Federal Register, Volume 84 Issue 235 (Friday, December 6, 2019)

[Federal Register Volume 84, Number 235 (Friday, December 6, 2019)]
[Proposed Rules]
[Pages 67046-67058]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-25745]

Federal Register / Vol. 84, No. 235 / Friday, December 6, 2019 /
Proposed Rules

[[Page 67046]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-112607-19]
RIN 1545-BP36

Additional Rules Regarding Base Erosion and Anti-Abuse Tax

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide
guidance regarding the base erosion and anti-abuse tax imposed on
certain large corporate taxpayers with respect to certain payments made
to foreign related parties. The proposed regulations would affect
corporations with substantial gross receipts that make payments to
foreign related parties.

DATES: Written or electronic comments and requests for a public hearing
must be received by February 4, 2020.

ADDRESSES: Submit electronic submissions via the Federal eRulemaking
Portal at www.regulations.gov (indicate IRS and REG-112607-19) by
following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The Department of the Treasury (Treasury Department) and
the IRS will publish for public availability any comment received to
its public docket, whether submitted electronically or in hard copy.
Send hard copy submissions to: CC:PA:LPD:PR (REG-112607-19), Room 5203,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
112607-19), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW, Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Sheila Ramaswamy, Azeka J. Abramoff, or Karen Walny at (202) 317-6938;
concerning submissions of comments and requests for a public hearing,
Regina Johnson at (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to 26 CFR part 1 under
sections 59A and 6031 of the Internal Revenue Code (the ``Code''). The
Tax Cuts and Jobs Act, Public Law 115-97 (2017) (the ``Act''), which
was enacted on December 22, 2017, added section 59A to the Code.
Section 59A imposes on each applicable taxpayer a tax equal to the base
erosion minimum tax amount for the taxable year (the ``base erosion and
anti-abuse tax'' or ``BEAT'').
The Act also added reporting obligations regarding this tax for 25-
percent foreign-owned corporations subject to section 6038A and foreign
corporations subject to section 6038C and addressed other issues for
which information reporting under those sections is important to tax
administration.
On December 21, 2018, the Treasury Department and the IRS published
proposed regulations (REG-104259-18) under section 59A, and proposed
amendments to 26 CFR part 1 under sections 383, 1502, 6038A, and 6655
in the Federal Register (83 FR 65956) (the ``2018 proposed
regulations''). On December 6, 2019, the Treasury Department and the
IRS published final regulations (the ``final regulations'') under
sections 59A, 383, 1502, 6038A, and 6655. These proposed regulations
propose other regulations under sections 59A and 6031.

Explanation of Provisions

I. Overview

These proposed regulations provide guidance under sections 59A and
6031 regarding certain aspects of the BEAT. Part II of this Explanation
of Provisions describes proposed modifications to the rules set forth
in the final regulations relating to how a taxpayer determines its
aggregate group for purposes of determining gross receipts and the base
erosion percentage. Part III of this Explanation of Provisions
describes proposed regulations providing an election to waive
deductions. Part IV of this Explanation of Provisions describes
proposed regulations addressing the application of the BEAT to
partnerships.

II. Determination of a Taxpayer's Aggregate Group

For certain purposes, including the determination of gross receipts
described in section 59A(e)(2) and the base erosion percentage
described in section 59A(c)(4), section 59A(e)(3) and Sec. 1.59A-
1(b)(1) generally aggregate a group of corporations (``aggregate
group'') on the basis of persons treated as a single employer under
section 52(a), which treats members of the same controlled group of
corporations (as defined in section 1563(a) with certain modifications)
as one person. To determine gross receipts, section 59A(e)(2) requires
the application of rules similar to, but not necessarily the same as,
section 448(c)(3)(B), (C), and (D). The 2018 proposed regulations
provided rules for determining the aggregate group for applying the
gross receipts test as well as the base erosion percentage test.
Generally, the 2018 proposed regulations provided that each taxpayer
determines its gross receipts and base erosion percentage by reference
to its own taxable year, taking into account the results of other
members of its aggregate group during that taxable year. See 2018
proposed Sec. 1.59A-2(d)(2).
Comments to the 2018 proposed regulations recommended that the
determination of gross receipts and the base erosion percentage of a
taxpayer's aggregate group be made on the basis of the taxpayer's
taxable year and the taxable year of each member of its aggregate group
that ends with or within the applicable taxpayer's taxable year (the
``with-or-within method''). In response to the comments to the 2018
proposed regulations, the final regulations generally adopt the with-
or-within method. Sec. 1.59A-2(c)(3). The final regulations do not
include specific rules regarding how the with-or-within method applies
in certain situations. These proposed regulations provide guidance
regarding certain applications of the aggregate group rules and request
comments regarding these rules in light of the with-or-within method.
A. Rules Relating to the Determination of Gross Receipts for a Short
Taxable Year
The 2018 proposed regulations provided guidance regarding the
determination of gross receipts for purposes of section 59A. In the
case of a taxpayer that has a short taxable year, the 2018 proposed
regulations annualized the gross receipts of the taxpayer by
multiplying the gross receipts for the short taxable year by 365 and
dividing the result by the number of days in the short taxable year.
See 2018 proposed Sec. 1.59A-2(d)(7).
One comment to the 2018 proposed regulations expressed concern that
determining the gross receipts of a taxpayer by annualizing a short
taxable year could yield inappropriate results when combined with the
rule providing that any reference to a taxpayer includes a reference to
its predecessor. For example, the comment asserted that if the taxpayer
has a full taxable year but a predecessor had a short taxable year, it
is not clear whether the taxable year of the predecessor should be
annualized first and then combined with the year of the taxpayer or
whether the taxable

[[Page 67047]]

years of the taxpayer and its predecessor should be combined first, in
which case no annualization may be necessary. The final regulations do
not include a rule on short taxable years. Instead, and to allow
taxpayers an additional opportunity to comment, these proposed
regulations provide updated guidance with respect to short taxable
years (in particular, for situations when an aggregate group has a
member with a short taxable year).
In the case of a taxpayer that has a short taxable year, solely for
purposes of section 59A, these proposed regulations continue to
annualize the gross receipts of the taxpayer by multiplying the gross
receipts for the short taxable year by 365 and dividing the result by
the number of days in the short taxable year. Proposed Sec. 1.59A-
2(c)(5). However, the Treasury Department and the IRS recognize that
the with-or-within method in Sec. 1.59A-2(c)(3) must be adjusted to
prevent the understatement or overstatement of the gross receipts, base
erosion tax benefits, and deductions of an aggregate group in the case
of a taxpayer with a short taxable year. For example, the with-or-
within method would completely exclude the taxable year of certain
members of an aggregate group if the taxable year of those members did
not end with or within the taxpayer's short taxable year.\1\ In other
instances, the with-or-within method combined with an annualization
approach might over-count the gross receipts of other aggregate group
members if the method is applied by annualizing the full taxable years
of the other members of the aggregate group that end with or within the
taxpayer's short taxable year. Specifically, the regulation's
requirement that a taxpayer annualize gross receipts when it has a
short taxable year could be read to mean that gross receipts of
aggregate group members (which may have full taxable years that end
with or within the taxpayer's taxable year) also be annualized on the
basis of the taxpayer's short taxable year, which could result in over-
counting. In light of these concerns, these proposed regulations
provide that a taxpayer with a short taxable year must use a reasonable
approach to determine the base erosion percentage of its aggregate
group and whether the taxpayer or its aggregate group satisfies the
gross receipts test and base erosion percentage in section 59A. A
reasonable approach should neither over-count nor under-count the gross
receipts, base erosion tax benefits, and deductions of the aggregate
group of the taxpayer.
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\1\ For example, assume FC, a foreign corporation, wholly owns
DC1, DC2, and DC3, each domestic corporations. DC1, DC2, and DC3
each have a calendar year taxable year. Pursuant to the with-or-
within method, DC1 includes in its aggregate group for Year 1 the
taxable years of DC2 and DC3 ending on December 31, Year 1.
Subsequently, DC1 changes its taxable year end to November 30.
Accordingly, DC1 has a short taxable year beginning January 1, Year
2 and ending November 30, Year 2. No taxable year of DC2 or DC3 ends
with or within the taxable year of DC1 ending November 30, Year 2.
Nonetheless, it would not be appropriate to wholly exclude the gross
receipts, base erosion tax benefits, and deductions of DC2 and DC3
from the aggregate group of DC1 for the taxable year ending November
30, Year 2.
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The Treasury Department and the IRS request comments on whether
more specific guidance is needed, and if so, the best approach for
determining the gross receipts and base erosion percentage of an
aggregate group for purposes of section 59A when the applicable
taxpayer or another member of an aggregate group has a short taxable
year. The approach should neither over-count nor under-count the gross
receipts, base erosion tax benefits, and deductions of the aggregate
group. The approach should also appropriately account for short taxable
years that result from a change in a taxpayer's taxable year end (in
which case the preceding and following taxable years would be full
taxable years) and short taxable years that result from changes in
ownership, such as a joining or leaving a consolidated group (in which
case the preceding or succeeding taxable year may also be a short
taxable year).
B. Members Leaving and Joining an Aggregate Group
A member may join or leave the aggregate group of a taxpayer
because of a change in ownership of the member such as a sale of the
member to a third party. A comment to the 2018 proposed regulations
requested clarity on whether the determination of gross receipts and
the base erosion percentage of an aggregate group takes into account
the gross receipts, base erosion tax benefits, and deductions of a
member of the aggregate group for the period before the member joins
the group or the period after the member leaves the group. In response
to this comment, the proposed regulations provide guidance that
clarifies the treatment of members that join or leave the aggregate
group of a taxpayer.
To determine the gross receipts and the base erosion percentage of
a taxpayer with respect to its aggregate group for purposes of section
59A, these proposed regulations take into account only items of members
that occur during the period that they were members of the taxpayer's
aggregate group. Proposed Sec. 1.59A-2(c)(4). Items of members that
occur before a member joins an aggregate group of a taxpayer or after a
member leaves an aggregate group of a taxpayer are not taken into
account by the taxpayer. Solely for purposes of determining which items
occurred while a corporation was a member of an aggregate group under
section 59A, a corporation is treated as having a deemed taxable year
end when the corporation joins or leaves an aggregate group of a
taxpayer. The taxpayer may determine items attributable to this deemed
short taxable year by either deeming a close of the corporation's books
or, in the case of items other than extraordinary items (as defined in
Sec. 1.1502-76(b)(2)(ii)(C)), making a pro-rata allocation. See
proposed Sec. 1.59A-2(c)(4). For an illustration of this proposed
rule, see proposed Sec. 1.59A-2(f)(2), Example 2.
C. Consolidated Groups
A comment to the 2018 proposed regulations expressed concern that
gross receipts arising from intercompany transactions (as defined in
Sec. 1.1502-13(b)(1)) might be treated as gross receipts of the
selling member (S) when S deconsolidates from a consolidated group
(original consolidated group) and separately joins a different
aggregate group (new aggregate group). For purposes of section 59A, the
comment to the 2018 proposed regulations recommended that the gross
receipts resulting from intercompany transactions in which S engaged
while a member of the original consolidated group should not be counted
even after S becomes a member of the new aggregate group, despite S no
longer being a member of the original consolidated group.
The Treasury Department and the IRS are studying whether it is
appropriate to continue to eliminate gross receipts resulting from
intercompany transactions when members deconsolidate and join a
different aggregate group. Furthermore, the Treasury Department and the
IRS are aware of more general questions regarding the proper treatment
of gross receipts when members join or deconsolidate from a
consolidated group. These issues are currently under study, and the
proposed regulations reserve on such issues. The Treasury Department
and the IRS request comments on the appropriate treatment of a
deconsolidating member's gross receipts history as it relates to the
original consolidated group and the acquiring consolidated group in the
context of the BEAT aggregate group.

