 
as applicable, and the allocation or carry forward of an item of 
deduction or loss composing such dual consolidated loss as a result of 
such ownership. See Sec.  1.1503(d)-7(c) Example 13.
    (ii) Combined separate unit. This paragraph applies to a dual 
consolidated loss attributable to a combined separate unit that includes 
an individual separate unit to which paragraph (c)(4)(i) of this section 
would apply, but for the application of the separate unit combination 
rule provided under Sec.  1.1503(d)-1(b)(4)(ii). In such a case, 
paragraph (c)(4)(i) of this section shall

[[Page 1002]]

apply to the portion of the dual consolidated loss of such combined 
separate unit that is attributable, as provided under Sec.  1.1503(d)-
5(c) through (e), to the individual separate unit (otherwise described 
in paragraph (c)(4)(i) of this section) that is a component of the 
combined separate unit. See Sec.  1.1503(d)-7(c) Example 14.
    (iii) Reduction in interest. The exception under paragraph (c)(4)(i) 
of this section shall not apply if, at any time following the year in 
which the dual consolidated loss is incurred, there is more than a de 
minimis reduction in the domestic owner's percentage interest in the 
partnership or grantor trust, as applicable, as described in paragraph 
(c)(5) of this section. In such a case, a foreign use shall be deemed to 
occur at the time the reduction in interest exceeds the de minimis 
amount. See Sec.  1.1503(d)-7(c) Example 13.
    (5) De minimis reduction of an interest in a separate unit--(i) 
General rule. This paragraph applies to a de minimis reduction of a 
domestic owner's interest in a separate unit (including an interest 
described in paragraph (c)(4)(i) of this section). Except to the extent 
provided in paragraph (c)(5)(ii) of this section, no foreign use shall 
be considered to occur with respect to a dual consolidated loss as a 
result of an item of deduction or loss composing such dual consolidated 
loss being made available solely as a result of a reduction in the 
domestic owner's interest in the separate unit, as provided under 
paragraph (c)(5)(iii) of this section. See Sec.  1.1503(d)-7(c) Example 
5.
    (ii) Limitations. The exception provided in paragraph (c)(5)(i) of 
this section shall not apply if--
    (A) During any 12-month period the domestic owner's percentage 
interest in the separate unit is reduced by 10 percent or more, as 
determined by reference to the domestic owner's interest at the 
beginning of the 12-month period; or
    (B) At any time the domestic owner's percentage interest in the 
separate unit is reduced by 30 percent or more, as determined by 
reference to the domestic owner's interest at the end of the taxable 
year in which the dual consolidated loss was incurred.
    (iii) Reduction in interest. The following rules apply for purposes 
of paragraphs (c)(4) and (5) of this section. A reduction of a domestic 
owner's interest in a separate unit shall include a reduction resulting 
from another person acquiring through sale, exchange, contribution, or 
other means, an interest in the foreign branch or hybrid entity, as 
applicable. A reduction may occur either directly or indirectly, 
including through an interest in a partnership, a disregarded entity, or 
a grantor trust through which a separate unit is carried on or owned. In 
the case of an interest in a hybrid entity partnership or a separate 
unit all or a portion of which is carried on or owned through a 
partnership, an interest in such separate unit (or portion of such 
separate unit) is determined by reference to the owner's interest in the 
profits or the capital in the separate unit. In the case of an interest 
in a hybrid entity grantor trust or a separate unit all or a portion of 
which is carried on or owned through a grantor trust, an interest in 
such separate unit (or portion of such separate unit) is determined by 
reference to the domestic owner's share of the assets and liabilities of 
the separate unit.
    (iv) Examples and coordination with exceptions to other triggering 
events. See Sec.  1.1503(d)-7(c) Examples 5, 13, and 14. See also Sec.  
1.1503(d)-6(f)(3) and (f)(5) for rules that coordinate the de minimis 
exception to foreign use with exceptions to other triggering events 
described in Sec.  1.1503(d)-6(e)(1), and provide an exception to 
foreign use following certain compulsory transfers.
    (6) Certain asset basis carryovers. No foreign use shall be 
considered to occur with respect to a dual consolidated loss solely as a 
result of items of deduction or loss composing such dual consolidated 
loss being made available as a result of the transfer of assets of a 
dual resident corporation or separate unit, provided--
    (i) Such items of loss and deduction are made available solely as a 
result of the basis of the transferred assets being determined, under 
foreign law, in whole or in part by reference to the basis of the assets 
in the hands of the dual resident corporation or separate unit;

[[Page 1003]]

    (ii) The aggregate adjusted basis, as determined under U.S. tax 
principles, of all the assets so transferred during any 12-month period 
is less than 10 percent of the aggregate adjusted basis, as determined 
under U.S. tax principles, of all the dual resident corporation's or 
separate unit's assets, determined by reference to the assets held at 
the beginning of such 12-month period; and
    (iii) The aggregate adjusted basis, as determined under U.S. tax 
principles, of all the assets so transferred at any time is less than 30 
percent of the aggregate adjusted basis, as determined under U.S. tax 
principles, of all the dual resident corporation's or separate unit's 
assets, determined by reference to the assets held at the end of the 
taxable year in which the dual consolidated loss was generated. See 
Sec.  1.1503(d)-7(c) Example 15.
    (7) Assumption of certain liabilities--(i) In general. Except to the 
extent provided in paragraph (c)(7)(ii) of this section, no foreign use 
shall be considered to occur with respect to any dual consolidated loss 
solely as a result of an item of deduction or loss composing such dual 
consolidated loss being made available following the assumption of 
liabilities of a dual resident corporation or separate unit, provided 
such availability arises solely as the result of an item of deduction or 
loss incurred with respect to, or as a result of, such liabilities. See 
Sec.  1.1503(d)-7(c) Example 16.
    (ii) Ordinary course limitation. Paragraph (c)(7)(i) of this section 
shall apply only to the extent the liabilities assumed were incurred in 
the ordinary course of the dual resident corporation's, or separate 
unit's, trade or business. For purposes of this paragraph, liabilities 
incurred in the ordinary course of a trade or business shall include 
debt incurred to finance the trade or business of the dual resident 
corporation or separate unit.
    (8) Multiple-party events. This paragraph applies to a transaction 
that qualifies for the triggering event exception described in Sec.  
1.1503(d)-6(f)(2)(i)(B) where the acquiring unaffiliated domestic 
corporation or consolidated group owns, directly or indirectly, more 
than 90 percent, but less than 100 percent, of the transferred assets or 
interests immediately after the transaction. In such a case, no foreign 
use shall be considered to occur with respect to a dual consolidated 
loss of the dual resident corporation or separate unit whose assets or 
interests were acquired, solely as a result of the less than 10 percent 
direct or indirect ownership of the acquired assets or interests by 
persons other than the acquiring unaffiliated domestic corporation or 
consolidated group, as applicable, immediately after the transaction. 
See Sec.  1.1503(d)-7(c) Example 37.
    (9) Additional guidance. The Commissioner may provide, by guidance 
published in the Internal Revenue Bulletin, that certain events or 
transactions do or do not result in a foreign use. Such guidance may 
also modify the triggering events and rebuttals described in Sec.  
1.1503(d)-6(e), and the exceptions thereto under Sec.  1.1503(d)-6(f), 
as appropriate.
    (d) Ordering rules for determining the foreign use of losses. If the 
laws of a foreign country provide for the foreign use of losses of a 
dual resident corporation or a separate unit, but do not provide 
applicable rules for determining the order in which such losses are used 
in a taxable year, the following rules shall apply:
    (1) Any net loss, or net income, that the dual resident corporation 
or separate unit has in a taxable year shall first be used to offset net 
income, or loss, recognized by its affiliates in the same taxable year 
before any carry over of its losses is considered to be used to offset 
any income from the taxable year.
    (2) If under the laws of the foreign country the dual resident 
corporation or separate unit has losses from different taxable years, it 
shall be deemed to use first the losses which would not constitute a 
triggering event that would result in the recapture of a dual 
consolidated loss pursuant to Sec.  1.1503(d)-6(h). Thereafter, it shall 
be deemed to use first the losses from the most recent taxable year from 
which a loss may be carried forward or back for foreign law purposes.
    (3) Where different losses or deductions (for example, capital 
losses and ordinary losses) of a dual resident corporation or separate 
unit incurred in

[[Page 1004]]

the same taxable year are available for foreign use, the different 
losses shall be deemed to be used on a pro rata basis. See Sec.  
1.1503(d)-7(c) Example 12.
    (e) Mirror legislation rule--(1) In general. Except as provided in 
paragraph (e)(2) or (3) of this section and Sec.  1.1503(d)-6(b) 
(relating to agreements entered into between the United States and a 
foreign country), a foreign use shall be deemed to occur if the income 
tax laws of a foreign country would deny any opportunity for the foreign 
use of the dual consolidated loss in the year in which the dual 
consolidated loss is incurred (mirror legislation), determined by 
assuming that such foreign country had recognized the dual consolidated 
loss in such year, for any of the following reasons:
    (i) The dual resident corporation or separate unit that incurred the 
loss is subject to income taxation by another country (for example, the 
United States) on its worldwide income or on a residence basis.
    (ii) The loss may be available to offset income (other than income 
of the dual resident corporation or separate unit) under the laws of 
another country (for example, the United States).
    (iii) The deductibility of any portion of a deduction or loss taken 
into account in computing the dual consolidated loss depends on whether 
such amount is deductible under the laws of another country (for 
example, the United States). See Sec.  1.1503(d)-7(c) Examples 17 
through 19.
    (2) Stand-alone exception--(i) In general. This paragraph (e)(2) 
applies if, in the absence of the mirror legislation described in 
paragraph (e)(1) of this section, no item of deduction or loss composing 
the dual consolidated loss of such dual resident corporation or separate 
unit would otherwise be available for a foreign use in the taxable year 
in which such dual consolidated loss is incurred. This determination is 
made without regard to whether such availability is limited by election 
(or other similar procedure). However, for purposes of this paragraph 
(e)(2)(i), no item of deduction or loss composing the dual consolidated 
loss of a dual resident corporation or separate unit is considered to be 
made available for foreign use solely because the laws of a foreign 
country would enable a foreign use through a sale, merger, or similar 
transaction (provided no such sale, merger, or similar transaction 
actually occurs). In such a case, no foreign use shall be considered to 
occur pursuant to paragraph (e)(1) of this section with respect to the 
dual consolidated loss, provided the requirements of paragraph 
(e)(2)(ii) of this section are satisfied. See Sec.  1.1503(d)-7(c) 
Examples 17 through 19.
    (ii) Stand-alone domestic use agreement. In order to qualify for the 
exception under paragraph (e)(2)(i) of this section, the consolidated 
group, unaffiliated dual resident corporation, or unaffiliated domestic 
owner, as the case may be, must enter into a domestic use agreement in 
accordance with the provisions of Sec.  1.1503(d)-6(d) and, in addition, 
must include the following items in such domestic use agreement:
    (A) A statement that the document is also being submitted under the 
provisions of paragraph (e)(2) of this section.
    (B) A certification that the conditions of paragraph (e)(2)(i) of 
this section are satisfied during the taxable year in which the dual 
consolidated loss is incurred.
    (C) An agreement to include with each annual certification required 
under Sec.  1.1503(d)-6(g), a certification that the conditions 
described in paragraph (e)(2)(i) of this section are satisfied during 
the taxable year of each such certification.
    (iii) Termination of stand-alone domestic use agreement. This 
paragraph (e)(2)(iii) applies to a consolidated group, unaffiliated dual 
resident corporation, or unaffiliated domestic owner, as the case may 
be, that entered into a domestic use agreement pursuant to paragraph 
(e)(2)(ii) of this section, with respect to a dual consolidated loss, 
and which subsequently makes an election pursuant to Sec.  1.1503(d)-
6(b) (relating to agreements entered into between the United States and 
a foreign country) with respect to such dual consolidated loss. In such 
a case, the dual consolidated loss shall be subject to the election 
under Sec.  1.1503(d)-6(b) (and any related agreements, representations 
and conditions), and the domestic use agreement entered into pursuant to 
paragraph (e)(2)(ii) of this

[[Page 1005]]

section shall terminate and have no further effect.
    (3) Exception for domestic consenting corporations. Paragraph (e)(1) 
of this section will not apply so as to deem a foreign use of a dual 
consolidated loss incurred by a domestic consenting corporation that is 
a dual resident corporation under Sec.  1.1503(d)-1(b)(2)(iii).

[T.D. 9315, 72 FR 12914, Mar. 19, 2007, as amended by T.D. 9896, 85 FR 
19855, Apr. 8, 2020]



Sec.  1.1503(d)-4  Domestic use limitation and related operating rules.

    (a) Scope. This section prescribes rules that apply when the general 
limitation on the domestic use of a dual consolidated loss under 
paragraph (b) of this section applies. Thus, the rules of this section 
do not apply when an exception to the domestic use limitation applies 
(for example, as a result of a domestic use election under Sec.  
1.1503(d)-6(d)). In general, when the domestic use limitation applies, 
the dual consolidated loss of a dual resident corporation or separate 
unit is subject to the separate return limitation year (SRLY) provisions 
of Sec.  1.1502-21(c), as modified under this section. Paragraph (c) of 
this section provides rules that determine the effect of a dual 
consolidated loss on a consolidated group, an unaffiliated dual resident 
corporation, or an unaffiliated domestic owner. Paragraph (d) of this 
section provides rules that eliminate dual consolidated losses following 
certain transactions or events. Paragraph (e) of this section contains 
provisions that prevent dual consolidated losses from offsetting tainted 
income. Finally, paragraph (f) of this section provides rules for 
computing foreign tax credits.
    (b) Limitation on domestic use of a dual consolidated loss. Except 
as provided in Sec.  1.1503(d)-6, the domestic use of a dual 
consolidated loss is not permitted. See Sec.  1.1503(d)-2 for the 
definition of a domestic use. See also Sec.  1.1503(d)-7(c) Examples 2 
through 4.
    (c) Effect of a dual consolidated loss on a consolidated group, 
unaffiliated dual resident corporation, or unaffiliated domestic owner. 
For any taxable year in which a dual resident corporation or separate 
unit has a dual consolidated loss that is subject to the domestic use 
limitation of paragraph (b) of this section, the following rules shall 
apply:
    (1) Dual resident corporation. This paragraph (c)(1) applies to a 
dual consolidated loss of a dual resident corporation. The unaffiliated 
dual resident corporation, or consolidated group that includes the dual 
resident corporation, shall compute its taxable income (or loss), or 
consolidated taxable income (or loss), respectively, without taking into 
account those items of deduction and loss that compose the dual resident 
corporation's dual consolidated loss. For this purpose, the dual 
consolidated loss shall be treated as composed of a pro rata portion of 
each item of deduction and loss of the dual resident corporation taken 
into account in calculating the dual consolidated loss. The dual 
consolidated loss is subject to the limitations on its use contained in 
paragraph (c)(3) of this section and, subject to such limitations, may 
be carried over or back for use in other taxable years as a separate net 
operating loss carryover or carryback of the dual resident corporation 
arising in the year incurred. If the dual resident corporation owns a 
separate unit or an interest in a transparent entity, the limitations 
contained in paragraph (c)(3) of this section shall apply to the dual 
resident corporation as if the separate unit or interest in a 
transparent entity were a separate domestic corporation that filed a 
consolidated return with the unaffiliated dual resident corporation, or 
with the consolidated group of the affiliated dual resident corporation, 
as applicable.
    (2) Separate unit. This paragraph (c)(2) applies to a dual 
consolidated loss that is attributable to a separate unit. The 
unaffiliated domestic owner of a separate unit, or the consolidated 
group of an affiliated domestic owner of a separate unit, shall compute 
its taxable income (or loss) or consolidated taxable income (or loss), 
respectively, without taking into account those items of deduction and 
loss that compose the separate unit's dual consolidated loss. For this 
purpose, the dual consolidated loss shall be treated as composed of a 
pro rata portion of each item of deduction and loss of the separate unit 
taken into

[[Page 1006]]

account in calculating the dual consolidated loss. The dual consolidated 
loss is subject to the limitations contained in paragraph (c)(3) of this 
section as if the separate unit to which the dual consolidated loss is 
attributable were a separate domestic corporation that filed a 
consolidated return with its unaffiliated domestic owner or with the 
consolidated group of its affiliated domestic owner, as applicable. 
Subject to such limitations, the dual consolidated loss may be carried 
over or back for use in other taxable years as a separate net operating 
loss carryover or carryback of the separate unit arising in the year 
incurred. See Sec.  1.1503(d)-7(c) Examples 29 and 38.
    (3) SRLY limitation. The dual consolidated loss shall be treated as 
a loss incurred by the dual resident corporation or separate unit in a 
separate return limitation year and shall be subject to all of the 
limitations of Sec.  1.1502-21(c) (SRLY limitation), subject to the 
following modifications--
    (i) Notwithstanding Sec.  1.1502-1(f)(2)(i), the SRLY limitation is 
applied to any dual consolidated loss of a common parent that is a dual 
resident corporation, or any dual consolidated loss attributable to a 
separate unit of a common parent;
    (ii) The SRLY limitation is applied without regard to Sec.  1.1502-
21(c)(2) (SRLY subgroup limitation) and 1.1502-21(g) (overlap with 
section 382);
    (iii) For purposes of calculating the general SRLY limitation under 
Sec.  1.1502-21(c)(1)(i), the calculation of aggregate consolidated 
taxable income shall only include items of income, gain, deduction, and 
loss generated--
    (A) In the case of a hybrid entity separate unit, in years in which 
the hybrid entity (an interest in which is a separate unit) is taxed as 
a corporation (or otherwise at the entity level) either on its worldwide 
income or as a resident in the same foreign country in which it was so 
taxed during the year in which the dual consolidated loss was generated; 
and
    (B) In the case of a foreign branch separate unit, in years in which 
the foreign branch qualified as a separate unit in the same foreign 
country in which it so qualified during the year in which the dual 
consolidated loss was generated;
    (iv) For purposes of calculating the general SRLY limitation under 
Sec.  1.1502-21(c)(1)(i), the calculation of aggregate consolidated 
taxable income shall not include any amount included in income pursuant 
to Sec.  1.1503(d)-6(h) (relating to the recapture of a dual 
consolidated loss).
    (v) The SRLY limitation is applied without regard to Sec.  1.1502-
21(c)(1)(i)(E) (section 172(a) limitation applicable to a SRLY member).
    (4) Items of a dual consolidated loss used in other taxable years. A 
pro rata portion of each item of deduction or loss that composes the 
dual consolidated loss shall be considered to be used when the dual 
consolidated loss is used in other taxable years. See Sec.  1.1503(d)-
7(c) Examples 29 and 38.
    (5) Reconstituted net operating losses. For additional rules and 
limitations that apply to reconstituted net operating losses, see Sec.  
1.1503(d)-6(h)(6).
    (d) Elimination of a dual consolidated loss after certain 
transactions--(1) General rule. In general, a dual resident corporation 
has a net operating loss (and, therefore, a dual consolidated loss) only 
if it sustains such loss, or succeeds to such loss as a result of 
acquiring the assets of a corporation that sustained the loss in a 
transaction described in section 381(a). Similarly, a net loss generally 
is attributable to a separate unit of a domestic owner (and therefore is 
a dual consolidated loss) only if the domestic owner incurs the 
deductions or losses, or succeeds to such deductions or losses in a 
transaction described in section 381(a). Except as provided in Sec.  
1.1503(d)-6(h)(6)(iii), section 1503(d) and these regulations do not 
alter these general rules. Thus, the provisions of Sec. Sec.  1.1503(d)-
1 through 1.1503(d)-8 generally do not cause a corporation to have a 
dual consolidated loss if it did not sustain (or inherit) the loss. 
Instead, these regulations either eliminate a dual consolidated loss 
that a corporation sustained (or inherited), or prevent the carryover of 
a dual consolidated loss under section 381 that would ordinarily occur, 
as a result of certain transactions.

[[Page 1007]]

    (i) Transactions described in section 381(a). This paragraph 
(d)(1)(i) applies to a dual consolidated loss of a dual resident 
corporation, or of a domestic owner attributable to a separate unit, 
that is subject to the domestic use limitation rule of paragraph (b) of 
this section. In such a case, and except as provided in paragraph (d)(2) 
of this section, the dual consolidated loss shall not carry over to 
another corporation in a transaction described in section 381(a) and, as 
a result, shall be eliminated. See Sec.  1.1503(d)-7(c) Example 20.
    (ii) Cessation of separate unit status. This paragraph (d)(1)(ii) 
applies when a separate unit of an unaffiliated domestic owner ceases to 
be a separate unit of its domestic owner, or when a separate unit of an 
affiliated domestic owner ceases to be a separate unit with respect to 
its domestic owner and all other members of the affiliated domestic 
owner's consolidated group. In such a case, and except as provided in 
paragraph (d)(2)(iii) of this section, a dual consolidated loss of the 
domestic owner attributable to such separate unit, that is subject to 
the domestic use limitation of paragraph (b) of this section, shall be 
eliminated. For purposes of this paragraph (d)(1)(ii), a separate unit 
may cease to be a separate unit if, for example, such separate unit is 
terminated, dissolved, liquidated, sold, or otherwise disposed of. See 
Sec.  1.1503(d)-7(c) Example 21.
    (2) Exceptions--(i) Certain section 368(a)(1)(F) reorganizations. 
Paragraph (d)(1)(i) of this section (relating to transactions described 
in section 381(a)) shall not apply to a dual consolidated loss of a dual 
resident corporation that undergoes a reorganization described in 
section 368(a)(1)(F) in which the resulting corporation is a domestic 
corporation. In such a case, the dual consolidated loss of the resulting 
corporation continues to be subject to the limitations of paragraphs (b) 
and (c) of this section, applied as if the resulting corporation 
incurred the dual consolidated loss.
    (ii) Acquisition of a dual resident corporation by another dual 
resident corporation. If a dual resident corporation transfers its 
assets to another dual resident corporation in a transaction described 
in section 381(a), and the transferee corporation is a resident of (or 
is taxed on its worldwide income by) the same foreign country of which 
the transferor was a resident (or was taxed on its worldwide income), 
then paragraph (d)(1)(i) of this section shall not apply with respect to 
dual consolidated losses of the dual resident corporation, and income 
generated by the transferee may be offset by the carryover dual 
consolidated losses of the transferor, subject to the limitations of 
paragraphs (b) and (c) of this section applied as if the transferee 
incurred the dual consolidated loss. Dual consolidated losses of the 
transferor dual resident corporation may not, however, be used to offset 
income attributable to separate units or interests in transparent 
entities owned by the transferee because they constitute domestic 
affiliates under Sec.  1.1503(d)-1(b)(12)(iii) and (iv), respectively.
    (iii) Acquisition of a separate unit by a domestic corporation. This 
paragraph (d)(2)(iii) provides exceptions to the general rules in 
paragraphs (d)(1)(i) and (ii) of this section that eliminate the dual 
consolidated loss of a domestic owner that is attributable to a separate 
unit following certain transactions or events. The exceptions set forth 
in this paragraph (d)(2)(iii) shall only apply where a domestic owner 
transfers its assets to a domestic corporation (transferee corporation) 
in a transaction described in section 381(a).
    (A) Acquisition by a corporation that is not a member of the same 
consolidated group--(1) General rule. If a domestic owner transfers 
either an individual separate unit or a combined separate unit to a 
transferee corporation that is not a member of its consolidated group in 
a transaction described in section 381(a), and the transferee 
corporation, or a member of the transferee's consolidated group, is a 
domestic owner of the transferred separate unit immediately after the 
transaction, then paragraphs (d)(1)(i) and (ii) of this section shall 
not apply to such transfer. In addition, income of the transferee, or a 
member of the transferee's consolidated group, that is attributable to 
the transferred separate unit may be offset by the carryover dual 
consolidated losses of the transferor domestic owner

[[Page 1008]]

that were attributable to the transferred separate unit, subject to the 
limitations of paragraphs (b) and (c) of this section applied as if the 
transferee incurred the dual consolidated losses and such losses were 
attributable to the separate unit. See Sec.  1.1503(d)-7(c) Example 21.
    (2) Combination with separate units of the transferee. This 
paragraph (d)(2)(iii)(A)(2) applies to a transaction described in 
paragraph (d)(2)(iii)(A)(1) of this section where the transferred 
separate unit is combined with another separate unit of the transferee, 
or another member of the transferee's consolidated group, immediately 
after the transfer as provided under Sec.  1.1503(d)-1(b)(4)(ii). In 
such a case, income generated by the transferee, or another member of 
the transferee's consolidated group, that is attributable to the 
combined separate unit may be offset by the carryover dual consolidated 
losses that were attributable to the transferred separate unit, subject 
to the limitations of paragraphs (b) and (c) of this section, applied as 
if the transferee incurred the dual consolidated losses and such losses 
were attributable to the combined separate unit.
    (B) Acquisition by a member of the same consolidated group. If an 
affiliated domestic owner transfers its assets to another member of its 
consolidated group in a transaction described in section 381(a), and the 
transferee corporation or another member of such consolidated group is a 
domestic owner of the separate unit to which the dual consolidated loss 
was attributable, then paragraphs (d)(1)(i) and (ii) of this section 
shall not apply. In addition, income generated by the transferee that is 
attributable to the transferred separate unit may be offset by the 
carryover dual consolidated losses that were attributable to the 
transferred separate unit, subject to the limitations of paragraphs (b) 
and (c) of this section, applied as if the transferee incurred the dual 
consolidated losses and such losses were attributable to the separate 
unit. See Sec.  1.1503(d)-7(c) Example 21.
    (iv) Special rules for foreign insurance companies. See Sec.  
1.1503(d)-6(a) for additional limitations that apply where the 
transferor is a foreign insurance company that is a dual resident 
corporation under Sec.  1.1503(d)-1(b)(2)(ii).
    (e) Special rule denying the use of a dual consolidated loss to 
offset tainted income--(1) In general. Dual consolidated losses incurred 
by a dual resident corporation that are subject to the domestic use 
limitation rule under paragraph (b) of this section shall not be used to 
offset income it earns after it ceases to be a dual resident corporation 
to the extent that such income is tainted income.
    (2) Tainted income--(i) Definition. For purposes of paragraph (e)(1) 
of this section, the term tainted income means--
    (A) Income or gain recognized on the sale or other disposition of 
tainted assets; and
    (B) Income derived as a result of holding tainted assets.
    (ii) Income presumed to be derived from holding tainted assets. In 
the absence of evidence establishing the actual amount of income that is 
attributable to holding tainted assets, the portion of a corporation's 
income in a particular taxable year that is treated as tainted income 
derived as a result of holding tainted assets shall be an amount equal 
to the corporation's taxable income for the year (other than income 
described in paragraph (e)(2)(i)(A) of this section) multiplied by a 
fraction, the numerator of which is the fair market value of all tainted 
assets acquired by the corporation (determined at the time such assets 
were so acquired) and the denominator of which is the fair market value 
of the total assets owned by the corporation at the end of such taxable 
year. To establish the actual amount of income that is attributable to 
holding tainted assets, documentation must be attached to, and filed by 
the due date (including extensions) of, the domestic corporation's tax 
return or the consolidated tax return of an affiliated group of which it 
is a member, as the case may be, for the taxable year in which the 
income is generated. See Sec.  1.1503(d)-7(c) Example 22.
    (3) Tainted assets defined. For purposes of paragraph (e)(2) of this 
section, tainted assets are any assets acquired by a domestic 
corporation in a nonrecognition transaction, as defined in section 
7701(a)(45), any assets otherwise

[[Page 1009]]

transferred to the corporation as a contribution to capital, or any 
assets otherwise received from a separate unit or a transparent entity 
owned by such domestic corporation, at any time during the three taxable 
years immediately preceding the taxable year in which the corporation 
ceases to be a dual resident corporation or at any time thereafter.
    (4) Exceptions. Income derived from assets acquired by a domestic 
corporation shall not be subject to the limitation described in 
paragraph (e)(1) of this section, and in addition shall not be treated 
as tainted assets as defined in paragraph (e)(3) of this section, if--
    (i) For the taxable year in which the assets were acquired, the 
corporation did not have a dual consolidated loss (or a carryforward of 
a dual consolidated loss to such year); or
    (ii) The assets were acquired as replacement property in the 
ordinary course of business.
    (f) Computation of foreign tax credit limitation. If a dual 
consolidated loss is subject to the domestic use limitation rule under 
paragraph (b) of this section, the consolidated group, unaffiliated dual 
resident corporation, or unaffiliated domestic owner shall compute its 
foreign tax credit limitation by applying the limitations of paragraph 
(c) of this section. Thus, the items constituting the dual consolidated 
loss are not taken into account until the year in which such items are 
absorbed.

[T.D. 9315, 72 FR 12914, Mar. 19, 2007, as amended by T.D. 9927, 85 FR 
67988, Oct. 27, 2020]

    Editorial Note: By T.D. 9927, 85 FR 67988, Oct. 27, 2020, Sec.  
1.1503(d)-4 was amended; however, a portion of the amendment could not 
be incorporated due to inaccurate amendatory instruction.



Sec.  1.1503(d)-5  Attribution of items and basis adjustments.

    (a) In general. This section provides rules for determining the 
amount of income or dual consolidated loss of a dual resident 
corporation. This section also provides rules for determining the income 
or dual consolidated loss attributable to a separate unit, as well as 
the income or loss attributable to an interest in a transparent entity. 
Paragraph (b) of this section provides rules with respect to dual 
resident corporations. Paragraph (c) of this section provides rules with 
respect to separate units and interests in transparent entities. These 
determinations are required for various purposes under section 1503(d). 
For example, it is necessary for purposes of applying the domestic use 
limitation rule under Sec.  1.1503(d)-4(b) to a dual consolidated loss, 
and for determining the extent to which a dual consolidated loss is 
available to offset income as provided under Sec.  1.1503(d)-4(c). These 
determinations are also necessary for purposes of determining whether 
the amount subject to recapture may be reduced pursuant to Sec.  
1.1503(d)-6(h)(2). Paragraph (d) of this section provides rules with 
respect to the foreign tax treatment of items. Paragraph (e) of this 
section provides rules regarding the treatment of items where a dual 
resident corporation, separate unit, or transparent entity only 
qualified as such during a portion of a taxable year. Paragraph (f) of 
this section provides rules for determining the assets and liabilities 
of a separate unit. Finally, paragraph (g) of this section provides 
rules for making basis adjustments to stock of certain members of a 
consolidated group and to certain interests in partnerships. The rules 
in this section apply for purposes of Sec. Sec.  1.1503(d)-1 through 
1.1503(d)-7.
    (b) Determination of amount of income or dual consolidated loss of a 
dual resident corporation--(1) In general. For purposes of determining 
whether a dual resident corporation has income or a dual consolidated 
loss for the taxable year, and except as provided in paragraph (b)(2) of 
this section, the dual resident corporation shall compute its income or 
dual consolidated loss taking into account only those items of income, 
gain, deduction, and loss from such year (including any items recognized 
by such corporation as a result of an election under section 338). In 
the case of an affiliated dual resident corporation, such calculation 
shall be made in accordance with the rules set forth in the regulations 
under section 1502 governing the computation of consolidated taxable 
income. See also paragraphs (d) and (e) of this section.

[[Page 1010]]

    (2) Exceptions. For purposes of determining the income or dual 
consolidated loss of a dual resident corporation, the following shall 
not be taken into account--
    (i) Any net capital loss of the dual resident corporation;
    (ii) Any carryover or carryback losses; or
    (iii) Any items of income, gain, deduction, and loss that are 
attributable to a separate unit or an interest in a transparent entity 
of the dual resident corporation.
    (c) Determination of amount of income or dual consolidated loss 
attributable to a separate unit, and income or loss attributable to an 
interest in a transparent entity--(1) In general--(i) Scope and purpose. 
Paragraphs (c) through (e) of this section apply for purposes of 
determining the income or dual consolidated loss attributable to a 
separate unit, and the income or loss attributable to an interest in a 
transparent entity, for the taxable year. In the case of an affiliated 
domestic owner, this determination shall be made in accordance with the 
rules set forth in the regulations under section 1502 governing the 
computation of consolidated taxable income. These rules apply solely for 
purposes of section 1503(d).
    (ii) Only items of domestic owner taken into account. The 
computation made under paragraphs (c) through (e) of this section shall 
be made using only those existing items of income, gain, deduction, and 
loss of the separate unit's or transparent entity's domestic owner (or 
owners, in the case of certain combined separate units), as determined 
for U.S. tax purposes. These items must be translated into U.S. dollars 
(if necessary) at the appropriate exchange rate provided under section 
989(b), as modified by regulations. The computation shall be made as if 
the separate unit or interest in a transparent entity were a domestic 
corporation, using items that are attributable to the separate unit or 
interest in a transparent entity. However, for purposes of making this 
computation, net capital losses, and carryover or carryback losses, of 
the domestic owner shall not be taken into account. Items of income, 
gain, deduction, and loss that are otherwise disregarded for U.S. tax 
purposes shall not be regarded or taken into account for purposes of 
this section. See Sec.  1.1503(d)-7(c) Examples 6 and 23 through 25.
    (iii) Separate application. The attribution rules of this section 
shall apply separately to each separate unit or interest in a 
transparent entity. Thus, an item of income, gain, deduction, or loss 
shall not be considered attributable to more than one separate unit or 
interest in a transparent entity. In addition, for purposes of this 
section items of income, gain, deduction, and loss attributable to a 
separate unit or an interest in a transparent entity shall not offset 
items of income, gain, deduction, and loss of another separate unit or 
interest in a transparent entity. See Sec.  1.1503(d)-7(c) Example 24. 
See also the separate unit combination rule in Sec.  1.1503(d)-
1(b)(4)(ii).
    (2) Foreign branch separate unit--(i) In general. Except to the 
extent provided in paragraph (c)(4) of this section, for purposes of 
determining the items of income, gain, deduction (other than interest), 
and loss of a domestic owner that are attributable to the domestic 
owner's foreign branch separate unit, the principles of section 
864(c)(2), (c)(4), and (c)(5), as set forth in Sec.  1.864-4(c), and 
Sec. Sec.  1.864-5 through 1.864-7, shall apply. The principles apply 
without regard to limitations imposed on the effectively connected 
treatment of income, gain, or loss under the trade or business safe 
harbors in section 864(b) and the limitations for treating foreign 
source income as effectively connected under section 864(c)(4)(D). 
Except as provided in paragraph (c)(2)(iii) of this section, for 
purposes of determining the domestic owner's interest expense that is 
attributable to a foreign branch separate unit, the principles of Sec.  
1.882-5, as modified in paragraph (c)(2)(ii) of this section, shall 
apply. When applying the principles of section 864(c) (as modified by 
this paragraph) and Sec.  1.882-5 (as modified in paragraph (c)(2)(ii) 
of this section), the foreign branch separate unit's domestic owner 
shall be treated as a foreign corporation, the foreign branch separate 
unit shall be treated as a trade or business within the United States, 
and the other assets of the domestic owner shall be treated as assets 
that are not U.S. assets.

[[Page 1011]]

    (ii) Principles of Sec.  1.882-5. For purposes of paragraph 
(c)(2)(i) of this section, the principles of Sec.  1.882-5 shall be 
applied, subject to the following modifications--
    (A) Except as otherwise provided in this section, only the assets, 
liabilities, and interest expense of the domestic owner shall be taken 
into account in the Sec.  1.882-5 formula;
    (B) Except as provided under paragraph (c)(2)(ii)(C) of this 
section, a taxpayer may use the alternative tax book value method under 
Sec.  1.861-9(i) for purposes of determining the value of its U.S. 
assets pursuant to Sec.  1.882-5(b)(2) and its worldwide assets pursuant 
to Sec.  1.882-5(c)(2);
    (C) For purposes of determining the value of a U.S. asset pursuant 
to Sec.  1.882-5(b)(2), and worldwide assets pursuant to Sec.  1.882-
5(c)(2), the taxpayer must use the same methodology under Sec.  1.861-
9T(g) (that is, tax book value, alternative tax book value, or fair 
market value) that the taxpayer uses for purposes of allocating and 
apportioning interest expense for the taxable year under section 864(e);
    (D) Asset values shall be determined pursuant to Sec.  1.861-
9T(g)(2); and
    (E) For purposes of determining the step-two U.S. connected 
liabilities, the amounts of worldwide assets and liabilities under Sec.  
1.882-5(c)(2)(iii) and (iv) must be determined in accordance with U.S. 
tax principles, rather than substantially in accordance with U.S. tax 
principles.
    (iii) Exception where foreign country attributes interest expense 
solely by reference to books and records. The principles of Sec.  1.882-
5 shall not apply if the foreign country in which the foreign branch 
separate unit is located determines, for purposes of computing taxable 
income (or loss) of a permanent establishment or branch of a nonresident 
corporation under the laws of the foreign country, the interest expense 
of the foreign branch separate unit by taking into account only the 
items of interest expense reflected on the foreign branch separate 
unit's books and records. In such a case, only those items of the 
domestic owner's interest expense reflected on the foreign branch 
separate unit's books and records (as provided in paragraph (c)(3)(i) of 
this section), adjusted to conform to U.S. tax principles, shall be 
attributable to the foreign branch separate unit. This paragraph shall 
not apply where the foreign country does not use a method of attributing 
interest based solely on the interest that is reflected on the books and 
records. For example, this paragraph does not apply if the foreign 
country uses a method for attributing interest expense similar to Sec.  
1.882-5 or that set forth in the Organization for Economic Co-operation 
and Development Report on the Attribution of Profits to Permanent 
Establishments, Part II (Banks), December 2006. See http://www.oecd.org.
    (3) Hybrid entity separate unit and an interest in a transparent 
entity--(i) General rule. This paragraph (c)(3) applies to determine the 
items of income, gain, deduction, and loss of a domestic owner that are 
attributable to a hybrid entity separate unit, or an interest in a 
transparent entity, of such domestic owner. Except to the extent 
provided in paragraph (c)(4) of this section, the domestic owner's items 
of income, gain, deduction, and loss are attributable to the extent they 
are reflected on the books and records of the hybrid entity or 
transparent entity, as applicable, as adjusted to conform to U.S. tax 
principles. See Sec.  1.1503(d)-7(c) Examples 23 through 26. For 
purposes of this paragraph (c)(3), the term ``books and records'' has 
the meaning provided under Sec.  1.989(a)-1(d). The treatment of items 
for foreign tax purposes, including under any type of foreign anti-
deferral regime, is not relevant for purposes of determining whether 
items are reflected on the books and records of the entity, or for 
purposes of making adjustments to such items to conform to U.S. tax 
principles. The method described in the second sentence of this 
paragraph shall not apply to the extent that the Commissioner determines 
that booking practices are employed with a principal purpose of avoiding 
the principles of section 1503(d), including inconsistently treating the 
same or similar items of income, gain, deduction, and loss. In such a 
case, the Commissioner may reallocate the items of income, gain, 
deduction, and loss between or among a domestic owner, its hybrid 
entities, its transparent entities

[[Page 1012]]

(and interests therein), its separate units, or any other entity, as 
applicable, in a manner consistent with the principles of section 
1503(d) and which properly reflects income (or loss).
    (ii) Interests in certain disregarded entities, partnerships, and 
grantor trusts owned by a hybrid entity or transparent entity. This 
paragraph (c)(3)(ii) applies if a hybrid entity or transparent entity to 
which paragraph (c)(3)(i) of this section applies owns, directly or 
indirectly (other than through a hybrid entity or transparent entity), 
an interest in an entity that is treated as a disregarded entity, 
partnership, or grantor trust for U.S. tax purposes, but is not a hybrid 
entity or a transparent entity. For example, the rules of this paragraph 
would apply when a hybrid entity holds an interest in a limited 
partnership created in the United States and, for both U.S. and foreign 
tax purposes the entity is considered a partnership. In such a case, and 
except to the extent provided in paragraph (c)(4) of this section, items 
of income, gain, deduction, and loss that are reflected on the books and 
records of such disregarded entity, partnership or grantor trust, as 
determined under paragraph (c)(3)(i) of this section, shall be treated 
as being reflected on the books and records of the hybrid entity or 
transparent entity for purposes of applying paragraph (c)(3)(i) of this 
section. See Sec.  1.1503(d)-7(c) Example 26.
    (4) Special rules. The following special rules shall apply for 
purposes of attributing items to separate units or interests in 
transparent entities under this section:
    (i) Allocation of items between certain tiered separate units and 
interests in transparent entities--(A) Foreign branch separate unit. 
This paragraph (c)(4)(i) applies where a hybrid entity or transparent 
entity owns directly or indirectly (other than through a hybrid entity 
or a transparent entity), a foreign branch separate unit. For purposes 
of determining items of income, gain, deduction, and loss of the 
domestic owner that are attributable to the domestic owner's foreign 
branch separate unit described in the preceding sentence, only items of 
income, gain, deduction, and loss that are attributable to the domestic 
owner's interest in the hybrid entity, or transparent entity, as 
provided in paragraph (c)(3) of this section, shall be taken into 
account. Further, only assets, liabilities, and activities of the 
domestic owner's interest in the hybrid entity or the transparent entity 
shall be taken into account under paragraph (c)(2) of this section when 
applying the principles of 864(c)(2), (c)(4), (c)(5) (as set forth in 
Sec.  1.864-4(c), and Sec. Sec.  1.864-5 through 1.864-7), and Sec.  
1.882-5 (as modified in paragraph (c)(2)(ii) of this section). See Sec.  
1.1503(d)-7(c) Examples 25 and 26.
    (B) Hybrid entity separate unit or interest in a transparent entity. 
For purposes of determining items of income, gain, deduction, and loss 
that are attributable to a hybrid entity separate unit or an interest in 
a transparent entity described in paragraph (c)(3) of this section, such 
items shall not be taken into account to the extent they are 
attributable to a foreign branch separate unit pursuant to paragraph 
(c)(4)(i)(A) of this section. See Sec.  1.1503(d)-7(c) Examples 25 and 
26.
    (ii) Combined separate unit. If two or more individual separate 
units defined in Sec.  1.1503(d)-1(b)(4)(i) are treated as one combined 
separate unit pursuant to Sec.  1.1503(d)-1(b)(4)(ii), the items of 
income, gain, deduction, and loss that are attributable to the combined 
separate unit shall be determined as follows:
    (A) Items of income, gain, deduction, and loss are first attributed 
to each individual separate unit without regard to Sec.  1.1503(d)-
1(b)(4)(ii), pursuant to the rules of paragraphs (c) through (e) of this 
section.
    (B) The combined separate unit then takes into account all of the 
items of income, gain, deduction, and loss attributable to its 
individual separate units pursuant to paragraph (c)(4)(ii)(A) of this 
section. See Sec.  1.1503(d)-7(c) Examples 25 and 26.
    (iii) Gain or loss on the direct or indirect disposition of a 
separate unit or an interest in a transparent entity--(A) In general. 
This paragraph (c)(4)(iii) applies for purposes of attributing items of 
income, gain, deduction, and loss

[[Page 1013]]

that are recognized on the sale, exchange, or other disposition of a 
separate unit or an interest in a transparent entity (or an interest in 
a disregarded entity, partnership, or grantor trust that owns, directly 
or indirectly, a separate unit or an interest in a transparent entity). 
For purposes of this paragraph (c)(4)(iii), items taken into account on 
the sale, exchange, or other disposition include loss recapture income 
or gain under section 367(a)(3)(C) or 904(f)(3), and gain or loss 
recognized by the domestic owner as the result of an election under 
section 338. In cases where this paragraph (c)(4)(iii)(A) applies, items 
taken into account on the sale, exchange, or other disposition shall be 
attributable to the separate unit or the interest in the transparent 
entity to the extent of gain or loss that would have been recognized had 
the separate unit or transparent entity sold all its assets (as 
determined in paragraph (f) of this section) in a taxable exchange, 
immediately before the sale, exchange, or other disposition (deemed 
sale). For purposes of a deemed sale described in this paragraph 
(c)(4)(iii), the assets are treated as being sold for an amount equal to 
their fair market value, plus the assumption of the liabilities of the 
separate unit or interest in a transparent entity (as determined in 
paragraph (f) of this section). See Sec.  1.1503(d)-7(c) Example 27.
    (B) Multiple separate units or interests in transparent entities. 
This paragraph (c)(4)(iii)(B) applies to a sale, exchange, or other 
disposition described in paragraph (c)(4)(iii)(A) of this section that 
results in more than one separate unit or interest in a transparent 
entity being, directly or indirectly, disposed of. In such a case, items 
of income, gain, deduction, and loss recognized on such sale, exchange, 
or other disposition are allocated and attributed to each separate unit 
or interest in a transparent entity, based on the relative gain or loss 
that would have been recognized by each separate unit or interest in a 
transparent entity pursuant to a deemed sale of their assets. See Sec.  
1.1503(d)-7(c) Example 28.
    (iv) Inclusions on stock. Any amount included in income of a 
domestic owner arising from ownership of stock in a foreign corporation 
(for example, under sections 78, 951, or 986(c)) through a separate 
unit, or interest in a transparent entity, shall be attributable to the 
separate unit or interest in a transparent entity, if an actual dividend 
from such foreign corporation would have been so attributed. See Sec.  
1.1503(d)-7(c) Example 24.
    (v) Foreign currency gain or loss recognized under section 987. 
Foreign currency gain or loss of a domestic owner recognized under 
section 987 as a result of a transfer or remittance shall not be 
attributable to a separate unit or an interest in a transparent entity.
    (vi) Recapture of dual consolidated loss. If all or a portion of a 
dual consolidated loss that was attributable to a separate unit is 
included in the gross income of a domestic owner under the recapture 
provisions of Sec.  1.1503(d)-6(h), such amount shall be attributable to 
the separate unit that incurred the dual consolidated loss being 
recaptured. See Sec.  1.1503(d)-7(c) Examples 38 and 40.
    (d) Foreign tax treatment disregarded. The fact that a particular 
item taken into account in computing the income or dual consolidated 
loss of a dual resident corporation or a separate unit, or the income or 
loss of an interest in a transparent entity, is not taken into account 
in computing income (or loss) subject to a foreign country's income tax 
shall not cause such item to be excluded from being taken into account 
under paragraph (b), (c), or (e) of this section.
    (e) Items generated or incurred while a dual resident corporation, a 
separate unit, or a transparent entity. For purposes of determining the 
amount of the dual consolidated loss of a dual resident corporation for 
the taxable year, only the items of income, gain, deduction, and loss 
generated or incurred during the period the dual resident corporation 
qualified as such shall be taken into account. For purposes of 
determining the amount of income of a dual resident corporation for the 
taxable year, all the items of income, gain, deduction, and loss 
generated or incurred during the year shall be taken into account. For 
purposes of determining the amount of the income or dual consolidated 
loss attributable to a separate

[[Page 1014]]

unit, or the income or loss attributable to an interest in a transparent 
entity, for the taxable year, only the items of income, gain, deduction, 
and loss generated or incurred during the period the separate unit or 
the interest in the transparent entity qualified as such shall be taken 
into account. For purposes of this paragraph (e), the allocation of 
items to periods shall be made under the principles of Sec.  1.1502-
76(b).
    (f) Assets and liabilities of a separate unit or an interest in a 
transparent entity. A separate unit or an interest in a transparent 
entity shall be treated as owning assets to the extent items of income, 
gain, deduction, and loss from such assets would be attributable to the 
separate unit or interest in the transparent entity under paragraphs (c) 
through (e) of this section. Similarly, liabilities shall be treated as 
liabilities of a separate unit, or an interest in a transparent entity, 
to the extent interest expense incurred on such liabilities would be 
attributable to the separate unit, or the interest in a transparent 
entity, under paragraphs (c) through (e) of this section.
    (g) Basis adjustments--(1) Affiliated dual resident corporation or 
affiliated domestic owner. If a member of a consolidated group owns 
stock in an affiliated dual resident corporation or an affiliated 
domestic owner that is a member of the same consolidated group, the 
member shall adjust the basis of the stock in accordance with the 
provisions of Sec.  1.1502-32. Corresponding adjustments shall be made 
to the stock of other members in accordance with the provisions of Sec.  
1.1502-32. In the case where two or more individual separate units are 
treated as a combined separate unit pursuant to Sec.  1.1503(d)-
1(b)(4)(ii), see paragraph (g)(3) of this section.
    (2) Interests in hybrid entities that are partnerships or interests 
in partnerships through which a separate unit is owned indirectly--(i) 
Scope. This paragraph (g)(2) applies for purposes of determining the 
adjusted basis of an interest in--
    (A) A hybrid entity that is a partnership; and
    (B) A partnership through which a domestic owner indirectly owns a 
separate unit.
    (ii) Determination of basis of partner's interest. The adjusted 
basis of an interest described in paragraph (g)(2)(i) of this section 
shall be adjusted in accordance with section 705 and this paragraph 
(g)(2). The adjusted basis shall not be decreased for any amount of a 
dual consolidated loss that is attributable to the partnership interest, 
or separate unit owned indirectly through the partnership interest, as 
applicable, that is not absorbed as a result of the application of Sec.  
1.1503(d)-4(b) and (c). The adjusted basis shall, however, be decreased 
for the amount of such dual consolidated loss that is absorbed in a 
carryover or carryback taxable year. The adjusted basis shall be 
increased for any amount included in income pursuant to Sec.  1.1503(d)-
6(h) as a result of the recapture of a dual consolidated loss that was 
attributable to the interest in the hybrid partnership, or separate unit 
owned indirectly through the partnership interest, as applicable.
    (3) Combined separate units. This paragraph (g)(3) applies where two 
or more individual separate units of one or more affiliated domestic 
owners are treated as one combined separate unit pursuant to Sec.  
1.1503(d)-1(b)(4)(ii). In such a case, a member owning stock in an 
affiliated domestic owner of the combined separate unit shall adjust the 
basis in the stock of such domestic owner as provided in paragraph 
(g)(1) of this section, and an affiliated domestic owner shall adjust 
its basis in a partnership, as provided in paragraph (g)(2) of this 
section, taking into account only those items of income, gain, 
deduction, or loss attributable to each individual separate unit, prior 
to combination. For purposes of this rule, if the dual consolidated loss 
attributable to a combined separate unit is subject to the domestic use 
limitation of Sec.  1.1503(d)-4(b), then for purposes of this paragraph 
(g) and Sec.  1.1502-32, the dual consolidated loss shall be allocated 
to an individual separate unit to the extent such individual separate 
unit contributed items of deduction or loss giving rise to the dual 
consolidated loss. In addition, if one or more affiliated domestic 
owners are required to recapture all or a portion of a dual consolidated 
loss pursuant to paragraph (h) of this section, such recapture amount

[[Page 1015]]

shall be allocated to the affiliated domestic owner of the individual 
separate units composing the combined separate unit, to the extent such 
individual separate units contributed items of deduction or loss giving 
rise to the recaptured dual consolidated loss.

[T.D. 9315, 72 FR 12914, Mar. 19, 2007; 72 FR 20424, Apr. 25, 2007]



Sec.  1.1503(d)-6  Exceptions to the domestic use limitation rule.

    (a) In general--(1) Scope and purpose. This section provides certain 
exceptions to the domestic use limitation rule of Sec.  1.1503(d)-4(b). 
Paragraph (b) of this section provides an exception for bilateral 
elective agreements. Paragraph (c) of this section provides rules 
regarding an exception that applies when there is no possibility of a 
foreign use. Paragraphs (d) through (h) of this section provide rules 
for an exception where a domestic use election is made. Paragraph (e) of 
this section provides rules with respect to triggering events, and 
paragraph (f) of this section provides rules regarding exceptions to 
triggering events. Paragraph (g) of this section provides rules with 
respect to the annual certification reporting requirement. Paragraph (h) 
of this section provides rules regarding the recapture of dual 
consolidated losses. Finally, paragraph (j) of this section provides 
rules regarding the termination of domestic use agreements and the 
annual certification requirement.
    (2) Absence of foreign affiliate or foreign consolidation regime. 
The absence of a foreign affiliate or a foreign consolidation regime 
alone does not constitute an exception to the domestic use limitation 
rule. This is the case because it is still possible that all or a 
portion of the dual consolidated loss may be put to a foreign use. For 
example, there may be a foreign use with respect to an affiliate 
acquired in a year subsequent to the year in which the dual consolidated 
loss was incurred. In addition, a foreign use may occur in the absence 
of a foreign consolidation regime through a sale, merger, or similar 
transaction. See Sec.  1.1503(d)-7(c) Example 2.
    (3) Foreign insurance companies treated as domestic corporations. 
The exceptions contained in this section shall not apply to losses of a 
foreign insurance company that is a dual resident corporation under 
Sec.  1.1503(d)-1(b)(2)(ii), or to losses attributable to any separate 
unit of such foreign insurance company. In addition, these exceptions 
shall not apply to losses described in the preceding sentence that, 
subject to the rules of Sec.  1.1503(d)-4(d), carry over to a domestic 
corporation pursuant to a transaction described in section 381(a).
    (b) Elective agreement in place between the United States and a 
foreign country--(1) In general. The domestic use limitation rule of 
Sec.  1.1503(d)-4(b) shall not apply to a dual consolidated loss to the 
extent the consolidated group, unaffiliated dual resident corporation, 
or unaffiliated domestic owner, as the case may be, elects to deduct the 
loss in the United States pursuant to an agreement entered into between 
the United States and a foreign country that puts into place an elective 
procedure through which losses in a particular year may be used to 
offset income in only one country. This exception shall apply only if 
all the terms and conditions required under such agreement are 
satisfied, including any reporting or filing requirements. See Sec.  
1.1503(d)-3(e)(2)(iii) for the effect of an agreement described in this 
paragraph on a stand-alone domestic use agreement.
    (2) Application to combined separate units. This paragraph (b)(2) 
applies where two or more individual separate units are treated as one 
combined separate unit pursuant to Sec.  1.1503(d)-1(b)(4)(ii), and an 
agreement described in paragraph (b)(1) of this section would apply to 
at least one of the individual separate units. In such a case, and 
except to the extent provided in the agreement, the consolidated group, 
unaffiliated dual resident corporation, or unaffiliated domestic owner, 
as the case may be, may apply the agreement to the individual separate 
units, as applicable, provided the terms and conditions of the agreement 
are otherwise satisfied. See Sec.  1.1503(d)-7(c) Example 19.
    (c) No possibility of foreign use--(1) In general. The domestic use 
limitation rule of Sec.  1.1503(d)-4(b) shall not apply to a dual 
consolidated loss if the consolidated group, unaffiliated dual resident

[[Page 1016]]

corporation, or unaffiliated domestic owner, as the case may be--
    (i) Demonstrates, to the satisfaction of the Commissioner, that no 
foreign use (as defined in Sec.  1.1503(d)-3) of the dual consolidated 
loss occurred in the year in which it was incurred, and that no foreign 
use can occur in any other year by any means; and
    (ii) Prepares a statement described in paragraph (c)(2) of this 
section that is attached to, and filed by the due date (including 
extensions) of, its U.S. income tax return for the taxable year in which 
the dual consolidated loss is incurred. See Sec.  1.1503(d)-7(c) 
Examples 2, 30, and 31.
    (2) Statement. The statement described in this paragraph (c)(2) must 
be signed under penalties of perjury by the person who signs the tax 
return. The statement must be labeled ``No Possibility of Foreign Use of 
Dual Consolidated Loss Statement'' at the top of the page and must 
include the following items, in paragraphs labeled to correspond with 
the items set forth in paragraphs (c)(2)(i) through (iv) of this 
section:
    (i) A statement that the document is submitted under the provisions 
of paragraph (c) of this section.
    (ii) The name, address, taxpayer identification number, and place 
and date of incorporation of the dual resident corporation, and the 
country or countries that tax the dual resident corporation on its 
worldwide income or on a residence basis, or, in the case of a separate 
unit, identification of the separate unit, including the name under 
which it conducts business, its principal activity, and the country in 
which its principal place of business is located. In the case of a 
combined separate unit, such information must be provided for each 
individual separate unit that is treated as part of the combined 
separate unit under Sec.  1.1503(d)-1(b)(4)(ii).
    (iii) A statement of the amount of the dual consolidated loss at 
issue.
    (iv) An analysis, in reasonable detail and specificity, of the 
treatment of the losses and deductions composing the dual consolidated 
loss under the relevant facts. The analysis must include the reasons 
supporting the conclusion that no foreign use of the dual consolidated 
loss can occur as described in paragraph (c)(1)(i) of this section. The 
analysis must be supported with official or certified English 
translations of the relevant provisions of foreign law. The analysis 
may, for example, be based on the taxpayer's interpretation of foreign 
law, on advice received from local tax advisers in an opinion, or on a 
ruling from local country tax authorities. In all cases, however, the 
determination must be made to the satisfaction of the Commissioner.
    (d) Domestic use election--(1) In general. The domestic use 
limitation rule of Sec.  1.1503(d)-4(b) shall not apply to a dual 
consolidated loss if an election to be bound by the provisions of 
paragraphs (d) through (j) of this section is made by the consolidated 
group, unaffiliated dual resident corporation, or unaffiliated domestic 
owner, as the case may be (elector). In order to elect such relief, an 
agreement described in this paragraph (d)(1) (domestic use agreement) 
must be attached to, and filed by the due date (including extensions) 
of, the U.S. income tax return of the elector for the taxable year in 
which the dual consolidated loss is incurred. The domestic use agreement 
must be signed under penalties of perjury by the person who signs the 
return. If dual consolidated losses of more than one dual resident 
corporation or separate unit requires the filing of domestic use 
agreements by the same elector, the agreements may be combined in a 
single document, but the information required by paragraphs (d)(1)(ii) 
and (iv) of this section must be provided separately with respect to 
each dual consolidated loss. The domestic use agreement must be labeled 
``Domestic Use Election and Agreement'' at the top of the page and must 
include the following items, in paragraphs labeled to correspond with 
the following:
    (i) A statement that the document submitted is an election and an 
agreement under the provisions of paragraph (d) of this section.
    (ii) The information required by paragraph (c)(2)(ii) of this 
section.
    (iii) An agreement by the elector to comply with all of the 
provisions of paragraphs (d) through (j) of this section, as applicable.

