income tax notice 2017–16, page 913

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

INCOME TAX

REG–127203–15, page 918.Proposed regulations address transfers of appreciated propertyby United States persons (U.S. persons) to partnerships withforeign partners related to the transferor. The regulations over-ride the rules providing for nonrecognition of gain on a contribu-tion of property to a partnership in exchange for an interest in thepartnership under section 721(a) of the Internal Revenue Code(Code) pursuant to section 721(c) unless the partnership adoptsthe remedial method and certain other requirements are satisfied.The document also contains regulations under sections 197,704, and 6038B that apply to certain transfers described insection 721. The regulations affect U.S. partners in domestic orforeign partnerships. The text of the proposed regulations is thesame as temporary regulations published in TD 9814.

REG–137604–07, page 920.The proposed regulations reflect changes to the Code relatingto the dependency exemption. The proposed regulations alsomake conforming changes relating to the definition of survivingspouse and the definition of head of household, the tax tablesfor individuals, the child and dependent care credit, the earnedincome credit, the standard deduction, joint tax returns, andtaxpayer identification numbers for children placed for adop-tion. To make the earned income credit and the dependencyexemption easier for taxpayers to claim, the proposed regulationschange the IRS’s position regarding who may take the childlessearned income credit and the source of support for certain pay-ments originating as governmental payments. The proposed reg-ulations also change the IRS’s position regarding the adjustedincome of a taxpayer filing a joint return to be consistent withother Code sections that require the filing of a joint return.

Action On Decision 2017–01, page 868.Nonacquiescence to the holding that a limited partnership was nota farming syndicate because the sole shareholder of a limited part-ner S Corporation actively participated in the farming business.

Notice 2017–16, page 913.This notice provides that, pursuant to the authority granted tothe Secretary by § 35(g)(11)(B), a health coverage tax credit(HCTC) election for a month in 2016 may be made at any timebefore the expiration of the 3-year statute of limitation under§ 6511 for such year, including on an amended income taxreturn. This extension of time is provided because, prior to itsexpiration, the HCTC did not require an election and the Trea-sury Department and the IRS are concerned that eligible tax-payers may not be aware of the requirement to affirmativelyelect the HCTC for coverage provided in 2016.

Rev. Proc. 2017–19, page 913.This revenue procedure provides a safe harbor under which theService will respect certain Energy Savings Performance Con-tracts for the sale of electricity by an Energy Service Companyto a Federal Agency as a service contract under § 7701(e)(3).

Rev. Proc. 2017–24, page 916.This revenue procedure extends the relief provided under Rev.Proc. 2015–57, 2015–51 I.R.B. 863, to taxpayers who tookout Federal student loans to finance attendance at a schoolowned by American career Institutes, Inc. (ACI) and whoseFederal student loans are discharged under the Department ofEducations’s �Defense to Repayment� or �Closed School� dis-charge process. Further, this revenue procedure provides thatthe Internal Revenue Service (IRS) will not assert that thecreditor must file information returns and furnish payee state-ments as a result of discharging these loans. This revenueprocedure also modifies Rev. Proc. 2015–57 to provide thatthe IRS will not assert that creditors under that revenue proce-dure must file information returns and furnish payee state-ments as a result of discharges under the revenue procedure.

(Continued on the next page)

Finding Lists begin on page ii.

Bulletin No. 2017–7February 13, 2017

T.D. 9811, page 869.This document contains final regulations regarding the applica-tion of the modified carryover basis rules of section 1022 ofthe Internal Revenue Code. Specifically, the final regulationsmodify provisions of the Treasury Regulations involving basisrules by including a reference to section 1022 where appro-priate. The regulations will affect property transferred fromcertain decedents who died in 2010. The regulations reflectchanges to the law made by the Economic Growth and TaxRelief Reconciliation Act of 2001 and the Tax Relief, Unem-ployment Insurance Reauthorization, and Job Creation Act of2010.

T.D. 9814, page 878.Temporary regulations address transfers of appreciated prop-erty by United States persons (U.S. persons) to partnershipswith foreign partners related to the transferor. The regulationsoverride the rules providing for nonrecognition of gain on acontribution of property to a partnership in exchange for aninterest in the partnership under section 721(a) of the InternalRevenue Code (Code) pursuant to section 721(c) unless thepartnership adopts the remedial method and certain otherrequirements are satisfied. The document also contains regu-lations under sections 197, 704, and 6038B that apply tocertain transfers described in section 721. The regulationsaffect U.S. partners in domestic or foreign partnerships.

EMPLOYEE PLANS

T.D. 9811, page 869.This document contains final regulations regarding the applica-tion of the modified carryover basis rules of section 1022 ofthe Internal Revenue Code. Specifically, the final regulationsmodify provisions of the Treasury Regulations involving basisrules by including a reference to section 1022 where appro-priate. The regulations will affect property transferred fromcertain decedents who died in 2010. The regulations reflectchanges to the law made by the Economic Growth and TaxRelief Reconciliation Act of 2001 and the Tax Relief, Unem-ployment Insurance Reauthorization, and Job Creation Act of2010.

ESTATE TAX

T.D. 9811, page 869.This document contains final regulations regarding the applica-tion of the modified carryover basis rules of section 1022 ofthe Internal Revenue Code. Specifically, the final regulationsmodify provisions of the Treasury Regulations involving basisrules by including a reference to section 1022 where appro-priate. The regulations will affect property transferred fromcertain decedents who died in 2010. The regulations reflectchanges to the law made by the Economic Growth and TaxRelief Reconciliation Act of 2001 and the Tax Relief, Unemploy-ment Insurance Reauthorization, and Job Creation Act of 2010.

GIFT TAX

T.D. 9811, page 869.This document contains final regulations regarding the applica-tion of the modified carryover basis rules of section 1022 ofthe Internal Revenue Code. Specifically, the final regulationsmodify provisions of the Treasury Regulations involving basisrules by including a reference to section 1022 where appro-priate. The regulations will affect property transferred fromcertain decedents who died in 2010. The regulations reflectchanges to the law made by the Economic Growth and TaxRelief Reconciliation Act of 2001 and the Tax Relief, Unemploy-ment Insurance Reauthorization, and Job Creation Act of 2010.

ADMINISTRATIVE

Rev. Proc. 2017–23, page 915.This revenue procedure describes the process for filing Form8975, Country-by-Country Report, and accompanying Sched-ules A, Tax Jurisdiction and Constituent Entity Information (col-lectively, Form 8975), by ultimate parent entities of U.S. mul-tinational enterprise (MNE) groups for reporting periodsbeginning on or after January 1, 2016, but before the applica-bility date of § 1.6038–4 (early reporting periods).

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

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

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

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

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

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

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

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

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

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

February 13, 2017 Bulletin No. 2017–7

Actions Relating toDecisions of the Tax Court

It is the policy of the Internal RevenueService to announce at an early datewhether it will follow the holdings in cer-tain cases. An Action on Decision is thedocument making such an announcement.An Action on Decision will be issued atthe discretion of the Service only on un-appealed issues decided adverse to thegovernment. Generally, an Action on De-cision is issued where its guidance wouldbe helpful to Service personnel workingwith the same or similar issues. Unlike aTreasury Regulation or a Revenue Ruling,an Action on Decision is not an affirma-tive statement of Service position. It is notintended to serve as public guidance andmay not be cited as precedent.

Actions on Decisions shall be reliedupon within the Service only as conclu-sions applying the law to the facts in theparticular case at the time the Action onDecision was issued. Caution should beexercised in extending the recommenda-tion of the Action on Decision to similar

cases where the facts are different. More-over, the recommendation in the Actionon Decision may be superseded by newlegislation, regulations, rulings, cases, orActions on Decisions. Prior to 1991, theService published acquiescence or nonac-quiescence only in certain regular TaxCourt opinions. The Service has expandedits acquiescence program to include othercivil tax cases where guidance is deter-mined to be helpful. Accordingly, the Ser-vice now may acquiesce or nonacquiescein the holdings of memorandum TaxCourt opinions, as well as those of theUnited States District Courts, ClaimsCourt, and Circuit Courts of Appeal. Re-gardless of the court deciding the case, therecommendation of any Action on Deci-sion will be published in the InternalRevenue Bulletin.

The recommendation in every Actionon Decision will be summarized as acqui-escence, acquiescence in result only, ornonacquiescence. Both “acquiescence”and “acquiescence in result only” meanthat the Service accepts the holding of thecourt in a case and that the Service willfollow it in disposing of cases with the

same controlling facts. However, “acqui-escence” indicates neither approval nordisapproval of the reasons assigned by thecourt for its conclusions; whereas, “acqui-escence in result only” indicates disagree-ment or concern with some or all of thosereasons. “Nonacquiescence” signifies that,although no further review was sought,the Service does not agree with the hold-ing of the court and, generally, will notfollow the decision in disposing of casesinvolving other taxpayers. In reference toan opinion of a circuit court of appeals, a“nonacquiescence” indicates that the Ser-vice will not follow the holding on a na-tionwide basis. However, the Service willrecognize the precedential impact of theopinion on cases arising within the venueof the deciding circuit.

The Commissioner does NOT ACQUI-ESCE in the following decision:

Burnett Ranches, Ltd v. UnitedStates,1

753 F.3d 143 (5th Cir. 2014),aff’g 113 A.F.T.R.2d (RIA) 2014–

2178 (N.D. Tex. 2012)

1Nonacquiescence to the holding that a limited partnership was not a farming syndicate because the sole shareholder of a limited partner S Corporation actively participated in the farmingbusiness.


Part I. Rulings and Decisions Under the Internal Revenue Codeof 198626 CFR 1.1041–1: Basis of property acquired froma decedent

T.D. 9811DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Application of ModifiedCarryover Basis to GeneralBasis Rules

AGENCY: Internal Revenue Service (IRS),Treasury.

ACTION: Final Regulations.

SUMMARY: This document contains fi-nal regulations regarding the applicationof the modified carryover basis rules ofsection 1022 of the Internal RevenueCode (Code). Specifically, the final regu-lations modify provisions of the TreasuryRegulations involving basis rules by in-cluding a reference to section 1022 whereappropriate. The regulations will affectproperty transferred from certain dece-dents who died in 2010. The regulationsreflect changes to the law made by theEconomic Growth and Tax Relief Recon-ciliation Act of 2001 and the Tax Relief,Unemployment Insurance Reauthoriza-tion, and Job Creation Act of 2010.

DATES: Effective Date: The regulationsare effective on January 19, 2017.

Applicability Date: The regulations areapplicable on January 19, 2017.

FOR FURTHER INFORMATION CON-TACT: Mayer R. Samuels at (202) 317-6859 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendmentsto 26 CFR part 1 under various provisionsof the Code in response to statutorychanges made by the Economic Growthand Tax Relief Reconciliation Act of2001, Public Law 107–16 (EGTRRA) andthe Tax Relief, Unemployment Insurance

Reauthorization, and Job Creation Act of2010, Public Law 111–312 (TRUIRJCA).

Section 501(a) of EGTRRA enactedsection 2210 of the Code, which madechapter 11 (the estate tax) inapplicable tothe estate of any decedent who died after2009. Section 542 of EGTRRA also en-acted section 1022. While section 1014generally provides that the recipient’s ba-sis in property passing from a decedent isthe fair market value of the property onthe decedent’s date of death, section 1022sets forth a modified carryover basis sys-tem applicable after 2009 generally pro-viding that the recipient’s basis in prop-erty acquired from a decedent is the lesserof the decedent’s adjusted basis in theproperty or the fair market value of theproperty on the decedent’s date of death.Section 901(a) of EGTRRA, known as the“sunset clause”, provided that all provi-sions of and amendments made by EG-TRRA do not apply to estates of dece-dents dying, gifts made, or generation-skipping transfers after December 31,2010. The sunset clause effectively lim-ited the application of sections 501(a) and542 of EGTRRA to 2010.

Section 301(a) of TRUIRJCA, whichbecame law on December 17, 2010, ret-roactively reinstated the estate tax and re-pealed section 1022 with respect to theestates of decedents who died in 2010.However, section 301(c) of TRUIRJCAallowed the executor of the estate of adecedent who died in 2010 to elect toapply the Code and regulations thereunderas though section 301(a) of TRUIRJCAdid not apply with respect to chapter 11and with respect to property acquired orpassing from the decedent (within themeaning of section 1014(b) of the Code).Thus, section 301(c) of TRUIRJCA al-lowed the executor of the estate of a de-cedent who died in 2010 to elect not tohave the provisions of chapter 11 apply tothe decedent’s estate, but rather to havethe provisions of section 1022 apply (aSection 1022 Election).

To provide executors with guidance re-garding the making of a Section 1022Election and certain other collateral issuesarising from the determination of basis

under section 1022, on August 29, 2011,the Treasury Department and the IRS is-sued Notice 2011–66 (2011–35 IRB 184)and Revenue Procedure 2011–41 (2011–35 IRB 188). Although section 1022 wasapplicable only to decedents dying in cal-endar year 2010, basis determined pursu-ant to that section will continue to berelevant until all of the property whosebasis is determined under that section hasbeen sold or otherwise disposed of in atransaction in which gain or loss is recog-nized. Accordingly, on May 11, 2015, theTreasury Department and the IRS pub-lished in the Federal Register (80 FR26873) a notice of proposed rulemaking(REG–107595–11, 2015–21 IRB 986)proposing amendments to existing regula-tions under various sections of the Code totake into account the application of themodified carryover basis rules of section1022. The IRS received written commentsresponding to the notice of proposed rule-making. No public hearing was requestedor held.

After consideration of the commentsreceived on the proposed regulations, thisTreasury decision adopts the proposedregulations without modification as finalregulations. However, the final regula-tions adopt certain nonsubstantive, clari-fying changes. The comments received onthe proposed regulations are discussed inthe remainder of this preamble.

Summary of Comments

One commenter noted that the pro-posed regulations proposed to amend§ 1.742–1 to provide that the basis of apartnership interest acquired from a dece-dent is determined under section 1022 ifthe decedent died in 2010 and the dece-dent’s executor made a Section 1022Election with respect to the decedent’sestate. The commenter noted that therewas no similar amendment proposed to bemade to § 1.1367–1(j), relating to the ba-sis of stock of an S corporation where aportion of the value of the stock is attrib-utable to items constituting income in re-spect of a decedent (IRD). The commenterrecommended that the final regulations

Bulletin No. 2017–7 February 13, 2017869

amend § 1.1367–1(j) with language refer-encing section 1022.

After considering this comment, theTreasury Department and the IRS havedetermined that no change is necessary.Section 1.1367–1(j) states, “[t]he basis de-termined under section 1014 of any stockin an S corporation is reduced by theportion of the value of the stock that isattributable to items constituting incomein respect of a decedent.” This regulationsection, with its required basis adjustmentfor IRD, is limited to situations in whichsection 1014 applies. Section 1.1367–1(j)does not apply when a Section 1022 Elec-tion is made because there is no basisadjustment under section 1022 to the dateof death value of S corporation stock.Without an adjustment to date of deathvalue, no further adjustment to the basis ofS corporation stock is required to accountfor IRD. Therefore, the final regulationsdo not adopt this comment.

A commenter noted that the proposedregulations only propose amendments tofinalized regulations, and not to proposedregulations or temporary regulations. Thatcommenter specifically requested guid-ance with respect to proposed regulation§ 1.465–69(a) (which provides that a suc-cessor to a decedent’s amount at risk in anactivity is increased by the amount bywhich the successor’s basis in the activityis increased under section 1014) and tem-porary regulation § 16A.1255–2(b)(2)(which provides that if, as of the date aperson acquires section 126 property froma decedent, the basis of the property isdetermined under section 1014, then onthat date the aggregate of excludable por-tions under section 126 in the hands ofsuch transferee is zero). This Treasurydecision cannot modify provisions of theproposed or temporary regulations refer-enced by the commenter without adoptingthose provisions as final or temporary reg-ulations. The Treasury Department andthe IRS continue to study these areas, andtherefore are not prepared to adopt modi-fications to the proposed or temporaryregulations referenced by the commenterat this time. Accordingly, the final regu-lations do not adopt this comment. How-ever, the Treasury Department and theIRS expect that, if those proposed or tem-porary regulations are adopted as final ortemporary regulations in the future, such

regulations will be updated as appropriateto account for the existence of section1022.

Another commenter asked why thepreamble to the proposed regulationsomitted any discussion of the revisionsmade to regulations under six particularsections of the Code, and requested anexplanation as to why changes to thoseregulatory provisions were consideredless significant than the changes for whichan explanation was given. Generally, theTreasury Department and the IRS in-cluded descriptions of the proposedchanges in that preamble that involvedmore than a mere insertion of a referenceto section 1022 in addition to an existingreference to section 1014. In such cases, itwas determined that an explanation orclarification of the substance or effect ofthe proposed revision would be helpful. Inthe case of the proposed amendments toregulations under the six Code sectionsmentioned by the commenter, the onlychange proposed was the mere insertionof references to section 1022 in additionto existing references to section 1014. Ac-cordingly, the Treasury Department andthe IRS determined that no further expla-nation of those changes was necessary.

A commenter also asked why the pro-posed regulations did not incorporate thetreatment of items under the various Codesections addressed in Revenue Procedure2011–41, 2011–35 IRB 188. That revenueprocedure provides a safe harbor that de-termines the effect on the application ofvarious Code sections of a Section 1022Election. The provisions relating to thatsafe harbor are available only if the exec-utor of the estate makes a Section 1022Election and takes no position contrary toa provision in that revenue procedure.Nothing in these final regulations changesor invalidates the provisions of RevenueProcedure 2011–41, so the safe harborwill remain available to qualifying tax-payers. Consequently, it is unnecessary toincorporate the revenue procedure intothese regulations.

Special Analyses

Certain IRS regulations, including thisone, are exempt from the requirements ofExecutive Order 12866, as supplementedand reaffirmed by Executive Order 13563.Therefore, a regulatory impact assessment

is not required. The Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply tothese final regulations because the finalregulations do not impose a collection ofinformation requirement on small entities.Therefore, a Regulatory Flexibility Anal-ysis is not required. Pursuant to section7805(f) of the Code, the notice of pro-posed rulemaking preceding this regula-tion has been submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business, and no com-ments were received.

Drafting Information

The principal author of these finalregulations is Mayer R. Samuels, Officeof the Associate Chief Counsel (Pass-throughs and Special Industries). Otherpersonnel from the Treasury Depart-ment and the IRS participated in theirdevelopment.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 isamended as follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.48–12 is amended by

revising the last sentence of paragraph(b)(2)(vii)(B) and adding paragraph (g) toread as follows:

§ 1.48–12 Qualified rehabilitatedbuilding; expenditures incurred afterDecember 31, 1981.

* * * * *(b) * * *(2) * * *(vii) * * *(B) * * * If a transferee’s basis is

determined under section 1014 or section1022, any expenditures incurred by thedecedent within the measuring period thatare treated as having been incurred by thetransferee under paragraph (c)(3)(ii) ofthis section shall decrease the transferee’sbasis for purposes of the substantial reha-bilitation test.


* * * * *(g) Effective/applicability date. This

section applies on and after January 19,2017. For rules before January 19, 2017,see § 1.48–12 as contained in 26 CFR part1 revised as of April 1, 2016.

Par. 3. Section 1.83–4 is amended byrevising the last sentence of paragraph(b)(1) and adding paragraph (d) to read asfollows:

§ 1.83–4 Special rules.

* * * * *(b) * * *(1) * * * Such basis shall also reflect

any adjustments to basis provided undersections 1015, 1016, and 1022.* * * * *

(d) Effective/applicability date. Theprovisions in this section are applicablefor taxable years beginning on or afterJuly 21, 1978. The provisions of para-graph (b)(1) of this section relating tosection 1022 are effective on and afterJanuary 19, 2017.

Par. 4. Section 1.179–4 is amended byrevising the first sentence of paragraph(c)(1)(iv) to read as follows:

§ 1.179–4 Definitions.

* * * * *(c) * * *(1) * * *(iv) The property is not acquired by

purchase if the basis of the property in thehands of the person acquiring it is deter-mined in whole or in part by reference tothe adjusted basis of such property in thehands of the person from whom acquired,is determined under section 1014(a), re-lating to property acquired from a dece-dent, or is determined under section 1022,relating to property acquired from certaindecedents who died in 2010. * * ** * * * *

Par. 5. Section 1.179–6 is amended by:1. Revising the section heading and the

first sentence of paragraph (a).2. Adding paragraph (d).The revision and addition read as fol-

lows:

§ 1.179–6 Effective/applicability dates.

(a) * * * Except as provided in para-graphs (b), (c), and (d) of this section, theprovisions of §§ 1.179–1 through 1.179–5 apply for property placed in service bythe taxpayer in taxable years ending afterJanuary 25, 1993. * * ** * * * *

(d) Application of § 1.179–4(c)(1)(iv).The provisions of § 1.179–4(c)(1)(iv) re-lating to section 1022 are effective on andafter January 19, 2017.

Par. 6. Section 1.197–2 is amended byrevising paragraphs (h)(5)(i) and (h)(12)(viii) and adding paragraph (l)(5) to readas follows:

§ 1.197–2 Amortization of goodwill andcertain other intangibles.

* * * * *(h) * * *(5) * * *(i) The acquisition of a section

197(f)(9) intangible if the acquiring tax-payer’s basis in the intangible is deter-mined under section 1014(a) or 1022; or* * * * *

(12) * * *(viii) Operating rule for transfers upon

death. For purposes of this paragraph(h)(12), if the basis of a partner’s interestin a partnership is determined under sec-tion 1014(a) or 1022, such partner istreated as acquiring such interest from aperson who is not related to such partner,and such interest is treated as having pre-viously been held by a person who is notrelated to such partner.* * * * *

(l) * * *(5) Application of section 1022. The

provisions of § 1.197–2(h)(5)(i) and (h)(12)(viii) relating to section 1022 are ef-fective on and after January 19, 2017.

Par. 7. Section 1.267(d)–1 is amendedby revising paragraph (a)(3) to read asfollows:

§ 1.267(d)–1 Amount of gain where losspreviously disallowed.

(a) * * *(3) The benefit of the general rule is

available only to the original transfereebut does not apply to any original trans-

feree (for example, a donee or a personacquiring property from a decedent wherethe basis of property is determined undersection 1014 or 1022) who acquired theproperty in any manner other than by pur-chase or exchange.* * * * *

Par. 8. Section 1.267(d)–2 is amendedby revising the section heading and add-ing a sentence to the end of the paragraphto read as follows:

§ 1.267(d)–2 Effective/applicabilitydates.

* * * The provisions of § 1.267(d)–1(a)(3) relating to section 1022 are effec-tive on and after January 19, 2017.

Par. 9. Section 1.273–1 is revised toread as follows:

§ 1.273–1 Life or terminable interests.

(a) In general. Amounts paid as in-come to the holder of a life or a terminableinterest acquired by gift, bequest, or in-heritance shall not be subject to any de-duction for shrinkage (whether called bydepreciation or any other name) in thevalue of such interest due to the lapse oftime. In other words, the holder of such aninterest so acquired may not set up thevalue of the expected future payments ascorpus or principal and claim deductionfor shrinkage or exhaustion thereof due tothe passage of time. For the treatmentgenerally of distributions to beneficiariesof an estate or trust, see Subparts A, B, C,and D (section 641 and following), Sub-chapter J, Chapter 1 of the Code, and theregulations thereunder. For basis of prop-erty acquired from a decedent and by giftsand transfers in trust, see sections 1014,1015, and 1022, and the regulations there-under.

(b) Effective/applicability date. Theprovisions in this section are applicablefor taxable years beginning on or afterSeptember 16, 1958. The provisions ofthis section relating to section 1022 areeffective on and after January 19, 2017.

Par. 10. Section 1.306–3 is amendedby removing the last sentence of para-graph (e) and adding two sentences in itsplace to read as follows:


§ 1.306–3 Section 306 stock defined.

* * * * *(e) * * * Section 306 stock ceases to be

so classified if the basis of such stock isdetermined by reference to its fair marketvalue on the date of the decedent-stockholder’s death under section 1014 orthe optional valuation date under section2032. Section 306 stock continues to be soclassified if the basis of such stock isdetermined under section 1022.* * * * *

Par. 11. Section 1.306–4 is added toread as follows:

§ 1.306–4 Effective/applicability date.

The provisions of §§ 1.306–1 through1.306–3 are applicable on or after June22, 1954. The provisions of § 1.306–3relating to section 1022 are effective onand after January 19, 2017.

Par. 12. Section 1.336–1 is amendedby revising paragraph (b)(5)(i)(A) to readas follows:

§ 1.336–1 General principles,nomenclature, and definitions for asection 336(e) election.

* * * * *(b) * * *(5) * * *(i) * * *(A) The basis of the stock in the hands

of the purchaser is not determined inwhole or in part by reference to the ad-justed basis of such stock in the hands ofthe person from whom the stock is ac-quired, is not determined under section1014(a) (relating to property acquiredfrom a decedent), or is not determinedunder section 1022 (relating to the basis ofproperty acquired from certain decedentswho died in 2010);* * * * *

Par. 13. Section 1.336–5 is amendedby revising the section heading and add-ing a sentence to the end of the paragraphto read as follows:


* * * The provisions of § 1.336–1(b)(5)(i)(A) relating to section 1022 areeffective on and after January 19, 2017.

Par. 14. Section 1.355–6 is amendedby revising paragraphs (d)(1)(i)(A)(2) and(g) to read as follows:

§ 1.355–6 Recognition of gain oncertain distributions of stock orsecurities in controlled corporation.

* * * * *(d) * * *(1) * * *(i) * * *(A) * * *(2) Under section 1014(a) or 1022; and

* * * * *(g) Effective/applicability dates. This

section applies to distributions occurringafter December 20, 2000, except that theydo not apply to any distributions occurringpursuant to a written agreement that is(subject to customary conditions) bindingon December 20, 2000, and at all latertimes. The provisions of paragraph(d)(1)(i)(A)(2) of this section relating tosection 1022 are effective on and afterJanuary 19, 2017.

Par. 15. Section 1.382–1 is amended byrevising the entry for § 1.382–9(d)(6) toread as follows:

§ 1.382–9 Special rules under section382 for corporations under thejurisdiction of a court in a title 11 orsimilar case.

*****(d) ***(6) Effective/applicability date.*****Par. 16. Section 1.382–9 is amended by

revising paragraphs (d)(5)(ii)(D) and (d)(6)(i) to read as follows:

§ 1.382–9 Special rules under section382 for corporations under thejurisdiction of a court in a title 11 orsimilar case.

* * * * *(d) * * *(5) * * *(ii) * * *(D) The transferee’s basis in the in-

debtedness is determined under section1014, 1015, or 1022 or with reference tothe transferor’s basis in the indebtedness;* * * * *

(6) Effective/applicability date—(i) Ingeneral. This paragraph (d) applies toownership changes occurring on or afterMarch 17, 1994. The provisions of para-graph (d)(5)(ii)(D) of this section relatingto section 1022 are effective on and afterJanuary 19, 2017.* * * * *

Par. 17. Section 1.421–2 is amendedby:

1. Revising paragraphs (c)(4)(i)(a) and(c)(4)(ii).

2. Revising the heading of paragraph(f) and adding paragraph (f)(3).

The revisions and addition read as fol-lows:

§ 1.421–2 General rules.

* * * * *(c) * * *(4)(i)(a) In the case of the death of an

optionee, the basis of any share of stockacquired by the exercise of an option un-der this paragraph (c), determined undersection 1011, shall be increased by anamount equal to the portion of the basis ofthe option attributable to such share. Forexample, if a statutory option to acquire10 shares of stock has a basis of $100, thebasis of one share acquired by a partialexercise of the option, determined undersection 1011, would be increased by1/10th of $100, or $10. The option ac-quires a basis, determined under section1014(a) or under section 1022, if applica-ble, only if the transfer of the share pur-suant to the exercise of such option qual-ifies for the special tax treatment providedby section 421(a). To the extent the optionis so exercised, in whole or in part, it willacquire a basis equal to its fair marketvalue (or the basis as determined undersection 1022, if applicable) at the date ofthe employee’s death or, if an election ismade under section 2032, its value at itsapplicable valuation date. In certain cases,the basis of the share is subject to theadjustments provided by paragraphs (c)(4)(i)(b) and (c) of this section, but suchadjustments are only applicable in thecase of an option that is subject to section423(c).

* * * * *(ii) If a statutory option is not exercised

by the estate of the individual to whom the


option was granted, or by the person whoacquired such option by bequest or inher-itance or by reason of the death of suchindividual, the option shall be consideredto be property that constitutes a right toreceive an item of income in respect of adecedent to which the rules of sections691 and 1014(c) (or section 1022(f), ifapplicable) apply.* * * * *

(f) Effective/applicability date. * * ** * * * *

(3) Application of section 1022. Theprovisions of paragraph (c) of this sectionrelating to section 1022 are effective onand after [January 19, 2017.


1. Revising the third sentence of para-graph (k)(2).

2. Adding a sentence to the end ofparagraph (l).

The revision and addition read as fol-lows:

§ 1.423–2 Employee stock purchase plandefined.

* * * * *(k) * * *(2) * * * If the special rules provided in

this paragraph (k) are applicable to a shareof stock upon the death of an employee,then the basis of the share in the hands ofthe estate or the person receiving the stockby bequest or inheritance shall be deter-mined under section 1014 or under section1022, if applicable, and shall not be in-creased by reason of the inclusion uponthe decedent’s death of any amount in thedecedent’s gross income under this para-graph (k). * * ** * * * *

(l) * * * The provisions of this sectionrelating to section 1022 are effective onand after January 19, 2017.

Par. 19. Section 1.424–1 is amendedby revising the last sentence of paragraph(c)(2) and adding paragraph (g)(3) to readas follows:

§ 1.424–1 Definitions and special rulesapplicable to statutory options.

* * * * *(c) * * *

(2) * * * For determination of basis inthe hands of the survivor where joint own-ership is terminated by the death of one ofthe owners, see section 1014 or section1022, if applicable.* * * * *

(g) * * *(3) Application of section 1022. The

provisions of paragraph (c)(2) of this sec-tion relating to section 1022 are effectiveon and after January 19, 2017.

Par. 20. Section 1.467–7 is amended byrevising paragraph (c)(2) and revising thefirst sentence of paragraph (c)(4) to readas follows:

§ 1.467–7 Section 467 recapture andother rules relating to dispositions andmodifications.

* * * * *(c) * * *(2) Dispositions at death. Paragraph (a)

of this section does not apply to a dispo-sition if the basis of the property in thehands of the transferee is determined un-der section 1014(a) or section 1022. How-ever, see paragraph (c)(4) of this sectionfor dispositions of property subject to sec-tion 1022 by transferees. This paragraph(c)(2) does not apply to property that con-stitutes a right to receive an item of in-come in respect of a decedent. See sec-tions 691, 1014(c), and 1022(f).* * * * *

(4) * * * If the recapture amount withrespect to a disposition of property (thefirst disposition) is limited under para-graph (c)(1) or (c)(3) of this section, orunder paragraph (c)(2) of this section be-cause the basis of the property in thehands of the transferee is determined un-der section 1022, and the transferee sub-sequently disposes of the property in atransaction to which paragraph (a) of thissection applies, the prior understated in-clusion determined under paragraph (b)(2)of this section is computed by taking intoaccount the amounts attributable to theperiod of the transferor’s ownership of theproperty prior to the first disposition. * * ** * * * *

Par. 21. Section 1.467–9 is amended byrevising the section heading and addingparagraph (f) to read as follows:

§ 1.467–9 Effective/applicability datesand automatic method changes forcertain agreements.

* * * * *(f) Application of section 1022. The

provisions of § 1.467–7(c)(2) and (4) re-lating to section 1022 are effective on andafter January 19, 2017.

Par. 22. Section 1.617–3 is amended byrevising paragraph (d)(5)(ii)(b) to read asfollows:

§ 1.617–3 Recapture of explorationexpenditures.

* * * * *(d) * * *(5) * * *(ii) * * *(b) The transactions referred to in para-

graph (d)(5)(ii)(a) of this section are:(1) A disposition that is in part a sale or

exchange and in part a gift;(2) A disposition that is described in

section 617(d) through the incorporationby reference of the provisions of section1245(b)(3) (relating to certain tax freetransactions); or

(3) A transfer at death where basis ofproperty in the hands of the transferee isdetermined under section 1022.* * * * *

Par. 23. Section 1.617–4 is amendedby revising the second sentence of para-graph (c)(1)(i) to read as follows:

§ 1.617–4 Treatment of gain fromdisposition of certain mining property.

* * * * *(c) * * *(1)(i) * * * For purposes of this para-

graph (c), the term gift means, except tothe extent that paragraph (c)(1)(ii) of thissection applies, a transfer of mining prop-erty that, in the hands of the transferee,has a basis determined under the provi-sions of section 1015(a) or 1015(d) (relat-ing to basis of property acquired by gift)or section 1022 (relating to the basis ofproperty acquired from certain decedentswho died in 2010). * * ** * * * *

Par. 24. Section 1.617–5 is added toread as follows:



Sections 1.617–3 and 1.617–4 applyon and after January 19, 2017. For rulesbefore January 19, 2017, see §§ 1.617–3and 1.617–4 as contained in 26 CFR part1 revised as of April 1, 2016.

Par. 25. Section 1.684–3 is amendedby revising paragraph (c) to read as fol-lows:

§ 1.684–3 Exceptions to general rule ofgain recognition.

* * * * *(c) Certain transfers at death—(1) Sec-

tion 1014 basis. The general rule of gainrecognition under § 1.684–1 shall not ap-ply to any transfer of property to a foreigntrust or foreign estate or, in the case of atransfer of property by a U.S. transferordecedent dying in 2010, to a foreign trust,foreign estate, or a nonresident alien, byreason of death of the U.S. transferor, ifthe basis of the property in the hands ofthe transferee is determined under section1014(a).

(2) Section 1022 basis election. ForU.S. transferor decedents dying in 2010,the general rule of gain recognition under§ 1.684–1 shall apply to any transfer ofproperty by reason of death of the U.S.transferor if the basis of the property inthe hands of the foreign trust, foreign es-tate, or the nonresident alien individual isdetermined under section 1022. The gainon the transfer shall be calculated as setout under § 1.684–1(a), except that ad-justed basis will reflect any increases al-located to such property under section1022.* * * * *



(a) Sections 1.684–1 through 1.684–4apply to transfers of property to foreigntrusts and foreign estates after August 7,2000, except as provided in paragraph (b)of this section.

(b) In the case a U.S. transferor dece-dent dying in 2010, § 1.684–3(c) appliesto transfers of property to foreign trusts,foreign estates, and nonresident aliens af-

ter December 31, 2009, and before Janu-ary 1, 2011.

Par. 27. Section 1.691(a)–3 is amendedby revising the last two sentences of para-graph (a) and adding paragraph (c) to readas follows:

§ 1.691(a)–3 Character of gross income.

(a) * * * The provisions of section1014(a), relating to the basis of propertyacquired from a decedent, and section1022, relating to the basis of propertyacquired from certain decedents who diedin 2010, do not apply to these amounts inthe hands of the estate and such persons.See sections 1014(c) and 1022(f).* * * * *

(c) Effective/applicability dates. Thelast two sentences of paragraph (a) of thissection apply on and after January 19,2017. For rules before January 19, 2017,see § 1.691(a)–3 as contained in 26 CFRpart 1 revised as of April 1, 2016.


§ 1.742–1 Basis of transferee partner’sinterest.

(a) In general. The basis to a transfereepartner of an interest in a partnership shallbe determined under the general basisrules for property provided by part II (sec-tion 1011 and following), Subchapter O,Chapter 1 of the Internal Revenue Code.Thus, the basis of a purchased interest willbe its cost. Generally, the basis of a part-nership interest acquired from a decedentis the fair market value of the interest atthe date of his death or at the alternatevaluation date, increased by his estate’s orother successor’s share of partnership lia-bilities, if any, on that date, and reduced tothe extent that such value is attributable toitems constituting income in respect of adecedent (see section 753 and §§ 1.706–1(c)(3)(v) and 1.753–1(b)) under section691. See section 1014(c). However, thebasis of a partnership interest acquiredfrom a decedent is determined under sec-tion 1022 if the decedent died in 2010 andthe decedent’s executor elected to havesection 1022 apply to the decedent’s es-tate. For basis of contributing partner’sinterest, see section 722. The basis so de-

termined is then subject to the adjustmentsprovided in section 705.

(b) Effective/applicability date. Thissection applies on and after January 19,2017. For rules before January 19, 2017,see § 1.742–1 as contained in 26 CFR part1 revised as of April 1, 2016.

Par. 29. Section 1.743–1 is amended byrevising paragraphs (k)(2)(ii) and (l) toread as follows:

§ 1.743–1 Optional adjustment to basisof partnership property.

* * * * *(k) * * *(2) * * *(ii) Special rule. A transferee that ac-

quires, on the death of a partner, an inter-est in a partnership with an election undersection 754 in effect for the taxable yearof the transfer, must notify the partner-ship, in writing, within one year of thedeath of the deceased partner. The writtennotice to the partnership must be signedunder penalties of perjury and must in-clude the names and addresses of the de-ceased partner and the transferee, the tax-payer identification numbers of thedeceased partner and the transferee, therelationship (if any) between the trans-feree and the transferor, the deceased part-ner’s date of death, the date on which thetransferee became the owner of the part-nership interest, the fair market value ofthe partnership interest on the applicabledate of valuation set forth in section 1014or section 1022, the manner in which thefair market value of the partnership inter-est was determined, and the carryover ba-sis as adjusted under section 1022 (if ap-plicable).* * * * *

(l) Effective/applicability date. Theprovisions in this section apply to trans-fers of partnership interests that occur onor after December 15, 1999. The provi-sions of this section relating to section1022 are effective on and after January 19,2017.


1. Revising paragraphs (a)(4)(i)(C) andthe first sentence of (b)(4)(i).

2. Revising the heading of paragraph(e) and paragraph (e)(2).

The revisions read as follows:


§ 1.755–1 Rules for allocation of basis.

(a) * * *(4) * * *(i) * * *(C) Income in respect of a decedent.

Solely for the purpose of determiningpartnership gross value under this para-graph (a)(4)(i), where a partnership inter-est is transferred as a result of the death ofa partner, the transferee’s basis in its part-nership interest is determined without re-gard to section 1014(c) or section 1022(f),and is deemed to be adjusted for thatportion of the interest, if any, that is at-tributable to items representing income inrespect of a decedent under section 691.* * * * *

(b) * * *(4) * * *(i) * * * Where a partnership interest is

transferred as a result of the death of apartner, under section 1014(c) or section1022(f), the transferee’s basis in its part-nership interest is not adjusted for thatportion of the interest, if any, that is attrib-utable to items representing income in re-spect of a decedent under section 691. * * ** * * * *

(e) Effective/applicability dates. * * *(2) Special rules. Paragraphs (a) and

(b)(3)(iii) of this section apply to transfersof partnership interests and distributionsof property from a partnership that occuron or after June 9, 2003. The provisions ofparagraphs (a)(4)(i)(C) and (b)(4)(i) ofthis section relating to section 1022 areeffective on and after the date January 19,2017.

Par. 31. Section 1.995–4 is amendedby revising the first sentence of paragraph(d)(2) and adding paragraph (f) to read asfollows:

§ 1.995–4 Gain on disposition of stockin a DISC.

* * * * *(d) * * *(2) * * * For purposes of this section,

the period during which a shareholder hasheld stock includes the period he is con-sidered to have held it by reason of theapplication of section 1223 and, if hisbasis is determined in whole or in partunder the provisions of section 1014(d)(relating to special rule for DISC stock

acquired from decedent) or section 1022(relating to property acquired from certaindecedents who died in 2010), the holdingperiod of the decedent. * * ** * * * *

(f) Effective/applicability date. Thissection applies on and after January 19,2017. For rules before January 19, 2017,see § 1.995–4 as contained in 26 CFR part1 revised as of April 1, 2016.

Par. 32. Section 1.1001–1 is amendedby revising the last sentence of paragraph(a), revising paragraph (f)(1), and addingparagraph (i) to read as follows:

§ 1.1001–1 Computation of gain or loss.

(a) * * * Section 1001(e) and paragraph(f) of this section prescribe the method ofcomputing gain or loss upon the sale orother disposition of a term interest inproperty the adjusted basis (or a portion)of which is determined pursuant, or byreference, to section 1014 (relating to thebasis of property acquired from a dece-dent), section 1015 (relating to the basis ofproperty acquired by gift or by a transferin trust), or section 1022 (relating to thebasis of property acquired from certaindecedents who died in 2010).* * * * *

(f) * * *(1) General rule. Except as otherwise

provided in paragraph (f)(3) of this sec-tion, for purposes of determining gain orloss from the sale or other dispositionafter October 9, 1969, of a term interest inproperty (as defined in paragraph (f)(2) ofthis section), a taxpayer shall not take intoaccount that portion of the adjusted basisof such interest that is determined pursu-ant, or by reference, to section 1014 (re-lating to the basis of property acquiredfrom a decedent), section 1015 (relating tothe basis of property acquired by gift or bya transfer in trust), or section 1022 (relat-ing to the basis of property acquired fromcertain decedents who died in 2010) to theextent that such adjusted basis is a portionof the adjusted uniform basis of the entireproperty (as defined in § 1.1014–5).Where a term interest in property is trans-ferred to a corporation in connection witha transaction to which section 351 appliesand the adjusted basis of the term interest:

(i) Is determined pursuant to sections1014, 1015, or 1022; and

(ii) Is also a portion of the adjusteduniform basis of the entire property, asubsequent sale or other disposition ofsuch term interest by the corporation willbe subject to the provisions of section1001(e) and this paragraph (f) to the ex-tent that the basis of the term interest sosold or otherwise disposed of is deter-mined by reference to its basis in thehands of the transferor as provided bysection 362(a). See paragraph (f)(2) of thissection for rules relating to the character-ization of stock received by the transferorof a term interest in property in connec-tion with a transaction to which section351 applies. That portion of the adjusteduniform basis of the entire property that isassignable to such interest at the time ofits sale or other disposition shall be deter-mined under the rules provided in§ 1.1014–5. Thus, gain or loss realizedfrom a sale or other disposition of a terminterest in property shall be determined bycomparing the amount of the proceeds ofsuch sale with that part of the adjustedbasis of such interest that is not a portionof the adjusted uniform basis of the entireproperty.* * * * *

(i) Effective/applicability date. Exceptas provided in paragraphs (g) and (h) ofthis section, this section applies on andafter January 19, 2017. For rules beforeJanuary 19, 2017, see § 1.1001–1 as con-tained in 26 CFR part 1 revised as of April1, 2016.

Par.33. Section 1.1014–1 is amendedby revising paragraph (a) and adding para-graph (d) to read as follows:

§ 1.1014–1 Basis of property acquiredfrom a decedent.

(a) General rule. The purpose of sec-tion 1014 is, in general, to provide a basisfor property acquired from a decedent thatis equal to the value placed upon suchproperty for purposes of the federal estatetax. Accordingly, the general rule is thatthe basis of property acquired from a de-cedent is the fair market value of suchproperty at the date of the decedent’sdeath, or, if the decedent’s executor soelects, at the alternate valuation date pre-scribed in section 2032, or in section811(j) of the Internal Revenue Code(Code) of 1939. However, the basis of


property acquired from certain decedentswho died in 2010 is determined undersection 1022, if the decedent’s executormade an election under section 301(c) ofthe Tax Relief, Unemployment InsuranceReauthorization, and Job Creation Act of2010, Public Law 111–312 (124 Stat.3296, 3300 (2010)). See section 1022.Property acquired from a decedent in-cludes, principally, property acquired bybequest, devise, or inheritance, and, in thecase of decedents dying after December31, 1953, property required to be includedin determining the value of the decedent’sgross estate under any provision of theCode of 1954 or the Code of 1939. Thegeneral rule governing basis of propertyacquired from a decedent, as well as otherrules prescribed elsewhere in this section,shall have no application if the property issold, exchanged, or otherwise disposed ofbefore the decedent’s death by the personwho acquired the property from the dece-dent. For general rules on the applicablevaluation date where the executor of adecedent’s estate elects under section2032, or under section 811(j) of the Codeof 1939, to value the decedent’s grossestate at the alternate valuation date pre-scribed in such sections, see § 1.1014–3(e).* * * * *

(d) Effective/applicability date. Thissection applies on and after January 19,2017. For rules before January 19, 2017,see § 1.1014–1 as contained in 26 CFRpart 1 revised as of April 1, 2016.

Par. 34. Section 1.1014–4 is amendedby revising the first sentence of paragraph(a)(1), revising the second sentence ofparagraph (a)(2), and adding paragraph(d) to read as follows:

§ 1.1014–4 Uniformity of basis;adjustment to basis.