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D. Predecessors
For purposes of determining gross receipts, the 2018 proposed
regulations provided that a reference to a taxpayer includes a
reference to any predecessor of the taxpayer. 2018 proposed Sec.
1.59A-2(c)(6)(i). The Treasury Department and the IRS, however,
recognize that the aggregate groups of a taxpayer and its predecessor
may overlap. As a result, an interpretation of the predecessor rule
that simply adds the gross receipts of the predecessor to the gross
receipts of the taxpayer's aggregate group could result in double
counting of the gross receipts of corporations that are members of both
aggregate groups. These proposed regulations clarify that, for purposes
of section 59A, the gross receipts of those corporations included in
both aggregate groups are not double counted. Proposed Sec. 1.59A-
2(c)(6)(ii). The Treasury Department and the IRS request comments on
appropriate methods of taking into account predecessors for purposes of
determining gross receipts of an applicable taxpayer's aggregate group.
An appropriate method should avoid double-counting and address whether
to take into account the taxable year of a predecessor in determining
whether to annualize a short taxable year of a taxpayer.

III. Election To Waive Allowable Deductions

The final regulations provide that, in general, the base erosion
percentage for a taxable year is computed by dividing (1) the aggregate
amount of base erosion tax benefits (the ``numerator'') by (2) the sum
of the aggregate amount of deductions allowed plus certain other base
erosion tax benefits (the ``denominator''). See Sec. 1.59A-2(e)(3). In
general, and consistent with section 59A(c)(2), the final regulations
provide that a base erosion tax benefit is any deduction that is
allowed under chapter 1 of subtitle A of the Code for the taxable year
with respect to a base erosion payment. See Sec. 1.59A-3(c)(1)(i). The
final regulations, consistent with section 59A(d)(1), define one
category of a base erosion payment as any amount paid or accrued by the
taxpayer to a foreign related party of the taxpayer and with respect to
which a deduction is allowable under chapter 1 of subtitle A of the
Internal Revenue Code. Sec. 1.59A-3(b)(1)(i).
Comments to the 2018 proposed regulations requested that the final
regulations clarify that allowable deductions that a taxpayer declines
to claim on its tax return are not ``allowed'' deductions, and
therefore, the foregone deductions are not base erosion tax benefits.
These proposed regulations provide that a taxpayer may forego a
deduction and that those foregone deductions will not be treated as a
base erosion tax benefit if the taxpayer waives the deduction for all
U.S. federal income tax purposes and follows specified procedures.
Proposed Sec. 1.59A-3(c)(6). If the taxpayer waives a deduction for
purposes of section 59A, these proposed regulations provide that the
taxpayer cannot claim the deduction for any purpose of the Code or
regulations except as otherwise provided under the proposed
regulations. See proposed Sec. 1.59A-3(c)(6)(ii).
The Treasury Department and the IRS are concerned that in adopting
this approach, absent certain procedural rules, taxpayers that waive a
deduction pursuant to the proposed regulations to reduce their amount
of base erosion tax benefits could benefit by using some or all of the
foregone deductions in a subsequent year, while still benefiting from
the reduction of base erosion tax benefits made in the prior year.
Accordingly, proposed Sec. 1.59A-3(c)(6) provides rules to address
this concern. The proposed regulations also include certain reporting
rules concerning deductions that are waived pursuant to the proposed
regulations, and provide guidance on the time and manner for electing
to waive deductions. Proposed Sec. 1.59A-3(c)(6)(i) and (iii).
Specifically, the proposed regulations provide that as a baseline,
all deductions that could be properly claimed by a taxpayer for the
taxable year, determined after giving effect to the taxpayer's
permissible method of accounting and to any election, (such as the
election under section 173 to capitalize circulation expenditures or
the election under section 168(g)(7) to use the alternative
depreciation system of depreciation), are treated as allowed deductions
solely for purposes of section 59A(c)(2)(A)(i), unless a taxpayer
elects to waive certain deductions. See proposed Sec. 1.59A-3(c)(5)
and (6). As a result, if a taxpayer does not make an election to waive
a deduction that could be properly claimed by a taxpayer for the
taxable year pursuant to the procedures in proposed Sec. 1.59A-
3(c)(6), and the deduction otherwise meets the definition of a base
erosion tax benefit, the deduction is treated as a base erosion tax
benefit for purposes of section 59A. Consequently, the deduction is
taken into account in the base erosion percentage, and is taken into
account as an adjustment to modified taxable income. The proposed
regulations provide that if a taxpayer elects to waive certain
deductions, those deductions are waived for all tax purposes (except
for certain purposes as explained in part III of this Explanation of
Provisions) and, thus, are not taken into account as base erosion tax
benefits. Proposed Sec. 1.59A-3(c)(6)(ii)(A)(1). The waiver applies
only to the deduction, not to the underlying cost or expense. Thus, a
waiver of any portion of a deduction associated with a particular cost
or expense does not cause the corresponding portion of that cost or
expense not to be a ``cost'' or ``expense.''
A taxpayer may make the election to waive deductions on its
original filed Federal income tax return, by an amended return, or
during the course of an examination of the taxpayer's income tax return
for the relevant tax year pursuant to procedures prescribed by the
Commissioner. Proposed Sec. 1.59A-3(c)(6)(iii). Unless the
Commissioner prescribes specific procedures with respect to waiving
deductions during the course of an examination, the same procedures
that generally apply to affirmative tax return changes during an
examination will apply. The Treasury Department and the IRS request
comments related to the process for submitting an election under the
proposed regulations during the course of an examination. The
information related to this waiver must be reported on the appropriate
forms, which are expected to include Form 8991, Tax on Base Erosion
Payments of Taxpayers With Substantial Gross Receipts, (or a successor
form). Until these proposed regulations are final, a taxpayer choosing
to rely on these proposed regulations may attach a statement to the
Form 8991 to make this election and include the information listed in
proposed Sec. 1.59A-3(c)(6)(i) on that statement. A taxpayer makes the
election on an annual basis, and the taxpayer does not need the consent
of the Commissioner if the taxpayer chooses not to make the election
for a subsequent taxable year. The proposed regulations provide that
the election to waive a deduction pursuant to proposed Sec. 1.59A-
3(c)(6) is disregarded for determining (1) the taxpayer's overall
method of accounting or the taxpayer's method of accounting for any
item; (2) whether a change in the taxpayer's overall plan of accounting
or the taxpayer's treatment of a material item is a change in method of
accounting under section 446(e) and Sec. 1.446-1(e); and (3) the
amount allowable for depreciation or amortization for purposes of
section 167(c) and section

[[Page 67049]]