[[Page 1017]]

    (iv) A statement of the amount of the dual consolidated loss at 
issue.
    (v) A certification that there has not been, and will not be, a 
foreign use (as defined in Sec.  1.1503(d)-3) during the certification 
period (as defined in Sec.  1.1503(d)-1(b)(20)).
    (vi) A certification that arrangements have been made to ensure that 
there will be no foreign use of the dual consolidated loss during the 
certification period, and that the elector will be informed of any such 
foreign use of the dual consolidated loss during such period.
    (vii) If applicable, a notification that an excepted triggering 
event under paragraph (f)(2) of this section has occurred with respect 
to the dual consolidated loss within the taxable year in which the loss 
is incurred. See paragraph (g) of this section for notification of 
excepted triggering events occurring during the certification period.
    (2) No domestic use election available if there is a triggering 
event in the year the dual consolidated loss is incurred. Except as 
otherwise provided in this section, if a dual resident corporation or 
separate unit incurs a dual consolidated loss in a taxable year and a 
triggering event, as described in paragraph (e)(1) of this section, 
occurs (and no exception applies) with respect to the dual consolidated 
loss in such taxable year, then the consolidated group, unaffiliated 
dual resident corporation, or unaffiliated domestic owner, as the case 
may be, may not make a domestic use election with respect to such dual 
consolidated loss and the loss will be subject to the domestic use 
limitation rule of Sec.  1.1503(d)-4(b). See Sec.  1.1503(d)-7(c) 
Examples 5 through 7. See also Sec.  1.1503(d)-4(d) for rules that 
eliminate a dual consolidated loss after certain transactions.
    (e) Triggering events requiring the recapture of a dual consolidated 
loss--(1) Events. Except as provided under paragraphs (e)(2) (rebuttal 
of triggering events) and (f) (exceptions to triggering events) of this 
section, if there is a triggering event described in this paragraph 
(e)(1) with respect to a dual consolidated loss of a dual resident 
corporation or a separate unit during the certification period (as 
defined in Sec.  1.1503(d)-1(b)(20)), the elector will recapture and 
report as ordinary income the amount of such dual consolidated loss as 
provided in paragraph (h) of this section on its tax return for the 
taxable year in which the triggering event occurs (or, when the 
triggering event is a foreign use of the dual consolidated loss, the 
taxable year that includes the last day of the foreign taxable year 
during which such use occurs). In addition, the elector must pay any 
applicable interest charge required by paragraph (h) of this section. 
For purposes of this section, any of the following events shall 
constitute a triggering event:
    (i) Foreign use. A foreign use (as defined in Sec.  1.1503(d)-3) of 
the dual consolidated loss. See Sec.  1.1503(d)-3(c) for exceptions to 
foreign use.
    (ii) Disaffiliation. An affiliated dual resident corporation or 
affiliated domestic owner that incurred directly or through a separate 
unit, respectively, a dual consolidated loss that is subject to a 
domestic use election, ceases to be a member of the consolidated group 
that made the domestic use election. For purposes of this paragraph 
(e)(1)(ii), an affiliated dual resident corporation or affiliated 
domestic owner shall be considered to cease to be a member of the 
consolidated group if it is no longer a member of the group within the 
meaning of Sec.  1.1502-1(b), or if the group ceases to exist (for 
example, when the group no longer files a consolidated return). See 
Sec.  1.1503(d)-7(c) Example 34. Any consequences resulting from this 
triggering event (for example, recapture of a dual consolidated loss) 
shall be taken into account on the tax return of the consolidated group 
for the taxable year that includes the date on which the affiliated dual 
resident corporation or affiliated domestic owner ceases to be a member 
of the consolidated group. This paragraph (e)(1)(ii) shall not apply to 
an acquisition described in Sec.  1.1502-75(d)(3) where the consolidated 
group that includes the affiliated dual resident corporation or 
affiliated domestic owner, as applicable, is treated as remaining in 
existence.
    (iii) Affiliation. An unaffiliated dual resident corporation or 
unaffiliated domestic owner becomes a member of a consolidated group. 
Any consequences resulting from this triggering event

[[Page 1018]]

(for example, recapture of a dual consolidated loss) shall be taken into 
account on the tax return of the unaffiliated dual resident corporation 
or unaffiliated domestic owner for the taxable year that ends at the end 
of the day on which such corporation becomes a member of the 
consolidated group.
    (iv) Transfer of assets. Fifty percent or more of the dual resident 
corporation's or separate unit's gross assets (measured by the fair 
market value of the assets at the time of such transaction or, for 
multiple transactions, at the time of the first transaction) is sold or 
otherwise disposed of in either a single transaction or a series of 
transactions within a twelve-month period. See Sec.  1.1503(d)-7(c) 
Examples 5 and 35 through 37. In determining whether fifty percent or 
more of such assets is sold or otherwise disposed of, any dispositions 
occurring in the ordinary course of the dual resident corporation's or 
separate unit's trade or business shall be disregarded. In addition, for 
purposes of this paragraph (e)(1)(iv), an interest in another separate 
unit and the shares of a dual resident corporation shall not be treated 
as assets of a separate unit or a dual resident corporation.
    (v) Transfer of an interest in a separate unit. Fifty percent or 
more of the interest in a separate unit (measured by voting power or 
value at the time of such transaction, or for multiple transactions, at 
the time of the first transaction) of the domestic owner, as determined 
by reference to such domestic owner's percentage interest on the last 
day of the taxable year in which the dual consolidated loss was 
incurred, is sold or otherwise disposed of either in a single 
transaction or a series of transactions within a twelve-month period. 
See Sec.  1.1503(d)-7(c) Examples 5 and 35 through 37.
    (vi) Conversion to a foreign corporation. An unaffiliated dual 
resident corporation, unaffiliated domestic owner, or hybrid entity an 
interest in which is a separate unit, that incurred the dual 
consolidated loss, becomes a foreign corporation (for example, as a 
result of a reorganization or an election to be classified as a 
corporation under Sec.  301.7701-3(c) of this chapter).
    (vii) Conversion to a regulated investment company, a real estate 
investment trust, or an S corporation. An unaffiliated dual resident 
corporation or unaffiliated domestic owner elects to be a regulated 
investment company pursuant to section 851(b)(1), a real estate 
investment trust pursuant to section 856(c)(1), or an S corporation 
pursuant to section 1362(a).
    (viii) Failure to certify. The elector fails to file a certification 
with respect to a dual consolidated loss as required under paragraph (g) 
of this section.
    (ix) Cessation of stand-alone status. In the case of a dual 
consolidated loss that is subject to the stand-alone exception described 
in Sec.  1.1503(d)-3(e)(2), the conditions described in Sec.  1.1503(d)-
3(e)(2)(i) are no longer satisfied. See Sec.  1.1503(d)-7(c) Example 18.
    (2) Rebuttal--(i) General rule. An event described in paragraph 
(e)(1) of this section shall not constitute a triggering event if the 
elector demonstrates, to the satisfaction of the Commissioner, that 
there can be no foreign use (as defined in Sec.  1.1503(d)-3) of the 
dual consolidated loss during the remaining certification period by any 
means. See paragraph (j)(1) of this section for rules regarding the 
termination of domestic use agreements and annual certifications 
following rebuttals under this general rule.
    (ii) Certain asset transfers. An event described in paragraph 
(e)(1)(iv) of this section shall not constitute a triggering event if 
the elector demonstrates, to the satisfaction of the Commissioner, that 
the transfer of assets did not result in a carryover under foreign law 
of the dual resident corporation's, or separate unit's, losses, 
expenses, or deductions to the transferee of the assets. For purposes of 
this determination, the exception to foreign use in Sec.  1.1503(d)-
3(c)(7) shall be taken into account. Following rebuttal under this 
paragraph (e)(2)(ii), the domestic use agreement continues in effect.
    (iii) Reporting. In order to satisfy the requirements of paragraph 
(e)(2)(i) or (ii) of this section, the elector must prepare a statement, 
labeled ``Rebuttal of Triggering Event'' at the top of the page, that 
indicates that it is submitted under the provisions of this paragraph 
(e)(2). The statement must

[[Page 1019]]

include the information described in paragraphs (c)(2)(ii) and (iii) of 
this section. The statement must also include the information described 
in paragraph (c)(2)(iv) of this section that supports the conclusions 
under paragraph (e)(2)(i) or (ii) of this section, as applicable. The 
statement must be attached to, and filed by the due date (including 
extensions) of, the elector's income tax return for the taxable year in 
which the presumed triggering event occurs.
    (iv) Examples. See Sec.  1.1503(d)-7(c) Examples 32 and 33.
    (f) Triggering event exceptions--(1) Continuing ownership of assets 
or interests. The following events shall not constitute triggering 
events, requiring the recapture of the dual consolidated loss under 
paragraph (h) of this section:
    (i) Disaffiliation as a result of a transaction described in section 
381. An affiliated dual resident corporation or affiliated domestic 
owner ceases to be a member of a consolidated group solely by reason of 
a transaction in which a member of the same consolidated group succeeds 
to the tax attributes of the dual resident corporation or domestic owner 
under the provisions of section 381.
    (ii) Continuing ownership by consolidated group. This paragraph 
(f)(1)(ii) applies when assets of an affiliated dual resident 
corporation, or assets of, or interests in, a separate unit of an 
affiliated domestic owner are sold or otherwise disposed of. In such a 
case, the sale or disposition shall not be treated as a triggering event 
to the extent the assets or interests are acquired by one or more 
members of the consolidated group that includes the affiliated dual 
resident corporation or affiliated domestic owner, or by a partnership 
or a grantor trust, but only if immediately after the acquisition more 
than 90 percent of the partnership's or grantor trust's interests is 
owned, directly or indirectly, by members of such consolidated group.
    (iii) Continuing ownership by unaffiliated dual resident corporation 
or unaffiliated domestic owner. This paragraph (f)(1)(iii) applies when 
assets of an unaffiliated dual resident corporation, or assets of, or 
interests in, a separate unit of an unaffiliated domestic owner, are 
sold or otherwise disposed of. In such a case, the sale or disposition 
shall not be a triggering event to the extent such assets or interests 
are acquired by the unaffiliated dual resident corporation, or 
unaffiliated domestic owner, as applicable, or by a partnership or 
grantor trust, but only if immediately after the acquisition more than 
90 percent of the partnership's or grantor trust's interests is owned, 
directly or indirectly, by the unaffiliated dual resident corporation or 
unaffiliated domestic owner. For example, this paragraph (f)(1)(iii) 
applies when an unaffiliated domestic owner acquires direct ownership of 
the assets of a separate unit that it had immediately before owned 
indirectly through a partnership.
    (2) Transactions requiring a new domestic use agreement--(i) 
Multiple-party events. If all the requirements of paragraph (f)(2)(iii) 
of this section are satisfied, the following events shall not constitute 
triggering events requiring the recapture of the dual consolidated loss 
under paragraph (h) of this section:
    (A) An affiliated dual resident corporation or affiliated domestic 
owner becomes an unaffiliated domestic corporation or a member of a new 
consolidated group (other than in a transaction described in paragraph 
(f)(2)(ii)(B) of this section).
    (B) Assets of a dual resident corporation or assets of, or interests 
in, a separate unit, are sold or otherwise disposed of in a transaction 
in which such assets or interests are acquired by an unaffiliated 
domestic corporation, one or more members of a new consolidated group, 
or by a partnership or grantor trust, but only if immediately after the 
sale or disposition more than 90 percent of the partnership's or grantor 
trust's interests is owned, directly or indirectly, by the unaffiliated 
domestic owner or by members of a new consolidated group, as applicable. 
See the related exception to foreign use provided under Sec.  1.1503(d)-
3(c)(8). See also Sec.  1.1503(d)-7(c) Examples 36 and 37.
    (ii) Events resulting in a single consolidated group. If the 
requirements of paragraph (f)(2)(iii)(A) of this section are satisfied, 
the following events shall

[[Page 1020]]

not constitute triggering events requiring the recapture of the dual 
consolidated loss under paragraph (h) of this section:
    (A) An unaffiliated dual resident corporation or unaffiliated 
domestic owner becomes a member of a consolidated group.
    (B) A consolidated group ceases to exist as a result of a 
transaction described in Sec.  1.1502-13(j)(5)(i) (relating to 
acquisitions of the common parent of the consolidated group), other than 
a transaction in which any member of the terminating group, or the 
successor-in-interest of such member, is not a member of the surviving 
group immediately after the terminating group ceases to exist. See Sec.  
1.1503(d)-7(c) Example 34.
    (iii) Requirements--(A) New domestic use agreement. The unaffiliated 
domestic corporation or new consolidated group (subsequent elector) must 
file an agreement described in paragraph (d)(1) of this section (new 
domestic use agreement). The new domestic use agreement must be labeled 
``New Domestic Use Agreement'' at the top of the page, and must be 
attached to and filed by the due date (including extensions) of, the 
subsequent elector's income tax return for the taxable year in which the 
event described in paragraph (f)(2)(i) or (f)(2)(ii) of this section 
occurs. The new domestic use agreement must be signed under penalties of 
perjury by the person who signs the return and must include the 
following items:
    (1) A statement that the document submitted is an election and 
agreement under the provisions of paragraph (f)(2) of this section.
    (2) An agreement to assume the same obligations with respect to the 
dual consolidated loss as the unaffiliated dual resident corporation, 
unaffiliated domestic owner, or consolidated group, as applicable, that 
filed the original domestic use agreement (original elector) with 
respect to that loss. In such a case, obligations of an elector provided 
under this section shall also be considered to be obligations of a 
subsequent elector.
    (3) In the event of a transaction described in section 384(a) 
involving the subsequent elector, an agreement to treat any potential 
recapture amount under paragraph (h) of this section with respect to the 
dual consolidated loss as unrealized built-in gain for purposes of 
section 384(a), subject to any applicable exceptions (for example, the 
threshold requirements under section 382(h)(3)(B)). The potential 
recapture amount treated as unrealized built-in gain under this 
paragraph (f)(2)(iii)(A)(3) may be reduced to the extent permitted by 
paragraph (h)(2)(i) of this section.
    (4) In the case of a multiple-party event described in paragraph 
(f)(2)(i) of this section, an agreement to be subject to the rules 
provided in paragraph (h)(3) of this section.
    (5) The name, U.S. taxpayer identification number, and address of 
the original elector and prior subsequent electors, if any, with respect 
to the dual consolidated loss.
    (B) Statement filed by original elector. In the case of a multiple-
party event described in paragraph (f)(2)(i) of this section, the 
original elector must file a statement that is attached to and filed by 
the due date (including extensions) of its income tax return for the 
taxable year in which the event occurs. The statement must be labeled 
``Original Elector Statement'' at the top of the page, must be signed 
under penalties of perjury by the person who signs the tax return, and 
must include the following items:
    (1) A statement that the document submitted is an election and 
agreement under the provisions of paragraph (f)(2) of this section.
    (2) An agreement to be subject to the rules provided in paragraph 
(h)(3) of this section.
    (3) The name, U.S. taxpayer identification number, and address of 
the subsequent elector.
    (3) Certain transfers qualifying for the de minimis exception to 
foreign use. If a transaction or event qualifies for the de minimis 
exception to foreign use described in Sec.  1.1503(d)-3(c)(5), the 
transaction or event shall not constitute a triggering event under 
paragraph (e)(1)(iv) (transfers of assets) or (v) (transfers of an 
interest in a separate unit) of this section. For purposes of the 
preceding sentence, the transaction or event shall include deemed 
transfers

[[Page 1021]]

that occur as a result of the transaction or event. See, for example, 
deemed transfers occurring pursuant to Rev. Rul. 99-5 (1999-1 CB 434), 
see Sec.  601.601(d)(2)(ii)(b), and section 708 and the related 
regulations. See also Sec.  1.1503(d)-7 Example 5. This paragraph (f)(3) 
only applies if the entire transaction or event qualifies for the de 
minimis exception to foreign use. For example, if a domestic owner sells 
five percent of a separate unit to a foreign corporation, which would 
qualify for the de minimis exception to foreign use if it were the only 
transfer, but pursuant to the same transaction also sells 70 percent of 
the same separate unit to another corporation in a manner that results 
in a triggering event under paragraph (e)(1)(v) of this section, this 
paragraph shall not apply to prevent the transaction from resulting in a 
triggering event.
    (4) Deemed transactions as a result of certain transfers that do not 
result in a foreign use. The rules in this paragraph (f)(4) apply where 
the assets of, or the interests in, a separate unit are transferred in a 
transaction that would not result in a foreign use and, but for 
resulting deemed transactions or events, would not result in a 
triggering event described in paragraph (e)(1) of this section. For 
purposes of this paragraph (f)(4), deemed transactions or events shall 
include transactions or events that are deemed to occur pursuant to Rev. 
Rul. 99-5 and section 708 and the related regulations. In such a case, 
the deemed transactions shall not result in a triggering event under 
paragraph (e)(1)(iv) (transfers of assets) or (v) (transfers of an 
interest in a separate unit) of this section. See also Sec.  1.1503(d)-7 
Example 35.
    (5) Compulsory transfers. Transfers of the assets or stock of a dual 
resident corporation, or of the assets or interests in a separate unit, 
shall not constitute a triggering event (including a foreign use that 
occurs as a result of, or following, the transfer) if such transfers 
are--
    (i) Legally required by a government of a country as a necessary 
condition of doing business in the country;
    (ii) Compelled by a genuine threat of immediate expropriation by a 
government of a country; or
    (iii) The result of the expropriation of assets by a government of a 
country.
    (6) Subsequent triggering events. Any triggering event described in 
paragraph (e) of this section that occurs subsequent to one of the 
transactions described in this paragraph (f), and that itself does not 
meet any of the exceptions provided in this paragraph (f), shall require 
recapture under paragraph (h) of this section by the elector or 
subsequent elector, as applicable.
    (g) Annual certification reporting requirement. Unless and until the 
domestic use agreement is terminated pursuant to paragraph (j) of this 
section, the elector must file a certification, labeled ``Certification 
of Dual Consolidated Loss'' at the top of the page, that is attached to, 
and filed by the due date (including extensions) of, its income tax 
return for each taxable year during the certification period. The 
certification must provide that there has been no foreign use of the 
dual consolidated loss. The certification must identify the dual 
consolidated loss to which it pertains by setting forth the elector's 
year in which the loss was incurred and the amount of such loss. In 
addition, the certification must warrant that arrangements have been 
made to ensure that there will be no foreign use of the dual 
consolidated loss and that the elector will be informed of any such 
foreign use. If applicable, the certification must include a 
notification that an excepted triggering event under paragraph (f)(2) of 
this section has occurred with respect to the dual consolidated loss 
within the taxable year being certified. If dual consolidated losses of 
more than one taxable year are subject to the rules of this paragraph 
(g), the certification for those years may be combined in a single 
document, but each dual consolidated loss must be separately identified. 
See Sec.  1.1503(d)-3(e)(2)(ii) for additional certifications required 
where taxpayers elect the stand-alone exception of Sec.  1.1503(d)-
3(e)(2).
    (h) Recapture of dual consolidated loss and interest charge--(1) 
Presumptive rules--(i) Amount of recapture. Except as otherwise provided 
in this section, upon the occurrence of a triggering event described in 
paragraph (e) of this section that does not meet any of the

[[Page 1022]]

exceptions provided in paragraph (f) of this section, the dual resident 
corporation or domestic owner of the separate unit shall recapture as 
gross income the total amount of the dual consolidated loss to which the 
triggering event applies on its income tax return for the taxable year 
in which the triggering event occurs (or, when the triggering event is a 
foreign use of the dual consolidated loss, the taxable year that 
includes the last day of the foreign taxable year during which such 
foreign use occurs). See Sec.  1.1503(d)-5(c)(4)(vi) for rules with 
respect to the attribution of recapture income to a separate unit. See 
also Sec.  1.1503(d)-7 Examples 38 through 40.
    (ii) Interest charge. In connection with the recapture, the elector 
shall pay an interest charge. An interest charge may be due even if the 
amount of recapture income is reduced to zero pursuant to paragraph 
(h)(2)(i) of this section. See Sec.  1.1503(d)-7(c) Example 39. Except 
as otherwise provided in this section, the amount of the interest shall 
be computed under the rules of section 6601(a) by treating the 
additional tax resulting from the recapture as though it had been due 
and unpaid as of the date for payment of the tax for the taxable year in 
which the taxpayer received a tax benefit from the dual consolidated 
loss. For purposes of this paragraph (h)(1)(ii), a tax benefit shall be 
considered to have arisen in a taxable year in which the losses or 
deductions taken into account in computing the dual consolidated loss 
reduced U.S. taxable income. For the purpose of computing the interest 
charge, the additional tax resulting from the recapture is determined by 
treating the recapture income as the last income earned in the year of 
recapture. The interest shall be computed to the date for payment of the 
tax for the year of recapture and the interest thus computed becomes a 
part of the tax liability for that taxable year. See section 6601 for 
the computation of interest on a tax liability that it is not paid 
timely. The recapture interest charge shall be deductible to the same 
extent as interest under section 6601.
    (2) Reduction of presumptive recapture amount and presumptive 
interest charge--(i) Amount of recapture. The dual resident corporation 
or domestic owner may recapture an amount less than the total dual 
consolidated loss if the elector demonstrates, to the satisfaction of 
the Commissioner, the lesser amount described in this paragraph 
(h)(2)(i). The reduction in the amount of recapture is the amount by 
which the dual consolidated loss would have offset other taxable income 
reported on a timely filed U.S. income tax return for any taxable year 
up to and including the taxable year of the triggering event (or, when 
the triggering event is a foreign use of the dual consolidated loss, the 
taxable year that includes the last day of the foreign taxable year 
during which such foreign use occurs) if no domestic use election had 
been made for the loss such that it was subject to the domestic use 
limitation of Sec.  1.1503(d)-4(b) (and therefore subject to the 
limitation under Sec.  1.1503(d)-4(c)). For this purpose, the rules for 
attributing items of income, gain, deduction, and loss under Sec.  
1.1503(d)-5 shall apply. An elector using this rebuttal rule must 
prepare a separate accounting showing the income for each year that 
would have offset the dual resident corporation's or separate unit's 
recapture amount if no domestic use election had been made for the dual 
consolidated loss. The separate accounting must be signed under 
penalties of perjury by the person who signs the elector's tax return, 
must be labeled ``Reduction of Recapture Amount'' at the top of the 
page, and must indicate that it is submitted under the provisions of 
this paragraph (h)(2)(i). The accounting must be attached to, and filed 
by the due date (including extensions) of, the elector's income tax 
return for the taxable year in which the triggering event occurs. See 
Sec.  1.1503(d)-7(c) Examples 38 through 40.
    (ii) Interest charge. The interest charge imposed under this section 
may be reduced if the elector demonstrates, to the satisfaction of the 
Commissioner, that the net interest owed would have been less than that 
provided in paragraph (h)(1)(ii) of this section if the elector had 
filed an amended return for the taxable year in which the recaptured 
dual consolidated loss

[[Page 1023]]

was incurred, and for any other affected taxable years up to and 
including the taxable year of recapture, if no domestic use election had 
been made for the dual consolidated loss such that it had been subject 
to the restrictions of Sec.  1.1503(d)-4(b) (and therefore subject to 
the limitations under Sec.  1.1503(d)-4(c)). An elector using this 
rebuttal rule must prepare a computation demonstrating the reduction in 
the net interest owed as a result of treating the dual consolidated loss 
as a loss subject to the restrictions of Sec.  1.1503(d)-4(b) (and 
therefore subject to the limitations under Sec.  1.1503(d)-4(c)). The 
computation must be labeled ``Reduction of Interest Charge'' at the top 
of the page and must indicate that it is submitted under the provisions 
of this paragraph (h)(2)(ii). The computation must be signed under 
penalties of perjury by the person who signs the elector's tax return, 
and must be attached to, and filed by the due date (including 
extensions) of, the elector's income tax return for the taxable year in 
which the triggering event occurs. See Sec.  1.1503(d)-7(c) Examples 39 
and 40.
    (3) Rules regarding multiple-party event exceptions to triggering 
events--(i) Scope. The rules of this paragraph (h)(3) apply when, after 
a triggering event described in paragraph (e) of this section with 
respect to which the requirements of paragraph (f)(2)(i) of this section 
were met (excepted event), a triggering event under paragraph (e) of 
this section occurs, and no exception applies to such triggering event 
under paragraph (f) of this section (subsequent triggering event). See 
Sec.  1.1503(d)-7(c) Examples 36 and 37.
    (ii) Original elector and prior subsequent electors not subject to 
recapture or interest charge--(A) Except to the extent otherwise 
provided in this paragraph (h)(3), neither the original elector nor any 
prior subsequent elector shall be subject to the rules of this paragraph 
(h) with respect to dual consolidated losses subject to the original 
domestic use agreement.
    (B) In the case of a dual consolidated loss with respect to which 
multiple excepted events have occurred, only the subsequent elector that 
owns the dual resident corporation or separate unit at the time of the 
subsequent triggering event shall be subject to the recapture rules of 
this paragraph (h). For purposes of this paragraph (h), the term prior 
subsequent elector refers to all other subsequent electors.
    (iii) Recapture tax amount and required statement--(A) In general. 
If a subsequent triggering event occurs, the subsequent elector shall 
take into account the recapture tax amount as determined under paragraph 
(h)(3)(iii)(B) of this section. The subsequent elector must prepare a 
statement that computes the recapture tax amount, as provided under 
paragraph (h)(3)(iii)(B) of this section, with respect to the dual 
consolidated loss subject to the new domestic use agreement. This 
statement must be attached to, and filed by the due date (including 
extensions) of, the subsequent elector's income tax return for the 
taxable year in which the subsequent triggering event occurs (or, when 
the subsequent triggering event is a foreign use of the dual 
consolidated loss, the taxable year that includes the last day of the 
foreign taxable year during which such foreign use occurs). The 
statement must be signed under penalties of perjury by the person who 
signs the return. The statement must be labeled ``Statement Identifying 
Liability'' at the top and, in addition to the calculation of the 
recapture tax amount, must include the following items, in paragraphs 
labeled to correspond with the items set forth in paragraphs 
(h)(3)(iii)(A)(1) through (3) of this section:
    (1) A statement that the document is submitted under the provisions 
of Sec.  1.1503(d)-6(h)(3)(iii).
    (2) A statement identifying the amount of the dual consolidated 
losses at issue and the taxable years in which they were used.
    (3) The name, address, and taxpayer identification number of the 
original elector and all prior subsequent electors.
    (B) Recapture tax amount. The recapture tax amount equals the excess 
(if any) of--
    (1) The income tax liability of the subsequent elector for the 
taxable year that includes the amount of recapture and related interest 
charge with respect to the dual consolidated losses that are recaptured 
as a result of the

[[Page 1024]]

subsequent triggering event, as provided under paragraphs (h)(1) and 
(h)(2) of this section; over
    (2) The income tax liability of the subsequent elector for such 
taxable year, computed by excluding the amount of recapture and related 
interest charge described in paragraph (h)(3)(iii)(B)(1) of this 
section.
    (iv) Tax assessment and collection procedures--(A) In general--(1) 
Subsequent elector. An assessment identifying an income tax liability of 
the subsequent elector is considered an assessment of the recapture tax 
amount where the recapture tax amount is part of the income tax 
liability being assessed and the recapture tax amount is reflected in a 
statement attached to the subsequent elector's income tax return as 
provided under paragraph (h)(3)(iii) of this section.
    (2) Original elector and prior subsequent electors. The assessment 
of the recapture tax amount as set forth in paragraph (h)(3)(iv)(A)(1) 
of this section shall be considered as having been properly assessed as 
an income tax liability of the original elector and of each prior 
subsequent elector, if any. The date of such assessment shall be the 
date the income tax liability of the subsequent elector was properly 
assessed. The Commissioner may collect all or a portion of such 
recapture tax amount from the original elector and/or the prior 
subsequent electors under the circumstances set forth in paragraph 
(h)(3)(iv)(B) of this section.
    (B) Collection from original elector and prior subsequent electors; 
joint and several liability--(1) In general. If the subsequent elector 
does not pay in full the income tax liability that includes a recapture 
tax amount, the Commissioner may collect that portion of the unpaid 
balance of such income tax liability attributable to the recapture tax 
amount in full or in part from the original elector and/or from any 
prior subsequent elector, provided that the following conditions are 
satisfied with respect to such elector:
    (i) The Commissioner properly has assessed the recapture tax amount 
pursuant to paragraph (h)(3)(iv)(A)(1) of this section.
    (ii) The Commissioner has issued a notice and demand for payment of 
the recapture tax amount to the subsequent elector in accordance with 
Sec.  301.6303-1 of this chapter.
    (iii) The subsequent elector has failed to pay all of the recapture 
tax amount by the date specified in such notice and demand.
    (iv) The Commissioner has issued a notice and demand for payment of 
the unpaid portion of the recapture tax amount to the original elector, 
or prior subsequent elector (as the case may be), in accordance with 
Sec.  301.6303-1 of this chapter.
    (2) Joint and several liability. The liability imposed under this 
paragraph (h)(3)(iv)(B) on the original elector and each prior 
subsequent elector shall be joint and several.
    (C) Allocation of partial payments of tax. If the subsequent 
elector's income tax liability for a taxable period includes a recapture 
tax amount, and if such income tax liability is satisfied in part by 
payment, credit, or offset, such payment, credit or offset shall be 
allocated first to that portion of the income tax liability that is not 
attributable to the recapture tax amount, and then to that portion of 
the income tax liability that is attributable to the recapture tax 
amount.
    (D) Refund. If the Commissioner makes a refund of any income tax 
liability that includes a recapture tax amount, the Commissioner shall 
allocate and pay the refund to each elector who paid a portion of such 
income tax liability as follows:
    (1) The Commissioner shall first determine the total amount of 
recapture tax paid by and/or collected from the original elector and 
from any prior subsequent electors. The Commissioner shall then allocate 
and pay such refund to the original elector and prior subsequent 
electors, with each such elector receiving an amount of such refund on a 
pro rata basis, not to exceed the amount of recapture tax paid by and/or 
collected from such elector.
    (2) The Commissioner shall pay the balance of such refund, if any, 
to the subsequent elector.
    (v) Definition of income tax liability. Solely for purposes of 
paragraph (h)(3) of this section, the term income tax liability means 
the income tax liability imposed on a domestic corporation

[[Page 1025]]

under title 26 of the United States Code for a taxable year, including 
additions to tax, additional amounts, penalties, and any interest charge 
related to such income tax liability.
    (vi) Example. See Sec.  1.1503(d)-7(c) Example 36.
    (4) Computation of taxable income in year of recapture--(i) 
Presumptive rule. Except to the extent provided in paragraph (h)(4)(ii) 
of this section, for purposes of computing the taxable income for the 
year of recapture, no current, carryover or carryback losses may offset 
and absorb the recapture amount.
    (ii) Exception to presumptive rule. The recapture amount included in 
gross income may be offset and absorbed by that portion of the elector's 
net operating loss carryover that is attributable to the dual resident 
corporation or separate unit that incurred the dual consolidated loss 
being recaptured, if the elector demonstrates, to the satisfaction of 
the Commissioner, the amount of such portion of the carryover. The 
principles of Sec.  1.1502-21(b)(2)(iv) shall apply for purposes of 
determining whether any portion of a net operating loss carryover is 
attributable to the dual resident corporation or separate unit. In the 
case of a separate unit, such determination shall be made by treating 
the separate unit as a domestic corporation and a member of the 
consolidated group composing its unaffiliated domestic owner, or members 
of the consolidated group of which its affiliated domestic owner is a 
member, as appropriate. An elector utilizing this rebuttal rule must 
prepare a computation demonstrating the amount of net operating loss 
carryover that, under this paragraph (h)(4)(ii), may absorb the 
recapture amount included in gross income. Such computation must be 
signed under penalties of perjury and attached to and filed by the due 
date (including extensions) of, the income tax return for the taxable 
year in which the triggering event occurs (or, when the triggering event 
is a foreign use of the dual consolidated loss, the taxable year that 
includes the last day of the foreign taxable year during which such 
foreign use occurs).
    (5) Character and source of recapture income. The amount recaptured 
under this paragraph (h) shall be treated as ordinary income. Except as 
provided in the prior sentence, such income shall be treated, as 
applicable, as income from the same source, having the same character, 
and falling within the same separate category, for all purposes, 
including sections 904(d) and 907, to which the items of deduction or 
loss composing the dual consolidated loss were allocated and 
apportioned, as provided under sections 861(b), 862(b), 863(a), 864(e), 
865, and the related regulations. For this determination, the pro rata 
computation of the items of deduction or loss composing the dual 
consolidated loss as described in Sec.  1.1503(d)-4(c)(4) shall apply. 
See Sec.  1.1503(d)-7(c) Example 38.
    (6) Reconstituted net operating loss--(i) General rule. Except as 
provided in paragraphs (h)(6)(ii) and (iii) of this section, commencing 
in the taxable year immediately following the year in which the dual 
consolidated loss is recaptured, the dual resident corporation, or the 
domestic owner of the separate unit, that incurred the dual consolidated 
loss that is recaptured shall be treated as having a net operating loss 
(reconstituted net operating loss) in an amount equal to the amount 
actually recaptured under this paragraph (h). If a domestic corporation 
(transferee) acquires the assets of the dual resident corporation or 
domestic owner in a transaction described in section 381(a), the 
preceding sentence shall be applied by treating the transferee as the 
dual resident corporation or domestic owner, as applicable. In a case to 
which this paragraph (h)(6) applies, the transferee corporation shall be 
treated as having a reconstituted net operating loss in an amount equal 
to the amount actually recaptured under this paragraph (h). In no event, 
however, shall more than one corporation be treated as having a 
reconstituted net operating loss as a result of a single dual 
consolidated loss being recaptured. A reconstituted net operating loss 
of a domestic owner shall be attributable under Sec.  1.1503(d)-5 to the 
separate unit that incurred the dual consolidated loss that was 
recaptured. Moreover, a reconstituted net operating loss shall be 
subject to the domestic use limitation of Sec.  1.1503(d)-4(b) (and 
therefore subject to the limitation under Sec.  1.1503(d)-4(c)),

[[Page 1026]]

without regard to the exceptions contained in paragraphs (b) through (d) 
of this section (relating to elective agreements in place between the 
United States and a foreign country, the ability to demonstrate no 
possibility of a foreign use, and a domestic use election, 
respectively). The reconstituted net operating loss shall be available 
only for carryover, under section 172(b), to taxable years following the 
taxable year of recapture. For purposes of determining the remaining 
carryover period, the reconstituted net operating loss shall be treated 
as if it had been recognized in the taxable year in which the dual 
consolidated loss that is the basis of the recapture amount was 
incurred. See Sec.  1.1503(d)-7(c) Examples 36, 38, and 40.
    (ii) Exception. Paragraph (h)(6)(i) of this section shall not apply 
to the extent the dual consolidated loss that is the basis of the 
recapture amount would have been eliminated pursuant to Sec.  1.1503(d)-
4(d) if no domestic use election had been made for such loss. See Sec.  
1.1503(d)-7(c) Example 40.
    (iii) Special rule for recapture following multiple-party event 
exception to a triggering event. This paragraph applies to an excepted 
event described in paragraph (f)(2)(i)(B) of this section that is 
followed by a subsequent triggering event requiring recapture as 
described in paragraph (f)(6) of this section. In such a case, the 
domestic corporation that owns, directly or indirectly, the assets of 
the dual resident corporation, or the assets of or the interests in a 
separate unit, immediately following the excepted event shall be treated 
as if it incurred the dual consolidated loss that is recaptured for 
purposes of applying paragraph (h)(6)(i) of this section. See Sec.  
1.1503(d)-7(c) Example 36.
    (i) [Reserved]
    (j) Termination of domestic use agreement and annual 
certifications--(1) Rebuttals, exceptions to triggering events, and 
recapture. The domestic use agreement filed with respect to a dual 
consolidated loss shall terminate prior to the end of the certification 
period and have no further effect if--
    (i) An elector is able to rebut the presumption of a triggering 
event pursuant to the general rule in paragraph (e)(2)(i) of this 
section;
    (ii) An event described in paragraph (e)(1) of this section is not a 
triggering event as a result of the application of paragraphs (f)(2)(i) 
or (ii) (relating to events requiring a new domestic use agreement) of 
this section; this paragraph (j)(1)(ii) does not, however, apply to 
terminate the new domestic use agreement filed in connection with the 
event pursuant to paragraph (f)(2)(iii)(A) of this section. See also 
paragraph (h)(3)(iv) of this section regarding collection from the 
original elector and prior subsequent electors in certain cases; or
    (iii) A dual consolidated loss is recaptured pursuant to paragraph 
(h) of this section. See Sec.  1.1503(d)-7(c) Examples 32 through 34.
    (2) Termination of ability for foreign use--(i) In general. A 
domestic use agreement filed with respect to a dual consolidated loss 
shall terminate and have no further effect as of the end of a taxable 
year if the elector--
    (A) Demonstrates, to the satisfaction of the Commissioner, that as 
of the end of such taxable year no foreign use (as defined in Sec.  
1.1503(d)-3) of the dual consolidated loss can occur in any other year 
by any means; and
    (B) Prepares a statement described in paragraph (j)(2)(ii) of this 
section that is attached to, and filed by the due date (including 
extensions) of, its U.S. income tax return for such taxable year.
    (ii) Statement. The statement described in this paragraph (j)(2)(ii) 
must be signed under penalties of perjury by the person who signs the 
return. The statement must be labeled ``Termination of Ability for 
Foreign Use'' at the top of the page and must include the following 
information, in paragraphs labeled to correspond with the following:
    (A) A statement that the document is submitted under the provisions 
of paragraph (j)(2) of this section.
    (B) The information required by paragraph (c)(2)(ii) of this 
section.
    (C) A statement of the amount of the dual consolidated loss at issue 
and the year in which such dual consolidated loss was incurred.
    (D) The information described in paragraph (c)(2)(iv) of this 
section that supports the conclusion that no foreign

[[Page 1027]]

use can occur as provided in paragraph (j)(2)(i)(A) of this section.
    (3) Agreements filed in connection with stand-alone exception. See 
Sec.  1.1503(d)-3(e)(2)(iii) for the termination of domestic use 
agreements filed in connection with the stand-alone exception to the 
mirror legislation rule when a subsequent election is made under 
paragraph (b) of this section (relating to agreements entered into 
between the United States and a foreign country).

[T.D. 9315, 72 FR 12914, Mar. 19, 2007, as amended by T.D. 9896, 85 FR 
19855, Apr. 8, 2020]



Sec.  1.1503(d)-7  Examples.

    (a) In general. This section provides examples that illustrate the 
application of Sec. Sec.  1.1503(d)-1 through 1.1503(d)-6. This section 
also provides facts that are presumed for such examples.
    (b) Presumed facts for examples. For purposes of the examples in 
this section, unless otherwise indicated, the following facts are 
presumed:
    (1) Each entity has only a single class of equity outstanding, all 
of which is held by a single owner.
    (2) P, a domestic corporation and the common parent of the P 
consolidated group, owns S, a domestic corporation and a member of the P 
consolidated group.
    (3) DRCX, a domestic corporation, is subject to Country X 
tax on its worldwide income or on a residence basis, and is a dual 
resident corporation.
    (4) DE1X and DE2X are both Country X entities, 
subject to Country X tax on their worldwide income or on a residence 
basis, and disregarded as entities separate from their owners for U.S. 
tax purposes. DE3Y is a Country Y entity, subject to Country 
Y tax on its worldwide income or on a residence basis, and disregarded 
as an entity separate from its owner for U.S. tax purposes. All the 
interests in DE1X, DE2X, and DE3Y 
constitute hybrid entity separate units.
    (5) FBX is a Country X business operation that, if 
carried on by a U.S. person, would constitute a foreign branch, as 
defined in Sec.  1.367(a)-6T(g)(1), and is a Country X foreign branch 
separate unit.
    (6) Neither the assets nor the activities of an entity constitute a 
foreign branch separate unit.
    (7) FSX is a Country X entity that is subject to Country 
X tax on its worldwide income or on a residence basis and is classified 
as a foreign corporation for U.S. tax purposes.
    (8) The applicable foreign country has a consolidation regime that--
    (i) Includes as members of a consolidated group any commonly 
controlled branches and permanent establishments in such jurisdiction, 
and entities that are subject to tax in such jurisdiction on their 
worldwide income or on a residence basis; and
    (ii) Allows the losses of members of consolidated groups to offset 
income of other members.
    (9) There is no mirror legislation, within the meaning of Sec.  
1.1503(d)-3(e)(1), in the applicable foreign country.
    (10) There is no elective agreement described in Sec.  1.1503(d)-
6(b) between the United States and the applicable foreign country.
    (11) There is no income tax convention between the United States and 
the applicable foreign country.
    (12) If a domestic use election, within the meaning of Sec.  
1.1503(d)-6(d), is made, all the necessary filings related to such 
election are properly completed on a timely basis.
    (13) If there is a triggering event requiring recapture of a dual 
consolidated loss, the amount of recapture is not reduced pursuant to 
Sec.  1.1503(d)-6(h)(2).
    (14) There are no other items of income, gain, deduction, and loss. 
In addition, the United States and the applicable foreign country 
recognize the same items of income, gain, deduction, and loss in each 
taxable year.
    (15) All taxpayers use the calendar year as their taxable year.
    (c) Examples. The following examples illustrate the application of 
Sec. Sec.  1.1503(d)-1 through 1.1503(d)-6:
    (1) Example 1. Separate unit combination rule--(i) Facts. P owns 
DE3Y which, in turn, owns DE1X. DE1X 
owns FBX. PRS, an entity treated as a partnership for both 
U.S. and Country X tax purposes, is owned 50 percent by P and 50 percent 
by an unrelated foreign person. PRS carries on a business operation in

[[Page 1028]]

Country X that, if carried on by a U.S. person, would constitute a 
foreign branch within the meaning of Sec.  1.367(a)-6T(g)(1). In 
addition, P owns DRCX, a member of the consolidated group of 
which P is the parent, which carries on business operations in Country X 
that constitute a foreign branch within the meaning of Sec.  1.367(a)-
6T(g)(1). S owns DE2X.
    (ii) Result. Pursuant to Sec.  1.1503(d)-1(b)(4)(ii), the interest 
in DE1X, the interest in DE2X, FBX, P's 
share of the Country X business operations carried on by PRS (which is 
owned by P indirectly through its interest in PRS), and 
DRCX's Country X business operations are combined and treated 
as a single separate unit of the consolidated group of which P is the 
parent. This is the case regardless of whether the losses of each 
individual separate unit are made available to offset the income of the 
other individual separate units under Country X tax laws. Because 
DRCX is a dual resident corporation, it is not combined and 
treated as part of this combined separate unit and, as a result, 
DRCX's income or dual consolidated loss is not taken into 
account in determining the income or dual consolidated loss of the 
combined separate unit. In addition, P's interest in DE3Y is 
not combined and is another separate unit because it is subject to tax 
in Country Y, rather than Country X.
    (2) Example 2. Definition of a separate unit and application of 
domestic use limitation--foreign branch separate unit--(i) Facts. P 
carries on business operations in Country X that constitute a permanent 
establishment under the U.S.-Country X income tax convention. In year 1, 
a loss is attributable to P's Country X permanent establishment, as 
determined under Sec.  1.1503(d)-5.
    (ii) Result. Under Sec. Sec.  1.1503(d)-1(b)(4)(i)(A) and 1.367(a)-
6T(g)(1), P's Country X permanent establishment constitutes a foreign 
branch separate unit. Therefore, the year 1 loss attributable to the 
foreign branch separate unit constitutes a dual consolidated loss 
pursuant to Sec.  1.1503(d)-1(b)(5)(ii). The dual consolidated loss 
rules apply to the dual consolidated loss even though there is no 
affiliate of the foreign branch separate unit in Country X, because it 
is still possible that all or a portion of the dual consolidated loss 
can be put to a foreign use. For example, there may be a foreign use 
with respect to a Country X affiliate acquired in a year subsequent to 
the year in which the dual consolidated loss was incurred. See Sec.  
1.1503(d)-6(a)(2). Accordingly, unless an exception under Sec.  
1.1503(d)-6 applies (such as a domestic use election), the year 1 dual 
consolidated loss attributable to P's Country X permanent establishment 
is subject to the domestic use limitation rule of Sec.  1.1503(d)-4(b). 
As a result, pursuant to Sec.  1.1503(d)-4(c), the year 1 dual 
consolidated loss cannot offset income of P that is not attributable to 
its Country X foreign branch separate unit, nor can it offset income of 
any other domestic affiliate. The loss can, however, offset income of 
the Country X foreign branch separate unit, subject to the application 
of Sec.  1.1503(d)-4(c). The result would be the same even if Country X 
did not have a consolidation regime that includes as members of 
consolidated groups Country X branches or permanent establishments of 
nonresident corporations. The dual consolidated loss rules apply even in 
the absence of a consolidation regime in the foreign country because it 
is possible that all or a portion of a dual consolidated loss can be put 
to a foreign use by other means, such as through a sale, merger, or 
similar transaction. See Sec.  1.1503(d)-6(a)(2).
    (iii) Alternative facts. The facts are the same as in paragraph 
(c)(2)(i) of this section, except that P's Country X business operations 
constitute a foreign branch as defined in Sec.  1.367(a)-6T(g)(1), but 
do not constitute a permanent establishment under the U.S.-Country X 
income tax convention. Although the activities carried on by P in 
Country X would otherwise constitute a foreign branch separate unit as 
described in Sec.  1.1503(d)-1(b)(4)(i)(A), the exception under Sec.  
1.1503(d)-1(b)(4)(iii) applies because the activities do not constitute 
a permanent establishment under the U.S.-Country X income tax 
convention. Thus, the Country X business operations do not constitute a 
foreign branch separate unit, and the year 1 loss is not subject to the 
dual consolidated loss rules. If P instead carried on its Country X 
business operations

[[Page 1029]]

through DE1X, then the exception under Sec.  1.1503(d)-
1(b)(4)(iii) would not apply because P carries on the business 
operations through a hybrid entity and, as a result, the business 
operations would constitute a foreign branch separate unit. Thus, in 
such a case the year 1 loss would be subject to the dual consolidated 
loss rules.
    (3) Example 3. Domestic use limitation--foreign branch separate unit 
owned through a partnership--(i) Facts. P and S organize a partnership, 
PRSX, under the laws of Country X. PRSX is treated 
as a partnership for both U.S. and Country X tax purposes. 
PRSX owns FBX. PRSX earns U.S. source 
income that is unconnected with its FBX branch operations, 
and such income is not subject to tax by Country X. In addition, such 
U.S. source income is not attributable to FBX under Sec.  
1.1503(d)-5.
    (ii) Result. Under Sec.  1.1503(d)-1(b)(4)(i)(A), P's and S's shares 
of FBX owned indirectly through their interests in 
PRSX are individual foreign branch separate units. Pursuant 
to Sec.  1.1503(b)-1(b)(4)(ii), these individual separate units are 
combined and treated as a single separate unit of the consolidated group 
of which P is the parent. Unless an exception under Sec.  1.1503(d)-6 
applies, any dual consolidated loss attributable to FBX 
cannot offset income of P or S (other than income attributable to 
FBX, subject to the application of Sec.  1.1503(d)-4(c)), 
including their distributive share of the U.S. source income earned 
through their interests in PRSX, nor can it offset income of 
any other domestic affiliates.
    (4) Example 4. Definition of a separate unit and domestic use 
limitation--interest in hybrid entity partnership and indirectly owned 
foreign branch separate unit--(i) Facts. HPSX is a Country X 
entity that is subject to Country X tax on its worldwide income. 
HPSX is classified as a partnership for Federal tax purposes. 
P, S, and FSX, are the sole partners of HPSX. For 
U.S. tax purposes, P, S, and FSX each has an equal interest 
in each item of HPSX's profit or loss. HPSX 
carries on operations in Country Y that, if carried on by a U.S. person, 
would constitute a foreign branch within the meaning of Sec.  1.367(a)-
6T(g)(1).
    (ii) Result. Under Sec.  1.1503(d)-1(b)(4)(i)(B), the partnership 
interests in HPSX held by P and S are individual hybrid 
entity separate units. These individual separate units are combined into 
a single separate unit under Sec.  1.1503(d)-1(b)(4)(ii). In addition, 
P's and S's share of the Country Y operations owned indirectly through 
their interests in HPSX are individual foreign branch 
separate units under Sec.  1.1503(d)-1(b)(4)(i)(B). These individual 
separate units are also combined into a single separate unit under Sec.  
1.1503(d)-1(b)(4)(ii). Unless an exception under Sec.  1.1503(d)-6 
applies, dual consolidated losses attributable to P's and S's combined 
interests in HPSX can only be used to offset income 
attributable to their combined interests in HPSX (other than 
income attributable to P's and S's combined interests in the Country Y 
foreign branch separate unit), subject to the application of Sec.  
1.1503(d)-4(c). Similarly, dual consolidated losses attributable to P's 
and S's combined interests in the Country Y operations of 
HPSX can only be used to offset income attributable to their 
combined interests in such Country Y operations, subject to the 
application of Sec.  1.1503(d)-4(c). Neither FSX's interest 
in HPSX, nor its share of the Country Y operations owned by 
HPSX, is a separate unit because FSX is not a 
domestic corporation.
    (5) Example 5. Foreign use--general rule and de minimis reduction 
exception--(i) Facts. P owns DE1X. DE1X owns 
FSX. In year 1, there is a $100x loss attributable to P's 
interest in DE1X that is a dual consolidated loss. Also in 
year 1, FSX earns $200x of income. DE1X and 
FSX file a Country X consolidated tax return. For Country X 
tax purposes, the year 1 $100x loss of DE1X is used to offset 
$100x of year 1 income generated by FSX. Under Country X tax 
law, unused losses are carried forward and available to offset income in 
subsequent taxable years.
    (ii) Result. The $100x loss attributable to P's interest in 
DE1X is available to, and in fact does, offset 
FSX's income under the laws of Country X. In addition, under 
U.S. tax principles, such income is considered to be an item of 
FSX, a foreign corporation. As a result, under Sec.  
1.1503(d)-3(a), there has been a

[[Page 1030]]

foreign use of the year 1 dual consolidated loss attributable to P's 
interest in DE1X. Therefore, P cannot make a domestic use 
election with respect to the loss as provided under Sec.  1.1503(d)-
6(d)(2), and such loss will be subject to the domestic use limitation 
rule of Sec.  1.1503(d)-4(b). The result would be the same even if 
FSX, under Country X tax law, had no income against which the 
dual consolidated loss of DE1X could be offset (unless 
FSX's ability to use the loss under Country X tax law 
requires an election, and no such election is made).
    (iii) Alternative facts. The facts are the same as in paragraph 
(c)(5)(i) of this section, except that FSX cannot use the 
loss of DE1X under Country X tax law without an election, and 
no such election is made. Pursuant to the exception in Sec.  1.1503(d)-
3(c)(2), there is no foreign use of the year 1 dual consolidated loss 
attributable to P's interest in DE1X. In addition, P files a 
domestic use election with respect to the year 1 dual consolidated loss 
attributable to its interest in DE1X and, at the beginning of 
year 3, P sells its interest in DE1X to F, a Country Y entity 
that is a foreign corporation. The sale of the interest in 
DE1X to F results in a foreign use triggering event pursuant 
to Sec.  1.1503(d)-6(e)(1)(i) because, immediately after the sale, the 
loss attributable to the interest in DE1X carries over under 
Country X law and, therefore, is available under U.S. tax principles to 
offset income of the owner of the interest in DE1X which, in 
the hands of F, is not a separate unit. It is also a foreign use because 
the loss is available under U.S. tax principles to offset the income of 
F, a foreign corporation. See Sec.  1.1503(d)-3(a)(1). Finally, the 
transfer is a triggering event pursuant to Sec.  1.1503(d)-6(e)(1)(iv) 
and (v).
    (iv) Alternative facts. The facts are the same as in paragraph 
(c)(5)(iii) of this section, except that P only sells 5 percent of its 
interest in DE1X to F. Pursuant to Rev. Rul. 99-5 (1999-1 CB 
434), see Sec.  601.601(d)(2)(ii)(b) of this chapter, the transaction is 
treated as if P sold 5 percent of its interest in each of 
DE1X's assets to F, and then immediately thereafter P and F 
transferred their interests in the assets of DE1X to a 
partnership in exchange for an ownership interest therein. The sale of 
the 5 percent interest in DE1X generally results in a foreign 
use triggering event because a portion of the dual consolidated loss 
carries over under Country X tax law and is available under U.S. tax 
principles to offset income of the owner of the interest in 
DE1X, a hybrid entity, which in the hands of F is not a 
separate unit. It is also a foreign use because the loss is available 
under U.S. tax principles to offset the income of F, a foreign 
corporation. See Sec.  1.1503(d)-3(a)(1). However, pursuant to the 
exception under Sec.  1.1503(d)-3(c)(5) (relating to a de minimis 
reduction of an interest in a separate unit), such availability does not 
result in a foreign use. In addition, pursuant to Sec.  1.1503(d)-
6(f)(1) and (3), the deemed transfers pursuant to Rev. Rul. 99-5 as a 
result of the sale are not treated as triggering events described in 
Sec.  1.1503(d)-6(e)(1)(iv) or (v).
    (6) Example 6. Foreign use and indirect foreign use--foreign reverse 
hybrid structure and disregarded payments--(i) Facts. P owns 
DE1X. DE1X owns 99 percent and S owns 1 percent of 
FRHX, a Country X partnership that elected to be treated as a 
corporation for U.S. tax purposes. FRHX conducts a trade or 
business in Country X. In year 1, DE1X incurs interest 
expense on a third-party loan, which constitutes a dual consolidated 
loss attributable to P's interest in DE1X. In year 1, for 
Country X tax purposes, DE1X takes into account its 
distributive share of income generated by FRHX and offsets 
such income with its interest expense.
    (ii) Result. In year 1, the dual consolidated loss attributable to 
P's interest in DE1X is available to, and in fact does, 
offset income recognized in Country X and, under U.S. tax principles, 
the income is considered to be income of FRHX, a foreign 
corporation. Accordingly, pursuant to Sec.  1.1503(d)-3(a)(1), there is 
a foreign use of the dual consolidated loss. Therefore, P cannot make a 
domestic use election with respect to the year 1 dual consolidated loss 
attributable to its interest in DE1X, as provided under Sec.  
1.1503(d)-6(d)(2), and such loss will be subject to the domestic use 
limitation rule of Sec.  1.1503(d)-4(b).
    (iii) Alternative facts. (A) The facts are the same as in paragraph 
(c)(6)(i) of

[[Page 1031]]

this section, except as follows. Instead of owning DE1X, P 
owns DE3Y which, in turn, owns DE1X. In addition, 
DE3Y, rather than DE1X, is the obligor on the 
third-party loan and therefore incurs the interest expense on such loan. 
Finally, DE3Y on-lends the loan proceeds from the third-party 
loan to DE1X, and DE1X pays interest to 
DE3Y on such loan that is generally disregarded for U.S. tax 
purposes.
    (B) Pursuant to Sec.  1.1503(d)-5(c)(1)(ii), for purposes of 
calculating income or a dual consolidated loss, DE3Y and 
DE1X do not take into account interest income or interest 
expense, respectively, with respect to amounts paid on the disregarded 
loan from DE3Y to DE1X. As a result, such items 
neither create a dual consolidated loss with respect to the interest in 
DE1X, nor do they reduce (or eliminate) the dual consolidated 
loss attributable to the interest in DE3Y. Thus, in year 1, 
there is a dual consolidated loss attributable to P's interest in 
DE3Y, but not to P's indirect interest in DE1X.
    (C) In year 1, interest expense paid by DE1X to 
DE3Y on the disregarded loan is taken into account as a 
deduction in computing DE1X's taxable income for Country X 
tax purposes, but does not give rise to a corresponding item of income 
or gain for U.S. tax purposes (because it is generally disregarded). In 
addition, such interest has the effect of making an item of deduction or 
loss composing the dual consolidated loss attributable to P's interest 
in DE3Y available for a foreign use. This is the case because 
it may reduce or offset items of deduction or loss composing the dual 
consolidated loss for foreign tax purposes, and creates another 
deduction or loss that may reduce or offset income of DE1X 
for foreign tax purposes that, under U.S. tax principles, is treated as 
income of FRHX, a foreign corporation. Moreover, because the 
disregarded item is incurred or taken into account as interest for 
foreign tax purposes, it is deemed to have been incurred or taken into 
account with a principal purpose of avoiding the provisions of section 
1503(d). Accordingly, there is an indirect foreign use of the year 1 
dual consolidated loss attributable to P's interest in DE3Y, 
and P cannot make a domestic use election with respect to such loss as 
provided under Sec.  1.1503(d)-6(d)(2). Thus, the loss will be subject 
to the domestic use limitation rule of Sec.  1.1503(d)-4(b).
    (7) Example 7. Indirect foreign use--hybrid instrument--(i) Facts. P 
owns DE1X which, in turn, owns FSX. 
DE1X borrows cash from an unrelated lender and transfers the 
cash to FSX in exchange for an instrument (hybrid 
instrument). The hybrid instrument is treated as equity for U.S. tax 
purposes and debt for Country X tax purposes. Interest expense on the 
loan from the unrelated lender results in a dual consolidated loss being 
attributable to P's interest in DE1X in year 1. 
DE1X does not elect under Country X law to consolidate with 
FSX. In year 1, FSX distributes its stock as a 
payment on the hybrid instrument to DE1X. For U.S. tax 
purposes, such payment is excluded from P's gross income under section 
305. However, for Country X tax purposes, such payment is treated as 
interest and gives rise to a deduction taken into account in computing 
FSX's Country X tax liability; the payment also gives rise to 
interest income to DE1X for Country X tax purposes.
    (ii) Result. The payment on the hybrid instrument does not give rise 
to an item of income or gain for U.S. tax purposes and therefore does 
not reduce (or eliminate) the dual consolidated loss attributable to P's 
interest in DE1X. In addition, such payment is taken into 
account as a deduction in computing FSX's taxable income for 
Country X tax purposes. Moreover, such payment has the effect of making 
an item of deduction or loss composing the dual consolidated loss 
attributable to P's interest in DE1X available for a foreign 
use. This is the case because it may reduce or offset items of deduction 
or loss composing the dual consolidated loss for foreign tax purposes, 
and creates a deduction that reduces or offsets income of FSX 
for foreign tax purposes that, under U.S. tax principles, is income of a 
foreign corporation. Further, because the item is incurred, or taken 
into account, using an instrument that is treated as equity for U.S. tax 
purposes and debt for foreign tax purposes, it is deemed to have

[[Page 1032]]

been engaged in with the principal purpose of avoiding the provisions of 
section 1503(d). As a result, there has been an indirect foreign use of 
the year 1 dual consolidated loss, and P cannot make a domestic use 
election with respect to such loss, as provided under Sec.  1.1503(d)-
6(d)(2). Thus, the year 1 dual consolidated loss will be subject to the 
domestic use limitation rule of Sec.  1.1503(d)-4(b).
    (8) Example 8. No indirect foreign use--transaction entered into in 
the ordinary course of business--(i) Facts. P owns DE1X and 
FBY. FBY is a foreign branch separate unit located 
in Country Y. DE1X owns FBX and FSX. 
P's interest in DE1X and FBX are combined and 
treated as a single separate unit (Country X separate unit) pursuant to 
Sec.  1.1503(d)-1(b)(4)(ii). Under Country X tax laws, DE1X 
elects to consolidate with FSX. FBY engages in the 
business of providing services and, in connection with its ordinary 
course of business, provides services to unrelated third parties and to 
DE1X. As compensation for services, DE1X makes a 
payment to FBY. Under Country X tax law, the payment is 
deductible. However, the payment is generally disregarded for U.S. tax 
purposes and, pursuant to Sec.  1.1503(d)-5(c)(1)(ii), is not taken into 
account in calculating the income or dual consolidated loss attributable 
to the Country X separate unit or FBY. In year 1, the Country 
X separate unit and FBY each has a dual consolidated loss. 
The dual consolidated loss attributable to the Country X separate unit 
is subject to the domestic use limitation under Sec.  1.1503(d)-4(b) 
because DE1X and FSX elect to consolidate and, as 
a result, the dual consolidated loss is put to a foreign use.
    (ii) Result. The payment made by DE1X to FBY 
in connection with the performance of services is taken into account as 
a deduction in computing DE1X's taxable income for Country X 
tax purposes, but does not give rise to an item of income or gain for 
U.S. tax purposes. In addition, such payment has the effect of making an 
item of deduction or loss composing the dual consolidated loss 
attributable to FBY available for a foreign use. This is the 
case because it may reduce or offset items of deduction or loss 
composing the dual consolidated loss of FBY for foreign tax 
purposes, and creates another deduction that reduces or offsets income 
of FSX for foreign tax purposes (because DE1X and 
FSX elect to file a consolidated return) that, under U.S. tax 
principles, is income of a foreign corporation. However, the transaction 
between DE1X and FBY was entered into in the 
ordinary course of FBY's trade or business. As a result, if P 
can demonstrate to the satisfaction of the Commissioner that the 
transaction was not entered into with a principal purpose of avoiding 
the provisions of section 1503(d), FBY's year 1 dual 
consolidated loss will not be treated as having been made available for 
an indirect foreign use. In such a case, P would be entitled to make a 
domestic use election with respect to such loss.
    (9) Example 9. Foreign use--dual resident corporation with hybrid 
entity joint venture--(i) Facts. P owns DRCX, a member of the 
P consolidated group. DRCX owns 80 percent of 
HPSX, a Country X entity that is subject to Country X tax on 
its worldwide income. HPSX is classified as a partnership for 
U.S. tax purposes. FSX owns the remaining 20 percent of 
HPSX. In year 1, DRCX generates a $100x net 
operating loss (without regard to items attributable to 
DRCX's interest in HPSX). Also in year 1, 
HPSX generates $100x of income, $80x of which is attributable 
to DRCX's interest in HPSX. DRCX and 
HPSX file a consolidated tax return for Country X tax 
purposes, and HPSX offsets its $100x of income with the $100x 
loss generated by DRCX.
    (ii) Result. DRCX and its interest in HPSX are 
not combined because DRCX is a dual resident corporation and 
the combination rule under Sec.  1.1503(d)-1(b)(4)(ii) only applies to 
separate units. The $100x year 1 net operating loss incurred by 
DRCX (without regard to items attributable to 
DRCX's interest in HPSX) is a dual consolidated 
loss. In addition, HPSX is a hybrid entity and 
DRCX's interest in HPSX is a hybrid entity 
separate unit; however, there is no dual consolidated loss attributable 
to such separate unit in year 1 (instead, there is $80x of income 
attributable to such separate unit). DRCX's year 1 dual 
consolidated loss offsets $100x of income for Country X

[[Page 1033]]

purposes, and $20x of such income is, under U.S. tax principles, income 
of FSX, which owns an interest in HPSX that is not 
a separate unit (in addition, FSX is a foreign corporation). 
As a result, pursuant to Sec.  1.1503(d)-3(a), there is a foreign use of 
the year 1 dual consolidated loss of DRCX, and P cannot make 
a domestic use election with respect to such loss pursuant to Sec.  
1.1503(d)-6(d)(2). Therefore, such loss will be subject to the domestic 
use limitation rule of Sec.  1.1503(d)-4(b). The result would be the 
same even if HPSX, under Country X laws, had no income 
against which the dual consolidated loss could be offset (unless the 
ability to use the loss under Country X laws required an election, and 
no such election is made).
    (10) Example 10. Foreign use--foreign parent corporation--(i) Facts. 
F1 and F2, nonresident alien individuals, each owns 50 percent of 
FPX, a Country X entity that is subject to Country X tax on 
its worldwide income. FPX is classified as a foreign 
corporation for U.S. tax purposes. FPX owns DRCX. 
DRCX is the parent of a consolidated group that includes as a 
member DS, a domestic corporation. In year 1, DRCX incurs a 
dual consolidated loss of $100x and, for Country X tax purposes, 
FPX generates $100x of income. In year 1, FPX 
elects to consolidate with DRCX for Country X tax purposes, 
and the $100x year 1 loss of DRCX is used to offset the 
income of FPX under the laws of Country X. For U.S. tax 
purposes, the items of FPX do not constitute items of income 
in year 1.
    (ii) Result. The year 1 dual consolidated loss of DRCX 
offsets the income of FPX under the laws of Country X. 
Pursuant to Sec.  1.1503(d)-3(a), the offset constitutes a foreign use 
because the items constituting such income are considered under U.S. tax 
principles to be items of a foreign corporation. This is the case even 
though the United States does not recognize such items as income in year 
1. Therefore, DRCX cannot make a domestic use election with 
respect to its year 1 dual consolidated loss pursuant to Sec.  
1.1503(d)-6(d)(2). As a result, such loss will be subject to the 
domestic use limitation rule of Sec.  1.1503(d)-4(b).
    (iii) Alternative facts. The facts are the same as in paragraph 
(c)(10)(i) of this section, except that FPX is classified as 
a partnership for U.S. tax purposes. The result would be the same as in 
paragraph (c)(10)(ii) of this section, because the offset of the income 
generated by FPX is a foreign use pursuant to Sec.  
1.1503(d)-3(a). This is the case because the items constituting such 
income are considered under U.S. tax principles to be items of F1 and 
F2, the owners of interests in FPX (a hybrid entity), that 
are not separate units. Moreover, the result would be the same if F1 and 
F2 owned their interests in FPX indirectly through another 
partnership.
    (11) Example 11. No foreign use--absence of foreign loss allocation 
rules--(i) Facts. P owns DE1X and DRCX. 
DRCX is a member of the P consolidated group and owns 
FSX. DE1X owns FBX. P's interest in 
DE1X and P's indirect interest in FBX are 
individual separate units that are combined into a single separate unit 
(Country X separate unit) pursuant to Sec.  1.1503(d)-1(b)(4)(ii). In 
year 1, DRCX incurs a $200x net operating loss and $200x of 
income is attributable to P's Country X separate unit. The $200x net 
operating loss incurred by DRCX is a dual consolidated loss. 
FSX also earns $200x of income in year 1. DRCX, 
DE1X, and FSX file a Country X consolidated tax 
return. However, Country X has no applicable rules for determining which 
income is offset by DRCX's year 1 $200x loss.
    (ii) Result. Under Sec.  1.1503(d)-3(c)(3), DRCX's $200x 
loss shall be treated as having been made available to offset the $200x 
of income attributable to P's Country X separate unit. P's Country X 
separate unit is not, under U.S. tax principles, a foreign corporation, 
and there is no interest in DE1X (which is a hybrid entity) 
that is not a separate unit. As a result, DRCX's loss being 
made available to offset the income attributable to P's Country X 
separate unit is not considered a foreign use of such loss. Therefore, P 
can make a domestic use election with respect to DRCX's year 
1 dual consolidated loss.
    (iii) Alternative facts. The facts are the same as in paragraph 
(c)(11)(i) of this section, except that in year 1 only $150x of income 
is attributable to P's

[[Page 1034]]

Country X separate unit. Because only $150x of income is attributed to 
P's Country X separate unit, $50x of DRCX's year 1 dual 
consolidated loss is treated as being made available to offset the 
income of FSX, a foreign corporation, and therefore 
constitutes a foreign use. As a result, DRCX cannot make a 
domestic use election with respect to its year 1 dual consolidated loss 
pursuant to Sec.  1.1503(d)-6(d)(2), and such loss will be subject to 
the domestic use limitation rule of Sec.  1.1503(d)-4(b).
    (12) Example 12. No foreign use--absence of foreign loss usage 
ordering rules--(i) Facts. (A) P owns DRCX, a member of the P 
consolidated group. DRCX owns FSX. Under the 
Country X consolidation regime, a consolidated group may elect in any 
given year to use all or a portion of the losses of one consolidated 
group member to offset income of other consolidated group members. If no 
such election is made in a year in which losses are generated by a 
consolidated member, such losses carry forward and are available, at the 
election of the consolidated group, to offset income of consolidated 
group members in subsequent taxable years. Country X law does not 
provide ordering rules for determining when a loss from a particular 
taxable year is used because, under Country X law, losses never expire. 
In addition, Country X law does not provide ordering rules for 
determining when a particular type of loss (for example, capital or 
ordinary) is used.
    (B) In year 1, DRCX incurs a capital loss of $80x which, 
under Sec.  1.1503(d)-5(b)(2), is not a dual consolidated loss. 
DRCX also incurs a net operating loss of $80x in year 1 which 
is a dual consolidated loss. FSX generates $60x of capital 
gain in year 1 which, for Country X purposes, can be offset by capital 
losses and net operating losses. Under the laws of Country X, 
DRCX elects to use $60x of its total year 1 loss of $160x to 
offset the $60x of capital gain generated by FSX in year 1; 
the remaining $100x of year 1 loss carries forward. In both year 2 and 
year 3, DRCX incurs a net operating loss of $100x, while 
FSX incurs no income or loss in years 2 and 3. 
DRCX's $100x losses incurred in year 2 and year 3 are dual 
consolidated losses. Because DRCX does not elect under the 
laws of Country X to use all or a portion of its year 2 or year 3 net 
operating losses of $100x to offset the income of other members of the 
Country X consolidated group, P is permitted to make (and in fact does 
make) a domestic use election with respect to both the year 2 and year 3 
dual consolidated losses of DRCX. In year 4, DRCX 
has a net operating loss of $10x and FSX generates $125x of 
income. Country X law permits, upon an election, FSX's $125x 
of income generated in year 4 to be offset by losses (including 
carryover losses from prior years) of other group members. Accordingly, 
in year 4, DRCX elects to use $125x of its accumulated losses 
to offset the $125x of year 4 income generated by FSX.
    (ii) Result. (A) Under the ordering rules of Sec.  1.1503(d)-
3(d)(3), a pro rata amount of DRCX's year 1 net operating 
loss ($30x) and capital loss ($30x) is considered to be used to offset 
FSX's year 1 $60x capital gain. As a result, P cannot make a 
domestic use election with respect to DRCX's year 1 $80x dual 
consolidated loss because a portion of such loss is put to a foreign 
use.
    (B) DRCX's $10x year 4 net operating loss is also a dual 
consolidated loss. Under the ordering rules of Sec.  1.1503(d)-3(d)(1), 
such loss is considered to be used to offset $10x of FSX's 
year 4 $125x of income. Consequently, P cannot make a domestic use 
election with respect to such loss. Under the ordering rules of Sec.  
1.1503(d)-3(d)(2), $50x of capital loss carryover and $50x of ordinary 
loss from year 1 will be considered to offset $100x of FSX's 
year 4 income because the income is first deemed to have been offset by 
losses the use of which would not constitute a triggering event that 
would result in the recapture of a dual consolidated loss. The remaining 
$15x of FSX's year 4 income is considered to be offset by 
losses from year 3 because it is the most recent taxable year from which 
a loss may be carried forward. Thus, a portion of the year 3 dual 
consolidated loss has been put to a foreign use and the entire year 3 
dual consolidated loss is recaptured. However, none of DRCX's 
$100x year 2 net operating loss will be deemed to offset 
FSX's year 4 income. As a result, DRCX's year 2

[[Page 1035]]

dual consolidated loss will not be recaptured.
    (13) Example 13. Exception to foreign use through partnership 
interest--(i) Facts. (A) P owns 80 percent of HPSX, a Country 
X entity subject to Country X tax on its worldwide income. 
FSZ, an unrelated foreign corporation, owns the remaining 20 
percent of HPSX. HPSX is classified as a 
partnership for Federal tax purposes and carries on operations in 
Country X that, if carried on by a U.S. person, would constitute a 
foreign branch within the meaning of Sec.  1.367(a)-6T(g)(1). P's 
interest in HPSX and P's indirect interest in the Country X 
branch are individual separate units that are combined into a single 
separate unit (Country X separate unit) pursuant to Sec.  1.1503(d)-
1(b)(4)(ii).
    (B) In year 1, HPSX incurs a loss of $100x, $80x of which 
is attributable to P's Country X separate unit. The $80x of loss 
attributable to P's Country X separate unit constitutes a dual 
consolidated loss and P makes a domestic use election with respect to 
such loss. In year 2, HPSX generates $50x of income, $40x of 
which is attributable to P's interest in the Country X separate unit. 
Under Country X income tax laws, the $100x of year 1 loss incurred by 
HPSX is carried forward and offsets the $50x of income 
generated by HPSX in year 2; the remaining $50x of loss is 
carried forward and is available to offset income generated by 
HPSX in subsequent years. P and FSZ maintain their 
ownership interests in HPSX throughout years 1 and 2.
    (ii) Result. In year 2, under the laws of Country X, the $100x of 
year 1 loss, which includes the $80x dual consolidated loss attributable 
to P's Country X separate unit, is made available to offset income of 
HPSX. Such income is attributable to P's interest in 
HPSX, which is a separate unit. Such income also is income of 
FSZ, a foreign corporation that is an owner of an interest in 
HPSX, which is not a separate unit. However, pursuant to 
Sec.  1.1503(d)-3(c)(4), there is no foreign use of the year 1 dual 
consolidated loss in year 2. This is the case because P's interest in 
HPSX as of the end of year 1 has not been reduced by more 
than a de minimis amount, and the portion of the $80x dual consolidated 
loss was made available for a foreign use in year 2 solely as a result 
of FSZ's ownership in HPSX and the allocation or 
carry forward of the dual consolidated loss as a result of such 
ownership.
    (iii) Alternative facts. The facts are the same as in paragraph 
(c)(13)(i) of this section, except that P also owns FSX. In 
addition, FSX and HPSX elect to file a 
consolidated return under Country X law. The exception to foreign use 
under Sec.  1.1503(d)-3(c)(4) does not apply because there is a foreign 
use other than by reason of the dual consolidated loss being made 
available as a result of FSZ's ownership in HPSX 
and the allocation or carry forward of the dual consolidated loss as a 
result of such ownership. That is, the exception does not apply because 
there is also a foreign use of the dual consolidated loss as a result of 
FSX and HPSX filing a consolidated return under 
Country X law.
    (iv) Alternative facts. The facts are the same as in paragraph 
(c)(13)(i) of this section, except that at the end of year 2, 
FSZ contributes cash to HPSX in exchange for 
additional equity of HPSX. As a result of the contribution, 
FSZ's interest in HPSX increases from 20 percent 
to 30 percent, and P's interest in HPSX decreases from 80 
percent to 70 percent. P's interest in HPSX is reduced within 
a single 12-month period by 12.5 percent (10/80), as compared to P's 
interest in HPSX as of the beginning of such 12-month period. 
Accordingly, pursuant to Sec.  1.1503(d)-3(c)(4)(iii), the exception to 
foreign use provided under Sec.  1.1503(d)-3(c)(4)(i) does not apply. 
Therefore, in year 2 there is a foreign use of the $80x year 1 dual 
consolidated loss attributable to P's Country X separate unit. Such 
foreign use constitutes a triggering event in year 2 and the $80x year 1 
dual consolidated loss is recaptured. Alternatively, if FSZ 
were a domestic corporation, there would not be a foreign use of the 
$80x year 1 dual consolidated loss because the loss would not be 
available to offset income that, under U.S. tax principles, is income of 
a foreign corporation or a direct or indirect owner of an interest in a 
hybrid entity that is not a separate unit.