(a) * * *(1) The basis of property acquired from

a decedent, as determined under section1014(a) or section 1022, is uniform in thehands of every person having possessionor enjoyment of the property at any timeunder the will or other instrument or underthe laws of descent and distribution. * * *

(2) * * * Accordingly, there is a com-mon acquisition date for all titles to prop-erty acquired from a decedent within the

meaning of section 1014 or section 1022,and, for this reason, a common or uniformbasis for all such interests. * * ** * * * *


Par. 35. Section 1.1014–5 is amendedby revising paragraph (b) to read as fol-lows:

§ 1.1014–5 Gain or loss.

* * * * *(b) Sale or other disposition of certain

term interests—(1) In general. In deter-mining gain or loss from the sale or otherdisposition after October 9, 1969, of aterm interest in property (as defined in§ 1.1001–1(f)(2)) the adjusted basis ofwhich is determined pursuant, or by ref-erence, to section 1014 (relating to thebasis of property acquired from a dece-dent), section 1015 (relating to the basis ofproperty acquired by gift or by a transferin trust), or section 1022 (relating to thebasis of property acquired from certaindecedents who died in 2010), that part ofthe adjusted uniform basis assignable un-der the rules of paragraph (a) of this sec-tion to the interest sold or otherwise dis-posed of shall be disregarded to the extentand in the manner provided by section1001(e) and § 1.1001–1(f).

(2) Effective/applicability date. Theprovisions of paragraph (b)(1) of this sec-tion relating to section 1022 are effectiveon and after January 19, 2017. For rulesbefore January 19, 2017, see § 1.1014–5as contained in 26 CFR part 1 revised asof April 1, 2016.

Par. 36. Section 1.1223–1 is amendedby adding a sentence to the end of para-graph (b) and adding paragraph (l) to readas follows:

§ 1.1223–1 Determination of period forwhich capital assets are held.

* * * * *(b) * * * Similarly, the period for

which property acquired from a decedentwho died in 2010 was held by the dece-dent must be included in determining theperiod during which the property was held

by the recipient, if the recipient’s basis inthe property is determined under section1022.* * * * *

(l) Effective/applicability date. Thissection applies January 23,. For rules be-fore January 19, 2017, see § 1.1223–1 ascontained in 26 CFR part 1 revised as ofApril 1, 2016.

Par. 37. Section 1.1245–2 is amendedby revising paragraph (c)(2)(ii) and add-ing paragraph (d) to read as follows:

§ 1.1245–2 Definition of recomputedbasis.

* * * * *(c) * * *(2) * * *(ii) The transactions referred to in para-

graph (c)(2)(i) of this section are:(A) A disposition that is in part a sale

or exchange and in part a gift (see§ 1.1245–4(a)(3));

(B) A disposition (other than a dispo-sition to which section 1245(b)(6)(A)applies) that is described in section1245(b)(3) (relating to certain tax-freetransactions);

(C) An exchange described in § 1.1245–4(e)(2) (relating to transfers described insection 1081(d)(1)(A)); or

(D) A transfer at death where the basisof property in the hands of the transfereeis determined under section 1022.* * * * *


Par. 38. Section 1.1245–3 is amendedby revising paragraph (a)(3) and addingparagraph (d) to read as follows:

§ 1.1245–3 Definition of section 1245property.

(a) * * *(3) Even though property may not be

of a character subject to the allowance fordepreciation in the hands of the taxpayer,such property may nevertheless be section1245 property if the taxpayer’s basis forthe property is determined by reference toits basis in the hands of a prior owner ofthe property and such property was of a


character subject to the allowance for de-preciation in the hands of such priorowner, or if the taxpayer’s basis for theproperty is determined by reference to thebasis of other property that in the hands ofthe taxpayer was property of a charactersubject to the allowance for depreciation,or if the taxpayer’s basis for the propertyis determined under section 1022 and suchproperty was of a character subject to theallowance for depreciation in the hands ofthe decedent. Thus, for example, if a fa-ther uses an automobile in his trade orbusiness during a period after December31, 1961, and then gives the automobile tohis son as a gift for the son’s personal use,the automobile is section 1245 property inthe hands of the son.* * * * *


Par. 39. Section 1.1245–4 is amendedby revising the second sentence of para-graph (a)(1) and adding paragraph (i) toread as follows:

§ 1.1245–4 Exceptions and Limitations.

(a) * * *(1) * * * For purposes of this paragraph

(a), the term gift means, except to theextent that paragraph (a)(3) of this sectionapplies, a transfer of property that, in thehands of the transferee, has a basis deter-mined under the provisions of section1015(a) or 1015(d) (relating to basis ofproperty acquired by gifts) or section1022 (relating to basis of property ac-quired from certain decedents who died in2010). * * ** * * * *

(i) Effective/applicability date. Thissection applies on and after January 19,2017. For rules before January 19, 2017,see § 1.1245–4 as contained in 26 CFRpart 1 revised as of April 1, 2016.

Par. 40. Section 1.1250–4 is amendedby adding paragraphs (c)(5) and (h) toread as follows:

§ 1.1250–4 Holding period.

* * * * *(c) * * *

(5) A transfer at death where the basisof the property in the hands of the trans-feree is determined under section 1022.* * * * *

(h) Effective/applicability date. Thissection applies on and after January 19,2017. For rules before January 19, 2017,see § 1.1250–4 as contained in 26 CFRpart 1 revised as of April 1, 2016.

Par. 41. Section 1.1254–2 is amendedby revising the second sentence of para-graph (a)(1) to read as follows:

§ 1.1254–2 Exceptions and limitations.

(a) * * *(1) * * * For purposes of this paragraph

(a), the term gift means, except to theextent that paragraph (a)(2) of this sectionapplies, a transfer of natural resource re-capture property that, in the hands of thetransferee, has a basis determined underthe provisions of section 1015(a) or1015(d) (relating to basis of property ac-quired by gift) or section 1022 (relating tothe basis of property acquired from certaindecedents who died in 2010). * * *

* * * * *Par. 42. Section 1.1254–3 is amended

by revising paragraphs (b)(2)(ii) and (iii)and adding paragraph (b)(2)(iv) to read asfollows:

§ 1.1254–3 Section 1254 costsimmediately after certain acquisitions.

* * * * *(b) * * *(2) * * *(ii) A transaction described in section

1041(a);(iii) A disposition described in

§ 1.1254–2(c)(3) (relating to certain tax-free transactions); or

(iv) A transfer at death where basis ofproperty in the hands of the transferee isdetermined under section 1022.* * * * *

Par. 43. Section 1.1254–4 is amendedby revising paragraph (e)(4) introductorytext to read as follows:

§ 1.1254–4 Special rules for Scorporations and their shareholders.

* * * * *(e) * * *

(4) * * * If stock is acquired in atransfer that is a gift, in a transfer that isa part sale or exchange and part gift, in atransfer that is described in section1041(a), or in a transfer at death where thebasis of property in the hands of the trans-feree is determined under section 1022,the amount of section 1254 costs withrespect to the property held by the corpo-ration in the acquiring shareholder’shands immediately after the transfer is anamount equal to—* * * * *

Par. 44. Section 1.1254–5 is amendedby revising paragraph (c)(2)(iv) introduc-tory text to read as follows:

§ 1.1254–5 Special rules forpartnerships and their partners.

* * * * *(c) * * *(2) * * *(iv) * * * If an interest in a partnership

is transferred in a transfer that is a gift, ina transfer that is a part sale or exchangeand part gift, in a transfer that is describedin section 1041(a), or in a transfer at deathwhere the basis of property in the hands ofthe transferee is determined under section1022, the amount of the transferee part-ner’s section 1254 costs with respect toproperty held by the partnership immedi-ately after the transfer is an amount equalto—* * * * *



(a) Sections 1.1254–1 through 1.1254–3 and 1.1254–5 are effective with respectto any disposition of natural resource re-capture property occurring after March13, 1995. The rule in § 1.1254–1(b)(2)(iv)(A)(2), relating to a nonoperat-ing mineral interest carved out of an op-erating mineral interest with respect towhich an expenditure has been deducted,is effective with respect to any dispositionoccurring after March 13, 1995, of prop-erty (within the meaning of section 614)that is placed in service by the taxpayerafter December 31, 1986. Section1.1254–4 applies to dispositions of natu-ral resource recapture property by an S


corporation (and a corporation that wasformerly an S corporation) and disposi-tions of S corporation stock occurring onor after October 10, 1996. Sections1.1254–2(d)(1)(ii) and 1.1254–3(b)(1)(i),(b)(1)(ii), (d)(1)(i), and (d)(1)(ii) are ef-fective for dispositions of property occur-ring on or after October 10, 1996.

(b) The provisions of §§ 1.1254–2(a)(1), 1.1254–3(b)(2), 1.1254–4(e)(4),and 1.1254–5(c)(2)(iv) that relate to sec-tion 1022 are effective on and after Janu-ary 19, 2017.

Par. 46. Section 1.1296–1 is amendedby revising paragraphs (d)(4) and (j) toread as follows:

§ 1.1296–1 Mark to market election formarketable stock.

* * * * *(d) * * *(4) Stock acquired from a decedent. In

the case of stock of a PFIC that is acquiredby bequest, devise, or inheritance (or bythe decedent’s estate) and with respect towhich a section 1296 election was in ef-fect as of the date of the decedent’s death,notwithstanding section 1014 or section1022, the basis of such stock in the handsof the person so acquiring it shall be theadjusted basis of such stock in the handsof the decedent immediately before hisdeath (or, if lesser, the basis that wouldhave been determined under section 1014or section 1022 without regard to thisparagraph (d)).* * * * *

(j) Effective/applicability date. Theprovisions in this section are applicablefor taxable years beginning on or afterMay 3, 2004. The provisions of paragraph(d)(4) of this section relating to section1022 are effective on January 19, 2017.

Par. 47. Section 1.1312–7 is amendedby revising paragraph (b) and addingparagraph (d) to read as follows:

§ 1.1312–7 Basis of property aftererroneous treatment of a priortransaction.

* * * * *(b)(1) For this section to apply, the

taxpayer with respect to whom the erro-neous treatment occurred must be:

(i) The taxpayer with respect to whomthe determination is made; or

(ii) A taxpayer who acquired title to theproperty in the erroneously treated trans-action and from whom, mediately or im-mediately, the taxpayer with respect towhom the determination is made derivedtitle in such a manner that he will have abasis ascertained by reference to the basisin the hands of the taxpayer who acquiredtitle to the property in the erroneouslytreated transaction; or

(iii) A taxpayer who had title to theproperty at the time of the erroneouslytreated transaction and from whom, medi-ately or immediately, the taxpayer withrespect to whom the determination ismade derived title, if the basis of the prop-erty in the hands of the taxpayer withrespect to whom the determination ismade is determined under section 1015(a)(relating to the basis of property acquiredby gift) or section 1022 (relating to thebasis of property acquired from certaindecedents who died in 2010).

(2) No adjustment is authorized withrespect to the transferor of the property ina transaction upon which the basis of theproperty depends, when the determinationis with respect to the original transferee ora subsequent transferee of the originaltransferee.

* * * * *(d) Effective/applicability date. This

section applies on and after January 19,2017. For rules before January 19, 2017,see § 1.1312–7 as contained in 26 CFRpart 1 revised as of April 1, 2016.

John Dalrymple,Deputy Commissioner for

Services and Enforcement.

Approved: November 11, 2016.

Mark J. Mazur,Assistant Secretary of the

Treasury (Tax Policy).

(Filed by the Office of the Federal Register on January 18,2017, 8:45 a.m., and published in the issue of the FederalRegister for January 19, 2017, 82 F.R. 6235.)

26 CFR 1.721(c)–1T through –7T, 1.6038B–2T

T.D. 9814

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Transfers of Certain Propertyby U.S. Persons toPartnerships with RelatedForeign Partners


ACTION: Final and temporary regulations.

SUMMARY: This document containstemporary regulations that address trans-fers of appreciated property by UnitedStates persons (U.S. persons) to partner-ships with foreign partners related to thetransferor. The regulations override therules providing for nonrecognition of gainon a contribution of property to a partner-ship in exchange for an interest in thepartnership under section 721(a) of theInternal Revenue Code (Code) pursuant tosection 721(c) unless the partnershipadopts the remedial method and certainother requirements are satisfied. The doc-ument also contains regulations under sec-tions 197, 704, and 6038B that apply tocertain transfers described in section 721.The regulations affect U.S. partners in do-mestic or foreign partnerships. The text ofthe temporary regulations also serves asthe text of the proposed regulations setforth in the notice of proposed rulemakingon this subject in the Proposed Rules sec-tion of this issue of the Internal RevenueBulletin. The final regulations revise andadd cross-references to coordinate the ap-plication of the temporary regulations.

DATES: Effective Date: These regula-tions are effective on January 18, 2017.

Applicability Dates: For dates of appli-cability, see §§ 1.197–2T(l)(5)(i), 1.704–1T(f), 1.704–3T(g)(1), 1.721(c)–1T(e),1.721(c)–2T(e), 1.721(c)–3T(e), 1.721(c)–4T(d), 1.721(c)–5T(g), 1.721(c)–6T(g),and 1.6038B–2T(j)(4)(i).

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


tions, Ryan A. Bowen, (202) 317-6937;concerning submissions of comments orrequests for a public hearing, ReginaJohnson, (202) 317-6901 (not toll-freenumbers).


Paperwork Reduction Act

The collection of information con-tained in the regulations is listed with theOffice of Management and Budget undercontrol numbers 1545-1668 and 1545-0123 in accordance with the PaperworkReduction Act of 1995 (44 U.S.C.3507(d)). Comments on the collection ofinformation should be sent to the Office ofManagement and Budget, Attn: Desk Of-ficer for the Department of the Treasury,Office of Information and Regulatory Af-fairs, Washington, DC 20503, with copiesto the Internal Revenue Service, Attn: IRSReports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224.Comments on the collection of informa-tion should be received February 21,2017.

The collections of information are in§§ 1.721(c)–6T and 1.6038B–2T. Thecollections of information are mandatory.The likely respondents are domestic cor-porations. Burdens associated with theserequirements will be reflected in the bur-den for Form 1065, U.S. Return of Part-nership Income, and Form 8865, Returnof U.S. Persons With Respect to CertainForeign Partnerships. Estimates for com-pleting these forms can be located in theform instructions.

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

Background

I. Statutory Background

Until they were repealed as part of theTaxpayer Relief Act of 1997 (the 1997Act), Public Law 105–34 (111 Stat. 788),section 1131, sections 1491 through 1494imposed an excise tax on certain transfersof appreciated property by a U.S. personto a foreign partnership, which generallywas 35 percent of the amount of gaininherent in the property. Congress be-lieved that the imposition of enhanced in-

formation reporting obligations (includingsections 6038, 6038B, and 6046A) withrespect to foreign partnerships wouldeliminate the need for sections 1491through 1494. Staff of the Joint Commit-tee on Taxation, General Explanation ofTax Legislation Enacted in 1997, PartTwo: Taxpayer Relief Act of 1997 (H.R.2014) (JCS–23–97) (Dec. 17, 1997), at314-315.

Notwithstanding these enhanced infor-mation reporting requirements, the 1997Act granted the Secretary regulatory au-thority in section 721(c) to override theapplication of the nonrecognition provi-sion of section 721(a) to gain realized onthe transfer of property to a partnership(domestic or foreign) if the gain, whenrecognized, would be includible in thegross income of a person other than a U.S.person. In the 1997 Act, Congress alsoenacted section 367(d)(3), which providesthe Secretary regulatory authority to applythe rules of section 367(d)(2) to transfersof intangible property to partnerships incircumstances consistent with the pur-poses of section 367(d). Regulations havenever been issued pursuant to section721(c) or section 367(d)(3).

Congress enacted section 367 (and itspredecessor) in order to prevent U.S. per-sons from avoiding U.S. tax by transfer-ring appreciated property to foreign cor-porations using nonrecognition transactions.Staff of the Joint Committee on Taxation,General Explanation of the Revenue Pro-visions of the Deficit Reduction Act of1984 (H.R. 4170, 98th Congress; PublicLaw 98–369) (JCS–41–84) (Dec. 31,1984), at 427. The outbound transfer ofintangible property raises additional is-sues that Congress also sought to address.Specifically, section 367(d) was enactedto prevent U.S. persons from transferringintangibles offshore in order to achievedeferral of U.S. tax on the profits gener-ated by the intangibles. H.R. Rep. No.98–432, 98th Cong., 2d Sess., at 1311–15(1984). Under section 367(d), a U.S. per-son that transfers intangible property(within the meaning of section 936(h)(3)(B)) to a foreign corporation in an ex-change described in section 351 or section361 is treated as having sold such propertyin exchange for payments that are contin-gent upon the productivity, use, or dispo-sition of such property, and receiving

amounts that reasonably reflect theamounts that would have been receivedannually in the form of such paymentsover the useful life of the property, or, inthe case of a disposition following thetransfer (whether direct or indirect), at thetime of the disposition. Section 367(d)(2)(A). The amounts taken into accountmust be commensurate with the incomeattributable to the intangible property. Id.

Section 721(a) provides a general rulethat no gain or loss is recognized to apartnership or to any of its partners in thecase of a contribution of property to thepartnership in exchange for an interest inthe partnership. Because section 367 ap-plies only to the transfer of property to aforeign corporation, absent regulationsunder section 721(c) or section 367(d)(3),a U.S. person generally does not recog-nize gain on the contribution of appreci-ated property to a partnership with foreignpartners.

Section 704(c)(1)(A) requires partner-ships to allocate income, gain, loss, anddeduction with respect to property con-tributed by a partner to the partnership soas to take into account any variation be-tween the adjusted tax basis of the prop-erty and its fair market value at the time ofcontribution.

II. Regulatory Background

Section 1.704–3(a)(1) provides that thepurpose of section 704(c) is to prevent theshifting of tax consequences among part-ners with respect to pre-contribution gainor loss (forward section 704(c) layer). Inaddition, partnerships may, but are notrequired to, revalue partnership propertypursuant to § 1.704–1(b)(2)(iv)(f) or (s)upon the occurrence of enumeratedevents, such as the entry of a new partnerby contribution, giving rise to a reversesection 704(c) layer. Section 1.704–3(a)(6)(i) provides that the principles of§ 1.704–3 apply to allocations with re-spect to these reverse section 704(c) lay-ers (reverse section 704(c) allocations).

Section 704(c) allocations must bemade using any reasonable method con-sistent with the purpose of section 704(c).Section 1.704–3(a)(1). Section 1.704–3describes three methods of making section704(c) allocations that are generally rea-sonable, including the remedial allocation


method. Id. Under the remedial allocationmethod, a partnership may eliminate dis-tortions caused by the ceiling rule (as de-scribed in § 1.704–3(b)(1)) by makingremedial allocations of income, gain, loss,or deduction to the noncontributing part-ners equal to the full amount of the limi-tation caused by the ceiling rule, and off-setting those allocations with remedialallocations of income, gain, loss, or de-duction to the contributing partner. See§ 1.704–3(d)(1); see also T.D. 8585 (59FR 66724). Under § 1.704–3(a)(10), anallocation method (or combination ofmethods) is not reasonable if the contri-bution of property (or event that results inreverse section 704(c) allocations) and thecorresponding allocation of tax items withrespect to the property are made with aview to shifting the tax consequences ofbuilt-in gain or loss among the partners ina manner that substantially reduces thepresent value of the partners’ aggregatetax liability. However, § 1.704–3(d)(5)(ii)provides that, in exercising its authorityunder § 1.704–3(a)(10), the IRS will notrequire a partnership to use the remedialallocation method.

III. Reasons for Exercising RegulatoryAuthority

The Treasury Department and the IRSare aware that certain taxpayers purport tobe able to contribute, consistently withsections 704(b), 704(c), and 482, propertyto a partnership that allocates the incomeor gain from the contributed property torelated foreign partners that are not sub-ject to U.S. tax. Many of these taxpayerschoose a section 704(c) method other thanthe remedial method or use valuationtechniques that are inconsistent with thearm’s length standard. In 1997, Congressrecognized that taxpayers might use apartnership to shift gain to a foreign per-son and consequently enacted sections721(c) and 367(d)(3). Based on the expe-rience of the IRS with the taxpayer posi-tions described above, the Treasury De-partment and the IRS have determinedthat it is appropriate to exercise the regu-latory authority granted in section 721(c)to override the application of section721(a) to gain realized on the transfer ofproperty to a partnership (domestic or for-eign) in certain circumstances in which

the gain, when recognized, ultimatelywould be includible in the gross income ofa foreign person. Although Congress alsoprovided specific authority in section367(d)(3) to address transfers of intangi-ble property to partnerships, the TreasuryDepartment and the IRS have concludedthat acting pursuant to section 721(c) ismore appropriate because the transactionsat issue are not limited to transfers ofintangible property.

IV. Notice 2015–54

On August 6, 2015, the Department ofthe Treasury (Treasury Department) andthe IRS issued Notice 2015–54, 2015–34I.R.B. 210 (the notice), which describesregulations to be issued under section721(c) that would ensure that, when a U.S.person transfers certain property to a part-nership that has foreign partners related tothe U.S. person, income or gain attribut-able to the appreciation in the property atthe time of the contribution will be takeninto account by the transferor either im-mediately or over time. Comments werereceived on the notice and will be in-cluded in the administrative record for thenotice of proposed rulemaking on thissubject in the Proposed Rules section ofthis issue of the Bulletin (REG–127203–15). The Treasury Department and theIRS have considered all the submittedcomments. The significant comments arediscussed in the Explanation of Provisionssection of this preamble.

The notice states that future regulationsgenerally will override the application ofsection 721(a) to gain realized on thetransfer of property to a partnership (do-mestic or foreign) in certain circum-stances in which the gain, when recog-nized, ultimately would be includable inthe gross income of a related foreign per-son. The notice further states that futureregulations will allow for the continuedapplication of section 721(a) to transfersto partnerships with related foreign part-ners when certain requirements intendedto protect the U.S. tax base are satisfied.The notice described these requirements,in addition to others, as the “gain deferralmethod.”

The requirements of the gain deferralmethod described in the notice are that (i)the section 721(c) partnership adopts the

remedial allocation method for built-ingain with respect to all section 721(c)property contributed to the partnershippursuant to the same plan by the U.S.transferor and all U.S. transferors that arerelated persons; (ii) the section 721(c)partnership makes consistent allocationsof all section 704(b) items with respect toan item of section 721(c) property (theconsistent allocation method); (iii) certainreporting requirements are satisfied; (iv)the U.S. transferor recognizes any remain-ing built-in gain with respect to section721(c) property upon an accelerationevent; and (v) the gain deferral method isadopted for all section 721(c) propertysubsequently contributed to the section721(c) partnership by the U.S. transferorand all other U.S. transferors that are re-lated persons until the earlier of two dates:the date that no built-in gain remains withrespect to any section 721(c) property towhich the gain deferral method first ap-plied, or the date that is 60 months afterthe date of the initial contribution of sec-tion 721(c) property to which the gaindeferral method first applied (unified ap-plication requirement). See Part III of theExplanations of Provisions section of thispreamble for the definitions of “section721(c) partnership,” “section 721(c) prop-erty,” “U.S. transferor” and other com-monly used terms.

The notice generally provides that theregulations will define an accelerationevent as any transaction that either (i)would reduce the amount of remainingbuilt-in gain that a U.S. transferor wouldrecognize under the gain deferral methodif the transaction had not occurred, or (ii)could defer the recognition of the built-ingain. The notice also describes severalsituations that the regulations will nottreat as acceleration events.

The notice states that the regulationswill apply to transactions involving tieredpartnerships in a manner that is consistentwith the purpose of the regulations. Asexamples, the notice provides that the reg-ulations will treat a contribution of section721(c) property by a partnership (in whicha U.S. transferor is a direct or indirectpartner) to a lower-tier partnership, or acontribution by a U.S. transferor of aninterest in a partnership that owns section721(c) property to an upper-tier partner-ship, as though the U.S. transferor contrib-


uted its share of the section 721(c) prop-erty directly.

The notice provides that the regula-tions described therein will apply to con-tributions occurring on or after August 6,2015, and to contributions occurring be-fore August 6, 2015, resulting from anentity classification election made under§ 301.7701–3 that is filed on or after Au-gust 6, 2015, and that is effective on orbefore August 6, 2015. The notice pro-vides, however, that the reporting require-ments will not apply to taxable years thatend before the date of publication of reg-ulations described in the notice.

The notice also announced the intent toissue regulations under sections 482 and6662 to ensure the appropriate valuationof controlled transactions involving part-nerships. These regulations are not con-tained in this Treasury decision and willappear in future regulations. Section 482continues to apply to controlled transac-tions (within the meaning of § 1.482–1(i)(8)) that are also subject to these reg-ulations. An adjustment pursuant tosection 482 does not prevent the applica-tion of these regulations.

Explanation of Provisions

I. Comments Regarding StatutoryAuthority for Regulations

Comments questioned whether the reg-ulations described in the notice are withinthe scope of the grant of authority in sec-tion 721(c). Specifically, comments as-serted that pre-contribution gain could notbe taxed under section 721(c) until it isrecognized in a sale or exchange by thepartnership. The Treasury Department andthe IRS disagree with these comments forseveral reasons.

First, as explained in the notice, Con-gress added the broad grant of regulatoryauthority in section 721(c) in the 1997 Actto address transactions in which propertyis contributed to partnerships in order toinappropriately shift gain offshore as areplacement for the repealed excise tax ontransfers to foreign partnerships in sec-tions 1491 through 1494.

Second, section 721(c) provides au-thority to tax the gain when the property iscontributed if the gain “will be includible”in a foreign person’s income; it is not arule (like section 704(c)(1)(B)) that re-

quires the “wait-and-see” approach sug-gested by the comments. The commentsfail to acknowledge that neither the tradi-tional method nor the traditional methodwith curative allocations will necessarilyensure that a contributing partner willbear all the tax consequences of pre-contribution gain. A contributing partnerexchanges a share of the property it con-tributes for a share of the property theother partners contribute. Economically, acontribution is a current value-for-valueexchange. The purpose of section 704(c)is to prevent the shifting of tax conse-quences among partners with respect topre-contribution built-in gain or loss incontributed property. The regulations un-der section 704(c) provide three generallyreasonable methods under which partner-ships may allocate items with respect tocontributed property so as to take intoaccount the tax consequences of pre-contribution gain or loss—the traditionalmethod, the traditional method with cura-tive allocations, and the remedial alloca-tion method. None of the methods aremandatory, and taxpayers may choose anyof them (or another reasonable method)on a property-by-property and section704(c) layer-by-layer basis. In the case ofa contribution of depreciable or amortiz-able property with pre-contribution gain,under all three methods, book cost recov-ery deductions reduce the pre-contributiongain in the property (the gain that must beallocated back to the contributor) over thecourse of the recovery period for the prop-erty. Under the traditional method, taxcost recovery deductions (which are basedon tax basis in the property) are, to theextent available, allocated first to the non-contributing partner up to its allocatedbook cost recovery deductions. If the non-contributing partner’s book cost recoverydeductions exceed its tax cost recoverydeductions, the noncontributing partnerwill be overtaxed on its investment in thepartnership property. The traditionalmethod does not make up for shortfalls inavailable tax deductions, and if the part-nership uses the traditional method withcurative allocations, those shortfalls arecured only if there are other tax itemsavailable with which to cure. Becausebook cost recovery deductions reduce thebuilt-in gain in the property regardless ofwhether the noncontributing partner has

received all of the tax cost recovery de-ductions to which it is economically enti-tled or whether the contributing partnerhas received taxable income (or fewer taxdeductions) commensurate with the pre-contribution gain in its property, neitherthe traditional method nor the traditionalmethod with curative allocations preventsa shift of the tax consequences of pre-contribution gain to the noncontributingpartner when tax basis or other tax itemsare insufficient to reflect the economics ofthe noncontributing partner. When thisshift occurs, the contributing partner gen-erally will not bear the tax consequencesof the pre-contribution gain until, at theearliest, its partnership interest is liqui-dated or sold. In this way, the contributionof property to a partnership applying ei-ther of these two methods can result in atax-advantaged exchange with respect tothe contributing partner. When the non-contributing partner is foreign, this situa-tion is the appropriate target for the tem-porary regulations.

Finally, the regulations under section704(c) give wide latitude to taxpayers re-garding how and when partners maychoose to recognize pre-contribution gain.Subject to anti-abuse rules, taxpayers areallowed to adopt the traditional methodand the traditional method with curativeallocations despite those methods’ inabil-ity to prevent a shift of the tax conse-quences of pre-contribution gain in allcases. This latitude raises more concern inthe case of related partners, one or more ofwhom are foreign, given their likely over-all alignment of tax interests, which wouldnot necessarily exist among unrelatedpartners. As explained in Part II of theBackground section of this preamble, theremedial allocation method is the onlymethod that reliably and consistently en-sures that the tax consequences of pre-contribution gain from contributed prop-erty are properly borne by the contributingpartner. This feature of the remedialmethod is particularly relevant to the Con-gressional concerns about the erosion ofthe U.S. tax base that led to the enactmentof section 721(c), and thus the remedialmethod is the method that is most appro-priate for appreciated property that is con-tributed to a partnership controlled by theU.S. transferor and one or more relatedforeign partners. For these reasons, the


Treasury Department and the IRS havedetermined that these regulations arewithin the scope of the grant of authorityin section 721(c).

II. Overview of the TemporaryRegulations

The temporary regulations adopt therules that were described in the notice,with certain modifications, in part, in re-sponse to comments received.

Section 1.721(c)–1T provides defini-tions and rules of general application forpurposes of all sections of the temporaryregulations. Section 1.721(c)–2T providesthe general operative rules that overridesection 721(a) nonrecognition upon a con-tribution of section 721(c) property to apartnership. Section 1.721(c)–3T de-scribes the gain deferral method, which, ifadopted, avoids the immediate recogni-tion of gain upon a contribution of section721(c) property. Section 1.721(c)–4T pro-vides rules regarding events that acceler-ate the recognition of gain that previouslywas deferred under the gain deferralmethod. Section 1.721(c)–5T identifiesexceptions to the acceleration events pro-vided in § 1.721(c)–4T, the result ofwhich, generally, is that the gain deferralmethod either ends (termination events) orcontinues to apply without immediategain recognition (successor events) orcontinues to apply with partial gain rec-ognition (partial acceleration events). Sec-tion 1.721(c)–6T provides procedural andreporting requirements. Section 1.721(c)–7T provides examples illustrating theapplication of the temporary regulations.

III. General Scope of the TemporaryRegulations

The temporary regulations apply on aproperty-by-property basis. Accordingly,as discussed in Paragraph b of Part VI ofthe Explanations of Provisions section ofthis preamble, the temporary regulationsdo not include the unified application re-quirement announced in the notice.

The temporary regulations apply to allcontributions, actual or deemed, of prop-erty to a partnership, including, for exam-ple, a contribution of property that occursas a result of (i) a partnership merger,consolidation, or division in the assets-

over form, (ii) a change in entity classifica-tion that occurs pursuant to § 301.7701–3,or (iii) a transaction described in Rev. Rul.99–5, 1999–1 C.B. 434 (change from adisregarded entity to a partnership). How-ever, in response to a comment, the tem-porary regulations provide that a contribu-tion in a technical termination of apartnership described in section 708(b)(1)(B) (technical termination) will not, byitself, cause a partnership to become asection 721(c) partnership subject to thetemporary regulations. For further discus-sion, see Part IV of the Explanation ofProvisions section of this preamble. How-ever, the temporary regulations do applyto a technical termination of a section721(c) partnership applying the gain de-ferral method. In this regard, see Part Vand Paragraph c of Part VIII of the Expla-nation of Provisions section of this pream-ble, concerning the general rule of gainrecognition and successor events, respec-tively.

The temporary regulations provide thata mere change in identity, form, or placeof organization of a partnership or a re-capitalization of a partnership will notcause the partnership to become a section721(c) partnership. See § 1.721(c)–1T(c).

Finally, as announced in the notice, thetemporary regulations contain rules fortransactions involving tiered partnerships,as well as a general anti-abuse rule (see§ 1.721(c)–1T(d)) that applies for pur-poses of all sections of the temporary reg-ulations.

IV. Definitions: Section 721(c)Partnership, Section 721(c) Property,U.S. Transferor, and Other Terms

The notice states that future regulationswould provide that a partnership is a sec-tion 721(c) partnership if a U.S. transferorcontributes section 721(c) property to thepartnership, and, after the contributionand any transactions related to the contri-bution, (i) a related foreign person is adirect or indirect partner, and (ii) the U.S.transferor and related persons own (di-rectly or indirectly) more than 50 percentof the interests in partnership capital, prof-its, deductions, or losses.

A comment requested that the defini-tion of section 721(c) partnership be re-vised to exclude partnerships when the

interests held by related foreign personsare small and an unrelated third-party witha material adverse tax position to the U.S.transferor holds a meaningful interest inthe partnership. According to the com-ment, these two factors would sufficientlymitigate the potential for the abuse thatthe notice is intended to address. Whilethese factors may reduce the ability of aU.S. transferor to shift gain or incomeoutside the United States, the TreasuryDepartment and the IRS have concludedthat these factors alone are insufficient toprevent the erosion of the U.S. tax basethat section 721(c) was enacted to address.In particular, the Treasury Departmentand the IRS are concerned that even asmall ownership interest held by a relatedforeign person may be used for a mean-ingful shift of gain or income outside theUnited States. Furthermore, the TreasuryDepartment and the IRS have determinedthat such a rule would necessitate addi-tional rules to address small interests thatlater become large either in absolute orrelative terms. In this regard, the TreasuryDepartment and the IRS have determinedthat both a general anti-abuse rule and amore targeted rule that would require pe-riodic retesting of the size of a relatedforeign person’s interest would be diffi-cult to administer. Accordingly, this com-ment has not been adopted. The TreasuryDepartment and the IRS, however, ac-knowledge that the higher the overalllevel of related ownership in the partner-ship, the more likely the arrangementamong the partners will reflect tax consid-erations. After considering this commentand other comments that requested ahigher level of related-party ownership inthe definition of a section 721(c) partner-ship, the temporary regulations increasethe threshold from a “more than 50 per-cent” test to an “80 percent or more” test(ownership requirement). See § 1.721(c)–1T(b)(14)(i) for the general definition of asection 721(c) partnership. The temporaryregulations also provide rules that deemcertain controlled partnerships in a tiered-partnership structure to be section 721(c)partnerships in order to apply the gaindeferral method. See § 1.721(c)–1T(b)(14)(ii).

The temporary regulations define sec-tion 721(c) property as property, otherthan excluded property, with built-in gain


that is contributed to a partnership by aU.S. transferor. See § 1.721(c)–1T(b)(15)(i) for the general definition of section721(c) property. The notice incorporatedthe requirement that a U.S. transferormake the contribution in the definition ofa section 721(c) partnership rather than inthe definition of section 721(c) property.This adjustment to the definitions is in-tended to be a non-substantive change.The temporary regulations provide that ifa U.S. transferor is treated as contributingits share of an item of property, the entireitem of property is section 721(c) prop-erty. In addition, the temporary regula-tions provide rules that deem certain prop-erty of a tiered partnership to be section721(c) property. See § 1.721(c)–1T(b)(15)(ii). When an interest in a partnershipis contributed, the partnership interest, if itis not excluded property, is the section721(c) property.

The temporary regulations define ex-cluded property as (i) a cash equivalent;(ii) a security within the meaning of sec-tion 475(c)(2), without regard to section475(c)(4); (iii) an item of tangible prop-erty with built-in gain that does not ex-ceed $20,000 or with an adjusted tax basisin excess of book value (built-in loss); and(iv) an interest in a partnership that holds(directly, or indirectly through interests inone or more partnerships that are not ex-cluded property under this clause (iv))property of which 90 percent or more ofthe value consists of property described inclauses (i) through (iii) (partnership inter-est exclusion). See § 1.721(c)–1T(b)(6).The notice announced the first three cate-gories of excluded property. However, thetemporary regulations include tangibleproperty with a built-in loss in the thirdexclusion so that such property is ex-cluded property for purposes of the part-nership interest exclusion. The TreasuryDepartment and the IRS determined that itwas appropriate to add the partnership in-terest exclusion so that the temporary reg-ulations do not apply to transfers of part-nership interests when only a smallportion of the partnership’s property issection 721(c) property. If a partnershipinterest fails the 90-percent threshold testfor the partnership interest exclusion anddoes not qualify under the second exclu-sion for securities, the interest is section721(c) property.

Comments recommended that propertythat gives rise to income effectively con-nected with a U.S. trade or business (ECIproperty) be excluded from the definitionof section 721(c) property, because theincome will be subject to U.S. tax even ifit is allocated to a related foreign person.The Treasury Department and the IRSagree with the reasoning behind this com-ment, and have determined that the tem-porary regulations should also address thesituation when the property ceases to beECI property and still has built-in gain.Accordingly, the temporary regulationscontinue to include ECI property in thedefinition of section 721(c) property butmodify the application of the gain deferralmethod to ECI property, as discussed inParagraph c of Part VI of the Explanationof Provisions section of this preamble.

Another comment similarly suggestedthat the definition of section 721(c) prop-erty exclude property the gain on whichwould be subject to U.S. tax under subpartF of the Code. The Treasury Departmentand IRS have declined to adopt such arule, which would depend on a “wait andsee” approach and would import the rec-ognition rules of subpart F, including anearnings and profits requirement, ratherthan the more direct approach of section721(c).

The temporary regulations definebuilt-in gain with respect to an item ofproperty contributed to a partnership asthe excess of the book value of the prop-erty over the partnership’s adjusted taxbasis in the property upon the contribu-tion, determined without regard to the ap-plication of the gain recognition rule of§ 1.721(c)–2T(b). See § 1.721(c)–1T(b)(2). The temporary regulations clarify thedefinition provided in the notice in tworespects. First, the notice states thatbuilt-in gain would be determined withrespect to the contributing partner’s ad-justed tax basis in the property at the timeof the contribution, whereas the temporaryregulations provide that built-in gain isdetermined with respect to the partner-ship’s adjusted tax basis in the property.The revision was made in order to moreprecisely describe the amount of gain thatmay be shifted to a related foreign partner.Second, the temporary regulations clarifythat built-in gain is determined without

regard to the application of the gain rec-ognition rule under § 1.721(c)–2T(b).

The temporary regulations include anew term, “remaining built-in gain.” Sec-tion 1.721(c)–1T(b)(13)(i) generally de-fines remaining built-in gain, with respectto an item of section 721(c) property thatis subject to the gain deferral method, asthe built-in gain, reduced by decreases inthe difference between the property’sbook value and adjusted tax basis. How-ever, subsequent increases or decreases tothe property’s book value due to a reval-uation other than a revaluation requiredunder these temporary regulations fortiered partnerships are not taken into ac-count in determining remaining built-ingain. The temporary regulations providerules for determining remaining built-ingain in the case of tiered partnerships. See§ 1.721(c)–1T(b)(13)(ii).

Consistent with the notice, § 1.721(c)–1T(b)(18)(i) of the temporary regulationsgenerally defines a U.S. transferor as aU.S. person (within the meaning of sec-tion 7701(a)(30)) other than a domesticpartnership. The temporary regulationsalso provide a rule that deems certaintiered partnerships to be a U.S. transferorsolely for purposes of applying the con-sistent allocation method. See § 1.721(c)–1T(b)(18)(ii).

Finally, the temporary regulations,consistent with the notice, define (i) arelated person as a person that is related(within the meaning of section 267(b) orsection 707(b)(1)) to a U.S. transferor; (ii)a related foreign person as a person that isa related person (other than a partnership)that is not a U.S. person; and (iii) a director indirect partner as a person (other thana partnership) that owns an interest in apartnership directly or indirectly throughone or more partnerships. See § 1.721(c)–1T(b)(12), (b)(11), and (b)(5), respec-tively.

V. General Rule of Gain Recognitionupon a Contribution of Section 721(c)Property to a Section 721(c) Partnership

Section 1.721(c)–2T provides the gen-eral operative rules that override section721(a) nonrecognition of gain upon a con-tribution of section 721(c) property to apartnership. Section 1.721(c)–2T(b) pro-vides the general rule that nonrecognition


under section 721(a) will not apply to gainrealized upon a contribution of section721(c) property to a section 721(c) part-nership. In contrast to the regulations de-scribed in the notice, § 1.721(c)–2T(b)provides that this general rule does notapply — and therefore that nonrecogni-tion under section 721(a) continues to ap-ply — to a direct contribution of section721(c) property by an “unrelated” U.S.transferor (in other words, a U.S. trans-feror that does not, together with relatedpersons with respect to it, satisfy the own-ership requirement). The carve-out is con-sistent with the intent of the temporaryregulations to address the shifting of in-come among related persons. Because thiscarve-out for an unrelated U.S. transferoris limited to direct contributions of section721(c) property, it does not apply to acontribution that occurs pursuant to thepartnership look-through rule in § 1.721(c)–2T(d)(1) (as discussed elsewhere inthis Part V).

Section 1.721(c)–2T(c) provides a deminimis exception to the general rule. Thetemporary regulations modify the de mi-nimis exception described in the notice —which focused on contributions made by aU.S. transferor (and all related U.S. trans-ferors) during the U.S. transferor’s taxableyear — to focus instead on contributionsduring the partnership’s taxable year, inorder to align the rule with the reportingrequired under § 1.721(c)–6T. Under thede minimis exception in the temporaryregulations, contributions of section721(c) property will not be subject to im-mediate gain recognition if the sum of allbuilt-in gain for all section 721(c) prop-erty contributed to a section 721(c) part-nership during the partnership’s taxableyear does not exceed $1 million.

Section 1.721(c)–2T(d)(1) provides alook-through rule for identifying a section721(c) partnership when an upper-tierpartnership in which a U.S. transferor is adirect or indirect partner contributes prop-erty to a lower-tier partnership. For pur-poses of determining if the lower-tier part-nership is a section 721(c) partnership, theU.S. transferor will be treated as contrib-uting to the lower-tier partnership its shareof the property actually contributed by theupper-tier partnership to the lower-tierpartnership. If the lower-tier partnership isa section 721(c) partnership, absent appli-

cation of the gain deferral method by thelower-tier partnership to the entire prop-erty and by the upper-tier partnership tothe partnership interest in the lower-tierpartnership, the upper-tier partnership willrecognize the entire built-in gain in thesection 721(c) property under the generalgain recognition rule, because the entireproperty will be section 721(c) property(see the general definition of section721(c) property in § 1.721(c)–1T(b)(15)(i)).

Section 1.721(c)–2T(d)(2) providesthat the partnership look-through rule willnot apply to a deemed contribution by an“old” partnership to a “new” partnershipthat occurs as a result of a technical ter-mination of the old partnership. Thus, atechnical termination will not cause a non-section 721(c) partnership, in which aU.S. transferor is a direct or indirect part-ner, to become a section 721(c) partner-ship subject to these temporary regula-tions. If, however, a partnership is asection 721(c) partnership subject to thetemporary regulations immediately beforeits technical termination, the technical ter-mination would be a successor event(rather than an acceleration event) only ifthe new partnership continues the gaindeferral method with respect to the section721(c) property that was subject to thegain deferral method in the terminatedpartnership. In this regard, see § 1.721(c)–5T(c)(4) (defining a successor event toinclude certain technical terminations).

VI. Gain Deferral Method

a. In general

Section 1.721(c)–3T describes the gaindeferral method, which generally must beapplied in order to avoid the immediaterecognition of gain upon a contribution ofsection 721(c) property to a section 721(c)partnership. Section 1.721(c)–3T(b) pro-vides the five general requirements forapplying the gain deferral method to anitem of section 721(c) property: (i) thesection 721(c) partnership adopts the re-medial allocation method and allocatessection 704(b) items of income, gain, loss,and deduction with respect to the section721(c) property in a manner that satisfiesthe consistent allocation method; (ii) theU.S. transferor recognizes gain equal to

the remaining built-in gain with respect tothe section 721(c) property upon an accel-eration event, or an amount of gain equalto a portion of the remaining built-in gainupon a partial acceleration event or certaintransfers to foreign corporations describedin section 367; (iii) procedural and report-ing requirements are satisfied; (iv) theU.S. transferor extends the period of lim-itations on assessment of tax (as discussedin Part X of the Explanation of Provisionssection of this preamble); and (v) the rulesfor tiered partnerships are satisfied if ei-ther the section 721(c) property is an in-terest in a partnership or the section721(c) property is described in the part-nership look-through rule in § 1.721(c)–2T(d)(1).

b. Application of the gain deferralmethod on a property-by-property basis

Comments questioned the necessity forthe unified application requirement an-nounced in the notice. The unified appli-cation requirement was intended to pre-vent taxpayers from disaggregating thecontribution of separate but related busi-ness property and choosing to recognizegain upon contribution for some propertyand to apply the gain deferral method forother property, in an attempt to minimizethe reported cumulative value for all con-tributed property or to minimize the re-ported value of property for which thegain deferral method was not adopted.This concern arises, in part, because theIRS may not be able to make an adjust-ment for the correct amount of gain withrespect to property that is not subject tothe gain deferral method due to the expi-ration of the period of limitations on theassessment of tax. While the Treasury De-partment and the IRS continue to be con-cerned that taxpayers will attempt to dis-aggregate related business property inorder to undervalue their contributions,the temporary regulations adopt a moretargeted approach to address these com-ments. Accordingly, the temporary regu-lations do not include the unified applica-tion requirement and instead apply on aproperty-by-property basis.