1016(a)(2) or (3), and any other adjustment to basis under section
1016(a). Proposed Sec. 1.59A-3(c)(6)(ii)(B)(1)-(3). The proposed
regulations also provide that the election to waive deductions does not
constitute a method of accounting under section 446. Proposed Sec.
1.59A-3(c)(6)(ii)(C).
In addition, the proposed regulations provide that the waiver of
deductions is treated as occurring before the allocation and
apportionment of deductions under Sec. Sec. 1.861-8 through -14T and
1.861-17 (such as for purposes of section 904). Proposed Sec. 1.59A-
3(c)(6)(ii)(A)(2). However, the waiver of a deduction for interest
expense that is directly allocable to income produced by a particular
asset should not result in the allocation and apportionment of
additional interest expense to that asset. Accordingly, the proposed
regulations provide that to the extent a deduction for certain interest
expense is waived that would have been directly allocated and resulted
in a reduction of value of any asset for purposes of allocating and
apportioning other interest expense, the asset value is still reduced
as if the deduction had not been waived. Proposed Sec. 1.59A-
3(c)(6)(ii)(A)(3).
The waiver of a deduction is also disregarded for purposes of
applying the exclusive apportionment rule in Sec. 1.861-17(b), in
determining the geographic source where the research and experimental
activities that account for more than fifty percent of the amount of
the deduction for research and experimentation was performed. Proposed
Sec. 1.59A-3(c)(6)(ii)(B)(4). For example, if this exclusive
apportionment rule would not apply in the absence of waiving deductions
for research and experimentation performed outside the United States,
then waiving those deductions will not result in the exclusive
apportionment rule applying (on the basis of a smaller pool of deducted
expenses, more than fifty percent of which relate to research and
experimentation performed in the United States).
The waiver of a deduction is also disregarded for purposes of
determining the price of a controlled transaction under section 482.
Proposed Sec. 1.59A-3(c)(6)(ii)(B)(5). Accordingly, in determining
whether a deduction that a taxpayer reports on its Federal income tax
return with respect to a controlled transaction clearly reflects the
taxpayer's income with respect to the controlled transaction, the IRS
will consider the amount waived as if it were actually deducted. In
addition, if a taxpayer applies a transfer pricing method that uses
costs or expenses as an input (such as the cost plus method described
in Sec. 1.482-3(d)), the costs or expenses associated with waived
deductions continue to be treated as ``costs'' or ``expenses'' for
purposes of the section 482 regulations because the waiver impacts the
deductible amount only, not the amount of the underlying cost or
expense.
Furthermore, the waiver of a deduction is disregarded for purposes
of determining: (1) The amount of a taxpayer's earnings and profits,
(2) any item as necessary to prevent a taxpayer from receiving the
benefit of a waived deduction, and (3) any other item that is expressly
identified in published guidance. Proposed Sec. 1.59A-
3(c)(6)(ii)(B)(6)-(8).
To ensure a taxpayer is not able to reduce the amount of its base
erosion tax benefits via a waiver of deductions in a prior year and
then recover the waived deductions in a subsequent year by making an
accounting method change, the proposed regulations provide that, by
making the election to waive deductions, the taxpayer agrees that if a
change in method of accounting is made with respect to an item that had
been waived, the previously waived portion of the item is not taken
into account in determining the amount of adjustment under section
481(a). Proposed Sec. 1.59A-3(c)(6)(ii)(D). For an illustration of
this proposed rule, see proposed Sec. 1.59A-3(d), Example 9. More
generally, the Treasury Department and the IRS are studying the
treatment of changes in method of accounting and the related section
481 adjustments for purposes of the BEAT. To the extent that a negative
adjustment under section 481(a) relates to an increase in an item that
would be a base erosion tax benefit, it is expected that the section
481(a) adjustment would also be taken into account as a base erosion
tax benefit. In addition, the Treasury Department and the IRS are
considering other consequences of adjustments under section 481(a),
including (a) how positive adjustments under section 481(a) are taken
into account for BEAT purposes and (b) whether a waiver similar to the
waiver provided in proposed Sec. 1.59A-3(c)(6) should be permitted
with respect to negative section 481(a) adjustments.
The Treasury Department and the IRS request comments regarding the
election to waive deductions, including the reporting requirements and
additional rules necessary to prevent a taxpayer from claiming a waived
deduction in a subsequent year. The Treasury Department and the IRS
also request comments on the effect of adjustments under section 481(a)
on the BEAT, including in the context of waived items.

IV. Application of the BEAT to Partnerships

A. Allocations by a Partnership of Income Instead of Deductions
In general, the final regulations treat deductions allocated by the
partnership to an applicable taxpayer resulting from a base erosion
payment as a base erosion tax benefit. However, the Treasury Department
and the IRS are cognizant that a partner in a partnership can obtain a
similar economic result if the partnership allocates income items away
from the partner instead of allocating a deduction to the partner
through curative allocations. To the extent the partnership places a
taxpayer in such an economically equivalent position by allocating less
income to that partner in lieu of allocating a deduction to the partner
through curative allocations, the proposed regulations provide that the
partner is similarly treated as having a base erosion tax benefit to
the extent of that substitute allocation. Proposed Sec. 1.59A-
7(b)(5)(v).
B. Effectively Connected Income (``ECI'')
Comments to the 2018 proposed regulations recommended that
contributions of depreciable (or amortizable) property by a foreign
related party to a partnership (in which an applicable taxpayer is a
partner) or distributions of depreciable or amortizable property by a
partnership (in which a foreign related party is a partner) to an
applicable taxpayer be excluded from the definition of a base erosion
payment to the extent that the foreign related party would receive (or
would be expected to receive) allocations of income from that
partnership interest that would be taxable to the foreign related party
as ECI.
The Treasury Department and the IRS are considering additional
guidance to address the treatment of a contribution by a foreign person
to a partnership engaged in a U.S. trade or business, as well as
transfers of partnership interests by a foreign person and transfers of
property by the partnership with a foreign person as a partner to a
related U.S. person. The Treasury Department and the IRS request
comments addressing how these issues should be addressed, including
rules to ensure that the foreign partner is treating the items
allocated with respect to the property and any gain from the property
as ECI.

[[Page 67050]]

C. Partnership Anti-Abuse Rules
1. Derivatives on Partnership Interests
Section 1.59A-9(b) of the final regulations provides that certain
transactions that have a principal purpose of avoiding section 59A will
be disregarded or deemed to result in a base erosion payment. These
proposed regulations provide an additional anti-abuse rule relating to
derivatives on partnership interests. See proposed Sec. 1.59A-9(b)(5).
The rule provides that a taxpayer is treated as having a direct
interest in the partnership interest or asset if the taxpayer acquires
a derivative on a partnership interest or asset with a principal
purpose of eliminating or reducing a base erosion payment.
2. Allocations by a Partnership To Prevent or Reduce a Base Erosion
Payment
The proposed regulations also provide an additional anti-abuse rule
to prevent a partnership from allocating items of income with a
principal purpose of eliminating or reducing the base erosion payments
to a taxpayer not acting in a partner capacity on amounts paid to or
accrued by a partnership that do not change the economic arrangement of
the partners. For example, assume that a domestic corporation and a
third party both pay equal amounts to a partnership with a foreign
related party partner and an unrelated partner (each having equal
interests in the partnership) for services. If the partnership
allocates the income it receives from the domestic corporation to the
unrelated partner while allocating an equivalent amount of income from
the third party to the foreign related party partner with a principal
purpose of eliminating the domestic corporation's base erosion payment,
the domestic corporation must determine its base erosion payment as if
the allocations had not been made and the partners shared the income
proportionately. As a result, half of the domestic corporation's
payment would be a base erosion payment.
D. Return of a Partnership With Respect to Base Erosion Payments and
Base Erosion Tax Benefits
Pursuant to section 6031 and Sec. 1.6031(a)-1(a), a domestic
partnership must file a return of partnership income for each taxable
year on the form prescribed for the partnership return. Pursuant to
Sec. 1.6031(a)-1(b), with limited exceptions, a foreign partnership
that has gross income that is, or is treated as, effectively connected
with the conduct of a trade or business within the United States or
gross income (including gains) derived from sources within the United
States must file a partnership return for its taxable year in
accordance with the rules for domestic partnerships (such a foreign
partnership, a ``reporting foreign partnership''). The partnership
return must contain the information required by the prescribed form and
the accompanying instructions. The IRS plans to update Form 1065,
Schedule K, and Schedule K-1 to incorporate certain information that
will be necessary for its partners to complete their Form 8991 or a
successor form. The IRS expects that these revisions to the Form 1065,
Schedule K, and Schedule K-1 will track the information required by the
Form 8991.
As a result of these planned revisions, a domestic partnership and
a reporting foreign partnership will be required to report the
information required by Form 8991. See Sec. 1.6031(a)-1(a) and
(b)(1)(i). Proposed Sec. 1.6031(a)-1(b)(7) provides that United States
partners must determine the relevant information with respect to the
base erosion payments and base erosion tax benefits of a foreign
partnership that is not required to file a partnership return. For a
partnership that is required to file a Form 1065 and Schedule K-1, the
Commissioner is expected to receive sufficient information to examine
the accuracy of the partners' liability under section 59A, including as
a result of items allocated to the partner by the partnership. For a
foreign partnership that is not required to file a Form 1065 and
Schedule K-1, proposed Sec. 1.6031(a)-1(b)(7) is intended to ensure
that the Commissioner receives similar information from the partners of
that foreign partnership.

Proposed Applicability Date

The rules in the section 59A proposed regulations generally apply
to taxable years beginning on or after the date that final regulations
are filed with the Federal Register. The rules in proposed Sec. Sec.
1.59A-7(c)(5)(v) and (g)(2)(x) and 1.59A-9(b)(5) and (6) apply to
taxable years ending on or after December 2, 2019. As proposed, the
section 59A regulations will permit taxpayers to apply the rules
therein in their entirety for taxable years beginning after December
31, 2017, and before the regulations apply. See section 7805(b)(7). If
a taxpayer applies the 2018 proposed regulations to a taxable year
ending on or before December 6, 2019, the determination as to whether
the taxpayer is applying these proposed regulations in their entirety
to such taxable year is made without regard to the application of Sec.
1.59A-2(c)(2)(ii), (c)(4), (c)(5), and (c)(6).
In addition, taxpayers may rely on the rules in the section 59A
proposed regulations in their entirety for taxable years beginning
after December 31, 2017, and before the final regulations are
applicable.
The rules in the section 6031(a) proposed regulations generally
apply to taxable years ending on or after the date that final
regulations are filed with the Federal Register.