[[Page 1036]]

    (14) Example 14. Exception to foreign use through partnership 
interest--combination rule--(i) Facts. (A) P and FSX form 
PRSX. P and FSX each own 50 percent of 
PRSX throughout years 1 and 2. PRSX is treated as 
a partnership for both U.S. and Country X tax purposes. PRSX 
owns DEY. DEY is a Country Y entity subject to 
Country Y tax on its worldwide income and disregarded as an entity 
separate from its owner for U.S. tax purposes. DEY conducts 
business operations in Country Y that, if carried on by a U.S. person, 
would constitute a foreign branch as defined in Sec.  1.367(a)-6T(g)(1). 
P's interest in the Country Y operations conducted by DEY is 
an individual foreign branch separate unit. P's interest in 
DEY, owned indirectly through PRSX, is a hybrid 
entity individual separate unit. P also owns FBY, a Country Y 
foreign branch individual separate unit. Under Sec.  1.1503(d)-
1(b)(4)(ii), FBY and P's indirect interests in DEY 
and DEY's Country Y business operations are treated as a 
combined separate unit (Country Y separate unit).
    (B) In year 1, there is a $100x loss attributable to the Country Y 
business operations conducted by DEY. Thus, there is a $50x 
loss attributable to P's interest in DEY's Country Y business 
operations in year 1. Also in year 1, there is a $200x loss attributable 
to FBY. No income or loss is attributable to P's interest in 
DEY in year 1. Under Sec.  1.1503(d)-5(c)(4)(ii), the dual 
consolidated loss attributable to P's combined Country Y separate unit 
is $250x ($50x loss attributable to P's indirect interest in 
DEY's Country Y operations, plus $200x loss attributable to 
FBY). In year 2, neither DEY nor DEY's 
Country Y operations generates income or loss. Under Country Y law, the 
$100x of year 1 loss incurred by DEY is carried forward and 
is available to offset income of DEY in year 2.
    (ii) Result. As a result of the carryover of the year 1 $100x loss 
(which includes $50x of the year 1 dual consolidated loss) under Country 
Y law, a portion of such loss will be available to offset income of 
DEY that is attributable to P's interest in DEY 
owned indirectly through PRSX. A portion of such loss will 
also be available to offset income of DEY that is 
attributable to FSX's indirect ownership of DEY. 
Accordingly, under Sec.  1.1503(d)-3(a), there would be a foreign use of 
a portion of P's $250x year 1 dual consolidated loss because it is 
available to offset an item of income of the owner of an interest in a 
hybrid entity, which is not a separate unit (there would also be a 
foreign use in this case because FSX is a foreign 
corporation). However, there has not been a reduction of P's interest in 
DEY, DEY has not consolidated under the laws of 
Country Y, and there has not been any other foreign use of the dual 
consolidated losses. As a result, no foreign use occurs as a result of 
the carryforward pursuant to Sec.  1.1503(d)-3(c)(4)(i) and (ii).
    (15) Example 15. No foreign use--asset basis carryover exception--
(i) Facts. P owns FBX and FSX. In year 1, there is 
a dual consolidated loss attributable to FBX. P's items of 
income, gain, deduction, and loss that are taken into account in 
calculating FBX's dual consolidated loss include depreciation 
deductions attributable to FBX's assets. P makes a domestic 
use election under Sec.  1.1503(d)-6(d) with respect to the year 1 dual 
consolidated loss of FBX. At the end of year 2, P contributes 
a portion of FBX's assets to FSX, in exchange for 
stock in FSX. The aggregate adjusted basis of the assets 
transferred by P to FSX is less than 10 percent of the 
aggregate adjusted basis of all of FBX's assets held at the 
beginning of year 2. In addition, no other assets of FBX are 
transferred during the certification period. Under Country X law, 
FSX's basis in the transferred assets is determined by 
reference to P's basis in such assets. In addition, under Country X law, 
a portion of the depreciation deductions that were taken into account in 
year 1 for U.S. tax purposes, are taken into account in year 2 for 
Country X tax purposes.
    (ii) Result. As a result of the transfer of assets from P to 
FSX, a portion of the year 1 dual consolidated loss is 
available for a foreign use. This is the case because a portion of the 
basis in FBX's assets, which gave rise to depreciation 
deductions that were taken into account in computing the year 1 dual 
consolidated loss, will give rise to a depreciation deduction under 
Country X laws that will be available, under

[[Page 1037]]

U.S. tax principles, to offset the income of FSX, a foreign 
corporation, in year 2. However, the aggregate adjusted basis of all the 
assets transferred by P to FSX, within the 12-month period 
ending at the end of year 2, is less than 10 percent of the aggregate 
adjusted basis of all of FBX's assets at the beginning of 
such 12-month period. Moreover, the aggregate adjusted basis of the 
assets transferred by P to FSX at any time during the 
certification period is less than 30 percent of the aggregate adjusted 
basis of FBX's assets held at the end of year 1. In addition, 
the item of deduction giving rise to the foreign use is being made 
available solely as a result of the adjusted basis of the transferred 
assets being determined in whole, or in part, by reference to the 
adjusted basis of such transferred assets in the hands of 
FBX. As a result, this transfer will not result in a foreign 
use pursuant to Sec.  1.1503(d)-3(c)(6).
    (16) Example 16. No foreign use--liability assumption exception--(i) 
Facts. P owns FBX. In year 1, there is a dual consolidated 
loss attributable to FBX for which P makes a domestic use 
election under Sec.  1.1503(d)-6(d). The dual consolidated loss includes 
a deduction for salary expense that was deductible for U.S. tax purposes 
at the end of year 1, even though it was not paid until year 2. The 
deduction was incurred in the ordinary course of FBX's trade 
or business. During year 2, and before the accrued salary expense 
liability was paid, P sells all the assets of FBX to 
FSX in exchange for cash and FSX's assumption of 
the liabilities of the FBX trade or business, including the 
obligation to pay the accrued salary expense. Under Country X law, the 
accrued salary expense of FBX is deductible, and is taken 
into account for purposes of computing the taxable income of 
FBX, when paid. FBX pays the accrued salary 
expense after the sale of FBX to FSX.
    (ii) Result. (A) As a result of FSX's assumption of the 
FBX liabilities, including the accrued salary expense, a 
portion of the dual consolidated loss is available for a foreign use in 
year 2. This is the case because the deduction that was taken into 
account in year 1 in computing the dual consolidated loss under U.S. tax 
principles will, under Country X tax law, be taken into account and will 
be available to offset the income of FSX, a foreign 
corporation, in year 2. However, because this item of expense is made 
available solely as a result of the assumption of a liability of 
FBX, and such liability was incurred in the ordinary course 
of FBX's trade or business, there will not be a foreign use 
of the year 1 dual consolidated loss pursuant to Sec.  1.1503(d)-
3(c)(7).
    (B) The transfer of all the assets of FBX to 
FSX is a triggering event under Sec.  1.1503(d)-6(e)(1)(iv), 
unless P can rebut the triggering event under Sec.  1.1503(d)-6(e)(2). 
For purposes of determining whether, under Sec.  1.1503(d)-6(e)(2)(ii), 
the transfer of assets resulted in a carryover under foreign law of 
FBX's losses, expenses, or deductions, the exception to 
foreign use for the assumption of liabilities is taken into account. 
However, the other exceptions to foreign use do not apply for this 
purpose (or for purposes of demonstrating that no foreign use of a dual 
consolidated loss can occur in any other year under Sec.  1.1503(d)-
6(c), (e)(2)(i) or (j)(2)). See Sec.  1.1503(d)-3(c)(1). Provided the 
other requirements of Sec.  1.1503(d)-6(e)(2)(ii) and (iii) are 
satisfied, P may be able to rebut the occurrence of a triggering event 
upon the transfer of FBX's assets to FSX.
    (17) Example 17. Mirror legislation rule--dual resident corporation 
and hybrid entity separate unit--(i) Facts. P owns DRCX, a 
member of the P consolidated group. DRCX owns FSX. 
In year 1, DRCX incurs a $100x net operating loss that is a 
dual consolidated loss. To prevent corporations like DRCX 
from offsetting losses both against income of affiliates in Country X 
and against income of foreign affiliates under the tax laws of another 
country, Country X mirror legislation prevents a corporation that is 
subject to the income tax of another country on its worldwide income or 
on a residence basis from using the Country X form of consolidation. 
Accordingly, the Country X mirror legislation prevents the loss of 
DRCX from being made available to offset income of 
FSX.
    (ii) Result. Under Sec.  1.1503(d)-3(e), because the losses of 
DRCX are subject to Country X's mirror legislation, there is

[[Page 1038]]

a deemed foreign use of DRCX's year 1 dual consolidated loss. 
The stand-alone exception to the mirror rule in Sec.  1.1503(d)-3(e)(2) 
does not apply because, absent the mirror legislation, DRCX's 
year 1 dual consolidated loss would be available for a foreign use (as 
defined in Sec.  1.1503(d)-3), without regard to whether such 
availability is limited by election or similar procedure. That is, 
absent the mirror legislation, all or a portion of the dual consolidated 
loss would be available to offset the income of FSX under the 
Country X consolidation regime. This is the case even if Country X did 
not recognize DRCX as having a loss in year 1. Therefore, P 
may not make a domestic use election with respect to DRCX's 
year 1 dual consolidated loss pursuant to Sec.  1.1503(d)-3(d)(2).
    (iii) Alternative facts. The facts are the same as in paragraph 
(c)(17)(i) of this section, except that P owns DE1X (rather 
than DRCX) and, in year 1, there is a $100 dual consolidated 
loss attributable to P's interest in DE1X (rather than of 
DRCX). The Country X mirror legislation only applies to 
Country X dual resident corporations and, therefore, does not apply to 
losses attributable to P's interest in DE1X. As a result, the 
mirror legislation rule under Sec.  1.1503(d)-3(e) would not deny the 
opportunity of such loss from being put to a foreign use (for example, 
by offsetting the income of FSX through the Country X 
consolidation regime). Therefore, a domestic use election can be made 
with respect to the dual consolidated loss (provided the conditions for 
such an election are otherwise satisfied).
    (18) Example 18. Mirror legislation rule--standalone foreign branch 
separate unit--(i) Facts. P owns FBX. In year 1, there is a 
$100x dual consolidated loss attributable to FBX. Country X 
enacted mirror legislation to prevent Country X branches and permanent 
establishments of nonresident corporations from offsetting losses both 
against income of Country X affiliates and against other income of its 
owner (or foreign affiliates thereof) under the tax laws of another 
country. The Country X mirror legislation prevents a Country X branch or 
permanent establishment of a nonresident corporation from offsetting its 
losses against the income of Country X affiliates if such losses may be 
deductible against income (other than income of the Country X branch or 
permanent establishment) under the laws of another country.
    (ii) Result. In general, under Sec.  1.1503(d)-3(e), because the 
losses of FBX are subject to Country X's mirror legislation, 
there is a deemed foreign use of FBX's year 1 dual 
consolidated loss. However, in the absence of the Country X mirror 
legislation, no item of deduction or loss composing FBX's 
year 1 dual consolidated loss would be available in the year incurred 
for a foreign use (as defined in Sec.  1.1503(d)-3), without regard to 
whether such availability is limited by election or otherwise. This is 
the case because there is no Country X entity through which the dual 
consolidated loss could be put to a foreign use (absent a sale, merger, 
or similar transaction involving FBX). As a result, the 
stand-alone exception in Sec.  1.1503(d)-3(e)(2) may apply, provided P 
complies with the requirements of Sec.  1.1503(d)-3(e)(2)(ii). 
Accordingly, P may make a domestic use election with respect to the year 
1 dual consolidated loss of FBX pursuant to Sec.  1.1503(d)-
6(d). If, however, any item of the dual consolidated loss would 
otherwise be available for a foreign use during the certification period 
(for example, as a result of P acquiring a foreign corporation that is 
organized under the laws of Country X such that losses of FBX 
could be put to a foreign use through consolidation or similar means), 
then such loss would be recaptured pursuant to Sec.  1.1503(d)-
6(e)(1)(ix).
    (iii) Alternative facts. The facts are the same as in paragraph 
(c)(18)(i) of this section, except that the Country X mirror legislation 
operates in a manner similar to the rules under section 1503(d). That 
is, it allows the taxpayer to elect to use the loss to either offset 
income of an affiliate in Country X, or income of an affiliate (or other 
income of the owner of the Country X branch or permanent establishment) 
in the other country, but not both. Because the Country X mirror 
legislation permits the taxpayer to choose to put the dual consolidated 
loss to a foreign use, it does not deny the opportunity to put the loss 
to a foreign use. Therefore,

[[Page 1039]]

there is no deemed foreign use of the dual consolidated loss pursuant to 
Sec.  1.1503(d)-4(e) and a domestic use election can be made for such 
loss.
    (19) Example 19. Application of mirror legislation rule to combined 
separate unit--(i) Facts. P owns FBX, FSX, and 
DE1X. In year 1, there is a $50x dual consolidated loss 
attributable to FBX and $10x of income attributable to P's 
interest in DE1X. FSX has income of $100x. 
Pursuant to Sec.  1.1503(d)-1(b)(4)(ii), FBX and P's interest 
in DE1X are combined and treated as a single separate unit 
(Country X separate unit) which has a year 1 dual consolidated loss of 
$40x. Country X enacted mirror legislation to prevent Country X branches 
or permanent establishments of nonresident corporations from offsetting 
losses both against income of Country X affiliates and against other 
income of its owner (or foreign affiliates thereof) under the tax laws 
of another country. The Country X mirror legislation prevents a Country 
X branch or permanent establishment of a nonresident corporation from 
offsetting its losses against the income of Country X affiliates if such 
losses may be deductible against income (other than income of the 
Country X branch or permanent establishment) under the laws of another 
country. However, the United States and Country X have entered into an 
agreement described in Sec.  1.1503(d)-6(b) pursuant to the U.S.-Country 
X income tax convention (mirror agreement). The mirror agreement applies 
to Country X foreign branch separate units of domestic corporations, but 
not to Country X hybrid entity separate units. The mirror agreement 
provides that neither the Country X mirror legislation nor the mirror 
legislation rule under Sec.  1.1503(d)-3(e) will apply to losses 
attributable to Country X foreign branch separate units, provided 
certain conditions and reporting requirements are satisfied (including a 
domestic use election, if the loss is to be used to offset income of a 
domestic affiliate). Thus, losses attributable to Country X foreign 
branch separate units can, subject to the requirements of the mirror 
agreement, be used to offset income of a domestic affiliate or a Country 
X affiliate (but not both).
    (ii) Result. The Country X mirror legislation only applies to 
Country X foreign branch separate units and does not apply to hybrid 
entity separate units. In addition, if P complies with the terms and 
conditions of the mirror agreement, the Country X mirror legislation 
would not apply to FBX. As a result, the income tax laws of 
Country X would not deny the opportunity of a loss of either individual 
separate unit that composes P's combined Country X separate unit from 
being put to a foreign use. Therefore, notwithstanding Sec.  1.1503(d)-
3(e), a domestic use election can be made with respect to the dual 
consolidated loss attributable to P's Country X separate unit, provided 
the terms and conditions of the mirror agreement are satisfied. See 
Sec.  1.1503(d)-6(b)(2).
    (iii) Alternative facts. The facts are the same as in paragraph 
(c)(19)(i) of this section, except that the Country X mirror legislation 
also applies to losses attributable to DE1X, but the mirror 
agreement does not apply to such losses. The mirror legislation rule 
would apply with respect to P's interest in DE1X and, as a 
result, there is a deemed foreign use of the dual consolidated loss 
attributable to the Country X separate unit and a domestic use election 
cannot be made for such loss. This is the case even though, pursuant to 
Sec.  1.1503(d)-5(c)(4)(ii)(A), P's interest in DE1X (which 
is subject to the Country X mirror legislation) does not, as an 
individual separate unit, have a dual consolidated loss in year 1. 
Further, the stand-alone exception to the mirror legislation rule in 
Sec.  1.1503(d)-3(e)(2) does not apply because, absent the mirror 
legislation, the Country X combined separate unit's dual consolidated 
loss would be available in the year incurred for a foreign use (as 
defined in Sec.  1.1503(d)-3) because it could be used to offset income 
of FSX under the Country X consolidation regime. This is the 
case even if Country X requires an election to consolidate and no such 
election is made. The result would be the same even if Country X did not 
recognize DE1X as having a loss.
    (20) Example 20. Dual consolidated loss limitation after section 381 
transaction. disposition of assets and subsequent liquidation of dual 
resident corporation--(i)

[[Page 1040]]

Facts. P owns DRCX, a member of the P consolidated group. In 
year 1, DRCX incurs a dual consolidated loss and P does not 
make a domestic use election with respect to such loss. Under Sec.  
1.1503(d)-4(b), DRCX's year 1 dual consolidated loss is 
subject to the limitations under Sec.  1.1503(d)-4(c) and, therefore, 
may not be used to offset the income of P or S (or any other domestic 
affiliate) on the group's U.S. income tax return. At the beginning of 
year 2, DRCX sells all of its assets for cash and distributes 
the cash to P pursuant to a liquidation that qualifies under section 
332.
    (ii) Result. In general, under section 381, P would succeed to, and 
be permitted to use, DRCX's net operating loss carryover. 
However, Sec.  1.1503(d)-4(d)(1)(i) prohibits the dual consolidated loss 
of DRCX from carrying over to P. Therefore, DRCX's 
year 1 net operating loss carryover is eliminated.
    (21) Example 21. Dual consolidated loss limitation applied to a 
separate unit transferred in a section 381 transaction--(i) Facts. S 
owns DE1X which, in turn, owns FBX. S's interest 
in DE1X and its indirect interest in FBX are 
combined and treated as a single separate unit (Country X separate unit) 
pursuant to Sec.  1.1503(d)-1(b)(4)(ii). In year 1, a dual consolidated 
loss is attributable to the Country X separate unit, and P does not make 
a domestic use election with respect to such loss. Under Sec.  
1.1503(d)-4(b), the year 1 dual consolidated loss attributable to the 
Country X separate unit may not be used to offset the income of P or S 
(other than income attributable to the Country X separate unit, subject 
to the application of Sec.  1.1503(d)-4(c)) on the group's consolidated 
U.S. income tax return (nor may it be used to offset the income of any 
other domestic affiliates). At the beginning of year 2, S transfers its 
entire interest in DE1X, and thus its entire indirect 
interest in FBX, to FSX in a transaction described 
in section 381.
    (ii) Result. Section 1.1503(d)-4(d)(1)(ii) provides that the dual 
consolidated loss attributable to a separate unit that is subject to the 
domestic use limitation under Sec.  1.1503(d)-4(b) is eliminated if the 
separate unit ceases to be a separate unit of its affiliated domestic 
owner and all other members of the affiliated domestic owner's separate 
group. As a result of the transfer of the Country X separate unit to 
FSX, the Country X separate unit ceases to be a separate unit 
of S, and is not a separate unit of any other member of the P 
consolidated group. In addition, the exceptions in Sec.  1.1503(d)-
4(d)(2)(iii) do not apply because FSX is not a domestic 
corporation. Thus, the year 1 dual consolidated loss attributable to the 
Country X separate unit is eliminated.
    (iii) Alternative facts. Assume the same facts as in paragraph 
(c)(21)(i) of this section, except S transfers its assets to DC, a 
domestic corporation that is not a member of the P consolidated group, 
in a transaction described in section 381(a). Immediately after the 
transaction, the Country X separate unit is a separate unit of DC. Under 
Sec.  1.1503(d)-4(d)(1)(ii), the year 1 dual consolidated loss of the 
Country X separate unit would be eliminated because it ceases to be a 
separate unit of S, and is not a separate unit of any other member of 
the P consolidated group. However, because the transferee is a domestic 
corporation and the Country X separate unit is a separate unit in the 
hands of DC immediately after the transaction, the exception under Sec.  
1.1503(d)-4(d)(2)(iii)(A) applies. As a result, the year 1 dual 
consolidated loss of the Country X separate unit is not eliminated and 
any income generated by DC that is attributable to the Country X 
separate unit following the transfer may be offset by the carryover dual 
consolidated losses attributable to the Country X separate unit, subject 
to the limitations of Sec.  1.1503(d)-4(b) and (c) applied as if DC 
generated the dual consolidated loss and such loss was attributable to 
the Country X separate unit.
    (iv) Alternative facts. Assume the same facts as in paragraph 
(c)(21)(iii) of this section, except that P owns DE2X and the 
interest in DE2X is combined with and therefore included in 
the Country X separate unit. In addition, a portion of the dual 
consolidated loss of the Country X separate unit is attributable to P's 
interest in DE2X. Pursuant to Sec.  1.1503(d)-
4(d)(2)(iii)(A), the result would be the same as in paragraph 
(c)(21)(iii) of this section, with respect to the portion of the dual 
consolidated

[[Page 1041]]

loss attributable to the combined separate unit that is succeeded to and 
taken into account by DC pursuant to section 381. The portion of the 
dual consolidated loss attributable to P's interest in DE2X, 
however, does not carry over to DC but is retained by P and continues to 
be subject to the limitations of Sec.  1.1503(d)-4(b) and (c) with 
respect to P's interest in DE2X.
    (v) Alternative facts. Assume the same facts as in paragraph 
(c)(21)(iv) of this section, except that DC is a member of the P 
consolidated group. Pursuant to Sec.  1.1503(d)-4(d)(2)(iii)(B), the 
dual consolidated loss of the Country X separate unit is not eliminated 
and income attributable to the Country X separate unit may continue to 
be offset by the dual consolidated loss that is succeeded to and taken 
into account by DC pursuant to section 381, subject to the limitations 
of Sec.  1.1503(d)-4(b) and (c). The result would be the same even if 
the interest in DE1X ceased to be a separate unit in the 
hands of DC (for example, because it dissolved under Country X law in 
connection with the transaction), provided P, or another member of the P 
consolidated group, continued to own a portion of the Country X separate 
unit.
    (22) Example 22. Tainted income--(i) Facts. P owns 100 percent of 
DRCZ, a domestic corporation that is included as a member of 
the P consolidated group. DRCZ conducts a business in the 
United States. During year 1, DRCZ was managed and controlled 
in Country Z and therefore was subject to tax as a resident of Country Z 
and was a dual resident corporation. In year 1, DRCZ incurred 
a dual consolidated loss of $200x, and P did not make a domestic use 
election with respect to such loss. As a result, such loss is subject to 
the domestic use limitation rule of Sec.  1.1503(d)-4(b). At the end of 
year 1, DRCZ moved its management and control to the United 
States and, as a result, ceased being a dual resident corporation. At 
the beginning of year 2, P transferred asset A, a non-depreciable asset, 
to DRCZ in exchange for common stock in a transaction that 
qualified for nonrecognition under section 351. At the time of the 
transfer, P's tax basis in asset A equaled $50x and the fair market 
value of asset A equaled $100x. The tax basis of asset A in the hands of 
DRCZ immediately after the transfer equaled $50x pursuant to 
section 362. Asset A did not constitute replacement property acquired in 
the ordinary course of business. DRCZ did not generate income 
or gain during years 2, 3, or 4. On June 30, year 5, DRCZ 
sold asset A to a third party for $100x, its fair market value at the 
time of the sale, and recognized $50x of income on such sale. In 
addition to the $50x income generated on the sale of asset A, 
DRCZ generated $100x of operating income in year 5. At the 
end of year 5, the fair market value of all the assets of 
DRCZ was $400x.
    (ii) Result. DRCZ ceased being a dual resident 
corporation at the end of year 1. Therefore, its year 1 dual 
consolidated loss cannot be offset by tainted income. Asset A is a 
tainted asset because it was acquired in a nonrecognition transaction 
after DRCZ ceased being a dual resident corporation (and was 
not replacement property acquired in the ordinary course of business). 
As a result, the $50x of income recognized by DRCZ on the 
disposition of asset A is tainted income and cannot be offset by the 
year 1 dual consolidated loss of DRCZ. In addition, absent 
evidence establishing the actual amount of tainted income, $25x of the 
$100x year 5 operating income of DRCZ (($100x/$400x) x $100x) 
also is treated as tainted income and cannot be offset by the year 1 
dual consolidated loss of DRCZ under Sec.  1.1503(d)-
4(e)(2)(ii). Therefore, $75x of the $150x year 5 income of 
DRCZ constitutes tainted income and may not be offset by the 
year 1 dual consolidated loss of DRCZ; however, the remaining 
$75x of year 5 income of DRCZ may be offset by such dual 
consolidated loss. The result would be the same if, instead of P 
transferring asset A to DRCZ, such asset was received from a 
separate unit or a transparent entity of DRCZ.
    (23) Example 23. Treatment of disregarded item and books and records 
of a hybrid entity--(i) Facts. P owns DE1X which, in turn, 
owns FSX. In year 1, P borrows from a third party and on-
lends the proceeds to DE1X. In year 1, P incurs interest 
expense attributable to the third-party loan. Also in year 1,

[[Page 1042]]

DE1X incurs interest expense attributable to its loan from P, 
but such expense is generally disregarded for U.S. tax purposes because 
DE1X is disregarded as an entity separate from P. The third-
party loan and related interest expense are reflected on the books and 
records of P (and not on the books and records of DE1X). The 
loan from P to DE1X and related interest expense are 
reflected on the books and records of DE1X. There are no 
other items of income, gain, deduction, or loss reflected on the books 
and records of DE1X in year 1.
    (ii) Result. Because the interest expense on P's third-party loan is 
not reflected on the books and records of DE1X, no portion of 
such expense is attributable to P's interest in DE1X pursuant 
to Sec.  1.1503(d)-5(c)(3) for purposes of calculating the year 1 dual 
consolidated loss, if any, attributable to such interest. In addition, 
even though P's interest in DE1X is treated as a separate 
domestic corporation for purposes of determining the amount of income or 
dual consolidated loss attributable to it pursuant to Sec.  1.1503(d)-
5(c)(1)(ii), such treatment does not cause the interest expense incurred 
on the loan from P to DE1X that is generally disregarded for 
U.S. tax purposes to be regarded for purposes of calculating the year 1 
dual consolidated loss, if any, attributable to P's interest in 
DE1X. As a result, even though the disregarded interest 
expense is reflected on the books and records of DE1X, it is 
not taken into account for purposes of calculating income or a dual 
consolidated loss. Therefore, there is no dual consolidated loss 
attributable to P's interest in DE1X in year 1.
    (24) Example 24. Dividend income attributable to a separate unit--
(i) Facts. P owns DE1X which, in turn, owns FBX. 
P's interest in DE1X and its indirect interest in 
FBX are combined and treated as a single separate unit 
(Country X separate unit) pursuant to Sec.  1.1503(d)-1(b)(4)(ii). 
DE1X owns DE3Y. DE3Y owns the stock of 
FSX. P's Country X separate unit would, without regard to 
year 1 dividend income (or related section 78 gross-up) received from 
FSX, have a dual consolidated loss of $75x in year 1. In year 
1, FSX distributes $50x to DE3Y that is taxable as 
a dividend. DE3Y distributes the same amount to 
DE1X. P computes foreign taxes deemed paid on the dividend 
under section 902 of $25x and includes that amount in gross income under 
section 78.
    (ii) Result. The $50x dividend is reflected on the books and records 
of DE3Y and, therefore, is attributable to P's interest in 
DE3Y pursuant to Sec.  1.1503(d)-5(c)(3)(i). In addition, the 
$25x section 78 gross-up is attributable to P's interest in 
DE3Y pursuant to Sec.  1.1503(d)-5(c)(4)(iv). The 
distribution of $50x from DE3Y to DE1X is 
generally disregarded for U.S. tax purposes and, therefore, does not 
give rise to an item that is taken into account for purposes of 
calculating income or a dual consolidated loss. This is the case even 
though the item would be reflected on the books and records of 
DE1X. In addition, pursuant to Sec.  1.1503(d)-5(c)(1)(iii), 
each separate unit must calculate its own income or dual consolidated 
loss, and each item of income, gain, deduction, and loss must be taken 
into account only once. As a result, the dual consolidated loss of $75x 
attributable to P's Country X separate unit in year 1 is not reduced by 
the amount of dividend income attributable to P's indirect interest in 
DE3Y.
    (25) Example 25. Items reflected on books and records of a combined 
separate unit--(i) Facts. P owns DE1X which, in turn, owns 
FBX. P's interest in DE1X and its indirect 
interest in FBX are combined and treated as a single separate 
unit (Country X separate unit) pursuant to Sec.  1.1503(d)-1(b)(4)(ii). 
The following items are reflected on the books and records of 
DE1X in year 1: Sales, depreciation expense, a political 
contribution, royalty expense paid to P, repairs and maintenance expense 
paid to a third party, and Country X income tax expense. The amount of 
sales under U.S. tax principles equals the amount of sales reported for 
accounting purposes. The depreciation expense is calculated on a 
straight-line basis over the useful life of the asset for accounting 
purposes, but is subject to accelerated depreciation for U.S. tax 
purposes. In addition, the repairs and

[[Page 1043]]

maintenance expense, which is deducted when paid for accounting 
purposes, is properly capitalized and amortized over five years for U.S. 
tax purposes. Finally, P elects to claim as a credit under section 901 
the Country X income tax expense that was paid in year 1.
    (ii) Result. (A) For purposes of determining the income or dual 
consolidated loss attributable to P's Country X separate unit, items of 
income, gain, deduction, and loss must first be attributed to the 
individual separate units (that is, P's interest in DE1X and 
its indirect interest in FBX). For purposes of attributing 
items to P's interest in DE1X, P's items that are reflected 
on DE1X's books and records, as adjusted to conform to U.S. 
tax principles, are taken into account. See Sec.  1.1503(d)-5(c)(3)(i). 
For purposes of attributing items (other than interest expense) to 
FBX, the principles of section 864(c)(2), (c)(4), and (c)(5) 
(as set forth in Sec.  1.864-4(c) and Sec. Sec.  1.864-5 through 1.864-
7) must be applied and, for interest expense, the principles of Sec.  
1.882-5, as modified under Sec.  1.1503(d)-5(c)(2)(ii), must be applied; 
however, for these purposes, pursuant to Sec.  1.1503(d)-5(c)(4)(i)(A), 
FBX only takes into account items attributable to P's 
interest in DE1X and the assets, liabilities, and activities 
of such interest. In addition, to the extent such items are taken into 
account by FBX, they are not taken into account in 
determining the items attributable to P's interest in DE1X. 
Sec.  1.1503(d)-5(c)(4)(i)(B). Because P's interest in DE1X 
has no assets or liabilities, and conducts no activities, other than 
through its ownership of FBX, all of the items that are 
reflected on the books and records of DE1X, as adjusted to 
conform to U.S. tax principles, are attributable to FBX; no 
items are attributable to P's interest in DE1X.
    (B) The items reflected on the books and records of DE1X 
must be adjusted to conform to U.S. tax principles. No adjustment is 
required to sales because the amount of sales under U.S. tax principles 
equals the amount of sales for accounting purposes. The amount of 
straight-line depreciation expense reflected on DE1X's books 
and records must be adjusted to reflect the amount of depreciation on 
the asset that is allowable for U.S. tax purposes. The political 
contribution is not taken into account because it is not deductible for 
U.S. tax purposes. Similarly, because the royalty expense is paid to P, 
and therefore is generally disregarded for U.S. tax purposes, it is not 
taken into account. The repair and maintenance expense that is deducted 
in year 1 for accounting purposes also must be adjusted to conform to 
U.S. tax principles. Thus, the repair and maintenance expense will be 
taken into account in computing the income or dual consolidated loss 
attributable to P's Country X separate unit over five years (even though 
no item related to such expense would be reflected on the books and 
records of DE1X for years 2 through 5). Finally, because P 
elected to claim as a credit the Country X foreign taxes paid during 
year 1, no deduction is allowed for such amount pursuant to section 
275(a)(4) and, therefore, the Country X tax expense is not taken into 
account.
    (C) Pursuant to Sec.  1.1503(d)-5(c)(4)(ii)(B), the combined Country 
X separate unit of P calculates its income or dual consolidated loss by 
taking into account all the items of income, gain, deduction, and loss 
that were separately attributable to P's interest in DE1X and 
FBX. However, in this case, there are no items attributable 
to P's interest in DE1X. Therefore, the items attributable to 
the Country X separate unit are the items attributable to 
FBX.
    (26) Example 26. Items attributable to a combined separate unit--(i) 
Facts. P owns DE1X. DE1X owns a 50 percent 
interest in PRSZ, a Country Z entity that is classified as a 
partnership both for Country Z tax purposes and for U.S. tax purposes. 
FSX, which is unrelated to P, owns the remaining 50 percent 
interest in PRSZ. PRSZ carries on operations in 
Country X that, if carried on by a U.S. person, would constitute a 
foreign branch as defined in Sec.  1.367(a)-6T(g)(1). Therefore, P's 
share of the Country X operations carried on by PRSZ 
constitutes a foreign branch separate unit. PRSZ also owns 
assets that do not constitute a part of its Country X branch, including 
all of the interests in TET, a disregarded entity. 
TET is an

[[Page 1044]]

entity incorporated under the laws of Country T, a country that does not 
have an income tax. Under the laws of Country X, an interest holder of 
TET does not take into account on a current basis the 
interest holder's share of items of income, gain, deduction, and loss of 
TET.
    (ii) Result. (A) Pursuant to Sec.  1.1503(d)-1(b)(4)(ii), P's 
interest in DE1X, and P's indirect ownership of a portion of 
the Country X operations carried on by PRSZ, are combined and 
treated as a single separate unit (Country X separate unit). Pursuant to 
Sec.  1.1503(d)-5(c)(4)(ii)(A), for purposes of determining P's items of 
income, gain, deduction, and loss attributable to the Country X separate 
unit, the items of P are first attributed to each separate unit that 
composes the Country X separate unit.
    (B) Pursuant to Sec.  1.1503(d)-5(c)(2)(i), the principles of 
section 864(c)(2), (c)(4), and (c)(5) (as set forth in Sec.  1.864-4(c) 
and Sec. Sec.  1.864-5 through 1.864-7), apply for purposes of 
determining P's items of income, gain, deduction (other than interest 
expense), and loss that are attributable to P's indirect interest in the 
Country X operations carried on by PRSZ. For purposes of 
determining P's interest expense that is attributable to P's indirect 
interest in the Country X operations carried on by PRSZ, the 
principles of Sec.  1.882-5, as modified under Sec.  1.1503(d)-
5(c)(2)(ii), shall apply. For purposes of applying these rules, P is 
treated as a foreign corporation, the Country X operations carried on by 
PRSZ are treated as a trade or business within the United 
States, and the assets of P (including its share of the PRSZ 
assets, other than those of the Country X operations) are treated as 
assets that are not U.S. assets. In addition, because P carries on its 
share of the Country X operations through DE1X, a hybrid 
entity, Sec.  1.1503(d)-5(c)(4)(i)(A) provides that only the items 
attributable to P's interest in DE1X, and only the assets, 
liabilities, and activities of P's interest in DE1X, are 
taken into account for purposes of this determination.
    (C) TET is a transparent entity as defined in Sec.  
1.1503(d)-1(b)(16) because it is not taxable as an association for 
Federal tax purposes, is not subject to income tax in a foreign country 
as a corporation (or otherwise at the entity level) either on its 
worldwide income or on a residence basis, and is not treated as a pass-
through entity under the laws of Country X (the applicable foreign 
country). TET is not a pass-through entity under the laws of 
Country X because a Country X holder of an interest in TET 
does not take into account on a current basis the interest holder's 
share of items of income, gain, deduction, and loss of TET. 
For purposes of determining P's items of income, gain, deduction, and 
loss that are attributable to P's interest in TET, only those 
items of P that are reflected on the books and records of 
TET, as adjusted to conform to U.S. tax principles, are taken 
into account. Sec.  1.1503(d)-5(c)(3)(i). Because the interest in 
TET is not a separate unit, a loss attributable to such 
interest is not a dual consolidated loss and is not subject to section 
1503(d) and these regulations. Items must nevertheless be attributed to 
the interests in TET. For example, such attribution is 
required for purposes of calculating the income or dual consolidated 
loss attributable to the Country X separate unit, and for purposes of 
applying the domestic use limitation under Sec.  1.1503(d)-4(b) to a 
dual consolidated loss attributable to the Country X separate unit.
    (D) For purposes of determining P's items of income, gain, 
deduction, and loss that are attributable to P's interest in 
DE1X, only those items of P that are reflected on the books 
and records of DE1X, as adjusted to conform to U.S. tax 
principles, are taken into account. Sec.  1.1503(d)-5(c)(3)(i). For this 
purpose, DE1X's distributive share of the items of income, 
gain, deduction, and loss that are reflected on the books and records of 
PRSZ, as adjusted to conform to U.S. tax principles, are 
treated as being reflected on the books and records of DE1X, 
except to the extent such items are taken into account by the Country X 
operations of PRSZ. See Sec.  1.1503(d)-5(c)(3)(ii) and 
(4)(i)(B). Because TET is a transparent entity, the items 
reflected on its books and records are not treated as being reflected on 
the books and records of DE1X.

[[Page 1045]]

    (E) Pursuant to Sec.  1.1503(d)-5(c)(4)(ii)(B), the combined Country 
X separate unit of P calculates its income or dual consolidated loss by 
taking into account all the items of income, gain, deduction, and loss 
that were separately attributable to P's interest in DE1X and 
the Country X operations of PRSZ owned indirectly by P.
    (27) Example 27. Sale of separate unit by another separate unit--(i) 
Facts. P owns DE3Y which, in turn, owns DE1X. 
DE3Y also owns other assets that do not constitute a foreign 
branch separate unit. DE1X owns FBX. Pursuant to 
Sec.  1.1503(d)-1(b)(4)(ii), P's indirect interests in DE1X 
and FBX are combined and treated as one Country X separate 
unit (Country X separate unit). DE3Y sells its interest in 
DE1X at the end of year 1 to an unrelated foreign person for 
cash. The sale results in an ordinary loss of $30x. Items of income, 
gain, deduction, and loss derived from the assets that gave rise to the 
$30x loss would be attributable to the Country X separate unit under 
Sec.  1.1503(d)-5(c) through (e). Without regard to the sale of 
DE1X, no items of income, gain, deduction, and loss are 
attributable to P's Country X separate unit in year 1.
    (ii) Result. Pursuant to Sec.  1.1503(d)-5(c)(4)(iii)(A), the $30x 
ordinary loss recognized on the sale is attributable to the Country X 
separate unit, and not P's interest in DE3Y. This is the case 
because the Country X separate unit is treated as owning the assets that 
gave rise to the loss under Sec.  1.1503(d)-5(f). Thus, the loss 
attributable to the sale creates a year 1 dual consolidated loss 
attributable to the Country X separate unit. In addition, pursuant to 
Sec.  1.1503(d)-6(d)(2), P cannot make a domestic use election with 
respect to the dual consolidated loss because the sale of the interest 
in DE1X is a triggering event described in Sec.  1.1503(d)-
6(e)(1)(iv) and (v). Further, although the year 1 dual consolidated loss 
would otherwise be subject to the domestic use limitation rule of Sec.  
1.1503(d)-4(b), it is eliminated pursuant to Sec.  1.1503(d)-
4(d)(1)(ii). Finally, if there were a dual consolidated loss 
attributable to P's interest in DE3Y, the sale of the 
interest in DE1X would not be taken into account for purposes 
of determining whether there is an asset triggering event with respect 
to such dual consolidated loss under Sec.  1.1503(d)-6(e)(1)(iv).
    (28) Example 28. Gain on sale of tiered separate units--(i) Facts. P 
owns 75 percent of HPSX, a Country X entity subject to 
Country X tax on its worldwide income. FSX owns the remaining 
25 percent of HPSX. HPSX is classified as a 
partnership for Federal tax purposes. HPSX carries on 
operations in Country Y that, if carried on by a U.S. person, would 
constitute a foreign branch within the meaning of Sec.  1.367(a)-
6T(g)(1). HPSX also owns assets that do not constitute a part 
of its Country Y operations and would not themselves constitute a 
foreign branch within the meaning of Sec.  1.367(a)-6T(g)(1) if owned by 
a U.S. person. Neither HPSX nor the Country Y operations has 
liabilities. P's indirect interest in the Country Y operations carried 
on by HPSX, and P's interest in HPSX, are each 
separate units. P sells its interest in HPSX and recognizes a 
gain of $150x on such sale. Immediately prior to P's sale of its 
interest in HPSX, P's portion of the assets of the Country Y 
operations (that is, assets the income, gain, deduction and loss from 
which would be attributable to P's Country Y foreign branch separate 
unit) had a built-in gain of $200x, and P's portion of HPSX's 
other assets (that is, assets the income, gain, deduction and loss from 
which would be attributable to P's interest in HPSX) had a 
built-in gain of $100x.
    (ii) Result. Pursuant to Sec.  1.1503(d)-5(c)(4)(iii)(B), $100x of 
the total $150x of gain recognized ($200x/$300x x $150x) is attributable 
to P's indirect interest in its share of the Country Y operations 
carried on by HPSX. Similarly, $50x of such gain ($100x/$300x 
x $150x) is attributable to P's interest in HPSX.
    (29) Example 29. Effect on domestic affiliate--(i) Facts. (A) P owns 
DE1X which, in turn, owns FBX. P's interest in 
DE1X and its indirect interest in FBX are combined 
and treated as a single separate unit (Country X separate unit) pursuant 
to Sec.  1.1503(d)-1(b)(4)(ii). In years 1 and 2, the items of income, 
gain, deduction, and loss that are attributable to P's Country X 
separate unit pursuant to Sec.  1.1503(d)-5 are as follows:

[[Page 1046]]



                   Table 1 to paragraph (c)(29)(i)(A)
------------------------------------------------------------------------
                         Item                            Year 1   Year 2
------------------------------------------------------------------------
Sales income..........................................    $100x    $160x
Salary expense........................................   ($75x)   ($75x)
Research and experimental expense.....................   ($50x)   ($50x)
Interest expense......................................   ($25x)   ($25x)
                                                       -----------------
Income/(dual consolidated loss).......................   ($50x)     $10x
------------------------------------------------------------------------

    (B) P does not make a domestic use election with respect to the year 
1 dual consolidated loss attributable to its Country X separate unit. 
Pursuant to Sec.  1.1503(d)-4(b) and (c)(2), the year 1 dual 
consolidated loss of $50x is treated as a loss incurred by a separate 
domestic corporation and is subject to the limitations under Sec.  
1.1503(d)-4(c)(3). The P consolidated group has $100x of consolidated 
taxable income in year 2.
    (ii) Result. (A) P must compute its taxable income for year 1 
without taking into account the $50x dual consolidated loss, pursuant to 
Sec.  1.1503(d)-4(c)(2). Such amount consists of a pro rata portion of 
the expenses that were taken into account in calculating the year 1 dual 
consolidated loss. Thus, the items of the dual consolidated loss that 
are not taken into account by P in computing its taxable income are as 
follows: $25x of salary expense ($75x/$150x x $50x); $16.67x of research 
and experimental expense ($50x/$150x x $50x); and $8.33x of interest 
expense ($25x/$150x x $50x). The remaining amounts of each of these 
items, together with the $100x of sales income, are taken into account 
by P in computing its taxable income for year 1 as follows: $50x of 
salary expense ($75x - $25x); $33.33x of research and experimental 
expense ($50x - $16.67x); and $16.67x of interest expense ($25x - 
$8.33x).
    (B) Subject to the limitations provided under Sec.  1.1503(d)-4(c), 
the year 1 $50x dual consolidated loss is carried forward and is 
available to offset the $10x of income attributable to the Country X 
separate unit in year 2. Pursuant to Sec.  1.1503(d)-4(c)(4), a pro rata 
portion of each item of deduction or loss included in such dual 
consolidated loss is considered to be used to offset the $10x of income, 
as follows: $5x of salary expense ($25x / $50x x $10x); $3.33x of 
research and experimental expense ($16.67x/$50x x $10x); and $1.67x of 
interest expense ($8.33x / $50x x $10x). The remaining amount of each 
item shall continue to be subject to the limitations under Sec.  
1.1503(d)-4(c).
    (30) Example 30. Exception to domestic use limitation--no 
possibility of foreign use because items are not deducted or capitalized 
under foreign law--(i) Facts. P owns DE1X which, in turn, 
owns FSX. In year 1, the sole item of income, gain, 
deduction, and loss attributable to P's interest in DE1X, as 
provided under Sec.  1.1503(d)-5, is $100x of interest expense paid on a 
loan to an unrelated lender. For Country X tax purposes, the $100x 
interest expense attributable to P's interest in DE1X in year 
1 is treated as a repayment of principal and therefore cannot be 
deducted (at any time) or capitalized.
    (ii) Result. The $100x of interest expense attributable to P's 
interest in DE1X constitutes a dual consolidated loss. 
However, because the sole item constituting the dual consolidated loss 
cannot be deducted or capitalized (at any time) for Country X tax 
purposes, P can demonstrate that there can be no foreign use of the dual 
consolidated loss at any time. As a result, pursuant to Sec.  1.1503(d)-
6(c)(1), if P prepares a statement described in Sec.  1.1503(d)-6(c)(2) 
and attaches it to its timely filed tax return, the year 1 dual 
consolidated loss attributable to P's interest in DE1X will 
not be subject to the domestic use limitation rule of Sec.  1.1503(d)-
4(b).
    (31) Example 31. No exception to domestic use limitation--inability 
to demonstrate no possibility of foreign use--(i) Facts. P owns 
DE1X which, in turn, owns FBX. P's interest in 
DE1X and its indirect interest in FBX are combined 
and treated as a single separate unit (Country X separate unit) pursuant 
to Sec.  1.1503(d)-1(b)(4)(ii). In year 1, the sole items of income, 
gain, deduction, and loss attributable to P's Country X separate unit, 
as provided under Sec.  1.1503(d)-5, are $75x of sales income and $100x 
of depreciation expense. For Country X tax purposes, DE1X 
also generates $75x of sales income in year 1, but the $100x of 
depreciation expense is not deductible until year 2.
    (ii) Result. The year 1 $25x net loss attributable to P's interest 
in the Country X separate unit constitutes a dual consolidated loss. In 
addition, even

[[Page 1047]]

though DE1X has positive income in year 1 for Country X tax 
purposes, P cannot demonstrate that there is no possibility of foreign 
use with respect to the Country X separate unit's dual consolidated loss 
as provided under Sec.  1.1503(d)-6(c)(1)(i). P cannot make such a 
demonstration because the depreciation expense, an item composing the 
year 1 dual consolidated loss, is deductible (in a later year) for 
Country X tax purposes and, therefore, may be available to offset or 
reduce income for Country X purposes that would constitute a foreign 
use. For example, if DE1X elected to be classified as a 
corporation pursuant to Sec.  301.7701-3(c) of this chapter effective as 
of the end of year 1, and the deferred depreciation expense were 
available for Country X tax purposes to offset year 2 income of 
DE1X, an entity treated as a foreign corporation in year 2 
for U.S. tax purposes, there would be a foreign use.
    (iii) Alternative facts. (A) The facts are the same as in paragraph 
(c)(31)(i) of this section, except as follows. In year 1, the sole items 
of income, gain, deduction, and loss attributable to P's Country X 
separate unit, as provided in Sec.  1.1503(d)-5, are $75x of sales 
income, $100x of interest expense, and $25x of depreciation expense. For 
Country X tax purposes, DE1X generates $75x of sales income 
in year 1; the $100x interest expense is treated as a repayment of 
principal and therefore cannot be deducted or capitalized (at any time); 
and the $25x of depreciation expense is not deductible in year 1, but is 
deductible in year 2.
    (B) In year 1, the $50x net loss attributable to P's Country X 
separate unit constitutes a dual consolidated loss. Even though the 
$100x interest expense, a nondeductible and noncapital item for Country 
X tax purposes, exceeds the $50x year 1 dual consolidated loss 
attributable to P's Country X separate unit, P cannot demonstrate that 
there is no possibility of foreign use of the dual consolidated loss as 
provided under Sec.  1.1503(d)-6(c)(1)(i). P cannot make such a 
demonstration because the $25x depreciation expense, an item of 
deduction or loss composing the year 1 dual consolidated loss, is 
deductible under Country X law (in year 2) and, therefore, may be 
available to offset or reduce income for Country X tax purposes that 
would constitute a foreign use.
    (32) Example 32. Triggering event rebuttal--expiration of losses in 
foreign country--(i) Facts. P owns DRCX, a member of the P 
consolidated group. In year 1, DRCX incurs a dual 
consolidated loss of $100x. P makes a domestic use election with respect 
to DRCX's year 1 dual consolidated loss and such loss 
therefore is included in the computation of the P group's consolidated 
taxable income. DRCX has no income or loss in year 2 through 
year 5. In year 5, P sells the stock of DRCX to 
FSX. At the time of the sale of the stock of DRCX, 
all of the losses and deductions that were included in the computation 
of the year 1 dual consolidated loss of DRCX had expired for 
Country X tax purposes because the laws of Country X only provide for a 
three-year carryover period for such items.
    (ii) Result. The sale of DRCX to FSX generally 
would be a triggering event under Sec.  1.1503(d)-6(e)(1)(ii), which 
would require DRCX to recapture the year 1 dual consolidated 
loss (and pay an applicable interest charge) on the P consolidated 
group's tax return for the year that includes the date on which 
DRCX ceases to be a member of the P consolidated group. 
However, upon adequate documentation that the losses and deductions have 
expired for Country X tax purposes, P can rebut the presumption that a 
triggering event has occurred pursuant to Sec.  1.1503(d)-6(e)(2)(i). If 
the triggering event presumption is rebutted, the domestic use agreement 
filed by the P consolidated group with respect to the year 1 dual 
consolidated loss of DRCX is terminated and has no further 
effect pursuant to Sec.  1.1503(d)-6(j)(1)(i). If the presumptive 
triggering event is not rebutted, the domestic use agreement would 
terminate and have no further effect pursuant to Sec.  1.1503(d)-
6(j)(1)(iii) because the dual consolidated loss would be recaptured.
    (33) Example 33. Triggering events and rebuttals--tax basis 
carryover transaction--(i) Facts. (A) P owns DE1X. 
DE1X's sole asset is A, which it acquired at the beginning of 
year 1 for $100x. DE1X does not have any liabilities. For 
U.S. tax purposes, DE1X's tax

[[Page 1048]]

basis in A at the beginning of year 1 is $100x and DE1X's 
sole item of income, gain, deduction, and loss for year 1 is a $20x 
depreciation deduction attributable to A. As a result, the $20x 
depreciation deduction constitutes a dual consolidated loss attributable 
to P's interest in DE1X. P makes a domestic use election with 
respect to the year 1 dual consolidated loss.
    (B) For Country X tax purposes, DE1X has a $100x tax 
basis in A at the beginning of year 1, but A is not a depreciable asset. 
As a result, DE1X does not have any items of income, gain, 
deduction, and loss in year 1 for Country X tax purposes.
    (C) During year 2, P sells its interest in DE1X to 
FSX for $80x. P's disposition of its interest in 
DE1X constitutes a presumptive triggering event under Sec.  
1.1503(d)-6(e)(1)(iv) and (v) requiring the recapture of the year 1 $20x 
dual consolidated loss (plus the applicable interest charge). For 
Country X tax purposes, DE1X retains its tax basis of $100x 
in A following the sale.
    (ii) Result. The year 1 dual consolidated loss is a result of the 
$20x depreciation deduction attributable to A. Although no item of 
deduction or loss was recognized by DE1X at the time of the 
sale for Country X tax purposes, the deduction composing the dual 
consolidated loss was retained by DE1X after the sale in the 
form of tax basis in A. As a result, a portion of the dual consolidated 
loss may be available to offset income for Country X tax purposes in a 
manner that would constitute a foreign use. For example, if 
DE1X were to dispose of A, the amount of gain recognized by 
DE1X would be reduced (or an amount of loss recognized by 
DE1X would be increased) and, therefore, an item composing 
the dual consolidated loss would be available, under U.S. tax 
principles, to reduce income of a foreign corporation (and an owner of 
an interest in a hybrid entity that is not a separate unit). Thus, P 
cannot demonstrate pursuant to Sec.  1.1503(d)-6(e)(2)(i) that there can 
be no foreign use of the year 1 dual consolidated loss following the 
triggering event, and must recapture the year 1 dual consolidated loss. 
Pursuant to Sec.  1.1503(d)-6(j)(1)(iii), the domestic use agreement 
filed by the P consolidated group with respect to the year 1 dual 
consolidated loss is terminated and has no further effect.
    (iii) Alternative facts. The facts are the same as paragraph 
(c)(33)(i) of this section, except that instead of P selling its 
interest in DE1X to FSX, DE1X sells 
asset A to FSX for $80x and, for Country X tax purposes, 
FSX's tax basis in A immediately after the sale is $80x. P's 
disposition of Asset A constitutes a presumptive triggering event under 
Sec.  1.1503(d)-6(e)(1)(iv) requiring the recapture of the year 1 $20x 
dual consolidated loss (plus the applicable interest charge). For 
Country X tax purposes, FSX's tax basis in A was not 
determined, in whole or in part, by reference to the basis of A in the 
hands of DE1X. As a result, the deduction composing the dual 
consolidated loss will not give rise to an item of deduction or loss in 
the form of tax basis for Country X tax purposes (for example, when 
FSX disposes of A). Therefore, P may be able to demonstrate 
(for example, by obtaining the opinion of a Country X tax advisor) 
pursuant to Sec.  1.1503(d)-6(e)(2)(i) that there can be no foreign use 
of the year 1 dual consolidated loss and, thus, would not be required to 
recapture the year 1 dual consolidated loss.
    (34) Example 34. Triggering event resulting in a single consolidated 
group where acquirer files a new domestic use agreement--(i) Facts. P 
owns DRCX, a member of the P consolidated group. In year 1, 
DRCX incurs a dual consolidated loss and P makes a domestic 
use election with respect to such loss. No member of the P consolidated 
group incurs a dual consolidated loss in year 2. At the end of year 2, 
T, the parent of the T consolidated group, acquires all the stock of P, 
and all the members of the P group, including DRCX, become 
members of a consolidated group of which T is the common parent.
    (ii) Result. (A) Under Sec.  1.1503(d)-6(f)(2)(ii)(B), the 
acquisition by T of the P consolidated group is not an event described 
in Sec.  1.1503(d)-6(e)(1)(ii) requiring the recapture of the year 1 
dual consolidated loss of DRCX (and the payment of an 
interest charge), provided that the T consolidated group files a new 
domestic use agreement described

[[Page 1049]]

in Sec.  1.1503(d)-6(f)(2)(iii)(A). If a new domestic use agreement is 
filed, then pursuant to Sec.  1.1503(d)-6(j)(1)(ii), the domestic use 
agreement filed by the P consolidated group with respect to the year 1 
dual consolidated loss of DRCX is terminated and has no 
further effect.
    (B) Assume that T files a new domestic use agreement and a 
triggering event occurs at the end of year 3. As a result, the T 
consolidated group must recapture the dual consolidated loss that 
DRCX incurred in year 1 (and pay an interest charge), as 
provided in Sec.  1.1503(d)-6(h). Each member of the T consolidated 
group, including DRCX and any former members of the P 
consolidated group, is severally liable for the additional tax (and the 
interest charge) due upon the recapture of the dual consolidated loss of 
DRCX. In addition, pursuant to Sec.  1.1503(d)-6(j)(1)(iii), 
the new domestic use agreement filed by the T group with respect to the 
year 1 dual consolidated loss of DRCX is terminated and has 
no further effect.
    (35) Example 35. Triggering event exceptions for certain deemed 
transfers--(i) Facts. P owns DE1X. In year 1, there is a 
$100x dual consolidated loss attributable to P's interest in 
DE1X. P files a domestic use agreement under Sec.  1.1503(d)-
6(d) with respect to such loss. During year 2, P sells 33 percent of its 
interest in DE1X to T, an unrelated domestic corporation.
    (ii) Result. Pursuant to Rev. Rul. 99-5, the transaction is treated 
as if P sold 33 percent of its interest in each of DE1X's 
assets to T and then immediately thereafter P and T transferred their 
interests in the assets of DE1X to a partnership in exchange 
for an ownership interest therein. Upon the transfer of 33 percent of 
P's interest to T, a domestic corporation, no foreign use occurs and, 
therefore, there is no foreign use triggering event. However, P's deemed 
transfer of 67 percent of its interest in the assets of DE1X 
to a partnership is nominally a triggering event under Sec.  1.1503(d)-
6(e)(1)(iv). Because the initial transfer of 33 percent of 
DE1X's interest was to a domestic corporation and there is 
only a triggering event because of the deemed transfer under Rev. Rul. 
99-5, the deemed asset transfer is not treated as resulting in a 
triggering event pursuant to Sec.  1.1503(d)-6(f)(4).
    (iii) Alternative facts. The facts are the same as in paragraph 
(c)(35)(i) of this section, except that P sells 60 percent (rather than 
33 percent) of its interest in DE1X to T. The sale is a 
triggering event under Sec.  1.1503(d)-6(e)(1)(iv) and (v) without 
regard to the occurrence of a deemed transaction. Therefore, Sec.  
1.1503(d)-6(f)(4) does not apply.
    (36) Example 36. Triggering event exception involving multiple 
parties--(i) Facts. P owns DE1X which, in turn, owns 
FBX. P's interest in DE1X and its indirect 
interest in FBX are combined and treated as a single separate 
unit (Country X separate unit) pursuant to Sec.  1.1503(d)-1(b)(4)(ii). 
In year 1, there is a $100x dual consolidated loss attributable to P's 
Country X separate unit and P makes a domestic use election with respect 
to such loss. No member of the P consolidated group incurs a dual 
consolidated loss in year 2. At the end of year 2, T, the parent of the 
T consolidated group, acquires all of P's interest in DE1X 
for cash.
    (ii) Result. (A) Under Sec.  1.1503(d)-6(f)(2)(i)(B), the 
acquisition by T of the interest in DE1X is not an event 
described in Sec.  1.1503(d)-6(e)(1)(iv) or (v) requiring the recapture 
of the year 1 dual consolidated loss attributable to the Country X 
separate unit (and the payment of an interest charge), provided: (1) the 
T consolidated group files a new domestic use agreement described in 
Sec.  1.1503(d)-6(f)(2)(iii)(A) with respect to the year 1 dual 
consolidated loss of the Country X separate unit; and (2) the P 
consolidated group files a statement described in Sec.  1.1503(d)-
6(f)(2)(iii)(B) with respect to the year 1 dual consolidated loss. If 
these requirements are satisfied, then pursuant to Sec.  1.1503(d)-
6(j)(1)(ii) the domestic use agreement filed by the P consolidated group 
with respect to the year 1 dual consolidated loss is terminated and has 
no further effect (if these requirements are not satisfied such that the 
P consolidated group recaptures the dual consolidated loss, the domestic 
use agreement would terminate pursuant to Sec.  1.1503(d)-6(j)(1)(iii)).
    (B) Assume a triggering event occurs at the end of year 3 that 
requires recapture by the T consolidated group of

[[Page 1050]]

the year 1 dual consolidated loss, as well as the payment of an interest 
charge, as provided in Sec.  1.1503(d)-6(h). T continues to own the 
Country X separate unit after the triggering event. In that case, each 
member of the T consolidated group is severally liable for the 
additional tax (and the interest charge) due upon the recapture of the 
year 1 dual consolidated loss. The T consolidated group must prepare a 
statement that computes the recapture tax amount as provided under Sec.  
1.1503(d)-6(h)(3)(iii). Pursuant to Sec.  1.1503(d)-6(h)(3)(iv)(A), the 
recapture tax amount is assessed as an income tax liability of the T 
consolidated group and is considered as having been properly assessed as 
an income tax liability of the P consolidated group. If the T 
consolidated group does not pay in full the income tax liability 
attributable to the recapture tax amount, the unpaid balance of such 
recapture tax amount may be collected from the P consolidated group in 
accordance with the provisions of Sec.  1.1503(d)-6(h)(3)(iv)(B). 
Pursuant to Sec.  1.1503(d)-6(j)(1)(iii), the new domestic use agreement 
filed by the T consolidated group is terminated and has no further 
effect. Finally, pursuant to Sec.  1.1503(d)-6(h)(6)(iii), T is treated 
as if it incurred the dual consolidated loss that is recaptured for 
purposes of applying Sec.  1.1503(d)-6(h)(6)(i). Thus, T has a 
reconstituted net operating loss equal to the amount of the year 1 dual 
consolidated loss that was recaptured, and such loss is attributable to 
the Country X separate unit (and subject to the rules and limitations 
under Sec.  1.1503(d)-6(h)(6)(i)). Because T is treated as if it 
incurred the year 1 dual consolidated loss, P shall not be treated as 
having a net operating loss under Sec.  1.1503(d)-6(h)(6)(i).
    (37) Example 37. No foreign use following multiple-party event 
exception to triggering event--(i) Facts. P owns DE1X which, 
in turn, owns FBX. P's interest in DE1X and its 
indirect interest in FBX are combined and treated as a single 
separate unit (Country X separate unit) pursuant to Sec.  1.1503(d)-
1(b)(4)(ii). In year 1, there is a $100x dual consolidated loss 
attributable to P's Country X separate unit and P makes a domestic use 
election with respect to such loss. T, a domestic corporation unrelated 
to P, owns 95 percent of PRS, a partnership. FSX owns the 
remaining 5 percent of PRS. At the beginning of year 3, PRS purchases 
100 percent of the interest in DE1X from P for cash. For 
Country X tax purposes, the $100x loss incurred by DE1X in 
year 1 carries forward and is available to offset income of 
DE1X in subsequent years.
    (ii) Result. P's sale of its interest in DE1X is a 
triggering event under Sec.  1.1503(d)-6(e)(1)(iv) and (v). However, if 
P and T comply with the requirements under Sec.  1.1503(d)-6(f)(2)(iii), 
the sale would qualify for the multiple-party event exception under 
Sec.  1.1503(d)-6(f)(2)(i). In addition, because the $100x loss of 
DE1X carries forward to subsequent years for Country X 
purposes and is available to offset income of DE1X, there 
would be a foreign use of the dual consolidated loss immediately after 
the sale pursuant to Sec.  1.1503(d)-3(a)(1). This is the case because 
the dual consolidated loss would be available to offset or reduce income 
that is considered, under U.S. tax principles, to be an item of 
FSX, a foreign corporation (it would also be a foreign use 
because FSX is an indirect owner of an interest in a hybrid 
entity that is not a separate unit). However, there is no foreign use in 
this case as a result of FSX's 5 percent interest in 
DE1X pursuant to Sec.  1.1503(d)-3(c)(8).
    (38) Example 38. Character and source of recapture income--(i) 
Facts. (A) P owns FBX. In year 1, the items of income, gain, 
deduction, and loss that are attributable to FBX for purposes 
of determining whether it has a dual consolidated loss are as follows:

                   Table 2 to paragraph (c)(38)(i)(A)
Sales income...................................................    $100x
Salary expense.................................................   ($75x)
Interest expense...............................................   ($50x)
                                                                --------
Dual consolidated loss.........................................   ($25x)
 

    (B) P makes a domestic use election with respect to the year 1 dual 
consolidated loss attributable to FBX and, thus, the $25x 
dual consolidated loss is used to offset the P group's consolidated 
taxable income.