As described in the notice, in order toapply the gain deferral method with re-spect to a contribution of section 721(c)property to a section 721(c) partnership,


the temporary regulations require the U.S.transferor to extend the period of limita-tions on assessment of tax on all itemsrelated to the property with respect towhich the gain deferral method appliesthrough the close of the eighth full taxableyear following the contribution. To ad-dress the concerns that motivated the uni-form application requirement, the tempo-rary regulations require a U.S. transferorto extend the period of limitations on as-sessment of tax on the gain recognizedunder the general rule with respect to anysection 721(c) property that is contributedto the partnership for which the gain de-ferral method will not be applied throughthe close of the fifth full taxable yearfollowing the contribution of such prop-erty, if the property is contributed withinfive full taxable years after a gain deferralcontribution, defined in § 1.721(c)–1T(b)(7) as a contribution of section 721(c)property to a section 721(c) partnershipwith respect to which the gain is deferredunder the gain deferral method. See§§ 1.721(c)–3T(b)(4) and 1.721(c)–6T(b)(5)(iii), discussed in Part X of the Expla-nation of Provisions section of this pream-ble. Additionally, it should be noted that§ 1.482–1T(f)(2)(i)(B) provides that sep-arate transactions must be aggregated forpurposes of determining the arm’s lengthpricing of such transactions under section482, including for purposes of an analysisunder multiple provisions of the Code orregulations, if the transactions are so in-terrelated that an aggregate analysis pro-vides the most reliable measure of thearm’s length result.

c. Application of the gain deferralmethod to ECI property

As discussed in Part IV of the Expla-nation of Provisions section of this pream-ble, the temporary regulations do notadopt the comment recommending thatECI property be excluded from the defi-nition of section 721(c) property. Instead,the temporary regulations continue to pro-vide that a contribution of section 721(c)property that is ECI property is subject toimmediate gain recognition if the gain de-ferral method is not applied. However, inresponse to the comment, the temporaryregulations modify the gain deferralmethod such that ECI property is not sub-

ject to the remedial allocation method orthe consistent allocation method. Thisspecial exception for ECI property appliesfor as long as, beginning on the date of thecontribution and ending when there is noremaining built-in gain with respect to theproperty, all distributive shares of incomeand gain with respect to the property forall direct and indirect partners that arerelated foreign persons will be subject totaxation as effectively connected with atrade or business within the United States(under section 871 or 882), and neither thesection 721(c) partnership nor a direct orindirect partner that is a related foreignperson claims benefits under an incometax treaty that would exempt the incomeor gain from tax or reduce the rate oftaxation to which the income or gain issubject. See § 1.721(c)–3T(b)(1)(ii).

All the other requirements of the gaindeferral method apply with respect to ECIproperty. Thus, a U.S. transferor must rec-ognize gain upon an acceleration eventwith respect to ECI property, includingwhen property ceases to be ECI property,and satisfy the procedural and reportingrequirements with respect to ECI prop-erty. See § 1.721(c)–6T(b)(2)(iii), (b)(3)(vii), and (c)(1).

A comment also requested an exclu-sion for property subject to tax under sec-tion 897 (relating to U.S. real propertyinterests) from the definition of section721(c) property. The temporary regula-tions do not adopt this comment becausethe special rules for ECI property appro-priately address the concerns expressedregarding U.S. real property interests.

d. Application of the gain deferralmethod to anti-churning property

Comments requested guidance on howthe requirement to use the remedial allo-cation method interacts with the section197 anti-churning rules. In general, sec-tion 197(f)(9) prohibits the amortizationof goodwill and going concern value thatwas non- amortizable before the enact-ment of section 197 (section 197(f)(9) in-tangible property), and that prohibitioncontinues if the property is transferred to arelated person. Under § 1.197–2(h)(12)(vii)(B), when section 197(f)(9) intangibleproperty is contributed to a partnership, anoncontributing partner generally may re-

ceive remedial allocations of amortizationwith respect to the property. A noncon-tributing partner that is related to the con-tributing partner, however, may not re-ceive such remedial allocations.

One comment requested that a U.S.transferor not be required to include reme-dial income with respect to section197(f)(9) intangible property when thegain deferral method is being applied. Thetemporary regulations do not adopt thiscomment. The Treasury Department andthe IRS are concerned that providing fa-vorable treatment for section 721(c) prop-erty belonging to a particular class wouldincentivize taxpayers to attribute exces-sive value to that class of property whilesimultaneously undervaluing related butseparate section 721(c) property that re-mains subject to all of the requirements ofthe gain deferral method. This concern isespecially pronounced in the case of sec-tion 197(f)(9) intangible property, whichis often difficult to value separately fromother identifiable intangible property. Inthis regard, see the preamble of the noticeof proposed rulemaking (REG–139483–13) containing proposed regulations undersection 367, published in the FederalRegister on September 16, 2015 (80 FR55568). See also the preamble to T.D.9803, which finalized those proposed reg-ulations, published in the Federal Regis-ter on December 16, 2016 (81 FR 91012).

Another comment recommended thatregulations implementing the gain deferralmethod require the partnership to amortizethe section 197(f)(9) intangible and allocateremedial items of amortization to a relatedforeign partner and corresponding remedialitems of income to the contributing partner.The Treasury Department and the IRS havedetermined that changing § 1.197–2(h)(12)(vii)(B) to permit remedial allocationsof amortization to related partners, or distin-guishing between domestic and related for-eign partners, would be contrary to section197(f)(9) and therefore do not adopt thiscomment. In lieu of providing that remedialallocations may be made to a related part-ner, the temporary regulations provide aspecial non-amortizable tax basis adjust-ment to the property. This special adjust-ment is made solely with respect to therelated partner. The Treasury Departmentand the IRS have determined that allowingthis tax basis adjustment is consistent with


the policy of the section 197 anti-churningrules.

More specifically, the temporary regu-lations revise the remedial allocationmethod in § 1.704–3(d) as to related part-ners when a section 721(c) partnership isapplying the gain deferral method withrespect to section 197(f)(9) intangibleproperty. The revised rule requires thepartnership to amortize the portion of thepartnership’s book value in the section197(f)(9) intangible property that exceedsits adjusted tax basis in the property. Ac-cordingly, the allocation of book amorti-zation to a noncontributing partner willresult in a ceiling rule limitation to theextent of this allocation of book amortiza-tion. If a noncontributing partner is a re-lated person with respect to the U.S. trans-feror, the temporary regulations providethat, solely with respect to the related non-contributing partner, the partnership mustincrease the adjusted tax basis of the prop-erty by the amount of the difference be-tween the book allocation of the item tothe related person and the tax allocation ofthe same item to the related person andallocate remedial income in the sameamount to the U.S. transferor. See§ 1.704–3T(d)(5)(iii)(C).

The rules governing the tax conse-quences of the special tax basis adjust-ment are modeled on § 1.743–1 and pro-posed regulations under section 704(c)(1)(C) that are contained in a notice ofproposed rulemaking (REG–144468–05)published in the Federal Register (79 FR3042) on January 16, 2014. The adjust-ment to the tax basis of section 197(f)(9)intangible property will be recovered bythe related partner only upon a sale orexchange of the property by the partner-ship. Generally, a transfer by the noncon-tributing related partner of all or a portionof its interest in the partnership will elim-inate the tax basis adjustment attributableto the interest such that the transferee willnot succeed to the tax basis adjustment.However, if the interest is transferred in asubstituted basis transaction, the trans-feree will succeed to the transferor’s taxbasis adjustment and the adjustment willbe taken into account in computing andallocating any adjustment to the basis ofthe section 197(f)(9) intangible propertyunder sections 743(b) and 755. Theserules must be applied together with the

general rules under section 197 and sub-chapter K of the Code. In resolving anyuncertainty that arises in the implementa-tion of these rules, it would be reasonablefor taxpayers to apply principles similar tothose contained in § 1.743–1, the pro-posed regulations under section 704(c)(1)(C), and any Code sections or regula-tions that reference those rules.

The Treasury Department and the IRSrequest comments on the following issues,and on any other issues relevant to a sec-tion 721(c) partnership’s application ofthe remedial allocation method to section197(f)(9) intangible property: (i) the ap-plication of the method to members of aconsolidated group; (ii) the treatment of atax basis adjustment when the adjustedsection 197(f)(9) intangible property istransferred (a) in a like-kind exchange de-scribed in section 1031, (b) to a lower-tierpartnership, (c) in a transaction describedin section 351, (d) in a technical termina-tion, or (e) in an installment sale; (iii) thetreatment of a tax basis adjustment whenthe section 197(f)(9) intangible property isdistributed to the related person for whomthe adjustment was made or to anotherpartner in a current or liquidating distri-bution; and (iv) any rules that are neces-sary to ensure that the tax basis adjust-ment does not become amortizable incontravention of the anti-churning rules.

e. Consistent allocation method

1. In General

Section 1.721(c)–3T(c)(1) describes theconsistent allocation method, which, likethe gain deferral method, applies on aproperty-by-property basis. The consis-tent allocation method requires a section721(c) partnership to allocate the samepercentage of each book item of income,gain, deduction, and loss “with respect tothe section 721(c) property” to the U.S.transferor. Comments questioned the ne-cessity of the requirement to apply theconsistent allocation method. Some com-ments asserted that the requirement is un-necessary because the built-in gain in sec-tion 721(c) property will be preserved inthe difference between the book and taxcapital accounts of a U.S. transferor. TheTreasury Department and the IRS havedetermined that remedial allocations alone

are insufficient to ensure that built-in gainwith respect to section 721(c) propertywill be subject to U.S. tax. The consistentallocation method is intended to prevent aU.S. transferor from rendering the reme-dial allocation method ineffective by, forexample, having the partnership allocate ahigher percentage share of book depreci-ation to the U.S. transferor (which wouldreduce the U.S. transferor’s remedial in-come inclusion) than the U.S. transferor’spercentage share of income or gain withrespect to the property, which would re-sult in shifting the gain (and taxable in-come) to related foreign persons that aredirect or indirect partners in the partner-ship. Therefore the temporary regulationsdo not adopt this comment. The temporaryregulations provide rules (discussed inParagraph e.2 of this Part VI) to determinethe amount of income, gain, deduction,and loss that is considered to be “withrespect to section 721(c) property” underthe gain deferral method.

According to another comment, the con-sistent allocation method is both over-inclusive, in that situations in which a U.S.transferor is allocated greater income thanits share of deductions would violate therule, and under-inclusive, because deduc-tions allocated to a U.S. transferor that donot arise from section 721(c) property arebeyond the scope of the rule. This commentproposed an alternative anti-abuse rule thatwould require that a minimum cumulativeamount of income be allocated to a U.S.transferor. The Treasury Department andthe IRS have concluded that the rule de-scribed in the comment would be difficult toadminister. However, in response to com-ments, the temporary regulations provideexceptions (discussed in Paragraph e.3 ofthis Part VI) to the consistent allocationmethod for certain regulatory allocationsand the allocations of creditable foreign taxexpenditures.

2. Determining Book Items with Respectto Section 721(c) Property

The notice did not describe how part-nership items are determined to be “withrespect to section 721(c) property.” Thetemporary regulations provide guidancefor making this determination based onprinciples that will be familiar to manytaxpayers.


i. Book items of income and gain

Section 1.721(c)–3T(c)(2) provides therule for determining the extent to whichpartnership items of book income andgain are considered to be “with respect to”particular section 721(c) property for pur-poses of applying the consistent allocationmethod on a property-by-property basis.This rule provides that a section 721(c)partnership must attribute book incomeand gain to each property in a consistentmanner using any reasonable method thattakes into account all the facts and cir-cumstances. The temporary regulationsprovide that all items of book income andgain attributable to each property willcomprise a single class of gross incomefor purposes of determining the extent towhich partnership items of deduction orloss are allocated and apportioned withrespect to the section 721(c) property.

ii. Book items of deduction and loss

Section 1.721(c)–3T(c)(3) provides therules for determining the extent to whichpartnership items of book deduction andloss are considered to be “with respect to”particular section 721(c) property for pur-poses of applying the consistent allocationmethod. A section 721(c) partnershipmust use the principles of §§ 1.861–8 and1.861–8T to allocate and apportion all ofits items of deduction, except for interestexpense and research and experimentalexpenditures (R&E), and loss to the classof gross income with respect to each sec-tion 721(c) property. The section 721(c)partnership may allocate and apportion itsinterest expense and R&E using any rea-sonable method, including, but not limitedto, the methods described in §§ 1.861–9and 1.861–9T (interest expense) and§ 1.861–17 (R&E).

3. Exceptions to the ConsistentAllocation Method

In response to comments, the tempo-rary regulations provide exceptions fromthe requirement to apply the consistentallocation method with respect to certainbook items of a section 721(c) partner-ship.

i. Regulatory allocations

The temporary regulations provide thata regulatory allocation (as defined in§ 1.721(c)–1T(b)(10)) of book income,gain, deduction, or loss with respect tosection 721(c) property that otherwisewould fail to satisfy the requirements ofthe consistent allocation method neverthe-less will, in certain cases, be deemed tosatisfy the requirements. Specifically, aregulatory allocation is deemed to satisfythe requirements of the consistent alloca-tion method if the allocation is (i) an al-location of income or gain to the U.S.transferor (or a member of its consoli-dated group); or (ii) an allocation of de-duction or loss to a partner other than theU.S. transferor (or a member of its con-solidated group). In addition, if the allo-cation is not described in clause (i) or (ii)but the U.S. transferor receives less in-come or gain or more deductions or losswith respect to the section 721(c) propertybecause of the regulatory allocation, theallocation is treated as described in§ 1.721(c)–5T(d)(2) (generally requiringthat a portion of remaining built-in gain berecognized, as discussed in Paragraph d.2of Part VIII of the Explanation of Provi-sions section of this preamble). See§ 1.721(c)–3T(c)(4)(i)(C). The TreasuryDepartment and the IRS have determinedthat this special rule for regulatory alloca-tions is appropriate because an allocationdescribed in clause (i) or (ii) will notreduce the U.S. tax base and an allocationdescribed in clause (iii) will result in theU.S. transferor recognizing gain that willoffset the reduction in the U.S. tax baseresulting from the regulatory allocation.

The temporary regulations provide thata regulatory allocation is (i) an allocationpursuant to a minimum gain chargeback,as defined in § 1.704–2(b)(2), (ii) a part-ner nonrecourse deduction, as determinedin § 1.704–2(i)(2), (iii) an allocation pur-suant to a partner minimum gain charge-back, as described in § 1.704–2(i)(4), (iv)an allocation pursuant to a qualified in-come offset, as defined in § 1.704–1(b)(2)(ii)(d), (v) an allocation with respect tothe exercise of a noncompensatory optiondescribed in § 1.704–1(b)(2)(iv)(s), and(vi) an allocation of partnership level or-dinary income or loss described in§ 1.751–1(a)(3). The Treasury Depart-

ment and the IRS have determined thatrelief is appropriate for these regulatoryallocations because, in general, partnersdo not have discretion regarding their ap-plication and, when necessary, treatingthem as a partial acceleration event willresult in the appropriate amount of gainbeing recognized for purposes of the gaindeferral method. The Treasury Depart-ment and the IRS have determined thatrelief is not appropriate for a nonrecoursededuction, as defined in § 1.704–2(b)(1),because, unlike the other types of regula-tory allocations, partners have significantdiscretion regarding the allocation of anonrecourse deduction.

ii. Creditable foreign tax expenditures

The temporary regulations provide thatallocations of creditable foreign tax ex-penditures (as defined in § 1.704–1(b)(4)(viii)(b)) (CFTEs) are not subjectto the consistent allocation method. See§ 1.721(c)–3T(c)(4)(ii). The regulationsgoverning the allocation of CFTEs takeinto account section 704(c) income andgain and are not based strictly on theallocation of book items. As a result, itwould be difficult to apply the consistentallocation method with respect to CFTEs.

VII. Acceleration Events

a. Overview

Section 1.721(c)–4T provides rules re-garding acceleration events, which, likethe gain deferral method, apply on aproperty-by-property basis. When an ac-celeration event occurs with respect tosection 721(c) property, remainingbuilt-in gain in the property must be rec-ognized and the gain deferral method nolonger applies. The temporary regulationsprovide exceptions to acceleration eventsthat are discussed in Part VIII of the Ex-planation of Provisions section of this pre-amble.

b. Definition of an acceleration event

1. General Rules

Subject to the exceptions described inPart VIII of the Explanation of Provisionssection of this preamble, § 1.721(c)–


4T(b)(1) defines an acceleration event asany event that would reduce the amount ofremaining built-in gain that a U.S. trans-feror would have recognized under thegain deferral method if the event had notoccurred or that could defer the recogni-tion of the remaining built-in gain. Thetemporary regulations clarify that an ac-celeration event includes the transfer ofsection 721(c) property via a contributionof the property itself or through a contri-bution of a partnership interest.

2. Failure to Comply with aRequirement of the Gain DeferralMethod

The rules described in the notice wouldhave provided that a failure to complywith one of the requirements of the gaindeferral method with respect to any sec-tion 721(c) property would cause an ac-celeration event for all section 721(c)property. Comments requested that theTreasury Department and the IRS elimi-nate this provision. Because the temporaryregulations provide that the gain deferralmethod is applied on a property-by-property basis (in lieu of containing theunified application requirement), the tem-porary regulations adopt this comment.

Under the temporary regulations, anacceleration event with respect to section721(c) property occurs when any partyfails to comply with a requirement of thegain deferral method with respect to thatproperty. See § 1.721(c)–4T(b)(2)(i). Forexample, if section 721(c) property is ECIproperty, an acceleration event occurs if adistributive share of income or gain fromthe property that is allocated to a direct orindirect partner that is a related foreignperson is no longer subject to taxation asincome effectively connected with a tradeor business within the United States or ifthe section 721(c) partnership or a director indirect partner that is a related foreignperson claims certain benefits under anincome tax treaty with respect to the in-come (see § 1.721(c)–3T(b)(1)(ii)).

An acceleration event will not occursolely as a result of a failure to complywith a procedural or reporting require-ment of the gain deferral method if thatfailure is not willful and relief is soughtunder the prescribed procedures. See

§§ 1.721(c)–4T(b)(2)(ii) and 1.721(c)–6T(f).

3. Special Rule when Section 721(c)Property is an Interest in a Partnership

When section 721(c) property is an in-terest in a partnership, the temporary reg-ulations provide that an acceleration eventwill not occur because of a reduction inremaining built-in gain in the partnershipinterest as a result of allocations of bookitems of deduction and loss or tax items ofincome and gain by that partnership. See§ 1.721(c)–4T(b)(3).

4. Deemed Acceleration Event

Under the temporary regulations, aU.S. transferor may affirmatively treat anacceleration event as having occurredwith respect to section 721(c) property byrecognizing the remaining built-in gainwith respect to that property and satisfy-ing the reporting required by § 1.721(c)–6T(b)(3)(iv). See § 1.721(c)–4T(b)(4).

c. Consequences of an accelerationevent

Section 1.721(c)–4T(c) sets forth theconsequences of an acceleration event.Specifically, the U.S. transferor must rec-ognize gain in an amount equal to theremaining built-in gain that would havebeen allocated to the U.S. transferor ifthe section 721(c) partnership had sold thesection 721(c) property immediately be-fore the acceleration event for fair marketvalue. Following the acceleration event,the section 721(c) property will no longerbe subject to the gain deferral method.

The U.S. transferor generally mustmake correlative adjustments to its basisin its partnership interest. See § 1.721(c)–4T(c)(1). In addition, the section 721(c)partnership will increase its basis in thesection 721(c) property by the amount ofgain recognized by the U.S. transferor.This basis increase is made immediatelybefore the acceleration event. See§ 1.721(c)–4T(c)(2). If the section 721(c)property remains in the partnership afterthe acceleration event, the increase in thebasis of the section 721(c) property gen-erally would be treated in the same man-ner as newly purchased property, includ-ing for purposes of determining the

depreciation schedule if the property isdepreciable property.

VIII. Acceleration Event Exceptions

a. In general

Section 1.721(c)–5T identifies the fol-lowing categories of exceptions to accel-eration events, which, like accelerationevents, apply on a property-by-propertybasis: (i) termination events, in whichcase, the gain deferral method ceases toapply to the section 721(c) property; (ii)successor events, in which case, the gaindeferral method continues to apply to thesection 721(c) property but with respect toa successor U.S. transferor or a successorsection 721(c) partnership, as applicable;(iii) partial acceleration events, in whichcase, a U.S. transferor recognizes anamount of gain that is less than the fullamount of remaining built-in gain in thesection 721(c) property and the gain de-ferral method continues to apply; (iv)transfers described in section 367 of sec-tion 721(c) property to a foreign corpora-tion, in which case, the gain deferralmethod ceases to apply and a U.S. trans-feror recognizes an amount of gain equalto the remaining built-in gain attributableto the portion of the section 721(c) prop-erty that is not subject to tax under section367; and (v) fully taxable dispositions of aportion of an interest in a section 721(c)partnership, in which case, the gain defer-ral method continues to apply for the re-tained portion of the interest.

b. Termination events

1. In General

Section 1.721(c)–5T(b) identifies theevents that cause the gain deferral methodto no longer apply. The Treasury Depart-ment and the IRS have determined that itis appropriate to terminate the applicationof the gain deferral method with respect tothe affected section 721(c) property inthese cases because the potential to shiftgain or income to a related foreign personthat is a direct or indirect partner in thesection 721(c) partnership has been elim-inated.


2. Transfers of Section 721(c) Property(Other Than a Partnership Interest) to aDomestic Corporation Described inSection 351

The temporary regulations provide thata termination event occurs if a section721(c) partnership transfers section 721(c)property other than a partnership interestto a domestic corporation in a transactionto which section 351 applies. See § 1.721(c)–5T(b)(2).

3. Certain Incorporations of a Section721(c) Partnership

A comment questioned whether therules described in the notice would ex-empt from the definition of an accelera-tion event certain transactions after whichthe partnership ceases to exist, such asthose described in Rev. Rul. 84–111,1984–2 C.B. 88 (describing three meth-ods for incorporating a partnership). See§ 601.601(d)(2)(ii)(b). The temporary reg-ulations provide that a termination eventoccurs upon an incorporation of a section721(c) partnership into a domestic corpo-ration by any method of incorporationother than a method involving an actualdistribution of partnership property to thepartners, followed by a contribution ofthat property to a corporation, providedthat the section 721(c) partnership is liq-uidated as part of the incorporation trans-action. See § 1.721(c)–5T(b)(3).

4. Certain Distributions of Section721(c) Property

A comment questioned whether an ac-celeration event should occur as a result ofa distribution of section 721(c) property toa partner other than a U.S. transferor out-side of the seven-year period described insections 704(c)(1)(B) and 737 (rules thataddress certain distributions of propertywithin seven years of a contribution).While sections 704(c)(1)(B) and 737 alsoare intended to ensure that gain on con-tributed property is not inappropriatelytransferred to a partner other than the con-tributor, in the context of contributions topartnerships with related foreign partners,the Treasury Department and the IRShave determined that concerns about theerosion of the U.S. tax base remain aslong as there is remaining built-in gain in

the section 721(c) property. Accordingly,the Treasury Department and the IRShave determined that it is inappropriate toprovide a termination event exception forall distributions of section 721(c) propertyafter seven years.

The temporary regulations, however,provide that a termination event occurs ifa section 721(c) partnership distributessection 721(c) property to the U.S. trans-feror. A termination event will also occurif a section 721(c) partnership distributessection 721(c) property to a member of aU.S. transferor’s consolidated group andthe distribution occurs more than sevenyears after the contribution. See § 1.721(c)–5T(b)(4).

5. Section 721(c) Partnership Ceases toHave a Related Foreign Person Partner

In response to a comment, the tempo-rary regulations generally provide that atermination event occurs when a section721(c) partnership ceases to have any di-rect or indirect partners that are relatedforeign persons, provided there is no planfor a related foreign person to subse-quently become a direct or indirect partnerin the partnership (or a successor). See§ 1.721(c)–5T(b)(5). The no-plan require-ment applies independently of the generalanti-abuse rule under § 1.721(c)–1T(d).An acceleration event, however, occursupon a distribution of section 721(c) prop-erty in redemption of a related foreignperson’s interest in a section 721(c) part-nership.

6. Fully Taxable Dispositions of Section721(c) Property or of an Entire Interestin a Section 721(c) Partnership

The notice treated a taxable dispositionof section 721(c) property by a section721(c) partnership, or an indirect disposi-tion of section 721(c) property through ataxable disposition of an interest in a sec-tion 721(c) partnership interest, as an ac-celeration event. The Treasury Depart-ment and the IRS have determined that itis appropriate instead to treat a fully tax-able disposition of section 721(c) propertyor of an entire interest in a section 721(c)partnership as a termination event becauseother sections of the Code require gain tobe recognized.

Accordingly, the temporary regulationsprovide that a termination event occurs ifa section 721(c) partnership disposes ofsection 721(c) property in a transaction inwhich all gain or loss, if any, is recog-nized. See § 1.721(c)–5T(b)(6). In addi-tion, a termination event occurs if either aU.S. transferor or a partnership in which aU.S. transferor is a direct or indirect part-ner disposes of an entire interest in a sec-tion 721(c) partnership that owns section721(c) property in a transaction in whichall gain or loss, if any, is recognized. Thisrule does not apply if a U.S. transferor isa member of a consolidated group and theinterest in the section 721(c) partnership istransferred to another member in an inter-company transaction (as defined in§ 1.1502–13(b)(1)). See § 1.721(c)–5T(b)(7). See, however, Paragraph c.2 of thisPart VIII, which describes the rule in§ 1.721(c)–5T(c)(3) that provides thatsuch a transaction may be a successorevent.

c. Successor events

1. In General

Section 1.721(c)–5T(c) identifies thesuccessor events that allow for the contin-ued application of the gain deferralmethod. In each of these cases, it is ap-propriate to continue application of thegain deferral method (rather than acceler-ate gain recognition), because its applica-tion can be preserved in the hands of asuccessor U.S. transferor or a successorsection 721(c) partnership, as applicable.If, however, the successor does not con-tinue the gain deferral method, the event isan acceleration event. If only a portion ofan interest in a partnership is transferredin a successor event, the principles of§ 1.704–3(a)(7) apply to determine theremaining built-in gain in section 721(c)property that is attributable to the portionof the interest that is transferred and theportion that is retained. See § 1.721(c)–5T(c)(1).

2. A Domestic Corporation Becomes aSuccessor U.S. Transferor

The temporary regulations provide thata successor event occurs if either a U.S.transferor or a partnership in which a U.S.


transferor is a direct or indirect partnertransfers (directly or indirectly throughone or more partnerships) an interest in asection 721(c) partnership to a domesticcorporation in a transaction to which sec-tion 351 or 381 applies, and the gain de-ferral method is continued by treating thetransferee domestic corporation as theU.S. transferor. See § 1.721(c)–5T(c)(2).

In addition, a successor event occurs ifa U.S. transferor that is a member of aconsolidated group transfers (directly orindirectly through one or more partner-ships) an interest in a section 721(c) part-nership to another member in an inter-company transaction (as defined in§ 1.1502–13(b)(1)), and the gain deferralmethod is continued by treating the trans-feree member as the U.S. transferor. See§ 1.721(c)–5T(c)(3).

3. Technical Termination of a Section721(c) Partnership

In response to comments, the tempo-rary regulations provide that a successorevent occurs if there is a technical termi-nation of a section 721(c) partnership, andthe gain deferral method is continued bytreating the new partnership as the section721(c) partnership. See § 1.721(c)–5T(c)(4). Although a technical termina-tion will cause the depreciation scheduleto be reset with respect to any depreciablesection 721(c) property of the terminatedsection 721(c) partnership, and thus deferthe recognition of remaining built-in gain,the Treasury Department and the IRShave concluded that this should not causean acceleration event. In this case, how-ever, the general anti-abuse rule under§ 1.721(c)–1T(d) may apply, dependingon the facts relating to the technical ter-mination.

4. A Partnership Becomes a SuccessorSection 721(c) Partnership

The temporary regulations provide twoother categories of successor events thatinvolve successor section 721(c) partner-ships. In each case, section 721(c) prop-erty is directly or indirectly contributed toa successor section 721(c) partnershipand the gain deferral method is applieddown the chain of ownership with the

result that the remaining built-in gain willcontinue to be subject to U.S. tax.

In the first category, a successor eventoccurs if (i) a section 721(c) partnershipcontributes section 721(c) property to alower-tier partnership that is a controlledpartnership; (ii) the gain deferral methodis applied both with respect to the section721(c) partnership’s interest in the lower-tier partnership and with respect to thesection 721(c) property in the hands of thelower-tier partnership; and (iii) the lower-tier partnership either is a section 721(c)partnership, or is a controlled partnershipthat fails the ownership requirement but istreated as a section 721(c) partnership.See § 1.721(c)–5T(c)(5)(i). In the case inwhich the lower-tier partnership is a con-trolled partnership but not a section 721(c)partnership, the Treasury Department andthe IRS have determined that it is appro-priate to allow the parties to continue toapply the gain deferral method to the sec-tion 721(c) property, rather than triggeringan acceleration event, provided the partiestreat the lower-tier partnership as a section721(c) partnership for purposes of apply-ing the gain deferral method.

In the second category, a successorevent occurs if (i) either a U.S. transferoror a partnership in which a U.S. transferoris a direct or indirect partner contributes(directly or indirectly through one or morepartnerships) an interest in a section721(c) partnership to an upper-tier part-nership that is a controlled partnership;(ii) the gain deferral method is continuedwith respect to the section 721(c) propertyin the hands of the section 721(c) partner-ship; (iii) if the upper-tier partnership di-rectly owns its interest in the section721(c) partnership, the gain deferralmethod is applied with respect to theupper-tier partnership’s interest in the sec-tion 721(c) partnership and the upper-tierpartnership is, or is treated as, a section721(c) partnership; and (iv) if the upper-tier partnership indirectly owns its interestin the section 721(c) partnership throughone or more partnerships, the principlesdescribed in clause (iii) are applied withrespect to the upper-tier partnership andeach partnership through which the upper-tier partnership indirectly owns an interestin the section 721(c) partnership. See§ 1.721(c)–5T(c)(5)(ii).

Both categories of successor events in-volve tiered partnerships. Therefore, pur-suant to § 1.721(c)–3T(b)(5), the rulesfor tiered partnerships (described in§ 1.721(c)–3T(d)) must be applied in or-der to satisfy the requirements to apply thegain deferral method as required under therules described in the two preceding para-graphs.

To illustrate, consider the followingsimplified example: In year 1, USP, a do-mestic corporation, and CFC1, a whollyowned foreign subsidiary of USP, formPS1, a partnership, as equal partners. USPcontributes section 721(c) property, assetA, a depreciable asset with a $10 millionbuilt-in gain (fair market value of $10million and tax basis of zero) (USP con-tribution). PS1 is a section 721(c) partner-ship as a result of the USP contribution,and the gain deferral method is appliedwith respect to asset A. In year 2, PS1 andCFC1 form PS2, a partnership, as equalpartners. PS1 contributes asset A to PS2(PS1 contribution) when asset A has re-maining built-in gain of $8 million and afair market value of $12 million (the taxbasis is still zero). PS2 is a section 721(c)partnership as a result of the PS1 contri-bution. The PS1 contribution will be asuccessor event with respect to asset A ifPS2 applies the gain deferral method toasset A and PS1 applies the gain deferralmethod to its interest in PS2 as describedin § 1.721(c)–5T(c)(5)(i). The remainingbuilt-in gain in asset A in the hands of PS2will be $12 million (excess of book valueof $12 million over PS2’s adjusted taxbasis of $0). If PS2 sells the property, PS2will allocate $12 million to PS1, and PS1will allocate $10 million of the gain toUSP ($8 million of which would be allo-cated under § 1.704–3(a)(9)).

On the other hand, the PS1 contribu-tion will be an acceleration event (ratherthan a successor event) with respect toasset A if either PS1 or PS2 does notapply the gain deferral method. In thiscase, USP will recognize $8 million ofgain, which is the amount of the remain-ing built-in gain that would have beenallocated to USP if PS1 had sold asset Aimmediately before the PS1 contributionfor fair market value, and PS1 will in-crease its tax basis in asset A from $0 to$8 million. See § 1.721(c)–4T(c). Fur-thermore, the PS1 contribution will be


subject to the general gain recognitionrule under § 1.721(c)–2T(b) because PS2is a section 721(c) partnership and asset Ais section 721(c) property. PS1’s realizedgain with respect to asset A that will notqualify for nonrecognition under section721(a) is $4 million (fair market value of$12 million less adjusted tax basis of $8million) and PS1 will allocate half of thatgain to USP.

d. Partial acceleration events

1. In General

Section 1.721(c)–5T(d) identifies thepartial acceleration events, and, in eachcase, the amount of gain that a U.S. trans-feror must recognize. The basis adjust-ments in § 1.721(c)–4T(c) that must bemade by a U.S. transferor and a section721(c) partnership upon a “full” accelera-tion event also apply for a partial acceler-ation event, except in the case of a partialacceleration that occurs as a result of anadjustment under section 734 to section721(c) property, as described in Paragraphd.3 of this Part VIII. If there is remainingbuilt-in gain in the section 721(c) propertyimmediately after the partial accelerationevent, the gain deferral method must con-tinue to apply following the partial accel-eration event.

2. Regulatory Allocations

Section 1.721(c)–3T(c)(4)(i)(C) pro-vides that a regulatory allocation that re-sults in an over-allocation of book deduc-tion or loss to a U.S. transferor or anunder-allocation of book income or gainto a U.S. transferor will nevertheless betreated as satisfying the consistent alloca-tion method if gain is recognized. See thediscussion in Paragraph e.3.i of Part VI ofthe Explanation of Provisions section ofthis preamble. In order for such a regula-tory allocation to be deemed to satisfy theconsistent allocation method, the U.S.transferor must recognize an amount ofgain equal to the amount of the allocationthat, had the regulatory allocation not oc-curred, would have been allocated to theU.S. transferor in the case of income orgain, or would not have been allocated tothe U.S. transferor in the case of deduc-tion or loss. See § 1.721(c)–5T(d)(2).

However, the amount of gain recognizedis limited to the amount of the remainingbuilt-in gain that would have been allo-cated to the U.S. transferor upon a hypo-thetical sale by the section 721(c) partner-ship of that portion of the propertyimmediately before the regulatory alloca-tion is made for fair market value.

3. Distributions of Other PartnershipProperty to a Partner that Result in anAdjustment under Section 734

The temporary regulations provide thata partial acceleration event occurs if thereis a distribution of other property by asection 721(c) partnership that results in apositive basis adjustment to section 721(c)property under section 734. In these cases,the U.S. transferor must recognize anamount of gain equal to the positive basisadjustment to the section 721(c) propertyunder section 734. However, the amountof gain recognized is limited to theamount of the remaining built-in gain thatwould have been allocated to the U.S.transferor upon a hypothetical sale by thesection 721(c) partnership of that portionof the property immediately before theregulatory allocation is made for fair mar-ket value. Furthermore, if the propertythat triggered the section 734 adjustmentwas distributed to the U.S. transferor or amember of its consolidated group, theamount described in the preceding sen-tence is reduced (but not below zero) bythe amount of gain recognized by the U.S.transferor (or the consolidated groupmember) under section 731(a). See§ 1.721(c)–5T(d)(3). The amount of gainrecognized as a result of the accelerationevent is not reduced by any step-down todistributed property described by section734(b)(1)(B). The partnership will not in-crease its basis under § 1.721(c)–4T(c)(2)for the gain recognized by the U.S. trans-feror.

e. Section 367 transfers of section721(c) property to a foreign corporation

Section 1.721(c)–5T(e) provides rulesfor certain direct and indirect transfers ofsection 721(c) property to a foreign cor-poration. These rules apply if a section721(c) partnership transfers section 721(c)property, or if a U.S. transferor or a part-

nership in which a U.S. transferor is adirect or indirect partner transfers (di-rectly or indirectly through one or morepartnerships) an interest in a section721(c) partnership, to a foreign corpora-tion in a transaction described in section367. In this case, the underlying section721(c) property will no longer be subjectto the gain deferral method. The TreasuryDepartment and the IRS have determinedthat this result is appropriate because tothe extent any U.S. transferor is treatedas transferring the section 721(c) propertyto the foreign corporation for purposes ofsection 367, the tax consequences will bedetermined under section 367. In this re-gard, see §§ 1.367(a)–1T(c)(3)(i) and (ii),1.367(d)–1T(d)(1), and 1.367(e)–2(b)(1)(iii) (in general, providing an aggregatetreatment of partnerships for purposes ofapplying the outbound transfer provisionsunder section 367). Furthermore, for theremaining portion of the property (whichis the portion attributable to non-U.S. per-sons and therefore not subject to tax undersection 367), the U.S. transferor must rec-ognize an amount of gain equal to theremaining built-in gain that would havebeen allocated to the U.S. transferor upona hypothetical sale by the section 721(c)partnership of that portion of the propertyimmediately before the transfer for fairmarket value. The basis adjustments in§ 1.721(c)–4T(c) that must be made by aU.S. transferor and a section 721(c) part-nership upon a “full” acceleration eventalso apply in this case. If stock in thetransferee foreign corporation is receivedby a section 721(c) partnership, the stockwill not be subject to the gain deferralmethod.

f. Fully taxable dispositions of a portionof an interest in a section 721(c)partnership

Section 1.721(c)–5T(f) provides a spe-cial rule when there is a fully taxabledisposition of a portion of an interest in asection 721(c) partnership. Specifically, ifa U.S. transferor or a partnership in whicha U.S. transferor is a direct or indirectpartner disposes of (directly or indirectlythrough one or more partnerships) a por-tion of an interest in a section 721(c)partnership in a transaction in which allgain or loss, if any, is recognized, an ac-


celeration event will not occur with re-spect to the portion of the interest trans-ferred. The gain deferral method willcontinue to apply with respect to the sec-tion 721(c) property of the section 721(c)partnership. The principles of § 1.704–3(a)(7) will apply to determine the re-maining built-in gain in section 721(c)property that is attributable to the portionof the interest in a section 721(c) partner-ship that is retained. This rule does notapply to an intercompany transaction (asdefined in § 1.1502–13(b)(1)). See§ 1.721–5T(c)(3). See also the discussionin Paragraph c.2 of this Part VIII.

IX. Tiered Partnerships Rules

a. Overview

This Part IX discusses the applicationof the gain deferral method to tiered part-nerships. The temporary regulations em-ploy two general principles in applyingthe gain deferral method to tiered partner-ships. First, if the section 721(c) propertyis an interest in a partnership, the contri-bution of that partnership interest, and notthe indirect contribution of the underlyingproperty of the lower-tier partnership, to asection 721(c) partnership is subject tosection 721(c), and the gain deferralmethod applies to the contribution of theinterest. Second, the gain deferral methodmust also be adopted at all levels in theownership chain.

These principles, however, raise vari-ous issues in applying the gain deferralmethod to tiered partnerships: (i) not allpartnerships in the ownership chain willnecessarily be section 721(c) partnerships;(ii) when the book value of an interest ina partnership reflects appreciation in theproperty of the lower-tier partnership thathas not yet been reflected in the bookvalue of the property, there will be a dis-crepancy between the built-in gain in thepartnership interest and the built-in gain inthe underlying property; (iii) an upper-tierpartnership’s allocation of its distributiveshare of certain lower-tier partnershipitems must comply with § 1.704–3(a)(9)(concerning the application of section704(c) to tiered partnerships) and with theconsistent allocation method; and (iv) apartnership whose interest is section721(c) property that is contributed to a

section 721(c) partnership may have pre-viously adopted a method other than theremedial allocation method with respectto its underlying section 704(c) property.

To address these issues, the temporaryregulations specify requirements that mustbe satisfied, in addition to all the otherrequirements to apply the gain deferralmethod, in order for the gain deferralmethod to be applied to tiered partner-ships. See § 1.721(c)–3T(b)(5) (the lastrequirement to apply the gain deferralmethod).

b. Additional requirements for applyingthe gain deferral method

1. In General

For purposes of applying the gain de-ferral method, the temporary regulationsaddress the conditions required to besatisfied by upper-tier partnerships andlower-tier partnerships involved in tiered-partnership transactions to ensure that thegain deferral method is applied at all lev-els in the ownership chain and the alloca-tion of partnership items up the chain cor-rectly traces the built-in gain to the U.S.transferor. See § 1.721(c)–3T(d). In thebase case in which a U.S. transferor di-rectly contributes section 721(c) propertyto a section 721(c) partnership, the U.S.transferor will recognize gain under thegeneral rule in these temporary regula-tions unless the gain deferral method isapplied to the contribution. The sameprinciple applies when section 721(c)property is indirectly (through an upper-tier partnership) contributed by a U.S.transferor to a section 721(c) partnershipand the partnership look-through rule in§ 1.721(c)–2T(d)(1) applies, in whichcase, the tiered-partnership rules in§ 1.721(c)–3T(d)(2) apply to the trans-feror upper-tier partnership and all con-trolled partnerships above it in the owner-ship chain. In addition, when the section721(c) property is an interest in a partner-ship, the tiered-partnership rules in§ 1.721(c)–3T(d)(1) apply to the partner-ship whose interest is transferred and allcontrolled partnerships below it in theownership chain. Therefore, when a part-nership interest described in the precedingsentence is indirectly contributed by aU.S. transferor and the partnership look-

through rule applies, the rules of both§ 1.721(c)–3T(d)(1) and (2) apply.

2. Indirect Contribution of Section721(c) Property

Section 1.721(c)–3T(d)(2) provides theadditional requirements for applying thegain deferral method if the section 721(c)property is indirectly contributed by aU.S. transferor to a section 721(c) partner-ship and the partnership look-through ruleapplies. In particular, this rule applies ifan upper-tier partnership in which a U.S.transferor is a direct or indirect partnercontributes section 721(c) property to alower-tier section 721(c) partnership. Theupper-tier partnership need not be a sec-tion 721(c) partnership for the partnershiplook-through rule to apply, but, in orderfor the upper-tier partnership to avoid im-mediate gain recognition under the gen-eral gain recognition rule, the lower-tiersection 721(c) partnership must apply thegain deferral method to the contributedproperty. This application of the gain de-ferral method has several additional re-quirements. First, the lower-tier section721(c) partnership must treat the upper-tier partnership (which is not necessarily asection 721(c) partnership) as the U.S.transferor solely for purposes of applyingthe consistent allocation method. Second,the upper-tier partnership, if it is acontrolled partnership, must apply thegain deferral method to its interest in thelower-tier section 721(c) partnership. Ifthe upper-tier partnership is not a section721(c) partnership, it is deemed to be so,and the interest in the lower-tier section721(c) partnership is deemed to be section721(c) property. See § 1.721(c)–1T(b)(14)(ii) and (b)(15)(ii).

For the upper-tier partnership to applythe gain deferral method to the interest inthe lower-tier partnership, § 1.704–3T(a)(13)(ii) provides that the upper-tierpartnership must treat its distributiveshare of lower-tier partnership items ofgain, loss, and amortization, depreciation,or other cost recovery deductions withrespect to a lower-tier partnership’s sec-tion 721(c) property as though they wereitems of gain, loss, and amortization, de-preciation, or other cost recovery with re-spect to the upper-tier partnership’s inter-est in the lower-tier partnership. Section


1.704–3T(a)(13)(ii) is intended to reachthe same result as if an aggregate ap-proach governed the application of§ 1.704–3(a)(9) in the context of the gaindeferral method. Section 1.704–3(a)(9)provides that if a partnership contributessection 704(c) property to a lower-tierpartnership, or if a partner that receives apartnership interest in exchange for con-tributed property subsequently contributesthe partnership interest to an upper-tierpartnership, the upper-tier partnershipmust allocate its distributive share oflower-tier partnership items with respectto that section 704(c) property in a mannerthat takes into account the contributingpartner’s remaining built-in gain or loss.The Treasury Department and the IRSconsidered comments about aggregatetreatment that were received on Notice2009–70, 2009–34 I.R.B. 255, in devel-oping the rule in § 1.704–3T(a)(13)(ii).This rule applies only to a tiered-partnership structure that has at least onesection 721(c) partnership and to whichthe gain deferral method is applied. TheTreasury Department and the IRS intendno inference regarding the application of§ 1.704–3(a)(9) to partnerships not apply-ing the gain deferral method.

If the U.S. transferor is an indirect part-ner in the upper-tier partnership throughone or more partnerships, these require-ments must be satisfied by each controlledpartnership in the chain of ownership be-tween the upper-tier partnership and theU.S. transferor.