Special Analyses

Regulatory Planning and Review--Economic Analysis

Executive Orders 13563 and 12866 direct agencies to assess costs
and benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects, distributive impacts, and equity). Executive Order 13563
emphasizes the importance of quantifying both costs and benefits, of
reducing costs, of harmonizing rules, and of promoting flexibility. The
Executive Order 13771 designation for any final rule resulting from the
proposed regulation will be informed by comments received. The
preliminary Executive Order 13771 designation for this proposed
regulation is regulatory.
These proposed regulations have been designated as subject to
review under Executive Order 12866 pursuant to the Memorandum of
Agreement (April 11, 2018) (MOA) between the Treasury Department and
the Office of Management and Budget (OMB) regarding review of tax
regulations. The Office of Information and Regulatory Affairs (OIRA)
has designated these proposed regulations as significant under section
1(b) of the MOA. Accordingly, these proposed regulations have been
reviewed by OIRA.
A. Background
The Tax Cuts and Jobs Act of 2017 (the ``Act'') added new section
59A, which imposes a Base Erosion and Anti-Abuse Tax (``BEAT'') on
certain deductions paid or accrued to foreign related parties. By
taxing such payments, the BEAT ``aims to level the playing field
between U.S. and foreign-owned multinational corporations in an
administrable way.'' Senate Committee on Finance, Explanation of the
Bill, S. Prt. 115-20, at 391 (November 22, 2017).
In plain language, the tax is levied only on corporations with
substantial gross receipts (a determination referred to as the gross
receipts test) and for which the relevant deductions are three

[[Page 67051]]

percent or higher (two percent or higher in the case of certain banks
or registered securities dealers) of their total deductions (with
certain exceptions), a determination referred to as the base erosion
percentage test. This cut-off for the base erosion percentage test is
referred to in these Special Analyses as the base erosion threshold.
A taxpayer that satisfies both the gross receipts test and the base
erosion percentage test is referred to as an applicable taxpayer. A
taxpayer is not an applicable taxpayer, and thus does not have any BEAT
liability, if its base erosion percentage is less than the base erosion
threshold.
Additional features of the BEAT also enter its calculation. The
BEAT operates as a minimum tax, so an applicable taxpayer is only
subject to additional tax under the BEAT if the tax at the BEAT rate
multiplied by the taxpayer's modified taxable income exceeds the
taxpayer's regular tax liability, reduced by certain credits. Because
of this latter provision, the BEAT formula has the effect of imposing
the BEAT on the amount of those tax credits. In general, tax credits
are subject to the BEAT except the research credit under section 41,
and a portion of low income housing credits, renewable electricity
production credits under section 45, and certain investment tax credits
under section 46. Notably, this means that the foreign tax credit is
currently subject to the BEAT. In taxable years beginning after
December 31, 2025, all tax credits are subject to the BEAT.
B. Need for the Proposed Regulations
Section 59A does not explicitly state whether an amount that is
permitted as a deduction under the Code or regulations but that is not
claimed as a deduction on a taxpayer's tax return is potentially a base
erosion tax benefit for purposes of the BEAT and the base erosion
percentage test. Comments recommended that the Treasury Department and
the IRS clarify the treatment of amounts that are allowable as a
deduction but not claimed as a deduction on a taxpayer's tax return.
These proposed regulations are needed to respond to these comments and
to clarify the treatment of these amounts under section 59A. The
proposed regulations are also needed to clarify certain aspects of the
rules set forth in the final regulations relating to how a taxpayer
determines its aggregate group for purposes of determining gross
receipts and the base erosion percentage, and how the BEAT applies to
partnerships.
C. Overview of the Proposed Regulations
The proposed regulations provide taxpayers an election to waive
deductions that would otherwise be taken into account in determining
whether the taxpayer is an applicable taxpayer subject to the BEAT.
This change is analyzed in part D of these Special Analyses.
These proposed regulations also include modifications to the rules
set forth in the final regulations relating to how a taxpayer
determines its aggregate group for purposes of determining gross
receipts and the base erosion percentage, and how the BEAT applies to
partnerships. These latter modifications to the existing final rule are
not expected to result in any substantial changes in taxpayer behavior.
D. Economic Analysis
1. Baseline
The Treasury Department and the IRS have assessed the benefits and
costs of the proposed regulations compared to a no-action baseline that
reflects anticipated Federal income tax-related behavior in the absence
of these proposed regulations.
2. Economic Effects of the Election To Waive Deductions (Part III of
the Explanation of Provisions)
a. Background and Alternatives Considered
Section 59A does not explicitly state whether an amount that is
permitted as a deduction under the Code or regulations but that is not
claimed as a deduction on the taxpayer's tax return is potentially a
base erosion tax benefit for the purposes of the base erosion
percentage test. A taxpayer may find waiving certain deductions
advantageous if the waived deductions lower the taxpayer's base erosion
percentage below the base erosion threshold, thus making section 59A
inapplicable to the taxpayer. Comments recommended that the Treasury
Department and the IRS clarify the treatment of allowable amounts that
are not claimed as a deduction on the taxpayer's tax return for
purposes of section 59A.
To address concerns about the treatment of these amounts permitted
as deductions under law, the Treasury Department and the IRS considered
two alternatives for the proposed guidance: (1) Providing that all
deductions that could be properly claimed by a taxpayer for the taxable
year are taken into account for purposes of the base erosion percentage
test (and for other purposes of the BEAT) even if a deduction is not
claimed on the taxpayer's tax return (the ``alternative regulatory
approach''); or (2) providing that an allowable deduction that a
taxpayer does not claim on its tax return is not taken into account in
the base erosion percentage test or for other purposes of the BEAT,
provided that certain procedural steps are followed. The proposed
regulations adopt the latter approach.
Under the alternative regulatory approach, base erosion payments
allowable as deductions but not claimed by a taxpayer would nonetheless
be taken into account in the base erosion percentage. Thus, a taxpayer
could not avoid satisfying the base erosion percentage test by not
claiming certain deductions. Under the proposed regulations, base
erosion payments allowable as deductions but waived by a taxpayer are
not taken into account in the base erosion percentage test, assuming
certain procedural steps are followed. The waived deductions are waived
for all U.S. federal income tax purposes and thus, for example, the
deductions are also not allowed for regular income tax purposes. If the
taxpayer is not an applicable taxpayer because it waives deductions so
as not to satisfy the base erosion percentage test, the taxpayer may
continue to claim deductions for base erosion payments that are not
waived, provided these deductions would otherwise be allowed.
b. Example
Consider a U.S.-parented multinational enterprise that satisfies
the gross receipts test and that is not a bank or registered securities
dealer. The U.S. corporation has gross income from domestic sources of
$1000x and also has a net global intangible low-taxed income
(``GILTI'') inclusion of $500x.\2\ The taxpayer has $870x of deductions
pertinent to this example that are not base erosion tax benefits and
$30x of deductions that are base erosion tax benefits. It is also
assumed that the amount of foreign tax credits permitted under section
904(a) is $105x. This taxpayer's regular U.S. taxable income is $600x
($1000x + $500x - $870x - $30x), its regular U.S. tax rate is 21.0
percent, and its regular U.S. tax liability is $21x ($600x x 21% =
$126x, less

[[Page 67052]]

foreign tax credits of $105x ($126x - $105x)).
---------------------------------------------------------------------------

\2\ For simplification of this example, the $500x GILTI income
is presented as the net of the global intangible low-tax income
amount of the domestic corporation under section 951A, plus the
section 78 gross up amount for foreign taxes, less the GILTI
deduction under section 250(a)(1)(B). The deduction under section
250(a)(1)(B) is not taken into account in determining the base
erosion percentage. See section 59A(c)(4)(B)(i).
---------------------------------------------------------------------------

Under the alternative regulatory approach, the taxpayer is an
applicable taxpayer because its base erosion percentage is 3.33 percent
($30x/$900x), which is greater than the three percent base erosion
threshold. Because the taxpayer is subject to the BEAT, it must further
compute its modified taxable income, which is $630x--its regular U.S.
taxable income ($600x) plus its base erosion tax benefits ($30x). The
taxpayer determines its base erosion minimum tax amount as the excess
of the BEAT rate (10 percent) multiplied by its modified taxable income
$63x ($630x x 10%) over its regular U.S. tax liability of $21x, which
is equal to $42x ($63x - $21x). In this example the total U.S. tax bill
is $63x ($21x of regular tax and $42x of BEAT).
Under the proposed regulations, this taxpayer would have the option
to waive all or part of its deductions that are base erosion payments
so that its base erosion percentage would fall below the base erosion
threshold. Specifically, the taxpayer could waive $3.10x of its
deductions that are base erosion payments, yielding a base erosion
percentage of less than the three percent base erosion threshold (base
erosion tax benefits = $26.90x ($30x - $3.10x); base erosion percentage
= $26.90x/($870x + $26.90x) = 2.99%). After taking into account this
waiver, the taxpayer's regular taxable income would increase to
$603.10x ($1000x + $500x - $870x - $26.90x), and its regular tax
liability would increase to $21.65x ($603.10x x 21% = $126.65, less
foreign tax credits of $105x = $21.65x).\3\ The waiver is valuable to
this taxpayer because its tax bill in this simple example is lower by
$41.35x ($63x - $21.65x).
---------------------------------------------------------------------------