[[Page 1051]]

    (C) Pursuant to Sec.  1.861-8, the $75x of salary expense incurred 
by FBX is allocated and apportioned entirely to foreign 
source general limitation income. Pursuant to Sec.  1.861-9T, $25x of 
the $50x interest expense attributable to FBX is allocated 
and apportioned to domestic source income, $15x of such interest expense 
is allocated and apportioned to foreign source general limitation 
income, and the remaining $10x of such interest expense is allocated and 
apportioned to foreign source passive income.
    (D) During year 2, $5x of income is attributable to FBX 
under the rules of Sec.  1.1503(d)-5, and the P consolidated group has 
$100x of consolidated taxable income. At the end of year 2, 
FBX undergoes a triggering event described in Sec.  
1.1503(d)-6(e)(1), and P continues to own FBX following the 
triggering event. Pursuant to Sec.  1.1503(d)-6(h)(2)(i), P is able to 
demonstrate to the satisfaction of the Commissioner that the $25x dual 
consolidated loss attributable to FBX in year 1 would have 
offset the $5x of income attributable to FBX in year 2, if no 
domestic use election were made with respect to the year 1 loss such 
that it was subject to the limitations of Sec.  1.1503(d)-4(b) and (c).
    (ii) Result. P must recapture and report as ordinary income $20x 
($25x - $5x) of FBX's year 1 dual consolidated loss, plus 
applicable interest. The $20x recapture income is attributable to 
FBX pursuant to Sec.  1.1503(d)-5(c)(4)(vi). Pursuant to 
Sec.  1.1503(d)-6(h)(5), the recapture income is treated as ordinary 
income whose source and character (including section 904 separate 
limitation character) is determined by reference to the manner in which 
the recaptured items of expense or loss taken into account in 
calculating the dual consolidated loss were allocated and apportioned. 
Further, pursuant to Sec.  1.1503(d)-6(h)(5), the pro rata computation 
described in Sec.  1.1503(d)-4(c)(4) shall apply. Thus, the character 
and source of the recapture income is determined in the same proportion 
as each item of deduction or loss that contributed to the dual 
consolidated loss being recaptured. Accordingly, P's $20x of recapture 
income is characterized and sourced as follows: $4x of domestic source 
income (($25x/$125x) x $20x); $14.4x of foreign source general 
limitation income (($75x + $15x)/$125x) x $20x); and $1.6x of foreign 
source passive income (($10x/$125x) x $20x). Pursuant to Sec.  
1.1503(d)-6(h)(6)(i), commencing in year 3, the $20x recapture amount is 
reconstituted and treated as a net operating loss incurred by 
FBX in a separate return limitation year, subject to the 
limitation under Sec.  1.1503(d)-4(b) (and therefore subject to the 
restrictions of Sec.  1.1503(d)-4(c)). Pursuant to Sec.  1.1503(d)-
6(j)(1)(iii), the domestic use agreement filed by the P consolidated 
group with respect to the year 1 dual consolidated loss of 
FBX is terminated and has no further effect.
    (39) Example 39. Interest charge without recapture--(i) Facts. P 
owns DE1X which, in turn, owns FBX. P's interest 
in DE1X and its indirect interest in FBX are 
combined and treated as a single separate unit (Country X separate unit) 
pursuant to Sec.  1.1503(d)-1(b)(4)(ii). In year 1, a dual consolidated 
loss of $100x is attributable to P's Country X separate unit. P makes a 
domestic use election with respect to such loss and uses the loss to 
offset the P group's consolidated taxable income. In year 2, there is 
$100x of income attributable to P's Country X separate unit and the P 
consolidated group has $200x of consolidated taxable income. At the end 
of year 2, the Country X separate unit undergoes a triggering event 
within the meaning of Sec.  1.1503(d)-6(e)(1). P demonstrates, to the 
satisfaction of the Commissioner, that if no domestic use election were 
made with respect to the year 1 dual consolidated loss such that it was 
subject to the limitations of Sec.  1.1503(d)-4(b) and (c), the year 1 
$100x dual consolidated loss would have been offset by the $100x of year 
2 income.
    (ii) Result. There is no recapture of the year 1 dual consolidated 
loss attributable to P's Country X separate unit because it is reduced 
to zero under Sec.  1.1503(d)-6(h)(2)(i). However, P is liable for one 
year of interest charge under Sec.  1.1503(d)-6(h)(1)(ii), even though 
P's recapture amount is zero. This is the case because the P 
consolidated group had the benefit of the dual consolidated loss in year 
1, and the income that offset the recapture income was not recognized 
until year 2. Pursuant to Sec.  1.1503(d)-6(j)(1)(iii), the domestic use

[[Page 1052]]

agreement filed by the P consolidated group with respect to the year 1 
dual consolidated loss is terminated and has no further effect.
    (40) Example 40. Reduced recapture and interest charge, and 
reconstituted dual consolidated loss--(i) Facts. S owns DE1X 
which, in turn, owns FBX. S's interest in DE1X and 
its indirect interest in FBX are combined and treated as a 
single separate unit (Country X separate unit) pursuant to Sec.  
1.1503(d)-1(b)(4)(ii). In year 1, there is a $100x dual consolidated 
loss attributable to S's Country X separate unit, and P earns $100x. P 
makes a domestic use election with respect to the Country X separate 
unit's year 1 dual consolidated loss. Therefore, the consolidated group 
is permitted to offset P's $100x of income with the Country X separate 
unit's $100x dual consolidated loss. In year 2, $30x of income is 
attributable to the Country X separate unit under the rules of Sec.  
1.1503(d)-5 and such income is offset by a $30x net operating loss 
incurred by P in such year. In year 3, $25x of income is attributable to 
the Country X separate unit under the rules of Sec.  1.1503(d)-5, and P 
earns $15x of income. In addition, at the end of year 3 there is a 
foreign use of the year 1 dual consolidated loss that constitutes a 
triggering event. S continues to own the Country X separate unit after 
the triggering event.
    (ii) Result. (A) Under the presumptive rule of Sec.  1.1503(d)-
6(h)(1)(i), S must recapture $100x (plus applicable interest). However, 
under Sec.  1.1503(d)-6(h)(2)(i), S may be able to demonstrate that a 
lesser amount is subject to recapture. The lesser amount is the amount 
of the $100x dual consolidated loss that would have remained subject to 
Sec.  1.1503(d)-4(c) at the time of the foreign use triggering event if 
a domestic use election had not been made for such loss.
    (B) Although the combined separate unit earned $30x of income in 
year 2, there was no consolidated taxable income in such year. As a 
result, as of the end of year 2 the $100x dual consolidated loss would 
continue to be subject to Sec.  1.1503(d)-4(c) if a domestic use 
election had not been made for such loss. However, the $30x earned in 
year 2 can be carried forward to subsequent taxable years and may reduce 
the recapture income to the extent of consolidated taxable income 
generated in subsequent years. In year 3, $25x of income was 
attributable to the Country X separate unit and P earns $15x of income. 
Thus, the P consolidated group has $40x of consolidated taxable income 
in year 3. As a result, the $100x of recapture income can be reduced by 
$40x. This is the case because if a domestic use election had not been 
made for the $100x year 1 dual consolidated loss such that it was 
subject to the limitations of Sec.  1.1503(d)-4(b) and (c), only $60x of 
the loss would have remained subject to such limitations at the time of 
the foreign use triggering event. Accordingly, if S can adequately 
document the lesser amount, the amount of recapture income is $60x 
($100x - $40x). The $60x recapture income is attributable to the Country 
X separate unit pursuant to Sec.  1.1503(d)-5(c)(4)(vi).
    (C) Pursuant to Sec.  1.1503(d)-6(h)(6)(i), commencing in year 4, 
the $60x recapture amount is reconstituted and treated as a net 
operating loss incurred by the Country X separate unit of S in a 
separate return limitation year, subject to the limitation under Sec.  
1.1503(d)-4(b) (and therefore subject to the restrictions of Sec.  
1.1503(d)-4(c)). The loss is only available for carryover to taxable 
years after year 3 (and is not available for carryback). The carryover 
period of the loss, for purposes of section 172(b), will start from year 
1, when the dual consolidated loss that was subject to recapture was 
incurred. In addition, such reconstituted net operating loss is not 
eligible for the exceptions contained in Sec.  1.1503(d)-6(b) through 
(d). Pursuant to Sec.  1.1503(d)-6(j)(1)(iii), the domestic use 
agreement filed by the P consolidated group with respect to the year 1 
dual consolidated loss of the Country X separate unit is terminated and 
has no further effect.
    (iii) Alternative facts. The facts are the same as in paragraph 
(c)(40)(i) of this section, except that the triggering event that occurs 
at the end of year 3 is a sale by S of its entire interest in 
DE1X to B, an unrelated domestic corporation. The sale does 
not qualify as a transaction described in section 381. The results are 
the same as in paragraph (c)(40)(ii) of this section, except that 
pursuant to Sec.  1.1503(d)-6(h)(6)(ii)

[[Page 1053]]

the $60x net operating loss is not reconstituted (with respect to either 
S or B). The loss is not reconstituted with respect to S because the 
Country X separate unit ceases to be a separate unit of S (or any other 
member of the consolidated group that includes S) and therefore would 
have been eliminated pursuant to Sec.  1.1503(d)-4(d)(1)(ii) if no 
domestic use election had been made with respect to such loss. The loss 
is not reconstituted with respect to B because B was not the domestic 
owner of the combined separate unit when the dual consolidated loss that 
is recaptured was incurred, and B did not acquire the Country X separate 
unit in a section 381 transaction.
    (41) Example 41. Domestic consenting corporation--treated as dual 
resident corporation--(i) Facts. FSZ1, a Country Z entity that is 
subject to Country Z tax on its worldwide income or on a residence basis 
and is classified as a foreign corporation for U.S. tax purposes, owns 
all the interests in DCC, a domestic eligible entity that has filed an 
election to be classified as an association. Under Country Z tax law, 
DCC is fiscally transparent. For taxable year 1, DCC's only item of 
income, gain, deduction, or loss is a $100x deduction and such deduction 
comprises a $100x net operating loss of DCC. For Country Z tax purposes, 
FSZ1's only item of income, gain, deduction, or loss, other than the 
$100x loss attributable to DCC, is $60x of operating income.
    (ii) Result. DCC is a domestic consenting corporation because by 
electing to be classified as an association, it consents to be treated 
as a dual resident corporation for purposes of section 1503(d). See 
Sec.  301.7701-3(c)(3) of this chapter. For taxable year 1, DCC is 
treated as a dual resident corporation under Sec.  1.1503(d)-
1(b)(2)(iii) because FSZ1 (a specified foreign tax resident that bears a 
relationship to DCC that is described in section 267(b) or 707(b)) 
derives or incurs items of income, gain, deduction, or loss of DCC. See 
Sec.  1.1503(d)-1(c). FSZ1 derives or incurs items of income, gain, 
deduction, or loss of DCC because, under Country Z tax law, DCC is 
fiscally transparent. Thus, DCC has a $100x dual consolidated loss for 
taxable year 1. See Sec.  1.1503(d)-1(b)(5). Because the loss is 
available to, and in fact does, offset income of FSZ1 under Country Z 
tax law, there is a foreign use of the dual consolidated loss in year 1. 
Accordingly, the dual consolidated loss is subject to the domestic use 
limitation rule of Sec.  1.1503(d)-4(b). The result would be the same if 
FSZ1 were to indirectly own its DCC stock through an intermediate entity 
that is fiscally transparent under Country Z tax law, or if an 
individual were to wholly own FSZ1 and FSZ1 were a disregarded entity. 
In addition, the result would be the same if FSZ1 had no items of 
income, gain, deduction, or loss, other than the $100x loss attributable 
to DCC.
    (iii) Alternative facts--DCC not treated as a dual resident 
corporation. The facts are the same as in paragraph (c)(41)(i) of this 
section, except that DCC is not fiscally transparent under Country Z tax 
law and thus under Country Z tax law FSZ1 does not derive or incur items 
of income, gain, deduction, or loss of DCC. Accordingly, DCC is not 
treated as a dual resident corporation under Sec.  1.1503(d)-
1(b)(2)(iii) for year 1 and, consequently, its $100x net operating loss 
in that year is not a dual consolidated loss.
    (iv) Alternative facts--mirror legislation. The facts are the same 
as in paragraph (c)(41)(i) of this section, except that, under 
provisions of Country Z tax law that constitute mirror legislation under 
Sec.  1.1503(d)-3(e)(1) and that are substantially similar to the 
recommendations in Chapter 6 of OECD/G-20, Neutralising the Effects of 
Hybrid Mismatch Arrangements, Action 2: 2015 Final Report (October 
2015), Country Z tax law prohibits the $100x loss attributable to DCC 
from offsetting FSZ1's income that is not also subject to U.S. tax. As 
is the case in paragraph (c)(41)(ii) of this section, DCC is treated as 
a dual resident corporation under Sec.  1.1503(d)-1(b)(2)(iii) for year 
1 and its $100x net operating loss is a dual consolidated loss. Pursuant 
to Sec.  1.1503(d)-3(e)(3), however, the dual consolidated loss is not 
deemed to be put to a foreign use by virtue of the Country Z mirror 
legislation. Therefore, DCC is

[[Page 1054]]

eligible to make a domestic use election for the dual consolidated loss.

[T.D. 9315, 72 FR 12914, Mar. 19, 2007; 72 FR 20424, Apr. 25, 2007, as 
amended by T.D. 9896, 85 FR 19855, Apr. 8, 2020; 85 FR 48651, Aug. 12, 
2020]



Sec.  1.1503(d)-8  Effective dates.

    (a) General rule. Except as provided in paragraph (b) of this 
section, this paragraph (a) provides the dates of applicability of 
Sec. Sec.  1.1503(d)-1 through 1.1503(d)-7. Sections 1.1503(d)-1 through 
1.1503(d)-7 shall apply to dual consolidated losses incurred in taxable 
years beginning on or after April 18, 2007. However, a taxpayer may 
apply Sec. Sec.  1.1503(d)-1 through 1.1503(d)-7, in their entirety, to 
dual consolidated losses incurred in taxable years beginning on or after 
January 1, 2007, by filing its return and attaching to such return the 
domestic use agreements, certifications, or other information in 
accordance with these regulations. For purposes of this section, the 
term application date means either April 18, 2007, or, if the taxpayer 
applies these regulations pursuant to the preceding sentence, January 1, 
2007. Section 1.1503-2 applies for dual consolidated losses incurred in 
taxable years beginning on or after October 1, 1992, and before the 
application date.
    (b) Special rules--(1) Reduction of term of agreements filed under 
Sec. Sec.  1.1503-2A(c)(3), 1.1503-2A(d)(3), 1.1503-2(g)(2)(i), or 
1.1503-2T(g)(i). If an agreement is filed in accordance with Sec. Sec.  
1.1503-2A(c)(3), 1.1503-2A(d)(3), 1.1503-2(g)(2)(i), or 1.1503-
2T(g)(2)(i) with respect to a dual consolidated loss incurred in a 
taxable year beginning prior to the application date and an event 
requiring recapture with respect to the dual consolidated loss subject 
to the agreement has not occurred as of the application date, then such 
agreement will be considered by the Internal Revenue Service to apply 
only for any taxable year up to and including the fifth taxable year 
following the year in which the dual consolidated loss that is the 
subject of the agreement was incurred and thereafter will have no 
effect.
    (2) Reduction of term of agreements filed under Sec. Sec.  1.1503-
2(g)(2)(iv)(B)(2)(i) (1992), 1.1503-2(g)(2)(iv)(B)(3)(i), or Rev. Proc. 
2000-42. Taxpayers subject to the terms of a closing agreement entered 
into with the Internal Revenue Service pursuant to Sec. Sec.  1.1503-
2(g)(2)(iv)(B)(2)(i) (1992), 1.1503-2(g)(2)(iv)(B)(3)(i), or Rev. Proc. 
2000-42 (2000-2 CB 394), see Sec.  601.601(d)(2)(ii)(b) of this chapter, 
will be deemed to have satisfied the closing agreement's fifteen-year 
certification period requirement if the five-year certification period 
specified in Sec.  1.1503(d)-1(b)(20) has elapsed, provided such closing 
agreement is still in effect as of the application date, and provided 
the dual consolidated losses have not been recaptured. For example, if a 
calendar year taxpayer that has a January 1, 2007, application date 
entered into a closing agreement with respect to a dual consolidated 
loss incurred in 2003 and, as of January 1, 2007, the closing agreement 
is still in effect and the dual consolidated loss subject to the closing 
agreement has not been recaptured, then the closing agreement's fifteen-
year certification period will be deemed satisfied when the five-year 
certification period described in Sec.  1.1503(d)-1(b)(20) has elapsed. 
Thus, the dual consolidated loss will be subject to the recapture and 
certification provisions of the closing agreement in such a case only 
through December 31, 2008. Alternatively, if a calendar year taxpayer 
that has a January 1, 2007, application date entered into a closing 
agreement with respect to a dual consolidated loss incurred in 2000 and, 
as of January 1, 2007, the closing agreement is still in effect and the 
dual consolidated loss subject to the closing agreement has not been 
recaptured, then the certification period is deemed to be satisfied.
    (3) Relief for untimely filings. Paragraphs (b)(3)(i) through (iii) 
of this section set forth the effective dates for rules that provide 
relief for the failure to make timely filings of an election, agreement, 
statement, rebuttal, computation, closing agreement, or other 
information, pursuant to section 1503(d) and these regulations.
    (i) General rule. Except as provided in paragraphs (b)(3)(ii) and 
(iii) of this section, the reasonable cause relief standard of Sec.  
1.1503(d)-1(d) applies for all untimely filings with respect to dual 
consolidated losses, including with respect to dual consolidated losses

[[Page 1055]]

incurred in taxable years beginning before the application date.
    (ii) Closing agreements. Solely with respect to closing agreements 
described in Sec.  1.1503-2(g)(2)(iv)(B)(3)(i) and Rev. Proc. 2000-42, 
taxpayers must request relief for untimely requests through the process 
provided under Sec. Sec.  301.9100-1 through 301.9100-3 of this chapter. 
See paragraph (b)(4) of this section for rules that permit the multiple-
party event exception, rather than closing agreements, for certain 
triggering events.
    (iii) Pending requests for relief. Taxpayers that have letter ruling 
requests under Sec. Sec.  301.9100-1 through 301.9100-3 of this chapter 
pending as of March 19, 2007 (other than requests under paragraph 
(b)(3)(ii) of this section) are not required to use the reasonable cause 
procedure under Sec.  1.1503(d)-1(d); however, if such taxpayers have 
not yet received a determination of their request, they may withdraw 
their request consistent with the procedures contained in Rev. Proc. 
2007-1 (2007-1 IRB 1), see Sec.  601.601(d)(2)(ii)(b) of this chapter, 
(or any succeeding document) and use the reasonable cause procedure set 
forth in Sec.  1.1503(d)-1(d). In that event, the Internal Revenue 
Service will refund the taxpayer's user fee.
    (4) Multiple-party event exception to triggering events. This 
paragraph (b)(4) applies to events described in Sec.  1.1503-
2(g)(2)(iv)(B)(1)(i) through (iii) that occur after April 18, 2007 and 
that are with respect to dual consolidated losses that were incurred in 
taxable years beginning on or after October 1, 1992, and before the 
application date. The events described in the previous sentence are not 
eligible for the exception described in Sec.  1.1503-2(g)(2)(iv)(B)(1), 
but instead are eligible for the multiple-party event exception 
described in Sec.  1.1503(d)-6(f)(2)(i), as modified by this paragraph 
(b)(4). Thus, such events are not eligible for a closing agreement 
described in Sec.  1.1503-2(g)(2)(iv)(B)(3)(i) and Rev. Proc. 2000-42. 
For purposes of applying Sec.  1.1503(d)-6(f)(2)(i) to transactions 
covered by this paragraph, agreements described in Sec.  1.1503-
2(g)(2)(i) (rather than domestic use agreements) shall be filed, and 
subsequent triggering events and exceptions thereto have the meaning 
provided in Sec.  1.1503-2(g)(2)(iii)(A) and (iv) (other than the 
exception provided under Sec.  1.1503-2(g)(2)(iv)(B)(1)). For example, 
if a calendar year taxpayer that has a January 1, 2007, application date 
filed an election under Sec.  1.1503-2(g)(2)(i) with respect to a dual 
consolidated loss that was incurred in 2004, and a triggering event 
described in Sec.  1.1503-2(g)(2)(iv)(B)(1)(ii) occurs with respect to 
such dual consolidated loss after April 18, 2007, then the event is 
eligible for the multiple-party event exception under Sec.  1.1503(d)-
6(f)(2)(i) (and not the exception under Sec.  1.1503-2(g)(2)(iv)(B)(1)). 
However, in order to comply with Sec.  1.1503(d)-6(f)(2)(iii)(A), the 
subsequent elector must file a new agreement described in Sec.  1.1503-
2(g)(2)(i) (rather than a new domestic use agreement). In addition, for 
purposes of determining whether there is a subsequent triggering event, 
and exceptions thereto, pursuant to such new agreement, Sec.  1.1503-
2(g)(2)(iii)(A) and (iv) (other than the exception provided under Sec.  
1.1503-2(g)(2)(iv)(B)(1)) shall apply. Notwithstanding the general 
application of this paragraph (b)(4) to events described in Sec.  
1.1503-2(g)(2)(iv)(B)(1)(i) through (iii) that occur after April 18, 
2007, a taxpayer may choose to apply this paragraph (b)(4) to events 
described in Sec.  1.1503-2(g)(2)(iv)(B)(1)(i) through (iii) that occur 
after March 19, 2007 and on or before April 18, 2007.
    (5) Basis adjustment rules. Taxpayers may apply the basis adjustment 
rules of Sec.  1.1503(d)-5(g) for all open years in which such basis is 
relevant, even if the basis adjustment is attributable to a dual 
consolidated loss incurred (or recaptured) in a closed taxable year. 
Taxpayers applying the provisions of Sec.  1.1503(d)-5(g), however, must 
do so consistently for all open years.
    (6) Rules regarding domestic consenting corporations. Section 
1.1503(d)-1(b)(2)(iii) and (c), as well Sec.  1.1503(d)-3(e)(1) and (3), 
apply to determinations under Sec. Sec.  1.1503(d)-1 through 1.1503(d)-7 
relating to taxable years ending on or after December 20, 2018. For 
taxable years ending before December 20, 2018, see Sec.  1.1503(d)-
3(e)(1) as contained in 26 CFR part 1 revised as of April 1, 2018.
    (7) Compulsory transfer triggering event exception. Section 
1.1503(d)-6(f)(5)(i) through (iii) applies to transfers that

[[Page 1056]]

occur on or after December 20, 2018. For transfers occurring before 
December 20, 2018, see Sec.  1.1503(d)-6(f)(5)(i) through (iii) as 
contained in 26 CFR part 1 revised as of April 1, 2018. However, 
taxpayers may consistently apply Sec.  1.1503(d)-6(f)(5)(i) through 
(iii) to transfers occurring before December 20, 2018.
    (8) Rule providing that SRLY limitation applies without regard to 
Sec.  1.1502-21(c)(1)(i)(E). Section 1.1503(d)-4(c)(3)(v) applies to any 
period to which Sec.  1.1502-21(c)(1)(i)(E) applies.

[T.D. 9315, 72 FR 12914, Mar. 19, 2007; 72 FR 20424, Apr. 25, 2007, as 
amended by T.D. 9896, 85 FR 19856, Apr. 8, 2020; T.D. 9927, 85 FR 67988, 
Oct. 27, 2020]



Sec.  1.1504-0  Outline of provisions.

    In order to facilitate the use of Sec. Sec.  1.1504-1 through 
1.1504-4, this section lists the captions contained in Sec. Sec.  
1.1504-1 through 1.1504-4.

                       Sec.  1.1504-1 Definitions.

                Sec. Sec.  1.1504-2--1.1504-3 [Reserved]

Sec.  1.1504-4 Treatment of warrants, options, convertible obligations, 
                      and other similar interests.

    (a) Introduction.
    (1) General rule.
    (2) Exceptions.
    (b) Options not treated as stock or as exercised.
    (1) General rule.
    (2) Options treated as exercised.
    (i) In general.
    (ii) Aggregation of options.
    (iii) Effect of treating option as exercised.
    (A) In general.
    (B) Cash settlement options, phantom stock, stock appreciation 
rights, or similar interests.
    (iv) Valuation.
    (3) Example.
    (c) Definitions.
    (1) Issuing corporation.
    (2) Related or sequential option.
    (3) Related persons.
    (4) Measurement date.
    (i) General rule.
    (ii) Issuances, transfers, or adjustments not treated as measurement 
dates.
    (iii) Transactions increasing likelihood of exercise.
    (iv) Measurement date for options issued pursuant to a plan.
    (v) Measurement date for related or sequential options.
    (vi) Example.
    (5) In-the-money.
    (d) Options.
    (1) Instruments treated as options.
    (2) Instruments generally not treated as options.
    (i) Options on section 1504(a)(4) stock.
    (ii) Certain publicly traded options.
    (A) General rule.
    (B) Exception.
    (iii) Stock purchase agreements.
    (iv) Escrow, pledge, or other security agreements.
    (v) Compensatory options.
    (A) General rule.
    (B) Exceptions.
    (vi) Options granted in connection with a loan.
    (vii) Options created pursuant to a title 11 or similar case.
    (viii) Convertible preferred stock.
    (ix) Other enumerated instruments.
    (e) Elimination of federal income tax liability.
    (f) Substantial amount of federal income tax liability.
    (g) Reasonable certainty of exercise.
    (1) Generally.
    (i) Purchase price.
    (ii) In-the-money option.
    (iii) Not in-the-money option.
    (iv) Exercise price.
    (v) Time of exercise.
    (vi) Related or sequential options.
    (vii) Stockholder rights.
    (viii) Restrictive covenants.
    (ix) Intention to alter value.
    (x) Contingencies.
    (2) Cash settlement options, phantom stock, stock appreciation 
rights, or similar interests.
    (3) Safe harbors.
    (i) Options to acquire stock.
    (ii) Options to sell stock.
    (iii) Options exercisable at fair market value.
    (iv) Exceptions.
    (v) Failure to satisfy safe harbor.
    (h) Examples.
    (i) Effective date.

[T.D. 8462, 57 FR 61800, Dec. 29, 1992]



Sec.  1.1504-1  Definitions.

    The privilege of filing consolidated returns is extended to all 
includible corporations constituting affiliated groups as defined in 
section 1504. See the regulations under Sec.  1.1502 for a description 
of an affiliated group and the corporations which may be considered as 
includible corporations.

[T.D. 6500, 25 FR 12106, Nov. 26, 1960]

[[Page 1057]]



Sec.  1.1504-2  [Reserved]



Sec.  1.1504-3  Treatment of stock in a QOF C corporation for
purposes of consolidation.

    (a) Scope and definitions--(1) Scope. This section provides rules 
regarding the treatment of stock in a QOF C corporation for purposes of 
determining whether such corporation can join in the filing of a 
consolidated return. Paragraph (b) of this section generally prevents a 
subsidiary QOF C corporation from joining in the filing of a 
consolidated return, but it provides an election to consolidate a 
subsidiary QOF C corporation (subject to certain conditions). Paragraph 
(c) of this section provides instructions for making the election 
provided by paragraph (b) of this section. Paragraph (d) of this section 
provides an example. Paragraph (e) of this section provides the 
applicability dates.
    (2) Definitions. The definitions provided in Sec. Sec.  1.1400Z2(a)-
1(b) and 1.1502-14Z(a)(2)(ii) apply for purposes of this section.
    (b) QOF stock not stock for purposes of consolidation--(1) In 
general. Except as otherwise provided in paragraph (b)(2) of this 
section, stock in a QOF C corporation (whether qualifying QOF stock or 
otherwise) is not treated as stock under section 1504 for purposes of 
determining whether any corporation may join in the filing of a 
consolidated return under section 1501. Therefore, a QOF C corporation 
can be the common parent of a consolidated group, and a QOF C 
corporation generally can be a member of an affiliated group for 
purposes of section 1504, but a QOF C corporation cannot join in the 
filing of a consolidated return as a subsidiary member (except as 
provided in paragraph (b)(2) of this section).
    (2) Election to consolidate a subsidiary QOF C corporation--(i) In 
general. Notwithstanding paragraph (b)(1) of this section, a 
consolidated group may elect to consolidate a subsidiary QOF C 
corporation that was formed, or section 1504 control of which was 
acquired, by the consolidated group after May 1, 2019, and that 
otherwise meets the affiliation requirements under section 1504. If a 
pre-existing corporation was a member of the consolidated group prior to 
becoming a QOF C corporation, a consolidated group may elect to continue 
to consolidate such pre-existing corporation if it self-certified to be 
a QOF after May 1, 2019. The consolidated group must make the election 
under this paragraph (b)(2) with regard to the first taxable year during 
which the subsidiary QOF C corporation otherwise meets the section 1504 
affiliation requirements (without regard to paragraph (b)(1) of this 
section). See Sec.  1.1502-14Z(f)(3) for an election available with 
regard to a subsidiary QOF C corporation that met the section 1504 
affiliation requirements as of May 1, 2019. The election under this 
paragraph (b)(2) is effective on the later of May 1, 2019, or the first 
date on which the QOF C corporation otherwise meets the requirements of 
section 1504. If a consolidated group makes the election under this 
paragraph (b)(2), then the conditions in paragraph (b)(2)(ii) of this 
section apply to the consolidated group and to the QOF member. See 
paragraph (c) of this section for the form and manner of making this 
election.
    (ii) Conditions to consolidate a subsidiary QOF C corporation--(A) 
Ownership status of QOF investor member. On and at all times after the 
date of the investment, the common parent must directly or indirectly 
own all shares of all classes of stock (including non-qualified 
preferred stock) issued by any QOF investor member.
    (B) Direct investment. Except as provided in Sec.  1.1502-14Z(c), 
each QOF investor member must maintain direct ownership of its 
qualifying investment (see, for example, Sec.  1.1400Z2(b)-1(c), which 
generally treats transfers of a qualifying investment as an inclusion 
event). See Sec.  1.1502-14Z(c)(4) for rules regarding the treatment of 
intercompany transfers as qualifying investments in a QOF member. See 
also Sec.  1.1502-14Z(c)(2) and (c)(3)(ii) for rules regarding actual 
and deemed intercompany transfers of qualifying investments.
    (3) Failure of continued qualification. Consolidation of a 
subsidiary QOF C corporation is contingent upon continued satisfaction 
of all of the conditions of paragraph (b)(2)(ii) of this section. The 
requirements of paragraph (b)(2) of

[[Page 1058]]

this section continue to apply (with appropriate modifications to 
reflect single-entity treatment) following any intercompany transfer of 
the QOF member stock that is subject to Sec.  1.1502-14Z(c)(3)(ii). For 
example, following an intercompany transfer of the QOF member stock that 
is subject to Sec.  1.1502-14Z(c)(3)(ii), the buying member must 
maintain a direct investment in the QOF member. On the failure to 
satisfy any condition of paragraph (b)(2), the QOF member will 
deconsolidate, and Sec.  1.1502-14Z(g) will apply with respect to such 
deconsolidation.
    (c) Election under paragraph (b)(2) of this section to consolidate a 
subsidiary QOF C corporation--(1) In general. The election under 
paragraph (b)(2) of this section is irrevocable and is made in the form 
provided in paragraph (c)(2) of this section.
    (2) Form of election. The election under paragraph (b)(2) of this 
section must be made in the form of a statement titled ``THIS IS AN 
ELECTION UNDER Sec.  1.1504-3(b)(2) TO CONSOLIDATE [insert name and 
employer identification number (E.I.N.) of subsidiary QOF C corporation] 
as of [insert date].'' The statement must be included with the 
consolidated group's timely filed return (original, superseding, or 
amended return, as applicable, including extensions) for the year the 
election under Sec.  1.1504-3(b)(2) is made.
    (d) Example. The following example illustrates the treatment of QOF 
stock as not stock for purposes of affiliation as described in paragraph 
(b)(1) of this section.
    (1) QOF stock as not stock for purposes of affiliation to join in 
the filing of a consolidated return--(i) Facts. P wholly owns S, which 
wholly owns corporation Q1. P, S, and Q1 are members of the P group. In 
2021, S sells an asset to an unrelated party and realizes $500x of 
eligible gain. S contributes $500x to Q1 and properly elects to defer 
the eligible gain under section 1400Z-2(a) and Sec.  1.1400Z2(a)-1. At 
such time, Q1 qualifies and elects to be treated as a QOF, but the P 
group does not elect to consolidate Q1 under paragraph (b)(2) of this 
section.
    (ii) Analysis. Under paragraph (b)(1) of this section, stock of a 
QOF C corporation (qualifying or otherwise) is not treated as stock for 
purposes of determining whether the QOF C corporation may join in the 
filing of a consolidated return. Thus, because no election has been made 
under paragraph (b)(2) of this section, once Q1 becomes a QOF, Q1 ceases 
to be affiliated with the P group members for purposes of section 1501, 
and it deconsolidates from the P group. See Sec. Sec.  1.1502-1 through 
1.1502-100 generally for the consequences of deconsolidation.
    (2) [Reserved]
    (e) Applicability dates--(1) In general. This section applies for 
taxable years beginning after March 13, 2020.
    (2) Prior periods. With respect to the portion of a consolidated 
group's first taxable year ending after December 21, 2017, and for 
taxable years beginning after December 21, 2017, and on or before March 
13, 2020, a consolidated group may choose either--
    (i) To apply the section 1400Z-2 regulations, if applied in a 
consistent manner for all such taxable years; or
    (ii) To rely on the rules in proposed Sec.  1.1400Z2(g)-1 contained 
in the notice of proposed rulemaking (REG-120186-18) published on May 1, 
2019, but only if applied in a consistent manner for all such taxable 
years.

[T.D. 9889, 85 FR 2000, Jan. 13, 2020; 85 FR 19086, Apr. 6, 2020]



Sec.  1.1504-4  Treatment of warrants, options, convertible 
obligations, and other similar interests.

    (a) Introduction--(1) General rule. This section provides 
regulations under section 1504(a)(5) (A) and (B) regarding the 
circumstances in which warrants, options, obligations convertible into 
stock, and other similar interests are treated as exercised for purposes 
of determining whether a corporation is a member of an affiliated group. 
The fact that an instrument may be treated as an option under these 
regulations does not prevent such instrument from being treated as stock 
under general principles of law. Except as provided in paragraph (a)(2) 
of this section, this section applies to all provisions under the 
Internal Revenue Code and the regulations to which affiliation within 
the meaning of section 1504(a) (with or without the exceptions in 
section 1504(b)) is relevant, including those

[[Page 1059]]

provisions that refer to section 1504(a)(2) (with or without the 
exceptions in section 1504(b)) without referring to affiliation, 
provided that the 80 percent voting power and 80 percent value 
requirements of section 1504(a)(2) are not modified therein.
    (2) Exceptions. This section does not apply to sections 864(e) or 
904(i) or to the regulations thereunder. This section also does not 
apply to any other provision specified by the Internal Revenue Service 
in regulations, a revenue ruling, or revenue procedure. See Sec.  
601.601(d)(2)(ii)(b) of this chapter.
    (b) Options not treated as stock or as exercised--(1) General rule. 
Except as provided in paragraph (b)(2) of this section, an option is not 
considered either as stock or as exercised. Thus, options are 
disregarded in determining whether a corporation is a member of an 
affiliated group unless they are described in paragraph (b)(2) of this 
section.
    (2) Options treated as exercised--(i) In general. Solely for 
purposes of determining whether a corporation is a member of an 
affiliated group, an option is treated as exercised if, on a measurement 
date with respect to such option--
    (A) It could reasonably be anticipated that, if not for this 
section, the issuance or transfer of the option in lieu of the issuance, 
redemption, or transfer of the underlying stock would result in the 
elimination of a substantial amount of federal income tax liability (as 
described in paragraphs (e) and (f) of this section); and
    (B) It is reasonably certain that the option will be exercised (as 
described in paragraph (g) of this section).
    (ii) Aggregation of options. All options with the same measurement 
date are aggregated in determining whether the issuance or transfer of 
an option in lieu of the issuance, redemption, or transfer of the 
underlying stock would result in the elimination of a substantial amount 
of federal income tax liability.
    (iii) Effect of treating option as exercised--(A) In general. An 
option that is treated as exercised is treated as exercised for purposes 
of determining the percentage of the value of stock owned by the holder 
and other parties, but is not treated as exercised for purposes of 
determining the percentage of the voting power of stock owned by the 
holder and other parties.
    (B) Cash settlement options, phantom stock, stock appreciation 
rights, or similar interests. If a cash settlement option, phantom 
stock, stock appreciation right, or similar interest is treated as 
exercised, the option is treated as having been converted into stock of 
the issuing corporation. If the amount to be received upon the exercise 
of such an option is determined by reference to a multiple of the 
increase in the value of a share of the issuing corporation's stock on 
the exercise date over the value of a share of the stock on the date the 
option is issued, the option is treated as converted into a 
corresponding number of shares of such stock. Appropriate adjustments 
must be made in any situation in which the amount to be received upon 
exercise of the option is determined in another manner.
    (iv) Valuation. For purposes of section 1504(a)(2)(B) and this 
section, all shares of stock within a single class are considered to 
have the same value. Thus, control premiums and minority and blockage 
discounts within a single class are not taken into account.
    (3) Example. The provisions of paragraph (b)(2) of this section may 
be illustrated by the following example:

    Example. (i) Corporation P owns all 100 shares of the common stock 
of Corporation S, the only class of S stock outstanding. Each share of S 
stock has a fair market value of $10 and has one vote. On June 30, 1992, 
P issues to Corporation X an option to acquire 80 shares of the S stock 
from P.
    (ii) If, under the provisions of this section, the option is treated 
as exercised, then, solely for purposes of determining affiliation, P is 
treated as owning only 20 percent of the value of the outstanding S 
stock and X is treated as owing the remaining 80 percent of the value of 
the S stock. P is still treated as owning all of the voting power of S. 
Accordingly, because P is treated as owning less than 80 percent of the 
value of the outstanding S stock, P and S are no longer affiliated. 
However, because X is not treated as owning any of the voting power of 
S, X and S are also not affiliated.

    (c) Definitions. For purposes of this section--
    (1) Issuing corporation. ``Issuing corporation'' means the 
corporation whose stock is subject to an option.

[[Page 1060]]

    (2) Related or sequential option. ``Related or sequential option'' 
means an option that is one of a series of options issued to the same or 
related persons. For purposes of this section, any options issued to the 
same person or related persons within a two-year period are presumed to 
be part of a series of options. This presumption may be rebutted if the 
facts and circumstances clearly establish that the options are not part 
of a series of options. Any options issued to the same person or related 
persons more than two years apart are presumed not to be part of a 
series of options. This presumption may be rebutted if the facts and 
circumstances clearly establish that the options are part of a series of 
options.
    (3) Related persons. Persons are related if they are related within 
the meaning of section 267(b) (without the application of sections 
267(c) and 1563(e)(1)) or 707(b)(1), substituting ``10 percent'' for 
``50 percent'' wherever it appears.
    (4) Measurement date--(i) General rule. ``Measurement date'' means a 
date on which an option is issued or transferred or on which the terms 
of an existing option or the underlying stock are adjusted (including an 
adjustment pursuant to the terms of the option or the underlying stock).
    (ii) Issuances, transfers, or adjustments not treated as measurement 
dates. A measurement date does not include a date on which--
    (A) An option is issued or transferred by gift, at death, or between 
spouses or former spouses under section 1041;
    (B) An option is issued or transferred--
    (1) Between members of an affiliated group (determined with the 
exceptions in section 1504(b) and without the application of this 
section); or
    (2) Between persons none of which is a member of the affiliated 
group (determined without the exceptions in section 1504(b) and without 
the application of this section), if any, of which the issuing 
corporation is a member, unless--
    (i) Any such person is related to (or acting in concert with) the 
issuing corporation or any member of its affiliated group; and
    (ii) The issuance or transfer is pursuant to a plan a principal 
purpose of which is to avoid the application of section 1504 and this 
section;
    (C) An adjustment occurs in the terms or pursuant to the terms of an 
option or the underlying stock that does not materially increase the 
likelihood that the option will be exercised; or
    (D) A change occurs in the exercise price of an option or in the 
number of shares that may be issued or transferred pursuant to the 
option as determined by a bona fide, reasonable, adjustment formula that 
has the effect of preventing dilution of the interests of the holders of 
the options.
    (iii) Transactions increasing likelihood of exercise. If a change or 
alteration referred to in this paragraph (c)(4)(iii) is made for a 
principal purpose of increasing the likelihood that an option will be 
exercised, a measurement date also includes any date on which--
    (A) The capital structure of the issuing corporation is changed; or
    (B) The fair market value of the stock of the issuing corporation is 
altered through a transfer of assets to or from the issuing corporation 
(other than regular, ordinary dividends) or by any other means.
    (iv) Measurement date for options issued pursuant to a plan. In the 
case of options issued pursuant to a plan, a measurement date for any of 
the options constitutes a measurement date for all options issued 
pursuant to the plan that are outstanding on the measurement date.
    (v) Measurement date for related or sequential options. In the case 
of related or sequential options, a measurement date for any of the 
options constitutes a measurement date for all related or sequential 
options that are outstanding on the measurement date.
    (vi) Example. The provisions of paragraph (c)(4)(v) of this section 
may be illustrated by the following example.

    Example. (i) Corporation P owns all 80 shares of the common stock of 
Corporation S, the only class of S stock outstanding. On January 1, 
1992, S issues a warrant, exercisable within 3 years, to U, an unrelated 
corporation, to acquire 10 newly issued shares of S common stock. On 
July 1, 1992, S issues a second warrant to U to acquire 10 additional 
newly issued shares of S common

[[Page 1061]]

stock. On January 1, 1993, S issues a third warrant to T, a wholly owned 
subsidiary of U, to acquire 10 newly issued shares of S common stock. 
Assume that the facts and circumstances do not clearly establish that 
the options are not part of a series of options.
    (ii) January 1, 1992, July 1, 1992, and January 1, 1993, constitute 
measurement dates for the first warrant, the second warrant, and the 
third warrant, respectively, because the warrants were issued on those 
dates.
    (iii) Because the first and second warrants were issued within two 
years of each other, and both warrants were issued to U, the warrants 
constitute related or sequential options. Accordingly, July 1, 1992, 
constitutes a measurement date for the first warrant as well as for the 
second warrant.
    (iv) Because the first, second, and third warrants were all issued 
within two years of each other, and were all issued to the same or 
related persons, the warrants constitute related or sequential options. 
Accordingly, January 1, 1993, constitutes a measurement date for the 
first and second warrants, as well as for the third warrant.

    (5) In-the-money. ``In-the-money'' means the exercise price of the 
option is less than (or in the case of an option to sell stock, greater 
than) the fair market value of the underlying stock.
    (d) Options--(1) Instruments treated as options. For purposes of 
this section, except to the extent otherwise provided in this paragraph 
(d), the following are treated as options:
    (i) A call option, warrant, convertible obligation, put option, 
redemption agreement (including a right to cause the redemption of 
stock), or any other instrument that provides for the right to issue, 
redeem, or transfer stock (including an option on an option); and
    (ii) A cash settlement option, phantom stock, stock appreciation 
right, or any other similar interest (except for stock).
    (2) Instruments generally not treated as options. For purposes of 
this section, the following will not be treated as options:
    (i) Options on section 1504(a)(4) stock. Options on stock described 
in section 1504(a)(4);
    (ii) Certain publicly traded options--(A) General rule. Options 
which on the measurement date are traded on (or subject to the rules of) 
a qualified board or exchange as defined in section 1256(g)(7), or on 
any other exchange, board of trade, or market specified by the Internal 
Revenue Service in regulations, a revenue ruling, or revenue procedure. 
See Sec.  601.601(d)(2)(ii)(b) of this chapter;
    (B) Exception. Paragraph (d)(2)(ii)(A) of this section does not 
apply to options issued, transferred, or listed with a principal purpose 
of avoiding the application of section 1504 and this section. For 
example, a principal purpose of avoiding the application of section 1504 
and this section may exist if warrants, convertible or exchangeable debt 
instruments, or other similar instruments have an exercise price (or, in 
the case of convertible or exchangeable instruments, a conversion or 
exchange premium) that is materially less than, or a term that is 
materially longer than, those that are customary for publicly traded 
instruments of their type. A principal purpose may also exist if a large 
percentage of an issuance of an instrument is placed with one investor 
(or group of investors) and a very small percentage of the issuance is 
traded on a qualified board or exchange;
    (iii) Stock purchase agreements. Stock purchase agreements or 
similar arrangements whose terms are commercially reasonable and in 
which the parties' obligations to complete the transaction are subject 
only to reasonable closing conditions;
    (iv) Escrow, pledge, or other security agreements. Agreements for 
holding stock in escrow or under a pledge or other security agreement 
that are part of a typical commercial transaction and that are subject 
to customary commercial conditions;
    (v) Compensatory options--(A) General rule. Stock appreciation 
rights, warrants, stock options, phantom stock, or other similar 
instruments provided to employees, directors, or independent contractors 
in connection with the performance of services for the corporation or a 
related corporation (and that is not excessive by reference to the 
services performed) and which--
    (1) Are nontransferable within the meaning of Sec.  1.83-3(d); and
    (2) Do not have a readily ascertainable fair market value as defined 
in Sec.  1.83-7(b) on the measurement date;
    (B) Exceptions. (1) Paragraph (d)(2)(v)(A) of this section does not 
apply to options issued or transferred

[[Page 1062]]

with a principal purpose of avoiding the application of section 1504 and 
this section; and
    (2) Paragraph (d)(2)(v)(A) of this section ceases to apply to 
options that become transferable;
    (vi) Options granted in connection with a loan. Options granted in 
connection with a loan if the lender is actively and regularly engaged 
in the business of lending and the options are issued in connection with 
a loan to the issuing corporation that is commercially reasonable. This 
paragraph (d)(2)(vi) continues to apply if the option is transferred 
with the loan (or if a portion of the option is transferred with a 
corresponding portion of the loan). However, if the option is 
transferred without a corresponding portion of the loan, this paragraph 
(d)(2)(vi) ceases to apply;
    (vii) Options created pursuant to a title 11 or similar case. 
Options created by the solicitation or receipt of acceptances to a plan 
of reorganization in a title 11 or similar case (within the meaning of 
section 368(a)(3)(A)), the option created by the confirmation of the 
plan, and any option created under the plan prior to the time the plan 
becomes effective;
    (viii) Convertible preferred stock. Convertible preferred stock, 
provided the terms of the conversion feature do not permit or require 
the tender of any consideration other than the stock being converted; 
and
    (ix) Other enumerated instruments. Any other instruments specified 
by the Internal Revenue Service in regulations, a revenue ruling, or 
revenue procedure. See Sec.  601.601(d)(2)(ii)(b) of this chapter.
    (e) Elimination of federal income tax liability. For purposes of 
this section, the elimination of federal income tax liability includes 
the elimination or deferral of federal income tax liability. In 
determining whether there is an elimination of federal income tax 
liability, the tax consequences to all involved parties are considered. 
Examples of elimination of federal income tax liability include the use 
of a loss or deduction that would not otherwise be utilized, the 
acceleration of a loss or deduction to a year earlier than the year in 
which the loss or deduction would otherwise be utilized, the deferral of 
gain or income to a year later than the year in which the gain or income 
would otherwise be reported, and the acceleration of gain or income to a 
year earlier than the year in which the gain or income would otherwise 
be reported, if such gain or income is offset by a net operating loss or 
net capital loss that would otherwise expire unused. The elimination of 
federal income tax liability does not include the deferral of gain with 
respect to the stock subject to the option that would be recognized if 
such stock were sold on a measurement date.
    (f) Substantial amount of federal income tax liability. The 
determination of what constitutes a substantial amount of federal income 
tax liability is based on all the facts and circumstances, including the 
absolute amount of the elimination, the amount of the elimination 
relative to overall tax liability, and the timing of items of income and 
deductions, taking into account present value concepts.
    (g) Reasonable certainty of exercise--(1) Generally. The 
determination of whether, as of a measurement date, an option is 
reasonably certain to be exercised is based on all the facts and 
circumstances, including:
    (i) Purchase price. The purchase price of the option in absolute 
terms and in relation to the fair market value of the stock or the 
exercise price of the option;
    (ii) In-the-money option. Whether and to what extent the option is 
in-the-money on the measurement date;
    (iii) Not in-the-money option. If the option is not in-the-money on 
the measurement date, the amount or percentage by which the exercise 
price of the option is greater than (or in the case of an option to sell 
stock, is less than) the fair market value of the underlying stock;
    (iv) Exercise price. Whether the exercise price of the option is 
fixed or fluctuates depending on the earnings, value, or other 
indication of economic performance of the issuing corporation;
    (v) Time of exercise. The time at which, or the period of time 
during which, the option can be exercised;

[[Page 1063]]

    (vi) Related or sequential options. Whether the option is one in a 
series of related or sequential options;
    (vii) Stockholder rights. The existence of an arrangement (either 
within the option agreement or in a related agreement) that, directly or 
indirectly, affords managerial or economic rights in the issuing 
corporation that ordinarily would be afforded to owners of the issuing 
corporation's stock (e.g., voting rights, dividend rights, or rights to 
proceeds on liquidation) to the person who would acquire the stock upon 
exercise of the option or a person related to such person. For this 
purpose, managerial or economic rights in the issuing corporation 
possessed because of actual stock ownership in the issuing corporation 
are not taken into account;
    (viii) Restrictive covenants. The existence of restrictive covenants 
or similar arrangements (either within the option agreement or in a 
related agreement) that, directly or indirectly, prevent or limit the 
ability of the issuing corporation to undertake certain activities while 
the option is outstanding (e.g., covenants limiting the payment of 
dividends or borrowing of funds);
    (ix) Intention to alter value. Whether it was intended that through 
a change in the capital structure of the issuing corporation or a 
transfer of assets to or from the issuing corporation (other than 
regular, ordinary dividends) or by any other means, the fair market 
value of the stock of the issuing corporation would be altered for a 
principal purpose of increasing the likelihood that the option would be 
exercised; and
    (x) Contingencies. Any contingency (other than the mere passage of 
time) to which the exercise of the option is subject (e.g., a public 
offering of the issuing corporation's stock or reaching a certain level 
of earnings).
    (2) Cash settlement options, phantom stock, stock appreciation 
rights, or similar interests. A cash settlement option, phantom stock, 
stock appreciation right, or similar interest is treated as reasonably 
certain to be exercised if it is reasonably certain that the option will 
have value at some time during the period in which the option may be 
exercised.
    (3) Safe harbors--(i) Options to acquire stock. Except as provided 
in paragraph (g)(3)(iv) of this section, an option to acquire stock is 
not considered reasonably certain, as of a measurement date, to be 
exercised if--
    (A) The option may be exercised no more than 24 months after the 
measurement date and the exercise price is equal to or greater than 90 
percent of the fair market value of the underlying stock on the 
measurement date; or
    (B) The terms of the option provide that the exercise price of the 
option is equal to or greater than the fair market value of the 
underlying stock on the exercise date.
    (ii) Options to sell stock. Except as provided in paragraph 
(g)(3)(iv) of this section, an option to sell stock is not considered 
reasonably certain, as of a measurement date, to be exercised if--
    (A) The option may be exercised no more than 24 months after the 
measurement date and the exercise price is equal to or less than 110 
percent of the fair market value of the underlying stock on the 
measurement date; or
    (B) The terms of the option provide that the exercise price of the 
option is equal to or less than the fair market value of the underlying 
stock on the exercise date.
    (iii) Options exercisable at fair market value. For purposes of 
paragraphs (g)(3)(i)(B) and (g)(3)(ii)(B) of this section, an option 
whose exercise price is determined by a formula is considered to have an 
exercise price equal to the fair market value of the underlying stock on 
the exercise date if the formula is agreed upon by the parties when the 
option is issued in a bona fide attempt to arrive at fair market value 
on the exercise date and is to be applied based upon the facts in 
existence on the exercise date.
    (iv) Exceptions. The safe harbors of this paragraph (g)(3) do not 
apply if--
    (A) An arrangement exists that provides the holder or a related 
party with stockholder rights described in paragraph (g)(1)(vii) of this 
section (except for rights arising upon a default under the option or a 
related agreement);
    (B) It is intended that through a change in the capital structure of 
the issuing corporation or a transfer of assets to or from the issuing 
corporation (other than regular, ordinary dividends) or by any other 
means, the fair

[[Page 1064]]

market value of the stock of the issuing corporation will be altered for 
a principal purpose of increasing the likelihood that the option will be 
exercised; or
    (C) The option is one in a series of related or sequential options, 
unless all such options satisfy paragraph (g)(3) (i) or (ii) of this 
section.
    (v) Failure to satisfy safe harbor. Failure of an option to satisfy 
one of the safe harbors of this paragraph (g)(3) does not affect the 
determination of whether an option is treated as reasonably certain to 
be exercised.
    (h) Examples. The provisions of this section may be illustrated by 
the following examples. These examples assume that the measurement dates 
set forth in the examples are the only measurement dates that have taken 
place or will take place.