3. Contribution of an Interest in aPartnership

Section 1.721(c)–3T(d)(1) provides theadditional requirements for applying thegain deferral method if the section 721(c)property that is contributed to a section721(c) partnership is an interest in alower-tier partnership. The lower-tierpartnership need not be a section 721(c)partnership. First, the lower-tier partner-ship, if it is a controlled partnership withrespect to a U.S. transferor, must revalueall of its property under § 1.704–1T(b)(2)(iv)(f)(6) if the revaluation would resultin a new positive reverse section 704(c)layer in at least one property that is notexcluded property (revaluation require-ment). If the lower-tier partnership is not a

section 721(c) partnership, it will bedeemed to be so upon the revaluation. See§ 1.721(c)–1T(b)(14)(ii).

The revaluation requirement ensures,to the greatest extent possible, that allappreciation in the underlying property ofa lower-tier partnership that is reflected inthe book value of the partnership interestin the lower-tier partnership is subject tothe temporary regulations to the same ex-tent that appreciation would be subject tothe temporary regulations if the propertyof the lower-tier partnership (rather thanthe interest in the lower-tier partnership)were contributed.

Second, the lower-tier partnership mustapply the gain deferral method with re-spect to each property (other than ex-cluded property) for which there is a newpositive reverse section 704(c) layer as aresult of the revaluation. A property witha new positive reverse section 704(c)layer is deemed to be section 721(c) prop-erty, and the remaining built-in gain in-cludes the new positive reverse section704(c) layer. See § 1.721(c)–1T(b)(15)(ii)and (b)(13)(ii), respectively. Although§ 1.721(c)–3T(b)(1)(i)(A) requires theapplication of the remedial allocationmethod to the remaining built-in gain, alower-tier partnership may apply the gaindeferral method by adopting the remedialallocation method only for the positivereverse section 704(c) layer if the partner-ship has previously adopted a section704(c) method other than the remedialmethod for the property. Accordingly, thelower-tier partnership may continue to ap-ply a different, historical section 704(c)method to forward section 704(c) layersor to pre-existing reverse section 704(c)layers, as applicable, and still satisfy therequirements of the gain deferral method.For further discussion of the revaluationrequirement and the definition of a con-trolled partnership, see Paragraph c of thisPart IX.

Third, the lower-tier partnership musttreat a partner that is a partnership inwhich the U.S. transferor is a direct orindirect partner as the U.S. transferorsolely for purposes of applying the con-sistent allocation requirement. As a result,the lower-tier partnership must allocate itsbook items to the deemed U.S. transferorunder the consistent allocation method.Regardless of the number of tiers of

partnerships in the chain, the tiered-partnership rules are intended to cause theU.S. transferor that contributed (directlyor indirectly) the lower-tier partnershipinterest to the section 721(c) partnershipto be the person to recognize gain upon anacceleration event.

If the lower-tier partnership owns (di-rectly or indirectly through one or morepartnerships) one or more partnershipsthat are controlled partnerships with re-spect to the U.S. transferor, these threerequirements must be satisfied by eachcontrolled partnership.

c. Revaluation requirement

In recognition of the possibility that aU.S. transferor may not be able to cause alower-tier partnership to revalue its prop-erty when a partnership interest is contrib-uted to an upper-tier partnership, the re-valuation requirement is limited to thoselower-tier partnerships that are controlledpartnerships with respect to the U.S. trans-feror. Control is a facts-and-circumstancestest, except that the U.S. transferor andrelated persons will be deemed to controla partnership in which those persons, inthe aggregate, own (directly or indirectlythrough one or more partnerships) morethan 50 percent of the interests in partner-ship capital or profits. See § 1.721(c)–1T(b)(4).

The definition of built-in gain in thenotice excluded revaluation gain becausea reverse section 704(c) layer with respectto property does not arise on the contribu-tion of that property. However, a partner-ship that does not create and apply theremedial method to a positive reverse sec-tion 704(c) layer created on the contribu-tion of a lower-tier partnership interest toan upper-tier partnership may shift the taxconsequences of a portion of the built-ingain to a partner that is a related foreignperson. The Treasury Department andthe IRS believe that the description of thetiered-partnership rules contained in thenotice notified taxpayers of an intention topromulgate a rule with the result reachedby the temporary regulations.

The revaluation requirement describedin the gain deferral method requires anexpansion of permissible events for part-nership revaluations under section 704(b).Accordingly, § 1.704–1T(b)(2)(iv)(f)(6)


allows a partnership to revalue its prop-erty if the revaluation is a condition forapplying the gain deferral method. Whenmultiple partnerships revalue their prop-erty, the revaluations occur in order fromthe lowest-tier partnership to the highest-tier partnership.

If a partnership revalues its property,§ 1.704–3T(a)(13)(i) provides that theprinciples of § 1.704–3(a)(9) shall applyto any reverse section 704(c) allocationsmade as a result of the revaluation.

In developing the revaluation require-ment and § 1.704–3T(a)(13)(i), the Trea-sury Department and the IRS consideredcomments received on revaluation rules inproposed regulations under section 751(b)that are contained in a notice of proposedrulemaking (REG–151416–06) publishedon November 3, 2014, in the FederalRegister (79 FR 65151). See proposed§§ 1.704–1(b)(2)(iv)(f) and 1.704–3(a)(9).

X. Procedural and ReportingRequirements

To comply with the gain deferralmethod, the notice described regulationsthat would be issued requiring reportingof a gain deferral contribution and annualreporting with respect to the section721(c) property to which the gain deferralmethod applies. The notice requestedcomments on whether the regulationsshould provide rules similar to those in theregulations under sections 367(a) and6038B regarding failures to file gain rec-ognition agreements or to satisfy otherreporting obligations, including the stan-dards for relief therein. See T.D. 9704 (79FR 68763) (the 2014 GRA regulations).Comments were received expressing sup-port for this approach.

a. Reporting and proceduralrequirements for the year of the gaindeferral contribution

The temporary regulations implementthe rules described in the notice in a man-ner consistent with the approach in the2014 GRA regulations. For a U.S. trans-feror, the reporting requirements include,among other information, the informationrequired to be filed under section 6038B.The temporary regulations also adopt pro-cedural requirements in order to seek re-

lief for a failure to meet the reportingrequirements of the gain deferral method,which mirror the approach in the 2014GRA regulations, including proceduresrelating to the manner by which a trans-feror can establish the lack of willfulnessand that a failure was due to reasonablecause. See §§ 1.721(c)–6T(f) and 1.6038B–2T(h). The temporary regulations adoptthese procedural requirements for all U.S.persons that have a reporting obligationunder section 6038B with respect to atransfer of property to a foreign partner-ship and that are seeking relief under thereasonable cause exception, not only forU.S. transferors described in the section721(c) regulations. The reasonable causeprocedure in the temporary regulationsapplies to all requests for reasonable causerelief (regardless of the date on which thecontribution or the failure to file occurred)filed on or after January 18, 2017.

In addition to adopting the current re-quirements of § 1.6038B–2(c), the tempo-rary regulations require reporting neces-sary to demonstrate compliance with thegain deferral method. In general, the tem-porary regulations require a U.S. trans-feror to report information on a statementincluded on (or attached to) the Form8865, Schedule O, Transfer of Property toa Foreign Partnership. The Treasury De-partment and the IRS intend that theSchedule O will be revised to include theinformation required by the temporaryregulations.

For purposes of the U.S. transferor’sreporting requirements under § 1.721(c)–6T with respect to a gain deferral con-tribution to a domestic section 721(c)partnership, a domestic section 721(c)partnership will generally be treated asforeign under section 7701(a)(4) for re-porting purposes. See §§ 1.721(c)–6T(b)(4) and 1.6038B–2T(a)(1)(iii). As aresult, a U.S. transferor that contributessection 721(c) property to a domestic sec-tion 721(c) partnership in a gain deferralcontribution must file a Form 8865, Re-turn of U.S. Persons With Respect to Cer-tain Foreign Partnerships (including Form8865, Schedule O, Transfer of Property toa Foreign Partnership), with its return forthe taxable year that includes the date ofthe gain deferral contribution.

Also as a requirement of the gain de-ferral method, the temporary regulations

require that the U.S. transferor agree toextend the period of limitations on theassessment of tax for eight full taxableyears with respect to the gain realized butnot recognized on a gain deferral contri-bution, and for six full taxable years withrespect to the U.S. transferor’s distributiveshare of all items with respect to the sec-tion 721(c) property for the year of con-tribution and two subsequent years. See§ 1.721(c)–6T(b)(5)(i) and (ii). The U.S.transferor also must agree to extend theperiod of limitations on the assessment oftax for five full taxable years with respectto the gain recognized on the contributionof section 721(c) property for which thegain deferral method is not applied if thecontribution is made within five partner-ship taxable years following a gain defer-ral contribution. See § 1.721(c)–6T(b)(5)(iii). All agreements to extend theperiod of limitations on assessment of taxare deemed consented to and signed bythe Secretary for purposes of section6501(c)(4). The Treasury Department andthe IRS intend to issue a designated formfor use in extending the period of limita-tions by consent, as described above. Un-til the time such form is issued, the re-quired consent must be submitted as astatement attached to the U.S. Transfer-or’s Form 8865, Schedule O. Once suchform is issued, the U.S. transferor mustuse the designated form to submit the re-quired consent. These agreements must befiled only in connection with contributionsoccurring on or after January 18, 2017.

If section 721(c) property that is sub-ject to the gain deferral method is ECIproperty, the temporary regulations re-quire the U.S. transferor to obtain fromthe section 721(c) partnership and eachrelated foreign person that is a direct orindirect partner in the section 721(c) part-nership a statement pursuant to which thepartner and the partnership waive anyclaim under any income tax convention(whether or not currently in force at thetime of the contribution) to an exemptionfrom U.S. income tax or a reduced rate ofU.S. income taxation on income derivedfrom the use of the ECI property for theperiod in which there is remaining built-ingain. See § 1.721(c)–6T(c)(1).

The temporary regulations require theU.S. transferor also to provide informa-tion with respect to related foreign part-


ners and certain section 721(c) partner-ships under section 6038B and the gaindeferral method. This requirement alsoapplies in the case of a partnership in atiered-partnership structure that appliesthe gain deferral method under § 1.721(c)–3T(d). See § 1.721(c)–6T(b)(2). TheU.S. transferor must attach this informa-tion to its return.

If the section 721(c) partnership has areporting obligation under section 6031, italso will be required to report certain in-formation under the temporary regula-tions. See § 1.721(c)–6T(d). Although thetemporary regulations require the partner-ship to submit certain information to theIRS and comply with other requirementsrelating to the application of the gain de-ferral method, a failure to do so will notconstitute an acceleration event to theU.S. transferor. The Treasury Departmentand the IRS intend that the Form 1065,Schedule K–1, or their accompanying in-structions will be revised to describe thisrequired information. Failure to includethis information may result in impositionof a penalty. See sections 6721 and 6722.

b. Annual reporting requirements

The temporary regulations require theU.S. transferor to provide certain informa-tion on an annual basis with respect tosection 721(c) property subject to the gaindeferral method. See §§ 1.721(c)–6T(b)(3) and 1.6038B–2T(c)(9). This includesinformation about income from the sec-tion 721(c) property (book and remedialincome) allocated to the U.S. transferor inthe partnership taxable year that endswith, or within, the U.S. transferor’s tax-able year, a calculation of remainingbuilt-in gain, and information about accel-eration, termination, successor, and partialacceleration events. The U.S. transferormust also attach a Schedule K–1 (Form8865), Partner’s Share of Income, Deduc-tions, Credits, etc., for all related foreignpersons that are direct or indirect partnersin the section 721(c) partnership (if thepartnership does not have a filing obliga-tion under section 6031) for the partner-ship taxable year that ends with, or within,the U.S. transferor’s taxable year.

In the case of ECI property subject tothe gain deferral method, the U.S. trans-feror must annually declare that, after ex-

ercising reasonable diligence, to the bestof the U.S. transferor’s knowledge andbelief all the income from the propertywas income effectively connected withthe conduct of a trade or business withinthe United States, and no benefits withrespect to the ECI property were claimedunder any income tax convention by re-lated foreign persons that are direct orindirect partners in the section 721(c)partnership or by the section 721(c) part-nership. This requirement eliminates thepotential need for related foreign personsthat are direct or indirect partners in thesection 721(c) partnership and the partner-ship to submit to the U.S. transferor anannual waiver of treaty benefits.

The U.S. transferor must describe allacceleration, termination, successor, andpartial acceleration events that occur withrespect to the section 721(c) property dur-ing the partnership taxable year that endswith, or within, the U.S. transferor’s tax-able year. When there is a successorevent, the U.S. transferor must identify thenew partnership, lower-tier partnership,upper-tier partnership, or U.S. corporation(as applicable). If the section 721(c) part-nership is a foreign partnership, the U.S.transferor must include the informationdescribed in § 1.6038–3(g) (contents ofinformation returns required of certainUnited States persons with respect to con-trolled foreign partnerships), if not alreadyreported elsewhere, without regard towhether the section 721(c) partnership is acontrolled foreign partnership or whetherthe U.S. transferor controlled the section721(c) partnership. If the U.S. transferor isnot a controlling fifty-percent partner (asdefined in § 1.6038–3(a)), the U.S. trans-feror may comply with this requirementby providing only the information de-scribed in § 1.6038–3(g)(1). These re-quirements also apply to a U.S. transferorthat is a successor, as described in Para-graph c.2 of Part VIII of the Explanationof Provisions section of this preamble.

If the section 721(c) partnership has afiling obligation under section 6031, thepartnership must include the informationrequired under § 1.721(c)–6T(b)(2) and(3) on the Schedule K–1 (Form 1065),Partner’s Share of Income, Deductions,Credits, etc., of the U.S. transferor and allrelated foreign persons that are direct or

indirect partners in the section 721(c)partnership. See § 1.721(c)–6T(d)(2).

XI. Effective/Applicability Dates

The applicability dates of the tempo-rary regulations generally relate back tothe issuance of the notice. Accordingly, ingeneral, the temporary regulations applyto contributions occurring on or after Au-gust 6, 2015, and to contributions occur-ring before August 6, 2015, resulting froman entity classification election made un-der § 301.7701–3 that is filed on or afterAugust 6, 2015 (referred to in this pream-ble as the “general applicability date”).However, new rules, including any sub-stantive changes to the rules described inthe notice, apply to contributions occur-ring on or after January 18, 2017, or tocontributions occurring before January18, 2017, resulting from an entity classi-fication election made under § 301.7701–3 that is filed on or after January 18,2017. Taxpayers may, however, elect toapply those new rules and substantivechanges to the rules described in the no-tice to a contribution occurring on or afterthe general applicability date. The electionis made by reflecting the application of therelevant rule on a timely filed or amendedreturn.

Special Analyses

Certain IRS regulations, includingthese, are exempt from the requirementsof Executive Order 12866, as supple-mented and reaffirmed by Executive Or-der 13563. Therefore, a regulatory impactassessment is not required. It is herebycertified that the collection of informationcontained in this regulation will not have asignificant economic impact on a substan-tial number of small entities. Accordingly,a regulatory flexibility analysis is not re-quired. This certification is based on thefact that the temporary regulations includea $1,000,000 de minimis exception forcertain transfers, and tangible propertywith built-in gain that does not exceed$20,000 is excluded from the regulations.In addition, the regulations only applywhen a U.S. transferor contributes prop-erty to a partnership with a partner that isa related foreign person, and persons re-lated to the U.S. transferor own more than80 percent of the interests in the partner-


ship. Accordingly, the Treasury Depart-ment and the IRS expect that theseregulations primarily will affect large do-mestic corporations. Pursuant to section7805(f) of the Code, these regulationshave been submitted to the Chief Counselfor Advocacy of the Small Business Ad-ministration for comment on their impacton small business.


The principal author of these regula-tions is Ryan A. Bowen of the Office ofthe Associate Chief Counsel (Interna-tional). However, other personnel fromthe Treasury Department and the IRS par-ticipated in the development of the regu-lations.

* * * * *

Amendments to the Regulations

Accordingly, 26 CFR part 1 is amendedas follows:


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

Authority: 26 U.S.C. 7805 * * *Section 1.197–2T also issued under 26

U.S.C.197(g).* * * * *Section 1.721(c)–1T also issued under

26 U.S.C. 721(c).Section 1.721(c)–2T also issued under






26 U.S.C. 721(c).* * * * *Section 1.6038B–2T also issued under

26 U.S.C. 6038B.* * * * *Par. 2. Section 1.197–2 is amended by

adding paragraphs (h)(12)(vii)(C) and(l)(5) to read as follows:


* * * * *(h) * * *(12) * * *(vii) * * *(C) [Reserved]. For further guidance,

see § 1.197–2T(h)(12)(vii)(C).* * * * *

(l) * * *(5) [Reserved]. For further guidance,

see § 1.197–2T(l)(5).Par 3. Section 1.197–2T is added to

read as follows:

§ 1.197–2T Amortization of goodwilland certain other intangibles.

(a) through (h)(12)(vii)(B) [Reserved].For further guidance, see § 1.197–2(a)through (h)(12)(vii)(B).

(C) Rules for section 721(c) partner-ships. See § 1.704–3T(d)(5)(iii) if there isa contribution of a section 197(f)(9) intan-gible to a section 721(c) partnership (asdefined in § 1.721(c)–1T(b)(14)).

(viii) through (l)(4)(iii) [Reserved]. Forfurther guidance, see § 1.197–2(h)(12)(viii) through (l)(4)(iii).

(5) Rules for section 721(c) partner-ships—(i) Applicability dates—(A) Ingeneral. Except as provided in paragraph(l)(5)(i)(B) of this section, paragraph(h)(12)(vii)(C) of this section applies withrespect to contributions occurring on orafter January 18, 2017, and with respectto contributions occurring before January18, 2017, resulting from an entity classi-fication election made under § 301.7701–3 of this chapter that is filed on or afterJanuary 18, 2017.

(B) Election to apply the provisionsdescribed in paragraph (l)(5)(i)(A) of thissection retroactively. Paragraph(h)(12)(vii)(C) of this section may, byelection, be applied with respect to a con-tribution occurring on or after August 6,2015, and to a contribution occurring be-fore August 6, 2015, resulting from anentity classification election made under§ 301.7701–3 of this chapter that is filedon or after August 6, 2015. The election ismade by applying paragraph(h)(12)(vii)(C) of this section on a timelyfiled original return (including extensions)

or an amended return filed no later thansix months after January 18, 2017.

(ii) Expiration date. Paragraph(h)(12)(vii)(C) of this section expires onJanuary 17, 2020.

Par. 4. Section 1.704–1 is amended byadding paragraph (b)(2)(iv)(f)(6) follow-ing the undesignated paragraph at the endof paragraph (b)(2)(iv)(f)(5) and addingparagraph (f) to read as follows:

§ 1.704–1 Partner’s distributive share.

* * * * *(b) * * *(2) * * *(iv) * * *(f) * * *(6) [Reserved]. For further guidance,

see § 1.704–1T(b)(2)(iv)(f)(6).* * * * *

(f) [Reserved]. For further guidance,see § 1.704–1T(f).

Par. 5. Section 1.704–1T is amendedby:

1. Revising paragraphs (b)(1)(iii)through (b)(2)(iv)(f)(5).

2. Adding paragraph (b)(2)(iv)(f)(6).3. Revising paragraphs (b)(2)(iv)(g)

through (b)(4)(viii)(a) introductorytext.

3. Redesignating paragraph (f) as para-graph (g).

4. Adding a new paragraph (f).5. Revising newly redesignated para-

graph (g).The additions and revisions read as fol-

lows:

§ 1.704–1T Partner’s distributive share(temporary).

* * * * *(b)(1)(iii) through (b)(2)(iv)(f)(5) [Re-

served]. For further guidance, see § 1.704–1(b)(1)(iii) through (b)(2)(iv)(f)(5).

(6) Notwithstanding paragraph (b)(2)(iv)(f)(5) of this section, the revaluation isrequired under § 1.721(c)–3T(d)(1) as acondition of the application of the gaindeferral method (as described in§ 1.721(c)–3T(b)) and is pursuant to anevent described in this paragraph (b)(2)(iv)(f)(6). If an interest in a partnership iscontributed to a section 721(c) partnership(as defined in § 1.721(c)–1T(b)(14)), thepartnership whose interest is contributed


may revalue its property in accordancewith this section. In this case, the revalu-ation by the partnership whose interestwas contributed must occur immediatelybefore the contribution. If a partnershipthat revalues its property pursuant to thisparagraph owns an interest in anotherpartnership, the partnership in which itowns an interest may also revalue itsproperty in accordance with this section.When multiple partnerships revalue underthis paragraph (b)(2)(iv)(f)(6), the revalu-ations occur in order from the lowest-tierpartnership to the highest-tier partnership.

(b)(2)(iv)(g) through (b)(4)(viii)(a) intro-ductory text [Reserved]. For further guid-ance, see § 1.704–1(b)(2)(iv)(g) through(b)(4)(viii)(a) introductory text.* * * * *

(f) Dates—(1) Applicability dates—(i)In general. Except as provided in para-graph (f)(1)(ii) of this section, paragraph(b)(2)(iv)(f)(6) of this section applies withrespect to contributions occurring on orafter January 18, 2017, and with respect tocontributions occurring before January 18,2017, resulting from an entity classificationelection made under § 301.7701–3 of thischapter that is filed on or after January 18,2017.

(ii) Election to apply the provisions de-scribed in paragraph (f)(1)(i) of this sectionretroactively. Paragraph (b)(2)(iv)(f)(6) ofthis section may, by election, be appliedwith respect to a contribution occurring onor after August 6, 2015, but before Janu-ary 18, 2017, and with respect to a con-tribution occurring before August 6, 2015,resulting from an entity classificationelection made under § 301.7701–3 of thischapter that is filed on or after August 6,2015. The election is made by applyingparagraph (b)(2)(iv)(f)(6) of this sectionon a timely filed original return (includingextensions) or an amended return filed nolater than six months after January 18,2017.

(2) Expiration date. Paragraph (b)(2)(iv)(f)(6) of this section expires onJanuary 17, 2020.

(g) Expiration date. The applicabilityof this section (other than paragraphs(b)(2)(iv)(f)(6) and (f) of this section) ex-pires on February 4, 2019.

Par. 6. Section 1.704–3 is amended byadding paragraphs (a)(13), (d)(5)(iii), and(g) to read as follows:

§ 1.704–3 Contributed property.

(a) * * *(13) [Reserved]. For further guidance,

see § 1.704–3T(a)(13).* * * * *(d) * * *(5) * * *(iii) [Reserved]. For further guidance,

see § 1.704–3T(d)(5)(iii).* * * * *

(g) [Reserved]. For further guidance,see § 1.704–3T(g).

Par. 7. Section 1.704–3T is added toread as follows:

§ 1.704–3T Contributed property(temporary).

(a)(1) through (12) [Reserved]. Forfurther guidance, see § 1.704–3(a)(1)through (12).

(13) Rules for tiered section 721(c)partnerships—(i) Revaluations. If a part-nership revalues its property pursuant to§ 1.704–1T(b)(2)(iv)(f)(6) immediatelybefore an interest in the partnership iscontributed to another partnership, or if anupper-tier partnership owns an interest ina lower-tier partnership, and both theupper-tier partnership and the lower-tierpartnership revalue partnership propertypursuant to § 1.704–1T(b)(2)(iv)(f)(6),the principles of § 1.704–3(a)(9) will ap-ply to any reverse section 704(c) alloca-tions made as a result of the revaluation.

(ii) Basis-derivative items. If a lower-tier partnership that is a section 721(c)partnership applies the gain deferralmethod, then, for purposes of applyingthis section, the upper-tier partnership musttreat its distributive share of lower-tier part-nership items of gain, loss, amortization,depreciation, or other cost recovery withrespect to the lower-tier partnership’s sec-tion 721(c) property as though they wereitems of gain, loss, amortization, depreci-ation, or other cost recovery with respectto the upper-tier partnership’s interest inthe lower-tier partnership. For purposes ofthis paragraph (a)(13)(ii), gain deferralmethod is defined in § 1.721(c)–1T(b)(8),section 721(c) partnership is defined in§ 1.721(c)–1T(b)(14), and section 721(c)property is defined in § 1.721(c)–1T(b)(15).

(b) through (d)(5)(ii) [Reserved]. Forfurther guidance, see § 1.704–3(b)through (d)(5)(ii).

(iii) Special rules for a section 721(c)partnership and anti-churning property—(A) In general. Solely in the case of a gaindeferral contribution of section 721(c)property that is a section 197(f)(9) intan-gible that was not an amortizable section197 intangible in the hands of the contrib-utor, the remedial allocation method ismodified with respect to allocations to arelated person to the U.S. transferor pur-suant to paragraphs (d)(5)(iii)(B) through(F) of this section. For purposes of thisparagraph (d)(5)(iii), gain deferral contri-bution is defined in § 1.721(c)–1T(b)(7),related person is defined in § 1.721(c)–1T(b)(12), section 721(c) partnership isdefined in § 1.721(c)–1T(b)(14), section721(c) property is defined in § 1.721(c)–1T(b)(15), and U.S. transferor is definedin § 1.721(c)–1T(b)(18). For an exampleapplying the rules of this paragraph(d)(5)(iii), see § 1.721(c)–7T, Example 6.

(B) Book basis recovery. The section721(c) partnership must amortize the por-tion of the partnership’s book value in thesection 197(f)(9) intangible that exceedsthe adjusted basis in the property uponcontribution using any recovery periodand amortization method available to thepartnership as if the property had beennewly purchased by the partnership froman unrelated party.

(C) Effect of ceiling rule limitations. Ifthe ceiling rule causes the book allocationof the item of amortization of a section197(f)(9) intangible under paragraph(d)(5)(iii)(B) of this section by a section721(c) partnership to a related person withrespect to the U.S. transferor to differfrom the tax allocation of the same item tothe related person (a ceiling rule limitedrelated person), the partnership must notcreate a remedial item of deduction toallocate to the related person but insteadmust increase the adjusted basis of thesection 197(f)(9) intangible by an amountequal to the difference solely with respectto that related person. The partnership si-multaneously must create an offsetting re-medial item in an amount identical to theincrease in adjusted tax basis of the sec-tion 197(f)(9) intangible and allocate it tothe contributing partner.


(D) Effect of basis adjustment—(1) Ingeneral. The basis adjustment describedin paragraph (d)(5)(iii)(C) of this sectionconstitutes an adjustment to the adjustedbasis of a section 197(f)(9) intangible withrespect to the ceiling rule limited relatedperson only. No adjustment is made to thecommon basis of partnership property.Thus, for purposes of calculating gain andloss, the ceiling rule limited related personwill have a special basis for that section197(f)(9) intangible. The adjustment tothe basis of partnership property underthis section has no effect on the partner-ship’s computation of any item under sec-tion 703.

(2) Computation of a partner’s distrib-utive share of partnership items. The part-nership first computes its items of gain orloss at the partnership level under section703. The partnership then allocates thepartnership items among the partners, in-cluding the ceiling rule limited relatedperson, in accordance with section 704,and adjusts the partners’ capital accountsaccordingly. The partnership then adjuststhe ceiling rule limited related person’sdistributive share of the items of partner-ship gain or loss, in accordance with para-graph (d)(5)(iii)(D)(3) of this section, toreflect the effects of that person’s basisadjustment under this section. These ad-justments to that person’s distributiveshares must be reflected on Schedules Kand K–1 of the partnership’s return (Form1065) (when otherwise required to becompleted) and do not affect that person’scapital account.

(3) Effect of basis adjustment in deter-mining items of income, gain, or loss. Theamount of a ceiling rule limited relatedperson’s gain or loss from the sale orexchange of a section 197(f)(9) intangiblein which that person has a tax basis ad-justment is equal to that person’s share ofthe partnership’s gain or loss from the saleof the asset (including any remedial allo-cations under this paragraph (d) and§ 1.704–3(d)), minus the amount of thatperson’s tax basis adjustment for the sec-tion 197(f)(9) intangible.

(E) Subsequent transfers—(1) In gen-eral. Except as provided in paragraph(d)(5)(iii)(E)(2) of this section, if a ceilingrule limited related person transfers all orpart of its partnership interest, the portionof the basis adjustment for a section

197(f)(9) intangible attributable to the in-terest transferred is eliminated. The trans-feror of the partnership interest remainsthe ceiling rule limited related person withrespect to any remaining basis adjustmentfor the section 197(f)(9) intangible.

(2) Special rules for substituted basistransactions. Paragraph (d)(5)(iii)(E)(1)of this section does not apply to the extenta ceiling rule limited related person trans-fers its partnership interest in a transactionin which the transferee’s basis in the part-nership interest is determined in whole orin part by reference to the ceiling rulelimited related person’s basis in that inter-est. Instead, in such a case, the transfereesucceeds to that portion of the transferor’sbasis adjustment for a section 197(f)(9)intangible attributable to the interest trans-ferred. In such a case, the basis adjustmentin a section 197(f)(9) intangible to whichthe transferee succeeds is taken into ac-count for purposes of determining thetransferee’s share of the adjusted basis tothe partnership of the partnership’s prop-erty for purposes of §§ 1.743–1(b) and1.755–1(b)(5). To the extent a transfereewould be required to decrease the adjustedbasis of a section 197(f)(9) intangible pur-suant to §§ 1.743–1(b)(2) and 1.755–1(b)(5), the decrease first reduces the spe-cial basis adjustment described inparagraph (d)(5)(iii)(C) of this section, ifany, to which the transferee succeeds.

(F) Non-amortization of basis adjust-ment. Neither the increase to the adjustedbasis of a section 197(f)(9) intangible withrespect to a ceiling rule limited relatedperson nor the portion of the basis of anyproperty that was determined by referenceto such increase is subject to amortization,depreciation, or other cost recovery.

(d)(6) through (f) [Reserved]. Forfurther guidance, see § 1.704 –3(d)(6)through (f).

(g) Certain rules for section 721(c)partnerships—(1) Applicability dates—(i)In general. Notwithstanding § 1.704–3(f),except as provided in paragraph (g)(1)(ii)of this section, paragraphs (a)(13) and(d)(5)(iii) of this section apply with re-spect to contributions occurring on or af-ter January 18, 2017, and with respect tocontributions occurring before January 18,2017, resulting from an entity classificationelection made under § 301.7701–3 of this

chapter that is filed on or after January 18,2017.

(ii) Election to apply the provisionsdescribed in paragraph (g)(1)(i) of thissection retroactively. Paragraphs (a)(13)and (d)(5)(iii) of this section may, by elec-tion, be applied with respect to a contri-bution occurring on or after August 6,2015, but before January 18, 2017, andwith respect to a contribution occurringbefore August 6, 2015, resulting from anentity classification election made under§ 301.7701–3 of this chapter that is filedon or after August 6, 2015. The election ismade by applying paragraph (a)(13) orparagraph (d)(5)(iii) of this section, as ap-plicable, on a timely filed original return(including extensions) or an amended re-turn filed no later than six months afterJanuary 18, 2017.

(2) Expiration date. The applicabilityof paragraphs (a)(13) and (d)(5)(iii) of thissection expires on January 17, 2020.

Par. 8. Section 1.721(c)–1T is added toread as follows:

§ 1.721(c)–1T Overview, definitions, andrules of general application (temporary).

(a) Overview—(1) In general. Thissection and §§ 1.721(c)–2T through 1.721(c)–7T (collectively, the section 721(c)regulations) provide rules under section721(c). This section provides definitionsand rules of general application for pur-poses of the section 721(c) regulations.Section 1.721(c)–2T provides the generaloperative rules that override section721(a) nonrecognition of gain upon a con-tribution of section 721(c) property to asection 721(c) partnership. Section1.721(c)–3T describes the gain deferralmethod, which may be applied in order toavoid the immediate recognition of gainupon a contribution of section 721(c)property to a section 721(c) partnership.Section 1.721(c)–4T provides rules re-garding acceleration events for purposesof applying the gain deferral method. Sec-tion 1.721(c)–5T identifies exceptions tothe rules regarding acceleration eventsprovided in § 1.721(c)–4T(b). Section1.721(c)–6T provides procedural and re-porting requirements. Section 1.721(c)–7Tprovides examples illustrating the applica-tion of the section 721(c) regulations.


(2) Scope. Paragraph (b) of this sectionprovides definitions. Paragraph (c) of thissection describes the treatment of achange in form of a partnership. Para-graph (d) of this section provides an anti-abuse rule. Paragraph (e) of this sectionprovides the dates of applicability, andparagraph (f) of this section provides thedate of expiration.

(b) Definitions. The following defini-tions apply for purposes of the section721(c) regulations. Unless otherwise indi-cated, the definitions apply on a property-by-property basis, as applicable.

(1) Acceleration event. An accelerationevent has the meaning provided in§ 1.721(c)–4T(b).

(2) Built-in gain. Built-in gain is, withrespect to property contributed to a part-nership, the excess of the book value ofthe property over the partnership’s ad-justed tax basis in the property upon thecontribution, determined without regardto the application of § 1.721(c)–2T(b).

(3) Consistent allocation method. Theconsistent allocation method is themethod described in § 1.721(c)–3T(c).

(4) Controlled partnership. A partner-ship is a controlled partnership with re-spect to a U.S. transferor if the U.S. trans-feror and related persons control thepartnership. For this purpose, control isdetermined based on all the facts and cir-cumstances, except that a partnership willbe deemed to be controlled by a U.S.transferor and related persons if those per-sons, in the aggregate, own (directly orindirectly through one or more partner-ships) more than 50 percent of the inter-ests in the partnership capital or profits.

(5) Direct or indirect partner. A director indirect partner is a person (other thana partnership) that owns an interest in apartnership directly or indirectly throughone or more partnerships.

(6) Excluded property. Excluded prop-erty is—

(i) A cash equivalent;(ii) A security within the meaning of

section 475(c)(2), without regard tosection 475(c)(4);

(iii) Tangible property with a bookvalue exceeding adjusted tax basisby no more than $20,000 or withan adjusted tax basis in excess ofbook value; and

(iv) An interest in a partnership inwhich 90 percent or more of theproperty (as measured by value)held by the partnership (directly orindirectly through interests in oneor more partnerships that are notexcluded property) consists ofproperty described in paragraphs(b)(6)(i) through (iii) of this sec-tion.

(7) Gain deferral contribution. A gaindeferral contribution is a contribution ofsection 721(c) property to a section 721(c)partnership with respect to which the rec-ognition of gain is deferred under the gaindeferral method.

(8) Gain deferral method. The gain de-ferral method is the method described in§ 1.721(c)–3T(b).

(9) Partial acceleration event. A par-tial acceleration event is an event de-scribed in § 1.721(c)–5T(d)(2) or (3).

(10) Regulatory allocation. A regula-tory allocation is—

(i) An allocation pursuant to a mini-mum gain chargeback, as defined in§ 1.704–2(b)(2);

(ii) A partner nonrecourse deduction, asdetermined in § 1.704–2(i)(2);

(iii) An allocation pursuant to a partnerminimum gain chargeback, as de-scribed in § 1.704–2(i)(4);

(iv) An allocation pursuant to a quali-fied income offset, as defined in§ 1.704–1(b)(2)(ii)(d);

(v) An allocation with respect to theexercise of a noncompensatory option de-scribed in § 1.704–1(b)(2)(iv)(s); and

(vi) An allocation of partnership levelordinary income or loss describedin § 1.751–1(a)(3).

(11) Related foreign person. A relatedforeign person is, with respect to a U.S.transferor, a related person (other than apartnership) that is not a U.S. person.

(12) Related person. A related personis, with respect to a U.S. transferor, aperson that is related (within the meaningof section 267(b) or 707(b)(1)) to the U.S.transferor.

(13) Remaining built-in gain—(i) Ingeneral. Remaining built-in gain is, withrespect to section 721(c) property subjectto the gain deferral method, the built-ingain reduced by decreases in the differ-ence between the property’s book valueand adjusted tax basis, but, for this purpose,

without taking into account increases or de-creases to the property’s book value pursu-ant to § 1.704–1(b)(2)(iv)(f) or (s).

(ii) Special rule for tiered partnerships.If section 721(c) property is described in§ 1.721(c)–3T(d)(1)(ii), the remainingbuilt-in gain includes the new positive re-verse section 704(c) layer described in§ 1.721(c)–3T(d)(1)(ii), reduced by de-creases in the difference between theproperty’s book value and adjusted taxbasis, but, for this purpose, without takinginto account increases or decreases to theproperty’s book value pursuant to§ 1.704–1(b)(2)(iv)(f) or (s) that are un-related to the revaluation described in§ 1.721(c)–3T(d)(1)(i).

(14) Section 721(c) partnership—(i) Ingeneral. A partnership (domestic or for-eign) is a section 721(c) partnership ifthere is a contribution of section 721(c)property to the partnership and, after thecontribution and all transactions related tothe contribution—

(A) A related foreign person with re-spect to the U.S. transferor is adirect or indirect partner in thepartnership; and

(B) The U.S. transferor and related per-sons own 80 percent or more of theinterests in partnership capital,profits, deductions, or losses.

(ii) Special rule for tiered partnerships.A partnership described in § 1.721(c)–3T(d)(1) or (2) is deemed to be a section721(c) partnership for purposes of thegain deferral method.

(15) Section 721(c) property—(i) Ingeneral. Section 721(c) property is prop-erty, other than excluded property, withbuilt-in gain that is contributed to a partner-ship by a U.S. transferor, including pursuantto a contribution described in § 1.721(c)–2T(d) (partnership look-through rule). If theU.S. transferor is treated as contributing itsshare of property to a partnership pursuantto § 1.721(c)–2T(d), the entire property willbe section 721(c) property.

(ii) Special rule for tiered partnerships.Property described in § 1.721(c)–3T(d)(1)(ii)and an interest in a partnership described in§ 1.721(c)–3T(d)(2)(ii) is deemed to be sec-tion 721(c) property.

(16) Successor event. A successorevent is an event described in § 1.721(c)–5T(c)(2), (3), (4), or (5).


(17) Termination event. A terminationevent is an event described in § 1.721(c)–5T(b)(2), (3), (4), (5), (6), or (7).

(18) U.S. transferor—(i) In general. AU.S. transferor is a United States personwithin the meaning of section 7701(a)(30)(a U.S. person), other than a domesticpartnership.

(ii) Special rule for tiered partnerships.Solely for purposes of applying the con-sistent allocation method, a U.S. trans-feror includes a partnership that is treatedas a U.S. transferor under § 1.721(c)–3T(d)(1)(iii) or (d)(2)(i).

(c) Change in form of a partnership. Amere change in identity, form, or place oforganization of a partnership or a recapi-talization of a partnership will not causethe partnership to become a section 721(c)partnership.

(d) Anti-abuse rule. If a U.S. transferorengages in a transaction (or series oftransactions) or an arrangement with aprincipal purpose of avoiding the applica-tion of the section 721(c) regulations, thetransaction (or series of transactions) orthe arrangement may be recharacterized(including by aggregating or disregardingsteps or disregarding an intermediate en-tity) in accordance with its substance.

(e) Applicability dates—(1) In general.Except as provided in paragraphs (e)(2)and (3) of this section, this section appliesto contributions occurring on or after Au-gust 6, 2015, and to contributions occur-ring before August 6, 2015, resulting froman entity classification election made un-der § 301.7701–3 of this chapter that isfiled on or after August 6, 2015.

(2) Certain provisions. Except as pro-vided in paragraph (e)(3) of this section,paragraphs (b)(6)(iv) and (c) of this sec-tion apply to contributions occurring on orafter January 18, 2017, and to contribu-tions occurring before January 18, 2017,resulting from an entity classificationelection made under § 301.7701–3 of thischapter that is filed on or after January 18,2017. Except as provided in paragraph (e)(3)of this section, paragraph (b)(14)(i)(B) of thissection applies by replacing “80 percent ormore” with “greater than 50 percent” withrespect to contributions occurring on or afterAugust 6, 2015, but before January 18,2017, and with respect to contributions oc-curring before August 6, 2015, resultingfrom an entity classification election made

under § 301.7701–3 of this chapter that isfiled on or after August 6, 2015, but beforeJanuary 18, 2017.

(3) Election to apply the provisionsdescribed in paragraph (e)(2) of this sec-tion retroactively. Paragraphs (b)(6)(iv),(b)(14)(i)(B), and (c) of this section, withoutthe modification described in paragraph(e)(2) of this section, may, by election, beapplied to a contribution occurring on orafter August 6, 2015, but before January18, 2017, and to a contribution occurringbefore August 6, 2015, resulting from anentity classification election made under§ 301.7701–3 of this chapter that is filedon or after August 6, 2015. The election ismade by applying paragraph (b)(6)(iv) or(c) as described in paragraph (b)(14)(i)(B)or (e)(2) of this section, without the mod-ification described in paragraph (e)(2) ofthis section, as applicable, to the contribu-tion on a timely filed original return (in-cluding extensions) or an amended returnfiled no later than six months after Janu-ary 18, 2017.

(f) Expiration date. The applicabilityof this section expires on January 17,2020.

Par. 9. Section 1.721(c)–2T is added toread as follows:

§ 1.721(c)–2T Recognition of gain oncertain contributions of property topartnerships with related foreignpartners (temporary).

(a) Scope. This section provides thegeneral operative rules that override sec-tion 721(a) nonrecognition of gain upon acontribution of section 721(c) property toa section 721(c) partnership. Paragraph(b) of this section provides the generalrule that nonrecognition of gain under sec-tion 721(a) does not apply to a contribu-tion of section 721(c) property to a section721(c) partnership. Paragraph (c) of thissection provides a de minimis exceptionto the application of the general rule inparagraph (b) of this section. Paragraph(d) of this section provides rules for iden-tifying a section 721(c) partnership whena partnership in which a U.S. transferor isa direct or indirect partner contributesproperty to another partnership. Paragraph(e) of this section provides the dates ofapplicability, and paragraph (f) of this sec-tion provides the date of expiration. For

definitions that apply for purposes of thissection, see § 1.721(c)–1T(b).

(b) General rule for contributions ofsection 721(c) property. Except as pro-vided in this paragraph (b), paragraph (c)of this section, and § 1.721(c)–3T (de-scribing the gain deferral method), non-recognition under section 721(a) will notapply to gain realized by the contributingpartner upon a contribution of section721(c) property to a section 721(c) part-nership. This paragraph (b) does not applyto a direct contribution by a U.S. trans-feror if the U.S. transferor and relatedpersons with respect to the U.S. transferordo not own 80 percent or more of theinterests in partnership capital, profits, de-ductions, or losses.

(c) De minimis exception. Paragraph(b) of this section will not apply withrespect to contributions to a section 721(c)partnership during a taxable year of thesection 721(c) partnership for which thesum of the built-in gain with respect to allsection 721(c) property contributed in thattaxable year does not exceed $1 million.If, pursuant to the last sentence of para-graph (b) of this section, a direct contri-bution of property to the section 721(c)partnership by a U.S. transferor is notsubject to paragraph (b) of this section,then such contribution is not taken intoaccount for purposes of this paragraph (c).

(d) Rules for identifying a section721(c) partnership when a partnershipcontributes property to another partner-ship—(1) Partnership look-through rule.If a U.S. transferor is a direct or indirectpartner in a partnership (upper-tier part-nership) and the upper-tier partnershipcontributes all or a portion of its propertyto another partnership (lower-tier partner-ship), then, for purposes of determining ifthe lower-tier partnership is a section721(c) partnership, the U.S. transferor istreated as contributing to the lower-tierpartnership its share of the property actu-ally contributed by the upper-tier partner-ship to the lower-tier partnership.

(2) Exception for a technical termina-tion of a partnership. Paragraph (d)(1) ofthis section will not apply to a deemedcontribution that occurs as a result of atermination of a partnership described insection 708(b)(1)(B) (technical termina-tion). If a partnership is a section 721(c)partnership immediately before a technical


termination, see § 1.721(c)–5T(c)(4) (whichtreats technical terminations as successorevents in certain circumstances).


(2) Certain provisions. Except as pro-vided in paragraph (e)(3) of this section,the final sentence of paragraph (b) of thissection, the final sentence of paragraph (c)of this section, and paragraph (d)(2) of thissection apply to contributions occurring onor after January 18, 2017, and to contribu-tions occurring before January 18, 2017,resulting from an entity classification elec-tion made under § 301.7701–3 of this chap-ter that is filed on or after January 18, 2017.

(3) Election to apply the provisionsdescribed in paragraph (e)(2) of this sec-tion retroactively. The final sentence ofparagraph (b) of this section, the finalsentence of paragraph (c) of this section,and paragraph (d)(2) of this section may,by election, be applied to a contributionoccurring on or after August 6, 2015, butbefore January 18, 2017, and to a contri-bution occurring before August 6, 2015,resulting from an entity classificationelection made under § 301.7701–3 of thischapter that is filed on or after August 6,2015. The election is made by applyingthe final sentence of paragraph (b) of thissection, the final sentence of paragraph (c)of this section, or paragraph (d)(2) of thissection, as applicable, to the contributionon a timely filed original return (includingextensions) or an amended return filed nolater than six months after January 18,2017.


Par. 10. Section 1.721(c)–3T is addedto read as follows:

§ 1.721(c)–3T Gain deferral method(temporary).