\3\ Although the waiver increases the taxpayer's regular taxable
income, the taxpayer's gross income (in the context of this example)
is unchanged. Thus, only the tax liability needs to be compared
across the regulatory approaches to determine whether the taxpayer
would benefit from waiving deductions.
---------------------------------------------------------------------------

This example shows the difference in tax liability caused by
allowing deductions to be waived and thus, the difference between the
proposed regulations and the alternative regulatory approach. The next
part D.2.c of these Special Analyses discusses the behavioral
incentives and economic effects that can result from this tax
treatment.
c. Economic Effects of These Proposed Regulations
The proposed regulations effectively allow a taxpayer to make
payments that would be base erosion payments without becoming an
applicable taxpayer. This provision reduces the effective tax on base
erosion payments for at least some taxpayers, relative to the
alternative regulatory approach. Because of this reduction, the
proposed regulations may lead to a higher amount of base erosion
payments than under the alternative regulatory approach.
Any additional base erosion payments under the proposed regulations
would come from taxpayers who, under the alternative regulatory
approach, would not be applicable taxpayers but would be close to being
applicable taxpayers; that is, they would have base erosion percentages
that were close to but below the base erosion threshold.
Taxpayers that would be applicable taxpayers under the alternative
regulatory approach will not increase their base erosion payments under
the proposed regulations. To see this point, consider an applicable
taxpayer under the alternative regulatory approach with base erosion
payments of $Y. If this taxpayer were to increase its base erosion
payments by $10 and reduce its non-base erosion payments by $10 (that
is, it has substituted base erosion payments for non-base erosion
payments), its tax bill would generally increase by $1. The fact that
this taxpayer chose base erosion payments of $Y rather than $Y+10
suggests that this substitution would be worth less than $1 to the
taxpayer. The substitution is not worth the increased tax. Next
consider this taxpayer under the proposed regulations. If it elects to
waive sufficient deductions such that it is not an applicable taxpayer,
then the marginal increase in its tax bill from the hypothetized
substitution is $2.10. Thus, if this increase in base erosion payments
(and substitution away from non-base erosion payments) is not
worthwhile to the taxpayer under the alternative regulatory approach,
it will not be worthwhile under the proposed regulations.
This example suggests that to the extent that there is any increase
in base erosion payments under the proposed regulations, it will not
come from taxpayers that would be applicable taxpayers under the
alternative regulatory approach and will instead come from those
taxpayers that would not be applicable taxpayers under the alternative
regulatory approach. These taxpayers would be able, under the proposed
regulations, to take on activities that increase their base erosion
payments but, by waiving all or part of the deduction for these
activities, avoid crossing the base erosion threshold. This is the set
of taxpayers that will be the source of any economic effects arising
from the proposed regulations.
As a result of the ability to waive deductions in the proposed
regulations, taxpayers may change business behavior in two possible
ways. First, businesses may expand economic activities in the United
States even if those activities result in payments to foreign related
parties (i.e., base erosion payments). For example, under the
alternative regulatory approach a multinational enterprise may decide
not to open an office or manufacturing plant in the United States if
that incremental activity also resulted in incremental base erosion
payments that would cause the taxpayer to become an applicable
taxpayer. Under the proposed regulations, this business can expand its
activities in the U.S. and avoid becoming an applicable taxpayer,
provided it waived sufficient deductions to stay below the base erosion
threshold.
Second, businesses already operating in the United States may not
be discouraged from structuring transactions as base erosion payments
under the proposed regulations. Under the alternative regulatory
approach, a business might conduct its transactions through unrelated
parties rather than with a foreign related party so that its base
erosion percentage would remain below the base erosion threshold. Under
the proposed regulations, this business could use a foreign related
party rather than an unrelated party for these transactions, without
paying the BEAT, again provided it waived sufficient deductions to stay
below the base erosion threshold.
In each of these cases, a business adopting these strategies would
be presumed to accrue a non-tax, economic benefit from using a foreign
related party rather than an unrelated party to conduct this aspect of
its business. Under the proposed regulations, there is no U.S. tax-
related benefit tax associated with transacting with a foreign related
party and thus any decisions made by a business to make a base erosion
payment would occur because of the economic advantage it provides to
the business, rather than that payment being avoided, diverted or
otherwise distorted because it would result in the taxpayer becoming an
applicable taxpayer subject to the BEAT. This economic advantage might
arise, for example, because the business has a closer relationship with
the foreign related party and its transactions with the foreign related
party provide enhanced managerial control. This economic benefit
accruing to this business would generally be beneficial to the U.S.
economy; this is

[[Page 67053]]

particularly true in the first case described in the preceding
paragraphs. While taxpayers may have compliance costs related to
deciding whether to waive deductions and ensuring that procedural rules
are followed, any changes in compliance costs are expected to be small
because the accounting required for the relevant deductions is
essentially the same under both the proposed regulations and the
alternative regulatory approach.
Note that under the proposed regulations, a taxpayer would in
general face a marginal tax rate that is 21 percentage points higher on
its base erosion payments than on comparable deductions that are not
base erosion payments. Economic analysis would conclude that the
business will undertake a base erosion payment rather than a non-base
erosion payment only if it provides a non-tax benefit at least this
large. Businesses will choose a different mix of base erosion and non-
base erosion payments under the alternative regulatory approach, but an
analogous inference about the marginal value of a base erosion payment
here (and thus of the difference between the proposed regulations and
the alternative regulatory approach) is more complex because the
marginal tax incurred by base erosion payments near the base erosion
threshold depends on (i) how close the taxpayer would be to the
threshold; (ii) the quantity of its base erosion payments that are
below the base erosion threshold and subject to tax if the base erosion
threshold is exceeded; and (iii) other factors affecting the potential
BEAT liability. Because of these factors, the difference in the non-tax
value to businesses of a marginal base erosion payment between the
proposed regulations and alternative regulatory approach is complex and
not readily inferred.
This said, as a general matter, for taxpayers who chose to waive
deductions under the proposed regulations in order not to be applicable
taxpayers, the Treasury Department and the IRS expect that relative to
the alternative regulatory approach, the proposed regulations would
tend to:
Reduce tax costs of additional economic activity in the
United States by those taxpayers in the situation where additional
economic activity in the United States would tend to increase base
erosion payments;
Reduce tax-related incentives for otherwise economically
inefficient business, contractual or accounting changes designed to
avoid the taxpayer being an applicable taxpayer;
Continue to fulfill the general intent and purpose of the
statute by not providing tax incentives for certain large corporations
to make deductible payments to foreign related parties in excess of 3
percent of the taxpayer's deductions; and
Reduce the number of taxpayers that are applicable
taxpayers and the overall amount of BEAT collected. This revenue effect
is likely to be offset to some degree by the fact that some taxpayers
are likely to elect to waive allowable deductions.
The Treasury Department and the IRS have not attempted to provide a
quantitative estimate of the economic consequences of the proposed
regulations relative to the alternative regulatory approach. Any
increase in base erosion payments under the proposed regulations
depends on the number of taxpayers that would be close to the base
erosion threshold under the alternative regulatory approach, the
quantity of base erosion payments they would have under the alternative
regulatory approach, and, most importantly, the economic value provided
by those base erosion payments relative to alternative economic
decisions. These items are difficult to estimate with any reasonable
precision in part because they involve economic activities, including
potential new economic activity in the United States, that cannot be
readily inferred from existing data or models available to the Treasury
Department and the IRS.
In the absence of such quantitative estimates, the Treasury
Department and the IRS have undertaken a qualitative analysis of the
economic effects of the proposed regulations relative to the
alternative regulatory approach.
The Treasury Department and the IRS solicit comments on these
findings and more generally on the economic effects of these proposed
regulations. The Treasury Department and the IRS particularly solicit
data, other evidence, or models that could be used to enhance the rigor
of the process by which the final regulations might be developed.
d. Number of Affected Taxpayers
These proposed regulations affect all corporate taxpayers that
satisfy the gross receipts test, base erosion percentage test, and have
base erosion payments. The Treasury Department and the IRS project that
3,500-4,500 taxpayers may be applicable taxpayers under the BEAT. This
estimate is based on the number of filers that (1) filed the Form 1120
series of tax returns (except for the Form 1120-S), (2) filed a Form
5471 or Form 5472, and (3) reported gross receipts of at least $500
million. Because an applicable taxpayer is defined under section
59A(e)(1)(A) as a corporation other than a regulated investment
company, a real estate investment trust, or an S corporation, the
Treasury Department and the IRS have determined that taxpayers who
filed the Form 1120 series of tax returns will be most likely to be
affected by these proposed regulations. Additionally, the Treasury
Department and the IRS estimated the number of filers likely to make
payments to a foreign related party based on filers of the Form 1120
series of tax returns who also filed a Form 5471 or Form 5472 to
determine the number of respondents. Finally, because an applicable
taxpayer is defined under section 59A(e)(1)(B) as a taxpayer with
average annual gross receipts of at least $500 million for the 3-
taxable-year period ending with the preceding taxable year, the
Treasury Department and the IRS estimated the scope of Affected
Taxpayers based on the amount of gross receipts reported by taxpayers
filing the Form 1120 series of tax returns.
These projections are based solely on data with respect to the
taxpayer, without taking into account any members of the taxpayer's
aggregate group. As many as 100,000-110,000 additional taxpayers may be
applicable taxpayers as a result of being members of an aggregate
group.\4\ This estimate is based on the number of taxpayers who filed a
Form 1120 and also filed a Form 5471 or a Form 5472, but without regard
to the gross receipts test. Current data do not permit an estimate of
the number of taxpayers that would be close to the base erosion
threshold.
---------------------------------------------------------------------------