    Example 1. (i) P is the common parent of a consolidated group, 
consisting of P, S, and T. P owns all 100 shares of S's only class of 
stock, which is voting common stock. P also owns all the stock of T. On 
June 30, 1992, when the fair market value of the S stock is $40 per 
share, P sells to U, an unrelated corporation, an option to acquire 40 
shares of the S stock that P owns at an exercise price of $30 per share, 
exercisable at any time within 3 years after the granting of the option. 
P and T have had substantial losses for 5 consecutive years while S has 
had substantial income during the same period. Because P, S, and T have 
been filing consolidated returns, P and T have been able to use all of 
their losses to offset S's income. It is anticipated that P, S, and T 
will continue their earnings histories for several more years. On July 
31, 1992, S declares and pays a dividend of $1 per share to P.
    (ii) If P, S, and T continue to file consolidated returns after June 
30, 1992, it could reasonably be anticipated that P, S, and T would 
eliminate a substantial amount of federal income tax liability by using 
P's and T's future losses to offset S's income in consolidated returns. 
Furthermore, based on the difference between the exercise price of the 
option and the fair market value of the S stock, it is reasonably 
certain, on June 30, 1992, a measurement date, that the option will be 
exercised. Therefore, the option held by U is treated as exercised. As a 
result, for purposes of determining whether P and S are affiliated, P is 
treated as owning only 60 percent of the value of outstanding shares of 
S stock and U is treated as owning the remaining 40 percent. P is still 
treated as owning 100 percent of the voting power. Because members of 
the P group are no longer treated as owning stock possessing 80 percent 
of the total value of the S stock as of June 30, 1992, S is no longer a 
member of the P group. Additionally, P is not entitled to a 100 percent 
dividends received deduction under section 243(a)(3) because P and S are 
also treated as not affiliated for purposes of section 243. P is only 
entitled to an 80 percent dividends received deduction under section 
243(c).
    Example 2. (i) The facts are the same as in Example 1 except that 
rather than P issuing an option to acquire 40 shares of S stock to U on 
June 30, 1992, P, pursuant to a plan, issues an option to U1 on July 1, 
1992, to acquire 20 shares of S stock, and issues an option to U2 on 
July 2, 1992, to acquire 20 shares of S stock.
    (ii) Because the options issued to U1 and U2 were issued pursuant to 
a plan, July 2, 1992, constitutes a measurement data for both options. 
Therefore, both options are aggregated in determining whether the 
issuance of the options, rather than the sale of the S stock, would 
result in the elimination of a substantial amount of federal income tax 
liability. Accordingly, as in Example 1, because the continued 
affiliation of P, S, and T could reasonably be anticipated to result in 
the elimination of a substantial amount of federal income tax liability 
and the options are reasonably certain to be exercised, the options are 
treated as exercised for purposes of determining whether P and S are 
affiliated, and P and S are no longer affiliated as of July 2, 1992.
    Example 3. (i) The facts are the same as in Example 1 except that 
the option gives U the right to acquire all 100 shares of the S stock, 
and U is the common parent of a consolidated group. The U group has had 
substantial losses for 5 consecutive years and it is anticipated that 
the U group will continue its earnings history for several more years.
    (ii) If P sold the S stock, in lieu of the option, to U, S would 
become a member of the U group. Because the U group files consolidated 
returns, if P sold the S stock to U, U would be able to use its future 
losses to offset future income of S. When viewing the transaction from 
the effect on all parties, the sale of the option, in lieu of the 
underlying S stock, does not result in the elimination of federal income 
tax liability because S's income would be offset by the losses of 
members of either the P or U group. Accordingly, the option is 
disregarded and S remains a member of the P group.
    Example 4. (i) P is the common parent of a consolidated group, 
consisting of P and S. P owns 90 of the 100 outstanding shares of S's 
only class of stock, which is voting common stock, and U, an unrelated 
corporation, owns the remaining 10 shares. On August 31, 1992, when the 
fair market value of the S stock is $100 per share, P sells a call 
option to U that entitles U to purchase 20 shares of S stock

[[Page 1065]]

from P, at any time before August 31, 1993, at an exercise price of $115 
per share. The call option does not provide U with any voting rights, 
dividend rights, or any other managerial or economic rights ordinarily 
afforded to owners of the S stock. There is no intention on August 31, 
1992, to alter the value of S to increase the likelihood of the exercise 
of the call option.
    (ii) Because the exercise price of the call option is equal to or 
greater than 90 percent of the fair market value of the S stock on 
August 31, 1992, a measurement date, the option may be exercised no more 
than 24 months after the measurement date, and none of the items 
described in paragraph (g)(3)(iv) of this section that preclude 
application of the safe harbor are present, the safe harbor of paragraph 
(g)(3)(i) of this section applies and the call option is treated as if 
it is not reasonably certain to be exercised. Therefore, regardless of 
whether the continued affiliation of P and S would result in the 
elimination of a substantial amount of federal income tax liability, the 
call option is disregarded in determining whether S remains a member of 
the P group.
    Example 5. (i) The facts are the same as in Example 4 except that 
the call option gives U the right to vote similar to that of a 
shareholder.
    (ii) Under paragraph (g)(3)(iv) of this section, the safe harbor of 
paragraph (g)(3)(i) of this section does not apply because the call 
option entitles U to voting rights equivalent to that of a shareholder. 
Accordingly, all of the facts and circumstances surrounding the sale of 
the call option must be taken into consideration in determining whether 
it is reasonably certain that the call option will be exercised.
    Example 6. (i) In 1992, two unrelated corporations, X and Y, decide 
to engage jointly in a new business venture. To accomplish this purpose, 
X organizes a new corporation, S, on September 30, 1992. X acquires 100 
shares of the voting common stock of S, which are the only shares of S 
stock outstanding. Y acquires a debenture of S which is convertible, on 
September 30, 1995, into 100 shares of S common stock. If the conversion 
right is not exercised, X will have the right, on September 30, 1995, to 
put 50 shares of its S stock to Y in exchange for 50 percent of the 
debenture held by Y. The likelihood of the success of the venture is 
uncertain. It is anticipated that S will generate substantial losses in 
its early years of operation. X expects to have substantial taxable 
income during the three years following the organization of S.
    (ii) Under the terms of this arrangement, it is reasonably certain 
on September 30, 1992, a measurement date, that on September 30, 1995, 
either through Y's exercise of its conversion right or X's right to put 
S stock to Y, that Y will own 50 percent of the S stock. Additionally, 
it could reasonably be anticipated, on September 30, 1992, a measurement 
date, that the affiliation of X and S would result in the elimination of 
a substantial amount of federal income tax liability. Accordingly, for 
purposes of determining whether X and S are affiliated, X is treated as 
owning only 50 percent of the value of the S stock as of September 30, 
1992, a measurement date, and S is not a member of the X affiliated 
group.
    Example 7. (i) The facts are the same as in Example 6 except that 
rather than acquiring 100 percent of the S stock and the right to put S 
stock to Y, X acquires only 80 percent of the S stock, while S, rather 
than acquiring a convertible debenture, acquires 20 percent of the S 
stock, and an option to acquire an additional 30 percent of the S stock. 
The terms of the option are such that the option will only be exercised 
if the new business venture succeeds.
    (ii) In contrast to Example 6, because of the true business risks 
involved in the start-up of S and whether the business venture will 
ultimately succeed, along with the fact that X does not have an option 
to put S stock to Y, it is not reasonably certain on September 30, 1992, 
a measurement date, that the option will be exercised and that X will 
only own 50 percent of the S stock on September 30, 1995. Accordingly, 
the option is disregarded in determining whether S is a member of the X 
group.

    (i) Effective date. This section applies, generally, to options with 
a measurement date on or after February 28, 1992. This section does not 
apply to options issued prior to February 28, 1992, which have a 
measurement date on or after February 28, 1992, if the measurement date 
for the option occurs solely because of an adjustment in the terms of 
the option pursuant to the terms of the option as it existed on February 
28, 1992. Paragraph (b)(2)(iv) of this section applies to stock 
outstanding on or after February 28, 1992. Paragraph (a)(2) of this 
section applies with respect to taxable years beginning on or after 
November 13, 2020. However, taxpayers and their related parties, within 
the meaning of sections 267(b) and 707(b)(1), may choose to apply the 
rules of this section to a taxable year beginning after December 31, 
2017, so long as the taxpayers and their related parties consistently 
apply the rules of this section, the section 163(j) regulations (as 
defined in Sec.  1.163(j)-1(b)(37)), and, if applicable, Sec. Sec.  
1.263A-9, 1.263A-15, 1.381(c)(20)-1, 1.382-1, 1.382-2, 1.382-5, 1.382-6, 
1.382-7, 1.383-0, 1.383-1, 1.469-9,

[[Page 1066]]

1.469-11, 1.704-1, 1.882-5, 1.1362-3, 1.1368-1, 1.1377-1, 1.1502-13, 
1.1502-21, 1.1502-36, 1.1502-79, 1.1502-91 through 1.1502-99 (to the 
extent they effectuate the rules of Sec. Sec.  1.382-2, 1.382-5, 1.382-
6, 1.382-7, and 1.383-1), to that taxable year.

[T.D. 8462, 57 FR 61801, Dec. 29, 1992; 58 FR 7041, Feb. 3, 1993, as 
amended by T.D. 9905, 85 FR 56845, Sept. 14, 2020]

  Regulations Applicable for Tax Years for Which a Return Is Due on or 
                         Before August 11, 1999



Sec.  1.1502-9A  Application of overall foreign loss recapture rules
to corporations filing consolidated returns due on or before 
August 11, 1999.

    (a) Scope--(1) Effective date. This section applies only to 
consolidated return years for which the due date of the income tax 
return (without extensions) is on or before August 11, 1999.
    (2) In general. Affiliated group of corporations filing a 
consolidated return sustains an overall foreign loss (a consolidated 
overall foreign loss) in any taxable year in which its gross income from 
sources without the United States subject to a separate limitation (as 
defined in Sec.  1.904(f)-1(c)(2)) is exceeded by the sum of the 
deductions properly allocated and apportioned thereto. However, for 
taxable years prior to 1983, affiliated groups may have determined their 
overall foreign losses for income subject to the passive interest 
limitation, DISC dividend limitation, and general limitation on a 
combined basis in accordance with the rules in Sec.  1.904(f)-1(c)(1). 
The rules contained in Sec. Sec.  1.904(f)-1 through 1.904(f)-6 are 
applicable to affiliated groups filing consolidated returns. This 
section provides special rules for applying those sections to such 
groups. Paragraph (b) provides rules for additions and subtractions of a 
portion of overall foreign losses to and from consolidated overall 
foreign loss accounts. Paragraph (c) requires that separate notional 
overall foreign loss accounts be kept for each member of the group that 
contributes to a consolidated overall foreign loss account and provides 
for allocation of a portion of the group's overall foreign loss account 
to a member when the member leaves the group prior to recapture of the 
entire amount of the loss account. These rules are similar to the rules 
provided in Sec.  1.1502-21(b)(2) (or Sec.  1.1502-79A, as appropriate) 
concerning the apportionment of consolidated net operating losses to a 
member who leaves the group. However, the rules differ somewhat because 
the absorption rule of Sec.  1.1502-21(b)(1) (or Sec.  1.1502-79A, as 
appropriate) is applied year-by-year, consistently with the sequence 
rules of section 172(b), and recapture of overall foreign losses is 
based on overall foreign loss accounts that may consist of losses in 
more than one year. Paragraph (d) provides rules for recapture of 
amounts in consolidated overall foreign loss accounts. Paragraph (e) 
provides special rules pertaining to section 904(f)(3) dispositions 
between members of a group. Paragraphs (b), (c), and (e) also contain 
special rules that apply to overall foreign losses that arise in 
separate return limitation years; the principles therein also apply to 
overall foreign losses when there has been a consolidated return change 
of ownership (as defined in Sec.  1.1502-1(g)). See Sec.  1.1502-
9T(b)(1)(v) for the rule that ends the separate return limitation year 
limitation for consolidated return years for which the due date of the 
income tax return (without extensions) is after March 13, 1998, and 
Sec.  1.1502-9T(b)(1)(vi) for an election to continue the separate 
return limitation year limitation for consolidated return years 
beginning before January 1, 1998. See also Sec.  1.1502-3(d)(4) for an 
optional effective date rule (generally making the rules of paragraphs 
(b)(1)(iii) and (iv) of this section inapplicable for a consolidated 
return year beginning after December 31, 1996, if the due date of the 
income tax return (without extensions) for such year is on or before 
March 13, 1998).
    (b) Consolidated overall foreign loss accounts. Any group that 
sustains an overall foreign loss (or acquires a member with a balance in 
an overall foreign loss account) must establish a consolidated overall 
foreign loss account for such loss, and amounts shall be added to and 
subtracted from such account as provided in Sec. Sec.  1.904(f)-1 
through 1.904(f)-6 and this section.
    (1) Additions to the consolidated overall foreign loss accounts--(i) 
Consolidated overall foreign losses. Any consolidated

[[Page 1067]]

overall foreign loss shall be added to the applicable consolidated 
overall foreign loss account for such separate limitation, to the extent 
that the overall foreign loss has reduced United States source income, 
in accordance with the rules of Sec. Sec.  1.904(f)-1 and 1.904(f)-3.
    (ii) Overall foreign losses from separate return years. If a 
corporation joins in the filing of a consolidated return in a taxable 
year in which such corporation has a balance in an overall foreign loss 
account from a prior separate return year that is not a separate return 
limitation year, such balance shall be added to the applicable 
consolidated overall foreign loss account in such year and treated as a 
consolidated overall foreign loss incurred in the previous year (and 
shall therefore be subject to recapture, in accordance with paragraph 
(d) of this section, beginning in the same year in which it is added to 
the consolidated overall foreign loss account).
    (iii) Overall foreign losses from separate return limitation years. 
If a corporation joins in the filing of a consolidated return in a 
taxable year in which such corporation has a balance in an overall 
foreign loss account from a prior separate return limitation year, such 
balance shall be added to the applicable consolidated overall foreign 
loss account in such consolidated return year to the extent of the 
lesser of the balance in the overall foreign loss account from the 
separate return limitation year or 50 percent (or such larger percentage 
as the taxpayer may elect) of the difference between the consolidated 
foreign source taxable income subject to the same separate limitation 
(computed in accordance with Sec. Sec.  1.904(f)-2(b) and 1.1502-
4(d)(1)) minus such consolidated foreign source taxable income 
recomputed by excluding the items of income and deduction of such 
corporation (but not less than zero). The amount added to a consolidated 
overall foreign loss account in any taxable year under this paragraph 
(b)(1)(iii) shall be treated as a consolidated overall foreign loss in 
the previous year (and shall therefore be subject to recapture, in 
accordance with paragraph (d) of this section, beginning in the same 
year in which it is added to the consolidated overall foreign loss 
account).
    (iv) Overall foreign losses that are part of a net operating loss or 
net capital loss carried over from a separate return limitation year. 
Overall foreign losses that are part of a net operating loss or net 
capital loss carryover from a separate return limitation year of a 
member that is absorbed in a consolidated return year shall be treated 
as though they were added to an overall foreign loss account in a 
separate return limitation year of such member and will be subject to 
the limitation on recapture of SRLY losses contained in paragraph 
(b)(1)(iii) of this section. See paragraph (c)(2) of this section for 
rules regarding the addition of such losses to the applicable overall 
foreign loss account of such member.
    (v) Special effective date for SRLY limitation. Except as provided 
in paragraph (b)(1)(vi) of this section, paragraphs (b)(1)(iii) and (iv) 
of this section apply only to consolidated return years for which the 
due date of the income tax return (without extensions) is on or before 
March 13, 1998. For consolidated return years for which the due date of 
the income tax return (without extensions) is after March 13, 1998, the 
rules of paragraph (b)(1)(ii) of this section shall apply to overall 
foreign losses from separate return years that are separate return 
limitation years. For purposes of applying paragraph (b)(1)(ii) of this 
section in such years, the group treats a member with a balance in an 
overall foreign loss account from a separate return limitation year on 
the first day of the first consolidated return year for which the due 
date of the income tax return (without extensions) is after March 13, 
1998, as a corporation joining the group on such first day. An overall 
foreign loss that is part of a net operating loss or net capital loss 
carryover from a separate return limitation year of a member that is 
absorbed in a consolidated return year for which the due date of the 
income tax return (without extensions) is after March 13, 1998, shall be 
added to the appropriate consolidated overall foreign loss account in 
the year that it is absorbed. For consolidated return years for which 
the due date of the income tax return (without extensions) is

[[Page 1068]]

after March 13, 1998, similar principles apply to overall foreign losses 
when there has been a consolidated return change of ownership 
(regardless of when the change of ownership occurred). See also Sec.  
1.1502-3(d)(4) for an optional effective date rule (generally making 
this paragraph (b)(1)(v) applicable to a consolidated return year 
beginning after December 31, 1996, if the due date of the income tax 
return (without extensions) for such year is on or before March 13, 
1998).
    (vi) Election to defer application of special effective date. A 
consolidated group may elect not to apply paragraph (b)(1)(v) of this 
section to consolidated return years beginning before January 1, 1998. 
To make this election, a consolidated group must write ``Election 
Pursuant to Notice 98-40'' across the top of page 1 of an original or 
amended tax return for each consolidated return year subject to the 
election. For the first consolidated return year to which the overall 
foreign loss provisions of paragraph (b)(1)(v) of this section apply 
(i.e., the first year beginning on or after January 1, 1998), such 
consolidated group must write ``Notice 98-40 Election in Effect in Prior 
Years'' across the top of page 1 of the consolidated tax return for that 
year. For purposes of applying paragraph (b)(1)(ii) of this section with 
respect to such year, any member with a balance in an overall foreign 
loss account from a separate return limitation year on the first day of 
such year shall be treated as joining the group on such first day.
    (2) Reductions of the consolidated overall foreign loss accounts--
(i) Amounts allocated to members leaving the group. When a member leaves 
the group, each applicable consolidated overall foreign loss account 
shall be reduced by the amount allocated from such account to such 
member in accordance with paragraph (c)(3)(i) of this section.
    (ii) Amounts recaptured. A consolidated overall foreign loss account 
shall be reduced by the amount of any overall foreign loss under the 
same separate limitation that is recaptured from consolidated income in 
accordance with Sec.  1.904(f)-2.
    (c) Allocation of overall foreign losses among members of an 
affiliated group--(1) Notional overall foreign loss accounts. Separate 
notional overall foreign loss accounts shall be established for each 
member of a group that contributes to a consolidated overall foreign 
loss account. Additions to and reductions of such notional accounts 
shall be made when additions or reductions are made to consolidated 
overall foreign loss accounts in accordance with paragraph (b) of this 
section and Sec.  1.904(f)-1.
    (i) Additions to notional accounts--(A) Consolidated overall foreign 
losses. When a consolidated overall foreign loss is added to a 
consolidated overall foreign loss account, each member shall add its pro 
rata share of the amount of such loss to the member's notional overall 
foreign loss account. A member's pro rata share of a consolidated 
overall foreign loss for any taxable year is determined by multiplying 
the consolidated loss by a fraction. The numerator of this fraction is 
the amount by which the member's separate gross income for the taxable 
year from sources without the United States subject to the applicable 
separate limitation is exceeded by the sum of the deductions properly 
allocated and apportioned thereto (including such member's share of any 
consolidated net operating loss deduction and consolidated net capital 
loss carryovers and carrybacks to the taxable year), for each member 
with such deductions in excess of such income. The denominator of this 
fraction is the sum of the numerators of this fraction for all such 
members of the group.
    (B) Overall foreign losses from separate return years and separate 
return limitation years. When an amount from a member's overall foreign 
loss account from a separate return year or separate return limitation 
year is added to a consolidated overall foreign loss account in 
accordance with paragraph (b)(1) (ii) or (iii) of this section, such 
amount shall also be added to that member's notional overall foreign 
loss account for such separate limitation.
    (ii) Reductions of notional accounts. When a consolidated overall 
foreign loss account is reduced by recapture, in accordance with 
paragraph (b)(2)(ii) of this section, each member of the group shall 
reduce its notional overall foreign loss account for that separate 
limitation by its pro rata share of the amount by which the consolidated

[[Page 1069]]

overall foreign loss account is reduced. A member's pro rata share of 
the amount by which a consolidated overall foreign loss account is 
reduced and determined by multiplying the amount recaptured by a 
fraction, the numerator of which is the amount in such member's notional 
account under such separate limitation, and the denominator of which is 
the amount in the consolidated overall foreign loss account under such 
separate limitation before reduction for the amount recaptured for that 
taxable year.
    (2) Overall foreign losses that are part of a net operating loss or 
net capital loss from a separate return limitation year. An overall 
foreign loss that is part of a net operating loss or net capital loss 
carryover from a separate return limitation year of a member that is 
absorbed in a consolidated return year shall be treated as an overall 
foreign loss of such member (rather than the group) and shall be added 
to such member's separate overall foreign loss account to the extent it 
reduces United States source income, in accordance with Sec.  1.904(f)-
1(d)(5). Such overall foreign losses shall be added to the appropriate 
consolidated overall foreign loss account in later years in accordance 
with paragraph (b)(1)(iii) of this section.
    (3) Allocation of a portion of overall foreign loss accounts to a 
member leaving the group--(i) Consolidated overall foreign losses. When 
a corporation ceases to be a member of an affiliated group filing 
consolidated returns, a portion of the balance in each applicable 
consolidated overall foreign loss account shall be allocated to such 
corporation. The amount allocated to such corporation shall be equal to 
the amount, if any, in such member's notional overall foreign loss 
account under the same separate limitation.
    (ii) Overall foreign losses from separate return limitation years. 
When a corporation ceases to be a member of an affiliated group filing 
consolidated returns, it shall take with it the remaining portion of 
each separate overall foreign loss account for overall foreign losses 
from separate return limitation years (including amounts added to such 
accounts under paragraph (c)(2) of this section).
    (d) Recapture of consolidated overall foreign losses. The amount in 
any consolidated overall foreign loss account shall be recaptured under 
Sec. Sec.  1.904(f)-1 through 1.904(f)-6 by recharacterizing 
consolidated foreign source taxable income subject to the separate 
limitation under which the loss arose as United States source taxable 
income. For purposes of recapture, consolidated foreign source taxable 
income subject to the separate limitation under which the loss arose 
shall be determined in accordance with Sec. Sec.  1.904(f)-2 and 1.1502-
4. Amounts in a member's excess loss account that are included in income 
under Sec.  1.1502-19 shall be subject to recapture to the extent that 
they are included in consolidated foreign source taxable income subject 
to the separate limitation under which the loss arose.
    (e) Dispositions of property between members of the same affiliated 
group during a consolidated return year--(1) In general. Except as 
provided in paragraph (2) with respect to overall foreign losses of a 
selling member from a separate return limitation year, the rules of 
Sec.  1.1502-13 with respect to intercompany transactions will apply to 
dispositions of property to which section 904(f)(3)(A) applies.
    (2) Recapture of overall foreign loss from a separate return 
limitation year. Paragraph (1) will not apply and gain will be 
recognized to the extent that the selling member has a balance in its 
overall foreign loss account from a separate return limitation year 
unless the selling member adds the entire amount of its overall foreign 
loss account from separate return limitation years to the applicable 
consolidated overall foreign loss account and treats such amount as an 
overall foreign loss incurred in the previous year. Such loss shall be 
subject to recapture, in accordance with paragraph (d) of Sec.  1.1502-
9, beginning in the same year in which it is added to the consolidated 
overall foreign loss account.
    (f) Illustrations. The provisions of this section are illustrated by 
the following examples. All foreign source income or loss in these 
examples is subject to the general limitation.


[[Page 1070]]


    Example (1). A, B, and C are the members of an affiliated group of 
corporations (as defined in section 1504), and all use the calendar year 
as their taxable year. For 1983, A, B, and C file a consolidated return. 
ABC has United States source income of $1,000 and foreign source losses 
(overall foreign loss) of $400. In accordance with paragraph (b)(1)(i) 
of this section, ABC adds $400 to its consolidated overall foreign loss 
account at the end of 1983. For 1983, the separate foreign source 
taxable income (or loss) of A is $400, of B is ($200), and of C is 
($600). Under paragraph (c)(1) of this section, B and C must establish 
separate notional overall foreign loss accounts. Under paragraph 
(c)(1)(i)(A) of this section, the amount added to each notional account 
is the pro rata share of the consolidated overall foreign loss of each 
member contributing to such loss. The pro rata share is determined by 
multiplying the consolidated loss by the member's proportionate share of 
the total foreign source losses of all members having such losses. B's 
foreign source loss if $200 and C's foreign source loss is $600, 
totaling $800. B must add $400 x 200/800, or $100, to its notional 
overall foreign loss account. C must add $400 x 600/800, or $300, to its 
notional overall foreign loss account.
    Example (2). The facts are the same as in example (1). In 1984, ABC 
has consolidated foreign source taxable income of $200. Under paragraph 
(d) of this section and Sec.  1.904(f)-2, ABC is required to recapture 
$100 of the amount in its consolidated overall foreign loss account, 
which reduces that account by $100 under paragraph (b)(2)(ii) of this 
section. In accordance with paragraph (c)(1)(ii) of this section, B 
reduces its notional account by $100 x 100/400, or $25, and C reduces it 
notional account by $100 x 300/400, or $75. At the end of 1984 ABC has 
$300 in its consolidated overall foreign loss account, B has $75 in its 
notional account, and C has $225 in its notional account.
    Example (3). D and E are members of an affiliated group and file 
separate returns using the calendar year as their taxable year for 1980. 
In 1980, D has an overall foreign loss of $200, which it adds to its 
overall foreign loss account, and E has no overall foreign losses. For 
1981, D and E file a consolidated return, and DE must establish a 
consolidated overall foreign loss account, to which D's overall foreign 
loss from 1980 is added under paragraph (b)(1)(ii) of this section. D 
also adds the same amount $200 to its notional account under paragraph 
(c)(1)(i)(B) of this section. In 1981, DE has consolidated foreign 
source taxable income of $300. Since the amount added to the 
consolidated overall foreign loss account in 1981 is treated as a 
consolidated overall foreign loss from 1980, DE must recapture $150 in 
1981 under paragraph (d) of this section and Sec.  1.904(f)-2. DE's 
consolidated overall foreign loss account is reduced by $150 under 
paragraph (b)(2)(ii) of this section, and D's notional account is 
reduced by $150 under paragraph (c)(1)(ii) of this section, leaving 
balances of $50 in each of those accounts at the end of 1981.
    Example (4). F and G are not members of an affiliated group in 1980, 
and G has an overall foreign loss of $200, which it adds to its overall 
foreign loss account. F has no overall foreign loss. On January 1, 1981, 
F acquires G, and FG files a consolidated return for the calendar year 
1981. In 1981, F has no foreign source taxable income or loss, and G has 
$100 of foreign source taxable income. FG's consolidated foreign source 
taxable income, $100, minus such income without G's items of income and 
deduction, $0, is $100. Therefore 50% of that amount, $50, of G's 
overall foreign loss from its 1980 separate return limitation year is 
added to FG's consolidated overall foreign loss account under paragraph 
(b)(1)(iii) of this section, and the same amount is added to G's 
notional account under paragraph (c)(1)(i)(B) of this section. In 
accordance with paragraph (d) of this section and Sec.  1.904(f)-2, FG 
must recapture the $50 balance in its consolidated overall foreign loss 
account in 1981 because the amount added from G's separate return 
limitation year is treated as a 1980 consolidated overall foreign loss. 
At the end of 1981, FG has a balance of $0 in its consolidated overall 
foreign loss account, G has $0 in its notional account, and G also has 
$150 remaining from its 1980 overall foreign loss that has not yet been 
added to the consolidated overall foreign loss account.
    On January 1, 1982, F sells G and G leaves the affiliated group. 
Under paragraph (c)(3)(i) of this section, G takes with it the balance 
in its overall foreign loss account from 1980 (its prior separate return 
limitation year) that has not been added to the consolidated account. G 
has $150 of overall foreign loss in its overall foreign loss account. 
Because the amount in the consolidated overall foreign loss account is 
zero, no amount from that account is allocated to G.
    Example (5). (i) In 1982 corporation H has United States source 
income of $300 and foreign source losses of $500, resulting in a net 
operating loss of $200 and a balance in H's overall foreign loss account 
at the end of 1982 of $300.
    (ii) On January 1, 1983, H is acquired by J, and for the calendar 
year 1983 JH files a consolidated return. JH has consolidated taxable 
income of $700 in 1983, including a consolidated net operating loss 
deduction of $100. This net operating loss deduction is $100 of H's $200 
net operating loss from 1982 (a separate return limitation year), which 
is limited by Sec.  1.1502-21A(c). For 1983, H has separate taxable 
income of $100, comprised of $100 of United States source taxable income 
and zero foreign source taxable income, and

[[Page 1071]]

J has separate taxable income of $700, comprised of $700 of United 
States source taxable income and zero foreign source taxable income. 
Under paragraph (c)(2) of this section, H adds $100 to its separate 
overall foreign loss account, since that amount of its net operating 
loss has reduced United States source income. H has $400 in its separate 
overall foreign loss account at the end of 1983, none of which has been 
added to a consolidated overall foreign loss account.
    (iii) In 1984, H has separate taxable income of $400, comprised of 
$100 of United States source taxable income and $300 of foreign source 
taxable income. J has separate taxable income of $900, comprised of $700 
of United States source taxable income and $200 of foreign source 
taxable income. JH has consolidated taxable income of $1200, which 
includes $100 of consolidated net operating loss deduction from H's 1982 
net operating loss. Since this net operating loss deduction is allocated 
to foreign source income, it does not reduce United States source income 
and will not be added to an overall foreign loss account. Under 
paragraph (b)(1)(iii) of this section, $100, from H's overall foreign 
loss is added to the consolidated overall foreign loss account computed 
as follows:

Consolidated foreign source taxable income.................         $400
Consolidated foreign source taxable income recomputed by            -200
 excluding H's foreign source income and deduction.........
                                                            ------------
   $200....................................................
   x 50%...................................................         $100
Amount from H's separate return limitation year overall             $100
 foreign loss account added to the consolidated overall
 foreign loss account......................................
 


This amount is subject to recapture beginning in the same taxable year, 
as it is treated as a consolidated overall foreign loss incurred in a 
previous year. Therefore, under paragraph (d) of this section and Sec.  
1.904(f)-2 JH also recaptures this $100, reducing the consolidated 
overall foreign loss account to $0. H has $300 remaining in its separate 
overall foreign loss account at the end of 1984.
    (iv) In 1985, H has separate taxable income of $400, comprised of 
$100 of United States source taxable income and $300 of foreign source 
taxable income. J has separate taxable income of $300 comprised of $600 
of United States source taxable income and $300 of foreign source 
losses. JH has consolidated taxable income of $700, all of which is 
United States source. Under paragraph (b)(1)(iii) of this section an 
additional $150 from H's separate overall foreign loss is added to the 
consolidated overall foreign loss account, computed as follows:

Consolidated foreign source taxable income.................           $0
Consolidated foreign source taxable income recomputed by          -(300)
 excluding H's foreign source income and deductions........
                                                            ------------
   300.....................................................
   x 50%...................................................         $150
Amount from H's separate return limitation year overall             $150
 foreign loss account added to the consolidated overall
 foreign loss account......................................
 

Thus, an additional $150 of H's separate overall foreign loss is added 
to the consolidated overall foreign loss account, and, under paragraph 
(c)(1)(i)(B) of this section, the same amount is added to J's notional 
account. While this amount is subject to recapture beginning in the same 
taxable year, JH has no consolidated foreign source taxable income in 
1985, so no overall foreign loss is recaptured. H has a remaining 
balance of $150 in its separate return limitation year overall foreign 
loss account and HJ has $150 in its consolidated overall foreign loss 
account.
    Example (6). A, B, and C are members of an affiliated group of 
corporations (as defined in section 1504), and all use the calendar year 
as their taxable year. For 1986, A, B, and C file a consolidated return. 
A has an overall foreign loss account which arose in a separate return 
limitation year. The amount in the overall foreign loss account is 
$2,000. A makes a disposition of all its assets to B on January 1, 1986. 
The gain on the transfer is $1,500, all of which would be recognized 
under section 904(f)(3). However, if A adds the total amount of its 
overall foreign loss from separate return limitation years to ABC's 
consolidated overall foreign loss account, no gain will be recognized on 
the transfer until the intercompany gain is taken into account under 
Sec.  1.1502-13. In the interim, any foreign source gain of the 
purchasing member (or any other member of the consolidated group) may be 
used to recapture on a consolidated basis the amount in ABC's 
consolidated overall foreign loss account.

[T.D. 8153, 52 FR 32005, Aug. 25, 1987; 52 FR 43434, Nov. 12, 1987, as 
amended by T.D. 8597, 60 FR 36679, July 18, 1995; T.D. 8677, 61 FR 
33323, June 27, 1996; T.D. 8766, 63 FR 12643, Mar. 16, 1998; T.D. 8800, 
63 FR 71590, Dec. 29, 1998; T.D. 8823, 64 FR 36099, July 2, 1999; 
Redesignated and amended by T.D. 8833, 64 FR 43615, Aug. 11, 1999; T.D. 
8884, 65 FR 33760, May 25, 2000]

     Regulations Applicable to Taxable Years Before January 1, 1997



Sec.  1.1502-15A  Limitations on the allowance of built-in deductions 
for consolidated return years beginning before January 1, 1997.

    (a) Limitation on built-in deductions--(1) General rule. Built-in 
deductions (as defined in subparagraph (2) of this paragraph) for a 
taxable year shall be subject to the limitation of Sec.  1.1502-21A(c) 
(determined without regard to such deductions and without regard to net 
operating loss carryovers to such

[[Page 1072]]

year) and the limitation of Sec.  1.1502-22A(c) (determined without 
regard to such deductions and without regard to capital loss carryovers 
to such year). If as a result of applying such limitations, built-in 
deductions are not allowable in such consolidated return year, such 
deductions shall be treated as a net operating loss or net capital loss 
(as the case may be) sustained in such year and shall be carried to 
those taxable years (consolidated or separate) to which a consolidated 
net operating loss or a consolidated net capital loss could be carried 
under Sec. Sec.  1.1502-21A, 1.1502-22A and 1.1502-79A, (or Sec. Sec.  
1.1502-21T and 1.1502-22T, as appropriate) except that such losses shall 
be treated as losses subject to the limitations contained in Sec. Sec.  
1.1502-21T(c) or 1.1502-22T(c) (or Sec. Sec.  1.1502-21A(c), 1.1502-
22A(c), as appropriate), as the case may be. Thus, for example, if 
member X sells a capital asset during a consolidated return year at a 
$1,000 loss and such loss is treated as a built-in deduction, then such 
loss shall be subject to the limitation contained in Sec.  1.1502-22(c), 
which, in general, would allow such loss to be offset only against X's 
own capital gain net income (net capital gain for taxable years 
beginning before January 1, 1977). Assuming X had no capital gain net 
income (net capital gain for taxable years beginning before January 1, 
1977) reflected in such year (after taking into account its capital 
losses, other than capital loss carryovers and the built-in deduction), 
such $1,000 loss shall be treated as a net capital loss and shall be 
carried over for 5 years under Sec.  1.1502-22, subject to the 
limitation contained in Sec.  1.1502-22(c) for consolidated return 
years.
    (2) Built-in deductions. (i) For purposes of this paragraph, the 
term ``built-in deductions'' for a consolidated return year means those 
deductions or losses of a corporation which are recognized in such year, 
or which are recognized in a separate return year and carried over in 
the form of a net operating or net capital loss to such year, but which 
are economically accrued in a separate return limitation year (as 
defined in Sec.  1.1502-1(f)). Such term does not include deductions or 
losses incurred in rehabilitating such corporation. Thus, for example, 
assume P is the common parent of a group filing consolidated returns on 
the basis of a calendar year and that P purchases all of the stock of S 
on December 31, 1966. Assume further that on December 31, 1966, S owns a 
capital asset with an adjusted basis of $100 and a fair market value of 
$50. If the group files a consolidated return for 1967, and S sells the 
asset for $30, $50 of the $70 loss is treated as a built-in deduction, 
since it was economically accrued in a separate return limitation year. 
If S sells the asset for $80 instead of $30, the $20 loss is treated as 
a built-in deduction. On the other hand, if such asset is a depreciable 
asset and is not sold by S, depreciation deductions attributable to the 
$50 difference between basis and fair market value are treated as built-
in deductions.
    (ii) In determining, for purposes of subdivision (i) of this 
subparagraph, whether a deduction or loss with respect to any asset is 
economically accrued in a separate return limitation year, the term 
``predecessor'' as used in Sec.  1.1502-1(f)(1) shall include any 
transferor of such asset if the basis of the asset in the hands of the 
transferee is determined (in whole or in part) by reference to its basis 
in the hands of such transferor.
    (3) Transitional rule. If the assets which produced the built-in 
deductions were acquired (either directly or by acquiring a new member) 
by the group on or before January 4, 1973, and the separate return 
limitation year in which such deductions were economically accrued ended 
before such date, then at the option of the taxpayer, the provisions of 
this paragraph before amendment by T.D. 7246 shall apply, and, in 
addition, if such assets were acquired on or before April 17, 1968, and 
the separate return limitation year in which the built-in deductions 
were economically accrued ended on or before such date, then at the 
option of the taxpayer, the provisions of Sec.  1.1502-31A(b)(9)(as 
contained in the 26 CFR edition revised as of April 1, 1996) shall apply 
in lieu of this paragraph.
    (4) Exceptions. (i) Subparagraphs (1), (2), and (3) of this 
paragraph shall not limit built-in deductions in a taxable year with 
respect to assets acquired

[[Page 1073]]

(either directly or by acquiring a new member) by the group if:
    (a) The group acquired the assets more than 10 years before the 
first day of such taxable year, or
    (b) Immediately before the group acquired the assets, the aggregate 
of the adjusted basis of all assets (other than cash, marketable 
securities, and goodwill) acquired from the transferor or owned by the 
new member did not exceed the fair market value of all such assets by 
more than 15 percent.
    (ii) For purposes of subdivision (i)(b) of this subparagraph, a 
security is not a marketable security if immediately before the group 
acquired the assets:
    (a) The fair market value of the security is less than 95 percent of 
its adjusted basis, or
    (b) The transferor or new member had held the security for at least 
24 months, or
    (c) The security is stock in a corporation at least 50 percent of 
the fair market value of the outstanding stock of which is owned by the 
transferor or new member.
    (b) Effective date. This section applies to any consolidated return 
years to which Sec.  1.1502-21T does not apply. See Sec.  1.1502-21T(g) 
for effective dates of that section.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 6909, 31 FR 
16695, Dec. 30, 1966; T.D. 7246, 37 FR 761, Jan. 4, 1972; T.D. 7728, 45 
FR 72650, Nov. 3, 1980; T.D. 8677, 61 FR 33323, June 27, 1996. 
Redesignated and amended by T.D. 8677, 61 FR 33326, June 27, 1996]



Sec.  1.1502-21A  Consolidated net operating loss deduction generally 
applicable for consolidated return years beginning before 
January 1, 1997.

    (a) In general. The consolidated net operating loss deduction shall 
be an amount equal to the aggregate of the consolidated net operating 
loss carryovers and carrybacks to the taxable year (as determined under 
paragraph (b) of this section).
    (b) Consolidated net operating loss carryovers and carrybacks--(1) 
In general. The consolidated net operating loss carryovers and 
carrybacks to the taxable year shall consist of any consolidated net 
operating losses (as determined under paragraph (f) of this section) of 
the group, plus any net operating losses sustained by members of the 
group in separate return years, which may be carried over or back to the 
taxable year under the principles of section 172(b). However, such 
consolidated carryovers and carrybacks shall not include any 
consolidated net operating loss apportioned to a corporation for a 
separate return year pursuant to Sec.  1.1502-79A(a), and shall be 
subject to the limitations contained in paragraphs (c), (d), and (e) of 
this section and to the limitation contained in Sec.  1.1502-15A (or 
Sec.  1.1502-11(c), as appropriate).
    (2) Rules for applying section 172(b)(1)--(i) Regulated 
transportation corporations. For purposes of applying section 
172(b)(1)(C) (relating to net operating losses sustained by regulated 
transportation corporations), in the case of a consolidated net 
operating loss sustained in a taxable year for which a member of the 
group was a regulated transportation corporation (as defined in section 
172(j)(1)), the portion, if any, of such consolidated net operating loss 
which is attributable to such corporation (as determined under this 
paragraph shall be a carryover to the sixth taxable year following the 
loss year only if such corporation is a regulated transportation 
corporation for such sixth year, and shall be a carryover to the seventh 
taxable year following the loss year only if such corporation is a 
regulated transportation corporation for both such sixth and seventh 
years.
    (ii) Trade expansion losses. In the case of a carryback of a 
consolidated net operating loss from a taxable year for which a member 
of the group has been issued a certification under section 317 of the 
Trade Expansion Act of 1962 and with respect to which the requirements 
of section 172(b)(3)(A) have been met, section 172(b)(1)(A)(ii) shall 
apply only to the portion of such consolidated net operating loss 
attributable to such member.
    (iii) Foreign expropriation losses. An election under section 
172(b)(3)(C) (relating to 10-year carryover of portion of net operating 
loss attributable to a foreign expropriation loss) may be made for a 
consolidated return year only if the sum of the foreign expropriation 
losses (as defined in section 172(k)) of the members of the group for

[[Page 1074]]

such year equals or exceeds 50 percent of the consolidated net operating 
loss for such year. If such election is made, the amount which may be 
carried over under section 172(b)(1)(D) is the smaller of (a) the sum of 
such foreign expropriation losses, or (b) the consolidated net operating 
loss.
    (3) Absorption rules. For purposes of determining the amount, if 
any, of a net operating loss (whether consolidated or separate) which 
can be carried to a taxable year (consolidated or separate), the amount 
of such net operating loss which is absorbed in a prior consolidated 
return year under section 172(b)(2) shall be determined by:
    (i) Applying all net operating losses which can be carried to such 
prior year in the order of the taxable years in which such losses were 
sustained, beginning with the taxable year which ends earliest, and
    (ii) Applying all such losses which can be carried to such prior 
year from taxable years ending on the same date on a pro rata basis, 
except that any portion of a net operating loss attributable to a 
foreign expropriation loss to which section 172(b)(1)(D) applies shall 
be applied last.
    (c) Limitation on net operating loss carryovers and carrybacks from 
separate return limitation years--(1) General rule. In the case of a net 
operating loss of a member of the group arising in a separate return 
limitation year (as defined in paragraph (f) of Sec.  1.1502-1) of such 
member (and in a separate return limitation year of any predecessor of 
such member), the amount which may be included under paragraph (b) of 
this section (computed without regard to the limitation contained in 
paragraph (d) of this section) in the consolidated net operating loss 
carryovers and carrybacks to a consolidated return year of the group 
shall not exceed the amount determined under subparagraph (2) of this 
paragraph.
    (2) Computation of limitation. The amount referred to in 
subparagraph (1) of this paragraph with respect to a member of the group 
is the excess, if any, of:
    (i) Consolidated taxable income (computed without regard to the 
consolidated net operating loss deduction), minus such consolidated 
taxable income recomputed by excluding the items of income and deduction 
of such member, over
    (ii) The net operating losses attributable to such member which may 
be carried to the consolidated return year arising in taxable years 
ending prior to the particular separate return limitation year.
    (3) Examples. The provisions of this paragraph and paragraphs (a) 
and (b) of this section may be illustrated by the following examples:

    Example 1. (i) Corporation P formed corporations S and T on January 
1, 1965. P, S, and T filed separate returns for the calendar year 1965, 
a year for which an election under section 1562 was effective. T's 
return for that year reflected a net operating loss of $10,000. The 
group filed a consolidated return for 1966 reflecting consolidated 
taxable income of $30,000 (computed without regard to the consolidated 
net operating loss deduction). Among the transactions occurring during 
1966 were the following:
    (a) P sold goods to T deriving deferred profits of $7,000 on such 
sales, $2,000 of which was restored to consolidated taxable income on 
the sale of such goods to outsiders;
    (b) T sold a machine to S deriving a deferred profit of $5,000, 
$1,000 of which was restored to consolidated taxable income as a result 
of S's depreciation deductions;
    (c) T distributed a $3,000 dividend to P; and
    (d) In addition to the transactions described above, T had other 
taxable income of $6,000.
    (ii) The carryover of T's 1965 net operating loss to 1966 is subject 
to the limitation contained in this paragraph, since 1965 was a separate 
return limitation year (an election under section 1562 was effective for 
such year). Thus, only $7,000 of T's $10,000 net operating loss is a 
consolidated net operating loss carryover to 1966, since such carryover 
is limited to consolidated taxable income (computed without regard to 
the consolidated net operating loss deduction), $30,000, minus such 
consolidated taxable income recomputed by excluding the items of income 
and deduction of T, $23,000 (i.e., consolidated taxable income computed 
without regard to the $1,000 restoration of T's deferred gain and T's 
$6,000 of other income). In making such recomputation, no change is made 
in the effect on consolidated taxable income of P's sale to T, or of the 
dividend from T to P.
    Example 2. (i) Corporation P was formed on January 1, 1966. P filed 
separate returns for the calendar years 1966 and 1967 reflecting net 
operating losses of $4,000 and $12,000, respectively. P purchased 
corporation S on March 15, 1967. S was formed on February 1, 1966, and 
filed a separate return for the taxable year ending January 31, 1967. S 
also filed

[[Page 1075]]

a short period return for the period from February 1 to December 31, 
1967, and joined with P in filing a consolidated return for 1968. S 
sustained net operating losses of $5,000 and $6,000 for its taxable 
years ending January 31, 1967, and December 31, 1967, respectively. An 
election under section 1562 was not effective for P and S during the 
period involved. Consolidated taxable income for 1968 (computed without 
regard to the consolidated net operating loss deduction) was $16,000; 
such consolidated taxable income recomputed by disregarding the items of 
income and deduction of S was $9,000.
    (ii) In order of time, the following losses are absorbed in 1968:
    (a) P's $4,000 net operating loss for the calendar year 1966 (such 
loss is not subject to the limitation contained in this paragraph since 
P is the common parent corporation for 1968);
    (b) S's $5,000 net operating loss for the year ended January 31, 
1967. Such loss is subject to the limitation contained in this 
paragraph, since S was not a member of the group on each day of such 
year. However, such loss can be carried over and absorbed in full since 
such limitation is $7,000 (consolidated taxable income computed without 
regard to the consolidated net operating loss deduction, $16,000, minus 
such consolidated taxable income recomputed, $9,000); and
    (c) $6,000 of P's net operating loss and $1,000 of S's net operating 
loss for the taxable years ending December 31, 1967. This is determined 
by applying the losses from such year which can be carried to 1968 (P's 
$12,000 loss and $2,000 of S's $6,000 loss, since such $6,000 loss is 
limited under this paragraph) on a pro rata basis against the amount of 
such losses which can be absorbed in that year, $7,000 (consolidated 
taxable income of $16,000 less the $9,000 of losses absorbed from prior 
years). The carryover of S's loss to 1968 is subject to the limitation 
contained in that paragraph, since S was not a member of the group on 
each day of its taxable year ending December 31, 1967. Such loss is 
limited to $2,000, the excess of $7,000 (as determined under (ii)(b)) 
over $5,000 (S's carryover from the year ended January 31, 1967). If a 
consolidated return is filed in 1969, the consolidated net operating 
loss carryovers will consist of P's unabsorbed loss of $6,000 ($12,000 
minus $6,000) from 1967 and, subject to the limitation contained in this 
paragraph, S's unabsorbed loss of $5,000 ($6,000 minus $1,000) from its 
year ended December 31, 1967.

    (d) Limitation on carryovers where there has been a consolidated 
return change of ownership--(1) General rule. If a consolidated return 
change of ownership (as defined in paragraph (g) of Sec.  1.1502-1) 
occurs during the taxable year or an earlier taxable year, the amount 
which may be included under paragraph (b) of this section in the 
consolidated net operating loss carryovers to the taxable year with 
respect to the aggregate of the net operating losses attributable to old 
members of the group (as defined in paragraph (g)(3) of Sec.  1.1502-1) 
arising in taxable years (consolidated or separate) ending on the same 
day and before the taxable year in which the consolidated return change 
of ownership occurred shall not exceed the amount determined under 
subparagraph (2) of this paragraph.
    (2) Computation of limitation. The amount referred to in 
subparagraph (1) of this paragraph shall be the excess of:
    (i) The consolidated taxable income for the taxable year (determined 
without regard to the consolidated net operating loss deduction) 
recomputed by including only the items of income and deduction of the 
old members of the group, over
    (ii) The sum of the net operating losses attributable to the old 
members of the group which may be carried to the taxable year arising in 
taxable years ending prior to the particular loss year or years.
    (3) Example. The provisions of this paragraph may be illustrated by 
the following example:

    Example. (i) Corporation P is formed on January 1, 1967, and on the 
same day it forms corporation S. P and S file a consolidated return for 
the calendar year 1967, reflecting a consolidated net operating loss of 
$500,000. On January 1, 1968, individual X purchases all of the 
outstanding stock of P. X subsequently contributes $1,000,000 to P and P 
purchases the stock of corporation T. P, S, and T file a consolidated 
return for 1968 reflecting consolidated taxable income of $600,000 
(computed without regard to the consolidated net operating loss 
deduction). Such consolidated taxable income recomputed by including 
only the items of income and deduction of P and S is $350,000.
    (ii) Since a consolidated return change of ownership took place in 
1968 (there was more than a 50 percent change of ownership of P), the 
amount of the consolidated net operating loss from 1967 which can be 
carried over to 1968 is limited to $350,000, the excess of $350,000 
(consolidated taxable income recomputed by including only the items of 
income and deduction of the old members of the group, P and S) over zero 
(the amount of the consolidated net operating loss carryovers 
attributable to the old members of the group arising in taxable years 
ending before 1967).


[[Page 1076]]


    (4) Cross-reference. See Sec.  1.1502-21T(d)(1) for the rule that 
applies the principles of this paragraph (d) in consolidated return 
years beginning on or after January 1, 1997, with respect to a 
consolidated return change of ownership occurring before January 1, 
1997.
    (e) Limitations on net operating loss carryovers under section 382--
(1) Section 382(a). (i) If at the end of a taxable year (consolidated or 
separate) there has been an increase in ownership of the stock of the 
common parent of a group (within the meaning of section 382(a)(1) (A) 
and (B)), and any member of the group has not continued to carry on a 
trade or business substantially the same as that conducted before any 
such increase (within the meaning of section 382(a)(1)(C)), then the 
portion of any consolidated net operating loss sustained in prior 
taxable years attributable to such member (as determined under this 
paragraph shall not be allowed as a carryover to such taxable year or to 
any subsequent taxable year.
    (ii) If the provisions of section 382(a) disallow the deduction of a 
net operating loss carryover from a separate return year of a member of 
the group to a subsequent taxable year, no amount shall be included 
under paragraph (b) of this section as a consolidated net operating loss 
carryover to such a subsequent consolidated return year with respect to 
such separate return year of such member.
    (iii) The provisions of this subparagraph may be illustrated by the 
following example:

    Example. P, S, and T file a consolidated return for the calendar 
year 1969, reflecting a consolidated net operating loss attributable in 
part to each member. P owns 80 percent of S's stock and S owns 80 
percent of T's stock. On January 1, 1970, A purchases 50 percent of P's 
stock. During 1970 T's business is discontinued. Since there has been a 
50 percentage point increase in ownership of P, the common parent of the 
group, and since T has not continued to carry on the same trade or 
business after such increase, the portion of the 1969 consolidated net 
operating loss attributable to T shall not be included in any net 
operating loss deduction for 1970 or for any subsequent taxable years, 
whether consolidated or separate.

    (2) Section 382(b). If a net operating loss carryover from a 
separate return year of a predecessor of a member of the group to the 
taxable year is reduced under the provisions of section 382(b), the 
amount included under paragraph (b) of this section with respect to such 
predecessor shall be so reduced.
    (3) Effective date. This paragraph (e) disallows or reduces the net 
operating loss carryovers of a member as a result of a transaction to 
which old section 382 (as defined in Sec.  1.382-2T(f)(21)) applies. See 
Sec.  1.1502-21T(d)(2) for the rule that applies the principles of this 
paragraph (e) in consolidated return years beginning on or after January 
1, 1997, with respect to such a transaction.
    (f) Consolidated net operating loss. The consolidated net operating 
loss shall be determined by taking into account the following:
    (1) The separate taxable income (as determined under Sec.  1.1502-
12) of each member of the group, computed without regard to any 
deduction under section 242;
    (2) Any consolidated capital gain net income (net capital gain for 
taxable years beginning before January 1, 1977);
    (3) Any consolidated section 1231 net loss;
    (4) Any consolidated charitable contributions deduction;
    (5) Any consolidated dividends received deduction (determined under 
Sec.  1.1502-26 without regard to paragraph (a)(2) of that section); and
    (6) Any consolidated section 247 deduction (determined under Sec.  
1.1502-27 without regard to paragraph (a)(1)(ii) of that section).
    (g) Groups that include insolvent financial institutions. For rules 
applicable to relinquishing the entire carryback period with respect to 
losses attributable to insolvent financial institutions, see Sec.  
301.6402-7 of this chapter.
    (h) Effective date. Except as provided in Sec.  1.1502-21T (d)(1), 
(d)(2), and (g)(3), this section applies to consolidated return years 
beginning before January 1, 1997.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7728, 45 FR 
72650, Nov. 3, 1980; T.D. 8387, 56 FR 67489, Dec. 31, 1991; T.D. 8446, 
57 FR 53034, Nov. 6, 1992; T.D. 8677, 61 FR 33323, June 27, 1996. 
Redesignated and amended by T.D. 8677, 61 FR 33328, June 27, 1996]

[[Page 1077]]



Sec.  1.1502-22A  Consolidated net capital gain or loss generally
applicable for consolidated return years beginning before
January 1, 1997.

    (a) Computation--(1) Consolidated capital gain net income. The 
consolidated capital gain net income (net capital gain for taxable years 
beginning before January 1, 1977) for the taxable year shall be 
determined by taking into account:
    (i) The aggregate of the capital gains and losses (determined 
without regard to gains or losses to which section 1231 applies or net 
capital loss carryovers or carrybacks) of the members of the group for 
the consolidated return year,
    (ii) The consolidated section 1231 net gain for such year (computed 
in accordance with Sec. Sec.  1.1502-23A or 1.1502-23T), and
    (iii) The consolidated net capital loss carryovers or carrybacks to 
such year (as determined under paragraph (b) of this section).
    (2) Consolidated net capital loss. The consolidated net capital loss 
shall be determined under subparagraph (1) of this paragraph but without 
regard to subdivision (iii) thereof.
    (3) Special rules. For purposes of this section, capital gains and 
losses on intercompany transactions and transactions with respect to 
stock, bonds, and other obligations of a member of the group shall be 
reflected as provided in Sec. Sec.  1.1502-13, and 1.1502-19, and 
capital losses shall be limited as provided in Sec. Sec.  1.1502-15A and 
1.1502-11(c).
    (4) [Reserved]
    (5) Example. The provisions of this paragraph may be illustrated by 
the following example:

    Example. (i) Corporations P, S, and T file consolidated returns on a 
calendar year basis for 1966 and 1967. The members had the following 
transactions involving capital assets during 1967: P sold an asset with 
a $10,000 basis to S for $17,000 and none of the circumstances of 
restoration described in Sec.  1.1502-13 occurred by the end of the 
consolidated return year; S sold an asset to individual A for $7,000 
which S had purchased during 1966 from P for $10,000, and with respect 
to which P had deferred a gain of $2,000; T sold an asset with a basis 
of $10,000 to individual B for $25,000. The group has a consolidated net 
capital loss carryover to the taxable year of $10,000.
    (ii) The consolidated net capital gain of the group is $4,000, 
determined as follows: P's net capital gain of $2,000, representing the 
deferred gain on the sale to S during the taxable year 1966, restored 
into income during taxable year 1967 (the $7,000 gain on P's deferred 
intercompany transaction is not taken into account for the current 
year), plus T's net capital gain of $15,000, minus S's net capital loss 
of $3,000 and the consolidated net capital loss carryover of $10,000.

    (b) Consolidated net capital loss carryovers and carrybacks--(1) In 
general. The consolidated net capital loss carryovers and carrybacks to 
the taxable year shall consist of any consolidated net capital losses of 
the group, plus any net capital losses of members of the group arising 
in separate return years of such members, which may be carried to the 
taxable year under the principles of section 1212(a). However, such 
consolidated carryovers and carrybacks shall not include any 
consolidated net capital loss apportioned to a corporation for a 
separate return year pursuant to Sec.  1.1502-79A(b) (or Sec.  1.1502-
22T(b), as appropriate) and shall be subject to the limitations 
contained in paragraphs (c) and (d) of this section. For purposes of 
section 1212(a)(1), the portion of any consolidated net capital loss for 
any taxable year attributable to a foreign expropriation capital loss is 
the amount of the foreign expropriation capital losses of all the 
members for such year (but not in excess of the consolidated net capital 
loss for such year).
    (2) Absorption rules. For purposes of determining the amount, if 
any, of a net capital loss (whether consolidated or separate) which can 
be carried to a taxable year (consolidated or separate), the amount of 
such net capital loss which is absorbed in a prior consolidated return 
year under section 1212(a)(1) shall be determined by:
    (i) Applying all net capital losses which can be carried to such 
prior year in the order of the taxable years in which such losses were 
sustained, beginning with the taxable year which ends earliest, and
    (ii) Applying all such losses which can be carried to such prior 
year from taxable years ending on the same date on a prorata basis, 
except that any portion of a net capital loss attributable to a foreign 
expropriation capital loss to which section 1212(a)(1)(B) applies shall 
be applied last.

[[Page 1078]]

    (c) Limitation on net capital loss carryovers and carrybacks from 
separate return limitation years--(1) General rule. In the case of a net 
capital loss of a member of the group arising in a separate return 
limitation year (as defined in paragraph (f) of Sec.  1.1502-1) of such 
member (and in a separate return limitation year of any predecessor of 
such member), the amount that may be included under paragraph (b) of 
this section (computed without regard to the limitation contained in 
paragraph (d) of this section) shall not exceed the amount determined 
under subparagraph (2) of this paragraph.
    (2) Computation of limitation. The amount referred to in 
subparagraph (1) of this paragraph with respect to a member of the group 
is the excess, if any, of:
    (i) The consolidated capital gain net income (net capital gain for 
taxable years beginning before January 1, 1977) for the taxable year 
(computed without regard to any net capital loss carryovers and 
carrybacks), minus such consolidated capital gain net income (net 
capital gain for taxable years beginning before January 1, 1977) for the 
taxable year recomputed by excluding the capital gains and losses and 
the gains and losses to which section 1231 applies of such member, over
    (ii) The net capital losses attributable to such member which can be 
carried to the taxable year arising in taxable years ending prior to the 
particular separate return limitation year.
    (d) Limitation on capital loss carryovers where there has been a 
consolidated return change of ownership--(1) General rule. If a 
consolidated return change of ownership (as defined in paragraph (g) of 
Sec.  1.1502-1) occurs during the taxable year or an earlier taxable 
year, the amount which may be included under paragraph (b) of this 
section in the consolidated net capital loss carryovers to the taxable 
year with respect to the aggregate of the net capital losses 
attributable to old members of the group (as defined in paragraph (g)(3) 
of Sec.  1.1502-1) arising in taxable years (consolidated or separate) 
ending on the same day and before the taxable year in which the 
consolidated return change of ownership occurred shall not exceed the 
amount determined under subparagraph (2) of this paragraph.
    (2) Computation of limitation. The amount referred to in 
subparagraph (1) of this paragraph shall be the excess of:
    (i) The consolidated capital gain net income (net capital gain for 
taxable years beginning before January 1, 1977) (determined without 
regard to any net capital loss carryovers for the taxable year) 
recomputed by including only capital gains and losses and gains and 
losses to which section 1231 applies of the old members of the group, 
over
    (ii) The aggregate net capital losses attributable to the old 
members of the group which may be carried to the taxable year arising in 
taxable years ending prior to the particular loss year or years.
    (3) Cross-reference. See Sec.  1.1502-22T(d) for the rule that 
applies the principles of this paragraph (d) in consolidated return 
years beginning on or after January 1, 1997, with respect to a 
consolidated return change of ownership occurring before January 1, 
1997.
    (e) Effective date. This section applies to any consolidated return 
years to which Sec.  1.1502-21T(g) does not apply. See Sec.  1.1502-
21T(g) for effective dates of that section.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7728, 45 FR 
72650, Nov. 3, 1980; T.D. 8597, 60 FR 36679, July 18, 1995; T.D. 8677, 
33323, June 27, 1996. Redesignated and amended by T.D. 8677, 61 FR 
33333, June 27, 1996]



Sec.  1.1502-23A  Consolidated net section 1231 gain or loss generally
applicable for consolidated return years beginning before January 1, 1997.

    (a) The consolidated section 1231 net gain or loss for the taxable 
year shall be determined by taking into account the aggregate of the 
gains and losses to which section 1231 applies of the members of the 
group for the consolidated return year. Section 1231 gains and losses on 
intercompany transactions shall be reflected as provided in Sec.  
1.1502-13. Section 1231 losses that are ``built-in deductions'' shall be 
subject to the limitations of Sec. Sec.  1.1502-21A(c) and 1.1502-
22A(c), as provided in Sec.  1.1502-15A(a) (or Sec.  1.1502-21T(c) in 
effect prior to June 25, 1999, as contained in 26 CFR part 1 revised 
April 1, 1999, and 1.1502-22T(c) in effect prior to June 25, 1999, as

[[Page 1079]]

contained in 26 CFR part 1 revised April 1, 1999, as provided in 1.1502-
15T(a) in effect prior to June 25, 1999, as contained in 26 CFR part 1 
revised April 1, 1999) or (1.1502-21(c) and 1.1502-22(c), as provided in 
1.1502-15(a), as applicable), as appropriate).
    (b) Effective date. This section applies to any consolidated return 
years to which Sec.  1.1502-21(h) or 1.1502-21T(g) in effect prior to 
June 25, 1999, as contained in 26 CFR part 1 revised April 1, 1999, as 
applicable does not apply. See Sec.  1.1502-21(h) or 1.1502-21T(g) in 
effect prior to June 25, 1999, as contained in 26 CFR part 1 revised 
April 1, 1999, as applicable for effective dates of these sections.

[T.D. 7246, 38 FR 763, Jan. 4, 1973, as amended by T.D. 8677, 33323, 
June 27, 1996. Redesignated and amended by T.D. 8677, 61 FR 33334, June 
27, 1996; T.D. 8823, 64 FR 36099, July 2, 1999]



Sec.  1.1502-41A  Determination of consolidated net long-term capital gain and 
consolidated net short-term capital loss generally applicable for consolidated 
return years beginning before January 1, 1997.

    (a) Consolidated net long-term capital gain. The consolidated net 
long-term capital gain shall be determined by taking into account (1) 
those gains and losses to which Sec.  1.1502-22A(a) applies which are 
treated as long term under section 1222, and (2) the consolidated 
section 1231 net gain (computed in accordance with Sec.  1.1502-23A).
    (b) Consolidated net short-term capital loss. The consolidated net 
short-term capital loss shall be determined by taking into account (1) 
those gains and losses to which Sec.  1.1502-22A(a) applies which are 
treated as short term under section 1222, and (2) the consolidated net 
capital loss carryovers and carrybacks to the taxable year (as 
determined under Sec.  1.1502-22A(b)).
    (c) Effective date. This section applies to any consolidated return 
years to which Sec.  1.1502-21(h) or 1.1502-21T(g) in effect prior to 
June 25, 1999, as contained in 26 CFR part 1 revised April 1, 1999, as 
applicable does not apply. See Sec.  1.1502-21(h) or 1.1502-21T(g) in 
effect prior to June 25, 1999, as contained in 26 CFR part 1 revised 
April 1, 1999, as applicable for effective dates of these sections.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 8677, 61 FR 
33323, June 27, 1996. Redesignated and amended by T.D. 8677, 61 FR 
33334, June 27, 1996; T.D. 8823, 64 FR 36099, 36100, July 2, 1999]

 Regulations Applicable to Taxable Years Beginning Before June 28, 2002



Sec.  1.1502-77A  Common parent agent for subsidiaries applicable 
for consolidated return years beginning before June 28, 2002.