(a) Scope. This section describes thegain deferral method to avoid the imme-diate recognition of gain upon a contribu-

tion of section 721(c) property to a section721(c) partnership. Paragraph (b) of thissection provides the requirements of thegain deferral method, including the require-ment to apply the consistent allocationmethod. Paragraph (c) of this section de-scribes the consistent allocation method.Paragraph (d) of this section providesrules for tiered partnerships. Paragraph (e)of this section provides the dates of appli-cability, and paragraph (f) of this sectionprovides the date of expiration. For defi-nitions that apply for purposes of this sec-tion, see § 1.721(c)–1T(b).

(b) Requirements of the gain deferralmethod. A contribution of section 721(c)property to a section 721(c) partnershipthat would be subject to § 1.721(c)–2T(b)will not be subject to § 1.721(c)–2T(b) ifthe conditions in paragraphs (b)(1)through (5) of this section are satisfiedwith respect to that property.

(1) Either—(i) Both—(A) The section 721(c) partnership

adopts the remedial allocation method de-scribed in § 1.704–3(d) with respect to thesection 721(c) property; and

(B) The section 721(c) partnership ap-plies the consistent allocation method pro-vided in paragraph (c) of this section; or

(ii) For the period beginning on thedate of the contribution of the section721(c) property and ending on the date onwhich there is no remaining built-in gainwith respect to that property, all distribu-tive shares of income and gain with re-spect to the section 721(c) property for alldirect and indirect partners that are relatedforeign persons with respect to the U.S.transferor will be subject to taxation asincome effectively connected with a tradeor business within the United States (un-der either section 871 or 882), and neitherthe section 721(c) partnership nor a re-lated foreign person that is a direct orindirect partner in the section 721(c) part-nership claims benefits under an incometax convention that would exempt the in-come or gain from tax or reduce the rateof taxation to which the income or gain issubject.

(2) Upon an acceleration event, theU.S. transferor recognizes an amount ofgain equal to the remaining built-in gainwith respect to the section 721(c) propertyor an amount of gain required to be rec-

ognized under § 1.721(c)–5T(d) or (e), asapplicable.

(3) The procedural and reporting re-quirements provided in § 1.721(c)–6T(b)are satisfied.

(4) The U.S. transferor consents to ex-tend the period of limitations on assess-ment of tax as required by § 1.721(c)–6T(b)(5).

(5) If the section 721(c) property is apartnership interest or property describedin the partnership look-through rule pro-vided in § 1.721(c)–2T(d), the applicabletiered-partnership rules provided in para-graph (d) of this section are applied.

(c) Consistent allocation method—(1)In general. For each taxable year of asection 721(c) partnership in which thereis remaining built-in gain in the section721(c) property, the section 721(c) part-nership must allocate each book item ofincome, gain, deduction, and loss withrespect to the section 721(c) property tothe U.S. transferor in the same percentage.For exceptions to this general rule, seeparagraph (c)(4) of this section.

(2) Determining income or gain withrespect to section 721(c) property. Forpurposes of applying paragraph (c)(1) ofthis section, a section 721(c) partnershipmust attribute book income and gain toeach item of section 721(c) property in aconsistent manner using any reasonablemethod taking into account all the factsand circumstances. All items of book in-come and gain attributable to an item ofsection 721(c) property will comprise a sin-gle class of gross income for purposes ofapplying paragraph (c)(3) of this section.

(3) Determining deduction or loss withrespect to section 721(c) property. Forpurposes of applying paragraph (c)(1) ofthis section, a section 721(c) partnershipmust use the principles of §§ 1.861–8 and1.861–8T to allocate and apportion itsitems of deduction, except for interest ex-pense and research and experimental ex-penditures, and loss to the class of grossincome with respect to each item of sec-tion 721(c) property as determined inparagraph (c)(2) of this section. Accord-ingly, a deduction or loss will be consid-ered to be definitely related and thereforeallocable to a class of gross income withrespect to particular section 721(c) prop-erty whether or not there is any item ofgross income in that class that is received


or accrued during the taxable year andwhether or not the amount of deduction orloss exceeds the amount of gross incomein that class during the taxable year. If adeduction or loss is definitely related andtherefore allocable to gross income attrib-utable to more than one class of grossincome of the section 721(c) partnershipor if a deduction or loss is not definitelyrelated to any class of gross income of thesection 721(c) partnership, the section721(c) partnership must apportion that de-duction or loss among its classes of grossincome using a reasonable method thatreflects to a reasonably close extent thefactual relationship between the deductionor loss and the classes of gross income.The section 721(c) partnership may allo-cate and apportion its interest expense andresearch and experimental expendituresunder any reasonable method, including,but not limited to, the methods prescribedin §§ 1.861–9 and 1.861–9T (interest ex-pense) and § 1.861–17 (research and ex-perimental expenditures). For this pur-pose, the section 721(c) partnership mustallocate and apportion its deductions andlosses without regard to the partners’ per-centage interests in the partnership.

(4) Exceptions to the consistent alloca-tion method—(i) Regulatory allocations.A regulatory allocation (as defined in§ 1.721(c)–1T(b)(10)) of book income,gain, deduction, or loss with respect tosection 721(c) property that otherwisewould fail to satisfy paragraph (c)(1) ofthis section is nevertheless deemed to sat-isfy that paragraph if the allocation is—

(A) An allocation of income or gain tothe U.S. transferor (or a member of its con-solidated group as defined in § 1.1502–1(h));

(B) An allocation of deduction or lossto a partner other than the U.S. transferor(or a member of its consolidated group);or

(C) Treated as a partial accelerationevent pursuant to § 1.721(c)–5T(d)(2).

(ii) Allocation of creditable foreign taxexpenditures. An allocation of a creditableforeign tax expenditure (as defined in§ 1.704–1(b)(4)(viii)(b)) is not subject tothe consistent allocation method.

(d) Tiered partnership rules. This para-graph (d) provides the tiered partnershiprules referred to in paragraph (b)(5) of thissection.

(1) Section 721(c) property is a partner-ship interest. If the section 721(c) propertythat is contributed to a section 721(c) part-nership is an interest in a partnership (lower-tier partnership), then the lower-tier partner-ship, if it is a controlled partnership withrespect to the U.S. transferor, and each part-nership in which an interest is owned (di-rectly or indirectly through one or morepartnerships) by the lower-tier partnershipand that is a controlled partnership withrespect to the U.S. transferor, must satisfythe requirements of paragraphs (d)(1)(i), (ii),and (iii) of this section.

(i) The partnership must revalue all itsproperty under § 1.704–1(b)(2)(iv)(f)(6)if the revaluation would result in a sepa-rate positive difference between bookvalue and adjusted tax basis in at least oneproperty that is not excluded property.

(ii) The partnership must apply thegain deferral method for each property(other than excluded property) for whichthere is a separate positive difference be-tween book value and adjusted tax basisresulting from the revaluation described inparagraph (d)(1) of this section (new pos-itive reverse section 704(c) layer). If thepartnership has previously adopted a section704(c) method other than the remedial allo-cation method for the property, the partner-ship satisfies the requirement of paragraph(b)(1)(i)(A) of this section by adopting theremedial allocation method for the new pos-itive reverse section 704(c) layer.

(iii) The partnership must treat a part-ner that is a partnership in which the U.S.transferor is a direct or indirect partner asif it were the U.S. transferor with respectto the section 721(c) property solely forpurposes of applying the consistent allo-cation method.

(2) Section 721(c) property is indi-rectly contributed by a U.S. transferorunder the partnership look-through rule.If the U.S. transferor is a direct or indirectpartner in the upper-tier partnership de-scribed in § 1.721(c)–2T(d)(1), and under§ 1.721(c)–2T(d)(1), the U.S. transferor istreated as contributing the section 721(c)property (including an interest in a part-nership described in paragraph (d)(1) ofthis section) to a section 721(c) partner-ship, then the requirements of paragraphs(d)(2)(i), (ii), and (iii) of this section mustbe satisfied.

(i) The section 721(c) partnership musttreat the upper-tier partnership as the U.S.transferor of the section 721(c) propertysolely for purposes of applying the con-sistent allocation method;

(ii) The upper-tier partnership, if it is acontrolled partnership with respect to theU.S. transferor, must apply the gain defer-ral method to its interest in the section721(c) partnership; and

(iii) If the U.S. transferor is an indirectpartner in the upper-tier partnership throughone or more partnerships, the principles ofparagraphs (d)(2)(i) and (ii) of this sectionmust be applied with respect to those part-nerships that are controlled partnershipswith respect to the U.S. transferor.


(2) Certain provisions. Except as pro-vided in paragraph (e)(3) of this section,paragraphs (b)(1)(ii), (c)(2) and (3),(c)(4)(i) and (ii), and (d)(1) and (2) of thissection apply to contributions occurring onor after January 18, 2017, and to contribu-tions occurring before January 18, 2017,resulting from an entity classification elec-tion made under § 301.7701–3 of this chap-ter that is filed on or after January 18, 2017.

(3) Election to apply the provisionsdescribed in paragraph (e)(2) of this sec-tion retroactively. Paragraphs (b)(1)(ii),(c)(2) and (3), (c)(4)(i) and (ii), and (d)(1)and (2) of this section may, by election, beapplied to a contribution occurring on orafter August 6, 2015, but before January18, 2017, and to a contribution occurringbefore August 6, 2015, resulting from anentity classification election made under§ 301.7701–3 of this chapter that is filedon or after August 6, 2015. The election ismade by applying paragraph (b)(1)(ii),(c)(2) and (3), (c)(4)(i) and (ii), and (d)(1)or (2) of this section, as applicable, to thecontribution on a timely filed original re-turn (including extensions) or an amendedreturn filed no later than six months afterJanuary 18, 2017. In order to elect toapply paragraph (c)(2) or (3) of thissection to a contribution described in


this paragraph (e)(3), an election mustalso be made to apply paragraph (c)(3)or (2) of this section, respectively, to thecontribution.

(4) Transitional rules. If a contributionis described in paragraph (e)(2) of thissection and no election described in para-graph (e)(3) of this section is made toapply one or more of paragraphs (c)(2)and (3) and (c)(4)(i) and (ii) of this sec-tion, as applicable, to the contribution,then, for purposes of paragraph (c)(1) ofthis section, the section 721(c) partnershipmust attribute book income, gain, loss,and deduction to the section 721(c) prop-erty in a consistent manner under any rea-sonable method taking into account all thefacts and circumstances. If a contributionis described in paragraph (e)(2) of thissection and no election described in para-graph (e)(3) of this section is made toapply paragraph (d)(1) or (2) of this sec-tion, as applicable, to the contribution,then, this section must be applied in amanner consistent with the purpose of thesection 721(c) regulations. Thus, for ex-ample, if a U.S. transferor is a direct orindirect partner in a partnership and thatpartnership contributes section 721(c)property to a lower-tier partnership, or, ifa U.S. transferor contributes an interest ina partnership that owns section 721(c)property to a lower-tier partnership,then paragraph (b) of this section ap-plies as though the U.S. transferor con-tributed its share of the section 721(c)property directly.



§ 1.721(c)–4T Acceleration events(temporary).

(a) Scope. This section provides rulesregarding acceleration events for purposesof applying the gain deferral method.Paragraph (b) of this section defines anacceleration event. Paragraph (c) of thissection provides the consequences of anacceleration event. Paragraph (d) of thissection provides the dates of applicability,and paragraph (e) of this section providesthe date of expiration. For definitions that

apply for purposes of this section, see§ 1.721(c)–1T(b).

(b) Definition of an acceleration event—(1) General rules. Except as provided in thisparagraph (b) and § 1.721(c)–5T (accelera-tion event exceptions), an acceleration eventwith respect to section 721(c) property isany event that either would reduce theamount of remaining built-in gain that aU.S. transferor would recognize under thegain deferral method if the event had notoccurred or could defer the recognition ofthe remaining built-in gain. An accelera-tion event includes a contribution of sec-tion 721(c) property to another partner-ship by a section 721(c) partnership and acontribution of an interest in a section721(c) partnership to another partnership.This paragraph (b) applies on a property-by-property basis.

(2) Failure to comply with a require-ment of the gain deferral method—(i)General rule. An acceleration event withrespect to section 721(c) property occurswhen any party fails to comply with acondition of the gain deferral method withrespect to the section 721(c) property.

(ii) Certain failures to comply withprocedural and reporting requirements.Notwithstanding paragraph (b)(2)(i) of thissection, an acceleration event will not occursolely as a result of a failure to comply witha requirement of § 1.721(c)–3T(b)(3) that isnot willful. See §§ 1.721(c)–6T(f) and1.6038B–2T(h)(3).

(3) Lower-tier partnership allocations.Notwithstanding paragraph (b)(1) of thissection, an acceleration event will not oc-cur because of a reduction in remainingbuilt-in gain in an interest in a partnershipthat is section 721(c) property that occursas a result of allocations of book items ofdeduction and loss, or tax items of incomeand gain.

(4) Deemed acceleration event. A U.S.transferor may treat an acceleration eventas having occurred with respect to section721(c) property by both recognizing gainin an amount equal to the remainingbuilt-in gain that would have been allo-cated to the U.S. transferor if the section721(c) partnership had sold the section721(c) property immediately before thedeemed acceleration event for fair marketvalue and satisfying the reporting requiredby § 1.721(c)–6T(b)(3)(iv). In this case,

see paragraph (c) of this section regardingbasis adjustments.

(c) Consequences of an accelerationevent. Paragraphs (c)(1) and (2) of thissection provide the consequences of anacceleration event with respect to section721(c) property, a partial accelerationevent with respect to section 721(c) prop-erty to the extent provided in § 1.721(c)–5T(d)(1), and a transfer described in sec-tion 367 of section 721(c) property to theextent provided in § 1.721(c)–5T(e).

(1) U.S. transferor. The U.S. transferormust recognize gain in an amount equal tothe remaining built-in gain that wouldhave been allocated to the U.S. transferorif the section 721(c) partnership had soldthe section 721(c) property immediatelybefore the acceleration event for fair mar-ket value. The U.S. transferor will in-crease its basis in its partnership interestby the amount of gain recognized. If theU.S. transferor is an indirect partner in thesection 721(c) partnership through one ormore tiered partnerships, appropriate basisadjustments will be made to the interestsin the tiered partnerships.

(2) Section 721(c) partnership. Thesection 721(c) partnership will increase itsbasis in the section 721(c) property by theamount of built-in gain recognized by theU.S. transferor under paragraph (c)(1) ofthis section. Any tax consequences of theacceleration event will be determined tak-ing into account the increase in the part-nership’s adjusted tax basis in the section721(c) property. If the section 721(c)property remains in the partnership afterthe acceleration event, the increase in ba-sis of the section 721(c) property may berecovered using any applicable recoveryperiod and depreciation (or other cost re-covery) method (including first-year con-ventions) available to the partnership fornewly purchased property of the sametype placed in service on the date of theacceleration event. The section 721(c)property will no longer be subject to thegain deferral method.

(d) Applicability dates. This section ap-plies to contributions occurring on or afterAugust 6, 2015, and to contributions oc-curring before August 6, 2015, resultingfrom an entity classification election madeunder § 301.7701–3 of this chapter that isfiled on or after August 6, 2015.


(e) Expiration date. The applicabilityof this section expires on January 17,2020.


§ 1.721(c)–5T Acceleration eventexceptions (temporary).

(a) Scope. This section identifies ex-ceptions to the acceleration events, which,like the rules regarding accelerationevents provided in § 1.721(c)–4T(b), ap-ply on a property-by-property basis. Para-graph (b) of this section identifies theevents that terminate the requirement toapply the gain deferral method. Paragraph(c) of this section identifies the successorevents that allow for the continued appli-cation of the gain deferral method. Para-graph (d) of this section identifies the par-tial acceleration events. Paragraph (e) ofthis section provides special rules fortransfers of section 721(c) property to aforeign corporation described in section367. Paragraph (f) of this section allowsfor the continued application of the gaindeferral method if there is a fully taxabledisposition of a portion of an interest in apartnership. Paragraph (g) of this sectionprovides the dates of applicability, andparagraph (h) of this section provides thedate of expiration. For definitions that ap-ply for purposes of this section, see§ 1.721(c)–1T(b).

(b) Termination events—(1) In general.Notwithstanding § 1.721(c)–4T(b)(1), a ter-mination event with respect to section721(c) property will not constitute an accel-eration event. In these cases, the section721(c) property will no longer be subject tothe gain deferral method.

(2) Transfers of section 721(c) prop-erty (other than a partnership interest) toa domestic corporation described in sec-tion 351. A termination event occurs if asection 721(c) partnership transfers section721(c) property (other than an interest in apartnership) to a domestic corporation in atransaction to which section 351 applies.

(3) Certain incorporations of a section721(c) partnership. A termination eventoccurs upon an incorporation of a section721(c) partnership into a domestic corpo-ration by any method of incorporation(other than a method involving an actualdistribution of partnership property to the

partners, followed by a contribution of thatproperty to a corporation), provided that thesection 721(c) partnership is liquidated aspart of the incorporation transaction.

(4) Certain distributions of section721(c) property. A termination event oc-curs if a section 721(c) partnership distrib-utes section 721(c) property either to theU.S. transferor or, if the U.S. transferor isa member of a consolidated group (asdefined in § 1.1502–1(h)) at the time ofthe distribution and the distribution occursoutside the seven-year period described insection 704(c)(1)(B), to a member of theconsolidated group.

(5) Partnership ceases to have a part-ner that is a related foreign person. Atermination event occurs when a section721(c) partnership ceases to have any di-rect or indirect partners that are relatedforeign persons with respect to the U.S.transferor, provided there is no plan for arelated foreign person to subsequently be-come a direct or indirect partner in thepartnership (or a successor). This para-graph (b)(5) does not apply to a distribu-tion of section 721(c) property in redemp-tion of a related foreign person’s interestin a section 721(c) partnership.

(6) Fully taxable dispositions of sec-tion 721(c) property. A termination eventoccurs if a section 721(c) partnership dis-poses of section 721(c) property in atransaction in which all gain or loss, ifany, is recognized.

(7) Fully taxable dispositions of an en-tire interest in a section 721(c) partner-ship. A termination event occurs if a U.S.transferor or a partnership in which a U.S.transferor is a direct or indirect partnerdisposes of its entire interest in a section721(c) partnership that owns the section721(c) property in a transaction in whichall gain or loss, if any, is recognized. Thisparagraph (b)(7) does not apply if a U.S.transferor is a member of a consolidatedgroup (as defined in § 1.1502–1(h)) and theinterest in the section 721(c) partnership istransferred in an intercompany transaction(as defined in § 1.1502–13(b)(1)).

(c) Successor events—(1) In general.Notwithstanding § 1.721(c)–4T(b)(1), asuccessor event with respect to section721(c) property will not constitute an ac-celeration event. If only a portion of aninterest in a partnership is transferred in asuccessor event described in this para-

graph (c), the principles of § 1.704–3(a)(7) apply to determine the remainingbuilt-in gain in section 721(c) propertythat is attributable to the portion of theinterest that is transferred and the portionof the interest that is retained.

(2) Transfers of an interest in a section721(c) partnership by a U.S. transferor orupper-tier partnership to a domestic cor-poration in certain nonrecognition trans-actions. A successor event occurs if a U.S.transferor or a partnership in which a U.S.transferor is a direct or indirect partnertransfers (directly or indirectly throughone or more partnerships) an interest in asection 721(c) partnership to a domesticcorporation in a transaction to which sec-tion 351 or 381 applies, and the gain de-ferral method is continued by treating thetransferee domestic corporation as theU.S. transferor for purposes of the section721(c) regulations. If the transfer describedin this paragraph (c)(2) also results in atermination under section 708(b)(1)(B) ofthe section 721(c) partnership, see para-graph (c)(4) of this section.

(3) Transfers of an interest in a section721(c) partnership in an intercompanytransaction. A successor event occurs if aU.S. transferor that is a member of a con-solidated group (as defined in § 1.1502–1(h)) transfers (directly or indirectlythrough one or more partnerships) an in-terest in a section 721(c) partnership in anintercompany transaction (as defined in§ 1.1502–13(b)(1)), and the gain deferralmethod is continued by treating the trans-feree member as the U.S. transferor for pur-poses of the section 721(c) regulations. Ifthe transfer described in this paragraph (c)(3)also results in a termination under section708(b)(1)(B) of the section 721(c) partner-ship, see paragraph (c)(4) of this section.

(4) Termination under section 708(b)(1)(B) of a section 721(c) partnership. Asuccessor event occurs if there is a termi-nation under section 708(b)(1)(B) of asection 721(c) partnership, and the gaindeferral method is continued by treatingthe new partnership as the section 721(c)partnership for purposes of the section721(c) regulations.

(5) Transactions involving tiered part-nerships—(i) Contributions of section721(c) property to a lower-tier partner-ship. A successor event occurs if a section721(c) partnership contributes the section


721(c) property to a partnership that is acontrolled partnership with respect to theU.S. transferor (lower-tier section 721(c)partnership) and the requirements of para-graphs (c)(5)(i)(A), (B), and (C) of thissection are satisfied.

(A) The lower-tier section 721(c) part-nership is a section 721(c) partnership oris treated as a section 721(c) partnership.

(B) The gain deferral method is appliedwith respect to the section 721(c) propertyin the hands of the lower-tier section721(c) partnership.

(C) The gain deferral method is appliedwith respect to the section 721(c) part-nership’s interest in the lower-tier sec-tion 721(c) partnership. See §§ 1.721(c)–3T(b)(5) and (d)(2).

(ii) Contributions of an interest in asection 721(c) partnership to an upper-tier partnership. A successor event occursif a U.S. transferor or a partnership inwhich a U.S. transferor is a direct or in-direct partner contributes (directly or in-directly through one or more partnerships)an interest in a section 721(c) partnershipto a partnership that is a controlled partner-ship with respect to the U.S. transferor(upper-tier section 721(c) partnership) andthe requirements of paragraphs (c)(5)(ii)(A),(B), (C), and (D) of this section are satisfied.

(A) The gain deferral method is con-tinued with respect to the section 721(c)property in the hands of the section 721(c)partnership.

(B) The upper-tier section 721(c) part-nership is, or is treated as, a section 721(c)partnership.

(C) If the upper-tier section 721(c)partnership directly owns its interest in thesection 721(c) partnership, the gain defer-ral method is applied with respect to theupper-tier section 721(c) partnership’s in-terest in the section 721(c) partnership.See § 1.721(c)–3T(b)(5) and (d)(1).

(D) If the upper-tier section 721(c)partnership indirectly owns its interest inthe section 721(c) partnership through oneor more partnerships, the principles ofparagraphs (c)(5)(ii)(B) and (C) of this sec-tion are applied with respect to each part-nership through which the upper-tier section721(c) partnership indirectly owns an inter-est in the section 721(c) partnership.

(d) Partial acceleration events—(1) Ingeneral. Notwithstanding § 1.721(c)–4T,a partial acceleration event with respect to

section 721(c) property does not consti-tute an acceleration event. In these cases,except as provided in paragraph (d)(3) ofthis section, the rules in § 1.721(c)–4T(c)(concerning the consequences of an accel-eration event) for making basis adjust-ments apply to the extent that the U.S.transferor is required to recognize gainunder paragraph (d)(2) or (3) of this sec-tion. Furthermore, if there is remainingbuilt-in gain with respect to the section721(c) property after the application ofthis paragraph (d), the application of thegain deferral method with respect to thesection 721(c) property must be continuedin the same manner.

(2) Regulatory allocations. If a regula-tory allocation is described in § 1.721(c)–3T(c)(4)(i) but not in § 1.721(c)–3T(c)(4)(i)(A) or (B), a partial accelerationevent occurs with respect to section 721(c)property if the U.S. transferor recognizes anamount of gain (but not in excess of remain-ing built-in gain) equal to the amount of theallocation that, under the consistent alloca-tion method, had the regulatory allocationnot occurred, would have been allocated tothe U.S. transferor in the case of income orgain, or would not have been allocated tothe U.S. transferor in the case of deductionor loss.

(3) Certain distributions of other part-nership property to a partner that result inan adjustment under section 734. A partialacceleration event occurs with respect tosection 721(c) property if there is a distri-bution of other property by the section721(c) partnership that results in a posi-tive basis adjustment to the section 721(c)property under section 734. In these cases,the U.S. transferor must recognize anamount of gain (but not in excess of theremaining built-in gain) equal to the pos-itive basis adjustment to the section721(c) property under section 734, re-duced (but not below zero) by the amountof gain recognized by the U.S. transferor(or a member of its consolidated group (asdefined in § 1.1502–1(h))) under section731(a). In these cases, the partnership willnot increase its basis under § 1.721(c)–4T(c)(2) by the amount of gain recognizedby the U.S. transferor.

(e) Transfers described in section 367of section 721(c) property to a foreigncorporation. If a section 721(c) partner-ship transfers section 721(c) property, or a

U.S. transferor or a partnership in which aU.S. transferor is a direct or indirect part-ner transfers (directly or indirectlythrough one or more partnerships) all or aportion of an interest in a section 721(c)partnership that owns section 721(c) prop-erty, to a foreign corporation in a transac-tion described in section 367, then, theproperty will no longer be subject to thegain deferral method. To the extent anyU.S. transferor is treated as transferringthe section 721(c) property to the foreigncorporation for purposes of section 367, thetax consequences will be determined undersection 367. In this regard, see §§ 1.367(a)–1T(c)(3)(i) and (ii), 1.367(d)–1T(d)(1), and1.367(e)–2(b)(1)(iii) (providing for theaggregate treatment of partnerships).However, for the remaining portion of theproperty (if any), the U.S. transferor mustrecognize an amount of gain equal to theremaining built-in gain that would havebeen allocated to the U.S. transferor if thesection 721(c) partnership had sold thatportion of the section 721(c) property im-mediately before the transfer for fair mar-ket value. The stock in the transferee for-eign corporation received will not besubject to the gain deferral method. Therules in § 1.721(c)–4T(c) (concerning theconsequences of an acceleration event) formaking basis adjustments will apply to theextent that the U.S. transferor recognizesgain under this paragraph (e).

(f) Fully taxable dispositions of a por-tion of an interest in a partnership. If aU.S. transferor or a partnership in which aU.S. transferor is a direct or indirect part-ner disposes of (directly or indirectlythrough one or more partnerships) a por-tion of an interest in a section 721(c)partnership in a transaction in which allgain or loss, if any, is recognized, an ac-celeration event will not occur with re-spect to the portion of the interest trans-ferred. The gain deferral method willcontinue to apply with respect to the sec-tion 721(c) property of the section 721(c)partnership. The principles of § 1.704–3(a)(7) will apply to determine the re-maining built-in gain in section 721(c)property that is attributable to the portionof the interest in a section 721(c) partner-ship that is retained. This paragraph (f)will not apply to an intercompany trans-action (as defined in § 1.1502–13(b)(1)).


(g) Applicability dates—(1) In general.Except as provided in paragraph (g)(2) ofthis section, this section applies to contri-butions occurring on or after January 18,2017, and to contributions occurring be-fore January 18, 2017, resulting from anentity classification election made under§ 301.7701–3 of this chapter that is filedon or after January 18, 2017.

(2) Election to apply this section retro-actively. This section may, by election, beapplied to a contribution occurring on orafter August 6, 2015, but before January18, 2017, and to a contribution occurringbefore August 6, 2015, resulting from anentity classification election made under§ 301.7701–3 of this chapter that is filedon or after August 6, 2015. The election ismade by applying this section to the con-tribution on a timely filed original return(including extensions) or an amended re-turn filed no later than six months afterJanuary 18, 2017.

(h) Expiration date. The applicabilityof this section expires on January 17,2020.

Par. 13. Section 1.721(c)–6T is addedto read as follows

§ 1.721(c)–6T Procedural and reportingrequirements (temporary).

(a) Scope. This section provides proce-dural and reporting requirements thatmust be satisfied under § 1.721(c)–3T(b)(3) of the gain deferral method.Paragraph (b) of this section describes theprocedural and reporting requirements ofa U.S. transferor. Paragraph (c) of thissection describes information required tobe reported with respect to related foreignpersons and partnerships. Paragraph (d) ofthis section describes the procedural andreporting requirements of a section 721(c)partnership with a section 6031 filing ob-ligation. Paragraph (e) of this section pro-vides the proper signatory for the infor-mation provided under this section.Paragraph (f) of this section provides re-lief for certain failures to comply that arenot willful. Paragraph (g) of this sectionprovides the dates of applicability, andparagraph (h) of this section provides thedate of expiration. For definitions that ap-ply for purposes of this section, see§ 1.721(c)–1T(b).

(b) Procedural and reporting require-ments of a U.S. transferor—(1) In gen-eral. This paragraph (b) describes the pro-cedural and reporting requirements that aU.S. transferor (as defined § 1.721(c)–1T(b)(18)(i)) must satisfy in applying thegain deferral method. The information re-quired under this paragraph (b) must beincluded with the U.S. transferor’s timelyfiled return on (or attached to) the appro-priate forms (including Form 8865,Schedule O, Transfer of Property to aForeign Partnership), and must be submit-ted in the form and manner and to theextent prescribed by the form (and its ac-companying instructions).

(2) Reporting of a gain deferral contri-bution. A U.S. transferor must report thefollowing information with respect to again deferral contribution:

(i) A statement, titled “Statement ofApplication of the Gain Deferral Methodunder Section 721(c),” that contains thefollowing information with respect to thesection 721(c) property—

(A) A description of the property andrecovery period (or periods) for theproperty;

(B) Whether the property is an intan-gible described in section 197(f)(9);

(C) A calculation of the built-in gain,the basis, and fair market value on the dateof the contribution, including the amountof gain recognized by the U.S. transferor,if any, on the gain deferral contribution;

(D) The name, U.S. taxpayer identifi-cation number (if any), address, and coun-try of organization (if any) of each director indirect partner in the section 721(c)partnership that is a related person withrespect to the U.S. transferor, and a de-scription of each partner’s interest in cap-ital and profits immediately after the gaindeferral contribution; and

(E) When the section 721(c) propertyis a partnership interest, the informationdescribed in paragraphs (b)(2)(i)(A)through (D) of this section with respect toeach property of a lower-tier partnershipto which the gain deferral method is ap-plied under § 1.721(c)–3T(d)(1);

(ii) A statement, titled “Consent to Ex-tend the Time to Assess Tax Pursuant tothe Gain Deferral Method under Section721(c),” completed and executed in themanner prescribed in forms and instruc-tions, extending the period of limitations

on the assessment of tax as described inparagraph (b)(5) of this section;

(iii) A copy of the waiver of treatybenefits described in paragraphs (c)(1) ofthis section (if any);

(iv) Information relating to the section721(c) partnership described in paragraph(c)(2) of this section (if any);

(v) With respect to any foreign partner-ship (or partnership treated as foreign un-der paragraph (b)(4) of this section) theinformation required under § 1.6038B–2(c)(1) through (7); and

(vi) The information required underparagraph (b)(3) of this section.

(3) Annual reporting relating to gaindeferral method. A U.S. transferor mustfile an annual statement, titled “AnnualStatement of Application of the Gain De-ferral Method under Section 721(c),” foreach gain deferral contribution. The infor-mation in the statement must be with re-spect to the partnership taxable year thatends with, or within, the taxable year ofthe U.S. transferor, beginning with thepartnership’s taxable year that includesthe date of the gain deferral contributionand ending with the last taxable year inwhich the gain deferral method is ap-plied to the section 721(c) property. Thestatement must contain the followinginformation:

(i) The amount of book income, gain,deduction, and loss and tax items allo-cated to the U.S. transferor with respect tothe section 721(c) property, including adescription of any regulatory allocations;

(ii) The proportion (expressed as a per-centage) in which the book income, gain,deduction, and loss with respect to thesection 721(c) property was allocatedamong the U.S. transferor and related per-sons that are partners in the section 721(c)partnership under the consistent allocationmethod;

(iii) The amount of remaining built-ingain at the beginning of the taxable year,the remedial income allocated to the U.S.transferor under the remedial allocationmethod, the amount of built-in gain takeninto account by reason of an accelerationevent or partial acceleration event (if any),the partnership’s adjustment to its tax ba-sis in the section 721(c) property, and theremaining built-in gain at the end of thetaxable year;


(iv) A declaration stating whether anacceleration event or partial accelerationevent occurred during the taxable year, thedate of the event, and a description of theevent (including a citation to the relevantparagraph of § 1.721(c)–5T(d) in the caseof a partial acceleration event, and whetherthe acceleration event is described in§ 1.721(c)–4T(b)(4));

(v) A description of a terminationevent or any successor event that occurredduring the taxable year with a citation tothe relevant paragraph of § 1.721(c)–5T(b) or (c), the date of the event, and, inthe case of a successor event, the name,address, and U.S. taxpayer identificationnumber (if any) of any successor partner-ship, lower-tier partnership, upper-tier part-nership, or U.S. corporation (as applicable);

(vi) A description of all transfers of721(c) property to a foreign corporationdescribed in § 1.721–5T(e) that occurredduring the taxable year, and for eachtransfer, the date of the transfer, the sec-tion 721(c) property transferred, and thename, address, and U.S. taxpayer identi-fication number (if any) of the foreigntransferee corporation;

(vii) With respect to section 721(c)property for which a waiver of treaty ben-efits was filed under paragraph (b)(2)(iii)of this section, a declaration that, afterexercising reasonable diligence, to thebest of the U.S. transferor’s knowledgeand belief, all income from the section721(c) property allocated to the partnersduring the taxable year remained subjectto taxation as income effectively con-nected with the conduct of a trade or busi-ness within the United States (under eithersection 871 or 882) for all direct or indi-rect partners that are related foreign per-sons with respect to the U.S. transferor(regardless of whether any such partnerwas a partner at the time of the gain de-ferral contribution), and, that neither thepartnership nor any such partner has madeany claim under any income tax conven-tion to an exemption from U.S. incometax or a reduced rate of U.S. income tax-ation on income derived from the use ofthe section 721(c) property;

(viii) A statement, titled “Consent toExtend the Time To Assess Tax Pursuantto the Gain Deferral Method under Sec-tion 721(c),” completed and executed asprescribed in forms and instructions, ex-

tending the period of limitations on theassessment of tax, in the case of a gaindeferral contribution, as described in para-graph (b)(5)(ii) of this section, and, in thecase of certain contributions on whichgain is recognized, as described in para-graph (b)(5)(iii) of this section;

(ix) If the section 721(c) partnership isa partnership that does not have a filingobligation under section 6031, the infor-mation described in § 1.6038–3(g) (con-tents of information returns required ofcertain United States persons with respectto controlled foreign partnerships), if notalready reported elsewhere, without re-gard to whether the section 721(c) part-nership is a controlled foreign partnershipwithin the meaning of section 6038. If theU.S. transferor is not a controlling fifty-percent partner (as defined in § 1.6038–3(a)), the U.S. transferor complies withthe requirement of this paragraph (b)(3)(ix) by providing only the informationdescribed in § 1.6038–3(g)(1);

(x) A description of all section 721(c)property contributed by the U.S. trans-feror to the section 721(c) partnership (in-cluding pursuant to a contribution de-scribed in § 1.721(c)–2T(d)(1)) during thetaxable year to which the gain deferralmethod is not applied; and

(xi) The information required in para-graphs (c)(2) and (3) of this section forrelated foreign persons that are direct orindirect partners in the section 721(c)partnership and the section 721(c) partner-ship itself (if any).

(4) Domestic partnerships treated asforeign. Solely for purposes of this sec-tion, a U.S. transferor must treat a domes-tic section 721(c) partnership as a foreignpartnership if the partnership was formedon or after January 18, 2017. If the sec-tion 721(c) partnership has an informationreturn filing obligation under section6031, that requirement is not affected bythe requirement of this paragraph (b)(4)that the U.S. transferor treat the partner-ship as a foreign partnership.

(5) Extension of period of limitationson assessment of tax. In order to complywith the gain deferral method, a U.S.transferor must extend the period of lim-itations on the assessment of tax:

(i) With respect to the gain realized butnot recognized on a gain deferral contri-bution, through the close of the eighth full

taxable year following the U.S. transfer-or’s taxable year that includes the date ofthe gain deferral contribution;

(ii) With respect to all book and taxitems with respect to the section 721(c)property allocated to the U.S. transferor inthe partnership’s taxable year that in-cludes the date of the gain deferral contri-bution and the subsequent two years,through the close of the sixth full taxableyear following such taxable year withwhich, or within which, the partnership’staxable year ends; and

(iii) With respect to the gain recog-nized on a contribution of section 721(c)property to a section 721(c) partnershipfor which the gain deferral method is notapplied, if the contribution occurs withinfive partnership taxable years following apartnership taxable year that includes thedate of a gain deferral contribution,through the close of the fifth full taxableyear following the U.S. transferor’s tax-able year that includes the date of thecontribution on which gain is recognized.

(c) Information with respect to section721(c) partnerships and related foreignpersons—(1) Effectively connected in-come. If the gain deferral method is ap-plied with respect to a contribution ofsection 721(c) property that satisfies thecondition in § 1.721(c)–3T(b)(1)(ii), theU.S. transferor must obtain a statementfrom the section 721(c) partnership andfrom each related foreign person that is adirect or indirect partner in the section721(c) partnership, titled “Statement ofWaiver of Treaty Benefits under § 1.721(c)–6T,” pursuant to which the partner and thepartnership waive any claim under any in-come tax convention (whether or not cur-rently in force at the time of the contribu-tion) to an exemption from U.S. income taxor a reduced rate of U.S. income taxation onincome derived from the use of the section721(c) property for the period during whichthe section 721(c) property is subject to thegain deferral method.

(2) Partnerships in tiered-partnershipstructures applying the gain deferralmethod. If the gain deferral method isapplied as a result of a transaction de-scribed in § 1.721(c)–3T(d), the U.S.transferor must supply all information thata section 721(c) partnership would be re-quired to report under paragraph (b) of


this section if the section 721(c) partner-ship were a U.S. transferor.

(3) Schedules K–1 for related foreignpartners. If a section 721(c) partnershipdoes not have a filing obligation undersection 6031, the U.S. transferor must ob-tain a Schedule K–1 (Form 8865), Part-ner’s Share of Income, Deduction, Cred-its, etc., for all related foreign persons thatare direct or indirect partners in the sec-tion 721(c) partnership.

(d) Reporting and procedural require-ments of a section 721(c) partnership witha section 6031 filing obligation—(1)Waiver of treaty benefits. A section 721(c)partnership with a return filing obligationunder section 6031 must include itswaiver of treaty benefits described inparagraph (c)(1) of this section with its taxreturn for the taxable year that includesthe date of the gain deferral contribution.

(2) Information on Schedule K–1. Asection 721(c) partnership with a returnfiling obligation under section 6031 mustprovide the relevant information neces-sary for the U.S. transferor to comply withthe requirements in paragraphs (b)(2) and(3) of this section with the U.S. transfer-or’s Schedule K–1 (Form 1065), Partner’sShare of Income, Deductions, Credits, etc.The partnership must also attach to itsForm 1065 a Schedule K–1 (Form 1065)for each partner that is a related foreignperson with respect to the U.S. transferor.

(e) Signatory. The statements requiredin this section must be signed under pen-alties of perjury by an agent of the U.S.transferor, the related foreign person thatis a direct or indirect partner in the section721(c) partnership, or the section 721(c)partnership, as applicable, that is autho-rized to sign under a general or specificpower of attorney, or by an appropriateparty. For the U.S. transferor, an appro-priate party is a person described in§ 1.367(a)–8(e)(1). For a partnership witha section 6031 filing obligation, an appro-priate party is any party authorized to signForm 1065.

(f) Relief for certain failures to file orfailures to comply that are not willful—(1) In general. This paragraph (f)(1) pro-vides relief from the failure to complywith the procedural and reporting require-ments of the gain deferral method pre-scribed by § 1.721(c)–3T(b)(3) and pro-vided in paragraph (b) of this section if

there is a failure to file or to include in-formation required by this section (failureto comply). A failure to comply will bedeemed not to have occurred for purposesof § 1.721(c)–3T(b)(3) if the U.S. trans-feror demonstrates that the failure was notwillful using the procedure provided inthis paragraph (f). For this purpose, will-ful is to be interpreted consistent with themeaning of that term in the context ofother civil penalties, which would includea failure due to gross negligence, recklessdisregard, or willful neglect. Whether afailure to comply was willful will be de-termined by the Director of Field Opera-tions, Cross Border Activities PracticeArea of Large Business & International(or any successor to the roles and respon-sibilities of such position, as appropriate)(Director) based on all the facts and cir-cumstances. The U.S. transferor must sub-mit a request for relief and an explanationas provided in paragraph (f)(2) of thissection. A U.S. transferor whose failure tocomply is determined not to be willfulunder this paragraph will be subject to apenalty under section 6038B if it fails tosatisfy the applicable reporting require-ments under that section and does notdemonstrate that the failure was due toreasonable cause and not willful neglect.See § 1.6038B–2(h). The determination ofwhether the failure to comply was willfulunder this section has no effect on anyrequest for relief made under § 1.6038B–2(h).

(2) Procedures for establishing that afailure to comply was not willful—(i)Time and manner of submission. A U.S.transferor’s statement that a failure tocomply was not willful will be consideredonly if, promptly after the U.S. transferorbecomes aware of the failure, an amendedreturn is filed for the taxable year to whichthe failure relates that includes the infor-mation that should have been includedwith the original return for such taxableyear or that otherwise complies with therules of this section as well as a writtenstatement explaining the reasons for thefailure to comply. The U.S. transferor alsomust file, with the amended return, a Form8865, Schedule O, and a statement (asdescribed in paragraph (b)(5) of this sec-tion), completed and executed as pre-scribed in forms and instructions, consent-ing to extend the period of limitations on

assessment of tax with respect to the gainrealized but not recognized on the gaindeferral contribution to the later of theclose of the eighth full taxable year fol-lowing the taxable year during which thecontribution occurred (date one), or theclose of the third full taxable year endingafter the date on which the required infor-mation is provided to the Director (datetwo). However, the U.S. transferor is notrequired to file a Form 8865, Schedule O,with the amended return if both date oneis later than date two and a consent toextend the period of limitations on assess-ment of tax with respect to the gain real-ized but not recognized on the gain defer-ral contribution for the U.S. transferor’staxable year that includes the date of thecontribution was previously submittedwith a Form 8865, Schedule O. Theamended return and either a Form 8865,Schedule O, or a copy of the previouslyfiled Form 8865, Schedule O, as the casemay be, must be filed with the InternalRevenue Service at the location where theU.S. transferor filed its original return.The U.S. transferor may submit a requestfor relief from the penalty under section6038B as part of the same submission. See§ 1.6038B–2T(h)(3).

(ii) Notice requirement. In addition tothe requirements of paragraph (f)(2)(i) ofthis section, the U.S. transferor must com-ply with the notice requirements of thisparagraph (f)(2)(ii). If any taxable year ofthe U.S. transferor is under examinationwhen the amended return is filed, a copyof the amended return must be deliveredto the Internal Revenue Service personnelconducting the examination. If no taxableyear of the U.S. transferor is under exam-ination when the amended return is filed, acopy of the amended return must be de-livered to the Director.

(g) Applicability dates—(1) In general.Except as provided in paragraphs (g)(2)and (3) of this section, this section applieswith respect to contributions occurring onor after January 18, 2017, and with re-spect to contributions occurring beforeJanuary 18, 2017, resulting from an en-tity classification election made under§ 301.7701–3 of this chapter that is filedon or after January 18, 2017.

(2) Reporting relating to effectivelyconnected income. Paragraphs (b)(2)(iii),(b)(3)(vii), and (d)(1) of this section apply


to a contribution occurring on or afterAugust 6, 2015, and to a contribution oc-curring before August 6, 2015, resultingfrom an entity classification election madeunder § 301.7701–3 of this chapter that isfiled on or after August 6, 2015, and, ineither case, provided § 1.721(c)–3T(b)(1)(ii)applies to the contribution. To the extentthat a previously filed return did not com-ply with paragraph (b)(2)(iii), (b)(3)(vii),or (d)(1) of this section, an amended re-turn complying with such paragraphsmust be filed no later than six months afterJanuary 18, 2017.

(3) Transition rules. For transfers oc-curring on or after August 6, 2015, and fortransfers occurring before August 6, 2015,resulting from an entity classificationelection made under § 301.7701–3 of thischapter that is filed on or after August 6, aU.S. transferor (or a domestic partnershipin which a U.S. transferor is a direct orindirect partner) must fulfill any reportingrequirements imposed under sections6038, 6038B, and 6046A and the regula-tions thereunder with respect to the con-tribution of the section 721(c) property tothe section 721(c) partnership.

(h) Expiration date. The applicabilityof this section expires on January 17,2020.


§ 1.721(c)–7T Examples (temporary).

(a) Presumed facts. For purposes of theexamples in paragraph (b) of this section,assume that there are no other transactionsthat are related to the transactions de-scribed in the examples and that all part-nership allocations have substantial eco-nomic effect under section 704(b). Fordefinitions that apply for purposes of thissection, see § 1.721(c)–1T(b). Exceptwhere otherwise indicated, the followingfacts are presumed—

(1) USP and USX are domestic corpo-rations that each use a calendar tax-able year. USX is not a related per-son with respect to USP.