\4\ These estimates are based on current tax filings for taxable
year 2017 and do not yet include the BEAT. At this time, the
Treasury Department and the IRS do not have readily available data
to determine whether a taxpayer that is a member of an aggregate
group will meet all tests to be an applicable taxpayer for purposes
of the BEAT.
---------------------------------------------------------------------------

E. Paperwork Reduction Act
The collections of information in these proposed regulations with
respect to section 59A are in proposed Sec. Sec. 1.59A-3(c)(5), and
1.6031(a)-1(b)(7). The collection of information in proposed Sec. Sec.
1.59A-3(c)(5) is an election to waive deductions allowed under the
Code. The election to waive deductions is made by a taxpayer on its
original or amended income tax return. A taxpayer makes the election on
an annual basis by completing Form 8991 or as provided in applicable
instructions. The IRS is contemplating making additional changes to the
Form 8991 to take these proposed regulations into account.
The collection of information in proposed Sec. 1.6031(a)-1(b)(7)
requires a partner in a foreign partnership that: (1)

[[Page 67054]]

Is not required to file a partnership return and (2) has made a payment
or accrual that is treated as a base erosion payment of a partner under
Sec. 1.59A-7(b)(2), to provide the information necessary to report any
base erosion payments on Form 8991. The IRS intends that this
information will be collected by completing Form 8991, Tax on Base
Erosion Payments of Taxpayers With Substantial Gross Receipts, Form
1065, and Schedule K-1. The IRS is contemplating making revisions to
Form 1065, Schedule K, and Schedule K-1 to take these proposed
regulations into account.
For purposes of the Paperwork Reduction Act, the reporting burden
associated with the collections of information with respect to section
59A, will be reflected in the Paperwork Reduction Act Submission,
associated with Form 8991 (OMB control number 1545-0123).
The current status of the Paperwork Reduction Act submissions
related to BEAT is provided in the following table. The BEAT provisions
are included in aggregated burden estimates for the OMB control numbers
listed below which, in the case of 1545-0123, represents a total
estimated burden time, including all other related forms and schedules
for corporations, of 3.157 billion hours and total estimated monetized
costs of $58.148 billion ($2017). The burden estimates provided in the
OMB control numbers below are aggregate amounts that relate to the
entire package of forms associated with the OMB control number, and
will in the future include but not isolate the estimated burden of only
the BEAT requirements. These numbers are therefore unrelated to the
future calculations needed to assess the burden imposed by the proposed
regulations. The Treasury Department and IRS urge readers to recognize
that these numbers are duplicates and to guard against overcounting the
burden that international tax provisions imposed prior to the Act. No
burden estimates specific to the proposed regulations are currently
available. The Treasury Department has not estimated the burden,
including that of any new information collections, related to the
requirements under the proposed regulations. Those estimates would
capture both changes made by the Act and those that arise out of
discretionary authority exercised in the proposed regulations. The
Treasury Department and the IRS request comments on all aspects of
information collection burdens related to the proposed regulations. In
addition, when available, drafts of IRS forms are posted for comment at
https://apps.irs.gov/app/picklist/list/draftTaxForms.htm.

----------------------------------------------------------------------------------------------------------------
Form Type of filer OMB No.(s) Status
----------------------------------------------------------------------------------------------------------------
Form 8991........................ Business (NEW Model)..... 1545-0123 Published in the FRN on 10/11/18.
Link: https:// Public Comment period closed on
www.federalregister.gov/ 12/10/18.
documents/2018/10/09/
2018-21846/proposed-
collection-comment-
request-for-forms-1065-
1065-b-1066-1120-1120-c-
1120-f-1120-h-1120-nd.
----------------------------------------------------------------------------------------------------------------

Related New or Revised Tax Forms
----------------------------------------------------------------------------------------------------------------
Number of
New Revision of existing form respondents (2018,
estimated)
----------------------------------------------------------------------------------------------------------------
Form 8991............................... Y .......................... 3,500-4,500
----------------------------------------------------------------------------------------------------------------

The number of respondents in the Related New or Revised Tax Forms
table was estimated by Treasury's Office of Tax Analysis based on data
from IRS Compliance Planning and Analytics using tax return data for
tax years 2015 and 2016. Data for Form 8991 represent preliminary
estimates of the total number of taxpayers which may be required to
file the new Form 8991. Only certain large corporate taxpayers with
gross receipts of at least $500 million are expected to file this form.
F. Regulatory Flexibility Act
It is hereby certified that these regulations will not have a
significant economic impact on a substantial number of small entities
within the meaning of section 601(6) of the Regulatory Flexibility Act
(5 U.S.C. chapter 6). This certification is based on the fact that
these regulations will primarily affect aggregate groups of
corporations with average annual gross receipts of at least $500
million and that make payments to foreign related parties. Generally
only large businesses both have substantial gross receipts and make
payments to foreign related parties.
Notwithstanding this certification, the Treasury Department and the
IRS invite comments from the public about the impact of this proposed
rule on small entities.
Pursuant to section 7805(f), these regulations will be submitted to
the Chief Counsel for Advocacy of the Small Business Administration for
comment on their impact on small business.
G. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
state, local, or tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. In 2019, that threshold is approximately $154 million. This
rule does not include any Federal mandate that may result in
expenditures by state, local, or tribal governments, or by the private
sector in excess of that threshold.
H. Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on state and local
governments, and is not required by statute, or preempts state law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive Order. This proposed rule does not have
federalism implications and does not impose substantial direct
compliance costs on state and local governments or preempt state law
within the meaning of the Executive Order.

[[Page 67055]]

Comments and Request for Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ``Addresses''
heading. The Treasury Department and the IRS request comments on all
aspects of the proposed rules. See also parts II and III of the
Explanation of Provisions (requesting specific comments related to the
aggregate group rules in light of the with-or-without method and the
election to waive allowable deductions, respectively) and parts II.C.,
II.D., and IV.B. of the Explanation of Provisions (requesting specific
comments related to the appropriate treatment of a deconsolidating
member's gross receipts history, appropriate methods of taking into
account predecessors and successors for purposes of determining gross
receipts of an applicable taxpayer's aggregate group, and the treatment
of transactions involving partnerships engaged in a U.S. trade or
business, respectively).
All comments will be available at www.regulations.gov or upon
request. A public hearing will be scheduled if requested in writing by
any person that timely submits written comments. If a public hearing is
scheduled, notice of the date, time, and place for the public hearing
will be published in the Federal Register.

Drafting Information

The principal authors of the proposed regulations are Azeka J.
Abramoff, Sheila Ramaswamy and Karen Walny of the Office of Associate
Chief Counsel (International). However, other personnel from the
Treasury Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:

Authority: 26 U.S.C. 7805 * * *

0
Par. 2. Section1.59A-2, as added in a final rule published elsewhere in
this issue of the Federal Register, effective December 6, 2019, is
amended by adding paragraphs (c)(2)(ii), (c)(4) through (6), and
paragraph (f)(2) to read as follows:

Sec. 1.59A-2 Applicable taxpayer.

* * * * *
(c) * * *
(2) * * *
(ii) Change in the composition of an aggregate group. A change in
ownership of the taxpayer (for example, a sale of the taxpayer to a
third party) does not cause the taxpayer to leave its own aggregate
group. Instead, any members of the taxpayer's aggregate group before
the change in ownership that are no longer members following the change
in ownership are treated as having left the taxpayer's aggregate group,
and any new members that become members of the taxpayer's aggregate
group following the change in ownership are treated as having joined
the taxpayer's aggregate group. A change in ownership of another member
of the aggregate group of the taxpayer (for example, a sale of the
member to a third party) may result in the member joining or leaving
the aggregate group of the taxpayer. See paragraph (c)(4) of this
section for the treatment of members joining or leaving the aggregate
group of a taxpayer.
* * * * *
(4) Periods before and after a corporation is a member of an
aggregate group. Solely for purposes of this section, to determine the
gross receipts and the base erosion percentage of the aggregate group
of a taxpayer, the taxpayer takes into account only the portion of
another corporation's taxable year during which the corporation is a
member of the aggregate group of the taxpayer. The gross receipts of an
aggregate group of a taxpayer attributable to a member of the aggregate
group are not reduced as a result of the member leaving the aggregate
group of the taxpayer. Solely for purposes of this paragraph (c), when
a member joins or leaves the aggregate group of a taxpayer in a
transaction that does not result in the member having a taxable year-
end, the member is treated as having a taxable year end (deemed taxable
year-end) immediately before joining or leaving the group. For purposes
of this paragraph (c)(4), a corporation that has a deemed taxable year-
end may determine gross receipts, base erosion tax benefits, and
deductions attributable to that year by either treating the
corporation's books as closing at the deemed taxable year-end or, in
the case of items other than extraordinary items (as defined in Sec.
1.1502-76(b)(2)(ii)(C)), allocating those items on a pro-rata basis
without a closing of the books.
(5) Treatment of short taxable year. Solely for purposes of this
section, if a taxpayer has a taxable year of fewer than 12 months (a
short period), gross receipts are annualized by multiplying the gross
receipts for the short period by 365 and dividing the result by the
number of days in the short period. When a taxpayer has a taxable year
that is a short period, the taxpayer must use a reasonable approach to
determine the gross receipts and base erosion percentage of its
aggregate group for the short period. A reasonable approach should
neither over-count nor under-count the gross receipts, base erosion tax
benefits, and deductions of the aggregate group of the taxpayer, even
if the taxable year of a member or members of the aggregate group does
not end with or within the short period.
(6) Treatment of predecessors--(i) In general. Solely for purposes
of this section, in determining gross receipts under paragraph (d) of
this section, any reference to a taxpayer includes a reference to any
predecessor of the taxpayer. For this purpose, a predecessor includes
the distributor or transferor corporation in a transaction described in
section 381(a) in which the taxpayer is the acquiring corporation.
(ii) No duplication. If the taxpayer or any member of its aggregate
group is also a predecessor of the taxpayer or any member of its
aggregate group, the gross receipts, base erosion tax benefits, and
deductions of each member are taken into account only once.
* * * * *
(f) * * *