    (a) Scope of agency of common parent corporation. The common parent, 
for all purposes (other than the making of the consent required by 
paragraph (a)(1) of Sec.  1.1502-75, the making of an election under 
section 936(e), the making of an election to be treated as a DISC under 
Sec.  1.992-2, and a change of the annual accounting period pursuant to 
paragraph (b)(3)(ii) of Sec.  1.991-1) shall be the sole agent for each 
subsidiary in the group, duly authorized to act in its own name in all 
matters relating to the tax liability for the consolidated return year. 
Except as provided in the preceding sentence, no subsidiary shall have 
authority to act for or to represent itself in any such matter. For 
example, any election available to a subsidiary corporation in the 
computation of its separate taxable income must be made by the common 
parent, as must any change in an election previously made by the 
subsidiary corporation; all correspondence will be carried on directly 
with the common parent; the common parent shall file for all extensions 
of time including extensions of time for payment of tax under section 
6164; notices of deficiencies will be mailed only to the common parent, 
and the mailing to the common parent shall be considered as a mailing to 
each subsidiary in the group; notice and demand for payment of taxes 
will be given only to the common parent and such notice and demand will 
be considered as a notice and demand to each subsidiary; the common 
parent will file petitions and conduct proceedings before the Tax Court 
of the United States, and any such petition shall be considered as also 
having been filed by each such subsidiary. The common parent will file 
claims for refund or credit, and any refund will be

[[Page 1080]]

made directly to and in the name of the common parent and will discharge 
any liability of the Government in respect thereof to any such 
subsidiary; and the common parent in its name will give waivers, give 
bonds, and execute closing agreements, offers in compromise, and all 
other documents, and any waiver or bond so given, or agreement, offer in 
compromise, or any other document so executed, shall be considered as 
having also been given or executed by each such subsidiary. 
Notwithstanding the provisions of this paragraph, any notice of 
deficiency, in respect of the tax for a consolidated return year, will 
name each corporation which was a member of the group during any part of 
such period (but a failure to include the name of any such member will 
not affect the validity of the notice of deficiency as to the other 
members); any notice and demand for payment will name each corporation 
which was a member of the group during any part of such period (but a 
failure to include the name of any such member will not affect the 
validity of the notice and demand as to the other members); and any 
levy, any notice of a lien, or any other proceeding to collect the 
amount of any assessment, after the assessment has been made, will name 
the corporation from which such collection is to be made. The provisions 
of this paragraph shall apply whether or not a consolidated return is 
made for any subsequent year, and whether or not one or more 
subsidiaries have become or have ceased to be members of the group at 
any time. Notwithstanding the provisions of this paragraph, the 
Commissioner may, upon notifying the common parent, deal directly with 
any member of the group in respect of its liability, in which event such 
member shall have full authority to act for itself.
    (b) Notification of deficiency to corporation which has ceased to be 
a member of the group. If a subsidiary has ceased to be a member of the 
group and if such subsidiary files written notice of such cessation with 
the Commissioner, then the Commissioner upon request of such subsidiary 
will furnish it with a copy of any notice of deficiency in respect of 
the tax for a consolidated return year for which it was a member and a 
copy of any notice and demand for payment of such deficiency. The filing 
of such written notification and request by a corporation shall not have 
the effect of limiting the scope of the agency of the common parent 
provided for in paragraph (a) of this section and a failure by the 
Commissioner to comply with such written request shall not have the 
effect of limiting the tax liability of such corporation provided for in 
Sec.  1.1502-6.
    (c) Effect of waiver given by common parent. Unless the Commissioner 
agrees to the contrary, an agreement entered into by the common parent 
extending the time within which an assessment may be made or levy or 
proceeding in court begun in respect of the tax for a consolidated 
return year shall be applicable:
    (1) To each corporation which was a member of the group during any 
part of such taxable year, and
    (2) To each corporation the income of which was included in the 
consolidated return for such taxable year, notwithstanding that the tax 
liability of any such corporation is subsequently computed on the basis 
of a separate return under the provisions of Sec.  1.1502-75.
    (d) Effect of dissolution of common parent corporation. If the 
common parent corporation contemplates dissolution, or is about to be 
dissolved, or if for any other reason its existence is about to 
terminate, it shall forthwith notify the Commissioner of such fact and 
designate, subject to the approval of the Commissioner, another member 
to act as agent in its place to the same extent and subject to the same 
conditions and limitations as are applicable to the common parent. If 
the notice thus required is not given by the common parent, or the 
designation is not approved by the Commissioner, the remaining members 
may, subject to the approval of the Commissioner, designate another 
member to act as such agent, and notice of such designation shall be 
given to the Commissioner. Until a notice in writing designating a new 
agent has been approved by the Commissioner, any notice of deficiency or 
other communication mailed to the common parent shall be considered as 
having been properly mailed to the

[[Page 1081]]

agent of the group; or, if the Commissioner has reason to believe that 
the existence of the common parent has terminated, he may, if he deems 
it advisable, deal directly with any member in respect of its liability.
    (e) General rules--(1) Scope. This section applies if the 
corporation that is the common parent of the group ceases to be the 
common parent, whether or not the group remains in existence under Sec.  
1.1502-75(d).
    (2) Notice of deficiency. A notice of deficiency mailed to any one 
or more corporations referred to in paragraph (e)(4) of this section is 
deemed for purposes of Sec.  1.1502-77A to be mailed to the agent of the 
group. If the group has designated an agent that has been approved by 
the Commissioner under Sec.  1.1502-77A(d), a notice of deficiency shall 
be mailed to that designated agent in addition to any other corporation 
referred to in paragraph (e)(4) of this section. However, failure by the 
Commissioner to mail a notice of deficiency to that designated agent 
shall not invalidate the notice of deficiency mailed to any other 
corporation referred to in paragraph (e)(4) of this section.
    (3) Waiver of statute of limitations. A waiver of the statute of 
limitations with respect to the group given by any one or more 
corporations referred to in paragraph (e)(4) of this section is deemed 
to be given by the agent of the group.
    (4) Alternative agents. The corporations referred to in paragraph 
(e) (2) and (3) of this section are--
    (i) The common parent of the group for all or any part of the year 
to which the notice or waiver applies,
    (ii) A successor to the former common parent in a transaction to 
which section 381(a) applies,
    (iii) The agent designated by the group under Sec.  1.1502-77A(d), 
or
    (iv) If the group remains in existence under Sec.  1.1502-75(d) (2) 
or (3), the common parent of the group at the time the notice is mailed 
or the waiver given.
    (f) Cross-reference. For further rules applicable to groups that 
include insolvent financial institutions, see Sec.  301.6402-7 of this 
chapter.
    (g) Effective/applicability dates. This section applies to taxable 
years beginning before June 28, 2002, except paragraph (e) of this 
section applies to statutory notices and waivers of the statute of 
limitations for taxable years for which the due date (without 
extensions) of the consolidated return is after September 7, 1988, and 
which begin before June 28, 2002.

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7323, 39 FR 
34409, Sept. 25, 1974; T.D. 7673, 45 FR 8588, Feb. 8, 1980; T.D. 8226, 
53 FR 34733, Sept. 8, 1988; T.D. 8446, 57 FR 53034, Nov. 6, 1992. 
Redesignated and amended by T.D. 9002, 67 FR 43540, 43544, June 28, 
2002; T.D. 9715, 80 FR 17318, Apr. 1, 2015]

 Regulations Applicable to Taxable Years Beginning on or After June 28, 
                     2002, and Before April 1, 2015



Sec.  1.1502-77B  Agent for the group applicable for consolidated 
return years beginning on or after June 28, 2002, and before
April 1, 2015.

    (a) Scope of agency--(1) In general--(i) Common parent. Except as 
provided in paragraphs (a)(3) and (6) of this section, the common parent 
(or a substitute agent described in paragraph (a)(1)(ii) of this 
section) for a consolidated return year is the sole agent (agent for the 
group) that is authorized to act in its own name with respect to all 
matters relating to the tax liability for that consolidated return year, 
for--
    (A) Each member in the group; and
    (B) Any successor (see paragraph (a)(1)(iii) of this section) of a 
member.
    (ii) Substitute agents. For purposes of this section, any 
corporation designated as a substitute agent pursuant to paragraph (d) 
of this section to replace the common parent or a previously designated 
substitute agent acts as agent for the group to the same extent and 
subject to the same limitations as are applicable to the common parent, 
and any reference in this section to the common parent includes any such 
substitute agent.
    (iii) Successor. For purposes of this section only, the term 
successor means an individual or entity (including a disregarded entity) 
that is primarily liable, pursuant to applicable law (including, for 
example, by operation of a state or Federal merger statute), for the tax 
liability of a member of the

[[Page 1082]]

group. Such determination is made without regard to Sec.  1.1502-1(f)(4) 
or 1.1502-6(a). (For inclusion of a successor in references to a 
subsidiary or member, see paragraph (c)(2) of this section.)
    (iv) Disregarded entity. If a subsidiary of a group becomes, or its 
successor is or becomes, a disregarded entity for Federal tax purposes, 
the common parent continues to serve as the agent with respect to that 
subsidiary's tax liability under Sec.  1.1502-6 for consolidated return 
years during which it was included in the group, even though the entity 
generally is not treated as a person separate from its owner for Federal 
tax purposes.
    (v) Transferee liability. For purposes of assessing, paying and 
collecting transferee liability, any exercise of or reliance on the 
common parent's agency authority pursuant to this section is binding on 
a transferee (or subsequent transferees) of a member, regardless of 
whether the member's existence terminates prior to such exercise or 
reliance.
    (vi) Purported common parent. If any corporation files a 
consolidated return purporting to be the common parent of a consolidated 
group but is subsequently determined not to have been the common parent 
of the claimed group, that corporation is treated, to the extent 
necessary to avoid prejudice to the Commissioner, as if it were the 
common parent.
    (2) Examples of matters subject to agency. With respect to any 
consolidated return year for which it is the common parent--
    (i) The common parent makes any election (or similar choice of a 
permissible option) that is available to a subsidiary in the computation 
of its separate taxable income, and any change in an election (or 
similar choice of a permissible option) previously made by or for a 
subsidiary, including, for example, a request to change a subsidiary's 
method or period of accounting;
    (ii) All correspondence concerning the income tax liability for the 
consolidated return year is carried on directly with the common parent;
    (iii) The common parent files for all extensions of time, including 
extensions of time for payment of tax under section 6164, and any 
extension so filed is considered as having been filed by each member;
    (iv) The common parent gives waivers, gives bonds, and executes 
closing agreements, offers in compromise, and all other documents, and 
any waiver or bond so given, or agreement, offer in compromise, or any 
other document so executed, is considered as having also been given or 
executed by each member;
    (v) The common parent files claims for refund, and any refund is 
made directly to and in the name of the common parent and discharges any 
liability of the Government to any member with respect to such refund;
    (vi) The common parent takes any action on behalf of a member of the 
group with respect to a foreign corporation, for example, elections by, 
and changes to the method of accounting of, a controlled foreign 
corporation in accordance with Sec.  1.964-1(c)(3);
    (vii) Notices of claim disallowance are mailed only to the common 
parent, and the mailing to the common parent is considered as a mailing 
to each member;
    (viii) Notices of deficiencies are mailed only to the common parent 
(except as provided in paragraph (b) of this section), and the mailing 
to the common parent is considered as a mailing to each member;
    (ix) Notices of final partnership administrative adjustment under 
section 6223 with respect to any partnership in which a member of the 
group is a partner may be mailed to the common parent, and, if so, the 
mailing to the common parent is considered as a mailing to each member 
that is a partner entitled to receive such notice (for other rules 
regarding partnership proceedings, see paragraphs (a)(3)(v) and 
(a)(6)(iii) of this section);
    (x) The common parent files petitions and conducts proceedings 
before the United States Tax Court, and any such petition is considered 
as also having been filed by each member;
    (xi) Any assessment of tax may be made in the name of the common 
parent, and an assessment naming the common parent is considered as an 
assessment with respect to each member; and

[[Page 1083]]

    (xii) Notice and demand for payment of taxes is given only to the 
common parent, and such notice and demand is considered as a notice and 
demand to each member.
    (3) Matters reserved to subsidiaries. Except as provided in this 
paragraph (a)(3) and paragraph (a)(6) of this section, no subsidiary has 
authority to act for or to represent itself in any matter related to the 
tax liability for the consolidated return year. The following matters, 
however, are reserved exclusively to each subsidiary--
    (i) The making of the consent required by Sec.  1.1502-75(a)(1);
    (ii) Any action with respect to the subsidiary's liability for a 
federal tax other than the income tax imposed by chapter 1 of the 
Internal Revenue Code (including, for example, employment taxes under 
chapters 21 through 25 of the Internal Revenue Code, and miscellaneous 
excise taxes under chapters 31 through 47 of the Internal Revenue Code);
    (iii) The making of an election under section 936(e);
    (iv) The making of an election to be treated as a DISC under Sec.  
1.992-2; and
    (v) Any actions by a subsidiary acting as tax matters partner under 
sections 6221 through 6234 and the accompanying regulations (but see 
paragraph (a)(2)(ix) of this section regarding the mailing of a final 
partnership administrative adjustment to the common parent).
    (4) Term of agency--(i) In general. Except as provided in paragraph 
(a)(4)(iii) of this section, the common parent for the consolidated 
return year remains the agent for the group with respect to that year 
until the common parent's existence terminates, regardless of whether 
one or more subsidiaries in that year cease to be members of the group, 
whether the group files a consolidated return for any subsequent year, 
whether the common parent ceases to be the common parent or a member of 
the group in any subsequent year, or whether the group continues 
pursuant to Sec.  1.1502-75(d) with a new common parent in any 
subsequent year.
    (ii) Replacement of substitute agent designated by Commissioner. If 
the Commissioner replaces a previously designated substitute agent 
pursuant to paragraph (d)(3)(ii) of this section, the replaced 
substitute agent ceases to be the agent after the Commissioner 
designates another substitute agent.
    (iii) New common parent after a group structure change. If the group 
continues in existence with a new common parent pursuant to Sec.  
1.1502-75(d) during a consolidated return year, the common parent at the 
beginning of the year is the agent for the group through the date of the 
Sec.  1.1502-75(d) transaction, and the new common parent becomes the 
agent for the group beginning the day after the transaction, at which 
time it becomes the agent for the group with respect to the entire 
consolidated return year (including the period through the date of the 
transaction) and the former common parent is no longer the agent for 
that year.
    (5) Identifying members in notice of a lien. Notwithstanding any 
other provisions of this paragraph (a), any notice of a lien, any levy 
or any other proceeding to collect the amount of any assessment, after 
the assessment has been made, must name the entity from which such 
collection is to be made.
    (6) Direct dealing with a member--(i) Several liability. The 
Commissioner may, upon issuing to the common parent written notice that 
expressly invokes the authority of this provision, deal directly with 
any member of the group with respect to its liability under Sec.  
1.1502-6 for the consolidated tax of the group, in which event such 
member has sole authority to act for itself with respect to that 
liability. However, if the Commissioner believes or has reason to 
believe that the existence of the common parent has terminated, he may, 
if he deems it advisable, deal directly with any member with respect to 
that member's liability under Sec.  1.1502-6 without giving the notice 
required by this provision.
    (ii) Information requests. The Commissioner may, upon informing the 
common parent, request information relevant to the consolidated tax 
liability from any member of the group. However, if the Commissioner 
believes or has reason to believe that the existence of the common 
parent has terminated, he may request such information from

[[Page 1084]]

any member of the group without informing the common parent.
    (iii) Members as partners in partnerships. The Commissioner 
generally will deal directly with any member in its capacity as a 
partner of a partnership that is subject to the provisions of sections 
6221 through 6234 and the accompanying regulations (but see paragraph 
(a)(2)(ix) of this section regarding the mailing of a final partnership 
administrative adjustment to the common parent). However, if requested 
to do so in accordance with the provisions of Sec.  301.6223(c)-1(b) of 
this chapter, the Commissioner may deal with the common parent as agent 
for such member on any matter related to the partnership, except in 
regards to a settlement under section 6224(c) and except to the extent 
the member acts as tax matters partner of the partnership.
    (b) Copy of notice of deficiency to entity that has ceased to be a 
member of the group. An entity that ceases to be a member of the group 
during or after a consolidated return year may file a written notice of 
that fact with the Commissioner and request a copy of any notice of 
deficiency with respect to the tax for a consolidated return year during 
which the entity was a member, or a copy of any notice and demand for 
payment of such deficiency, or both. Such filing does not limit the 
scope of the agency of the common parent provided for in paragraph (a) 
of this section. Any failure by the Commissioner to comply with such 
request does not limit an entity's tax liability under Sec.  1.1502-6. 
For purposes of this paragraph (b), references to an entity include a 
successor of such entity.
    (c) References to member or subsidiary. For purposes of this 
section, all references to a member or subsidiary for a consolidated 
return year include--
    (1) Each corporation that was a member of the group during any part 
of such year (except that any reference to a subsidiary does not include 
the common parent);
    (2) Except as indicated otherwise, a successor (as defined in 
paragraph (a)(1)(iii) of this section) of any corporation described in 
paragraph (c)(1) of this section; and
    (3) Each corporation whose income was included in the consolidated 
return for such year, notwithstanding that the tax liability of such 
corporation should have been computed on the basis of a separate return, 
or as a member of another consolidated group, under the provisions of 
Sec.  1.1502-75.
    (d) Termination of common parent--(1) Designation of substitute 
agent by common parent. (i) If the common parent's existence terminates, 
it may designate a substitute agent for the group and notify the 
Commissioner, as provided in this paragraph (d)(1).
    (A) Subject to the Commissioner's approval under paragraph 
(d)(1)(ii) of this section, before the common parent's existence 
terminates, the common parent may designate, for each consolidated 
return year for which it is the common parent and for which the period 
of limitations either for assessment, for collection after assessment, 
or for claiming a credit or refund has not expired, one of the following 
to act as substitute agent in its place--
    (1) Any corporation that was a member of the group during any part 
of the consolidated return year and, except as provided in paragraph 
(e)(3)(ii) of this section, has not subsequently been disregarded as an 
entity separate from its owner or reclassified as a partnership for 
Federal tax purposes; or
    (2) Any successor (as defined in paragraph (a)(1)(iii) of this 
section) of such a corporation or of the common parent that is a 
domestic corporation (and, except as provided in paragraph (e)(3)(ii) of 
this section, is not disregarded as an entity separate from its owner or 
classified as a partnership for Federal tax purposes), including a 
corporation that will become a successor at the time that the common 
parent's existence terminates.
    (B) The common parent must notify the Commissioner in writing (under 
procedures prescribed by the Commissioner) of the designation and 
provide the following--
    (1) An agreement executed by the designated corporation agreeing to 
serve as the group's substitute agent; and
    (2) If the designated corporation was not itself a member of the 
group during the consolidated return year (because the designated 
corporation is a successor of a member of the group for the

[[Page 1085]]

consolidated return year), a statement by the designated corporation 
acknowledging that it is or will be primarily liable for the 
consolidated tax as a successor of a member.
    (ii) A designation under paragraph (d)(1)(i)(A) of this section does 
not apply unless and until it is approved by the Commissioner. The 
Commissioner's approval of such a designation is not effective before 
the existence of the common parent terminates.
    (2) Default substitute agent. If the common parent fails to 
designate a substitute agent for the group before its existence 
terminates and if the common parent has a single successor that is a 
domestic corporation, such successor becomes the substitute agent for 
the group upon termination of the common parent's existence. However, 
see paragraph (d)(4) of this section regarding the consequences of the 
successor's failure to notify the Commissioner of its status as default 
substitute agent in accordance with procedures established by the 
Commissioner.
    (3) Designation by the Commissioner. (i) In the event the common 
parent's existence terminates and no designation is made and approved 
under paragraph (d)(1) of this section and the Commissioner believes or 
has reason to believe that there is no successor of the common parent 
that satisfies the requirements of paragraph (d)(2) of this section (or 
the Commissioner believes or has reason to believe there is such a 
successor but has no last known address on file for such successor), the 
Commissioner may, at any time, with or without a request from any member 
of the group, designate a corporation described in paragraph 
(d)(1)(i)(A) of this section to act as the substitute agent. The 
Commissioner will notify the designated substitute agent in writing of 
its designation, and the designation is effective upon receipt by the 
designated substitute agent of such notice. The designated substitute 
agent must give notice of the designation to each corporation that was a 
member of the group during any part of the consolidated return year, but 
a failure by the designated substitute agent to notify any such member 
of the group does not invalidate the designation.
    (ii) At the request of any member, the Commissioner may, but is not 
required to, replace a substitute agent previously designated under 
paragraph (d)(3)(i) of this section with another corporation described 
in paragraph (d)(1)(i)(A) of this section.
    (4) Absence of designation or notification of default substitute 
agent. Until a designation of a substitute agent for the group under 
paragraph (d)(1) of this section has become effective, the Commissioner 
has received notification in accordance with procedures established by 
the Commissioner that a successor qualifying under paragraph (d)(2) of 
this section has become the substitute agent by default, or the 
Commissioner has designated a substitute agent under paragraph (d)(3) of 
this section--
    (i) Any notice of deficiency or other communication mailed to the 
common parent, even if no longer in existence, is considered as having 
been properly mailed to the agent for the group; and
    (ii) The Commissioner is not required to act on any communication 
(including, for example, a claim for refund) submitted on behalf of the 
group by any person other than the common parent (including a successor 
of the common parent qualifying as a default substitute agent under 
paragraph (d)(2) of this section).
    (e) Termination of a corporation's existence--(1) In general. For 
purposes of paragraphs (a)(1)(v), (a)(4)(i), (d), and (j) of this 
section, the existence of a corporation is deemed to terminate if--
    (i) Its existence terminates under applicable law; or
    (ii) Except as provided in paragraph (e)(3) of this section, it 
becomes, for Federal tax purposes, either--
    (A) An entity that is disregarded as an entity separate from its 
owner; or
    (B) An entity that is reclassified as a partnership.
    (2) Purported agency. If the existence of the agent for the group 
terminates under circumstances described in paragraph (e)(1)(ii) of this 
section, until the Commissioner has approved the designation of a 
substitute agent for the group pursuant to paragraph (d)(1) of this 
section or the Commissioner designates a substitute agent and notifies 
the designated substitute agent pursuant to paragraph (d)(3) of this 
section,

[[Page 1086]]

any post-termination action by that purported agent on behalf of the 
group has the same effect, to the extent necessary to avoid prejudice to 
the Commissioner, as if the agent's corporate existence had not 
terminated.
    (3) Exceptions where no eligible corporation exists. (i) For 
purposes of the common parent's term as agent under paragraph (a)(4)(i) 
of this section and the term as agent of the substitute agent designated 
under paragraph (d) of this section, if a corporation either becomes 
disregarded as an entity separate from its owner or is reclassified as a 
partnership for Federal tax purposes, its existence is not deemed to 
terminate if the effect of such termination would be that no corporation 
remains eligible to serve as the substitute agent for the group's 
consolidated return year.
    (ii) Similarly, for purposes of paragraph (d) of this section, an 
entity that is either disregarded as an entity separate from its owner 
or reclassified as a partnership for Federal tax purposes is not 
precluded from designation as a substitute agent merely because of such 
classification if the effect of the inability to make such designation 
would be that no corporation remains eligible to serve as the substitute 
agent for the group's consolidated return year.
    (iii) Any entity described in paragraphs (e)(3)(i) or (ii) of this 
section that remains or becomes the agent for the group is treated as a 
corporation for purposes of this section.
    (4) Exception for section 338 transactions. Notwithstanding section 
338(a)(2), a target corporation for which an election is made under 
section 338 is not deemed to terminate for purposes of this section.
    (f) Examples. The following examples illustrate the principles of 
this section. Unless otherwise indicated, each example addresses the 
question of which corporation is the proper party to execute a consent 
to waive the statute of limitations for Years 1 and 2 or the more 
general question of which corporation may be designated as a substitute 
agent for the group for Years 1 and 2. In each example, as of January 1 
of Year 1, the P group consists of P and its two subsidiaries, S and S-
1. P, as the common parent of the P group, files consolidated returns 
for the P group in Years 1 and 2. On January 1 of Year 1, domestic 
corporations S-2, U, V, W, W-1, X, Y, Z and Z-1 are not related to P or 
the members of the P group. All corporations are calendar year 
taxpayers. For none of the tax years at issue does the Commissioner 
exercise the authority under paragraph (a)(6) of this section to deal 
with any member separately. Any surviving corporation in a merger is a 
successor as described in paragraph (a)(1)(iii) of this section. Any 
notification to the Commissioner of the designation of the P group's 
substitute agent also contains a statement signed on behalf of the 
designated agent that it agrees to act as the group's substitute agent 
and, in the case of a successor, that it is primarily liable as a 
successor of a member. The examples are as follows:

    Example 1. Disposition of all group members. On December 31 of Year 
1, P sells all the stock of S-1 to X. On December 31 of Year 2, P 
distributes all the stock of S to P's shareholders. P files a separate 
return for Year 3. Although P is no longer a common parent after Year 2, 
P remains the agent for the P group for Years 1 and 2. For as long as P 
remains in existence, only P may execute a waiver of the period of 
limitations on assessment on behalf of the group for Years 1 and 2.
    Example 2. Acquisition of common parent by another group. The facts 
are the same as in Example 1, except on January 1 of Year 3, all of the 
outstanding stock of P is acquired by Y. P thereafter joins in the Y 
group consolidated return as a member of Y group. Although P is a member 
of Y group in Year 3, P remains the agent for the P group for Years 1 
and 2. For as long as P remains in existence, only P may execute a 
waiver of the period of limitations on assessment on behalf of the P 
group for Years 1 and 2.
    Example 3. Merger of common parent--designation of remaining member 
as substitute agent. On December 31 of Year 1, P sells all the stock of 
S-1 to X. On July 1 of Year 2, P acquires all the stock of S-2. On 
November 30 of Year 2, P distributes all the stock of S to P's 
shareholders. On January 1 of Year 3, P merges into Y corporation. Just 
before the merger, P notifies the Commissioner in writing of the planned 
merger and of its designation of S as the substitute agent for the P 
group for Years 1 and 2. S is the only member that P can designate as 
the substitute agent for both Years 1 and 2 because it is the only 
subsidiary that was a member of the P group during part of both years. 
Although S-2 is

[[Page 1087]]

the only remaining subsidiary of the P group when P merges into Y, S-2 
was a member of the P group only in Year 2. For that reason, S-2 cannot 
be the substitute agent for the P group for Year 1. Alternatively, P 
could designate a different substitute agent for each year, selecting S 
or S-1 as the substitute agent for Year 1, and S or S-2 as the 
substitute agent for Year 2. P could also designate its successor Y as 
the substitute agent for both Years 1 and 2.
    Example 4. Forward triangular merger of common parent. On January 1 
of Year 3, P merges with and into Z-1, a subsidiary of Z, in a forward 
triangular merger described in section 368(a)(1)(A) and (a)(2)(D). The 
transaction constitutes a reverse acquisition under Sec.  1.1502-
75(d)(3)(i) because P's shareholders receive more than 50% of Z's stock 
in exchange for all of P's stock. Just before the merger, P notifies the 
Commissioner in writing of the planned merger and its designation of Z-
1, the corporation that will survive the planned merger, as the 
substitute agent of the P group for Years 1 and 2. Because Z-1 will be 
P's successor (within the meaning of paragraph (a)(1) of this section) 
after the planned merger, P may designate Z-1 as the substitute agent 
for the P group for Years 1 and 2, pursuant to paragraph (d)(1) of this 
section. Alternatively, P could have designated S or S-1 as the 
substitute agent for the P group for Years 1 and 2. Although Z is the 
new common parent of the P group, which continues pursuant to Sec.  
1.1502-75(d)(3)(i), P may not designate Z as the substitute agent for 
Years 1 and 2 because Z was not a member of the group during any part of 
Years 1 or 2 and is not a successor of P or any other member of P group.
    Example 5. Reverse triangular merger of common parent. On March 1 of 
Year 3, W-1, a subsidiary of W, merges into P, in a reverse triangular 
merger described in section 368(a)(1)(A) and (a)(2)(E). P survives the 
merger with W-1. The transaction constitutes a reverse acquisition under 
Sec.  1.1502-75(d)(3)(i) because P's shareholders receive more than 50% 
of W's stock in exchange for all of P's stock. Under paragraph (a) of 
this section, P remains the agent for the P group for Years 1 and 2, 
even though the P group continues with W as its new common parent 
pursuant to Sec.  1.1502-75(d)(3)(i). Because the transaction 
constitutes a reverse acquisition, the P group is treated as remaining 
in existence with W as its common parent. Before March 2 of Year 3, P is 
the agent for the P group for Year 3. Beginning on March 2 of Year 3, W 
becomes the agent for the P group with respect to all of Year 3 
(including the period through March 1) and subsequent consolidated 
return years. For as long as P remains in existence, P remains the agent 
of the P group under paragraph (a) of this section for Years 1 and 2, 
and therefore only P may execute a waiver of the period of limitations 
on assessment on behalf of the P group for Years 1 and 2.
    Example 6. Reverse triangular merger of common parent-subsequent 
spinoff of common parent. The facts are the same as in Example 5, except 
that on April 1 of Year 4, in a transaction unrelated to the Year 3 
reverse acquisition, P distributes the stock of its subsidiaries S and 
S-1 to W, and W then distributes the stock of P to the W shareholders. 
Beginning on March 2 of Year 3, W becomes the agent for the P group with 
respect to Year 3 (including the period through March 1) and subsequent 
consolidated return years. Although P is no longer a member of the P 
group after the Year 4 spinoff, P remains the agent for the P group 
under paragraph (a) of this section for Years 1 and 2. Thus, for as long 
as P remains in existence, only P may execute a waiver of the period of 
limitations on assessment on behalf of the P group for Years 1 and 2.
    Example 7. Qualified stock purchase and section 338 election. On 
March 31 of Year 2, V purchases the stock of P in a qualified stock 
purchase (within the meaning of section 338(d)(3)), and V makes a timely 
election pursuant to section 338(g) with respect to P. Although section 
338(a)(2) provides that P is treated as a new corporation as of the 
beginning of the day after the acquisition date for purposes of subtitle 
A, paragraph (e)(4) of this section provides that P's existence is not 
deemed to terminate for purposes of this section notwithstanding the 
general rule of section 338(a)(2). Therefore, the election under section 
338(g) does not result in a termination of P under paragraph (e) of this 
section, and new P remains the agent of the P group for Year 1 and the 
period ending March 31 of Year 2 (short Year 2). For as long as new P 
remains in existence, only new P may execute a waiver of the period of 
limitations on assessment on behalf of the P group for Year 1 and short 
Year 2.
    Example 8. Fraudulent conveyance of assets. On March 15 of Year 2, P 
files a consolidated return that includes the income of S and S-1 for 
Year 1. On December 1 of Year 2, S-1 transfers assets having a fair 
market value of $100x to U in exchange for $10x. This transfer of assets 
for less than fair market value constitutes a fraudulent conveyance 
under applicable state law. On March 1 of Year 5, P executes a waiver 
extending to December 31 of Year 6 the period of limitations on 
assessment with respect to the group's Year 1 consolidated return. On 
February 1 of Year 6, the Commissioner issues a notice of deficiency to 
P asserting a deficiency of $30x for the P group's Year 1 consolidated 
tax liability. P does not file a petition for redetermination in the Tax 
Court, and the Commissioner makes a timely assessment against the P 
group. P, S and S-1 are all insolvent and are unable to pay the 
deficiency. On February 1 of Year 8, the Commissioner sends a

[[Page 1088]]

notice of transferee liability to U, which does not file a petition in 
the Tax Court. On August 1 of Year 8, the Commissioner assesses the 
amount of the P group's deficiency against U. Under section 6901(c), the 
Commissioner may assess U's transferee liability within one year after 
the expiration of the period of limitations against the transferor S-1. 
By operation of section 6213(a) and 6503(a), the issuance of the notice 
of deficiency to P and the expiration of the 90-day period for filing a 
petition in the Tax Court have the effect of further extending by 150 
days the P group's limitations period on assessment from the previously 
extended date of December 31 of Year 6 to May 30 of Year 7. Pursuant to 
paragraph (a)(1)(v) of this section, the waiver executed by P on March 1 
of Year 5 to extend the period of limitations on assessment to December 
31 of Year 6 and the further extension of the P group's limitations 
period to May 30 of Year 7 (by operation of sections 6213(a) and 
6503(a)) have the derivative effect of extending the period of 
limitations on assessment of U's transferee liability to May 30 of Year 
8. By operation of section 6901(f), the issuance of the notice of 
transferee liability to U and the expiration of the 90-day period for 
filing a petition in the Tax Court have the effect of further extending 
the limitations period on assessment of U's liability as a transferee by 
150 days, from May 30 of Year 8 to October 27 of Year 8. Accordingly, 
the Commissioner may send a notice of transferee liability to U at any 
time on or before May 30 of Year 8 and assess the unpaid liability 
against U at any time on or before October 27 of Year 8. The result 
would be the same even if S-1 ceased to exist before March 1 of Year 5, 
the date P executed the waiver.

    (g) Cross-reference. For further rules applicable to groups that 
include insolvent financial institutions, see Sec.  301.6402-7 of this 
chapter.
    (h) Effective/applicability date--(1) Application--(i) In general. 
This section applies to consolidated return years beginning on or after 
June 28, 2002, and before April 1, 2015. For instructions regarding 
communications relating to the determination of a substitute agent and 
other matters under this section, see Rev. Proc. 2002-43, 2002-2 CB 99 
(see Sec.  601.601(d)(2)(ii)(b) of this chapter). For rules governing 
the resignation of certain agents for the group subject to this section, 
see Sec.  1.1502-77(c)(7) and (j)(2).

    (ii) Election to apply for prior taxable years. Notwithstanding 
paragraphs (h)(1)(i) and (h)(2) of this section, the common parent may 
elect to apply paragraph (d)(1) of this section in lieu of Sec.  1.1502-
77A(d) in designating a substitute agent for taxable years beginning 
before June 28, 2002. The common parent makes such an election by 
expressly referring to the election under this paragraph (h)(1)(ii) in 
notifying the Commissioner of the designation of the substitute agent. 
Once made, such election applies to any subsequent designation of a 
substitute agent for the consolidated return year(s) subject to the 
election.
    (2) Prior law. For taxable years beginning before June 28, 2002, see 
Sec.  1.1502-77A.
    (3) Designation of a domestic substitute agent--(i) In general. The 
provisions of paragraphs (e)(1) and (j) of this section apply to taxable 
years for which the consolidated Federal income tax return is due 
(without extensions) after July 23, 2007.
    (ii) Prior law. For taxable years for which the consolidated Federal 
income tax return is due (without extensions) on or before July 23, 
2007, see Sec.  1.1502-77(e)(1) as contained in the 26 CFR part 1 
edition revised as of April 1, 2007. For taxable years for which the 
consolidated Federal income tax return is due (without extensions) after 
March 14, 2006, and on or before July 23, 2007, see Sec.  1.1502-77T as 
contained in the 26 CFR part 1 edition revised as of April 1, 2007.
    (i) [Reserved]
    (j) Designation by Commissioner if common parent is treated as a 
domestic corporation under section 7874 or section 953(d)--(1) In 
general. If the common parent is an entity created or organized under 
the law of a foreign country and is treated as a domestic corporation by 
reason of section 7874 (or regulations under that section) or a section 
953(d) election (a foreign common parent), the Commissioner may at any 
time, with or without a request from any member of the group, designate 
another member of the group to act as the agent for the group (a 
domestic substitute agent) for any taxable year for which the 
consolidated Federal income tax return is due (without extensions) after 
July 23, 2007, and the foreign common parent would otherwise be the 
agent for the group. For

[[Page 1089]]

each such year, the domestic substitute agent will be the sole agent for 
the group even though the foreign common parent remains in existence. 
The foreign common parent ceases to be the agent for the group when the 
Commissioner's designation of a domestic substitute agent becomes 
effective. The Commissioner may designate a domestic substitute agent 
for the term of a single taxable year, multiple years, or on a 
continuing basis.
    (2) Domestic substitute agent. The domestic substitute agent, by 
designation or by succession, shall be a domestic corporation described 
in paragraph (d)(1)(i)(A) of this section (determined without regard to 
section 7874, a section 953(d) election or section 1504(d)).
    (3) Designation by the Commissioner. The Commissioner will notify 
the domestic substitute agent in writing by mail or faxed transmission 
of the designation. The domestic substitute agent's designation is 
effective on the earliest of the 14th day following the date of a 
mailing, the 4th day following a faxed transmission, or the date the 
Commissioner receives written confirmation of the designation by a duly 
authorized officer of the domestic substitute agent (within the meaning 
of section 6062). The domestic substitute agent must give notice of its 
designation to the foreign common parent and each corporation that was a 
member of the group during any part of any consolidated return year for 
which the domestic substitute agent will be the agent. A failure of the 
domestic substitute agent to notify the foreign common parent or any 
member of the group does not invalidate the designation. The 
Commissioner will send a copy of the notification to the foreign common 
parent, and if applicable, to any domestic substitute agent the 
designation replaces; a failure to send a copy of the notification does 
not invalidate the designation.
    (4) Term of agency--(i) Taxable years for which domestic substitute 
agent is the agent. If the Commissioner designates a domestic substitute 
agent for one or more taxable years, unless the designation is expressly 
limited to such term, such domestic substitute agent will continue as 
the group's sole agent for subsequent taxable years until the domestic 
substitute agent ceases to be a member of the continuing group, is 
replaced by a new domestic common parent (as provided in paragraph 
(j)(4)(iv)(A) of this section), is replaced by the Commissioner, or is 
replaced by a default substitute agent (as provided in paragraph 
(j)(5)(ii) of this section). If during the course of a consolidated 
return year the domestic substitute agent ceases to be a member of the 
continuing group or is replaced, it shall no longer act as agent for 
such taxable year or subsequent taxable years in any matter.
    (ii) Continuing agency for prior taxable years. Unless replaced by a 
default substitute agent (as provided in paragraph (j)(5)(ii) of this 
section) or by the Commissioner, the domestic substitute agent at the 
end of a taxable year of the group will remain the agent for such year 
until its existence terminates, even if the group subsequently ceases to 
exist or the domestic substitute agent subsequently ceases to be a 
member of the group.
    (iii) Replacement of a Sec.  1.1502-77(d)(1) agent. If, pursuant to 
paragraph (d)(1) of this section, the common parent of the group 
designates a foreign common parent as the agent for the group for any 
taxable year, the Commissioner may, at any time, designate a domestic 
substitute agent to replace the foreign common parent, even if the 
Commissioner approved the terminating common parent's designation.
    (iv) Group continues with a new common parent--(A) Year the new 
common parent becomes the common parent. If the group has a domestic 
substitute agent and the group continues in existence with a new common 
parent during a consolidated return year, and such new common parent is 
a domestic corporation (determined without regard to section 7874 or a 
section 953(d) election), the domestic substitute agent at the beginning 
of the year is the agent for the group through the date of the 
transaction in which the new common parent becomes the common parent, 
and the new common parent becomes the agent for the group beginning the 
day after the transaction, at which time it becomes the agent for the

[[Page 1090]]

group with respect to the entire consolidated return year (including the 
period through the date of the transaction) and the former domestic 
substitute agent will no longer be the agent for the group for that 
year.
    (B) Years preceding the year the new common parent becomes the 
common parent. If after the Commissioner's designation of a domestic 
substitute agent the group remains in existence with a new common 
parent, and such new common parent is a domestic corporation (determined 
without regard to section 7874 or a section 953(d) election), the 
Commissioner may designate the new common parent as the sole agent for 
the group for any of the group's prior taxable years (for which the 
consolidated Federal income tax return is due (without extensions) after 
July 23, 2007) in which the new common parent was a member of the group. 
For this purpose, the new common parent is treated as having been a 
member of the group for any taxable year it is primarily liable for the 
group's income tax liability.
    (v) Replacement of domestic substitute agent by the Commissioner. 
The Commissioner may at any time, with or without a request from any 
member of the group, designate a replacement for a domestic substitute 
agent (or a successor to such agent).
    (5) Deemed Sec.  1.1502-77(d) designation--(i) In general. If the 
Commissioner designates a domestic substitute agent under this paragraph 
(j), it will be treated as a designation of a substitute agent under 
paragraph (d) of this section.
    (ii) Default substitute agent. If the domestic substitute agent's 
existence terminates and it has a single successor that is a domestic 
corporation (without regard to section 269B) that is eligible to be a 
domestic substitute agent, such successor becomes the domestic 
substitute agent and is treated as a default substitute agent under 
paragraph (d)(2) of this section. See paragraph (d)(4) of this section 
regarding the consequences of the successor's failure to notify the 
Commissioner of its status as a default substitute agent. The default 
substitute agent shall use procedures in section 9 of Rev. Proc. 2002-43 
(2002-2 CB 99) or a corresponding provision of a successor revenue 
procedure for notification. (See Sec.  601.601(d)(2)(ii)(b) of this 
chapter.)
    (6) Request that IRS designate a domestic substitute agent--(i) 
Original designation. If the common parent of the group is a foreign 
common parent, and the IRS has not designated a domestic substitute 
agent, one or more members of the group may request the IRS to make a 
designation for taxable years for which the consolidated Federal income 
tax return is due (without extensions) after July 23, 2007. Such request 
is deemed to be a request under paragraph (d)(3)(i) of this section. 
Members of the group shall use the procedures in section 10 of Rev. 
Proc. 2002-43 (2002-2 CB 99) or a corresponding provision of a successor 
revenue procedure for this purpose. (See Sec.  601.601(d)(2)(ii)(b) of 
this chapter.)
    (ii) Request that IRS replace a previously designated substitute 
agent. If the IRS designates a domestic substitute agent pursuant to 
this paragraph (j), one or more members of the group may request that 
the IRS replace the designated domestic substitute agent with another 
member (or successor to another member). Such a request is deemed to be 
a request pursuant to paragraph (d)(3)(ii) of this section. Members of 
the group shall use the procedures in section 11 of Rev. Proc. 2002-43 
(2002-2 CB 99) or a corresponding provision of a successor revenue 
procedure for this purpose. (See Sec.  601.601(d)(2)(ii)(b) of this 
chapter.)

[T.D. 9002, 67 FR 43540, June 28, 2002, as amended by T.D. 9255, 71 FR 
13002, Mar. 14, 2006; T.D. 9343, 72 FR 40067, July 23, 2007. 
Redesignated and amended by T.D. 9715, 80 FR 17318, Apr. 1, 2015]

     Regulations Applicable to Taxable Years Before January 1, 1997



Sec.  1.1502-79A  Separate return years generally applicable 
for consolidated return years beginning before January 1, 1997.

    (a) Carryover and carryback of consolidated net operating losses to 
separate return years--(1) In general. (i) If a consolidated net 
operating loss can be carried under the principles of section 172(b) and 
paragraph (b) of Sec.  1.1502-21A to a separate return year of a 
corporation (or could have been so carried if

[[Page 1091]]

such corporation were in existence) which was a member in the year in 
which such loss arose, then the portion of such consolidated net 
operating loss attributable to such corporation (as determined under 
subparagraph (3) of this paragraph) shall be apportioned to such 
corporation (and any successor to such corporation in a transaction to 
which section 381(a) applies) and shall be a net operating loss 
carryover or carryback to such separate return year; accordingly, such 
portion shall not be included in the consolidated net operating loss 
carryovers or carrybacks to the equivalent consolidated return year. 
Thus, for example, if a member filed a separate return for the third 
year preceding a consolidated return year in which a consolidated net 
operating loss was sustained and if any portion of such loss is 
apportioned to such member for such separate return year, such portion 
may not be carried back by the group to its third year preceding such 
consolidated return year.
    (ii) If a corporation ceases to be a member during a consolidated 
return year, any consolidated net operating loss carryover from a prior 
taxable year must first be carried to such consolidated return year, 
notwithstanding that all or a portion of the consolidated net operating 
loss giving rise to the carryover is attributable to the corporation 
which ceases to be a member. To the extent not absorbed in such 
consolidated return year, the portion of the consolidated net operating 
loss attributable to the corporation ceasing to be a member shall then 
be carried to such corporation's first separate return year.
    (iii) For rules permitting the reattribution of losses of a 
subsidiary to the common parent in the case of loss disallowance or 
basis reduction on the disposition or deconsolidation of stock of the 
subsidiary, see Sec.  1.1502-20.
    (2) Nonapportionment to certain members not in existence. 
Notwithstanding subparagraph (1) of this paragraph, the portion of a 
consolidated net operating loss attributable to a member shall not be 
apportioned to a prior separate return year for which such member was 
not in existence and shall be included in the consolidated net operating 
loss carrybacks to the equivalent consolidated return year of the group 
(or, if such equivalent year is a separate return year, then to such 
separate return year), provided that such member was a member of the 
group immediately after its organization.
    (3) Portion of consolidated net operating loss attributable to a 
member. The portion of a consolidated net operating loss attributable to 
a member of a group is an amount equal to the consolidated net operating 
loss multiplied by a fraction, the numerator of which is the separate 
net operating loss of such corporation, and the denominator of which is 
the sum of the separate net operating losses of all members of the group 
in such year having such losses. For purposes of this subparagraph, the 
separate net operating loss of a member of the group shall be determined 
under Sec.  1.1502-12 (except that no deduction shall be allowed under 
section 242), adjusted for the following items taken into account in the 
computation of the consolidated net operating loss:
    (i) The portion of the consolidated dividends received deduction, 
the consolidated charitable contributions deductions, and the 
consolidated section 247 deduction, attributable to such member;
    (ii) 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);
    (iii) 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 (as determined under paragraph (b)(2) of this section); 
and
    (iv) The portion of any consolidated net capital loss carryover 
attributable to such member which is absorbed in the taxable year.
    (4) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example 1. (i) Corporation P was formed on January 1, 1966. P filed 
a separate return for the calendar year 1966. On March 15, 1967, P 
formed corporation S. P and S filed a consolidated return for 1967. On 
January 1, 1968, P purchased all the stock of corporation T, which had 
been formed in 1967 and had filed a separate return for its taxable year 
ending December 31, 1967.

[[Page 1092]]

    (ii) P, S, and T join in the filing of a consolidated return for 
1968, which return reflects a consolidated net operating loss of 
$11,000. $2,000 of such consolidated net operating loss is attributable 
to P, $3,000 to S, and $6,000 to T. Such apportionment of the 
consolidated net operating loss was made on the basis of the separate 
net operating losses of each member as determined under subparagraph (3) 
of this paragraph.
    (iii) $5,000 of the 1968 consolidated net operating loss can be 
carried back to P's separate return for 1966. Such amount is the portion 
of the consolidated net operating loss attributable to P and S. Even 
though S was not in existence in 1966, the portion attributable to S can 
be carried back to P's separate return year, since S (unlike T) was a 
member of the group immediately after its organization. The 1968 
consolidated net operating loss can be carried back against the group's 
income in 1967 except to the extent (i.e., $6,000) that it is 
apportioned to T for its 1967 separate return year and to the extent 
that it was absorbed in P's 1966 separate return year. The portion of 
the 1968 consolidated net operating loss attributable to T ($6,000) is a 
net operating loss carryback to its 1967 separate return.
    Example 2. (i) Assume the same facts as in example (1). Assume 
further that on June 15, 1969, P sells all the stock of T to an 
outsider, that P and S file a consolidated return for 1969 (which 
includes the income of T for the period January 1 through June 15), and 
that T files a separate return for the period June 16 through December 
31, 1969.
    (ii) The 1968 consolidated net operating loss, to the extent not 
absorbed in prior years, must first be carried to the consolidated 
return year 1969. Any portion of the $6,000 amount attributable to T 
which is not absorbed in T's 1967 separate return year or in the 1969 
consolidated return year shall then be carried to T's separate return 
year ending December 31, 1969.

    (b) Carryover and carryback of consolidated net capital loss to 
separate return years--(1) In general. If a consolidated net capital 
loss can be carried under the principles of section 1212(a) and 
paragraph (b) of Sec.  1.1502-22A to a separate return year of a 
corporation (or could have been so carried if such corporation were in 
existence) which was a member of the group in the year in which such 
consolidated net capital loss arose, then the portion of such 
consolidated net capital loss attributable to such corporation (as 
determined under subparagraph (2) of this paragraph) shall be 
apportioned to such corporation (and any successor to such corporation 
in a transaction to which section 381(a) applies) under the principles 
of paragraph (a) (1), (2) and (3) of this section and shall be a net 
capital loss carryback or carryover to such separate return year.
    (2) Portion of consolidated net capital loss attributable to a 
member. The portion of a consolidated net capital loss attributable to a 
member of a group is an amount equal to such consolidated net capital 
loss multiplied by a fraction, the numerator of which is the net capital 
loss of such member, and the denominator of which is the sum of the net 
capital losses of those members of the group having net capital losses. 
For purposes of this subparagraph, the net capital loss of a member of 
the group shall be determined by taking into account the following:
    (i) Such member's capital gain net income (net capital gain for 
taxable years beginning before January 1, 1977) or loss (determined 
without regard to any net capital loss carryover or carryback); and
    (ii) Such member's section 1231 net loss, reduced by the portion of 
the consolidated section 1231 net loss attributable to such member.
    (c)-(e) [Reserved]
    (f) Effective date. Paragraphs (a) and (b) of this section apply to 
losses arising in consolidated return years to which Sec.  1.1502-21T(g) 
does not apply. For this purpose net operating loss deductions, 
carryovers, and carrybacks arise in the year from which they are 
carried. See Sec.  1.1502-21T(g) for effective dates of that section.

[T.D. 8677, 61 FR 33334, June 27, 1996]

  Regulations Applying Section 382 With Respect to Testing Dates (and 
  Corporations Joining or Leaving Consolidated Groups) Before June 25, 
                                  1999



Sec.  1.1502-90A  Table of contents.

    The following list contains the major headings in Sec. Sec.  1.1502-
91A through 1.1502-99A:

     Sec.  1.1502-91A Application of Section 382 With Respect to a 
 Consolidated Group Generally Applicable for Testing Dates Before June 
                                25, 1999.

    (a) Determination and effect of an ownership change.
    (1) In general.

[[Page 1093]]

    (2) Special rule for post-change year that includes the change date.
    (3) Cross reference.
    (b) Definitions and nomenclature.
    (c) Loss group.
    (1) Defined.
    (2) Coordination with rule that ends separate tracking.
    (3) Example.
    (d) Loss subgroup.
    (1) Net operating loss carryovers.
    (2) Net unrealized built-in loss.
    (3) Loss subgroup parent.
    (4) Principal purpose of avoiding a limitation.
    (5) Special rules.
    (6) Examples.
    (e) Pre-change consolidated attribute.
    (1) Defined.
    (2) Example.
    (f) Pre-change subgroup attribute.
    (1) Defined.
    (2) Example.
    (g) Net unrealized built-in gain and loss.
    (1) In general.
    (2) Members included.
    (i) Consolidated group.
    (ii) Loss subgroup.
    (3) Acquisitions of built-in gain or loss assets.
    (4) Indirect ownership.
    (h) Recognized built-in gain or loss.
    (1) In general. [Reserved]
    (2) Disposition of stock or an intercompany obligation of a member.
    (3) Deferred gain or loss.
    (4) Exchanged basis property.
    (i) [Reserved]
    (j) Predecessor and successor corporations.

  Sec.  1.1502-92A Ownership change of a loss group or a loss subgroup 
      generally applicable for testing dates before June 25, 1999.

    (a) Scope.
    (b) Determination of an ownership change.
    (1) Parent change method.
    (i) Loss group.
    (ii) Loss subgroup.
    (2) Examples.
    (3) Special adjustments.
    (i) Common parent succeeded by a new common parent.
    (ii) Newly created loss subgroup parent.
    (iii) Examples.
    (4) End of separate tracking of certain losses.
    (c) Supplemental rules for determining ownership change.
    (1) Scope.
    (2) Cause for applying supplemental rule.
    (3) Operating rules.
    (4) Supplemental ownership change rules.
    (i) Additional testing dates for the common parent (or loss subgroup 
parent).
    (ii) Treatment of subsidiary stock as stock of the common parent (or 
loss subgroup parent).
    (iii) 5-percent shareholder of the common parent (or loss subgroup 
parent).
    (5) Examples.
    (d) Testing period following ownership change under this section.
    (e) Information statements.
    (1) Common parent of a loss group.
    (2) Abbreviated statement with respect to loss subgroups.

   Sec.  1.1502-93A Consolidated section 382 limitation (or subgroup 
 section 382 limitation) generally applicable for testing dates before 
                             June 25, 1999.

    (a) Determination of the consolidated section 382 limitation (or 
subgroup section 382 limitation).
    (1) In general.
    (2) Coordination with apportionment rule.
    (b) Value of the loss group (or loss subgroup).
    (1) Stock value immediately before ownership change.
    (2) Adjustment to value.
    (3) Examples.
    (c) Recognized built-in gain of a loss group or loss subgroup.
    (d) Continuity of business.
    (1) In general.
    (2) Example.
    (e) Limitations of losses under other rules.

   Sec.  1.1502-94A Coordination with section 382 and the regulations 
 thereunder when a corporation becomes a member of a consolidated group 
generally applicable for corporations becoming members of a group before 
                             June 25, 1999.

    (a) Scope.
    (1) In general.
    (2) Successor corporation as new loss member.
    (3) Coordination in the case of a loss subgroup.
    (4) End of separate tracking of certain losses.
    (5) Cross-reference.
    (b) Application of section 382 to a new loss member.
    (1) In general.
    (2) Adjustment to value.
    (3) Pre-change separate attribute defined.
    (4) Examples.
    (c) Built-in gains and losses.
    (d) Information statements.

Sec.  1.1502-95A Rules on ceasing to be a member of a consolidated group 
 (or loss subgroup) generally applicable for corporations ceasing to be 
                      members before June 25, 1999.

    (a) In general.
    (1) Consolidated group.
    (2) Election by common parent.
    (3) Coordination with Sec. Sec.  1.1502-91T through 1.1502-93T.

[[Page 1094]]

    (b) Separate application of section 382 when a member leaves a 
consolidated group.
    (1) In general.
    (2) Effect of a prior ownership change of the group.
    (3) Application in the case of a loss subgroup.
    (4) Examples.
    (c) Apportionment of a consolidated section 382 limitation.
    (1) In general.
    (2) Amount of apportionment.
    (3) Effect of apportionment on the consolidated section 382 
limitation.
    (4) Effect on corporations to which the consolidated section 382 
limitation is apportioned.
    (5) Deemed apportionment when loss group terminates.
    (6) Appropriate adjustments when former member leaves during the 
year.
    (7) Examples.
    (d) Rules pertaining to ceasing to be a member of a loss subgroup.
    (1) In general.
    (2) Examples.
    (e) Filing the election to apportion.
    (1) Form of the election to apportion.
    (2) Signing of the election.
    (3) Filing of the election.
    (4) Revocation of election.

 Sec.  1.1502-96A Miscellaneous rules generally applicable for testing 
                       dates before June 25, 1999.

    (a) End of separate tracking of losses.
    (1) Application.
    (2) Effect of end of separate tracking.
    (3) Continuing effect of end of separate tracking.
    (4) Special rule for testing period.
    (5) Limits on effects of end of separate tracking.
    (b) Ownership change of subsidiary.
    (1) Ownership change of a subsidiary because of options or plan or 
arrangement.
    (2) Effect of the ownership change.
    (i) In general.
    (ii) Pre-change losses.
    (3) Coordination with Sec. Sec.  1.1502-91T, 1.1502-92T, and 1.1502-
94T.
    (4) Example.
    (c) Continuing effect of an ownership change.

 Sec.  1.1502-97A Special rules under section 382 for members under the 
    jurisdiction of a court in a title 11 or similar case. [Reserved]

Sec.  1.1502-98A Coordination with section 383 generally applicable for 
 testing dates (or members joining or leaving a group) before June 25, 
                                  1999.

                    Sec.  1.1502-99A Effective dates.

    (a) Effective date.
    (1) In general.
    (2) Anti-duplication rules for recognized built-in gain.
    (b) Testing period may include a period beginning before January 1, 
1997.
    (c) Transition rules.
    (1) Methods permitted.
    (i) In general.
    (ii) Adjustments to offset excess limitation.
    (iii) Coordination with effective date.
    (2) Permitted methods.
    (d) Amended returns.
    (e) Section 383.

[T.D. 8678, 61 FR 33336, June 27, 1996. Redesignated and amended by T.D. 
8824, 64 FR 36127, July 2, 1999]



Sec.  1.1502-91A  Application of section 382 with respect to a 
consolidated group generally applicable for testing dates 
before June 25, 1999.

    (a) Determination and effect of an ownership change--(1) In general. 
This section and Sec. Sec.  1.1502-92A and 1.1502-93A set forth the 
rules for determining an ownership change under section 382 for members 
of consolidated groups and the section 382 limitations with respect to 
attributes described in paragraphs (e) and (f) of this section. These 
rules generally provide that an ownership change and the section 382 
limitation are determined with respect to these attributes for the group 
(or loss subgroup) on a single entity basis and not for its members 
separately. Following an ownership change of a loss group (or a loss 
subgroup) under Sec.  1.1502-92A, the amount of consolidated taxable 
income for any post-change year which may be offset by pre-change 
consolidated attributes (or pre-change subgroup attributes) shall not 
exceed the consolidated section 382 limitation (or subgroup section 382 
limitation) for such year as determined under Sec.  1.1502-93A.
    (2) Special rule for post-change year that includes the change date. 
If the post-change year includes the change date, section 382(b)(3)(A) 
is applied so that the consolidated section 382 limitation (or subgroup 
section 382 limitation) does not apply to the portion of consolidated 
taxable income that is allocable to the period in the year on or before 
the change date. See generally Sec.  1.382-6 (relating to the allocation 
of income and loss). The allocation of consolidated taxable income for 
the post-change year that includes the

[[Page 1095]]

change date must be made before taking into account any consolidated net 
operating loss deduction (as defined in Sec.  1.1502-21(a) or 1.1502-
21T(a) in effect prior to June 25, 1999, as contained in 26 CFR part 1 
revised April 1, 1999, as applicable).
    (3) Cross reference. See Sec. Sec.  1.1502-94A and 1.1502-95A for 
rules that apply section 382 to a corporation that becomes or ceases to 
be a member of a group or loss subgroup.
    (b) Definitions and nomenclature. For purposes of this section and 
Sec. Sec.  1.1502-92A through 1.1502-99A, unless otherwise stated:
    (1) The definitions and nomenclature contained in section 382 and 
the regulations thereunder (including the nomenclature and assumptions 
relating to the examples in Sec.  1.382-2T(b)) and this section and 
Sec. Sec.  1.1502-92A through 1.1502-99A apply; and
    (2) In all examples, all groups file consolidated returns, all 
corporations file their income tax returns on a calendar year basis, the 
only 5-percent shareholder of a corporation is a public group, the facts 
set forth the only owner shifts during the testing period, and each 
asset of a corporation has a value equal to its adjusted basis.
    (c) Loss group--(1) Defined. A loss group is a consolidated group 
that:
    (i) Is entitled to use a net operating loss carryover to the taxable 
year that did not arise (and is not treated under Sec.  1.1502-21T(c) as 
arising) in a SRLY;
    (ii) Has a consolidated net operating loss for the taxable year in 
which a testing date of the common parent occurs (determined by treating 
the common parent as a loss corporation); or
    (iii) Has a net unrealized built-in loss (determined under paragraph 
(g) of this section by treating the date on which the determination is 
made as though it were a change date).
    (2) Coordination with rule that ends separate tracking. A 
consolidated group may be a loss group because a member's losses that 
arose in (or are treated as arising in) a SRLY are treated as described 
in paragraph (c)(1)(i) of this section. See Sec.  1.1502-96A(a).
    (3) Example. The following example illustrates the principles of 
this paragraph (c).

    Example. Loss group. (a) L and L1 file separate returns and each has 
a net operating loss carryover arising in Year 1 that is carried over to 
Year 2. A owns 40 shares and L owns 60 shares of the 100 outstanding 
shares of L1 stock. At the close of Year 1, L buys the 40 shares of L1 
stock from A. For Year 2, L and L1 file a consolidated return. The 
following is a graphic illustration of these facts:

[[Page 1096]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.002

    (b) L and L1 become a loss group at the beginning of Year 2 because 
the group is entitled to use the Year 1 net operating loss carryover of 
L, the common parent, which did not arise (and is not treated under 
Sec.  1.1502-21(c) or 1.1502-21T(c) in effect prior to June 25, 1999, as 
contained in 26 CFR part 1 revised April 1, 1999, as applicable as 
arising) in a SRLY. See Sec.  1.1502-94A for rules relating to the 
application of section 382 with respect to L1's net operating loss 
carryover from Year 1 which did arise in a SRLY.

    (d) Loss subgroup--(1) Net operating loss carryovers. Two or more 
corporations that become members of a consolidated group (the current 
group) compose a loss subgroup if:

[[Page 1097]]

    (i) They were affiliated with each other in another group (the 
former group), whether or not the group was a consolidated group;
    (ii) They bear the relationship described in section 1504(a)(1) to 
each other through a loss subgroup parent immediately after they become 
members of the current group; and
    (iii) At least one of the members carries over a net operating loss 
that did not arise (and is not treated under Sec.  1.1502-21(c) or 
1.1502-21T(c) in effect prior to June 25, 1999, as contained in 26 CFR 
part 1 revised April 1, 1999, as applicable as arising) in a SRLY with 
respect to the former group.
    (2) Net unrealized built-in loss. Two or more corporations that 
become members of a consolidated group compose a loss subgroup if they:
    (i) Have been continuously affiliated with each other for the 5 
consecutive year period ending immediately before they become members of 
the group;
    (ii) Bear the relationship described in section 1504(a)(1) to each 
other through a loss subgroup parent immediately after they become 
members of the current group; and
    (iii) Have a net unrealized built-in loss (determined under 
paragraph (g) of this section on the day they become members of the 
group by treating that day as though it were a change date).
    (3) Loss subgroup parent. A loss subgroup parent is the corporation 
that bears the same relationship to the other members of the loss 
subgroup as a common parent bears to the members of a group.
    (4) Principal purpose of avoiding a limitation. The corporations 
described in paragraph (d)(1) or (2) of this section do not compose a 
loss subgroup if any one of them is formed, acquired, or availed of with 
a principal purpose of avoiding the application of, or increasing any 
limitation under, section 382. Instead, Sec.  1.1502-94A applies with 
respect to the attributes of each such corporation. This paragraph 
(d)(4) does not apply solely because, in connection with becoming 
members of the group, the members of a group (or loss subgroup) are 
rearranged to bear a relationship to the other members described in 
section 1504(a)(1).
    (5) Special rules. See Sec.  1.1502-95A(d) for rules concerning when 
a corporation ceases to be a member of a loss subgroup. See also Sec.  
1.1502-96A(a) for a special rule regarding the end of separate tracking 
of SRLY losses of a member that has an ownership change or that has been 
a member of a group for at least 5 consecutive years.
    (6) Examples. The following examples illustrate the principles of 
this paragraph (d).