(2) CFC1, CFC2, FX, and FY are for-eign corporations.

(3) USP wholly owns CFC1 and CFC2.Neither FX nor FY is a related per-son with respect to USP or withrespect to each other.

(4) PRS1, PRS2, and PRS3 are foreignentities classified as partnerships forU.S. tax purposes. A partnership in-terest in PRS1, PRS2, and PRS3 isnot described in section 475(c)(2).

(5) A taxable year is referred to, forexample, as year 1.

(6) A partner in a partnership has thesame percentage interest in income,gain, loss, deduction, and capital ofthe partnership.

(7) No property is described in section197(f)(9) in the hands of a contrib-uting partner.

(8) No partnership is a controlled part-nership solely under the facts andcircumstances test in § 1.721(c)–1T(b)(4).

(b) Examples. The application of therules stated in §§ 1.721(c)–1T through1.721(c)–6T may be illustrated by the fol-lowing examples:

Example 1. Determining if a partnership is asection 721(c) partnership. (i) Facts. In year 1, USPand CFC1 form PRS1 as equal partners. CFC1 con-tributes cash of $1.5 million to PRS1, and USPcontributes three properties to PRS1: a patent with abook value of $1.2 million and an adjusted tax basisof zero, a security (within the meaning of section475(c)(2)) with a book value of $100,000 and anadjusted tax basis of $20,000, and a machine with abook value of $200,000 and an adjusted tax basis of$600,000.

(ii) Results. (A) Under § 1.721(c)–1T(b)(18)(i),USP is a U.S. transferor because USP is a U.S.person and not a domestic partnership. Under§ 1.721(c)–1T(b)(2), the patent has built-in gain of$1.2 million. The patent is not excluded property under§ 1.721(c)–1T(b)(6). Therefore, under § 1.721(c)–1T(b)(15)(i), the patent is section 721(c) property be-cause it is property, other than excluded property, withbuilt-in gain that is contributed by a U.S. transferor,USP.

(B) Under § 1.721(c)–1T(b)(2), the security hasbuilt-in gain of $80,000. Under § 1.721(c)–1T(b)(6)(ii), the security is excluded property be-cause it is described in section 475(c)(2). Therefore,the security is not section 721(c) property.

(C) The tax basis of the machine exceeds itsbook value. Under § 1.721(c)–1T(b)(6)(iii), the ma-chine is excluded property and therefore is not sec-tion 721(c) property.

(D) Under § 1.721(c)–1T(b)(12), CFC1 is a re-lated person with respect to USP, and under§ 1.721(c)–1T(b)(11), CFC1 is a related foreign per-son. Because USP and CFC1 collectively own atleast 80 percent of the interests in the capital, profits,deductions, or losses of PRS1, under § 1.721(c)–1T(b)(14)(i), PRS1 is a section 721(c) partnershipupon the contribution by USP of the patent.

(E) The de minimis exception described in§ 1.721(c)–2T(c) does not apply to the contributionbecause during PRS1’s year 1 the sum of the built-ingain with respect to all section 721(c) property con-

tributed in year 1 to PRS1 is $1.2 million, whichexceeds the de minimis threshold of $1 million. As aresult, under § 1.721(c)–2T(b), section 721(a) doesnot apply to USP’s contribution of the patent toPRS1, unless the requirements of the gain deferralmethod are satisfied.

Example 2. Determining if partnership interest issection 721(c) property. (i) Facts. In year 1, USP andFX form PRS2. USP contributes a security (withinthe meaning of section 475(c)(2)) with a book valueof $100,000 and an adjusted tax basis of $20,000 anda building located in country X with a book value of$30,000 and an adjusted tax basis of $8,000 in ex-change for a 40-percent interest. FX contributes amachine with a book value of $195,000 and anadjusted tax basis of $250,000 in exchange for a60-percent interest.

(ii) Results. PRS2 is not a section 721(c) part-nership because FX is not a related person withrespect to USP, USP’s contributions to PRS2 are notsubject to § 1.721(c)–2T(b).

(iii) Alternative facts and results. (A) Assume thesame facts as in paragraph (i) of this Example 2. Inaddition, USP and CFC1 form PRS1 as equal part-ners. CFC1 contributes cash of $130,000 to PRS1,and USP contributes its 40-percent interest in PRS2.

(B) PRS2’s property consists of a security and amachine that are excluded property, and a buildingwith built-in gain in excess of $20,000. Under§ 1.721(c)–1T(b)(6)(iv), because more than 90 per-cent of the value of the property of PRS2 consists ofexcluded property described in § 1.721(c)–1T(b)(6)(i) through (iii) (the security and the ma-chine), any interest in PRS2 is excluded property.Therefore, the 40-percent interest in PRS2 contrib-uted by USP to PRS1 is not section 721(c) property.Accordingly, USP’s contribution of its interest inPRS2 to PRS1 is not subject to § 1.721(c)–2T(b).

Example 3. Assets-over tiered partnerships. (i)Facts. In year 1, USP and CFC1 form PRS1 as equalpartners. USP contributes a patent with a book valueof $300 million and an adjusted tax basis of $30million (USP contribution). CFC1 contributes cashof $300 million. Immediately thereafter, PRS1 con-tributes the patent to PRS2 in exchange for a two-thirds interest (PRS1 contribution), and CFC2 con-tributes cash of $150 million in exchange for aone-third interest. The patent has a remaining recov-ery period of 5 years out of a total of 15 years. Withrespect to all contributions described in § 1.721(c)–2T(b), the de minimis exception does not apply, andthe gain deferral method is applied. Thus, the part-nership agreements of PRS1 and PRS2 provide thatthe partnership will make allocations under section704(c) using the remedial allocation method under§ 1.704–3(d).

(ii) Results: USP contribution. PRS1 is a section721(c) partnership as a result of the USP contribution.

(iii) Results: PRS1 contribution. (A) For pur-poses of determining whether PRS2 is a section721(c) partnership as a result of the PRS1 contribu-tion, under § 1.721(c)–2T(d)(1), USP is treated ascontributing to PRS2 its share of the patent thatPRS1 actually contributes to PRS2. USP and CFC1are each one-third indirect partners in PRS2. Takinginto account the one-third interest in PRS2 directlyowned by CFC2, USP, CFC1, and CFC2 collectivelyown at least 80 percent of the interests in PRS2.


Thus, PRS2 is a section 721(c) partnership as a resultof the PRS1 contribution.

(B) Under § 1.721(c)–2T(b), section 721(a) doesnot apply to PRS1’s contribution of the patent toPRS2, unless the requirements of the gain deferralmethod are satisfied. Under § 1.721(c)–3T(b), thegain deferral method must be applied with respect tothe patent. In addition, under § 1.721(c)–3T(d)(2),because PRS1 is a controlled partnership with re-spect to USP, the gain deferral method must beapplied with respect to PRS1’s interest in PRS2, and,solely for purposes of applying the consistent allo-cation method, PRS2 must treat PRS1 as the U.S.transferor. As stated in paragraph (i) of this Example3, the gain deferral method is applied. PRS2 is acontrolled partnership with respect to USP. Under§ 1.721(c)–5T(c)(5)(i), the PRS1 contribution is asuccessor event with respect to the USP contribution.

(iv) Results: application of remedial allocationmethod. (A) Under § 1.704–3(d)(2), in year 1, PRS2has $24 million of book amortization with respect tothe patent ($6 million ($30 million of book valueequal to adjusted tax basis divided by the 5-yearremaining recovery period) plus $18 million ($270million excess of book value over tax basis dividedby the new 15-year recovery period)). PRS2 has $6million of tax amortization. Under the PRS2 partner-ship agreement, PRS2 allocates $8 million of bookamortization to CFC2 and $16 million of book amor-tization to PRS1. Because of the application of theceiling rule, PRS2 allocates $6 million of tax amor-tization to CFC2 and $0 of tax amortization to PRS1.Because the ceiling rule would cause a disparity of$2 million between CFC2’s book and tax amortiza-tion, PRS2 must make a remedial allocation of $2million of tax amortization to CFC2 and an offset-ting remedial allocation of $2 million of taxableincome to PRS1.

(B) PRS1’s distributive share of each of PRS2’sitems with respect to the patent is $16 million ofbook amortization, $0 of tax amortization, and $2million of taxable income from the remedial alloca-tion from PRS1. Under § 1.704–3(a)(9), PRS1 mustallocate its distributive share of each of PRS2’sitems with respect to the patent in a manner thattakes into account USP’s remaining built-in gainin the patent. Therefore, PRS1 allocates $2 millionof taxable income to USP. Under § 1.704–3T(a)(13)(ii), PRS1 treats its distributive share ofeach of PRS2’s items of amortization with respect toPRS2’s patent as items of amortization with respectto PRS1’s interest in PRS2. Under the PRS1 part-nership agreement, PRS1 allocates $8 million ofbook amortization and $0 of tax amortization toCFC1, and $8 million of book amortization and $0 oftax amortization to USP. Because the ceiling rulewould cause a disparity of $8 million betweenCFC1’s book and tax amortization, PRS1 must makea remedial allocation of $8 million of tax amortiza-tion to CFC1. PRS1 must also make an offsettingremedial allocation of $8 million of taxable incometo USP. USP reports $10 million of taxable income($2 million of remedial income from PRS2 and $8million of remedial income from PRS1).

Example 4. Section 721(c) partnership ceases tohave a related foreign person as a partner. (i) Facts.In year 1, USP and CFC1 form PRS1. USP contrib-utes a trademark with a built-in gain of $5 million in

exchange for a 60-percent interest, and CFC1 con-tributes other property in exchange for the remaining40-percent interest. With respect to all contributionsdescribed in § 1.721(c)–2T(b), the de minimis ex-ception does not apply, and the gain deferral methodis applied. On day 1 of year 4, CFC1 sells its entireinterest in PRS1 to FX. There is no plan for a relatedforeign person with respect to USP to subsequentlybecome a partner in PRS1 (or a successor).

(ii) Results. (A) PRS1 is a section 721(c) part-nership.

(B) With respect to year 4, under § 1.721(c)–5T(b)(5), the sale is a termination event because, asa result of CFC1’s sale of its interest, PRS1 will nolonger have a partner that is a related foreign person,and there is no plan for a related foreign person tosubsequently become a partner in PRS1 (or a suc-cessor). Thus, under § 1.721(c)–5T(b)(1), the trade-mark is no longer subject to the gain deferralmethod.

Example 5. Transfer described in section 367 ofsection 721(c) property to a foreign corporation. (i)Facts. In year 1, USP, CFC1, and USX form PRS1.USP contributes a patent with a built-in gain of $5million in exchange for a 60-percent interest, CFC1contributes other property in exchange for a 30-percent interest, and USX contributes cash in ex-change for a 10-percent interest. With respect to allcontributions described in § 1.721(c)–2T(b), the deminimis exception does not apply, and the gain de-ferral method is applied. In year 3, when the patenthas remaining built-in gain, PRS1 transfers the pat-ent to FX in a transaction described in section 351.

(ii) Results. (A) PRS1 is a section 721(c) part-nership.

(B) With respect to year 3, the transfer of thepatent to FX is a transaction described in section367(d). Therefore, under § 1.721(c)–5T(e), the pat-ent is no longer subject to the gain deferral method.Under §§ 1.367(d)–1T(d)(1) and 1.367(a)–1T(c)(3)(i), for purposes of section 367(d), USP andUSX are treated as transferring their proportionateshare of the patent actually transferred by PRS1 toFX. Under § 1.721(c)–5T(e), to the extent USP andUSX are treated as transferring the patent to FX, thetax consequences are determined under section367(d) and the regulations thereunder. With respectto the remaining portion of the patent, which isattributable to CFC1, USP must recognize an amountof gain equal to the remaining built-in gain thatwould have been allocated to USP if PRS1 had soldthat portion of the patent immediately before thetransfer for fair market value. Under § 1.721(c)–4T(c)(1), USP must increase the basis in its partner-ship interest in PRS1 by the amount of gain recog-nized by USP and under § 1.721(c)–4T(c)(2),immediately before the transfer, PRS1 must increaseits basis in the patent by the same amount. The stockin FX received by PRS1 is not subject to the gaindeferral method.

Example 6. Limited remedial allocation methodfor anti-churning property with respect to relatedpartners. (i) Facts. USP, CFC1, and FX form PRS1.On January 1 of year 1, USP contributes intellectualproperty (IP) with a book value of $600 million andan adjusted tax basis of $0 in exchange for a 60-percent interest. The IP is a section 197(f)(9) intan-gible (within the meaning of § 1.197–2(h)(1)(i)) that

was not an amortizable section 197 intangible inUSP’s hands. CFC1 contributes cash of $300 millionin exchange for a 30-percent interest, and FX con-tributes cash of $100 million in exchange for a10-percent interest. The IP is section 721(c) prop-erty, and PRS1 is a section 721(c) partnership. Thegain deferral method is applied. The partnershipagreement provides that PRS1 will make allocationsunder section 704(c) with respect to the IP using theremedial allocation method under § 1.704–3T(d)(5)(iii). All of PRS1’s allocations with respectto the IP satisfy the requirements of the gain deferralmethod. On January 1 of year 16, PRS1 sells the IPfor cash of $900 million to a person that is not arelated person. During years 1 through 16, PRS1earns no income other than gain from the sale of theIP in year 16, has no expenses or deductions otherthan from amortization of the IP, and makes nodistributions.

(ii) Results: year 1. Under § 1.704–3T(d)(5)(iii)(B), PRS1 must recover the excess of the bookvalue of the IP over its adjusted tax basis at the timeof the contribution ($600 million) using any recov-ery period and amortization method that would havebeen available to PRS1 if the property had beennewly purchased property from an unrelated party.Thus, under section 197(a), PRS1 must amortize$600 million of the IP’s book value ratably over 15years for book purposes, and PRS1 will have $40million of book amortization per year without anytax amortization. Under the partnership agreement,in year 1, PRS1 allocates book amortization of $24million to USP, $12 million to CFC1, and $4 millionto FX. Because in year 1 the ceiling rule would causea disparity between FX’s allocations of book and taxamortization, PRS1 makes a remedial allocation oftax amortization of $4 million to FX and an offset-ting remedial allocation of $4 million of taxableincome to USP. In year 1, the ceiling rule would alsocause a disparity between CFC1’s allocations ofbook and tax amortization. However, § 1.197–2(h)(12)(vii)(B) precludes PRS1 from making a re-medial allocation of tax amortization to CFC1. In-stead, pursuant to § 1.704–3T(d)(5)(iii)(C), PRS1increases the adjusted tax basis in the IP by $12million, and pursuant to § 1.704–3T(d)(5)(iii)(D),that basis adjustment is solely with respect to CFC1.Pursuant to § 1.704–3T(d)(5)(iii)(C), PRS1 alsomakes an offsetting remedial allocation of $12 mil-lion of taxable income to USP.

(iii) Results: years 2–15. At the end of year 15,PRS1 has book basis and adjusted tax basis of $0 inthe IP. PRS1 has amortized $600 million for bookpurposes by allocating total book amortization de-ductions of $360 million to USP, $180 million toCFC1, and $60 million to FX. For U.S. tax purposes,by the end of year 15, PRS1 has made remedialallocations of $60 million of tax amortization to FXand increased the adjusted tax basis in the IP by $180million solely with respect to CFC1. PRS1 has alsomade total remedial allocations of $240 million oftaxable income to USP (attributable to $60 million ofremedial tax amortization to FX and $180 millionof tax basis adjustments with respect to CFC1). Withrespect to their partnership interests in PRS1, USPhas a capital account and an adjusted tax basis of$240 million, CFC1 has a capital account of $120million and an adjusted tax basis of $300 million,


and FX has a capital account and an adjusted taxbasis of $40 million.

(iv) Results: sale of property in year 16. PRS1’ssale of the IP for cash of $900 million on January 1of year 16 results in $900 million of book and taxgain ($900 million – $0). PRS1 allocates the bookand tax gain 60 percent to USP ($540 million), 10percent to FX ($90 million), and 30 percent to CFC1($270 million). However, under § 1.704–3T(d)(5)(iii)(D)(3), CFC1’s tax gain is $90 million,equal to its share of PRS1’s gain ($270 million),minus the amount of the tax basis adjustment ($180million). After the sale, PRS1’s only property is cashof $1.3 billion. With respect to their partnershipinterests in PRS1, USP has a capital account and anadjusted tax basis of $780 million, CFC1 has acapital account and an adjusted tax basis of $390million, and FX has a capital account and an adjustedtax basis of $130 million.

Par. 15. Section 1.6038B–2 is amendedby:

1. Revising paragraphs (a)(1)(i) and(ii), (a)(3), (c)(6) and (c)(7)(v).

2. Adding paragraphs (a)(1)(iii) and(c)(8) and (9).

3. Revising paragraphs (h)(1) introduc-tory text and (h)(3).

4. Adding paragraphs (j)(4) and (5).The revisions and additions read as

follows.

§ 1.6038B–2 Reporting of certaintransfers to foreign partnerships.

(a) * * *(1) * * *(i) Immediately after the transfer, the

United States person owns, directly, indi-rectly, or by attribution, at least a 10-percent interest in the partnership, as de-fined in section 6038(e)(3)(C) and theregulations thereunder;

(ii) The value of the property trans-ferred, when added to the value of anyother property transferred in a section 721contribution by such person (or any re-lated person) to the partnership during the12-month period ending on the date of thetransfer, exceeds $100,000; or

(iii) [Reserved]. For further guidance,see § 1.6038B–2T(a)(1)(iii).* * * * *

(3) [Reserved]. For further guidancesee § 1.6038B–2T(a)(3).* * * * *

(c) * * *(6) A separate description of each item

of contributed property that is appreciatedproperty subject to the allocation rules ofsection 704(c) (except to the extent that

the property is permitted to be aggregatedin making allocations under section704(c)), or is intangible property, includ-ing its estimated fair market value andadjusted basis;

(7) * * *(v) Other property;(8) [Reserved]. For further guidance,

see § 1.6038B–2T(c)(8); and(9) [Reserved]. For further guidance,

see § 1.6038B–2T(c)(9).* * * * *

(h) * * *(1) Consequences of a failure. If a

United States person is required to file areturn under paragraph (a) of this sectionand fails to comply with the reportingrequirements of section 6038B and thissection, or § 1.721(c)–6T, then that per-son is subject to the following penalties:* * * * *

(3) [Reserved]. For further guidancesee § 1.6038B–2T(h)(3).* * * * *

(j) * * *(4) through (5) [Reserved]. For further

guidance, see § 1.6038B–2T(j)(4) through(5).

Par. 16. Section 1.6038B–2T is addedto read as follows:

§ 1.6038B–2T Reporting of certaintransfers to foreign partnerships(temporary).

(a) introductory text through (a)(1)(ii)[Reserved]. For further guidance, see§ 1.6038B–2(a) introductory text through(a)(1)(ii).

(iii) The United States person is a U.S.transferor (as defined in § 1.721(c)–1T(b)(18)) that makes a gain deferral con-tribution and is required to report under§ 1.721(c)–6T(b)(2). The reporting requiredunder this paragraph (a) includes the annualreporting required by § 1.721(c)–6T(b)(3).For purposes of applying this paragraph(a)(1)(iii) to partnerships formed on or afterJanuary 18, 2017, a domestic partnership istreated as a foreign partnership pursuant tosection 7701(a)(4).

(a)(2) [Reserved]. For further guid-ance, see § 1.6038B–2(a)(2).

(3) Indirect transfer through a foreignpartnership. Solely for purposes of thissection, if a foreign partnership transferssection 721(c) property (as defined in

§ 1.721(c)–1T(b)(15)) to another foreignpartnership in a transfer described in§ 1.721(c)–3T(d) (tiered-partnership rules),then the transferor foreign partnership’spartners will be considered to have trans-ferred a proportionate share of the propertyto the foreign partnership.

(a)(4) through (c)(7) [Reserved]. Forfurther guidance, see § 1.6038B–2(a)(4)through (c)(7).

(8) With respect to reporting requiredunder § 1.721(c)–6T(b)(2) and paragraph(a)(1)(iii) of this section with regard to again deferral contribution, the informationrequired by § 1.721(c)–6T(b)(2); and

(9) With respect to section 721(c)property for which a statement is requiredto be filed under § 1.721(c)–6T(b)(3) andparagraph (a)(1)(iii) of this section, theinformation required by § 1.721(c)–6T(b)(3).

(d) through (h)(2) [Reserved]. For fur-ther guidance, see § 1.6038B–2(d) through(h)(2).

(3) Reasonable cause exception. Undersection 6038B(c)(2) and this section, theprovisions of paragraph (h)(1) of this sec-tion will not apply if the United Statesperson shows, in a timely manner, that afailure to comply was due to reasonablecause and not willful neglect. A UnitedStates person’s statement that the failureto comply was due to reasonable causeand not willful neglect will be consideredtimely only if, promptly after the UnitedStates person becomes aware of the failure,an amended return is filed for the taxableyear to which the failure relates that includesthe information that should have been in-cluded with the original return for such tax-able year or that otherwise complies withthe rules of this section, and that includes awritten statement explaining the reasons forthe failure to comply. If any taxable year ofthe United States person is under examina-tion when the amended return is filed, acopy of the amended return must be deliv-ered to the Internal Revenue Service person-nel conducting the examination when theamended return is filed. If no taxable year ofthe United States person is under examina-tion when the amended return is filed, acopy of the amended return must be deliv-ered to the Director of Field Operations,Cross Border Activities Practice Area ofLarge Business & International (or any suc-cessor to the roles and responsibilities of


such position, as appropriate) (Director).Whether a failure to comply was due toreasonable cause and not willful neglect willbe determined by the Director under all thefacts and circumstances.

(i) through (j)(3) [Reserved]. For fur-ther guidance, see § 1.6038B–2(i) through(j)(3).

(4) Transfers of section 721(c) proper-ty—(i) Applicability dates. Paragraph(c)(8) of this section applies to transfersoccurring on or after August 6, 2015, andto transfers occurring before August 6,2015, resulting from an entity classifica-tion election made under § 301.7701–3 ofthis chapter that is filed on or after August6, 2015. Paragraphs (a)(1)(iii), (a)(3), and(c)(9) of this section apply to transfers

occurring on or after January 18, 2017,and to transfers occurring before January18, 2017, resulting from entity classifica-tion elections made under § 301.7701–3of this chapter that are filed on or afterJanuary 18, 2017.

(ii) Expiration date. The applicabilityof paragraphs (a)(1)(iii), (a)(3), and (c)(8)and (9) of this section expires on January17, 2020.

(5) Reasonable cause exception—(i)Applicability date. Paragraph (h)(3) of thissection applies to all requests for relief fortransfers of property to partnerships filedon or after February 21, 2017.

(ii) Expiration date. The applicabilityof paragraph (h)(3) of this section expireson January 17, 2020.

John Dalrymple,Deputy Commissioner for Services and

Enforcement.Approved: January 10, 2017.

Mark J. Mazur,Assistant Secretary of the Treasury

(Tax Policy).



Part III. Administrative, Procedural, and MiscellaneousExtension of the Due Datefor a Section 35 HealthCoverage Tax CreditElectionNotice 2017–16

SECTION 1. PURPOSE

This notice provides guidance regard-ing the health coverage tax credit (HCTC)under § 35 of the Internal Revenue Code,as modified by the Trade Preferences Ex-tension Act of 2015, Pub. L. 114–27(June 29, 2015) (Act). Specifically, thisnotice extends the due date for the elec-tion to claim the HCTC for eligible cov-erage months in taxable years beginningon or after June 29, 2015, and beforeJanuary 1, 2017.

SECTION 2. BACKGROUND

Section 35 provides for the HCTC,which is a tax credit equal to 72.5 percentof the amount paid by an eligible individ-ual for qualified health coverage of theindividual and qualifying family membersfor eligible coverage months. Section 35was originally enacted by the Trade Act of2002, Pub. L. 107–210 (Aug. 6, 2002), butexpired at the end of 2013. The Trade Actof 2002 also enacted § 7527, which pro-vides for the establishment of a programfor making advance payment of theHCTC. In 2015, § 35 was reinstated ret-roactively to 2014, modified, and ex-tended through 2019 by the Act, and§ 7527 was revised by the Act.1

As part of the reinstatement of § 35, theAct added a new § 35(g)(11). Section35(g)(11)(A) provides that, for eligiblecoverage months in taxable years begin-ning after December 31, 2013, a taxpayermust make an election to claim the HCTC.Under § 35(g)(11)(B), “except as the Sec-retary may provide,” an HCTC electionfor any eligible coverage month in a tax-able year must be made not later than thedue date (including extensions) of the in-dividual’s Federal income tax return forthe taxable year. However, the Act pro-

vided a transition rule under which, foreligible coverage months in taxable yearsbeginning after December 31, 2013, andbefore the date of enactment of the Act(June 29, 2015), the HCTC election maybe made at any time on or after June 29,2015, and before the expiration of the3-year period of limitation prescribed in§ 6511(a) for the taxable year, and may bemade on an amended return. See Act§ 407(f)(3). Eligible taxpayers elect toclaim the HCTC by completing line 1 ofForm 8885, Health Coverage Tax Credit,and filing the form with their Federal in-come tax return. See Notice 2016–2 andInstructions for Form 8885.

Prior to its reinstatement, § 35 did notspecifically require that taxpayers claimthe HCTC by making an election on theirFederal income tax return. Taxpayersclaimed the HCTC on their Federal in-come tax return (using Form 8885) only ifthey were eligible to claim the HCTC inexcess of the advance payments made onthe taxpayer’s behalf under § 7527. Mosteligible individuals received the benefit ofthe HCTC through the advance paymentprocess described in § 7527 and, there-fore, did not claim the HCTC on theirFederal income tax returns.

SECTION 3. GUIDANCE

The Treasury Department and the In-ternal Revenue Service have determinedthat, pursuant to the authority granted by§ 35(g)(11)(B), it is appropriate to extendthe transition rule provided in the Act withrespect to the deadline for electing toclaim the HCTC through 2016. Accord-ingly, an election to claim the HCTC foran eligible coverage month in a taxableyear beginning on or after June 29, 2015,and before January 1, 2017, may be madebefore the end of the 3-year period oflimitation prescribed in § 6511(a), andmay be made on an amended return. Thisperiod of limitation is generally threeyears from the due date of the return (in-cluding extensions). Thus, for example, acalendar year taxpayer who files his or her2016 Federal income tax return by April

18, 2017, without electing the HCTC mustfile a return with a Form 8885 by April 15,2020, to elect the HCTC for coverageprovided in 2016.

SECTION 4. DRAFTINGINFORMATION

The principal author of this notice isJames Beatty of the Office of the Associ-ate Chief Counsel (Income Tax and Ac-counting). For further information regard-ing this notice, contact Mr. Beatty at (202)317-4613 (not a toll-free number). Forfurther information about the HCTC, go tohttps://www.irs.gov/hctc.

Rev. Proc. 2017–19

SECTION 1. PURPOSE

This revenue procedure provides a safeharbor under which the Internal RevenueService (Service) will not challenge thetreatment of an Energy Savings Perfor-mance Contract (ESPC) Energy SalesAgreement (ESA) between an EnergyService Company (ESCO) and a FederalAgency (FA) as a service contract under§ 7701(e)(3) of the Internal Revenue Code(Code). The revenue procedure also pro-vides an example of an ESPC ESA.


.01. 42 U.S.C § 8287 authorizes FAs toenter into ESPC ESAs with ESCOs for thepurpose of achieving energy savings andbenefits ancillary to energy savings. It alsosets forth certain requirements for suchESPC ESAs. The ESPC ESA projectstructure is intended to facilitate onsiterenewable energy generation projects..02. The Office of Management and Bud-get (OMB) issued OMB MemorandumM–12–21 to provide further guidance toFAs regarding ESPCs that include third-party owned and operated onsite renew-able energy generation assets and howthey will be treated for Federal budgetingpurposes. Specifically, OMB Memoran-dum M–12–21 requires title to the renew-

1For more information about the reinstated HCTC, see Notice 2016–2, 2016–2 I.R.B. 265. Notice 2016–2 provides guidance on various issues relating to the HCTC, including informationabout eligibility for the HCTC, the types of coverage eligible for the HCTC, and guidance for those who claim the HCTC for a qualified health plan purchased through a Health InsuranceMarketplace (also known as an Exchange) in 2014 and 2015.


able energy generation asset to transfer tothe FA at the end of the ESPC term..03. The ESPC ESA is a type of ESPC thatfacilitates third-party owned and operatedonsite energy generation projects in com-pliance with ESPC authority and OMBMemorandum M–12–21. An ESPC ESAmay also include the implementation ofother energy and water conservation mea-sures as part of a comprehensive project..04. The example in Section 5 of thisrevenue procedure illustrates a typicalESPC ESA that would satisfy the require-ments of 42 U.S.C § 8287 and OMBMemorandum M–12–21..05. Section 48(a) provides for an invest-ment tax credit for certain energy prop-erty, including solar energy property de-scribed in § 48(a)(3)(A)(i)..06. Section 50(b)(4)(A)(i) disallows theinvestment tax credit if the property isused by the United States, any State orpolitical subdivision thereof, any posses-sion of the United States, or any agency orinstrumentality of any of the foregoing.This disallowance applies to propertyused under a lease unless the term of suchlease is less than 6 months..07. Section 7701(e) provides rules to de-termine, for federal income tax purposes,whether a contract that purports to be aservice contract should be treated as alease of property. Section 7701(e)(1) gen-erally provides that a service contract willbe treated as a lease of property if it isproperly treated as a lease of property,taking into account all relevant factorsincluding whether or not:

the service recipient is in physical pos-session of the property;

the service recipient controls theproperty;

the service recipient has a significanteconomic or possessory interest in theproperty;

the service provider does not bear anyrisk of substantially diminished receiptsor substantially increased expendituresif there is nonperformance under thecontract;

the service provider does not use theproperty concurrently to provide signif-icant services to entities unrelated to theservice recipient; and

the total contract price does not substan-tially exceed the rental value of theproperty for the contract period.

.08. Notwithstanding the general rule of§ 7701(e)(1), § 7701(e)(3) provides specialrules for contracts or arrangements involv-ing solid waste disposal, a cogeneration oralternative energy facility, and clean waterfacilities. Section 7701(e)(3)(D) providesthat an “alternative energy facility” meansa facility producing electrical or thermalenergy if the primary energy source forthe facility is not oil, natural gas, coal ornuclear power. Section 7701(e)(3)(A) pro-vides that a purported service contractwith respect to this type of facility will betreated as a service contract..09. Section 7701(e)(4) provides that thespecial rule in § 7701(e)(3) will not apply,and thus the general rule in § 7701(e)(1)will apply, to any contract with respect tothe facilities described in § 7701(e)(3) if:

the service recipient (or a related entity)operates the facility;

the service recipient (or a related entity)bears any significant financial burden ifthere is nonperformance under the con-tract, unless this burden is due to (i) rea-sons beyond the control of the serviceprovider, (ii) a temporary shut-down forrepairs, maintenance, or capital improve-ments, or (iii) the bankruptcy or otherfinancial difficulty of the service provider;

the service recipient (or a related entity)receives any significant financial benefitif the operating costs of such facility areless than the standards of performanceor operation under the contract, unlessthe benefit arises from reduced pay-ments by the service recipient becauseof increased production or efficiency orthe recovery of energy or other prod-ucts; and

the service recipient (or a related entity)has an option or obligation to purchaseall or part of the facility at a fixed anddeterminable price, other than for thefair market value of the facility.

SECTION 3. SCOPE

.01. The safe harbor in section 4 of thisrevenue procedure applies to any ESPCESA between an ESCO and a FA for theprovision of electricity through an alter-native energy facility, as defined in

§ 7701(e)(3)(D), that satisfies the require-ments of 42 U.S.C § 8287 and OMBMemorandum M–12–21. It may not berelied upon, in whole or part, for any otherkind of transaction..02. The safe harbor provided in section 4of this revenue procedure applies only ifall the requirements of section 4 are sat-isfied..03. The safe harbor provided in section 4of this revenue procedure provides guid-ance to ESCO taxpayers that are establish-ing or participating in an ESPC ESA witha FA in lieu of providing a letter ruling tothose ESCO taxpayers. Therefore, theService will not rule on whether an ESPCESA between an ESCO and FA will beconsidered a service contract under§ 7701(e)(3).

SECTION 4. SAFE HARBOR

.01 Safe harbor. If an ESPC ESA enteredinto between an ESCO and a FA satisfiesall of the requirements of section 4.02 ofthis revenue procedure, the Service willnot challenge the treatment of the ESPCESA as a service contract under § 7701(e)(3)..02 Requirements. The ESPC ESA mustsatisfy the following requirements:(1) Term. The total term of the ESPC ESAcannot exceed 20 years in length. Theterm must be consistent with and appro-priate for the scope and scale of the re-newable project.(2) Other Federal guidance. The ESPCESA must satisfy the requirements of 42U.S.C § 8287 and OMB MemorandumM–12–21.(3) Operation of Alternative Energy Fa-cility. Under no circumstances will the FAattempt to operate the renewable energygeneration asset. In the event of a shut-down or mechanical issue, FA will imme-diately notify the ESCO or its designatedcontractor.(4) Risk. The ESCO bears all financial riskfor non-performance, except to the extentsuch non-performance is attributable to atemporary shut-down of the facility forrepairs, maintenance, or capital improve-ments.(5) Reduced Costs. The contract price forelectricity will not be reduced if operatingcosts should diminish.(6) Equipment Purchase. The FA mayhave the option to purchase, or may be


required to purchase, the renewable en-ergy generation asset at the end of thecontract term, for its fair market value(FMV) at the time of the purchase.

SECTION 5. EXAMPLE

ESCO contracts with FA under an ESPCESA to install, maintain ownership of (untilthe end of the contract), and provide opera-tion and maintenance of a renewable energygeneration asset at a federal site. The FAwill purchase all of the electricity generatedonsite at a rate that is less than the FA’scurrent and forecasted electricity rate.

• The contract term is 20 years.• The contract price, including operation

and maintenance, is based on a fixedper-kWh basis and must be paid for bythe FA from the energy savings pro-vided under the project.X The ESCO bears all financial risk

for non-performance.X The contract price does not vary

if the operating costs are lowerthan expected.

• The FA will purchase the renewableenergy generation asset at FMV asappraised at the time of the sale bythe end of the contract term, consis-tent with OMB Memorandum 12–21.X The ESCO will transfer a por-

tion of the payments it receivesfrom the FA into a reserve ac-count held by the ESCO for theFA’s future purchase of the on-site renewable energy assets.The amount charged for eachpayment period will includeboth the price of power and anamount for the reserve account(separate and in addition to theprice of power).

X The ESCO’s deposit into the re-serve account will be based onthe estimated future FMV of theon-site renewable energy gener-ation assets. To ensure that thereserve account has sufficientfunds for the FMV purchase bythe FA at the end of the contractterm, there may be periodic re-appraisals of the onsite renew-able assets and contract modifi-cations (if and as necessary).Any excess reserve account

funds after the onsite renewableasset purchase may be used tooffset the final ESPC ESA pay-ments. Alternatively, in theevent of termination, funds inthe reserve account at that timemay be used to satisfy any ter-mination liability of the FA, andany excess amounts will be re-turned to the FA.

X The FMV will be determined atthe time of sale by a mutuallyagreed upon independent ap-praiser with expertise in the rel-evant onsite renewable energyasset industry. The valuationmade by the appraiser shall bebinding upon the parties in theabsence of fraud or error.

• The ESPC ESA includes a schedulefor each year which establishes themaximum termination liability ofthe FA in the event of terminationprior to the end of the contract term.

This ESPC ESA satisfies the requirementsof the safe harbor in section 4 of thisrevenue procedure and the Service will notchallenge the treatment of the ESPC ESA as aservice contract under § 7701(e)(3).

SECTION 6. EFFECTIVE DATE

This revenue procedure is effective fortransactions entered into on or after thedate of publication in the Internal Reve-nue Bulletin. If an ESPC ESA entered intobetween an ESCO and a FA prior to thisdate satisfies all of the requirements of thesafe harbor provided in section 4 of thisrevenue procedure, the Service will notchallenge the treatment of the ESPC ESAas a service contract under § 7701(e)(3).


The principal author of this revenueprocedure is Philip Tiegerman of the Of-fice of Associate Chief Counsel (Pass-throughs & Special Industries). For fur-ther information regarding this revenueprocedure contact Philip Tiegerman at(202) 317-6853.

Rev. Proc. 2017–23

SECTION 1. PURPOSE AND SCOPE

This revenue procedure describes theprocess for filing Form 8975, Country-by-Country Report, and accompanying Sched-ules A, Tax Jurisdiction and ConstituentEntity Information (collectively, Form8975), by ultimate parent entities of U.S.multinational enterprise (MNE) groupsfor reporting periods beginning on or afterJanuary 1, 2016, but before the applica-bility date of § 1.6038–4 (early reportingperiods).


.01 On June 30, 2016, the Departmentof the Treasury (Treasury Department)and the Internal Revenue Service (IRS)published in the Federal Register finalregulations (T.D. 9773) (CbC reportingregulations) that require certain U.S. busi-ness entities that are the ultimate parententity of a U.S. MNE group to file Form8975 annually with the IRS. See § 1.6038–4. Form 8975 requires the ultimate parententity of a U.S. MNE group to reportinformation, on a country-by-country ba-sis, related to the group’s income andtaxes paid, together with certain indicatorsof the location of the group’s economicactivity. The CbC reporting regulationsapply to reporting periods of ultimate par-ent entities of U.S. MNE groups that be-gin on or after the first day of the firsttaxable year of the ultimate parent entitythat begins on or after June 30, 2016.

.02 Some jurisdictions have adoptedcountry-by-country (CbC) reporting re-quirements for annual accounting periodsbeginning on or after January 1, 2016, thatwould require a constituent entity residentin the jurisdiction to report CbC informa-tion if the constituent entity is part of anMNE group with an ultimate parent entityresident in a jurisdiction that does nothave a CbC reporting requirement (in-cluding pursuant to parent surrogate fil-ing) for the same annual accounting pe-riod (local CbC filing). Consequently,constituent entities of a U.S. MNE groupmay be subject to local CbC filing forearly reporting periods, unless the ulti-mate parent entity files a Form 8975, orreports CbC information to another juris-diction that accepts surrogate filing, for


such early reporting period. The preambleto the CbC reporting regulations indicatedthat the Treasury Department and the IRSwould provide a procedure for ultimateparent entities of U.S. MNE groups to fileForm 8975 for early reporting periods.

SECTION 3. FILING PROCEDURE

.01 Beginning on September 1, 2017,Form 8975 may be filed for an early re-porting period with the income tax returnor other return as provided in the Instruc-tions to Form 8975 for the taxable year ofthe ultimate parent entity of the U.S. MNEgroup with or within which the early re-porting period ends. In order to file Form8975 for an early reporting period, anultimate parent entity that files (or hasfiled) an income tax return for a taxableyear that includes an early reporting pe-riod without a Form 8975 attached mustfollow the procedures for filing anamended income tax return and attachForm 8975 to the amended return withintwelve months of the close of the taxableyear that includes the early reporting pe-riod. Filing an amended income tax returnsolely to attach Form 8975 in accordancewith this revenue procedure will have noeffect on the statute of limitations for theincome tax return.

.02 In order to ensure timely automaticexchange of the information on a Form8975 for an early reporting period, ulti-mate parent entities that are able to filetheir returns electronically are encouragedto file their returns and the Forms 8975electronically. An ultimate parent entitythat files its return electronically must filethe Form 8975 through the IRS Modern-ized e-File system in Extensible MarkupLanguage (XML) format, not as a binaryattachment (such as a PDF file). The IRSintends to provide specific electronic fil-ing information on Form 8975 to the soft-ware industry in early 2017 so that devel-opers will be able to make Form 8975available in their software ahead of theSeptember 1, 2017, implementation date.For filers of Form 8975 that are not eligi-ble to use Modernized e-File to file theirincome tax return, a paper version ofForm 8975 will be made available in ad-vance of the September 1, 2017, imple-mentation date.

SECTION 4. APPLICABILITYDATE

This revenue procedure applies to re-porting periods of ultimate parent entitiesof U.S. MNE groups beginning on or afterJanuary 1, 2016, and before the applica-bility date of § 1.6038–4.


The principal author of this revenueprocedure is Melinda E. Harvey of theOffice of Associate Chief Counsel (Inter-national). For further information regard-ing this revenue procedure contact Me-linda E. Harvey at (202) 317-6934 (not atoll free number).

26 CFR. 1.61–12; Income from discharge of indebt-edness.(Also Part III, §§ 61; 1.6050P–1.)

Rev. Proc. 2017–24

SECTION 1. PURPOSE

This revenue procedure extends the re-lief provided under Rev. Proc. 2015–57,2015–51 I.R.B. 863, to taxpayers whotook out Federal student loans to financeattendance at a school owned by Ameri-can Career Institutes, Inc. (ACI) andwhose Federal student loans are dis-charged under the Department of Educa-tion’s “Defense to Repayment” or“Closed School” discharge process.

This revenue procedure provides thatthe Internal Revenue Service (IRS) willnot assert that these taxpayers must rec-ognize gross income as a result of theDefense to Repayment discharge processor increase gross income by the amount ofcertain tax credits or deductions related toloans discharged under either process andwill not assert that the creditor must fileinformation returns and furnish payeestatements as a result of discharging theseloans. This revenue procedure also modi-fies Rev. Proc. 2015–57 to provide thatthe IRS will not assert that creditors underthat revenue procedure must file informa-tion returns and furnish payee statementsas a result of discharges under that reve-nue procedure.


.01 In general.

Revenue Procedure 2015–57 addressestaxpayers who took out Federal studentloans to finance attendance at a schoolowned by Corinthian Colleges, Inc. andwhose Federal student loans are dis-charged under the Department of Educa-tion’s “Defense to Repayment” or “ClosedSchool” discharge process. The IRS deter-mined that it will not assert that these tax-payers must recognize gross income as aresult of these discharge processes.

The Treasury Department and the IRSare aware that the Department of Educa-tion (ED) has begun a process for settlingand discharging Federal student loanstaken out by taxpayers to finance atten-dance at a school owned by ACI. ED hasestimated that to date about 4,400 ACIborrowers may be eligible for dischargesunder this program and that number mayincrease.

In general, under the Higher EducationAct of 1965 (HEA), Pub. L. 89–329, theClosed School discharge process allowsED to discharge a Federal student loanobtained by a student, or by a parent onbehalf of a student, who was attending aschool at the time it closed or who with-drew from the school within a certain pe-riod prior to the closing date. See gener-ally 20 U.S.C. § 1087(c) (Federal FamilyEducation Loan (FFEL)); 20 U.S.C.§ 1087dd(g) (Federal Perkins Loan); and20 U.S.C. § 1087e(a)(1) (Federal DirectLoan).

Under the HEA, the Defense to Repay-ment process requires ED to discharge aFederal Direct Loan if a student loan bor-rower establishes, as a defense againstrepayment, that a school’s actions wouldgive rise to a cause of action against theschool under applicable state law. Seegenerally 20 U.S.C. § 1087e(h) and 34C.F.R. § 685.206(c). FFEL loans may alsobe discharged under this process if certainadditional requirements are met. See 34C.F.R. § 682.209(g).

Section 61(a)(12) of the Internal Rev-enue Code (Code) provides that gross in-come includes income from the dischargeof indebtedness. There are, however, ex-ceptions under which a taxpayer may notbe required to include income from the


discharge of indebtedness in gross in-come.

Section 6050P of the Code requiresany applicable entity which discharges theindebtedness (in whole or in part) of anyperson to make an information return andfurnish a payee statement for that dis-charge of indebtedness. The regulations in26 C.F.R. § 1.6050P–1 provide that re-porting is required only upon the occur-rence of one of the identifiable eventsenumerated in the regulations.

.02 Borrowers participating in ClosedSchool discharge process.

The HEA provides statutory exclusionsfrom gross income for Federal studentloans discharged under the Closed Schooldischarge process. 20 U.S.C. §§ 1087(c),1087dd(g), 1087e(a)(1). Accordingly, ataxpayer whose Federal student loan isdischarged under the Closed School dis-charge process will not recognize grossincome as a result of the discharge, andthe taxpayer should not report the amountof the discharged loan in gross income onhis or her Federal income tax return.

.03 Borrowers participating inDefense to Repayment dischargeprocess.

The HEA does not provide a statutoryexclusion from gross income for Federalstudent loans discharged under the De-fense to Repayment discharge process.However, a taxpayer may be able to ex-clude amounts discharged under this pro-cess from gross income under a provisionof the Code or other tax law authorities.

For example, a borrower that has aliability reduced because of a legal infir-mity that relates back to the original saletransaction (for example, fraud) may nothave gross income to the extent of thedebt reduction. This rule requires a case-by-case analysis of each transaction.

In addition, section 108(a)(1)(B) of theCode provides that a taxpayer may ex-clude from gross income a discharge ofindebtedness that occurs when the tax-payer is insolvent (the insolvency exclu-sion).