(2) Example 2: Member leaving an aggregate group--(i) Facts.
Parent Corporation wholly owns Corporation 1 and Corporation 2. Each
corporation is a domestic corporation and a calendar year taxpayer
that does not file a consolidated return. The aggregate group of
Corporation 1 includes Parent Corporation and Corporation 2. At noon
on June 30, Year 1, Parent Corporation sells the stock of
Corporation 2 to Corporation 3, an unrelated domestic corporation,
in exchange for cash consideration. Before the acquisition,
Corporation 3 was not a member of an aggregate group. Corporation 2
and Corporation 3 do not file a consolidated return.
(ii) Analysis. (A) For purposes of section 59A, to determine the
gross receipts and base erosion percentage of the aggregate group of
Corporation 1 for calendar Year 1, Corporation 2 is treated as
having a taxable year end immediately before noon on June 30, Year
1, as a result of the sale. The aggregate group of Corporation 1
takes into account only the gross receipts, base erosion tax
benefits, and deductions of Corporation 2 attributable to the period
from January 1 to immediately before noon on June 30 of Year 1. The
same results apply to the aggregate

[[Page 67056]]

group of Parent Corporation for calendar Year 1.
(B) For purposes of section 59A, to determine the gross receipts
and base erosion percentage of the aggregate group of Corporation 2
for calendar Year 1, each of Parent Corporation, Corporation 1, and
Corporation 3 are treated as having a taxable year end at
immediately before noon on June 30, Year 1. Because Corporation 2
does not have a short taxable year, paragraph (c)(5) of this section
does not apply. The aggregate group of Corporation 2 takes into
account the gross receipts, base erosion tax benefits, and
deductions of Parent Corporation and Corporation 1 attributable to
the period from January 1 to immediately before noon on June 30 of
Year 1, and the gross receipts, base erosion tax benefits, and
deductions of Corporation 3 attributable to the period from noon on
June 30 to December 31 of Year 1.

0
Par. 3. Section 1.59A-3, as added in a final rule published elsewhere
in this issue of the Federal Register, effective December 6, 2019, is
amended by adding paragraphs (c)(5) and (6) and (d)(8) and (9) to read
as follows:

Sec. 1.59A-3 Base erosion payments and base erosion tax benefits.

* * * * *
(c) * * *
(5) Allowed deduction. Solely for purposes of paragraph (c)(1) of
this section, all deductions that could be properly claimed by a
taxpayer for the taxable year (determined after giving effect to the
taxpayer's permissible method of accounting and to any election, such
as the election under section 173 to capitalize circulation
expenditures or the election under section 168(g)(7) to use the
alternative depreciation system of depreciation) are treated as allowed
deductions under chapter 1 of subtitle A of the Internal Revenue Code.
(6) Election to waive allowed deductions--(i) In general. Solely
for purposes of paragraph (c)(1) of this section, if a taxpayer elects
to waive certain deductions, the amount of allowed deductions as
defined in paragraph (c)(5) of this section is reduced by the amount of
deductions that are properly waived under this paragraph (c)(6)(i). To
make this election, a taxpayer must provide information related to each
deduction waived as required by applicable forms and instructions
issued by the Commissioner, including--
(A) A detailed description of the item or property to which the
deduction relates, including sufficient information to identify that
item or property on the taxpayer's books and records;
(B) The date on which, or period in which, the waived deduction was
paid or accrued;
(C) The provision of the Internal Revenue Code (and regulations, as
applicable) that allows the deduction for the item or property to which
the election relates;
(D) The amount of the deduction that is claimed for the taxable
year with respect to the item or property;
(E) The amount of the deduction being waived for the taxable year
with respect to the item or property;
(F) A description of where the deduction is reflected (or would
have been reflected) on the Federal income tax return (schedule and
line number); and
(G) The name, EIN (if applicable), and country of organization of
the foreign related party that is or will be the recipient of the
payment that generates the deduction.
(ii) Effect of election to waive deduction--(A) In general--(1)
Consistent treatment. Except as otherwise provided in this paragraph
(c)(6)(ii), any deduction waived under paragraph (c)(6) of this section
is treated as having been waived for all purposes of the Code and
regulations.
(2) No allocation and apportionment of waived deductions. The
waiver of deductions described in this paragraph (c)(6) is treated as
occurring before the allocation and apportionment of deductions under
Sec. Sec. 1.861-8 through -14T and 1.861-17 (such as for purposes of
section 904).
(3) Effect of waiver of deductions described in Sec. Sec. 1.861-10
and Sec. 1.861-10T. To the extent that any waived deduction is
interest expense that would have been directly allocated under the
rules of Sec. Sec. 1.861-10 or Sec. 1.861-10T and would have resulted
in the reduction of value of any assets for purposes of allocating
other interest expense under Sec. Sec. 1.861-9 and 1.861-9T, the value
of the assets is reduced to the same extent as if the taxpayer had not
elected to waive the deduction.
(B) Effect of the election to waive deductions disregarded for
certain purposes. If a taxpayer makes the election to waive a
deduction, in whole or in part, under paragraph (c)(6)(i) of this
section, the election is disregarded for determining--
(1) The taxpayer's overall method of accounting, or the taxpayer's
method of accounting for any item, under section 446 and the
regulations in this part under section 446;
(2) Whether a change in the taxpayer's overall plan of accounting
or the taxpayer's treatment of a material item is a change in method of
accounting under section 446(e) and Sec. 1.446-1(e);
(3) The amount allowable under subtitle A of the Code for
depreciation or amortization for purposes of section 167(c) and section
1016(a)(2) or section 1016(a)(3) and any other adjustment to basis
under section 1016(a);
(4) For purposes of applying the exclusive apportionment rule in
Sec. 1.861-17(b), the geographic source where the research and
experimental activities which account for more than fifty percent of
the amount of the deduction for research and experimentation was
performed;
(5) The application of section 482 and the regulations under
section 482;
(6) The amount of the taxpayer's earnings and profits; and
(7) Any other item as necessary to prevent a taxpayer from
receiving the benefit of a waived deduction.
(C) Not a method of accounting. The election described in paragraph
(c)(6)(i) of this section is not a method of accounting under section
446 and the regulations in this part under section 446.
(D) Effect of the election in determining section 481(a)
adjustments. A taxpayer making the election described in paragraph
(c)(6)(i) of this section agrees that if the method of accounting for a
waived deduction is changed, the amount of adjustment taken into
account under section 481(a)(2) is determined without regard to the
election described in paragraph (c)(6)(i) of this section. As a result,
a waived deduction has no effect on the amount of a section 481(a)
adjustment compared to what the adjustment would have been if the
deduction had not been waived.
(iii) Time and manner for election to waive deduction. A taxpayer
may make the election described in paragraph (c)(6)(i) of this section
on its original filed Federal income tax return. In addition, a
taxpayer may elect to waive deductions or increase the amount of
deductions waived pursuant to the election described in paragraph
(c)(6)(i) of this section on an amended Federal income tax return filed
within the later of 3 years from the date the original return was
filed, taking into account section 6501(b)(1), for the taxable year for
which the election is made or the period described in section
6501(c)(4), or during the course of an examination of the taxpayer's
income tax return for the relevant tax year pursuant to procedures
prescribed by the Commissioner. However, a taxpayer may not decrease
the amount of deductions waived by the election, or otherwise revoke
the election that is described in paragraph (c)(6)(i) of this section
on any amended Federal income tax return or during the course of an
examination. To make the election, a

[[Page 67057]]

taxpayer must complete the appropriate part of Form 8991, Tax on Base
Erosion Payments of Taxpayers With Substantial Gross Receipts, (or
successor), including the information described in paragraph (c)(6)(i)
of this section and any other information required by the form or
instructions. A taxpayer makes the election described in paragraph
(c)(6)(i) of this section on an annual basis, and the taxpayer does not
need the consent of the Commissioner if the taxpayer chooses not to
make the election for a subsequent taxable year. The election described
in paragraph (c)(6)(i) of this section may not be made in any other
manner (for example, by filing an application for a change in
accounting method).
(d) * * *