    Example 1. Loss subgroup. (a) P owns all the L stock and L owns all 
the L1 stock. The P group has a consolidated net operating loss arising 
in Year 1 that is carried to Year 2. On May 2, Year 2, P sells all the 
stock of L to A, and L and L1 thereafter file consolidated returns. A 
portion of the Year 1 consolidated net operating loss is apportioned 
under Sec.  1.1502-21(b) or 1.1502-21T(b) in effect prior to June 25, 
1999, as contained in 26 CFR part 1 revised April 1, 1999, as applicable 
to each of L and L1, which they carry over to Year 2. The following is a 
graphic illustration of these facts:

[[Page 1098]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.003

    (b) (1) L and L1 compose a loss subgroup within the meaning of 
paragraph (d)(1) of this section because--
    (i) They were affiliated with each other in the P group (the former 
group);
    (ii) They bear a relationship described in section 1504(a)(1) to 
each other through a loss subgroup parent (L) immediately after they 
became members of the L group; and
    (iii) At least one of the members (here, both L and L1) carries over 
a net operating loss to the L group (the current group) that did not 
arise in a SRLY with respect to the P group.
    (2) Under paragraph (d)(3) of this section, L is the loss subgroup 
parent of the L loss subgroup.
    Example 2. Loss subgroup--section 1504(a)(1) relationship. (a) P 
owns all the stock of L and

[[Page 1099]]

L1. L owns all the stock of L2. L1 and L2 own 40 percent and 60 percent 
of the stock of L3, respectively. The P group has a consolidated net 
operating loss arising in Year 1 that is carried over to Year 2. On May 
22, Year 2, P sells all the stock of L and L1 to P1, the common parent 
of another consolidated group. The Year 1 consolidated net operating 
loss is apportioned under Sec.  1.1502-21(b) or 1.1502-21T(b) in effect 
prior to June 25, 1999, as contained in 26 CFR part 1 revised April 1, 
1999, as applicable, and each of L, L1, L2, and L3 carries over a 
portion of such loss to the first consolidated return year of the P1 
group ending after the acquisition. The following is a graphic 
illustration of these facts:

[[Page 1100]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.004

    (b) L and L2 compose a loss subgroup within the meaning of paragraph 
(d)(1) of this section. Neither L1 nor L3 is included in a loss subgroup 
because neither bears a relationship described in section 1504(a)(1) 
through a loss subgroup parent to any other member of the former group 
immediately after becoming members of the P1 group.
    Example 3. Loss subgroup--section 1504(a)(1) relationship. The facts 
are the same as in Example 2, except that the stock of L1 is transferred 
to L in connection with the sale of the

[[Page 1101]]

L stock to P1. L, L1, L2, and L3 compose a loss subgroup within the 
meaning of paragraph (d)(1) of this section because--
    (1) They were affiliated with each other in the P group (the former 
group);
    (2) They bear a relationship described in section 1504(a)(1) to each 
other through a loss subgroup parent (L) immediately after they become 
members of the P1 group; and
    (3) At least one of the members (here, each of L, L1, L2, and L3) 
carries over to the P1 group (the current group) a net operating loss 
that did not arise in a SRLY with respect to the P group (the former 
group).

    (e) Pre-change consolidated attribute--(1) Defined. A pre-change 
consolidated attribute of a loss group is--
    (i) Any loss described in paragraph (c)(1) (i) or (ii) of this 
section (relating to the definition of loss group) that is allocable to 
the period ending on or before the change date; and
    (ii) Any recognized built-in loss of the loss group.
    (2) Example. The following example illustrates the principle of this 
paragraph (e).

    Example. Pre-change consolidated attribute. (a) The L group has a 
consolidated net operating loss arising in Year 1 that is carried over 
to Year 2. The L loss group has an ownership change at the beginning of 
Year 2.
    (b) The net operating loss carryover of the L loss group from Year 1 
is a pre-change consolidated attribute because the L group was entitled 
to use the loss in Year 2, the loss did not arise in a SRLY with respect 
to the L group, and therefore the loss was described in paragraph 
(c)(1)(i) of this section. Under paragraph (a) of this section, the 
amount of consolidated taxable income of the L group for Year 2 that may 
be offset by this loss carryover may not exceed the consolidated section 
382 limitation of the L group for that year. See Sec.  1.1502-93A for 
rules relating to the computation of the consolidated section 382 
limitation.

    (f) Pre-change subgroup attribute--(1) Defined. A pre-change 
subgroup attribute of a loss subgroup is--
    (i) Any net operating loss carryover described in paragraph 
(d)(1)(iii) of this section (relating to the definition of loss 
subgroup); and
    (ii) Any recognized built-in loss of the loss subgroup.
    (2) Example. The following example illustrates the principle of this 
paragraph (f).

    Example. Pre-change subgroup attribute. (a) P is the common parent 
of a consolidated group. P owns all the stock of L, and L owns all the 
stock of L1. L2 is not a member of an affiliated group, and has a net 
operating loss arising in Year 1 that is carried over to Year 2. On 
December 11, Year 2, L1 acquires all the stock of L2, causing an 
ownership change of L2. During Year 2, the P group has a consolidated 
net operating loss that is carried over to Year 3. On November 2, Year 
3, M acquires all the L stock from P. M, L, L1, and L2 thereafter file 
consolidated returns. All of the P group Year 2 consolidated net 
operating loss is apportioned under Sec.  1.1502-21(b) or 1.1502-21T(b) 
in effect prior to June 25, 1999, as contained in 26 CFR part 1 revised 
April 1, 1999, as applicable to L and L2, which they carry over to the M 
group.
    (b)(1) L, L1, and L2 compose a loss subgroup because--
    (i) They were affiliated with each other in the P group (the former 
group);
    (ii) They bore a relationship described in section 1504(a)(1) to 
each other through a loss subgroup parent (L) immediately after they 
became members of the L group; and
    (iii) At least one of the members (here, both L and L2) carries over 
a net operating loss to the M group (the current group) that is 
described in paragraph (d)(1)(iii) of this section.
    (2) For this purpose, L2's loss from Year 1 that was a SRLY loss 
with respect to the P group (the former group) is treated as described 
in paragraph (d)(1)(iii) of this section because of the application of 
the principles of Sec.  1.1502-96A(a). See paragraph (d)(5) of this 
section. M's acquisition results in an ownership change of L, and 
therefore the L loss subgroup under Sec.  1.1502-92A(a)(2). See Sec.  
1.1502-93A for rules governing the computation of the subgroup section 
382 limitation.
    (c) In the M group, L2's Year 1 loss continues to be subject to a 
section 382 limitation resulting from the ownership change that occurred 
on December 11, Year 2. See Sec.  1.1502-96A(c).

    (g) Net unrealized built-in gain and loss--(1) In general. The 
determination whether a consolidated group (or loss subgroup) has a net 
unrealized built-in gain or loss under section 382(h)(3) is based on the 
aggregate amount of the separately computed net unrealized built-in 
gains or losses of each member that is included in the group (or loss 
subgroup) under paragraph (g)(2) of this section, including items of 
built-in income and deduction described in section 382(h)(6). Thus, for 
example, amounts deferred under section 267, or under Sec.  1.1502-13 
(other than amounts deferred with respect to the stock of a

[[Page 1102]]

member (or an intercompany obligation) included in the group (or loss 
subgroup) under paragraph (g)(2) of this section) are built-in items. 
The threshold requirement under section 382(h)(3)(B) applies on an 
aggregate basis and not on a member-by-member basis. The separately 
computed amount of a member included in a group or loss subgroup does 
not include any unrealized built-in gain or loss on stock (including 
stock described in section 1504(a)(4) and Sec.  1.382-2T(f)(18)(ii) and 
(iii)) of another member included in the group or loss subgroup (or on 
an intercompany obligation). However, a member of a group or loss 
subgroup includes in its separately computed amount the unrealized 
built-in gain or loss on stock of another member (or on an intercompany 
obligation) not included in the group or loss subgroup. If a member is 
not included in a group (or loss subgroup) under paragraph (g)(2) of 
this section, the determination of whether the member has a net 
unrealized built-in gain or loss under section 382(h)(3) is made on a 
separate entity basis. See Sec.  1.1502-94A(c) (relating to built-in 
gain or loss of a new loss member) and Sec.  1.1502-96A(a) (relating to 
the end of separate tracking of certain losses).
    (2) Members included--(i) Consolidated group. The members included 
in the determination whether a consolidated group has a net unrealized 
built-in gain or loss are all members of the group on the day that the 
determination is made other than--
    (A) A new loss member with a net unrealized built-in loss described 
in Sec.  1.1502-94A(a)(1)(ii); and
    (B) Members included in a loss subgroup described in Sec.  1.1502-
91A(d)(2).
    (ii) Loss subgroup. The members included in the determination 
whether a loss subgroup has a net unrealized built-in gain or loss are 
those members described in paragraphs (d)(2)(i) and (ii) of this 
section.
    (3) Acquisitions of built-in gain or loss assets. A member of a 
consolidated group (or loss subgroup) may not, in determining its 
separately computed net unrealized built-in gain or loss, include any 
gain or loss with respect to assets acquired with a principal purpose to 
affect the amount of its net unrealized built-in gain or loss. A group 
(or loss subgroup) may not, in determining its net unrealized built-in 
gain or loss, include any gain or loss of a member acquired with a 
principal purpose to affect the amount of its net unrealized built-in 
gain or loss.
    (4) Indirect ownership. A member's separately computed net 
unrealized built-in gain or loss is adjusted to the extent necessary to 
prevent any duplication of unrealized gain or loss attributable to the 
member's indirect ownership interest in another member through a 
nonmember if the member has a 5-percent or greater ownership interest in 
the nonmember.
    (h) Recognized built-in gain or loss--(1) In general. [Reserved]
    (2) Disposition of stock or an intercompany obligation of a member. 
Gain or loss recognized by a member on the disposition of stock 
(including stock described in section 1504(a)(4) and Sec.  1.382-
2T(f)(18)(ii) and (iii)) of another member or an intercompany obligation 
disposed of before June 25, 1999 is treated as a recognized built-in 
gain or loss under section 382(h)(2) (unless disallowed under Sec.  
1.1502-20 or otherwise), even though gain or loss on such stock or 
obligation was not included in the determination of a net unrealized 
built-in gain or loss under paragraph (g)(1) of this section.
    (3) Deferred gain or loss. Gain or loss that is deferred under 
provisions such as section 267 and Sec.  1.1502-13 is treated as 
recognized built-in gain or loss only to the extent taken into account 
by the group during the recognition period.
    (4) Exchanged basis property. If the adjusted basis of any asset is 
determined, directly or indirectly, in whole or in part, by reference to 
the adjusted basis of another asset held by the member at the beginning 
of the recognition period, the asset is treated, with appropriate 
adjustments, as held by the member at the beginning of the recognition 
period.
    (i) [Reserved]
    (j) Predecessor and successor corporations. A reference in this 
section and Sec. Sec.  1.1502-92A through 1.1502-99A to a corporation, 
member, common parent, loss subgroup parent, or subsidiary includes, as 
the context may require, a

[[Page 1103]]

reference to a predecessor or successor corporation. For example, the 
determination whether a successor satisfies the continuous affiliation 
requirement of paragraph (d)(2)(i) of this section is made by reference 
to its predecessor.

[T.D. 8678, 61 FR 33337, June 27, 1996, as amended by T.D. 8823, 64 FR 
36100, July 2, 1999. Redesignated and amended by T.D. 8824, 64 FR 36125, 
36127, July 2, 1999]



Sec.  1.1502-92A  Ownership change of a loss group or a loss
subgroup generally applicable for testing dates before 
June 25, 1999.

    (a) Scope. This section provides rules for determining if there is 
an ownership change for purposes of section 382 with respect to a loss 
group or a loss subgroup. See Sec.  1.1502-94A for special rules for 
determining if there is an ownership change with respect to a new loss 
member and Sec.  1.1502-96A(b) for special rules for determining if 
there is an ownership change of a subsidiary.
    (b) Determination of an ownership change--(1) Parent change method--
(i) Loss group. A loss group has an ownership change if the loss group's 
common parent has an ownership change under section 382 and the 
regulations thereunder. Solely for purposes of determining whether the 
common parent has an ownership change--
    (A) The losses described in Sec.  1.1502-91A(c) are treated as net 
operating losses (or a net unrealized built-in loss) of the common 
parent; and
    (B) The common parent determines the earliest day that its testing 
period can begin by reference to only the attributes that make the group 
a loss group under Sec.  1.1502-91A(c).
    (ii) Loss subgroup. A loss subgroup has an ownership change if the 
loss subgroup parent has an ownership change under section 382 and the 
regulations thereunder. The principles of Sec.  1.1502-95A(b) (relating 
to ceasing to be a member of a consolidated group) apply in determining 
whether the loss subgroup parent has an ownership change. Solely for 
purposes of determining whether the loss subgroup parent has an 
ownership change--
    (A) The losses described in Sec.  1.1502-91A(d) are treated as net 
operating losses (or a net unrealized built-in loss) of the loss 
subgroup parent;
    (B) The day that the members of the loss subgroup become members of 
the group (or a loss subgroup) is treated as a testing date within the 
meaning of Sec.  1.382-2(a)(4); and
    (C) The loss subgroup parent determines the earliest day that its 
testing period can begin under Sec.  1.382-2T(d)(3) by reference to only 
the attributes that make the members a loss subgroup under Sec.  1.1502-
91A(d).
    (2) Examples. The following examples illustrate the principles of 
this paragraph (b).

    Example 1. Loss group--ownership change of the common parent. (a) A 
owns all the L stock. L owns 80 percent and B owns 20 percent of the L1 
stock. For Year 1, the L group has a consolidated net operating loss 
that resulted from the operations of L1 and that is carried over to Year 
2. The value of the L stock is $1000. The total value of the L1 stock is 
$600 and the value of the L1 stock held by B is $120. The L group is a 
loss group under Sec.  1.1502-91A(c)(1) because it is entitled to use 
its net operating loss carryover from Year 1. On August 15, Year 2, A 
sells 51 percent of the L stock to C. The following is a graphic 
illustration of these facts:

[[Page 1104]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.005

    (b) Under paragraph (b)(1)(i) of this section, section 382 and the 
regulations thereunder are applied to L to determine whether it (and 
therefore the L loss group) has an ownership change with respect to its 
net operating loss carryover from Year 1 attributable to L1 on August 
15, Year 2. The sale of the L stock to C causes an ownership change of L 
under Sec.  1.382-2T and of the L loss group under paragraph (b)(1)(i) 
of this section. The amount of consolidated taxable income of the L loss 
group for any post-change taxable year that may be offset by its pre-
change consolidated attributes (that is, the net operating loss 
carryover from Year 1 attributable to L1) may not exceed the 
consolidated section 382 limitation for the L loss group for the taxable 
year.
    Example 2. Loss group--owner shifts of subsidiaries disregarded. (a) 
The facts are the same as in Example 1, except that on August 15, Year 
2, A sells only 49 percent of the L stock to C and, on December 12, Year 
3, in an unrelated transaction, B sells the 20 percent of the L1 stock 
to D. A's sale of the L stock to C does not cause an ownership change of 
L under Sec.  1.382-2T nor of the L loss group under paragraph (b)(1)(i) 
of this section. The following is a graphic illustration of these facts:

[[Page 1105]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.006

    (b) B's subsequent sale of L1 stock is not taken into account for 
purposes of determining whether the L loss group has an ownership change 
under paragraph (b)(1)(i) of this section, and, accordingly, there is no 
ownership change of the L loss group. See paragraph (c) of this section, 
however, for a supplemental ownership change method that would apply to 
cause an ownership change if the purchases by C and D were pursuant to a 
plan or arrangement.
    Example 3. Loss subgroup--ownership change of loss subgroup parent 
controls. (a) P owns all the L stock. L owns 80 percent and A owns 20 
percent of the L1 stock. The P group has a consolidated net operating 
loss arising in Year 1 that is carried over to Year 2. On September 9, 
Year 2, P sells 51 percent of the L stock to B, and L1 is apportioned a 
portion of the Year 1 consolidated net operating loss under Sec.  
1.1502-21(b) or 1.1502-21T(b) in effect prior to June 25, 1999, as 
contained in 26 CFR part 1 revised April 1, 1999, as applicable, which 
it carries over to its next taxable year. L and L1 file a consolidated 
return for their first taxable year ending after the sale to B. The 
following is a graphic illustration of these facts:

[[Page 1106]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.007


[[Page 1107]]


    (b) Under Sec.  1.1502-91A(d)(1), L and L1 compose a loss subgroup 
on September 9, Year 2, the day that they become members of the L group. 
Under paragraph (b)(1)(ii) of this section, section 382 and the 
regulations thereunder are applied to L to determine whether it (and 
therefore the L loss subgroup) has an ownership change with respect to 
the portion of the Year 1 consolidated net operating loss that is 
apportioned to L1 on September 9, Year 2. L has an ownership change 
resulting from P's sale of 51 percent of the L stock to A. Therefore, 
the L loss subgroup has an ownership change with respect to that loss.
    Example 4. Loss group and loss subgroup--contemporaneous ownership 
changes. (a) A owns all the stock of corporation M, M owns 35 percent 
and B owns 65 percent of the L

[[Page 1108]]

stock, and L owns all the L1 stock. The L group has a consolidated net 
operating loss arising in Year 1 that is carried over to Year 2. On May 
19, Year 2, B sells 45 percent of the L stock to M for cash. M, L, and 
L1 thereafter file consolidated returns. L and L1 are each apportioned a 
portion of the Year 1 consolidated net operating loss, which they carry 
over to the M group's Year 2 and Year 3 consolidated return years. The M 
group has a consolidated net operating loss arising in Year 2 that is 
carried over to Year 3. On June 9, Year 3, A sells 70 percent of the M 
stock to C. The following is a graphic illustration of these facts:
[GRAPHIC] [TIFF OMITTED] TR27JN96.008


[[Page 1109]]


    (b) Under Sec.  1.1502-91A(d)(1), L and L1 compose a loss subgroup 
on May 19, Year 2, the day they become members of the M group. Under 
paragraph (b)(1)(ii) of this section, section 382 and the regulations 
thereunder are applied to L to determine whether L (and therefore the L 
loss subgroup) has an ownership change with respect to the loss 
carryovers from Year 1 on May 19, Year 2, a testing date because of B's 
sale of L stock to M. The sale of L stock to M results in only a 45 
percentage point increase in A's ownership of L stock. Thus, there is no 
ownership change of L (or the L loss subgroup) with respect to those 
loss carryovers under paragraph (b)(1)(ii) of this section on that day.
    (c) June 9, Year 3, is also a testing date with respect to the L 
loss subgroup because of A's sale of M stock to C. The sale results in a 
56 percentage point increase in C's ownership of L stock, and L has an 
ownership change. Therefore, the L loss subgroup has an ownership change 
on that day with respect to the loss carryovers from Year 1.
    (d) Paragraph (b)(1)(i) of this section requires that section 382 
and the regulations thereunder be applied to M to determine whether M 
(and therefore the M loss group) has an ownership change with respect to 
the net operating loss carryover from Year 2 on June 9, Year 3, a 
testing date because of A's sale of M stock to C. The sale results in a 
70 percentage point increase in C's ownership of M stock, and M has an 
ownership change. Therefore, the M loss group has an ownership change on 
that day with respect to that loss carryover.

    (3) Special adjustments--(i) Common parent succeeded by a new common 
parent. For purposes of determining if a loss group has an ownership 
change, if the common parent of a loss group is succeeded or acquired by 
a new common parent and the loss group remains in existence, the new 
common parent is treated as a continuation of the former common parent 
with appropriate adjustments to take into account shifts in ownership of 
the former common parent during the testing period (including shifts 
that occur incident to the common parent's becoming the former common 
parent).
    (ii) Newly created loss subgroup parent. For purposes of determining 
if a loss subgroup has an ownership change, if the member that is the 
loss subgroup parent has not been the loss subgroup parent for at least 
3 years as of a testing date, appropriate adjustments must be made to 
take into account owner shifts of members of the loss subgroup so that 
the structure of the loss subgroup does not have the effect of avoiding 
an ownership change under section 382. (See paragraph (b)(3)(iii) 
Example 3 of this section.)
    (iii) Examples. The following examples illustrate the principles of 
this paragraph (b)(3).

    Example 1. New common parent acquires old common parent. (a) A, who 
owns all the L stock, sells 30 percent of the L stock to B on August 26, 
Year 1. L owns all the L1 stock. The L group has a consolidated net 
operating loss arising in Year 1 that is carried over to Year 3. On July 
16, Year 2, A and B transfer their L stock to a newly created holding 
company, HC, in exchange for 70 percent and 30 percent, respectively, of 
the HC stock. HC, L, and L1 thereafter file consolidated returns. Under 
the principles of Sec.  1.1502-75(d), the L loss group is treated as 
remaining in existence, with HC taking the place of L as the new common 
parent of the loss group. The following is a graphic illustration of 
these facts:

[[Page 1110]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.009

    (b) On November 11, Year 3, A sells 25 percent of the HC stock to B. 
For purposes of determining if the L loss group has an ownership change 
under paragraph (b)(1)(i) of this section on November 11, Year 3, HC is 
treated as a continuation of L under paragraph (b)(3)(i) of this section 
because it acquired L and became the common parent

[[Page 1111]]

without terminating the L loss group. Accordingly, HC's testing period 
commences on January 1, Year 1, the first day of the taxable year of the 
L loss group in which the consolidated net operating loss that is 
carried over to Year 3 arose (see Sec.  1.382-2T(d)(3)(i)). Immediately 
after the close of November 11, Year 3, B's percentage ownership 
interest in the common parent of the loss group (HC) has increased by 55 
percentage points over its lowest percentage ownership during the 
testing period (zero percent). Accordingly, HC and the L loss group have 
an ownership change on that day.
    Example 2. Common parent in case in which common parent ceases to 
exist. (a) A, B, and C each own one-third of the L stock. L owns all the 
L1 stock. The L group has a consolidated net operating loss arising in 
Year 2 that is carried over to Year 3. On November 22, Year 3, L is 
merged into P, a corporation owned by D, and L1 thereafter files 
consolidated returns with P. A, B, and C, as a result of owning stock of 
L, own 90 percent of P's stock after the merger. D owns the remaining 10 
percent of P's stock. The merger of L into P qualifies as a reverse 
acquisition of the L group under Sec.  1.1502-75(d)(3)(i), and the L 
loss group is treated as remaining in existence, with P taking the place 
of L as the new common parent of the L group. The following is a graphic 
illustration of these facts:

[[Page 1112]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.010

    (b) For purposes of determining if the L loss group has an ownership 
change on November 22, Year 3, the day of the merger, P is treated as a 
continuation of L so that the testing period for P begins on January 1, 
Year 2, the first day of the taxable year of the L loss group in which 
the consolidated net operating loss that is carried over to Year 3 
arose. Immediately after the close of November 22, Year 3, D is the only 
5-percent shareholder that has increased his ownership interest in P 
during the testing period (from zero to 10 percentage points).
    (c) The facts are the same as in paragraph (a) of this Example 2, 
except that A has held 23\1/3\ shares (23\1/3\ percent) of L's stock for 
five years, and A purchased an additional 10 shares of L stock from E 
two years before the merger. Immediately after the close of the day of 
the merger (a testing date), A's ownership interest in P, the common 
parent of the L loss group, has increased by 6\2/3\ percentage points 
over her lowest percentage

[[Page 1113]]

ownership during the testing period (23\1/3\ percent to 30 percent).
    (d) The facts are the same as in (a) of this Example 2, except that 
P has a net operating loss arising in Year 1 that is carried to the 
first consolidated return year ending after the day of the merger. 
Solely for purposes of determining whether the L loss group has an 
ownership change under paragraph (b)(1)(i) of this section, the testing 
period for P commences on January 1, Year 2. P does not determine the 
earliest day for its testing period by reference to its net operating 
loss carryover from Year 1, which Sec. Sec.  1502-1(f)(3) and 1.1502-
75(d)(3)(i) treat as arising in a SRLY. See Sec.  1.1502-94A to 
determine the application of section 382 with respect to P's net 
operating loss carryover.
    Example 3. Newly acquired loss subgroup parent. (a) P owns all the L 
stock and L owns all the L1 stock. The P group has a consolidated net 
operating loss arising in Year 1 that is carried over to Year 3. On 
January 19, Year 2, L issues a 20 percent stock interest to B. On 
February 5, Year 3, P contributes its L stock to a newly formed 
subsidiary, HC, in exchange for all the HC stock, and distributes the HC 
stock to its sole shareholder A. HC, L, and L1 thereafter file 
consolidated returns. A portion of the P group's Year 1 consolidated net 
operating loss is apportioned to L and L1 under Sec.  1.1502-21T(b) and 
is carried over to the HC group's year ending after February 5, Year 3. 
HC, L, and L1 compose a loss subgroup within the meaning of Sec.  
1.1502-91A(d) with respect to the net operating loss carryovers from 
Year 1. The following is a graphic illustration of these facts:

[[Page 1114]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.011

    (b) February 5, Year 3, is a testing date for HC as the loss 
subgroup parent with respect to the net operating loss carryovers of L 
and L1 from Year 1. See paragraph (b)(1)(ii)(B) of this section. For 
purposes of determining whether HC has an ownership change on the 
testing date, appropriate adjustments must be made with respect to the 
changes in the percentage ownership of the stock of HC because HC was 
not the loss subgroup parent for at least 3 years prior to the day on 
which it became a member of the HC loss subgroup (a testing date). The 
appropriate adjustments include adjustments so that HC succeeds to the 
owner shifts of other members of the former group. Thus, HC succeeds to 
the owner shift of L that resulted from the sale of the 20 percent 
interest to B in determining whether the HC loss subgroup has an 
ownership change on February 5, Year 3, and

[[Page 1115]]

on any subsequent testing date that includes January 19, Year 2.

    (4) End of separate tracking of certain losses. If Sec.  1.1502-
96A(a) (relating to the end of separate tracking of attributes) applies 
to a loss subgroup, then, while one or more members that were included 
in the loss subgroup remain members of the consolidated group, there is 
an ownership change with respect to their attributes described in Sec.  
1.1502-96A(a)(2) only if the consolidated group is a loss group and has 
an ownership change under paragraph (b)(1)(i) of this section (or such a 
member has an ownership change under Sec.  1.1502-96A(b) (relating to 
ownership changes of subsidiaries)). If, however, the loss subgroup has 
had an ownership change before Sec.  1.1502-96A(a) applies, see Sec.  
1.1502-96A(c) for the continuing application of the subgroup's section 
382 limitation with respect to its pre-change subgroup attributes.
    (c) Supplemental rules for determining ownership change--(1) Scope. 
This paragraph (c) contains a supplemental rule for determining whether 
there is an ownership change of a loss group (or loss subgroup). It 
applies in addition to, and not instead of, the rules of paragraph (b) 
of this section. Thus, for example, if the common parent of the loss 
group has an ownership change under paragraph (b) of this section, the 
loss group has an ownership change even if, by applying this paragraph 
(c), the common parent would not have an ownership change.
    (2) Cause for applying supplemental rule. This paragraph (c) applies 
to a loss group (or loss subgroup) if--
    (i) Any 5-percent shareholder of the common parent (or loss subgroup 
parent) increases its percentage ownership interest in the stock of 
both--
    (A) A subsidiary of the loss group (or loss subgroup) other than by 
a direct or indirect acquisition of stock of the common parent (or loss 
subgroup parent); and
    (B) The common parent (or loss subgroup parent); and
    (ii) Those increases occur within a 3 year period ending on any day 
of a consolidated return year or, if shorter, the period beginning on 
the first day following the most recent ownership change of the loss 
group (or loss subgroup).
    (3) Operating rules. Solely for purposes of this paragraph (c)--
    (i) A 5-percent shareholder of the common parent (or loss subgroup 
parent) is treated as increasing its percentage ownership interest in 
the common parent (or loss subgroup parent) or a subsidiary to the 
extent, if any, that any person acting pursuant to a plan or arrangement 
with the 5-percent shareholder increases its percentage ownership 
interest in the stock of that entity;
    (ii) The rules in section 382(l)(3) and Sec. Sec.  1.382-2T(h) and 
1.382-4(d) (relating to constructive ownership) apply with respect to 
the stock of the subsidiary by treating such stock as stock of a loss 
corporation; and
    (iii) In the case of a loss subgroup, a subsidiary includes any 
member of the loss subgroup other than the loss subgroup parent. (The 
loss subgroup parent is, however, a subsidiary of the loss group of 
which it is a member.)
    (4) Supplemental ownership change rules. The determination whether 
the common parent (or loss subgroup parent) has an ownership change is 
made by applying paragraph (b)(1) of this section as modified by the 
following additional rules--
    (i) Additional testing dates for the common parent (or loss subgroup 
parent). A testing date for the common parent (or loss subgroup parent) 
also includes--
    (A) Each day on which there is an increase in the percentage 
ownership of stock of a subsidiary as described in paragraph (c)(2) of 
this section; and
    (B) The first day of the first consolidated return year for which 
the group is a loss group (or the members compose a loss subgroup);
    (ii) Treatment of subsidiary stock as stock of the common parent (or 
loss subgroup parent). The common parent (or loss subgroup parent) is 
treated as though it had issued to the person acquiring (or deemed to 
acquire) the subsidiary stock an amount of its own stock (by value) that 
equals the value of the subsidiary stock represented by the percentage 
increase in that person's ownership of the subsidiary (determined on a 
separate entity basis). A similar principle applies if the increase

[[Page 1116]]

in percentage ownership interest is effected by a redemption or similar 
transaction; and
    (iii) 5-percent shareholder of the common parent (or loss subgroup 
parent). Any person described in paragraph (c)(3)(i) of this section who 
is acting pursuant to the plan or arrangement is treated as a 5-percent 
shareholder of the common parent (or loss subgroup parent).
    (5) Examples. The following examples illustrate the principles of 
this paragraph (c).

    Example 1. Stock of the common parent under supplemental rules. (a) 
A owns all the L stock. L is not a member of an affiliated group and has 
a net operating loss carryover arising in Year 1 that is carried over to 
Year 6. On September 20, Year 6, L transfers all of its assets and 
liabilities to a newly created subsidiary, S, in exchange for S stock. L 
and S thereafter file consolidated returns. On November 23, Year 6, B 
contributes cash to L in exchange for a 45 percent ownership interest in 
L and contributes cash to S for a 20 percent ownership interest in S.
    (b) B is a 5-percent shareholder of L who increases his percentage 
ownership interest in L and S during the 3 year period ending on 
November 23, Year 6. Under paragraph (c)(4)(ii) of this section, the 
determination whether L (the common parent of a loss group) has an 
ownership change on November 23, Year 6 (or on any testing date in the 
testing period which includes November 23, Year 6), is made by applying 
paragraph (b)(1)(i) of this section and by treating the value of B's 20 
percent ownership interest in S as if it were L stock issued to B.
    Example 2. Plan or arrangement--public offering of subsidiary stock. 
(a) A owns all the stock of L and L owns all the stock of L1. The L 
group has a consolidated net operating loss arising in Year 1 that 
resulted from the operations of L1 and that is carried over to Year 2. 
As part of a plan, A sells 49 percent of the L stock to B on October 7, 
Year 2, and L1 issues new stock representing a 20 percent ownership 
interest in L1 to the public on November 6, Year 2. The following is a 
graphic illustration of these facts:

[[Page 1117]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.012

    (b) A's sale of the L stock to B does not cause an ownership change 
of the L loss group on October 7, Year 2, under the rules of Sec.  
1.382-2T and paragraph (b)(1)(i) of this section.
    (c) Because the issuance of L1 stock to the public occurs in 
connection with B's acquisition of L stock pursuant to a plan, paragraph 
(c)(4) of this section applies to determine whether the L loss group has 
an ownership change on November 6, Year 2 (or on any testing date for 
which the testing period includes November 6, Year 2).

    (d) Testing period following ownership change under this section. If 
a loss group (or a loss subgroup) has had an ownership change under this 
section, the

[[Page 1118]]

testing period for determining a subsequent ownership change with 
respect to pre-change consolidated attributes (or pre-change subgroup 
attributes) begins no earlier than the first day following the loss 
group's (or loss subgroup's) most recent change date.
    (e) Information statements--(1) Common parent of a loss group. The 
common parent of a loss group must file the information statement 
required by Sec.  1.382-2T(a)(2)(ii) for a consolidated return year 
because of any owner shift, equity structure shift, or the issuance or 
transfer of an option--
    (i) With respect to the common parent and with respect to any 
subsidiary stock subject to paragraph (c) of this section; and
    (ii) With respect to an ownership change described in Sec.  1.1502-
96A(b) (relating to ownership changes of subsidiaries).
    (2) Abbreviated statement with respect to loss subgroups. The common 
parent of a consolidated group that has a loss subgroup during a 
consolidated return year must file the information statement required by 
Sec.  1.382-2T(a)(2)(ii) because of any owner shift, equity structure 
shift, or issuance or transfer of an option with respect to the loss 
subgroup parent and with respect to any subsidiary stock subject to 
paragraph (c) of this section. Instead of filing a separate statement 
for each loss subgroup parent, the common parent (which is treated as a 
loss corporation) may file the single statement described in paragraph 
(e)(1) of this section. In addition to the information concerning stock 
ownership of the common parent, the single statement must identify each 
loss subgroup parent and state which loss subgroups, if any, have had 
ownership changes during the consolidated return year. The loss subgroup 
parent is, however, still required to maintain the records necessary to 
determine if the loss subgroup has an ownership change. This paragraph 
(e)(2) applies with respect to the attributes of a loss subgroup until, 
under Sec.  1.1502-96A(a), the attributes are no longer treated as 
described in Sec.  1.1502-91A(d) (relating to the definition of loss 
subgroup). After that time, the information statement described in 
paragraph (e)(1) of this section must be filed with respect to those 
attributes.

[T.D. 8678, 61 FR 33341, June 27, 1996, as amended by T.D. 8823, 64 FR 
36100, July 2, 1999. Redesignated and amended by T.D. 8824, 64 FR 36125, 
36127, July 2, 1999]



Sec.  1.1502-93A  Consolidated section 382 limitation (or subgroup section 
382 limitation) generally applicable for testing dates before June 25, 1999.

    (a) Determination of the consolidated section 382 limitation (or 
subgroup section 382 limitation)--(1) In general. Following an ownership 
change, the consolidated section 382 limitation (or subgroup section 382 
limitation) for any post-change year is an amount equal to the value of 
the loss group (or loss subgroup), as defined in paragraph (b) of this 
section, multiplied by the long-term tax-exempt rate that applies with 
respect to the ownership change, and adjusted as required by section 382 
and the regulations thereunder. See, for example, section 382(b)(2) 
(relating to the carryforward of unused section 382 limitation), section 
382(b)(3)(B) (relating to the section 382 limitation for the post-change 
year that includes the change date), section 382(m)(2) (relating to 
short taxable years), and section 382(h) (relating to recognized built-
in gains and section 338 gains).
    (2) Coordination with apportionment rule. For special rules relating 
to apportionment of a consolidated section 382 limitation (or a subgroup 
section 382 limitation) when one or more corporations cease to be 
members of a loss group (or a loss subgroup) and to aggregation of 
amounts so apportioned, see Sec.  1.1502-95A(c).
    (b) Value of the loss group (or loss subgroup)--(1) Stock value 
immediately before ownership change. Subject to any adjustment under 
paragraph (b)(2) of this section, the value of the loss group (or loss 
subgroup) is the value, immediately before the ownership change, of the 
stock of each member, other than stock that is owned directly or 
indirectly by another member. For this purpose--
    (i) Ownership is determined under Sec.  1.382-2T;
    (ii) A member is considered to indirectly own stock of another 
member

[[Page 1119]]

through a nonmember only if the member has a 5-percent or greater 
ownership interest in the nonmember; and
    (iii) Stock includes stock described in section 1504(a)(4) and Sec.  
1.382-2T(f)(18)(ii) and (iii).
    (2) Adjustment to value. The value of the loss group (or loss 
subgroup), as determined under paragraph (b)(1) of this section, is 
adjusted under any rule in section 382 or the regulations thereunder 
requiring an adjustment to such value for purposes of computing the 
amount of the section 382 limitation. See, for example, section 
382(e)(2) (redemptions and corporate contractions), section 382(l)(1) 
(certain capital contributions) and section 382(l)(4) (ownership of 
substantial nonbusiness assets). The value of the loss group (or loss 
subgroup) determined under this paragraph (b) is also adjusted to the 
extent necessary to prevent any duplication of the value of the stock of 
a member. For example, the principles of Sec.  1.382-8 (relating to 
controlled groups of corporations) apply in determining the value of a 
loss group (or loss subgroup) if, under Sec.  1.1502-91A(g)(2), members 
are not included in the determination whether the group (or loss 
subgroup) has a net unrealized built-in loss.
    (3) Examples. The following examples illustrate the principles of 
this paragraph (b).

    Example 1. Basic case. (a) L, L1, and L2 compose a loss group. L has 
outstanding common stock, the value of which is $100. L1 has outstanding 
common stock and preferred stock that is described in section 
1504(a)(4). L owns 90 percent of the L1 common stock, and A owns the 
remaining 10 percent of the L1 common stock plus all the preferred 
stock. The value of the L1 common stock is $40, and the value of the L1 
preferred stock is $30. L2 has outstanding common stock, 50 percent of 
which is owned by L and 50 percent by L1. The L group has an ownership 
change. The following is a graphic illustration of these facts:
[GRAPHIC] [TIFF OMITTED] TR27JN96.013

    (b) Under paragraph (b)(1) of this section, the L group does not 
include the value of the stock of any member that is owned directly or 
indirectly by another member in computing its consolidated section 382 
limitation. Accordingly, the value of the stock of the loss group is 
$134, the sum of the value of--
    (1) The common stock of L ($100);
    (2) the 10 percent of the L1 common stock ($4) owned by A; and
    (3) The L1 preferred stock ($30) owned by A.
    Example 2. Indirect ownership. (a) L and L1 compose a consolidated 
group. L's stock has a value of $100. L owns 80 shares (worth $80) and 
corporation M owns 20 shares (worth $20) of the L1 stock. L also owns 79 
percent of the stock of corporation M. The L group has an ownership 
change. The following is a graphic illustration of these facts:

[[Page 1120]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.014

    (b) Under paragraph (b)(1) of this section, because of L's more than 
5 percent ownership interest in M, a nonmember, L is considered to 
indirectly own 15.8 shares of the L1 stock held by M (79% x 20 shares). 
The value of the L loss group is $104.20, the sum of the values of--
    (1) The L stock ($100); and
    (2) The L1 stock not owned directly or indirectly by L (21% x $20, 
or $4.20).

    (c) Recognized built-in gain of a loss group or loss subgroup. If a 
loss group (or loss subgroup) has a net unrealized built-in gain, any 
recognized built-in gain of the loss group (or loss subgroup) is taken 
into account under section 382(h) in determining the consolidated 
section 382 limitation (or subgroup section 382 limitation). See Sec.  
1.1502-99A(a)(2) for a special rule relating to the application of Sec.  
1.502-93(c)(2) to consolidated return years for which the due date of 
the return is after June 25, 1999.
    (d) Continuity of business--(1) In general. A loss group (or a loss 
subgroup) is treated as a single entity for purposes of determining 
whether it satisfies the continuity of business enterprise requirement 
of section 382(c)(1).
    (2) Example. The following example illustrates the principle of this 
paragraph (d).

    Example. Continuity of business enterprise. L owns all the stock of 
two subsidiaries, L1 and L2. The L group has an ownership change. It has 
pre-change consolidated attributes attributable to L2. Each of the 
members has historically conducted a separate line of business. Each 
line of business is approximately equal in value. One year after the 
ownership change, L discontinues its separate business and the business 
of L2. The separate business of L1 is continued for the remainder of the 
2 year period following the ownership change. The continuity of business 
enterprise requirement of section 382(c)(1) is met even though the 
separate businesses of L and L2 are discontinued.

    (e) Limitations of losses under other rules. If a section 382 
limitation for a post-change year exceeds the consolidated taxable 
income that may be offset by pre-change attributes for any reason, 
including the application of the limitation of Sec.  1.1502-21(c) or 
1.1502-21T(c) in effect prior to June 25, 1999, as contained in 26 CFR 
part 1 revised April 1, 1999, as applicable, the amount of the excess is 
carried forward under section 382(b)(2) (relating to the carryforward of 
unused section 382 limitation).

[T.D. 8678, 61 FR 33351, June 27, 1996, as amended by T.D. 8823, 64 FR 
36100, July 2, 1999. Redesignated and amended by T.D. 8824, 64 FR 36125, 
36128, July 2, 1999]

[[Page 1121]]



Sec.  1.1502-94A  Coordination with section 382 and the regulations 
thereunder when a corporation becomes a member of a consolidated group) 
generally applicable for corporations becoming members of a group
before June 25, 1999.

    (a) Scope--(1) In general. This section applies section 382 and the 
regulations thereunder to a corporation that is a new loss member of a 
consolidated group. A corporation is a new loss member if it--
    (i) Carries over a net operating loss that arose (or is treated 
under Sec.  1.1502-21(c) or 1.1502-21T(c) in effect prior to June 25, 
1999, as contained in 26 CFR part 1 revised April 1, 1999, as 
applicable, as arising) in a SRLY with respect to the current group, and 
that is not described in Sec.  1.1502-91A(d)(1); or
    (ii) Has a net unrealized built-in loss (determined under paragraph 
(c) of this section on the day it becomes a member of the current group 
by treating that day as a change date) that is not taken into account 
under Sec.  1.1502-91A(d)(2) in determining whether two or more 
corporations compose a loss subgroup.
    (2) Successor corporation as new loss member. A new loss member also 
includes any successor to a corporation that has a net operating loss 
carryover arising in a SRLY and that is treated as remaining in 
existence under Sec.  1.382-2(a)(1)(ii) following a transaction 
described in section 381(a).
    (3) Coordination in the case of a loss subgroup. For rules regarding 
the determination of whether there is an ownership change of a loss 
subgroup with respect to a net operating loss or a net unrealized built-
in loss described in Sec.  1.1502-91A(d) (relating to the definition of 
loss subgroup) and the computation of a subgroup section 382 limitation 
following such an ownership change, see Sec. Sec.  1.1502-92A and 
1.1502-93A.
    (4) End of separate tracking of certain losses. If Sec.  1.1502-
96A(a) (relating to the end of separate tracking of attributes) applies 
to a new loss member, then, while that member remains a member of the 
consolidated group, there is an ownership change with respect to its 
attributes described in Sec.  1.1502-96A(a)(2) only if the consolidated 
group is a loss group and has an ownership change under Sec.  1.1502-
92A(b)(1)(i) (or that member has an ownership change under Sec.  1.1502-
96A(b) (relating to ownership changes of subsidiaries)). If, however, 
the new loss member has had an ownership change before Sec.  1.1502-
96A(a) applies, see Sec.  1.1502-96A(c) for the continuing application 
of the section 382 limitation with respect to the member's pre-change 
losses.
    (5) Cross-reference. See section 382(a) and Sec.  1.1502-96A(c) for 
the continuing effect of an ownership change after a corporation becomes 
or ceases to be a member.
    (b) Application of section 382 to a new loss member--(1) In general. 
Section 382 and the regulations thereunder apply to a new loss member to 
determine, on a separate entity basis, whether and to what extent a 
section 382 limitation applies to limit the amount of consolidated 
taxable income that may be offset by the new loss member's pre-change 
separate attributes. For example, if an ownership change with respect to 
the new loss member occurs under section 382 and the regulations 
thereunder, the amount of consolidated taxable income for any post-
change year that may be offset by the new loss member's pre-change 
separate attributes shall not exceed the section 382 limitation as 
determined separately under section 382(b) with respect to that member 
for such year. If the post-change year includes the change date, section 
382(b)(3)(A) is applied so that the section 382 limitation of the new 
loss member does not apply to the portion of the taxable income for such 
year that is allocable to the period in such year on or before the 
change date. See generally Sec.  1.382-6 (relating to the allocation of 
income and loss).
    (2) Adjustment to value. The value of the new loss member is 
adjusted to the extent necessary to prevent any duplication of the value 
of the stock of a member. For example, the principles of Sec.  1.382-8T 
(relating to controlled groups of corporations) apply in determining the 
value of a new loss member.
    (3) Pre-change separate attribute defined. A pre-change separate 
attribute of a new loss member is--
    (i) Any net operating loss carryover of the new loss member 
described in paragraph (a)(1) of this section; and

[[Page 1122]]

    (ii) Any recognized built-in loss of the new loss member.
    (4) Examples. The following examples illustrate the principles of 
this paragraph (b).

    Example 1. Basic case. (a) A and P each own 50 percent of the L 
stock. On December 19, Year 6, P purchases 30 percent of the L stock 
from A for cash. L has net operating losses arising in Year 1 and Year 2 
that it carries over to Year 6 and Year 7. The following is a graphic 
illustration of these facts:
[GRAPHIC] [TIFF OMITTED] TR27JN96.015

    (b) L is a new loss member because it has net operating loss 
carryovers that arose in a SRLY with respect to the P group and L is not 
a member of a loss subgroup under Sec.  1.1502-91A(d). Under section 382 
and the regulations thereunder, L is a loss corporation on December 19, 
Year 6, that day is a testing date for L, and the testing period for L 
commences on December 20, Year 3.

[[Page 1123]]

    (c) P's purchase of L stock does not cause an ownership change of L 
on December 19, Year 6, with respect to the net operating loss 
carryovers from Year 1 and Year 2 under section 382 and Sec.  1.382-2T. 
The use of the loss carryovers, however, is subject to limitation under 
Sec.  1.1502-21(c) or 1.1502-21T(c) in effect prior to June 25, 1999, as 
contained in 26 CFR part 1 revised April 1, 1999, as applicable.
    Example 2. Multiple new loss members. (a) The facts are the same as 
in Example 1, and, on December 31, Year 6, L purchases all the stock of 
L1 from B for cash. L1 has a net operating loss of $40 arising in Year 3 
that it carries over to Year 7. The following is a graphic illustration 
of these facts:
[GRAPHIC] [TIFF OMITTED] TR27JN96.016


[[Page 1124]]


    (b) L1 is a new loss member because it has a net operating loss 
carryover from Year 3 that arose in a SRLY with respect to the P group 
and L1 is not a member of a loss subgroup under Sec.  1.1502-91A(d)(1).
    (c) L's purchase of all the stock of L1 causes an ownership change 
of L1 on December 31, Year 6, under section 382 and Sec.  1.382-2T. 
Accordingly, a section 382 limitation based on the value of the L1 stock 
immediately before the ownership change limits the amount of 
consolidated taxable income of the P group for any post-change year that 
may be offset by L1's loss from Year 3.
    (d) L1's ownership change in connection with its becoming a member 
of the P group is an ownership change described in Sec.  1.1502-96A(a). 
Thus, starting on January 1, Year 7, the P group no longer separately 
tracks owner shifts of the stock of L1 with respect to L1's loss from 
Year 3. Instead, the P group is a loss group because of such loss under 
Sec.  1.1502-91A(c).
    Example 3. Ownership changes of new loss members. (a) The facts are 
the same as in Example 2, and, on April 30, Year 7, C purchases all the 
stock of P for cash.
    (b) L is a new loss member on April 30, Year 7, because its Year 1 
and Year 2 losses arose in SRLYs with respect to the P group and it is 
not a member of a loss subgroup under Sec.  1.1502-91A(d)(1). The 
testing period for L commences on May 1, Year 4. C's purchase of all the 
P stock causes an ownership change of L on April 30, Year 7, under 
section 382 and Sec.  1.382-2T with respect to its Year 1 and Year 2 
losses. Accordingly, a section 382 limitation based on the value of the 
L stock immediately before the ownership change limits the amount of 
consolidated taxable income of the P group for any post-change year that 
may be offset by L's Year 1 and Year 2 losses. See also Sec.  1.1502-21T 
in effect prior to June 25, 1999, contained in 26 CFR Part 1, revised 
April 1, 1999, or Sec.  1.1502-21, as applicable.
    (c) The P group is a loss group on April 30, Year 7, because it is 
entitled to use L1's loss from Year 3, and such loss is no longer 
treated as a loss of a new loss member starting the day after L1's 
ownership change on December 31, Year 6. See Sec. Sec.  1.1502-96A(a) 
and 1.1502-91A(c)(2). C's purchase of all the P stock causes an 
ownership change of P, and therefore the P loss group, on April 30, Year 
7, with respect to L1's Year 3 loss. Accordingly, a consolidated section 
382 limitation based on the value of the P stock immediately before the 
ownership change limits the amount of consolidated taxable income of the 
P group for any post-change year that may be offset by L1's Year 3 loss.

    (c) Built-in gains and losses. As the context may require, the 
principles of Sec. Sec.  1.1502-91A(g) and (h) and 1.1502-93A(c) 
(relating to built-in gains and losses) apply to a new loss member on a 
separate entity basis. See Sec.  1.1502-91A(g)(3).
    (d) Information statements. The common parent of a consolidated 
group that has a new loss member subject to paragraph (b)(1) of this 
section during a consolidated return year must file the information 
statement required by Sec.  1.382-2T(a)(2)(ii) because of any owner 
shift, equity structure shift, or issuance or transfer of an option with 
respect to the new loss member. Instead of filing a separate statement 
for each new loss member the common parent may file a single statement 
described in Sec.  1.382-2T(a)(2)(ii) with respect to the stock 
ownership of the common parent (which is treated as a loss corporation). 
In addition to the information concerning stock ownership of the common 
parent, the single statement must identify each new loss member and 
state which new loss members, if any, have had ownership changes during 
the consolidated return year. The new loss member is, however, required 
to maintain the records necessary to determine if it has an ownership 
change. This paragraph (d) applies with respect to the attributes of a 
new loss member until an event occurs which ends separate tracking under 
Sec.  1.1502-96A(a). After that time, the information statement 
described in Sec.  1.1502-92A(e)(1) must be filed with respect to these 
attributes.

[T.D. 8678, 61 FR 33352, June 27, 1996, as amended by T.D. 8823, 64 FR 
36100, July 2, 1999. Redesignated and amended by T.D. 8824, 64 FR 36125, 
36126, 36128, July 2, 1999]



Sec.  1.1502-95A  Rules on ceasing to be a member of a consolidated
group generally applicable for corporations ceasing to be members 
before June 25, 1999.

    (a) In general--(1) Consolidated group. This section provides rules 
for applying section 382 on or after the day that a member ceases to be 
a member of a consolidated group (or loss subgroup). The rules concern 
how to determine whether an ownership change occurs with respect to 
losses of the member, and how a consolidated section 382 limitation (or 
subgroup section 382 limitation) is apportioned to the member. As the 
context requires, a reference in this section to a loss group, a member, 
or a

[[Page 1125]]

corporation also includes a reference to a loss subgroup, and a 
reference to a consolidated section 382 limitation also includes a 
reference to a subgroup section 382 limitation.
    (2) Election by common parent. Only the common parent (not the loss 
subgroup parent) may make the election under paragraph (c) of this 
section to apportion either a consolidated section 382 limitation or a 
subgroup section 382 limitation.
    (3) Coordination with Sec. Sec.  1.1502-91A through 1.1502-93A. For 
rules regarding the determination of whether there is an ownership 
change of a loss subgroup and the computation of a subgroup section 382 
limitation following such an ownership change, see Sec. Sec.  1.1502-91A 
through 1.1502-93A.
    (b) Separate application of section 382 when a member leaves a 
consolidated group--(1) In general. Except as provided in Sec. Sec.  
1.1502-91A through 1.1502-93A (relating to rules applicable to loss 
groups and loss subgroups), section 382 and the regulations thereunder 
apply to a corporation on a separate entity basis after it ceases to be 
a member of a consolidated group (or loss subgroup). Solely for purposes 
of determining whether a corporation has an ownership change--
    (i) Any portion of a consolidated net operating loss that is 
apportioned to the corporation under Sec.  1.1502-21(b) or 1.1502-21T(b) 
in effect prior to June 25, 1999, as contained in 26 CFR part 1 revised 
April 1, 1999, as applicable is treated as a net operating loss of the 
corporation beginning on the first day of the taxable year in which the 
loss arose;
    (ii) The testing period may include the period during which (or 
before which) the corporation was a member of the group (or loss 
subgroup); and
    (iii) Except to the extent provided in Sec.  1.1502-20(g) (relating 
to reattributed losses), the day it ceases to be a member of a 
consolidated group is treated as a testing date of the corporation 
within the meaning of Sec.  1.382-2(a)(4).
    (2) Effect of a prior ownership change of the group. If a loss group 
has had an ownership change under Sec.  1.1502-92A before a corporation 
ceases to be a member of a consolidated group (the former member)--
    (i) Any pre-change consolidated attribute that is subject to a 
consolidated section 382 limitation continues to be treated as a pre-
change loss with respect to the former member after the attribute is 
apportioned to the former member;
    (ii) The former member's section 382 limitation with respect to such 
attribute is zero except to the extent the common parent apportions 
under paragraph (c) of this section all or a part of the consolidated 
section 382 limitation to the former member;
    (iii) The testing period for determining a subsequent ownership 
change with respect to such attribute begins no earlier than the first 
day following the loss group's most recent change date; and
    (iv) As generally provided under section 382, an ownership change of 
the former member that occurs on or after the day it ceases to be a 
member of a loss group may result in an additional, lesser limitation 
amount with respect to such loss.
    (3) Application in the case of a loss subgroup. If two or more 
former members are included in the same loss subgroup immediately after 
they cease to be members of a consolidated group, the principles of 
paragraphs (b) and (c) of this section apply to the loss subgroup. 
Therefore, for example, an apportionment by the common parent under 
paragraph (c) of this section is made to the loss subgroup rather than 
separately to its members.
    (4) Examples. The following examples illustrate the principles of 
this paragraph (b).

    Example 1. Treatment of departing member as a separate corporation 
throughout the testing period. (a) A owns all the L stock. L owns all 
the stock of L1 and L2. The L group has a consolidated net operating 
loss arising in Year 1 that is carried over to Year 3. On January 12, 
Year 2, A sells 30 percent of the L stock to B. On February 7, Year 3, L 
sells 40 percent of the L2 stock to C, and L2 ceases to be a member of 
the group. A portion of the Year 1 consolidated net operating loss is 
apportioned to L2 under Sec.  1.1502-21(b) or 1.1502-21T(b) in effect 
prior to June 25, 1999, as contained in 26 CFR part 1 revised April 1, 
1999, as applicable and is carried to L2's first separate return year, 
which ends December 31, Year 3. The following is a graphic illustration 
of these facts:

[[Page 1126]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.017

    (b) Under paragraph (b)(1) of this section, L2 is a loss corporation 
on February 7, Year 3. Under paragraph (b)(1)(iii) of this section, 
February 7, Year 3, is a testing date. Under paragraph (b)(1)(ii) of 
this section, the testing period for L2 with respect to this testing 
date commences on January 1, Year 1, the first day of the taxable year 
in which the

[[Page 1127]]

portion of the consolidated net operating loss apportioned to L2 arose. 
Therefore, in determining whether L2 has an ownership change on February 
7, Year 3, B's purchase of 30 percent of the L stock and C's purchase of 
40 percent of the L2 stock are each owner shifts. L2 has an ownership 
change under section 382(g) and Sec.  1.382-2T because B and C have 
increased their ownership interests in L2 by 18 and 40 percentage 
points, respectively, during the testing period.
    Example 2. Effect of prior ownership change of loss group. (a) L 
owns all the L1 stock and L1 owns all the L2 stock. The L loss group had 
an ownership change under Sec.  1.1502-92A in Year 2 with respect to a 
consolidated net operating loss arising in Year 1 and carried over to 
Year 2 and Year 3. The consolidated section 382 limitation computed 
solely on the basis of the value of the stock of L is $100. On December 
31, Year 2, L1 sells 25 percent of the stock of L2 to B. L2 is 
apportioned a portion of the Year 1 consolidated net operating loss 
which it carries over to its first separate return year ending after 
December 31, Year 2. L2's separate section 382 limitation with respect 
to this loss is zero unless L elects to apportion all or a part of the 
consolidated section 382 limitation to L2. (See paragraph (c) of this 
section for rules regarding the apportionment of a consolidated section 
382 limitation.) L apportions $50 of the consolidated section 382 
limitation to L2.
    (b) On December 31, Year 3, L1 sells its remaining 75 percent stock 
interest in L2 to C, resulting in an ownership change of L2. L2's 
section 382 limitation computed on the change date with respect to the 
value of its stock is $30. Accordingly, L2's section 382 limitation for 
post-change years ending after December 31, Year 3, with respect to its 
pre-change losses, including the consolidated net operating losses 
apportioned to it from the L group, is $30, adjusted as required by 
section 382 and the regulations thereunder.

    (c) Apportionment of a consolidated section 382 limitation--(1) In 
general. The common parent may elect to apportion all or any part of a 
consolidated section 382 limitation to a former member (or loss 
subgroup). See paragraph (e) of this section for the time and manner of 
making the election to apportion.
    (2) Amount of apportionment. The common parent may apportion all or 
part of each element of the consolidated section 382 limitation 
determined under Sec.  1.1502-93A. For this purpose, the consolidated 
section 382 limitation consists of two elements--
    (i) The value element, which is the element of the limitation 
determined under section 382(b)(1) (relating to value multiplied by the 
long-term tax-exempt rate) without regard to such adjustments as those 
described in section 382(b)(2) (relating to the carryforward of unused 
section 382 limitation), section 382(b)(3)(B) (relating to the section 
382 limitation for the post-change year that includes the change date), 
section 382(h) (relating to built-in gains and section 338 gains), and 
section 382(m)(2) (relating to short taxable years); and
    (ii) The adjustment element, which is so much (if any) of the 
limitation for the taxable year during which the former member ceases to 
be a member of the consolidated group that is attributable to a 
carryover of unused limitation under section 382(b)(2) or to recognized 
built-in gains under 382(h).
    (3) Effect of apportionment on the consolidated section 382 
limitation. The value element of the consolidated section 382 limitation 
for any post-change year ending after the day that a former member (or 
loss subgroup) ceases to be a member(s) is reduced to the extent that it 
is apportioned under this paragraph (c). The consolidated section 382 
limitation for the post-change year in which the former member (or loss 
subgroup) ceases to be a member(s) is also reduced to the extent that 
the adjustment element for that year is apportioned under this paragraph 
(c).
    (4) Effect on corporations to which the consolidated section 382 
limitation is apportioned. The amount of the value element that is 
apportioned to a former member (or loss subgroup) is treated as the 
amount determined under section 382(b)(1) for purposes of determining 
the amount of that corporation's (or loss subgroup's) section 382 
limitation for any taxable year ending after the former member (or loss 
subgroup) ceases to be a member(s). Appropriate adjustments must be made 
to the limitation based on the value element so apportioned for a short 
taxable year, carryforward of unused limitation, or any other adjustment 
required under section 382. The adjustment element apportioned to a 
former member (or loss subgroup) is treated as an adjustment under 
section 382(b)(2) or section

[[Page 1128]]

382(h), as appropriate, for the first taxable year after the member (or 
members) ceases to be a member (or members).
    (5) Deemed apportionment when loss group terminates. If a loss group 
terminates, to the extent the consolidated section 382 limitation is not 
apportioned under paragraph (c)(1) of this section, the consolidated 
section 382 limitation is deemed to be apportioned to the loss subgroup 
that includes the common parent, or, if there is no loss subgroup that 
includes the common parent immediately after the loss group terminates, 
to the common parent. A loss group terminates on the first day of the 
first taxable year that is a separate return year with respect to each 
member of the former loss group.
    (6) Appropriate adjustments when former member leaves during the 
year. Appropriate adjustments are made to the consolidated section 382 
limitation for the consolidated return year during which the former 
member (or loss subgroup) ceases to be a member(s) to reflect the 
inclusion of the former member in the loss group for a portion of that 
year.
    (7) Examples. The following examples illustrate the principles of 
this paragraph (c).

    Example 1. Consequence of apportionment. (a) L owns all the L1 stock 
and L1 owns all the L2 stock. The L group has a $200 consolidated net 
operating loss arising in Year 1 that is carried over to Year 2. At the 
close of December 31, Year 1, the group has an ownership change under 
Sec.  1.1502-92A. The ownership change results in a consolidated section 
382 limitation of $10 based on the value of the stock of the group. On 
August 29, Year 2, L1 sells 30 percent of the stock of L2 to A. L2 is 
apportioned $90 of the group's $200 consolidated net operating loss 
under Sec.  1.1502-21(b) or 1.1502-21T(b) in effect prior to June 25, 
1999, as contained in 26 CFR part 1 revised April 1, 1999, as 
applicable. L, the common parent, elects to apportion $6 of the 
consolidated section 382 limitation to L2. The following is a graphic 
illustration of these facts:
[GRAPHIC] [TIFF OMITTED] TR27JN96.018

    (b) For its separate return years ending after August 29, Year 2 
(other than the taxable year ending December 31, Year 2), L2's section 
382 limitation with respect to the $90 of the group's net operating loss 
apportioned to it is $6, adjusted, as appropriate, for any short taxable 
year, unused section 382 limitation, or other adjustment. For its 
consolidated return years ending after August 29, Year 2, (other than 
the year ending December 31, Year 2) the L group's consolidated section 
382 limitation with respect to the remaining $110 of pre-change 
consolidated attribute is $4 ($10 minus the $6 value element apportioned 
to L2), adjusted, as appropriate, for any short taxable year, unused 
section 382 limitation, or other adjustment.

[[Page 1129]]

    (c) For the L group's consolidated return year ending December 31, 
Year 2, the value element of its consolidated section 382 limitation is 
increased by $4 (rounded to the nearest dollar), to account for the 
period during which L2 was a member of the L group ($6, the consolidated 
section 382 limitation apportioned to L2, times 241/365, the ratio of 
the number of days during Year 2 that L2 is a member of the group to the 
number of days in the group's consolidated return year). See paragraph 
(c)(6) of this section. Therefore, the value element of the consolidated 
section 382 limitation for Year 2 of the L group is $8 (rounded to the 
nearest dollar).
    (d) The section 382 limitation for L2's short taxable year ending 
December 31, Year 2, is $2 (rounded to the nearest dollar), which is the 
amount that bears the same relationship to $6, the value element of the 
consolidated section 382 limitation apportioned to L2, as the number of 
days during that short taxable year, 124 days, bears to 365. See Sec.  
1.382-4(c).
    Example 2. Consequence of no apportionment. The facts are the same 
as in Example 1, except that L does not elect to apportion any portion 
of the consolidated section 382 limitation to L2. For its separate 
return years ending after August 29, Year 2, L2's section 382 limitation 
with respect to the $90 of the group's pre-change consolidated attribute 
apportioned to L2 is zero under paragraph (b)(2)(ii) of this section. 
Thus, the $90 consolidated net operating loss apportioned to L2 cannot 
offset L2's taxable income in any of its separate return years ending 
after August 29, Year 2. For its consolidated return years ending after 
August 29, Year 2, the L group's consolidated section 382 limitation 
with respect to the remaining $110 of pre-change consolidated attribute 
is $10, adjusted, as appropriate, for any short taxable year, unused 
section 382 limitation, or other adjustment.
    Example 3. Apportionment of adjustment element. The facts are the 
same as in Example 1, except that L2 ceases to be a member of the L 
group on August 29, Year 3, and the L group has a $4 carryforward of an 
unused consolidated section 382 limitation (under section 382(b)(2)) to 
the 1993 consolidated return year.
    The carryover of unused limitation increases the consolidated 
section 382 limitation for the Year 3 consolidated return year from $10 
to $14. L may elect to apportion all or any portion of the $10 value 
element and all or any portion of the $4 adjustment element to L2.

    (d) Rules pertaining to ceasing to be a member of a loss subgroup--
(1) In general. A corporation ceases to be a member of a loss subgroup--
    (i) On the first day of the first taxable year for which it files a 
separate return; or
    (ii) The first day that it ceases to bear a relationship described 
in section 1504(a)(1) to the loss subgroup parent (treating for this 
purpose the loss subgroup parent as the common parent described in 
section 1504(a)(1)(A)).
    (2) Examples. The principles of this paragraph (d) are illustrated 
by the following examples.