The Treasury Department and the IRSconclude that most borrowers whose Fed-eral student loans taken out by taxpayers

to finance attendance at a school ownedby ACI that are discharged under the De-fense to Repayment discharge processwould be able to exclude from gross in-come all or substantially all of the dis-charged amounts based on fraudulent ormaterial misrepresentations made by theschools owned by ACI to the students orbased on the insolvency exclusion or an-other tax law authority. Accordingly, theIRS will not assert that a taxpayer withinthe scope of this revenue procedure rec-ognizes gross income as a result of theDefense to Repayment discharge process.Further, the IRS will not assert that cred-itors within the scope of this revenue pro-cedure must report under section 6050Pregarding these discharges.

SECTION 3. SCOPE

The treatment provided in section 4 ofthis revenue procedure applies to any tax-payer who took out Federal student loansto finance attendance at a school ownedby ACI that are discharged under theClosed School discharge process or theDefense to Repayment discharge processand any applicable entity, as defined insection 6050P and the regulations underthat section, discharging these loans.

SECTION 4. APPLICATION

.01 Discharge of indebtedness income.The IRS will not assert that a taxpayerwithin the scope of this revenue proceduremust recognize gross income as a result ofthe Defense to Repayment discharge pro-cess for discharged Federal student loansthat were taken out to finance attendanceat a school owned by ACI. See section2.02 of this revenue procedure for a gen-eral discussion regarding the exclusionfrom gross income for borrowers partici-pating in the Closed School discharge pro-cess.

.02 Recapture of tax credits and taxbenefit rule. The IRS will not assert that ataxpayer within the scope of this revenueprocedure must increase his or her taxesowed in the year of a discharge, or in aprior year, as a result of either dischargeprocess if in a prior year he or she re-ceived an education credit under section25A of the Code attributable to paymentsmade with proceeds of the discharged

loan. In addition, the IRS also will notassert that a taxpayer within the scope ofthis revenue procedure must increase hisor her income in the year of the dischargeif he or she took a deduction under section221 in a prior year attributable to interestpaid on a discharged loan or a deductionunder section 222 in a prior taxable yearattributable to payments of qualified tu-ition and related expenses made with pro-ceeds of the discharged loan.

.03 Information reporting. The IRSwill not assert that any creditor that is anapplicable entity, as defined in section6050P of the Code, must file informationreturns and furnish payee statements un-der that section for the discharge of anyindebtedness within the scope of this rev-enue procedure.

Further, this revenue procedure modi-fies Rev. Proc. 2015–57 to provide thatthe IRS will not assert that any creditorunder that revenue procedure that is anapplicable entity, as defined in section6050P of the Code, must file informationreturns and furnish payee statements forthe discharge of any indebtedness underthat revenue procedure.

SECTION 5. EFFECT ON OTHERDOCUMENTS

Revenue Procedure 2015–57 is modi-fied.

SECTION 6. EFFECTIVE DATE

This revenue procedure is effective fortaxable years beginning on or after Janu-ary 1, 2016, for Federal student loans dis-charged under ED’s Defense to Repay-ment discharge process or the ClosedSchool discharge process.


The principal author of this revenueprocedure is Craig Wojay of the Office ofAssociate Chief Counsel (Income Tax &Accounting). For further information re-garding discharge of indebtedness incomeand exclusions, contact Mr. Wojay at(202) 317-4718 (not a toll-free call), andfor further information regarding informa-tion reporting, contact Elie Mishory at (202)317-6844.


Part IV. Items of General InterestNotice of proposedrulemaking

Transfers of CertainProperty by U.S. Personsto Partnerships withRelated Foreign Partners

REG–127203–15

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemakingby cross-reference to temporary regulation.

SUMMARY: In the Rules and Regula-tions section of this issue of the InternalRevenue Bulletin, temporary regulationsare being issued under sections 197, 704,721(c), and 6038B of the Internal Reve-nue Code (Code) that address transfers ofappreciated property by U.S. persons topartnerships with foreign partners relatedto the transferor. The temporary regula-tions affect U.S. partners in domestic orforeign partnerships. The text of the tem-porary regulations also serves as the textof these proposed regulations.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by April 19, 2017.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–127203–15), InternalRevenue Service, Room 5203, P.O. Box7604, Ben Franklin Station, Washington,DC 20044. Submissions may be hand-delivered Monday through Friday be-tween the hours of 8 a.m. and 4 p.m. toCC:PA:LPD:PR (REG–127203–15), Couri-er’s Desk, Internal Revenue Service, 1111Constitution Avenue, NW, Washington,DC 20224, or sent electronically via theFederal eRulemaking Portal at http://www.regulations.gov (IRS REG–127203–15).

FOR FURTHER INFORMATION CON-TACT:Concerning the proposed regula-tions, Ryan A. Bowen, (202) 317-6937;concerning submissions of comments orrequests for a public hearing, ReginaJohnson, (202) 317-6901 (not toll-freenumbers).


Background

The temporary regulations in the Rulesand Regulations section of this issue ofthe Bulletin contain regulations undersections 197, 704, 721(c), and 6038B ofthe Code. The temporary regulations con-tain rules described in Notice 2015–54,2015–34 I.R.B. 210, and override nonrec-ognition of gain under section 721(a) fortransfers of property to a partnership withrelated foreign partners and with substan-tial related-party ownership unless certainrequirements are satisfied. The text of thetemporary regulations also serves asthe text of these proposed regulations. Thepreamble to the temporary regulations ex-plains the temporary regulations and thecorresponding proposed regulations.

Special Analyses

Certain IRS regulations, including thisone, are exempt from the requirements ofExecutive Order 12866, as supplementedand reaffirmed by Executive Order 13563.Therefore, a regulatory impact assessmentis not required. It is hereby certified thatthe collection of information contained inthis regulation will not have a significanteconomic impact on a substantial numberof small entities. Accordingly, a regula-tory flexibility analysis is not required.This conclusion is based on the fact thatthe proposed regulations include a$1,000,000 de minimis exception for cer-tain transfers, and tangible property withbuilt-in gain that does not exceed $20,000is excluded from the application of theregulations. In addition, the regulationsonly apply when a U.S. transferor contrib-utes property to a partnership with a re-lated foreign partner, and persons relatedto the U.S. transferor own 80 percent ormore of the interests in the partnership.Accordingly, the Treasury Departmentand the IRS expect that these regulationsprimarily will affect large domestic cor-porations. Pursuant to section 7805(f), thisnotice of proposed rulemaking has beensubmitted to the Chief Counsel for Advo-cacy of the Small Business Administra-tion for comment on its impact on smallbusiness.

Comments and Requests for PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any comments that aresubmitted timely to the IRS as prescribedin this preamble under the “Addresses”heading. The Treasury Department andthe IRS request comments on all aspectsof the proposed rules. All comments willbe available at www.regulations.gov orupon request. A public hearing will bescheduled if requested in writing by anyperson that timely submits written com-ments. If a public hearing is scheduled,notice of the date, time, and place for thepublic hearing will be published in theFederal Register.

Drafting information

The principal author of these proposedregulations is Ryan A. Bowen, Office ofAssociate Chief Counsel (International).However, other personnel from the Trea-sury Department and the IRS participatedin their development.* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is pro-posed to be amended as follows:


Paragraph 1. The authority citation forpart 1 is amended by adding entries toread in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.721(c)–1 also issued under

26 U.S.C. 721(c).Section 1.721(c)–2 also issued under






26 U.S.C. 721(c).* * * * *


Par. 2. Section 1.197–2 is amended byadding paragraphs (h)(12)(vii)(C) and (l)(5) to read as follows:


* * * * *(h) * * *(12) * * *(vii) * * *(C) [The text of proposed § 1.197–

2(h)(12)(vii)(C) is the same as the text of§ 1.197–2T(h)(12)(vii)(C) published else-where in this issue of the Bulletin].* * * * *

(l) * * *(5) [The text of proposed § 1.197–

2(l)(5) is the same as the text of § 1.197–2T(l)(5) published elsewhere in this issueof the Bulletin].* * * * *

Par. 3. Section 1.704–1 is amended byadding paragraph (b )(2)(iv)(f)(6) follow-ing the undesignated paragraph at the endof paragraph (b)(2)(iv)(f)(5) andaddingparagraph (f) to read as follows:

§ 1.704–1 Partner’s distributive share.

* * * * *(b) * * *(2) * * *(iv) * * *(f) * * *(6) [The text of proposed § 1.704–

1(b)(2)(iv)(f)(6) is the same as the text of§ 1.704–1T(b)(2)(iv)(f)(6) published else-where in this issue of the Bulletin].* * * * *

(f) [The text of proposed § 1.704–1(f)is the same as the text of § 1.704–1T(f)published elsewhere in this issue of theBulletin].* * * * *

Par. 4. Section 1.704–3 is amended byadding paragraphs (a)(13), (d)(5)(iii), and(g) to read as follows:

§ 1.704–3 Contributed property.

(a) * * *(13) [The text of proposed § 1.704–

3(a)(13) is the same as the text of§ 1.704–3T(a)(13) published elsewhere inthis issue of the Bulletin].* * * * *

(d) * * *(5) * * *(iii) [The text of proposed § 1.704–

3(d)(5)(iii) is the same as the text of§ 1.704–3T(d)(5)(iii) published elsewherein this issue of the Bulletin].* * * * *

(g) [The text of proposed § 1.704–3(g)is the same as the text of § 1.704–3T(g)published elsewhere in this issue of theBulletin].

Par. 5. Section 1.721(c)–1 is added toread as follows:

§ 1.721(c)–1 Overview, definitions, andrules of general application.

[The text of proposed § 1.721(c)–1 isthe same as the text of § 1.721(c)–1Tpublished elsewhere in this issue of theBulletin].


§ 1.721(c)–2 Recognition of gain oncertain contributions of property topartnerships with related foreignpartners.



§ 1.721(c)–3 Gain deferral method.



§ 1.721(c)–4 Acceleration events.



§ 1.721(c)–5 Acceleration eventexceptions.



§ 1.721(c)–6 Procedural and reportingrequirements.



§ 1.721(c)–7 Examples.


Par. 12. Section 1.6038B–2 is amendedby:

1. Revising paragraph (a)(3).2. Adding paragraphs (a)(1)(iii), (c)

(8), and (c)(9).3. Revising paragraph (h)(3).4. Adding paragraphs (j)(4) and (j)(5).

§ 1.6038B–2 Reporting of certaintransfers to foreign partnerships.

(a) * * *(1) * * *(iii) [The text of proposed § 1.6038B–

2(a)(1)(iii) is the same as the text of§ 1.6038B–2T(a)(1)(iii) published else-where in this issue of the Bulletin].* * * * *

(3) [The text of proposed § 1.6038B–2(a)(3) is the same as the text of§ 1.6038B–2T(a)(3) published elsewherein this issue of the Bulletin].* * * * *

(c) * * *(8) [The text of proposed § 1.6038B–

2(c)(8) is the same as the text of§ 1.6038B–2T(c)(8) published elsewherein this issue of the Bulletin].

(9) [The text of proposed § 1.6038B–2(c)(9) is the same as the text of§ 1.6038B–2T(c)(9) published elsewherein this issue of the Bulletin].


* * * * *(h) * * *(3) [The text of proposed § 1.6038B–

2(h)(3) is the same as the text of§ 1.6038B–2T(h)(3) published elsewherein this issue of the Bulletin].* * * * *

(j) * * *(4) [The text of proposed § 1.6038B–

2(j)(4) is the same as the text of§ 1.6038B–2T(j)(4) published elsewherein this issue of the Bulletin].

(5) [The text of proposed § 1.6038B–2(j)(5) is the same as the text of§ 1.6038B–2T(j)(5) published elsewherein this issue of the Bulletin].

John Dalrymple,Deputy Commissioner for

Services and Enforcement.


Withdrawal of notice ofproposed rulemaking andnotice of proposedrulemaking

Definition of Dependent

REG–137604–07


ACTION: Withdrawal of notice of pro-posed rulemaking and notice of proposedrulemaking.

SUMMARY: This document withdrawsproposed regulations relating to the defi-nition of an authorized placement agencyfor purposes of a dependency exemptionfor a child placed for adoption that wereissued prior to the changes made to thelaw by the Working Families Tax ReliefAct of 2004 (WFTRA). This documentcontains proposed regulations that reflectchanges made by WFTRA and by theFostering Connections to Success and In-creasing Adoptions Act of 2008 (FC-SIAA) relating to the dependency exemp-tion. This document also contains proposedregulations that, to reflect current law,amend the regulations relating to the sur-

viving spouse and head of household fil-ing statuses, the tax tables for individuals,the child and dependent care credit, theearned income credit, the standard deduc-tion, joint tax returns, and taxpayer iden-tification numbers for children placed foradoption. These proposed regulationschange the IRS’s position regarding thecategory of taxpayers permitted to claimthe childless earned income credit. In de-termining a taxpayer’s eligibility to claima dependency exemption, these proposedregulations change the IRS’s position re-garding the adjusted gross income of ataxpayer filing a joint return for purposesof the tiebreaker rules and the source ofsupport of certain payments that origi-nated as governmental payments. Theseregulations provide guidance to individu-als who may claim certain child-relatedtax benefits.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by April 19, 2017.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–137604–07), Room5203, Internal Revenue Service, PO Box7604, Ben Franklin Station, Washington,DC 20044. Submissions may be hand-delivered Monday through Friday be-tween the hours of 8 a.m. and 4 p.m. toCC:PA:LPD:PR (REG–137604–07), Cou-rier’s Desk, Internal Revenue Service, 1111Constitution Avenue, NW., Washington,DC 20224, or sent electronically viathe Federal eRulemaking Portal at www.regulations.gov (IRS REG–137604–07).

FOR FURTHER INFORMATION CON-TACT:Concerning the proposed regula-tions, Victoria J. Driscoll, (202) 317-4718; concerning the submission ofcomments and requests for a public hear-ing, Regina Johnson, (202) 317-6901 (nottoll-free numbers).


Background

This document withdraws a notice ofproposed rulemaking (REG–107279–00)amending § 1.152–2(c)(2) of the IncomeTax Regulations that was published in theFederal Register (65 FR 71277) on No-vember 30, 2000 (2000 proposed regula-tions) relating to the definition of an au-

thorized placement agency for purposes ofa dependency exemption for a childplaced for adoption under prior law. Priorlaw required that a child be placed withthe taxpayer for adoption by an authorizedplacement agency. Section 152 of the In-ternal Revenue Code was amended bysection 201 of WFTRA (Public Law 108–311, 118 Stat. 1166, 1169) to provide thata qualifying child eligible to be the depen-dent of a taxpayer may include a childlawfully placed with the taxpayer foradoption. Accordingly, the proposed reg-ulations in § 1.152–2(c)(2) under priorlaw are withdrawn.

This document also contains proposedamendments to 26 CFR Part 1 under sec-tions 2, 3, 21, 32, 63, 151, 152, 6013, andto Part 301 under section 6109 to reflectthe changes made by WFTRA and FC-SIAA (Public Law 110–351, 122 Stat.3949) relating to the dependency exemp-tion, as well as changes to these sectionsby other acts. WFTRA amended section152, in part, to provide a uniform defini-tion of a qualifying child; FCSIAA addedto the definition of a qualifying child therequirements that the child must beyounger than the taxpayer and that thechild must not file a joint return (otherthan as a claim for refund). FCSIAA alsoamended the rules that apply if two ormore taxpayers are eligible to claim anindividual as a qualifying child.

1. Dependency Rules

Under section 151, a taxpayer may de-duct an exemption amount for a depen-dent as defined in section 152. Prior toWFTRA, section 151 contained many ofthe rules related to the definition of adependent. WFTRA moved those rules tosection 152. As amended, section 152(a)defines a dependent as a qualifying childor a qualifying relative. Taxpayers shouldnote that a taxpayer’s treatment of thedependency exemption under section 151for a particular qualifying child or quali-fying relative might have tax conse-quences under other Code provisions,such as the education tax credits undersection 25A, the premium tax credit undersection 36B, and the penalty for failure tomaintain minimum essential coverage un-der section 5000A.


a. Individual not a dependent

Section 152(b) provides that an indi-vidual who is a qualifying child or a qual-ifying relative of a taxpayer is not a taxpay-er’s dependent in certain circumstances.Section 152(b)(2) provides that, to be adependent of a taxpayer, an individualmust not have filed a joint return with hisor her spouse. However, the WFTRA con-ference report provides that the “restric-tion does not apply if the return was filedsolely to obtain a refund and no tax lia-bility would exist for either spouse if theyfiled separate returns.” See H.R. Rep. No.108–696, at 55 n.38 (2004) (Conf. Rep.).

b. Qualifying child

WFTRA established under section152(c) a uniform definition of a qualifyingchild. The legislative history identifiesfive child-related benefits to which theuniform definition applies: the filing statusof head of household under section 2(b),the child and dependent care credit undersection 21, the child tax credit under sec-tion 24, the earned income credit undersection 32, and the dependency exemptionunder section 151. See H.R. Rep. No.108–696, at 55–65.

Section 152(c) defines a qualifyingchild as an individual who bears a certainrelationship to the taxpayer (qualifyingchild relationship test), has the same prin-cipal place of abode as the taxpayer formore than one-half of the taxable year(residency test), is younger than the tax-payer and is under the age of 19 (or age 24if a full-time student or any age if perma-nently and totally disabled) (age test),does not provide more than one-half of hisor her own support (qualifying child sup-port test), and does not file a joint returnwith a spouse except to claim a refund ofestimated or withheld taxes (joint returntest).

c. Temporary absence

A child is considered to reside in thesame principal place of abode as a tax-payer during a temporary absence. Underthe existing section 152 regulations, anonpermanent failure to occupy a com-mon abode by reason of illness, education,business, vacation, military service, or a

custody agreement may be a temporaryabsence due to special circumstances. Theexisting regulations under section 2 defin-ing surviving spouse and head of house-hold include a similar rule relating to theeffect of a temporary absence on the re-quirement to maintain a household, butadd the requirement that it is reasonable toassume that the absent person will returnto the household. Under case law, a factorto consider in determining whether an ab-sence is temporary is whether the individ-ual intends to establish a new principalplace of abode. In Rowe v. Commissioner,128 T.C. 13 (2007), the court concludedthat it was reasonable to assume that ataxpayer would return to her home afterpretrial confinement and that the taxpay-er’s absence was temporary. See also Heinv. Commissioner, 28 T.C. 826 (1957)(acq., 1958–2 CB 6), and Rev. Rul.66–28 (1966–1 CB 31).

d. Two or more taxpayers eligible toclaim individual as qualifying child

Section 152(c)(4) provides tiebreakerrules that apply if an individual meets thedefinition of a qualifying child for two ormore taxpayers (eligible taxpayers). Ingeneral, the eligible taxpayer who is aparent (eligible parent) of the individualmay claim the individual as a qualifyingchild or, if there is no eligible parent, thenthe individual may be claimed by the eli-gible taxpayer with the highest adjustedgross income.

If more than one of the eligible taxpay-ers is a parent of the individual, more thanone eligible parent claims the individualas a qualifying child, and the eligible par-ents claiming the individual do not file ajoint return with each other, the individualis treated as the qualifying child of theeligible parent claiming the individualwith whom the individual resided for thelongest period of time during the taxableyear. If the individual resided with eacheligible parent claiming the individual forthe same amount of time during the tax-able year, the individual is treated as thequalifying child of the eligible parentclaiming the individual with the highestadjusted gross income.

If at least one, but not all, of two ormore eligible taxpayers is a parent of theindividual, but no eligible parent claims

the individual as a qualifying child, an-other eligible taxpayer may claim the in-dividual, but only if the eligible taxpayer’sadjusted gross income is higher than theadjusted gross income of each eligibleparent. Since 2009, IRS Publication 501,Exemptions, Standard Deduction, and Fil-ing Information, has stated that “[i]f thechild’s parents file a joint return with eachother, this rule may be applied by dividingthe parents’ combined AGI equally be-tween the parents.”

Notice 2006–86 (2006–2 CB 680)provides interim guidance on these rulesprior to the amendments by FCSIAA. Thenotice provides that, except to the extentthat a noncustodial parent may claim thechild as a qualifying child under the spe-cial rule for divorced or separated parentsin section 152(e), discussed in the nextparagraph, if more than one taxpayerclaims a child as a qualifying child, thechild is treated as the qualifying child ofonly one taxpayer (as determined underthe tiebreaker rules of section 152(c)(4))for purposes of the five provisions subjectto the uniform definition of a qualifyingchild (the filing status of head of house-hold under section 2(b), the child and de-pendent care credit under section 21, thechild tax credit under section 24, theearned income credit under section 32,and the dependency exemption under sec-tion 151, as well as for purposes of theexclusion for dependent care assistanceunder section 129 (which may apply to thecare of a dependent qualifying child underage 13)). Thus, in general, the tiebreakerrules for determining which taxpayer mayclaim a child as a qualifying child apply tothese provisions as a group, rather than ona section-by-section basis.

Notice 2006–86 contains an exceptionto the rule that only one taxpayer mayclaim a child as a qualifying child for allpurposes. Section 152(e) has a special rulefor divorced or separated parents that de-termines who, as between the custodialand noncustodial parent, may claim achild as a qualifying child or qualifyingrelative if certain tests (different from thegeneral tests under sections 152(c) and(d)) regarding residency and support aremet and the custodial parent releases aclaim to exemption for the child. The no-tice provides that, if this special rule ap-plies, a noncustodial parent may claim a


child as a qualifying child for purposes ofthe dependency exemption and the childtax credit (the only two of the provisionsaddressed in the notice to which section152(e) applies in determining who is aqualifying child), and another taxpayermay claim the child for one or more of theother benefits to which section 152(e)does not apply.

Although FCSIAA affects other as-pects of section 152(c)(4) and Notice2006–86, there is nothing in FCSIAA thatwould compel a change in the rule de-scribed in Notice 2006–86 that an indi-vidual is treated as the qualifying child ofonly one taxpayer for the listed child-related tax benefits, except if the specialrule in section 152(e) applies.

e. Qualifying relative

Under section 152(d), a qualifying rel-ative is an individual who bears a certainrelationship to the taxpayer, including anindividual who has the same principalplace of abode as the taxpayer and is amember of the taxpayer’s household forthe taxable year (qualifying relative rela-tionship test), has gross income less thanthe exemption amount for the taxable year(gross income test), receives more thanone-half of his or her support from thetaxpayer (qualifying relative support test),and is not a qualifying child of any tax-payer (not a qualifying child test).

Notice 2008–5 (2008–1 CB 256) ad-dresses whether a taxpayer meets the testunder section 152(d)(1)(D) to claim anindividual as a qualifying relative. Thatprovision requires that the individual notbe a qualifying child of either the taxpayeror any other taxpayer during a taxableyear beginning in the calendar year inwhich the taxpayer’s taxable year begins.The notice provides that, for purposes ofsection 152(d)(1)(D), an individual is nota qualifying child of “any other taxpayer”if the individual’s parent (or other personfor whom the individual is defined as aqualifying child) is not required by section6012 to file an income tax return and (1)does not file an income tax return, or (2)files an income tax return solely to obtaina refund of withheld income taxes.

f. Support tests

Under section 152(c)(1)(D), to be ataxpayer’s qualifying child, an individualmust not have provided over one-half ofthe individual’s own support for the cal-endar year. Under section 152(d)(1)(C), tobe a taxpayer’s qualifying relative, a tax-payer must have provided over one-half ofan individual’s support for the calendaryear.

Regarding governmental payments to aperson with a qualifying need, the WF-TRA conference report, H.R. Rep. No.108–696, at 57, states that “[g]overnmen-tal payments and subsidies (e.g., Tempo-rary Assistance [for] Needy Families,food stamps, and housing) generally aretreated as support provided by a thirdparty.” The IRS has successfully assertedin litigation that governmental paymentsprovided to a parent to aid a family withdependent children and used by the parentfor support of her children was support ofthe children provided by the government,and not support provided by the parent.See Lutter v. Commissioner, 61 T.C. 685(1974), affd. per curiam, 514 F.2d 1095(7th Cir. 1975).

2. Surviving Spouse and Head ofHousehold, and Conforming Changes

Prior to amendment by section 803(b)of the Tax Reform Act of 1969 (PublicLaw 91–172, 83 Stat. 487), section 2(a)provided that the return of a survivingspouse is treated as a joint return for pur-poses of the tax rates, the tax tables forindividuals, and the standard deduction.Following the 1969 amendments, section2(a) defines the term surviving spouse forpurposes of section 1. The return of ataxpayer filing as a surviving spouse is nolonger treated as a joint return under sec-tions 2, 3, or 63. Section 3 provides taxtables for certain individuals in lieu of thetax imposed by section 1. Section 63(c)provides the same basic standard deduc-tion for a taxpayer filing as a survivingspouse as a taxpayer filing a joint return.Accordingly, a taxpayer filing as a surviv-ing spouse is no longer treated as filing ajoint return for any tax purpose, but rather,a taxpayer filing as a surviving spousesimply uses the same tax rates under sec-tion 1, the same amounts in the tax tables

under section 3, and the same standarddeduction under section 63 as a taxpayerfiling a joint return.

Generally, under section 2(b), to qual-ify as a head of household, a taxpayermust maintain a household that is the prin-cipal place of abode of a qualifying childor other dependent for more than one-halfof the taxable year. If the dependent is aparent of the taxpayer and the parent doesnot share a principal place of abode withthe taxpayer, the household maintained bythe taxpayer must be the parent’s principalplace of abode for the entire taxable year.

Prior to WFTRA, section 21 requiredthat a taxpayer maintain a household toclaim the credit for dependent care ex-penses, and regulations on maintaining ahousehold were published under that sec-tion. WFTRA removed that requirementfrom the dependent care credit.

3. Earned Income Credit

Section 32 provides a tax credit to eli-gible taxpayers who work and haveearned income below a certain dollaramount. Before the amendment of section32 by the Omnibus Reconciliation Act of1993 (Public Law 103–66, 107 Stat. 312),the earned income credit (EIC) was allow-able only to a taxpayer with one or morequalifying children. If an individual metthe definition of a qualifying child formore than one taxpayer, a tiebreaker rulein section 32 determined which taxpayerwas allowed to claim the individual as aqualifying child for the EIC. For taxableyears beginning after 1993, section32(c)(1)(A)(ii) allows a taxpayer withouta qualifying child to claim the EIC (child-less EIC) if certain requirements are met.Although there is no regulatory guidanceon this issue, since 1995, the IRS hastaken the position in IRS Publication 596,Earned Income Credit, that if an individ-ual meets the definition of a qualifyingchild for more than one taxpayer and theindividual is not treated as the qualifyingchild of a taxpayer under the tiebreakerrules, then that taxpayer is precluded fromclaiming the childless EIC. WFTRAmoved the tiebreaker rules from section32 to section 152(c)(4).

Before repeal in 2010, section 3507allowed advance payment of the EIC. Sec-tion 3507 was repealed by the FAA Air


Transportation Modernization and SafetyImprovement Act (Public Law 111–226,124 Stat. 2389).

4. Additional Standard Deduction for theAged and Blind

Before the amendments to sections 63and 151 made by the Tax Reform Act of1986 (Public Law 99–514, 100 Stat.2085), a taxpayer was entitled to an addi-tional personal exemption under section151 for the taxpayer or the taxpayer’sspouse (or both), if either was age 65 orolder or was blind at the close of thetaxable year. As amended, section 63 pro-vides an additional standard deduction forage or blindness instead of an additionalpersonal exemption under section 151.

Explanation of Provisions

The proposed regulations reflect statu-tory amendments to sections 2, 3, 21, 32,63, 151, 152, 6013, and 6109. In addition,the regulations address certain significantissues arising under these sections andmodify certain IRS positions, as explainedbelow.

1. Dependency Exemption

Consistent with the amendments madeto sections 151 and 152 by WFTRA, theproposed regulations move rules related tothe definition of a dependent from theregulations under section 151 to the reg-ulations under section 152.

a. Relationship test

i. General Rules

Section 152(c)(2) provides that a qual-ifying child must be a child or a descen-dant of a child of the taxpayer, or abrother, sister, stepbrother, or stepsister ofthe taxpayer, or a descendant of anyof these relatives. Section 152(d)(2) pro-vides that a qualifying relative must bear acertain relationship to the taxpayer, whichincludes a child or a descendant of a child,a brother, sister, stepbrother, stepsister,parent or ancestor of a parent, or an auntor uncle of the taxpayer. An individual(other than the taxpayer’s spouse) who isnot related to the taxpayer in one of thenamed relationships nevertheless may sat-

isfy the relationship test for a qualifyingrelative if the individual has the sameprincipal place of abode as the taxpayerand is a member of the taxpayer’s house-hold for the taxpayer’s taxable year.

The proposed regulations adopt therule in Notice 2008–5 regarding whetheran individual is a qualifying child of ataxpayer for purposes of determiningwhether that individual may be a qualify-ing relative. That is, the proposed regula-tions provide that an individual is not aqualifying child of a person if that personis not required to file an income tax returnunder section 6012, and either does notfile an income tax return or files an in-come tax return solely to claim a refund ofestimated or withheld taxes.

ii. Adopted Child—Adoption byIndividual Other than the Taxpayer

Prior to 2005, for purposes of the rela-tionship test, a person’s legally adoptedchild was treated as that person’s child byblood. Specifically, section 152(b)(2) pro-vided that “a legally adopted child of anindividual (and a child who is a memberof an individual’s household, if placedwith such individual by an authorizedplacement agency for legal adoption bysuch individual), . . . shall be treated as achild of such individual by blood.” There-fore, a taxpayer other than the adopting“individual” could be eligible to claim anexemption for an adopted child. For ex-ample, the parent of the adopting parentcould claim a dependency exemption forthe legally adopted child of the taxpayer’sson or daughter (just as biological grand-parents may claim an exemption for agrandchild) if all other requirements weremet.

WFTRA amended section 152 tochange the reference from a child placedby an authorized placement agency foradoption to a child who is “lawfullyplaced” for legal adoption. In making thatchange, however, WFTRA also changedthe reference to the adopting person from“an individual” to “the taxpayer,” so thatsection 152(f)(1)(B) currently providesthat a legally adopted individual of thetaxpayer is treated as a child by blood ofthe taxpayer. The use of the word “tax-payer” rather than “individual” arguablylimits the recognition of a relationship

through adoption only to those situationsin which the taxpayer claiming a depen-dency exemption for the child is the per-son who adopts the child. This interpreta-tion of the amended statutory languagewould diverge from the results of a legaladoption under property, inheritance, andother nontax law, and from the prior taxtreatment of adoptions – a significantchange in the applicable law. However,there is nothing in the legislative historyindicating that Congress intended to limitthe treatment of an adopted child as achild by blood in this manner or that oth-erwise suggests this change in languagewas intended to effect a change in existinglaw.

To fill this apparent gap in the statute,the proposed regulations provide that anychild legally adopted by a “person,” orany child who is placed with a “person”for legal adoption by that “person,” istreated as a child by blood of that personfor purposes of the relationship tests undersections 152(c)(2) and 152(d)(2). Simi-larly, the proposed regulations providethat an eligible foster child is a child whois placed with a “person” rather than witha taxpayer.

iii. Adopted Child and Foster Child—Child Placement

Although WFTRA removed the refer-ence to an authorized placement agencyfrom the provisions relating to an adoptedchild in section 152(f)(1)(B), the referenceto an authorized placement agency contin-ues to appear in section 152(f)(1)(C), re-lating to an eligible foster child. Prior toamendment by WFTRA, section 152treated a child who was a member of anindividual’s household pending adoptionas a child by blood of the individual forpurposes of the relationship test only if thechild was a foster child living with theindividual or if the child was placed withthe individual by an authorized placementagency for adoption by the individual.Similarly, § 301.6109–3(a) currently pro-vides that a taxpayer may obtain an adop-tion taxpayer identification number(ATIN) only for a child who was placedfor adoption by an authorized placementagency.

As amended by WFTRA, section 152treats a child placed for adoption as a


child by blood of the taxpayer if the child“is lawfully placed with the taxpayer forlegal adoption by the taxpayer.” A childmay be lawfully placed for legal adoptionby an authorized placement agency, thechild’s parents, or other persons autho-rized by State law to place children forlegal adoption. These proposed regula-tions reflect the changes made by WFTRAand amend the regulations under section6109 to provide that the IRS will assign anATIN to a child who has been lawfullyplaced with a person for legal adoption.

Under section 152(f)(1)(A)(ii) and§ 1.152–1(b)(1)(iii) of these proposed reg-ulations, the term child also includes aneligible foster child of the taxpayer asdefined in 152(f)(1)(C), that is, a childwho is placed with the taxpayer by anauthorized placement agency or by thejudgment, decree, or other order of a courtof competent jurisdiction.

iv. Definition of Authorized PlacementAgency

The 2000 proposed regulations under§ 1.152–2(c)(2) defined an authorizedplacement agency for purposes of theprior law regarding a child placed for le-gal adoption. These proposed regulationsdefine an authorized placement agency forpurposes of the definition of an eligiblefoster child and withdraw the 2000 pro-posed regulations, which defined that termwithout reference to an Indian Tribal Gov-ernment (ITG).

These proposed regulations providethat an authorized placement agency maybe a State, the District of Columbia, apossession of the United States, a foreigncountry, an agency or organization autho-rized by, or a political subdivision of, anyof these entities to place children in fostercare or for adoption. Under the IndianChild Welfare Act of 1978 (25 U.S.C.chapter 21), ITGs and states perform sim-ilar functions for foster care and adoptionprograms. Thus, the proposed regulationsprovide that an authorized placementagency also may be an ITG (as defined insection 7701(a)(40)), or an agency or or-ganization authorized by, or a politicalsubdivision of, an ITG that places childrenin foster care or for adoption.

b. Residency test—principal place ofabode

For purposes of determining whetheran individual has the same principal placeof abode as the taxpayer in applying theresidency test for a qualifying child andthe relationship test for a qualifying rela-tive who does not have one of the listedrelationships to the taxpayer, the proposedregulations provide that the term principalplace of abode means a person’s mainhome or dwelling where the person re-sides. A person’s principal place of abodeneed not be the same physical locationthroughout the taxable year and may betemporary lodging such as a homelessshelter or relief housing resulting fromdisplacement caused by a natural disaster.

The proposed regulations further pro-vide that a taxpayer and an individualhave the same principal place of abodedespite a temporary absence by either per-son. A person is temporarily absent if,based on the facts and circumstances, theperson would have resided with the tax-payer but for the temporary absence and itis reasonable to assume the person willreturn to reside at the place of abode.Thus, the proposed regulations adopt the“reasonable to assume” language fromthe existing regulations under section 2.The proposed regulations indicate that anonpermanent failure to occupy the abodeby reason of illness, education, business,vacation, military service, institutional-ized care for a child who is permanentlyand totally disabled (as defined in section22(e)(3)), or incarceration may be treatedas a temporary absence due to specialcircumstances. This definition of tempo-rary absence applies to the residency testfor a qualifying child, to the relationshiptest for a qualifying relative who does nothave a listed relationship to the taxpayer,and to the requirements to maintain ahousehold for surviving spouse and headof household.

For purposes of the residency test for aqualifying child, the proposed regulationsprovide that an individual is treated ashaving the same principal place of abodeas the taxpayer for more than one-half ofthe taxable year if the individual resideswith the taxpayer for at least 183 nightsduring the taxpayer’s taxable year or for atleast 184 nights during the taxpayer’s tax-

able year that includes a leap day (residingfor more than one-half of the taxableyear). The proposed regulations furtherprovide that an individual resides with thetaxpayer for a night if the individualsleeps (1) at the taxpayer’s residence, or(2) in the company of the taxpayer whenthe individual does not sleep at the tax-payer’s residence (for example, when theparent and the child are on vacation). Theregulations provide additional rules forcounting nights if a night extends overtwo taxable years and for taxpayers whowork at night.

The proposed regulations provide spe-cial rules for determining whether an in-dividual satisfies a residency test if theindividual is born or dies during the tax-able year, is adopted or placed for adop-tion, is an eligible foster child, or is amissing child.

c. Age test

The age test for a qualifying child re-quires that an individual be younger thanthe taxpayer claiming the individual as aqualifying child, and the individual mustnot have attained the age of 19 (or age 24if the individual is a student). The agerequirement is treated as satisfied if theindividual is permanently and totally dis-abled.

For purposes of this age test, the pro-posed regulations substantially adopt theexisting definition of a student. Accord-ingly, the proposed regulations providethat the term student means an individualwho, during some part of each of 5 calen-dar months during the calendar year inwhich the taxable year of the taxpayerbegins, is a full-time student at an educa-tional organization described in section170(b)(1)(A)(ii) or is pursuing a full-timecourse of institutional on-farm trainingunder the supervision of an accreditedagent of an educational institution or of aState or political subdivision of a State.An educational organization, as definedin section 170(b)(1)(A)(ii), is a schoolnormally maintaining a regular facultyand curriculum and having a regularly en-rolled body of students in attendance atthe place where its educational activitiesare regularly carried on.


d. Support tests

In determining whether an individualprovided more than one-half of the indi-vidual’s own support (qualifying childsupport test), or whether a taxpayer pro-vided more than one-half of an individu-al’s support (qualifying relative supporttest), the proposed regulations comparethe amount of support provided by theindividual or the taxpayer to the totalamount of the individual’s support fromall sources. In general, the amount of anindividual’s support from all sources in-cludes support the individual provides andincome that is excludable from gross in-come. The proposed regulations furtherprovide that the amount of an item ofsupport is the amount of expenses paid orincurred to furnish the item of support. Ifsupport is furnished in the form of prop-erty or a benefit (such as lodging), theamount of that support is the fair marketvalue of the item furnished (Rev. Rul.58–302 (1958–1 CB 62)).

The proposed regulations provide thatthe term support includes food, shelter,clothing, medical and dental care, educa-tion, and similar items for the benefit ofthe supported individual. Support does notinclude Federal, State, and local incometaxes, or Social Security and Medicaretaxes, of an individual paid from the indi-vidual’s own income (Rev. Rul. 58–67(1958–1 CB 62)), funeral expenses (Rev.Rul. 65–307 (1965–2 CB 40)), life insur-ance premiums, or scholarships receivedby a taxpayer’s child who is a student asdefined in section 152(f)(2).

The proposed regulations provide thatmedical insurance premiums are treated assupport. These premiums include Part ABasic Medicare premiums, if any, underTitle XVIII of the Social Security Act (42U.S.C. 1395c to 1395i–5), Part B Supple-mental Medicare premiums under TitleXVIII of the Social Security Act (42U.S.C. 1395j to 1395w–6), Part C Medi-care � Choice Program premiums underTitle XVIII of the Social Security Act (42U.S.C. 1395w–21 to 1395w–29), and PartD Voluntary Prescription Drug BenefitMedicare premiums under Title XVIII ofthe Social Security Act (42 U.S.C.1395w–101 to 1395w–154). However,medical insurance proceeds, includingbenefits received under Medicare Part A,

Part B, Part C, and Part D, are not treatedas support and are disregarded in deter-mining the amount of the individual’ssupport. Thus, only the premiums paidand the unreimbursed portion of the ex-penses for the individual’s medical careare support. See Rev. Rul. 64–223(1964–2 CB 50); and Rev. Rul. 70–341(1970–2 CB 31), revoked in part by Rev.Rul. 79–173 (1979–1 CB 86) to the ex-tent that it held that Part A Medicare ben-efits are included as a recipient’s contri-bution to support. In addition, servicesprovided to individuals under the medicaland dental care provisions of the ArmedForces Act (10 U.S.C. chapter 55) are nottreated as support and are disregarded indetermining the amount of the individu-al’s support. Finally, payments from athird party (including a third party’s insur-ance company) for the medical care of aninjured individual in satisfaction of a legalclaim for the personal injury of the indi-vidual are not items of support and aredisregarded in determining the amount ofthe individual’s support. See Rev. Rul.64–223.

The proposed regulations provide that,in general, governmental payments andsubsidies are treated as support providedby a third party. Consistent with previ-ously issued rulings and case law, thesepayments and subsidies include, for exam-ple, Temporary Assistance for NeedyFamilies (TANF) (42 U.S.C. 601–619),low-income housing assistance (42 U.S.C.1437f), benefits under the SupplementalNutrition Assistance Program (7 U.S.C.chapter 51), Supplemental Security In-come payments (42 U.S.C. 1381–1383f),foster care maintenance payments, andadoption assistance payments. See H.R.Rep. No. 108–696, at 57 (2004) (Conf.Rep.); Gulvin v. Commissioner, 644 F.2d2 (5th Cir. 1981); and Rev. Rul. 74–153(1974–1 CB 20).

However, unlike the subsidies de-scribed in the previous paragraph thatgenerally are based solely on need, oldage benefits under section 202(b) of TitleII of the Social Security Act (SSA) (42U.S.C. 402) are based on an individual’searnings and contributions into the SocialSecurity system and thus are treated assupport provided by the recipient to theextent the recipient uses the payments forsupport. See Rev. Rul. 58–419 (1958–2

CB 57), as modified by Rev. Rul. 64–222(1964–2 CB 47). Similarly, Social Secu-rity survivor and disability insurance ben-efit payments made under section 202(d)of the SSA to the child of a deceased ordisabled parent are treated as support pro-vided by the child to the extent thosepayments are used for the child’s support.See Rev. Rul. 57–344 (1957–2 CB 112)and Rev. Rul. 74–543 (1974–2 CB 39).

The proposed regulations provide aspecial rule for governmental paymentsused by the recipient or other intendedbeneficiary to support another individual.The proposed regulations draw a distinc-tion between: (1) governmental payments(such as Social Security old age benefits,or survivor and disability insurance bene-fits for a child) made to a recipient that areintended to benefit a particular named in-dividual (whether the recipient, or anotherintended beneficiary for whom the recip-ient merely acts as the payee on behalf ofthat other intended beneficiary); and (2)governmental payments made to a recipi-ent that are intended to support the recip-ient and other individuals (such asTANF). Although the governmental pay-ments of the former variety are intendedto benefit a particular named individual,because money is fungible, the intendedbeneficiary might use the governmentalpayments to support another individual. Inthis situation, the proposed regulationsprovide that, if the intended beneficiary(whether the recipient or another individ-ual) uses the governmental payments tosupport another individual, that amountwould constitute support of that other in-dividual provided by the intended benefi-ciary. Similarly, the proposed regulationsprovide that the use of governmental pay-ments of the latter variety by the recipientto support another individual would con-stitute support of that other individual pro-vided by the recipient, whereas any part ofsuch a payment used for the support of therecipient would constitute support of therecipient by a third party. For example, ifa mother receives TANF and uses theTANF payments to support her children,the proposed regulations treat the motheras having provided that support. Thus, theIRS will no longer assert the position thatit took in Lutter, which concerned pay-ments received by a mother under a pro-gram that was the predecessor of TANF.


The Treasury Department and the IRS areproposing this rule for the administrativeconvenience of both the IRS and taxpay-ers to avoid the need to trace the use ofsuch governmental payments, as opposedto the use of other funds of the recipient,for the support of another individual.

The Treasury Department and IRS re-quest comments on whether various pay-ments made pursuant to the Patient Pro-tection And Affordable Care Act (PublicLaw 111–148, 124 Stat. 119) in the formof a cost-sharing reduction, an advancedpayment of the premium tax credit, or as areimbursement of health insurance premi-ums in the form of a premium tax credit,when used for the benefit of another indi-vidual, are support provided by the recip-ient of those benefits or support providedby a third party.

e. Citizenship

Under section 152(b)(3)(A), an indi-vidual who is not a citizen or national ofthe United States is not a dependent unlessthe individual is a resident of the UnitedStates, Canada, or Mexico. Nevertheless,consistent with the exception for certainadopted children in section 152(b)(3)(B),the proposed regulations provide that anadopted child of a taxpayer who is a U.S.citizen or national may qualify as a depen-dent if, for the taxpayer’s taxable year, thechild has the same principal place ofabode as the taxpayer and is a member ofthe taxpayer’s household, and otherwisequalifies as the taxpayer’s dependent.

f. Tiebreaker rules

The proposed regulations change theinterpretation in Publication 501 regard-ing a taxpayer’s adjusted gross income ona joint return and provide that, in applyingthe tiebreaker rules that treat an individualas the qualifying child of the eligible tax-payer with the higher or highest adjustedgross income, the adjusted gross incomeof a taxpayer who files a joint tax return isthe total adjusted gross income shown onthe return. The prior interpretation ischanged to be consistent with other Codesections that require the filing of a jointreturn to claim a benefit and thereforecalculate income based on the entireamount shown on the joint return. For

example, the earned income credit undersection 32 calculates the earned incomeamount based on the entire amount shownon the joint return. This joint return rulealso is relevant for determining whethersection 152(c)(4)(C) applies. Under thatprovision, if an eligible parent does notclaim an individual as a qualifying child,another eligible taxpayer may claim theindividual as a qualifying child only if thattaxpayer’s adjusted gross income is higherthan the adjusted gross income of anyeligible parent.