(8) Example 8: Effect of election to waive deduction on method
of accounting--(i) Facts. DC, a domestic corporation, purchased and
placed in service a depreciable asset (Asset A) from a foreign
related party on the first day of its taxable year 1 for $100x. DC
elects to use the alternative depreciation system under section
168(g) to depreciate all properties placed in service during taxable
year 1. Asset A is not eligible for the additional first year
depreciation deduction. Beginning in taxable year 1, DC depreciates
Asset A under the alternative depreciation system using the
straight-line depreciation method, a 5-year recovery period, and the
half-year convention. This depreciation method, recovery period, and
convention are permissible for Asset A under section 168(g). On its
timely filed original Federal income tax return for taxable year 1,
DC does not elect to waive any deductions and DC claims a
depreciation deduction of $10x for Asset A. On its timely filed
original Federal income tax return for taxable year 2, DC does not
elect to waive any deductions and DC claims a depreciation deduction
of $20x for Asset A. During taxable year 3, DC files an amended
return for taxable year 1 to elect to waive the depreciation
deduction for Asset A and reports in accordance with paragraph
(c)(6)(i) of this section with its amended return for taxable year 1
that the amount of the waived depreciation deduction for Asset A is
$10x and the amount of the claimed depreciation deduction is $0x.
(ii) Analysis-- Pursuant to paragraph (c)(6)(ii)(B)(1) of this
section, DC's election to waive the depreciation deduction for Asset
A for taxable year 1 is disregarded for determining DC's method of
accounting for Asset A. Accordingly, after DC's election to waive
the depreciation deduction for Asset A for taxable year 1, DC's
method of accounting for depreciation for Asset A continues to be
the straight-line depreciation method, a 5-year recovery period, and
the half-year convention. Pursuant to paragraph (c)(6)(ii)(C) of
this section, the election made by DC in taxable year 3 on its
amended return for taxable year 1 is not a method of accounting.
(9) Example 9: Change of accounting method when taxpayer has
waived a deduction--(i) Facts. DC, a domestic corporation, purchased
and placed in service a depreciable asset (Asset B) from a foreign
related party on the first day of its taxable year 1 for $100x. DC
elects to use the alternative depreciation system under section
168(g) to depreciate all properties placed in service during taxable
year 1. Asset B is not eligible for the additional first year
depreciation deduction. Beginning in taxable year 1, DC depreciates
Asset B under the alternative depreciation system using the
straight-line depreciation method, a 10-year recovery period, and
the half-year convention. Under this method of accounting, the
depreciation deductions for Asset B are $5x for taxable year 1 and
$10x for taxable year 2. However, for taxable years 1 and 2, DC
elects to waive $3x and $6x, respectively, of the depreciation
deductions for Asset B and reports the information required under
paragraph (c)(6)(i) of this section with its returns. In taxable
year 3, DC realizes that the correct recovery period for Asset B is
5 years. If DC had used the correct recovery period for Asset B, the
depreciation deductions for Asset B would have been $10x for taxable
year 1 and $20x for taxable year 2. DC timely files a Form 3115 to
change its method of accounting for Asset B from a 10-year recovery
period to a 5-year recovery period, beginning with taxable year 3.
DC was not under examination as of the date on which it timely filed
this Form 3115.
(ii) Analysis--(A) Computation of the section 481(a) adjustment.
In determining the net negative section 481(a) adjustment for this
method change, DC compares the depreciation deductions under its
present method of accounting to the depreciation deductions under
its proposed method of accounting. Pursuant to paragraph
(c)(6)(ii)(D) of this section, DC agreed that, by making the
election to waive depreciation deductions for Asset B, DC will not
take into account the fact that depreciation deductions for Asset B
were waived under paragraph (c)(6)(i) of this section. Accordingly,
DC's net negative section 481(a) adjustment for this method change
is $15x, which is calculated by determining the difference between
the depreciation deductions for Asset B for taxable years 1 and 2
under DC's present method of accounting ($15x) and the depreciation
deductions that would have been allowable for Asset B for taxable
years 1 and 2 under DC's proposed method of accounting ($30x).
(B) Computation of basis adjustments. Pursuant to paragraph
(c)(6)(ii)(B)(3) of this section, DC's elections to waive the
depreciation deductions for Asset B for taxable years 1 and 2 are
disregarded for determining the amount allowable for depreciation
for purposes of section 1016(a)(2). The amount allowable for
depreciation of Asset B is determined based on the proper method of
computing depreciation for Asset B. Accordingly, Asset B's adjusted
basis at the end of taxable year 1 is $90x ($100x-$10x) and at the
end of taxable year 2 is $70x ($90x-$20x).

0
Par. 4. Section 1.59A-7, as added in a final rule published elsewhere
in this issue of the Federal Register, effective December 6, 2019, is
amended by adding paragraphs (c)(5)(v) and (g)(2)(x) to read as
follows:

Sec. 1.59A-7 Application of base erosion and anti-abuse tax to
partnerships.

* * * * *
(c) * * *
(5) * * *
(v) Allocations of income in lieu of deductions. If a partnership
adopts the curative method of making section 704(c) allocations under
Sec. 1.704-3(c), the allocation of income to the contributing partner
in lieu of a deduction allocation to the non-contributing partner is
treated as a deduction for purposes of section 59A in an amount equal
to the income allocation. See paragraph (g)(2)(x) of this section
(Example 10) for an example illustrating the application of this
paragraph (c)(5)(v).
* * * * *
(g) * * *
(2) * * *

(x) Example 10: Section 704(c) and curative allocations--(A)
Facts. The facts are the same as in paragraph (d)(2)(ii)(A) of this
section (the facts in Example 2), except that DC's property is not
depreciable, PRS uses the traditional method with curative
allocations under Sec. 1.704-3(c), and the curative allocations are
to be made from operating income. Also assume that the partnership
has $20x of gross operating income in each year and a curative
allocation of the operating income satisfies the ``substantially the
same effect'' requirement of Sec. 1.704-3(c)(3)(iii)(A).
(B) Analysis. The analysis and results are the same as in
paragraph (d)(2)(i)(B) of this section (the analysis in Example 1),
except that actual depreciation is $8x ($40x/5) per year and the
ceiling rule shortfall under Sec. 1.704-3(b)(1) of $2x per year is
corrected with a curative allocation of income from DC to FC is $2x
per year. Solely for U.S. federal income tax purposes, each year FC
is allocated $12x of total operating income and DC is allocated $8x
of operating income. Both the actual depreciation deduction to DC
and the curative allocation of income from DC are base erosion tax
benefits to DC under paragraph (d)(1) of this section.

0
Par. 5. Section1.59A-9, as added in a final rule published elsewhere in
this issue of the Federal Register, effective December 6, 2019, is
amended by adding paragraphs (b)(5) and (6) to read as follows:

Sec. 1.59A-9 Anti-abuse and recharacterization rules.

* * * * *
(b) * * *
(5) Transactions involving derivatives on a partnership interest.
If a taxpayer acquires a derivative on a partnership interest (or
partnership assets) as part of a transaction (or series of
transactions),

[[Page 67058]]

plan or arrangement that has as a principal purpose avoiding a base
erosion payment (or reducing the amount of a base erosion payment) and
the partnership interest (or partnership assets) would have resulted in
a base erosion payment had the taxpayer acquired that interest (or
partnership asset) directly, then the taxpayer is treated as having a
direct interest instead of a derivative interest for purposes of
applying section 59A. A derivative interest in a partnership includes
any contract (including any financial instrument) the value of which,
or any payment or other transfer with respect to which, is (directly or
indirectly) determined in whole or in part by reference to the
partnership, including the amount of partnership distributions, the
value of partnership assets, or the results of partnership operations.
(6) Allocations to eliminate or reduce a base erosion payment. If a
partnership receives (or accrues) income from a person not acting in a
partner capacity (including a person who is not a partner) and
allocates that income to its partners with a principal purpose of
avoiding a base erosion payment (or reducing the amount of a base
erosion payment), then the taxpayer transacting with the partnership
will determine its base erosion payment as if the allocations had not
been made and the items of income had been allocated proportionately.
The preceding sentence applies only when the allocations, in
combination with any related allocations, do not change the economic
arrangement of the partners to the partnership.
* * * * *
0
Par. 6. Section 1.59A-10, as added in a final rule published elsewhere
in this issue of the Federal Register, effective December 6, 2019, is
revised to read as follows:

Sec. 1.59A-10 Applicability date.

(a) General applicability date. Sections 1.59A-1 through 1.59A-9,
other than the provisions described in the first sentence of paragraph
(b) of this section, apply to taxable years ending on or after December
17, 2018. However, taxpayers may apply these regulations in their
entirety for taxable years beginning after December 31, 2017, and
ending before December 17, 2018. In lieu of applying these regulations,
taxpayers may apply the provisions matching Sec. Sec. 1.59A-1 through
1.59A-9 from the Internal Revenue Bulletin (IRB) 2019-02 (https://www.irs.gov/pub/irs-irbs/irb19-02.pdf) in their entirety for all
taxable years ending on or before December 6, 2019.
(b) Exception. Sections 1.59A-2(c)(2)(ii) and (c)(4) through (6)
and 1.59A-3(c)(5) and (6) apply to taxable years beginning on or after
[EFFECTIVE DATE OF FINAL RULE], and Sec. Sec. 1.59A-7(c)(5)(v) and
1.59A-9(b)(5) and (6) apply to taxable years ending on or after
December 2, 2019. However, taxpayers may apply these provisions in
their entirety for taxable years beginning after December 31, 2017, and
before the final regulations are applicable. If a taxpayer is applying
the provisions described in the last sentence of paragraph (a) of this
section, the taxpayer's failure to apply Sec. 1.59A-2(c)(2)(ii) and
(c)(4) through (6) to taxable years ending on or before December 6,
2019 is not taken into account for purposes of applying the preceding
sentence.
* * * * *
0
Par. 7. Section 1.6031(a)-1 is amended by adding paragraphs (b)(7) and
(f)(3) to read as follows:

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

* * * * *
(b) * * *
(7) Filing obligation for certain partners of certain foreign
partnerships with respect to base erosion payments. If a foreign
partnership is not required to file a partnership return and the
foreign partnership has made a payment or accrual that is treated as a
base erosion payment of a partner as provided in Sec. 1.59A-7(b)(2), a
person required to file a Form 8991 (or successor) who is a partner in
the partnership must provide the information necessary to report any
base erosion payments on Form 8991 (or successor) or the related
instructions. This paragraph does not apply to any partner described in
Sec. 1.59A-7(b)(4).
* * * * *
(f) * * *
(3) Paragraph (b)(7) of this section applies to taxable years
ending on or after the date that final regulations are filed with the
Federal Register.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-25745 Filed 12-2-19; 4:15 pm]
BILLING CODE 4830-01-P