    Example 1. Basic case. (a) P owns all the L stock, L owns all the L1 
stock and L1 owns all the L2 stock. The P group has a consolidated net 
operating loss arising in Year 1 that is carried over to Year 2. On 
December 11, Year 2, P sells all the stock of L to corporation M. Each 
of L, L1, and L2 is apportioned a portion of the Year 1 consolidated net 
operating loss, and thereafter each joins with M in filing consolidated 
returns. Under Sec.  1.1502-92A, the L loss subgroup has an ownership 
change on December 11, Year 2. The L loss subgroup has a subgroup 
section 382 limitation of $100. The following is a graphic illustration 
of these facts:

[[Page 1130]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.019

    (b) On May 22, Year 3, L1 sells 40 percent of the L2 stock to A. L2 
carries over a portion of the P group's net operating loss from Year 1 
to its separate return year ending December 31, Year 3. Under paragraph 
(d)(1) of this section, L2 ceases to be a member of the L loss subgroup 
on May 22, Year 3, which is both (1) the first day of the first taxable 
year

[[Page 1131]]

for which it files a separate return and (2) the day it ceases to bear a 
relationship described in section 1504(a)(1) to the loss subgroup 
parent, L. The net operating loss of L2 that is carried over from the P 
group is treated as a pre-change loss of L2 for its separate return 
years ending after May 22, Year 3. Under paragraphs (a)(2) and (b)(2) of 
this section, the separate section 382 limitation with respect to this 
loss is zero unless M elects to apportion all or a part of the subgroup 
section 382 limitation of the L loss subgroup to L2.
    Example 2. Formation of a new loss subgroup. The facts are the same 
as in Example 1, except that A purchases 40 percent of the L1 stock from 
L rather than purchasing L2 stock from L1. L1 and L2 file a consolidated 
return for their first taxable year ending after May 22, Year 3, and 
each of L1 and L2 carries over a part of the net operating loss of the P 
group that arose in Year 1. Under paragraph (d)(1) of this section, L1 
and L2 cease to be members of the L loss subgroup on May 22, Year 3. The 
net operating losses carried over from the P group are treated as pre-
change subgroup attributes of the loss subgroup composed of L1 and L2. 
The subgroup section 382 limitation with respect to those losses is zero 
unless M elects to apportion all or part of the subgroup section 382 
limitation of the L loss subgroup to the L1 loss subgroup. The following 
is a graphic illustration of these facts:

[[Page 1132]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.020

    Example 3. Ceasing to bear a section 1504(a)(1) relationship to a 
loss subgroup parent. (a) A owns all the stock of P, and P owns all the 
stock of L1 and L2. The P group has a consolidated net operating loss 
arising in Year 1 that is carried over to Year 3 and Year 4. Corporation 
M acquires all the stock of P on November 11, Year 3, and P, L1, and L2 
thereafter file consolidated returns with M. M's acquisition results in 
an ownership change of the P loss subgroup under Sec.  1.1502-
92A(b)(1)(ii). The following is a graphic illustration of these facts:

[[Page 1133]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.021

    (b) P distributes the L2 stock to M on October 7, Year 4. L2 ceases 
to be a member of the P loss subgroup on October 7, Year 4, the first 
day that it ceases to bear the relationship described in section 
1504(a)(1) to P, the P loss subgroup parent. See paragraph (d)(1)(ii) of 
this section. Thus, the section 382 limitation with respect to the pre-
change

[[Page 1134]]

subgroup attributes attributable to L2 is zero except to the extent M 
elects to apportion all or a part of the subgroup section 382 limitation 
of the P loss subgroup to L2.
    Example 4. Relationship through a successor. The facts are the same 
as in Example 3, except that, instead of P's distributing the stock of 
L2, L2 merges into L1 on October 7, Year 4. L1 (as successor to L2 in 
the merger within the meaning of Sec.  1.382-2T(f)(4)) continues to bear 
a relationship described in section 1504(a)(1) to P, the loss subgroup 
parent. Thus, L2 does not cease to be a member of the P loss subgroup as 
a result of the merger.

    (e) Filing the election to apportion--(1) Form of the election to 
apportion. An election under paragraph (c) of this section must be made 
by the common parent. The election must be made in the form of the 
following statement: ``THIS IS AN ELECTION UNDER Sec.  1.1502-95A OF THE 
INCOME TAX REGULATIONS TO APPORTION ALL OR PART OF THE [insert either 
CONSOLIDATED SECTION 382 LIMITATION or SUBGROUP SECTION 382 LIMITATION, 
as appropriate] TO [insert name and E.I.N. of the corporation (or the 
corporations that compose a new loss subgroup) to which allocation is 
made]. The declaration must also include the following information, as 
appropriate--
    (i) The date of the ownership change that resulted in the 
consolidated section 382 limitation (or subgroup section 382 
limitation);
    (ii) The amount of the consolidated section 382 limitation (or 
subgroup section 382 limitation) for the taxable year during which the 
former member (or new loss subgroup) ceases to be a member of the 
consolidated group (determined without regard to any apportionment under 
this section;
    (iii) The amount of the value element and adjustment element of the 
consolidated section 382 limitation (or subgroup section 382 limitation) 
that is apportioned to the former member (or new loss subgroup) pursuant 
to paragraph (c) of this section; and
    (iv) The name and E.I.N. of the common parent making the 
apportionment.
    (2) Signing of the election. The election statement must be signed 
by both the common parent and the former member (or, in the case of a 
loss subgroup, the common parent and the loss subgroup parent) by 
persons authorized to sign their respective income tax returns.
    (3) Filing of the election. The election statement must be filed by 
the common parent of the group that is apportioning the consolidated 
section 382 limitation (or the subgroup section 382 limitation) with its 
income tax return for the taxable year in which the former member (or 
new loss subgroup) ceases to be a member. The common parent must also 
deliver a copy of the statement to the former member (or the members of 
the new loss subgroup) on or before the day the group files its income 
tax return for the consolidated return year that the former member (or 
new loss subgroup) ceases to be a member. A copy of the statement must 
be attached to the first return of the former member (or the first 
return in which the members of a new loss subgroup join) that is filed 
after the close of the consolidated return year of the group of which 
the former member (or the members of a new loss subgroup) ceases to be a 
member.
    (4) Revocation of election. An election statement made under 
paragraph (c) of this section is revocable only with the consent of the 
Commissioner.

[T.D. 8678, 61 FR 33355, June 27, 1996, as amended by T.D. 8823, 64 FR 
36101, July 2, 1999. Redesignated and amended by T.D. 8824, 64 FR 36126, 
36128, July 2, 1999]



Sec.  1.1502-96A  Miscellaneous rules generally applicable for testing
dates before June 25, 1999.

    (a) End of separate tracking of losses--(1) Application. This 
paragraph (a) applies to a member (or a loss subgroup) with a net 
operating loss carryover that arose (or is treated under Sec.  1.1502-
21(c) or 1.1502-21T(c) in effect prior to June 25, 1999, as contained in 
26 CFR part 1 revised April 1, 1999, as applicable as arising) in a SRLY 
(or a net unrealized built-in gain or loss determined at the time that 
the member (or loss subgroup) becomes a member of the consolidated group 
if there is--
    (i) An ownership change of the member (or loss subgroup in 
connection with, or after, becoming a member of the group; or

[[Page 1135]]

    (ii) A period of 5 consecutive years following the day that the 
member (or loss subgroup) becomes a member of a group during which the 
member (or loss subgroup) has not had an ownership change.
    (2) Effect of end of separate tracking. If this paragraph (a) 
applies with respect to a member (or loss subgroup), then, starting on 
the day after the earlier of the change date (but not earlier than the 
day the member (or loss subgroup) becomes a member of the consolidated 
group) or the last day of the 5 consecutive year period described in 
paragraph (a)(1)(ii) of this section, the member's net operating loss 
carryover that arose (or is treated under Sec.  1.1502-21(c) or 1.1502-
21T(c) in effect prior to June 25, 1999, as contained in 26 CFR part 1 
revised April 1, 1999, as applicable as arising) in a SRLY, is treated 
as described in Sec.  1.1502-91A(c)(1)(i). Also, the member's separately 
computed net unrealized built-in gain or loss is included in the 
determination whether the group has a net unrealized built-in gain or 
loss. The preceding sentences also apply for purposes of determining 
whether there is an ownership change with respect to such attributes 
following such change date (or earlier day) or 5 consecutive year 
period. Thus, for example, starting the day after the change date or the 
end of the 5 consecutive year period--
    (i) The consolidated group which includes the new loss member or 
loss subgroup is no longer required to separately track owner shifts of 
the stock of the new loss member or loss subgroup parent to determine if 
an ownership change occurs with respect to the attributes of the new 
loss member or members included in the loss subgroup;
    (ii) The group includes the member's attributes in determining 
whether it is a loss group under Sec.  1.1502-91A(c);
    (iii) There is an ownership change with respect to such attributes 
only if the group is a loss group and has an ownership change; and
    (iv) If the group has an ownership change, such attributes are pre-
change consolidated attributes subject to the loss group's consolidated 
section 382 limitation.
    (3) Continuing effect of end of separate tracking. As the context 
may require, a current group determines which of its members are 
included in a loss subgroup on any testing date by taking into account 
the application of this section in the former group. See the example in 
Sec.  1.1502-91A(f)(2).
    (4) Special rule for testing period. For purposes of determining the 
beginning of the testing period for a loss group, the member's (or loss 
subgroup's) net operating loss carryovers (or net unrealized built-in 
gain or loss) described in paragraph (a)(2) of this section are 
considered to arise--
    (i) In a case described in paragraph (a)(1)(i) of this section, in a 
taxable year that begins not earlier than the later of the day following 
the change date or the day that the member becomes a member of the 
group; and
    (ii) in a case described in paragraph (a)(1)(ii) of this section, in 
a taxable year that begins 3 years before the end of the 5 consecutive 
year period.
    (5) Limits on effects of end of separate tracking. The rule 
contained in this paragraph (a) applies solely for purposes of 
Sec. Sec.  1.1502-91A through 1.1502-95A and this section (other than 
paragraph (b)(2)(ii)(B) of this section (relating to the definition of 
pre-change attributes of a subsidiary)) and Sec.  1.1502-98A, and not 
for purposes of other provisions of the consolidated return regulations, 
including, for example, Sec. Sec.  1.1502-15 and 1.1502-21 (or Sec.  
1.1502-15T in effect prior to June 25, 1999, as contained in 26 CFR part 
1 revised April 1, 1999, and 1.1502-21T in effect prior to June 25, 
1999, as contained in 26 CFR part 1 revised April 1, 1999, as 
applicable) (relating to the consolidated net operating loss deduction). 
See also paragraph (c) of this section for the continuing effect of an 
ownership change with respect to pre-change attributes.
    (b) Ownership change of subsidiary--(1) Ownership change of a 
subsidiary because of options or plan or arrangement. Notwithstanding 
Sec.  1.1502-92A, a subsidiary may have an ownership change for purposes 
of section 382 with respect to its attributes which a group or loss 
subgroup includes in making a determination under Sec.  1.1502-91A(c)(1) 
(relating to the definition of loss group) or Sec.  1.1502-91A(d) 
(relating to the definition of loss subgroup). The subsidiary has such 
an

[[Page 1136]]

ownership change if it has an ownership change under the principles of 
Sec.  1.1502-95A(b) and section 382 and the regulations thereunder 
(determined on a separate entity basis by treating the subsidiary as not 
being a member of a consolidated group) in the event of--
    (i) The deemed exercise under Sec.  1.382-4(d) of an option or 
options (other than an option with respect to stock of the common 
parent) held by a person (or persons acting pursuant to a plan or 
arrangement) to acquire more than 20 percent of the stock of the 
subsidiary; or
    (ii) An increase by 1 or more 5-percent shareholders, acting 
pursuant to a plan or arrangement to avoid an ownership change of a 
subsidiary, in their percentage ownership interest in the subsidiary by 
more than 50 percentage points during the testing period of the 
subsidiary through the acquisition (or deemed acquisition pursuant to 
Sec.  1.382-4(d)) of ownership interests in the subsidiary and in 
higher-tier members with respect to the subsidiary.
    (2) Effect of the ownership change--(i) In general. If a subsidiary 
has an ownership change under paragraph (b)(1) of this section, the 
amount of consolidated taxable income for any post-change year that may 
be offset by the pre-change losses of the subsidiary shall not exceed 
the section 382 limitation for the subsidiary. For purposes of this 
limitation, the value of the subsidiary is determined solely by 
reference to the value of the subsidiary's stock.
    (ii) Pre-change losses. The pre-change losses of a subsidiary are--
    (A) Its allocable part of any consolidated net operating loss which 
is attributable to it under Sec.  1.1502-21(b) or 1.1502-21T(b) in 
effect prior to June 25, 1999, as contained in 26 CFR part 1 revised 
April 1, 1999, as applicable (determined on the last day of the 
consolidated return year that includes the change date) that is not 
carried back and absorbed in a taxable year prior to the year including 
the change date;
    (B) Its net operating loss carryovers that arose (or are treated 
under Sec.  1.1502-21(c) or 1.1502-21T(c) in effect prior to June 25, 
1999, as contained in 26 CFR part 1 revised April 1, 1999, as applicable 
as having arisen) in a SRLY; and
    (C) Its recognized built-in loss with respect to its separately 
computed net unrealized built-in loss, if any, determined on the change 
date.
    (3) Coordination with Sec. Sec.  1.1502-91A, 1.1502-92A, and 1.1502-
94A. If an increase in percentage ownership interest causes an ownership 
change with respect to an attribute under this paragraph (b) and under 
Sec.  1.1502-92A on the same day, the ownership change is considered to 
occur only under Sec.  1.1502-92A and not under this paragraph (b). See 
Sec.  1.1502-94A for anti-duplication rules relating to value.
    (4) Example. The following example illustrates paragraph (b)(1)(ii) 
of this section.

    Example. Plan to avoid an ownership change of a subsidiary. (a) L 
owns all the stock of L1, L1 owns all the stock of L2, L2 owns all the 
stock of L3, and L3 owns all the stock of L4. The L group has a 
consolidated net operating loss arising in Year 1 that is carried over 
to Year 2. L has assets other than its L1 stock with a value of $900. 
L1, L2, and L3 own no assets other than their L2, L3, and L4 stock. L4 
has assets with a value of $100. During Year 2, A, B, C, and D, acting 
pursuant to a plan to avoid an ownership change of L4, acquire the 
following ownership interests in the members of the L loss group: (A) on 
September 11, Year 2, A acquires 20 percent of the L1 stock from L and B 
acquires 20 percent of the L2 stock from L1; and (B) on September 20, 
Year 2, C acquires 20 percent of the stock of L3 from L2 and D acquires 
20 percent of the stock of L4 from L3. The following is a graphic 
illustration of these facts:

[[Page 1137]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.022

    (b) The acquisitions by A, B, C, and D pursuant to the plan have 
increased their respective percentage ownership interests in L4 by 
approximately 10, 13, 16, and 20 percentage points, for a total of 
approximately 59 percentage points during the testing period. This more 
than 50 percentage point increase in the percentage ownership interest 
in L4 causes an ownership change of L4 under paragraph (b)(2) of this 
section.

    (c) Continuing effect of an ownership change. A loss corporation (or 
loss subgroup) that is subject to a limitation under section 382 with 
respect to its

[[Page 1138]]

pre-change losses continues to be subject to the limitation regardless 
of whether it becomes a member or ceases to be a member of a 
consolidated group. See Sec.  1.382-5(d) (relating to successive 
ownership changes and absorption of a section 382 limitation).

[T.D. 8678, 61 FR 33362, June 27, 1996; T.D. 8823, 64 FR 36101, July 2, 
1999. Redesignated and amended at T.D. 8824, 64 FR 36126, 36128, July 2, 
1999]



Sec.  1.1502-97A  Special rules under section 382 for members under 
the jurisdiction of a court in a title 11 or similar case. [Reserved]

[T.D. 8678, 61 FR 33364, June 27, 1996. Redesignated by T.D. 8824, 64 FR 
36128, July 2, 1999]



Sec.  1.1502-98A  Coordination with section 383 generally applicable 
for testing dates (or members joining or leaving a group) before 
June 25, 1999.

    The rules contained in Sec. Sec.  1.1502-91A through 1.1502-96A also 
apply for purposes of section 383, with appropriate adjustments to 
reflect that section 383 applies to credits and net capital losses. 
Similarly, in the case of net capital losses, general business credits, 
and excess foreign taxes that are pre-change attributes, Sec.  1.383-1 
applies the principles of Sec. Sec.  1.1502-91A through 1.1502-96A. For 
example, if a loss group has an ownership change under Sec.  1.1502-92A 
and has a carryover of unused general business credits from a pre-change 
consolidated return year to a post-change consolidated return year, the 
amount of the group's regular tax liability for the post-change year 
that can be offset by the carryover cannot exceed the consolidated 
section 383 credit limitation for that post-change year, determined by 
applying the principles of Sec. Sec.  1.383-1(c)(6) and 1.1502-93A 
(relating to the computation of the consolidated section 382 
limitation).

[T.D. 8678, 61 FR 33364, June 27, 1996. Redesignated and amended by T.D. 
8824, 64 FR 36126, 36128, July 2, 1999]



Sec.  1.1502-99A  Effective dates.

    (a) Effective date--(1) In general. Except as provided in Sec.  
1.1502-99(b), Sec. Sec.  1.1502-91A through 1.1502-96A and 1.1502-98A 
apply to any testing date on or after January 1, 1997, and before June 
25, 1999. Sections 1.1502-94A through 1.1502-96A also apply on any date 
on or after January 1, 1997, and before June 25, 1999, on which a 
corporation becomes a member of a group or on which a corporation ceases 
to be a member of a loss group (or a loss subgroup).
    (2) Anti-duplication rules for recognized built-in gain. Section 
1.1502-93(c)(2) (relating to recognized built-in gain of a loss group or 
loss subgroup) applies to taxable years for which the due date for 
income tax returns (without extensions) is after June 25, 1999,
    (b) Testing period may include a period beginning before January 1, 
1997. A testing period for purposes of Sec. Sec.  1.1502-91A through 
1.1502-96A and 1.1502-98A may include a period beginning before January 
1, 1997. Thus, for example, in applying Sec.  1.1502-92A(b)(1)(i) 
(relating to the determination of an ownership change of a loss group), 
the determination of the lowest percentage ownership interest of any 5-
percent shareholder of the common parent during a testing period ending 
on a testing date occurring on or after January 1, 1997, takes into 
account the period beginning before January 1, 1997, except to the 
extent that the period is more than 3 years before the testing date or 
is otherwise before the beginning of the testing period. See Sec.  
1.1502-92A(b)(1).
    (c) Transition rules--(1) Methods permitted--(i) In general. For the 
period ending before January 1, 1997, a consolidated group is permitted 
to use any method described in paragraph (c)(2) of this section which is 
consistently applied to determine if an ownership change occurred with 
respect to a consolidated net operating loss, a net operating loss 
carryover (including net operating loss carryovers arising in SRLYs), or 
a net unrealized built-in loss. If an ownership change occurred during 
that period, the group is also permitted to use any method described in 
paragraph (c)(2) of this section which is consistently applied to 
compute the amount of the section 382 limitation that applies to limit 
the use of taxable income in any post-change year ending before, on, or 
after January 1, 1997. The preceding sentence does not preclude the 
imposition of an additional, lesser limitation due to a subsequent 
ownership change nor, except as

[[Page 1139]]

provided in paragraph (c)(1)(iii) of this section, does it permit the 
beginning of a new testing period for the loss group.
    (ii) Adjustments to offset excess limitation. If an ownership change 
occurred during the period ending before January 1, 1997, and a method 
described in paragraph (c)(2) of this section was not used for a post-
change year, the members (or group) must reduce the section 382 
limitation for post-change years for which an income tax return is filed 
after January 1, 1997, to offset, as quickly as possible, the effects of 
any section 382 limitation that members took into account in excess of 
the amount that would have been allowable under Sec. Sec.  1.1502-91A 
through 1.1502-96A and 1.1502-98A.
    (iii) Coordination with effective date. Notwithstanding that a group 
may have used a method described in paragraph (c)(2)(ii) or (iii) of 
this section for the period before January 1, 1997, Sec. Sec.  1.1502-
91A through 1.1502-96A and 1.1502-98A apply to any testing date 
occurring on or after January 1, 1997, for purposes of determining 
whether there is an ownership change with respect to any losses and, if 
so, the collateral consequences. Any ownership change of a member other 
than the common parent pursuant to a method described in paragraph 
(c)(2)(ii) or (iii) of this section does not cause a new testing period 
of the loss group to begin for purposes of applying Sec.  1.1502-92A on 
or after January 1, 1997.
    (2) Permitted methods. The methods described in this paragraph 
(c)(2) are:
    (i) A method that does not materially differ from the rules in 
Sec. Sec.  1.1502-91A through 1.1502-96A and 1.1502-98A (other than 
those in Sec.  1.1502-95A(c) and (b)(2)(ii) (relating to the 
apportionment of a section 382 limitation) as they would apply to a 
corporation that ceases to be a member of the group before January 1, 
1997). As the context requires, the method must treat references to 
rules in current regulations as references to rules in regulations 
generally effective for taxable years before January 1, 1997. Thus, for 
example, the taxpayer must treat a reference to Sec.  1.382-4(d) 
(relating to options) as a reference to Sec.  1.382-2T(h)(4) for any 
testing date to which Sec.  1.382-2T(h)(4) applies. Similarly, a 
reference to Sec.  1.1502-21(c) or 1.1502-21T(c) in effect prior to June 
25, 1999, as contained in 26 CFR part 1 revised April 1, 1999, as 
applicable may be a reference to Sec.  1.1502-21A(c), as appropriate. 
Furthermore, the method must treat all corporations that were affiliated 
on January 1, 1987, and continuously thereafter as having met the 5 
consecutive year requirement of Sec.  1.1502-91A(d)(2)(i) on any day 
before January 1, 1992, on which the determination of net unrealized 
built-in gain or loss of a loss subgroup is made;
    (ii) A reasonable application of the rules in section 382 and the 
regulations thereunder applied to each member on a separate entity 
basis, treating each member's allocable part of a consolidated net 
operating loss which is attributable to it under Sec.  1.1502-21(b) or 
1.1502-21T(b) in effect prior to June 25, 1999, as contained in 26 CFR 
part 1 revised April 1, 1999, as applicable as a net operating loss of 
that member and applying rules similar to Sec.  1.382-8 to avoid 
duplication of value in computing the section 382 limitation for the 
member (see Sec.  1.382-8(h) (relating to the effective date and 
transition rules regarding controlled groups)); or
    (iii) A method approved by the Commissioner upon application by the 
common parent.
    (d) Amended returns. A group may file an amended return in 
connection with an ownership change occurring before January 1, 1997, to 
modify the amount of a section 382 limitation with respect to a 
consolidated net operating loss, a net operating loss carryover 
(including net operating loss carryovers arising in SRLYs), or a 
recognized built-in loss (or gain) only if it files amended returns:
    (1) For the earliest taxable year ending after December 31, 1986, in 
which it had an ownership change, if any, under Sec.  1.1502-92A;
    (2) For all subsequent taxable years for which returns have already 
been filed as of the date of the amended return;
    (3) The modification with respect to all members for all taxable 
years ending in 1987 and thereafter complies with Sec. Sec.  1.1502-91A 
through 1.1502-96A and 1.1502-98A; and

[[Page 1140]]

    (4) The amended return(s) permitted by the applicable statute of 
limitations is/are filed before March 26, 1997.
    (e) Section 383. This section also applies for the purposes of 
section 383, with appropriate adjustments to reflect that section 383 
applies to credits and net capital losses.

[T.D. 8678, 61 FR 33364, June 27, 1996, as amended by T.D. 8823, July 2, 
1999. Redesignated and amended by T.D. 8824, 64 FR 36126, July 2, 1999]

  Dual Consolidated Losses Incurred in Taxable Years Beginning Before 
                             October 1, 1992

[[Page 1141]]



                              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 1143]]



                    Table of CFR Titles and Chapters




                      (Revised as of April 1, 2023)

                      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 1144]]

     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)
        LX  Federal Communications Commission (Parts 6000--6099)

                        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)

[[Page 1145]]

      XXVI  Department of Defense (Parts 3600--3699)
    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)

[[Page 1146]]

    LXXIII  Department of Agriculture (Parts 8300--8399)
     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 (Parts 10100--10199)
       CII  U.S. Office of Special Counsel (Parts 10200--10299)
       CIV  Office of the Intellectual Property Enforcement 
                Coordinator (Part 10400--10499)

                      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)

[[Page 1147]]

      VIII  Agricultural Marketing Service (Federal Grain 
                Inspection Service, Fair Trade Practices Program), 
                Department of Agriculture (Parts 800--899)
        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]

[[Page 1148]]

      XLII  Rural Business-Cooperative Service and Rural Utilities 
                Service, Department of Agriculture (Parts 4200--
                4299)
         L  Rural Business-Cooperative Service, and Rural 
                Utilities Service, Department of Agriculture 
                (Parts 5000--5099)

                    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 (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  [Reserved]
        VI  Farm Credit Administration (Parts 600--699)
       VII  National Credit Union Administration (Parts 700--799)
      VIII  Federal Financing Bank (Parts 800--899)
        IX  (Parts 900--999)[Reserved]

[[Page 1149]]

         X  Consumer Financial Protection Bureau (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)
       XIV  Farm Credit System Insurance Corporation (Parts 1400--
                1499)
        XV  Department of the Treasury (Parts 1500--1599)
       XVI  Office of Financial Research, Department of the 
                Treasury (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)

[[Page 1150]]

      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)
      XIII  East-West Foreign Trade Board (Parts 1300--1399)
       XIV  Minority Business Development Agency (Parts 1400--
                1499)
        XV  Office of the Under-Secretary for Economic Affairs, 
                Department of Commerce (Parts 1500--1599)
            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]

[[Page 1151]]

                     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)
        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  United States Agency for Global Media (Parts 500--599)
       VII  U.S. International Development Finance 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)

[[Page 1152]]

                          Title 23--Highways

         I  Federal Highway Administration, Department of 
                Transportation (Parts 1--999)
        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)
         X  Office of Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Interstate Land Sales 
                Registration Program) (Parts 1700--1799) 
                [Reserved]
       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]

[[Page 1153]]

        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)

                           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--799)

                   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)

[[Page 1154]]

        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)
        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

[[Page 1155]]

         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)
      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  Great Lakes St. Lawrence Seaway Development 
                Corporation, Department of Transportation (Parts 
                400--499)

[[Page 1156]]

                          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)
       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  [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)

[[Page 1157]]

       III  Copyright Royalty Board, Library of Congress (Parts 
                300--399)
        IV  National Institute of Standards and Technology, 
                Department of Commerce (Parts 400--599)

           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)
        IX  Federal Permitting Improvement Steering Council (Part 
                1900)

          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)

[[Page 1158]]

       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--Federal Acquisition Supply Chain Security
       201  Federal Acquisition Security Council (Parts 201-1--
                201-99).
            Subtitle E [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)
   II--III  [Reserved]
        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)

[[Page 1159]]

                       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)
       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)

[[Page 1160]]

                      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)
        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)

[[Page 1161]]

        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]
        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)

[[Page 1162]]

        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)
        VI  Fishery Conservation and Management, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 600--699)

[[Page 1163]]





           Alphabetical List of Agencies Appearing in the CFR




                      (Revised as of April 1, 2023)

                                                  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 1164]]

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
Benefits Review Board                             20, VII
Bilingual Education and Minority Languages        34, V
     Affairs, Office of
Blind or Severely Disabled, Committee for         41, 51
     Purchase from People Who Are
  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
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 Affairs, Office of the Under-          15, XV
       Secretary for
  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
Council of the Inspectors General on Integrity    5, XCVIII
     and Efficiency
Court Services and Offender Supervision Agency    5, LXX; 28, VIII
     for the District of Columbia
Customs and Border Protection                     19, 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
  Defense Acquisition Regulations System          48, 2
  Defense Intelligence Agency                     32, I

[[Page 1165]]

  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 Affairs, Office of the Under-Secretary   15, XV
     for
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
  Trade Representative, Office of the United      15, XX
     States
[[Page 1166]]

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 Acquisition Security Council              41, 201
Federal Aviation Administration                   14, I
  Commercial Space Transportation                 14, III
Federal Claims Collection Standards               31, IX
Federal Communications Commission                 2, LX; 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 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 Permitting Improvement Steering Council   40, IX
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 1167]]

  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
Great Lakes St. Lawrence Seaway Development       33, IV
     Corporation
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

[[Page 1168]]

Indian Health Service                             25, V
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
Intellectual Property Enforcement Coordinator,    5, CIV
     Office of
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 Environmental Enforcement, Bureau    30, II
       of
  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
  Benefits Review Board                           20, VII
  Employee Benefits Security Administration       29, XXV
  Employees' Compensation Appeals Board           20, IV
  Employment and Training Administration          20, V
  Federal Acquisition Regulation                  48, 29

[[Page 1169]]

  Federal Contract Compliance Programs, Office    41, 60
       of
  Federal Procurement Regulations System          41, 50
  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, VI
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; 47, II

[[Page 1170]]

National Technical Information Service            15, XI
National Telecommunications and Information       15, XXIII; 47, III, IV, V
     Administration
National Transportation Safety Board              49, VIII
Natural Resource Revenue, Office of               30, XII
Natural Resources Conservation Service            7, VI
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
  Federal Acquisition Regulation                  48, 17
  Federal Employees Group Life Insurance Federal  48, 21
       Acquisition Regulation
  Federal Employees Health Benefits Acquisition   48, 16
       Regulation
  Human Resources Management and Labor Relations  5, XCVII
       Systems, Department of Homeland Security
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 and Indian Housing, Office of Assistant    24, IX
     Secretary for
Public Contracts, Department of Labor             41, 50
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, L
Rural Development Administration                  7, XLII
Rural Housing Service                             7, XVIII, XXXV, L
Rural Utilities Service                           7, XVII, XVIII, XLII, L
Safety and Environmental Enforcement, Bureau of   30, II
Science and Technology Policy, Office of          32, XXIV; 47, II
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
Special Counsel, Office of                        5, VIII
Special Education and Rehabilitative Services,    34, III
     Office of
State, Department of                              2, VI; 22, I; 28, XI

[[Page 1171]]

  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
  Great Lakes St. Lawrence Seaway Development     33, IV
       Corporation
  Maritime Administration                         46, II
  National Highway Traffic Safety Administration  23, II, III; 47, IV; 49, V
  Pipeline and Hazardous Materials Safety         49, I
       Administration
  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 Agency for Global Media             22, V
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
U.S. Office of Special Counsel                    5, CII
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 1173]]







                      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



    Authority: 26 U.S.C. 7805.



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

[[Page 1174]]

 
1.50B-5....................................................    1545-0895
1.51-1.....................................................    1545-0219
                                                               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

[[Page 1175]]

 
1.168-5....................................................    1545-0172
1.169-4....................................................    1545-0172
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

[[Page 1176]]

 
                                                               1545-2183
1.367(b)-1.................................................    1545-1271
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

[[Page 1177]]

 
1.455-2....................................................    1545-0152
1.455-6....................................................    1545-0123
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
1.529A-2...................................................    1545-2293
1.529A-5...................................................    1545-2262
1.529A-6...................................................    1545-2262
1.529A-7...................................................    1545-2262
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

[[Page 1178]]

 
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
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

[[Page 1179]]

 
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
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
1.927(a)-1T................................................    1545-0935
1.927(d)-2T................................................    1545-0935
1.931-1....................................................    1545-0074
                                                               1545-0123
1.934-1....................................................    1545-0782
1.935-1....................................................    1545-0074
                                                               1545-0087
                                                               1545-0803
1.936-1....................................................    1545-0215
                                                               1545-0217
1.936-4....................................................    1545-0215
1.936-5....................................................    1545-0704
1.936-6....................................................    1545-0215
1.936-7....................................................    1545-0215
1.936-10(c)................................................    1545-1138
1.937-1....................................................    1545-1930
1.952-2....................................................    1545-0126
1.953-2....................................................    1545-0126
1.954-1....................................................    1545-1068
1.954-2....................................................    1545-1068
1.955-2....................................................    1545-0123
1.955-3....................................................    1545-0123
1.955A-2...................................................    1545-0755
1.955A-3...................................................    1545-0755
1.956-1....................................................    1545-0704
1.956-2....................................................    1545-0704
1.959-1....................................................    1545-0704
1.959-2....................................................    1545-0704
1.960-1....................................................    1545-0122
1.962-2....................................................    1545-0704
1.962-3....................................................    1545-0704
1.964-1....................................................    1545-0126
                                                               1545-0704
                                                               1545-1072
                                                               1545-2104
1.964-3....................................................    1545-0126
1.970-2....................................................    1545-0126
1.985-2....................................................    1545-1051
                                                               1545-1131
1.985-3....................................................    1545-1051
1.987-1....................................................    1545-2265
1.987-3....................................................    1545-2265
1.987-9....................................................    1545-2265
1.987-10...................................................    1545-2265
1.988-0....................................................    1545-1131
1.988-1....................................................    1545-1131
1.988-2....................................................    1545-1131
1.988-3....................................................    1545-1131
1.988-4....................................................    1545-1131
1.988-5....................................................    1545-1131
1.988-6....................................................    1545-1831
1.992-1....................................................    1545-0190
                                                               1545-0938
1.992-2....................................................    1545-0190
                                                               1545-0884
                                                               1545-0938
1.992-3....................................................    1545-0190
                                                               1545-0938
1.992-4....................................................    1545-0190
                                                               1545-0938
1.993-3....................................................    1545-0938
1.993-4....................................................    1545-0938
1.994-1....................................................    1545-0938
1.995-5....................................................    1545-0938
1.1001-1...................................................    1545-1902
1.1012-1...................................................    1545-0074
                                                               1545-1139
1.1014-4...................................................    1545-0184
1.1015-1...................................................    1545-0020
1.1017-1...................................................    1545-1539
1.1031(d)-1T...............................................    1545-1021
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1.1042-1T..................................................    1545-0916
1.1044(a)-1................................................    1545-1421
1.1045-1...................................................    1545-1893
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1.1092(b)-1T...............................................    1545-0644
1.1092(b)-2T...............................................    1545-0644
1.1092(b)-3T...............................................    1545-0644
1.1092(b)-4T...............................................    1545-0644
1.1092(b)-5T...............................................    1545-0644
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1.1239-1...................................................    1545-0091
1.1242-1...................................................    1545-0184
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1.1244(e)-1................................................    1545-0123
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1.1245-1...................................................    1545-0184
1.1245-2...................................................    1545-0184
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1.1245-6...................................................    1545-0184
1.1248-7...................................................    1545-0074
1.1248(f)-2................................................    1545-2183
1.1248(f)-3T...............................................    1545-2183
1.1250-1...................................................    1545-0184
1.1250-2...................................................    1545-0184
1.1250-3...................................................    1545-0184
1.1250-4...................................................    1545-0184
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1.1252-1...................................................    1545-0184
1.1252-2...................................................    1545-0184
1.1254-1(c)(3).............................................    1545-1352
1.1254-4...................................................    1545-1493
1.1254-5(d)(2).............................................    1545-1352
1.1258-1...................................................    1545-1452
1.1272-3...................................................    1545-1353
1.1273-2(f)(9).............................................    1545-1353
1.1273-2(h)(2).............................................    1545-1353
1.1274-3(d)................................................    1545-1353
1.1274-5(b)................................................    1545-1353
1.1274A-1(c)...............................................    1545-1353
1.1275-2...................................................    1545-1450
1.1275-3...................................................    1545-0887
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1.1275-6...................................................    1545-1450
1.1287-1...................................................    1545-0786
1.1291-9...................................................    1545-1507
1.1291-10..................................................    1545-1304
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1.1294-1T..................................................    1545-1002
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1.1295-1...................................................    1545-1555
1.1295-3...................................................    1545-1555
1.1298-3...................................................    1545-1507
1.1301-1...................................................    1545-1662
1.1311(a)-1................................................    1545-0074
1.1361-1...................................................    1545-0731
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1.1362-5...................................................    1545-1308
1.1362-6...................................................    1545-1308
1.1362-7...................................................    1545-1308
1.1362-8...................................................    1545-1590
1.1363-2...................................................    1545-1906
1.1366-1...................................................    1545-1613
1.1367-1(f)................................................    1545-1139
1.1368-1(f)(2).............................................    1545-1139
1.1368-1(f)(3).............................................    1545-1139
1.1368-1(f)(4).............................................    1545-1139
1.1368-1(g)(2).............................................    1545-1139
1.1374-1A..................................................    1545-0130
1.1377-1...................................................    1545-1462
1.1378-1...................................................    1545-1748
1.1383-1...................................................    1545-0074
1.1385-1...................................................    1545-0074
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1.1397E-1..................................................    1545-1908
1.1398-1...................................................    1545-1375
1.1398-2...................................................    1545-1375
1.1402(a)-2................................................    1545-0074
1.1402(a)-5................................................    1545-0074
1.1402(a)-11...............................................    1545-0074
1.1402(a)-15...............................................    1545-0074
1.1402(a)-16...............................................    1545-0074
1.1402(b)-1................................................    1545-0171
1.1402(c)-2................................................    1545-0074
1.1402(e)(1)-1.............................................    1545-0074
1.1402(e)(2)-1.............................................    1545-0074
1.1402(e)-1A...............................................    1545-0168
1.1402(e)-2A...............................................    1545-0168
1.1402(e)-3A...............................................    1545-0168
1.1402(e)-4A...............................................    1545-0168
1.1402(e)-5A...............................................    1545-0168
1.1402(f)-1................................................    1545-0074
1.1402(h)-1................................................    1545-0064
1.1411-10(g)...............................................    1545-2227
1.1441-1...................................................    1545-1484
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1.1502-9A..................................................    1545-0121
1.1502-13..................................................    1545-0123
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1.1502-16..................................................    1545-0123
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1.1502-20..................................................    1545-1774
1.1502-21..................................................    1545-1237
1.1502.21T.................................................    1545-0123
1.1502-31..................................................    1545-1344
1.1502-32..................................................    1545-1344
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1.1502-33..................................................    1545-1344
1.1502-35..................................................    1545-1828
1.1502-36..................................................    1545-2096
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1.1502-75..................................................    1545-0025
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1.1502-76..................................................    1545-1344
1.1502-76T.................................................    1545-2019
1.1502-77..................................................    1545-1699
1.1502-77A.................................................    1545-0123
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1.1502-77B.................................................    1545-1699
1.1502-78..................................................    1545-0582
1.1502-95..................................................    1545-1218
1.1502-95A.................................................    1545-1218
1.1502-96..................................................    1545-1218
1.1503-2...................................................    1545-1583
1.1503-2A..................................................    1545-1083
1.1503(d)-1................................................    1545-1946
1.1503(d)-3................................................    1545-1946
1.1503(d)-4................................................    1545-1946
1.1503(d)-5................................................    1545-1946
1.1503(d)-6................................................    1545-1946
1.1552-1...................................................    1545-0123
1.1561-3...................................................    1545-0123
1.1563-1...................................................    1545-0123
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1.1563-3...................................................    1545-0123
1.5000A-3..................................................    1545-0074
1.5000A-4..................................................    1545-0074
1.5000C-2..................................................    1545-0096
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1.5000C-3..................................................    1545-0096
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1.5000C-4..................................................    1545-1223
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1.6001-1...................................................    1545-0058
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1.6011-2...................................................    1545-0055
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1.6011-3...................................................    1545-0238
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1.6011-4...................................................    1545-1685
1.6012-1...................................................    1545-0067
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1.6012-2...................................................    1545-0047
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1.6012-3...................................................    1545-0047
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1.6015-5...................................................    1545-1719
1.6015(a)-1................................................    1545-0087
1.6015(b)-1................................................    1545-0087
1.6015(d)-1................................................    1545-0087
1.6015(e)-1................................................    1545-0087
1.6015(f)-1................................................    1545-0087
1.6015(g)-1................................................    1545-0087
1.6015(h)-1................................................    1545-0087
1.6015(i)-1................................................    1545-0087
1.6017-1...................................................    1545-0074
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1.6031(a)-1................................................    1545-1583
1.6031(b)-1T...............................................    1545-0099
1.6031(c)-1T...............................................    1545-0099
1.6032-1...................................................    1545-0099
1.6033-2...................................................    1545-0047
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1.6033-3...................................................    1545-0052
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1.6035-2...................................................    1545-0704
1.6037-1...................................................    1545-0130
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1.6038-2...................................................    1545-1617
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1.6038-3...................................................    1545-1617
1.6038A-2..................................................    1545-1191
1.6038A-3..................................................    1545-1191
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1.6038B-1..................................................    1545-1617
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1.6038B-1T.................................................    1545-0026
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1.6038B-2..................................................    1545-1617
1.6039-2...................................................    1545-0820
1.6041-1...................................................    1545-0008
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1.6041-2...................................................    1545-0008
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1.6041-3...................................................    1545-1148
1.6041-4...................................................    1545-0115
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1.6041-5...................................................    1545-0295
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1.6041-6...................................................    1545-0008
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1.6041-7...................................................    1545-0112
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1.6042-2...................................................    1545-0110
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1.6042-3...................................................    1545-0295
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1.6043-3...................................................    1545-0047
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1.6044-4...................................................    1545-0118
1.6044-5...................................................    1545-0118
1.6045-1...................................................    1545-0715
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1.6045-1(c)(3)(xi)(C)......................................    1545-2186
1.6045-1(n)(5).............................................    1545-2186
1.6045A-1..................................................    1545-2186
1.6045-2...................................................    1545-0115
1.6045-4...................................................    1545-1085
1.6046-1...................................................    1545-0704
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1.6046-2...................................................    1545-0704
1.6046-3...................................................    1545-0704
1.6046A....................................................    1545-1646
1.6047-1...................................................    1545-0119
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1.6047-2...................................................    1545-2234
1.6049-1...................................................    1545-0112
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1.6049-2...................................................    1545-0117
1.6049-3...................................................    1545-0117
1.6049-4...................................................    1545-0096
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1.6050A-1..................................................    1545-0115
1.6050B-1..................................................    1545-0120
1.6050D-1..................................................    1545-0120
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1.6050E-1..................................................    1545-0120
1.6050H-1..................................................    1545-0901
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1.6050H-2..................................................    1545-0901
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1.6050I-2..................................................    1545-1449
1.6050J-1T.................................................    1545-0877
1.6050K-1..................................................    1545-0941
1.6050S-1..................................................    1545-1678
1.6050S-2..................................................    1545-1729
1.6050S-3..................................................    1545-1678
1.6050S-4..................................................    1545-1729
1.6052-1...................................................    1545-0008
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1.6060-1(a)(1).............................................    1545-1231
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1.6081-6...................................................    1545-0148
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1.6091-3...................................................    1545-0089
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1.6164-5...................................................    1545-0135
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1.6302-2...................................................    1545-0098
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1.6425-1...................................................    1545-0170
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1.6425-3...................................................    1545-0170
1.6654-1...................................................    1545-0087
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1.6654-2...................................................    1545-0087
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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
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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

[[Page 1184]]

 
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
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

[[Page 1185]]

 
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
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

[[Page 1186]]

 
31.6051-2..................................................    1545-0008
31.6051-3..................................................    1545-0008
31.6053-1..................................................    1545-0029
                                                               1545-0062
                                                               1545-0064
                                                               1545-0065
                                                               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

[[Page 1187]]

 
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
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

[[Page 1188]]

 
                                                               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
                                                               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

[[Page 1189]]

 
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
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 1191]]



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, 2018 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.

                                  2018

                       (No regulations published)

                                  2019

26 CFR
                                                                   84 FR
                                                                    Page
Chapter I
1 Authority citation amended................................29334, 67017
1.1402(e)(4)-1 Amended..............................................9237
1.1402(g)-1 (c) amended.............................................9237
1.1411-4 (d)(4)(i)(C) Example 2 reinstated; CFR correction.........11884
1.1471-0 Amended...................................................10979
1.1471-1 (b)(116), (121), and (c) revised..........................10980
1.1471-4 (f)(2)(ii)(A), (3)(i), (g)(2), and (j)(1) revised; 
        (f)(2)(ii)(B)(1) and (2) added.............................10980
1.1471-4 Correction: (j) amended...................................13121
1.1471-5 (f)(1)(i)(F)(3)(vii) and (2)(iii)(D)(5) removed; 
        (f)(1)(i)(F)(3)(viii), (2)(iii)(D)(6), and (l) 
        redesignated as (f)(1)(i)(F)(3)(vii), (2)(iii)(D)(5), and 
        (m); (f)(1)(i)(F)(3)(vi), (4), (2)(iii)(D)(4), (E), (j), 
        (k), and new (m) revised; (f)(1)(iv) and new (l) added.....10981
1.1471-5 Correction: (m) amended...................................13121
1.1472-1 (c)(5)(iii), (f), (g), and (h) revised....................10987
1.1472-1 Correction: (h) amended...................................13121
1.1491-1 Undesignated center heading and section removed............9237
1.1492-1 Removed....................................................9237
1.1493-1 Removed....................................................9237
1.1494-1 Removed....................................................9237
1.1494-2 Removed....................................................9237
1.1502-2 Revised...................................................67038
1.1502-4 (d)(3) revised............................................67039
1.1502-12 (s) added................................................29367
1.1502-43 (b)(2)(i)(A) revised.....................................67039
1.1502-47 (f)(7)(iii) revised......................................67039
1.1502-51 Added....................................................29367
1.1502-100 (b) amended.............................................67044
1.1502-59A Added...................................................67039

                                  2020

26 CFR
                                                                   85 FR
                                                                    Page
Chapter I
1 Authority citation amended...................1953, 43080, 71752, 76931
1 Technical correction..................8726, 11841, 47027, 69500, 79837
1.1441-0 Amended.....................................................198

[[Page 1192]]

1.1441-1 (b)(7)(ii)(B), (c)(2)(ii), (3)(ii), (38), (e)(2)(ii)(B), 
        (3)(iv)(C)(3), (4)(i)(B), (ii)(A)(2), (iv)(C), (E), 
        (f)(1), and (3) revised; (e)(3)(iv)(B) and (4)(ii)(D)(1) 
        amended; (e)(4)(iv)(F) added; (f)(4) and (5) removed.........199
1.1441-1T Removed....................................................203
1.1441-2 (a)(8) and (f) revised......................................203
1.1441-2T Removed....................................................203
1.1441-4 (h) removed.................................................203
1.1441-6 (b)(1)(i), (ii), (c)(5)(i), and (i)(3) revised; (i)(1) 
        amended; (b)(2)(iv) Examples 1 through 4 redesignated as 
        (b)(2)(iv)(A) through (D)....................................203
1.1441-6 Correction: (b)(2)(iv)(D) revised.........................13045
1.1441-6T Removed....................................................203
1.1441-7 (b)(4)(i) amended; (b)(10)(iv) and (g) revised..............204
1.1441-7T Removed....................................................204
1.1445-2 (b)(2)(v) added; (e) amended..............................76932
1.1445-5 (b)(3)(iv) added; (c)(1)(ii), (iii)(A), (B) introductory 
        text, (iv), (3)(ii), (d)(1), and (h) amended...............76932
1.1445-8 (c)(2)(i) and (f) revised; (j) added......................76932
1.1446-0 Amended...................................................76933
1.1446-3 (b)(2)(v)(C) and (g) revised...............................5324
1.1446-3 (c)(4) added; (d)(2)(vi) Examples 1 through 3 and (e)(4) 
        Examples 1 through 3 redesignated as (d)(2)(vi)(A) through 
        (C) and (e)(4)(i) through (iii); (a)(2)(i), new 
        (d)(2)(vi)(A) through (C) and new (e)(4)(i) through (iii) 
        amended; new (e)(4)(i)(i) through (viii), new (ii)(i) 
        through (v), and new (iii)(i) through (v) further 
        redesignated as new (e)(4)(i)(A) through (H), new (ii)(A) 
        through (E), and new (iii)(A) through (E); new 
        (e)(4)(i)(B), new (E) through (G), new (ii) introductory 
        text, new (iii) introductory text, and new (A) through D 
        amended; (g) removed.......................................76933
1.1446-3T Removed...................................................5324
1.1446-4 (b)(3), (4), (d), (e), and (f)(3) revised; (c) and (f)(1) 
        amended....................................................76934
1.1446-6 (e)(1) amended............................................76935
1.1446-7 Heading revised; section amended..........................76935
1.1446(f)-1 Added..................................................76935
1.1446(f)-2 Added..................................................76935
1.1446(f)-3 Added..................................................76935
1.1446(f)-4 Added..................................................76935
1.1446(f)-5 Added..................................................76935
1.1461-1 (a)(1), (c)(1)(i), (ii)(B)(3), (4), (2)(i) introductory 
        text, (N), (O), and (4)(ii)(A) amended; (c)(1)(ii)(A)(8) 
        and (i) revised; (c)(1)(ii)(B)(5), (2)(i)(P), (Q), and (R) 
        added......................................................76945
1.1461-2 (a)(1) and (d) revised; (b) amended.......................76946
1.1461-3 Amended...................................................76946
1.1463-1 (a) amended...............................................76946
1.1464-1 (a) amended; (c) revised..................................76947
1.1471-0 Amended.....................................................204
1.1471-1 (b)(99) revised.............................................204
1.1471-1T Removed....................................................204
1.1471-3 (c)(1), (3)(iii)(B)(5), (7)(ii), and (d)(6)(i)(F) 
        revised; (c)(6)(ii)(E)(3) amended............................204
1.1471-3T Removed....................................................205
1.1471-4 (c)(2)(ii)(B)(2)(iii), (d)(2)(ii)(G), (4)(iv)(C), (D) 
        introductory text, (7) introductory text, and (j)(2) 
        revised......................................................205
1.1471-4T Removed....................................................206
1.1474-1 (d)(4)(vii) revised.........................................206
1.1474-1T Removed....................................................206
1.1502-1 (k) and (l) added.........................................67974
1.1502-4 Revised...................................................72072
1.1502-12 (t) added................................................43112

[[Page 1193]]

1.1502-13 (c)(7)(ii) Example 1 through Example 17 redesignated as 
        (c)(7)(ii)(A) through (Q); new (c)(7)(ii)(A)(a) through 
        (i), (B)(a), (b), (C)(a) through (d), (D)(a) through (e), 
        (E)(a) through (f), (F)(a) through (d), (G)(a) through 
        (d), (I)(a) through (e), (J)(a) through (d), (K)(a) 
        through (d), (L)(a), (b), (N)(a), (b), (c), (O)(a) through 
        (d), (P)(a), (b), (Q)(a), (b), and (c) redesignated as 
        (c)(7)(ii)(A)(1) through (9), (B)(1), (2), (C)(1) through 
        (4), (D)(1) through (5),(E)(1) through (6), (F)(1) through 
        (4), (G)(1) through (4), (I)(1) through (5), (J)(1) 
        through (4), (K)(1) through (4), (L)(1), (2), (N)(1), (2), 
        (3), (O)(1) through (4), (P)(1), (2), (Q)(1), (2), and 
        (3); (a)(6)(ii), new (c)(7)(ii)(A)(5) through (9), new 
        (C)(3), new (4), new (D)(5), new (E)(3) through (6), new 
        (F)(3), new (4), new (G)(4), new (I)(3), new (4), new (5), 
        new (J)(4), new (4), new (K)(4), new (N)(2), new (O)(4), 
        new (Q)(1), new (2), and (iii)(A) amended..................43112
1.1502-13 Correction: (c)(7)(ii)(Q)(a) through (c) redesignated as 
        (c)(7)(ii)(Q)(1) through (3)...............................60910
1.1502-13 (a)(6)(ii) amended; (h)(2) Examples 1 through 5 
        redesignated as (h)(2)(i) through (v); (h)(2)(vi) added....56843
1.1502-13 (c)(7)(ii)(R) added......................................43113
1.1502-13 (c)(7)(ii)(N) revised....................................79853
1.1502-14Z Added....................................................1993
1.1502-14Z Correction: (b)(1)(iv)(A), (B), (C), (v), (c)(2)(i), 
        (3) introductory text, (f)(2)(i), (ii)(A), (D)(3)(i), 
        (iii)(A), (g)(3)(ii), (h)(3)(iii)(A), (j)(1)(i), and 
        (ii)(A) amended; (k)(2) introductory text revised..........19086
1.1502-21 (c)(3) added.............................................56843
1.1502-21 (b)(2)(v) Examples 1, 2, 3, (c)(1)(iii) Examples 1 
        through 5, (B)(i) through (vi), (C)(i), (ii), (iii), 
        (D)(i) through (iv), (E)(i) through (v), and (2)(viii) 
        Examples 1 through 4 redesignated as (b)(2)(v)(A), (B), 
        (C), (c)(1)(iii)(A) through (E), (B)(1) through (6), 
        (C)(1), (2), (3), (D)(1) through (4), (E)(1) through (5), 
        and (2)(viii)(A) through (D); new (b)(2)(v)(A)(i), new 
        (ii), new (B)(i), new (ii), new (C)(i), new (ii), new 
        (c)(1)(iii)(A)(i), new (ii), new (iii), new 
        (2)(viii)(A)(i) through (vii), new (B)(i) through (iv), 
        new (C)(i), new (ii), new (iii), new (D)(i), and new (ii) 
        redesignated as (b)(2)(v)(A)(1), (2), (B)(1), (2), (C)(1), 
        (2), (c)(1)(iii)(A)(1), (2), (3), (2)(viii)(A)(1) through 
        (7), (B)(1) through (4), (C)(1), (2), (3), (D)(1), and 
        (2); (b)(2)(v)(D) through (G), (3)(ii)(D), (c)(1)(i)(E), 
        (iii)(D)(5), (E)(6), and (F) added; (a), (b)(1), (2)(iv), 
        (v) introductory text, (3)(ii)(C), (c)(1)(i) introductory 
        text, (iii) introductory text, new (A)(2), new (B)(2) 
        through (6), new (D)(2), (3), (4), new (E)(2) through (5), 
        (2)(v), and (viii) introductory text revised; 
        (b)(3)(ii)(B), (c)(1)(i)(C)(2), (D), new (iii)(C)(2), and 
        new (2)(viii)(A)(3) through (7) amended....................67974

[[Page 1194]]

1.1502-21 (c)(2)(viii)(B)(4), (g)(5) Examples 1 through 9, 
        (g)(5)(i)(i) through (iv), (ii)(i) through (iv), (iii)(i), 
        (ii), (iii), (iv)(i) through (iv), (v)(i) through (iv), 
        (vi)(i) through (iv), (vii)(i) through (vi), (viii)(i) 
        through (v), and (ix)(i) through (vii) redesignated as 
        (c)(2)(viii)(B)(5), (g)(5)(i) through (ix), (g)(5)(i)(A) 
        through (D), (ii)(A) through (D), (iii)(A), (B), (C), 
        (iv)(A) through (D), (v)(A) through (D), (vi)(A) through 
        (D), (vii)(A) through (F), (viii)(A) through (E), and 
        (ix)(A) through (G); new (c)(2)(viii)(B)(4), (6), and 
        (h)(10) added; (c)(2)(viii)(B)(1) amended; 
        (c)(2)(viii)(B)(3), new (B)(5), and (h)(9) revised.........67975
1.1502-21 (b)(2)(iv)(B)(1) amended.................................72074
1.1502-21T Revised (temporary).....................................40896
1.1502-21T (b)(3)(ii)(C)(1), (5)(i), (ii), (D)(2)(ii), and (4)(ii) 
        amended....................................................53162
1.1502-36 (f)(2) amended; (h) heading revised; (h) redesignated as 
        (h)(1); (h)(1) heading and (2) added.......................56843
1.1502-47 (a)(3), (b), and (c) removed; (a)(4), (d), new (b)(14) 
        Examples 1 through 14, (e), and (f) redesignated as new 
        (a)(3), new (b), new (b)(14)(i) through (xiv), new (c), 
        and (d); (a)(2)(i), (ii), new (b)(1) through (5), new 
        (10), new (11), new (13), new (14)(ii), and new (d)(5) 
        revised; new (b)(14)(xiv), new (c)(4), new (5), and new 
        (d)(7)(ii) removed; new (c)(6) and new (d)(7)(iii) 
        redesignated as new (c)(4) and new (d)(7)(ii); new 
        (d)(7)(ii) revised; (b)(14)(i) and (d)(6) amended..........67981
1.1502-47 (a)(4), (d)(12)(i)(A), (C), (D), (iii) through (v), (B) 
        through (D), (vi), (vii), (viii)(A), (D), (F), (14), 
        Examples 1 through 5, through 13, (g), (h), (m), (q), (r), 
        and (s) redesignated as (a)(3), (b)(12)(i)(A), (C), (D), 
        (iii), (iv), (v), (B), (C), (D), (vi), (vii), (viii)(A), 
        (D), (F), (14), (i) through (v), (viii) through (xiii), 
        (e), (f), new (h), (k), (l), and new (m); (a)(1), new (3), 
        new (b)(12)(i)(A), new (C), new (D), new (iii), new (iv), 
        new (v), new (B), new (C), new (D), new (vi), new (vii), 
        new (viii)(A), new (D), new (F), new (14), new (i) through 
        (v), new (viii) through (xiii), new (e)(2), new (f)(2)(v), 
        new (h), new (2)(ii), new (3)(iv), new (viii), and new 
        (ix) amended; new (e)(3), new (f)(3), new (h)(4), (j), 
        (k), (l), (o), (p), and (t) removed; new (f)(4), (n), and 
        (h)(5) redesignated as new (f)(3), new (j), and new 
        (h)(4); (h)(4) Examples 1 through 6 and new (j)(2)(vi) 
        redesignated as (h)(4)(i) through (vi) and new (j)(2)(v); 
        new (f)(2)(iii), new (vi), new (vii), new (3)(ii), new 
        (h)(4) introductory text, new (ii), new (iii), new (v), 
        new (vi), new (j)(2)(iii), and new (3) revised; new 
        (j)(2)(v) removed; new (g) and new (n) added...............67982

[[Page 1195]]

1.1502-47 (d)(14), Examples 2 through 12, (e)(1), (3), (f)(3), 
        (7)(i), (g), (1), (2), (h)(1), (2)(i), (ii), (iv), (v), 
        (4)(i), (iii), (A), (m), (2)(ii), (3)(i), (iii), (v), 
        (vi)(A), (vii)(A), (B), and (viii) redesignated as 
        (b)(14), (ii) through (xii), (c)(1), (3), (d)(3), (7)(i), 
        (e), (1), (2), (f)(1), (2)(i), (ii), (iv), (v), (3)(i), 
        (iii), (A), (h), (2)(ii), (3)(i), (iii), (v), (vi)(A), 
        (vii)(A), (B), and (viii); new (b)(14), new (ii) through 
        (xii), new (c)(1), new (3), new (d)(3), new (7)(i), new 
        (e), new (1), new (2), new (f)(1), new (2)(i), new (ii), 
        new (iv), new (v), new (3)(i), new (iii), new (A), new 
        (h), new (2)(ii), new (3)(i), new (iii), new (v), new 
        (vi)(A), new (vii)(A), new (B), and new (viii) amended.....67983
1.1502-47 (m)(3)(ix), (x), (xii), (5), Examples 1 through 4, (n), 
        (1), (2), (ii), (iv), (q), (r), (s)(1)(iii), (iv), and (v) 
        redesignated as (h)(3)(ix), (x), (xii), (4), (i) through 
        (iv), (j), (1), (2), (ii), (iv), (k), (l), (m)(1)(iii), 
        (iv), and (v); new (h)(3)(ix), new (x), new (xii), new 
        (4), new (i) through (iv), new (j), new (1), new (2), new 
        (ii), new (iv), new (k), new (l), new (m)(1)(iii), new 
        (iv), and new (v) amended..................................67984
1.1502-50 Added....................................................43113
1.1502-51 (g)(1) amended...........................................44649
1.1502-59A Correction: transferred under 1.1502-42--1.1502-55 
        undesignated center heading................................49595
1.1502-59A (f)(6), (14), and (21) amended..........................64369
1.1502-68 Added....................................................71765
1.1502-79 (f) added................................................56843
1.1502-90 Amended..................................................56843
1.1502-91 (e)(2) revised...........................................56844
1.1502-95 (b)(4)...................................................56844
1.1502-98 Heading revised; undesignated text designated as (a); 
        new (a) heading and (b) added..............................56844
1.1502-99 (d) added................................................56844
1.1503(d)-1 (c) redesignated as (d); (b)(2)(iii) and new (c) 
        added; (b)(2)(i), (ii), new (d)(1), and new (2)(ii) 
        amended....................................................19855
1.1503(d)-3 (e)(1) introductory text amended; (e)(3) added.........19855
1.1503(d)-4 (c)(3)(iii)(B) and (iv) amended; (c)(3)(v) added.......67988
1.1503(d)-6 (f)(5)(i) through (iii) amended........................19855
1.1503(d)-7 (c) Examples 1 through 40 redesignated as (c)(1) 
        through (40) and amended; (c)(41) added....................19855
1.1503(d)-7 Correction: (c)(6)(iii)(A) amended.....................48651
1.1503(d)-8 (b)(3)(i) and (ii) amended; (b)(6) and (7) added.......19856
1.1503(d)-8 (b)(8) added...........................................67988
1.1504-3 Added......................................................2000
1.1504-3 Correction: (b) heading, (1), and (d)(1)(ii) amended; 
        (e)(2) introductory text revised...........................19086
1.1504-4 (a)(2) and (i) amended....................................56845

                                  2021

26 CFR
                                                                   86 FR
                                                                    Page
Chapter I
1.1446-4 Correction: (f)(1) amended................................13191

                                  2022

26 CFR
                                                                   87 FR
                                                                    Page
Chapter I
1.1441-3 (c)(4)(i) introductory text, (B)(2), and (C) revised; 
        (c)(4)(iii) added..........................................80064
1.1445-1 (g)(11) added.............................................80065
1.1445-2 (b)(2)(i) revised; (b)(2)(vi) added; (e) amended..........80065
1.1445-5 (b)(3)(ii)(A), (B), and (D) revised; (h) amended..........80065
1.1445-8 (e) revised; (j) amended..................................80066
1.1446-1 (c)(2)(ii)(G) amended; (c)(2)(ii)(H) revised..............80066
1.1446-2 (b)(4)(iii) amended.......................................80066
1.1446-7 Amended...................................................80067
1.1502-51 (b) amended...............................................3656

[[Page 1196]]

                                  2023

   (Regulations published from January 1, 2023, through April 1, 2023)

26 CFR
                                                                   88 FR
                                                                    Page
Chapter I
1.1461-1 (c)(5) removed; (i) redesignated as (j); new (i) added; 
        new (j) revised............................................11763
1.1471-0 Amended...................................................11763
1.1474-1 (e) and (j) revised.......................................11763
1.1502-80 (j) added................................................11393


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