The proposed regulations also expandthe tiebreaker rule in section 152(c)(4)(C)to address the situation in which an eligi-ble parent does not claim an individual asa qualifying child and two or more tax-payers, none of whom is a parent, areeligible to claim the individual as a qual-ifying child and each has adjusted grossincome higher than any eligible parent. Inthis situation, the proposed regulationsprovide that the individual is treated as thequalifying child of the eligible taxpayerwith the highest adjusted gross income.

g. Child of parents who are divorced,separated, or living apart

Section 152(e) provides, in general,that a child is treated as the qualifyingchild or qualifying relative of a noncusto-dial parent for a calendar year if, amongother things, the custodial parent providesto the noncustodial parent a written dec-laration that the custodial parent will notclaim the child as a dependent for anytaxable year beginning in that calendaryear. Under section 152(e)(2)(B), the non-custodial parent must attach the writtendeclaration to his or her return.

The proposed regulations provide thatthe noncustodial parent must attach a copyof the written declaration to an original oramended return. A taxpayer may submit acopy of the written declaration to the IRSduring an examination of that parent’s re-turn. However, to provide certainty forboth taxpayers and the IRS, the proposedregulations provide that a copy of a writ-ten declaration attached to an amendedreturn or provided during an examinationwill not meet the requirements of section152(e) and § 1.152–5(e) if the custodialparent signed the written declaration afterthe custodial parent filed a return claiming

a dependency exemption for the child forthe year at issue, and the custodial parenthas not filed an amended return to removethat claim to a dependency exemption.The proposed regulations provide similarrules for a parent revoking a written dec-laration.

h. Filing a return solely to obtain arefund of taxes

Individuals who file an income tax re-turn solely to obtain a refund of estimatedor withheld taxes are subject to specialrules under various provisions of section152. Section 152(c)(1)(E) provides that,for an individual to be a qualifying childof a taxpayer, the individual cannot havefiled a joint return “other than only for aclaim of refund.” Section 152(b)(2) pro-vides that, for an individual to be a depen-dent of a taxpayer, the individual cannothave filed a joint return with the individ-ual’s spouse. However, the WFTRA con-ference report states that “[t]his restrictiondoes not apply if the return was filedsolely to obtain a refund and no tax lia-bility would exist for either spouse if theyfiled separate returns.” Section 152(d)(1)(D) provides that, to be a qualifyingrelative, an individual may not be thequalifying child of the taxpayer or of anyother taxpayer. Notice 2008–5 concludesthat an individual is not the qualifyingchild of “any other taxpayer,” within themeaning of section 152(d)(1)(D), if theperson who could have claimed the indi-vidual as a qualifying child does not havea filing obligation and either does not filea return or files a return solely to obtain arefund of withheld taxes.

The proposed regulations provide asimilar exception to the rule in section152(b)(1) that a taxpayer cannot have adependent if the taxpayer himself or her-self is a dependent of another taxpayer.Specifically, the proposed regulations pro-vide that an individual is not a dependentof a person if that person is not required tofile an income tax return under section6012 and either does not file an incometax return or files an income tax returnsolely to claim a refund of estimated orwithheld taxes.


2. Surviving Spouse, Head of Household,and Conforming Changes

The proposed regulations amend theregulations under section 2 regarding thedefinition of surviving spouse and the def-inition of head of household to conform tothe amendments made by WFTRA. Toreflect the amendments made by the TaxReform Act of 1969, the proposed regu-lations remove from the regulations undersections 2, 3, and 6013 references to thereturn of a surviving spouse being treatedas a joint return. The proposed regulationsalso revise and move from the regulationsunder section 21 to the regulations undersection 2 the definition of maintaining ahousehold, in part, to conform to theamendments to section 21 made by WF-TRA, which removed the requirement thata taxpayer maintain a household to claimthe credit under section 21.

a. Surviving spouse

From the time of the 1969 amendmentuntil the enactment of WFTRA, section2(a)(1)(B) provided that a taxpayer who isa surviving spouse described in section2(a)(1)(A) may file as a surviving spouse(and thus may use the tax rates of jointfilers) only if the taxpayer “maintains ashis home a household which constitutesfor the taxable year the principal place ofabode (as a member of such household) ofa dependent (i) who (within the meaningof section 152) is a son, stepson, daughter,or stepdaughter of the taxpayer, and (ii)with respect to whom the taxpayer is en-titled to a deduction for the taxable yearunder section 151.” Thus, the member ofthe taxpayer’s household had to be a sonor daughter or stepson or stepdaughter forwhom the taxpayer was entitled to a de-pendency deduction.

WFTRA amended section 2(a), as wellas certain other sections such as section 42relating to the low-income housing creditand section 125 relating to cafeteria plans,to provide that the reference to section152 applies “without regard to subsections(b)(1), (b)(2), and (d)(1)(B).” These threesubsections, respectively: (1) deny a de-pendency exemption to a dependent, (2)deny a dependency exemption for a per-son filing a joint return with his or herspouse, and (3) require the gross income

of a qualifying relative to be less than theamount of the dependency exemption.Thus, the language inserted by the WF-TRA technical amendment to section 2(a)was intended to broaden the class of indi-viduals whose members could qualify ataxpayer as a surviving spouse for pur-poses of section 2. See also Staff of JointComm. on Taxation, 108th Cong., Gen-eral Explanation of Tax Legislation En-acted in the 108th Congress 130 (Comm.Print 2005) (“technical and conformingamendments ... provide that an individualmay qualify as a dependent for certainpurposes ... without regard to whether theindividual has gross income ... or is mar-ried and files a joint return.”)

However, in amending section 2(a) forthis purpose, WFTRA inserted the direc-tion to exclude the three referenced pro-visions after the reference to section 152in section 2(a)(1)(B)(i). Thus, this sectioncurrently provides, “(i) who (within themeaning of section 152, determined with-out regard to subsections (b)(1), (b)(2),and (d)(1)(B) thereof) is a son, stepson,daughter, or stepdaughter of the tax-payer.” Because section 2(a)(1)(B)(ii)continues to require that the taxpayer beentitled to a deduction under section 151for the dependent (a requirement thatcould not be met if any of these threesections applied), read literally, section2(a)(1)(B)(ii) would override the intent ofthe statutory change in section2(a)(1)(B)(i), thus preventing the WFTRAamendment from effecting any change inthe statute. Therefore, to give effect to thestatutory amendment, the proposed regu-lations construe the language added byWFTRA instead to modify the section 152requirements that apply in determiningwhether the taxpayer is entitled to thedependency exemption under section 151for purposes of section 2(a)(1)(B)(ii). Ac-cordingly, the proposed regulations pro-vide that an individual is a dependent forpurposes of section 2(a) if the taxpayermay claim a deduction under section 151for the individual without applying sec-tions 152(b)(1), (b)(2), and (d)(1)(B).

b. Head of household

The proposed regulations under section2(b) update and simplify the existing reg-ulations defining head of household. Con-

sistent with the statutory amendments tothe definition of a dependent, the proposedregulations provide rules on qualifying asa head of household by maintaining ahousehold that is the principal place ofabode of a qualifying child or a depen-dent. The proposed regulations on head ofhousehold apply the rules in the proposedregulations under section 152 for deter-mining principal place of abode, includingwhether an absence is temporary.

c. Maintaining a household

The proposed regulations provide thata taxpayer maintains a household only ifthe taxpayer pays more than one-half ofthe cost related to operating the householdfor the relevant period. Expenses relatedto operating the household include prop-erty taxes, mortgage interest, rent, utilitycharges, upkeep and repairs, property in-surance, and food consumed on the prem-ises. A taxpayer may treat a home’s fairmarket rental value as a cost of maintain-ing a household (instead of the sum ofpayments for mortgage interest, propertytaxes, and insurance). The proposed reg-ulations provide rules that, in certain cir-cumstances, prorate on a monthly basisthe annual cost of maintaining a house-hold when a qualifying child or dependentresides in the household for less than theentire taxable year. The proposed regula-tions also, in certain circumstances, rec-ognize the creation of a new householdduring a year and treat shared living quar-ters as separate households.

3. Tax Tables for Individuals

The proposed regulations remove fromthe regulations under section 3 referencesto the return of a surviving spouse beingtreated as a joint return to conform to theamendments made by the Tax Reform Actof 1969. The proposed regulations alsoupdate the regulations under section 3 toreflect current law.

4. Earned Income Credit

The proposed regulations conform theregulations under section 32 to amend-ments made to section 32 by WFTRA.Consistent with the 2010 repeal of section3507 by the FAA Air Transportation


Modernization and Safety ImprovementAct, the proposed regulations delete theparagraphs of the regulations under sec-tion 32 discussing advance payment of theearned income credit.

In addition, the proposed regulationsreflect a change in the IRS’s position onthe interaction of sections 152(c)(4) and32. Specifically, the proposed regulationsprovide that, if an individual meets thedefinition of a qualifying child under sec-tion 152(c)(1) for more than one taxpayerand the individual is not treated as thequalifying child of one such taxpayer un-der the tiebreaker rules of section152(c)(4), then the individual also is nottreated as a qualifying child of that tax-payer for purposes of section 32(c)(1)(A).Thus, that taxpayer may be an eligibleindividual under section 32(c)(1)(A)(ii)and may claim the childless EIC if he orshe meets the other requirements of thatsection. The Treasury Department and theIRS have concluded that this change inposition is consistent with the languageand purpose of section 32 and will be lessconfusing to taxpayers and easier for theIRS to administer.

The problems with the current rulemay be illustrated by the following exam-ple. Two sisters (B and C) live togetherand each of them is a low-income tax-payer. Neither has a child and each mayclaim the childless EIC under section32(c)(1)(A)(ii). Later, B has a child, andB’s child meets the definition of a quali-fying child under section 152(c)(1) forboth B and C. The child is treated as thequalifying child of B under the tiebreakerrules of section 152(c)(4), and B mayclaim the EIC as an eligible individualwith a qualifying child under section32(c)(1)(A)(i). Under the current rule, Cwould not be allowed to claim the child-less EIC under section 32(c)(1)(A)(ii).The Treasury Department and the IRShave determined that allowing C to con-tinue to claim the childless EIC after thechild is born is equitable and consistentwith the purpose of section 32 to assistworking, low-income taxpayers. Accord-ingly, the proposed regulations providethat, if an individual is not treated as aqualifying child of a taxpayer after apply-ing the tiebreaker rules of section152(c)(4), then the individual will not pre-

vent that taxpayer from qualifying for thechildless EIC.

5. Additional Standard Deduction for theAged and Blind

The proposed regulations remove theprovisions on additional exemptions forage and blindness from the regulationsunder section 151 and add regulations un-der section 63 on the additional standarddeduction for the aged and the blind toreflect the changes made by the Tax Re-form Act of 1986. The proposed regula-tions amend the regulations under section63 to remove a cross reference to now-repealed statutory provisions relating to acharitable deduction for taxpayers who donot itemize. To limit impediments to elec-tronic filing, the proposed regulations alsodelete the requirement that a taxpayerclaiming a tax benefit for blindness mustattach a certificate or statement to the tax-payer’s tax return. Instead, a taxpayermust maintain the certificate or statementin the taxpayer’s records.

Applicability Date

These regulations are proposed to ap-ply to taxable years beginning after thedate the regulations are published as finalregulations in the Federal Register.Pending the issuance of the final regula-tions, taxpayers may choose to apply theseproposed regulations in any open taxableyears.

Effect on Other Documents

When finalized, the proposed regula-tions will obsolete Rev. Rul. 57–344, Rev.Rul. 58–67, Rev. Rul. 58–302, Rev. Rul.64–223, Rev. Rul. 65–307, Rev. Rul. 70–341, Rev. Rul. 74–153, Rev. Rul. 74–543, Rev. Rul. 79–173, Rev. Rul. 84–89,Notice 2006–86, and Notice 2008–5.

Special Analyses

Certain IRS regulations, includingthese, are exempt from the requirementsof Executive Order 12866, as supple-mented and reaffirmed by Executive Or-der 13563. Therefore, a regulatory impactassessment is not required. The regula-tions affect individuals and do not imposea collection of information on small enti-ties, therefore the Regulatory Flexibility

Act (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the Code,this notice of proposed rulemaking will besubmitted to the Chief Counsel for Advo-cacy of the Small Business Administra-tion for comment on its impact on smallbusiness.

Statement of Availability of IRSDocuments

IRS revenue procedures, revenue rul-ings, notices and other guidance cited inthis preamble are published in the InternalRevenue Bulletin (or Cumulative Bulle-tin) and are available from the Superin-tendent of Documents, U.S. Govern-ment Publishing Office, Washington,DC 20402, or by visiting the IRS web-site at http://www.irs.gov.

Comments and Requests for a PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any comments that aresubmitted timely to the IRS, as prescribedin this preamble under the “Addresses”heading. The IRS and Treasury Depart-ment request comments on all aspects ofthe proposed rules. All comments will beavailable at www.regulations.gov or uponrequest. A public hearing will be sched-uled if requested in writing by any personthat timely submits written comments. If apublic hearing is scheduled, notice of thedate, time, and place for the hearing willbe published in the Federal Register.


The principal authors of these pro-posed regulations are Christina M. Glen-dening and Victoria J. Driscoll of the Of-fice of Associate Chief Counsel (IncomeTax and Accounting). However, otherpersonnel from the Treasury Departmentand the IRS participated in the develop-ment of the regulations.* * * * *

Withdrawal of Notice of ProposedRulemaking

Accordingly, under authority of 26U.S.C. 7805, the notice of proposed rule-making (REG–107279–00) that was pub-


lished in the Federal Register on Novem-ber 30, 2000 (65 FR 71277), is withdrawn.

Proposed Amendments to theRegulations

Accordingly, 26 CFR Parts 1 and 301are proposed to be amended as follows:


Paragraph 1. The authority citation forpart 1 continues to read, in part, as fol-lows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.2–1 is revised to read

as follows:

§ 1.2–1 Returns of surviving spouseand head of household.

(a) In general. Tax is determined undersection 1(a) for a return of a survivingspouse, as defined in section 2(a) and§ 1.2–2(a). Tax is determined under sec-tion 1(b) for a return of a head of house-hold, as defined in section 2(b) and § 1.2–2(b).

(b) Death of a spouse. If married tax-payers have different taxable years solelybecause of the death of either spouse, thetaxable year of the deceased spouse isdeemed to end on the last day of thesurviving spouse’s taxable year for pur-poses of determining their eligibility tofile a joint return for that year. For rulesrelating to filing a joint return in the yeara spouse dies, see section 6013 and therelated regulations.

(c) Tax tables. For rules on the use ofthe tax tables that apply to individuals, seesection 3 and the related regulations.

(d) Change in rates. For the treatmentof taxable years during which a change inthe tax rates occurs, see section 15.

(e) Applicability date. This section ap-plies to taxable years beginning after thedate these regulations are published asfinal regulations in the Federal Register.

Par. 3. Section 1.2–2 is revised to readas follows:

§ 1.2–2 Definitions and special rules.

(a) Surviving spouse—(1) In general.If a taxpayer is eligible to file a jointreturn under section 6013 (without apply-ing section 6013(a)(3)) for the taxableyear in which the taxpayer’s spouse dies,

the taxpayer qualifies as a survivingspouse for each of the two taxable yearsimmediately following the year of thespouse’s death if the taxpayer—

(i) Has not remarried before the closeof the taxable year; and

(ii) Maintains as the taxpayer’s home ahousehold that is for the taxable year theprincipal place of abode of a son ordaughter (including by adoption), stepson,or stepdaughter who is a member of thetaxpayer’s household and who is a depen-dent of the taxpayer within the meaning ofparagraph (a)(2) of this section.

(2) Dependent. An individual is a de-pendent of a taxpayer for purposes of thisparagraph (a) if the taxpayer may claim adeduction under section 151 for the indi-vidual, without applying sections 152(b)(1), (b)(2), and (d)(1)(B).

(b) Head of household—(1) In general.A taxpayer qualifies as a head of house-hold if the taxpayer is not married at theend of the taxable year, is not a survivingspouse, as defined in paragraph (a) of thissection, and either—

(i) Maintains as the taxpayer’s home ahousehold that is for more than one-halfof the taxable year the principal place ofabode of a qualifying child or dependentof the taxpayer, within the meaning ofparagraph (b)(2) of this section, who is amember of the taxpayer’s household dur-ing that period; or

(ii) Maintains a household, whether ornot the taxpayer’s home, that is for thetaxable year the principal place of abodeof a parent of the taxpayer, within themeaning of paragraph (b)(3) of this sec-tion.

(2) Qualifying child or dependent—(i)Qualifying child. An individual is a qual-ifying child for purposes of this paragraph(b) if the individual is a qualifying child ofthe taxpayer as defined in section 152(c)and the related regulations, determinedwithout applying section 152(e). How-ever, if the individual is married at the endof the taxpayer’s taxable year, the individ-ual is not a qualifying child for purposesof this section if the individual is not thetaxpayer’s dependent because of the lim-itations of section 152(b)(2) (relating to anindividual filing a joint return with his orher spouse) or 152(b)(3) (relating to indi-viduals who are citizens or nationals ofother countries).

(ii) Dependent. An individual is a de-pendent for purposes of this paragraph (b)if the individual is the taxpayer’s depen-dent, within the meaning of section 152without applying sections 152(d)(2)(H)(relating to an individual qualifying as amember of the household) and 152(d)(3)(relating to the special rule for multiplesupport agreements) for whom the tax-payer may claim a deduction under sec-tion 151.

(3) Parent. An individual is a parent ofthe taxpayer for purposes of this para-graph (b) if the individual is the taxpay-er’s father or mother, including a father ormother who legally adopted the taxpayer,and is the taxpayer’s dependent within themeaning of section 152 without applyingsection 152(d)(3), relating to the specialrule for multiple support agreements, forwhom the taxpayer may claim a deductionunder section 151.

(4) Limitation. An individual may qual-ify only one taxpayer as a head of householdfor taxable years beginning in the same cal-endar year.

(5) Marital status. For purposes of thisparagraph (b), the marital status of a tax-payer is determined at the end of the tax-payer’s taxable year. A taxpayer is con-sidered not married if the taxpayer islegally separated from the taxpayer’sspouse under a decree of divorce or sep-arate maintenance, if at any time duringthe taxable year the taxpayer’s spouse is anonresident alien, or if the provisions ofsection 7703(b) are satisfied. A taxpayer isconsidered married if the taxpayer’sspouse, other than a spouse who is a non-resident alien, dies during the taxableyear.

(6) Nonresident alien. A taxpayer doesnot qualify as a head of household if thetaxpayer is a nonresident alien, as definedin section 7701(b)(1)(B), at any time dur-ing the taxable year.

(c) Member of the household. An indi-vidual is a member of a taxpayer’s house-hold if the individual and the taxpayerreside in the same living quarters and thetaxpayer maintains the household, in part,for the benefit of the individual. An indi-vidual is a member of a taxpayer’s house-hold despite a temporary absence due tospecial circumstances. An individual isnot treated as a member of the taxpayer’shousehold if, at any time during the tax-


able year of the taxpayer, the relationshipbetween the individual and the taxpayerviolates local law. See § 1.152–4(c)(2) forrules relating to temporary absences.

(d) Maintaining a household—(1) Ingeneral. A taxpayer maintains a house-hold only if during the taxable year thetaxpayer pays more than one-half ofthe cost of operating the household for themutual benefit of the residents. These ex-penses include property taxes, mortgageinterest, rent, utility charges, upkeep andrepairs, property insurance, and food con-sumed on the premises. A taxpayer maytreat a home’s fair market rental value asa cost of maintaining a household, insteadof the sum of payments for property taxes,mortgage interest, and property insurance.Expenses of maintaining a household donot include—

(i) The cost of clothing, education,medical treatment, vacations, life insur-ance, and transportation;

(ii) The value of services performed inthe household by the taxpayer or any otherperson qualifying the taxpayer as a headof household or as a surviving spouse; or

(iii) An expense paid or reimbursed byany other person.

(2) Proration of costs. In determiningwhether a taxpayer pays more than one-half of the cost of maintaining a house-hold that is the principal place of abode ofa qualifying child or dependent for lessthan a taxable year, the cost for the entiretaxable year is prorated on the basis of thenumber of calendar months the qualifyingchild or dependent resides in the house-hold. A period of less than a calendarmonth is treated as a full calendar month.Thus, for example, if the cost of maintain-ing a household for a taxable year is$30,000, and a taxpayer shares a principalplace of abode with a qualifying child ordependent from May 20 to December 31,the taxpayer must furnish more than$10,000 (8/12 of $30,000 � 50 percent) inmaintaining the household from May 1 toDecember 31 to satisfy the requirementsof this paragraph (d).

(3) New household. If a new householdis established during the taxpayer’s tax-able year (for example, if spouses separateand one moves out of the family homewith the child), the cost of maintaining thenew household for the year is the cost ofmaintaining that household beginning

with the date the new household is estab-lished. If one spouse and the child remainin the family home and the other parentmoves out of the home, the cost of main-taining the household for the year is thecost of maintaining the household begin-ning with the date the other spouse movesout.

(4) Birth, death, adoption, or place-ment. If an individual is a member of ahousehold for less than a taxable year as aresult of the individual’s birth, death,adoption, or placement with a taxpayer foradoption or in foster care during that year,the requirement that the individual be amember of the household for more thanone-half of the taxable year is satisfied ifthe individual is a member of the house-hold for more than one-half of the periodafter the individual’s birth, adoption, orplacement for adoption or in foster care orbefore the individual’s death.

(5) Shared residence—(i) In general. Iftwo or more taxpayers not filing a jointreturn reside in the same living quarters,each taxpayer may be treated as maintain-ing a separate household if each providesmore than one-half of the cost of main-taining the separate household. For thispurpose, two households in the same liv-ing quarters are not considered separatehouseholds if any individual in one house-hold is the spouse of any individual in theother household, or if any individual inone household may claim, or would havepriority under the tiebreaker rules in sec-tion 152(c)(4) to claim, any individual inthe other household as a dependent.

(ii) Examples. The following examplesillustrate the rules in this paragraph (d)(5).In each example, assume that if a taxpayermay be treated as residing in a separatehousehold, that taxpayer provides morethan one-half of the cost of maintainingthat household.

Example 1. Two sisters and their respective chil-dren reside in the same living quarters. Neither sistermay claim the other sister as a dependent. Each sisterpays more than one-half of the expenses for herselfand her children, and each sister claims each of herown children as a dependent. Because neither sistermay claim the other sister as a dependent, and be-cause neither sister would have priority to claim anyof the other sister’s children as a qualifying childunder the tiebreaker rules of section 152(c)(4), eachsister is treated as maintaining a separate household.

Example 2. A and B, an unmarried couple, havetwo children together (C1 and C2) and all fourindividuals live in the same living quarters for the

entire tax year. Both A and B contribute to payingthe expenses of the couple and the two children. Ahas higher adjusted gross income than B. Each par-ent files a tax return. Under the tiebreaker rules insection 152(c)(4), the parent with the higher adjustedgross income (in this case, A) would have priority toclaim each child as a qualifying child if both claimedthe child. As a result, B may not be treated asmaintaining a separate household with either child orboth children. Therefore, if B may be claimed as A’sdependent, then all four individuals are members ofthe same household. However, if B may not beclaimed as A’s dependent, B may be treated asmaintaining a separate household consisting solelyof B, even if B claims one of the children as adependent on B’s return.

Example 3. The facts are the same as in Example2 of this paragraph (d)(5)(ii) except that A and B donot have any children together; C1 is the child of Aand C2 is the child of B. Neither A nor B may claimthe other as a dependent, and each parent pays morethan one-half of the expenses for himself or herselfand his or her child. Because neither A nor B mayclaim the other adult or the other adult’s child as adependent, each adult is treated as maintaining aseparate household.

Example 4. Grandparent, Parent, and Child livetogether and Child meets the definition of a qualify-ing child for both Parent and Grandparent. BothParent and Grandparent pay their respective ex-penses, and both contribute to paying Child’s ex-penses. Neither Parent nor Grandparent may claimthe other as a dependent. Under the tiebreaker rulesof section 152(c)(4), Parent would have priority overGrandparent to claim Child as a qualifying child.Therefore, Grandparent may not be treated as main-taining a household for Grandparent and Child sep-arate from the household of Parent. However, Parentmay be treated as maintaining a household for Parentand Child separate from the household of Grandparent.

(e) Special rules for maintaining ahousehold—(1) Principal place of abode.For purposes of this section, the term prin-cipal place of abode has the same mean-ing as in section 152 and § 1.152–4(c).

(2) Part-year residence. If, during thetaxable year, an individual who may qual-ify a taxpayer as head of household isborn or dies, is adopted or lawfully placedfor adoption with the taxpayer, is an eli-gible foster child, or is a missing child,whether the taxpayer maintained a house-hold that is the principal place of abode ofthe individual for the required period isdetermined under § 1.152–4(d) and (e).

(3) Change of location. A taxpayermay maintain a household even thoughthe physical location of the householdchanges.

(f) Certain married individuals livingapart. An individual who is considerednot married under section 7703(b) also isconsidered not married for all purposes of


part I of subchapter A of chapter 1 of theCode.

(g) Applicability date. This section ap-plies to taxable years beginning after thedate these regulations are published asfinal regulations in the Federal Register.


§ 1.3–1 Tax tables for individuals.

(a) In general. Except as otherwiseprovided in paragraph (b) of this section,in lieu of the tax imposed by section 1, anindividual who does not itemize deduc-tions for the taxable year and whose tax-able income for the taxable year does notexceed the ceiling amount as defined inparagraph (c) of this section, must deter-mine his or her tax liability under theprescribed tax tables in tax forms and pub-lications of the Internal Revenue Service.The individual must use the appropriatetax rate category under the tax tables. Thetax imposed under section 3 and this sec-tion shall be treated as tax imposed bysection 1.

(b) Exceptions. Section 3 and this sec-tion do not apply to (1) an individualmaking a return for a period of fewer than12 months as a result of a change in an-nual accounting period, or (2) an estate ortrust.

(c) Ceiling amount defined. The ceilingamount means the highest amount of tax-able income for which a tax amount isdetermined in the tax tables for the taxrate category in which the taxpayer falls.

(d) Special rule for surviving spouse. Ataxpayer filing as a surviving spouse usesthe same tax rate category as a taxpayerfiling a joint return.

(e) Applicability date. This section ap-plies to taxable years beginning after thedate these regulations are published asfinal regulations in the Federal Register.

Par. 5. Section 1.21–1 is amended byrevising paragraph (a)(1), removing para-graph (h), redesignating paragraphs (j),(k), and (l) as paragraphs (h), (j), and (k),and revising newly redesignated para-graph (k) to read as follows:

§ 1.21–1 Expenses for household anddependent care services necessary forgainful employment.

(a) In general. (1) Section 21 allows acredit to a taxpayer against the tax im-posed by chapter 1 for employment-related expenses for household servicesand care (as defined in paragraph (d) ofthis section) of a qualifying individual (asdefined in paragraph (b) of this section).The purpose of the expenses must be toenable the taxpayer to be gainfully em-ployed (as defined in paragraph (c) of thissection). For taxable years beginning afterDecember 31, 2004, a qualifying individ-ual must have the same principal place ofabode (as defined by paragraph (g) of thissection) as the taxpayer for more thanone-half of the taxable year.* * * * *

(k) Applicability date—(1) In general.Except as provide in paragraph (k)(2) ofthis section, this section and §§ 1.21–2through 1.21–4 apply to taxable yearsending after August 14, 2007.

(2) Exception. Paragraph (a)(1) of thissection applies to taxable years beginningafter the date these regulations are pub-lished as final regulations in the FederalRegister.

Par. 6. Section 1.32–2 is amended byrevising the section heading, adding para-graph (c)(3), and revising paragraph (e) toread as follows:

§ 1.32–2 Earned income credit.

* * * * *(c) * * *(3) Qualifying child—(i) In general.

For purposes of this section, a qualifyingchild of the taxpayer is a qualifying childas defined in section 152(c), determinedwithout applying sections 152(c)(1)(D)and 152(e).

(ii) Application of tiebreaker rules. Forpurposes of determining whether a tax-payer is an eligible individual under sec-tion 32(c)(1)(A), if an individual meetsthe definition of a qualifying child underparagraph (c)(3)(i) of this section for morethan one taxpayer and the individual istreated as the qualifying child of a tax-payer under the tiebreaker rules of section152(c)(4) and the related regulations, thenthat taxpayer may be an eligible individ-ual under section 32(c)(1)(A)(i) and may

claim the earned income credit for a tax-payer with a qualifying child if all otherrequirements of section 32 are satisfied. Ifan individual meets the definition of aqualifying child under paragraph (c)(3)(i)of this section for more than one taxpayerand the individual is not treated as thequalifying child of a taxpayer under thetiebreaker rules of section 152(c)(4) andthe related regulations, then the individualalso is not treated as a qualifying child ofthat taxpayer in the taxable year for pur-poses of section 32(c)(1)(A). Thus, thattaxpayer may be an eligible individualunder section 32(c)(1)(A)(ii) and mayclaim the earned income credit for a tax-payer without a qualifying child if allother requirements are satisfied.

(iii) Examples. The following exam-ples illustrate the rules of this paragraph(c). In each example, the taxpayer uses thecalendar year as the taxpayer’s taxableyear and, except to the extent indicated,each taxpayer meets the requirements toclaim the benefits(s) described in the ex-ample.

Example 1. Child, Parent, and Grandparent sharethe same principal place of abode for the taxableyear. Child meets the definition of a qualifying childunder paragraph (c)(3)(i) of this section for bothParent and Grandparent (and for no other person) forthe taxable year. Parent claims the earned incomecredit with Child as Parent’s qualifying child. Underthe tiebreaker rules of section 152(c)(4)(A) and therelated regulations, Child is treated as the qualifyingchild of Parent and is not treated as the qualifyingchild of Grandparent. Under section 32(c)(1) andparagraph (c)(3)(ii) of this section, Parent is an eli-gible individual under section 32(c)(1)(A)(i) whomay claim the earned income credit for a taxpayerwith a qualifying child, and Grandparent is an eligi-ble individual under section 32(c)(1)(A)(ii) who mayclaim the earned income credit for a taxpayer with-out a qualifying child.

Example 2. The facts are the same as in Example1 of this paragraph (c)(3)(iii), except that Grandpar-ent, rather than Parent, claims Child as a qualifyingchild, and Grandparent’s adjusted gross income ishigher than Parent’s adjusted gross income. Underthe tiebreaker rules of section 152(c)(4)(C) and therelated regulations, Child is treated as the qualifyingchild of Grandparent and is not treated as the qual-ifying child of Parent. Under section 32(c)(1) andparagraph (c)(3)(ii) of this section, Grandparent is aneligible individual under section 32(c)(1)(A)(i) whomay claim the earned income credit for a taxpayerwith a qualifying child, and Parent is an eligibleindividual under section 32(c)(1)(A)(ii) who mayclaim the earned income credit for a taxpayer with-out a qualifying child.

* * * * *(e) Applicability date—(1) In general.

Except as provided in paragraph (e)(2) of


this section, this section applies to taxableyears beginning after March 5, 2003.

(2) Exception. Paragraph (c)(3) of thissection applies to taxable years beginningafter the date these regulations are pub-lished as final regulations in the FederalRegister.

§ 1.63–1 [Amended]

Par. 7. Section 1.63–1 is amended by:1. Removing the language “the zero

bracket amount and” from the sectionheading.

2. Removing the language “section63(g)” and replacing it with the language“section 63(e)” in paragraph (a).


§ 1.63–2 Standard deduction.

The standard deduction means the sumof the basic standard deduction and theadditional standard deduction.

Par. 9. Section 1.63–3 is added to readas follows:

§ 1.63–3 Additional standarddeduction for the aged and blind.

(a) In general. A taxpayer who, at theend of the taxable year, has attained age65 or is blind is entitled to an additionalstandard deduction amount. The addi-tional standard deduction amount is thesum of the amounts to which the taxpayeris entitled under paragraphs (b) and (c) ofthis section. If an individual meets therequirements for both the additionalamount for the aged and the additionalamount for the blind, the taxpayer is en-titled to both additional amounts.

(b) Additional amount for the aged—(1) Aged taxpayer or spouse. A taxpayeris entitled to an additional amount undersection 63(f)(1) if the taxpayer has at-tained age 65 before the end of the taxableyear. If spouses file a joint return, eachspouse who has attained age 65 before theend of the taxable year for which thespouses file the joint return is entitled toan additional amount. A married taxpayerwho files a separate return is entitled to anadditional amount for the taxpayer’sspouse if the spouse has attained age 65before the end of the taxable year and, forthe calendar year in which the taxableyear of the taxpayer begins, the spouse has

no gross income and is not the dependentof another taxpayer. The taxpayer is notentitled to an additional amount if thespouse dies before attaining age 65, eventhough the spouse would have attainedage 65 before the end of the taxpayer’staxable year.

(2) Age determined. For purposes ofsection 63(f) and this paragraph (b), ataxpayer’s age is determined as of the lastday of the taxpayer’s taxable year. A per-son attains the age of 65 on the first mo-ment of the day preceding his or her sixty-fifth birthday.

(c) Additional amount for the blind—(1) Blind taxpayer or spouse. A taxpayeris entitled to an additional amount undersection 63(f)(2) if the taxpayer is blind atthe end of the taxable year. If spouses filea joint return, each spouse who is blind atthe end of the taxable year for which thespouses file the joint return is entitled toan additional amount. A married taxpayerwho files a separate return is entitled to anadditional amount for the taxpayer’sspouse if the spouse is blind and, for thecalendar year in which the taxable year ofthe taxpayer begins, the spouse has nogross income and is not the dependent ofanother taxpayer. If the spouse dies duringthe taxable year, the date of death is thetime for determining the spouse’s blind-ness.

(2) Blindness determined. A taxpayerwho claims an additional amount allowedby section 63(f)(2) for the blind mustmaintain in the taxpayer’s records a state-ment from a physician skilled in the dis-eases of the eye or a registered optometriststating that the physician or optometristhas examined the person for whom theadditional amount is claimed and, in theopinion of the physician or optometrist,the person’s central visual acuity did notexceed 20/200 in the better eye with cor-recting lenses, or the person’s visual acu-ity was accompanied by a limitation in thefield of vision such that the widest diam-eter of the visual field subtends an angleno greater than 20 degrees. The statementmust provide that the physician or optom-etrist examined the person in the taxpay-er’s taxable year for which the amount isclaimed, or that the physician or optome-trist examined the person in an earlier yearand that the visual impairment is irrevers-ible.

(d) Applicability date. This section and§§ 1.63–1(a) and 1.63–2 apply to taxableyears beginning after the date these regu-lations are published as final regulationsin the Federal Register.

Par. 10. Section 1.151–1 is amended byrevising paragraphs (a)(1), (c), and (d) toread as follows:

§ 1.151–1 Deductions for personalexemptions.

(a) * * * (1) In computing taxableincome, an individual is allowed a deduc-tion for the exemptions for an individualtaxpayer and spouse (the personal exemp-tions) and the exemption for a dependentof the taxpayer.* * * * *

(c) Additional exemption for depen-dent. Section 151(c) allows a taxpayer anexemption for each individual who is adependent (as defined in section 152) ofthe taxpayer for the taxable year. See§§ 1.152–1 through 1.152–5 for rules re-lating to dependents.

(d) Applicability date. Paragraphs (a)(1) and (c) of this section apply to taxableyears beginning after the date these regu-lations are published as final regulationsin the Federal Register.

§§ 1.151–2, 1.151–3, and 1.151–4[Removed]

Par. 11. Sections 1.151–2, 1.151–3,and 1.151–4 are removed.

Par. 12. Section 1.152–0 is added un-der the undesignated center heading De-ductions for Personal Exemptions to readas follows:

§ 1.152–0 Table of contents.

This section lists the captions con-tained in § 1.152–1 through § 1.152–5.

§ 1.152–1 General rules fordependents.

(a) In general.(1) Dependent defined.(2) Exceptions.(i) Dependents ineligible.(ii) Married dependents.(iii) Citizens or nationals of other coun-tries.(b) Definitions.(1) Child.


(i) In general.(ii) Adopted child.(iii) Eligible foster child.(iv) Authorized placement agency.(2) Student.(3) Brother and sister.(4) Parent.(c) Applicability date.

§ 1.152–2 Qualifying child.

(a) In general.(b) Qualifying child relationship test.(c) Residency test.(d) Age test.(1) In general.(2) Disabled individual.(e) Qualifying child support test.(f) Joint return test.(g) Child who is eligible to be claimed asa qualifying child by more than one tax-payer.(1) In general.(i) More than one eligible parent.(ii) Eligible parent not claiming.(iii) One eligible parent and other eligibletaxpayer(s).(iv) No eligible parent.(2) Determination of adjusted gross in-come of a person who files a joint return.(3) Coordination with other provisions.(4) Examples.

§ 1.152–3 Qualifying relative.

(a) In general.(b) Qualifying relative relationship test.(c) Gross income test.(1) In general.(2) Income of disabled or handicappedindividuals.(d) Qualifying relative support test.(1) In general.(2) Certain income of taxpayer’s spouse.(3) Support from stepparent.(4) Multiple support agreements.(e) Not a qualifying child test.(1) In general.(2) Examples.

§ 1.152–4 Rules for a qualifying childand a qualifying relative.

(a) Support.(1) In general.(2) Payments made during the year forunpaid or future support.

(3) Governmental payments.(i) Governmental payments as support.(A) In general.(B) Examples.(ii) Governmental payments based on ataxpayer’s contributions.(A) In general.(B) Examples.(iii) Payments used for support of anotherindividual.(4) Medical insurance.(5) Medical care payments from personalinjury claim.(6) Scholarships.(b) Relationship test.(1) Joint return.(2) Divorce or death of spouse.(c) Principal place of abode.(1) In general.(2) Temporary absence.(3) Residing with taxpayer for more thanone-half of the taxable year.(i) In general.(ii) Nights of residence.(A) Nights counted.(B) Night straddling two taxable years.(C) Exception for a parent who works atnight.(D) Absences.(4) Examples.(d) Residence for a portion of a taxableyear because of special circumstances.(1) Individual who is born or dies duringthe year.(2) Adopted child or foster child.(e) Missing child.(1) Qualifying child.(2) Qualifying relative.(3) Age limitation.(4) Application.

§ 1.152–5 Special rule for a child ofdivorced or separated parents or parentswho live apart.

(a) In general.(b) Release of claim by custodial parent.(1) In general.(2) Support, custody, and parental status.(i) In general.(ii) Multiple support agreement.(3) Release of claim to child.(c) Custody.(d) Custodial parent.(1) In general.(2) Night straddling taxable years.(3) Absences.

(4) Special rule for equal number ofnights.(5) Exception for a parent who works atnight.(e) Written declaration.(1) Form of declaration.(i) In general.(ii) Form designated by IRS.(2) Attachment to return.(i) In general.(ii) Examples.(3) Revocation of written declaration.(i) In general.(ii) Form of revocation.(iii) Attachment to return.(4) Ineffective declaration or revocation.(5) Written declaration executed in a tax-able year beginning on or before July 2,2008.(f) Coordination with other sections.(g) Examples.(h) Applicability date.(1) In general.(2) Exception.


§ 1.152–1 General rules fordependents.

(a) In general—(1) Dependent defined.Except as provided in section 152(b) andparagraph (a)(2) of this section, the termdependent means a qualifying child as de-scribed in § 1.152–2 or a qualifying rela-tive as described in § 1.152–3. In general,an individual may be treated as the depen-dent of only one taxpayer for taxableyears beginning in the same calendar year.

(2) Exceptions—(i) Dependents ineli-gible. If an individual is a dependent of ataxpayer for a taxable year of the tax-payer, the individual is treated as havingno dependents for purposes of section 152and the related regulations in the individ-ual’s taxable year beginning in the calen-dar year in which that taxable year of thetaxpayer begins. For purposes of this para-graph (a)(2)(i), an individual is not a de-pendent of a person if that person is notrequired to file an income tax return undersection 6012 and either does not file anincome tax return or files an income taxreturn solely to claim a refund of esti-mated or withheld taxes.

(ii) Married dependents. An individualis not treated as a dependent of a taxpayerfor a taxable year of the taxpayer if the


individual files a joint return, other thansolely to claim a refund of estimated orwithheld taxes, with the individual’sspouse under section 6013 for the taxableyear beginning in the calendar year inwhich that taxable year of the taxpayerbegins.

(iii) Citizens or nationals of other coun-tries. An individual who is not a citizen ornational of the United States is not treatedas a dependent of a taxpayer unless theindividual is a resident, as defined in sec-tion 7701(b), of the United States or of acountry contiguous to the United States(Canada or Mexico). This limitation, how-ever, does not apply to an adopted child,as defined in section 152(f)(1)(B) andparagraph (b)(1)(ii) of this section, if thetaxpayer is a citizen or national of theUnited States and the child has the sameprincipal place of abode as the taxpayerand is a member of the taxpayer’s house-hold, within the meaning of §§ 1.152–4(c)and 1.2–2(c), respectively, for the taxpay-er’s taxable year. See § 1.152–4(d)(2) forrules relating to residence for a portion ofa taxable year. A taxpayer and the childhave the same principal place of abode forthe taxpayer’s taxable year if the taxpayerand child have the same principal place ofabode for the entire portion of the taxableyear following the placement of the childwith the taxpayer.

(b) Definitions. The following definitionsapply for purposes of section 152 and therelated regulations.

(1) Child—(i) In general. The term childmeans a son, daughter, stepson, or step-daughter, or an eligible foster child, withinthe meaning of paragraph (b)(1)(iii) of thissection, of the taxpayer.

(ii) Adopted child. In determiningwhether an individual bears any of the rela-tionships described in paragraph (b)(1)(i)of this section, § 1.152–2(b), or § 1.152–3(b), a legally adopted child of a person,or a child who is lawfully placed with aperson for legal adoption by that person, istreated as a child by blood of that person.A child lawfully placed with a person forlegal adoption by that person includes achild placed for legal adoption by a par-ent, an authorized placement agency, orany other person(s) authorized by law toplace a child for legal adoption.

(iii) Eligible foster child. The term el-igible foster child means a child who is

placed with a person by an authorizedplacement agency or by judgment, decree,or other order of any court of competentjurisdiction.

(iv) Authorized placement agency. Theterm authorized placement agency meansa State, the District of Columbia, a pos-session of the United States, a foreigncountry, an Indian Tribal Government(ITG) (as defined in section 7701(a)(40)),or an agency or organization that is autho-rized by a State, the District of Columbia,a possession of the United States, a for-eign country, an ITG, or a political subdi-vision of any of the foregoing, to placechildren for legal adoption or in fostercare.

(2) Student. The term student means anindividual who, for some part of each offive calendar months, whether or not con-secutive, during the calendar year inwhich the taxable year of the taxpayerbegins, either is a full-time student at aneducational organization, as defined insection 170(b)(1)(A)(ii), or is pursuing afull-time course of institutional on-farmtraining under the supervision of an ac-credited agent of an educational organiza-tion or of a State or political subdivisionof a State. A full-time student is one whois enrolled for the number of hours orcourses that the educational organizationconsiders full-time attendance.

(3) Brother and sister. The termsbrother and sister include a brother orsister by half blood.

(4) Parent. The term parent refers to abiological or adoptive parent of an indi-vidual. It does not include a stepparentwho has not adopted the individual.

(c) Applicability date. This section, and§§ 1.152–2, 1.152–3, and 1.152–4 applyto taxable years beginning after the datethese regulations are published as finalregulations in the Federal Register.


§ 1.152–2 Qualifying child.

(a) In general. The term qualifyingchild of a taxpayer for a taxable yearmeans an individual who satisfies the testsdescribed in paragraphs (b), (c), (d), (e),and (f) of this section. If an individualsatisfies the definition of a qualifyingchild for more than one taxpayer, then thetiebreaker rules in paragraph (g) of this

section apply. See, however, section152(e) and § 1.152–5 for a special rule fora child of divorced or separated parents orparents who live apart.

(b) Qualifying child relationship test.The individual must bear one of the fol-lowing relationships to the taxpayer—

(1) A child of the taxpayer or descen-dant of such a child; or

(2) A brother, sister, stepbrother, orstepsister of the taxpayer, or a descendantof any of these relatives.

(c) Residency test. The individual musthave the same principal place of abode asthe taxpayer for more than one-half of thetaxable year. Generally, an individualhas the same principal place of abode asthe taxpayer for more than one-half of thetaxable year if the individual resides withthe taxpayer for more than one-half of thetaxable year. See § 1.152–4(c) for rulesrelating to principal place of abode andtemporary absence and for determiningwhether an individual resides with the tax-payer for more than one-half of the tax-able year.

(d) Age test—(1) In general. The indi-vidual must be younger than the taxpayerclaiming the individual as a qualifyingchild and must not have attained the ageof 19, or age 24 if the individual is astudent within the meaning of § 1.152–1(b)(2), as of the end of the calendar yearin which the taxpayer’s taxable year be-gins. For purposes of this section, an in-dividual attains an age on the anniversaryof the individual’s birth.

(2) Disabled individual. This age re-quirement is treated as satisfied if the in-dividual is permanently and totally dis-abled, as defined in section 22(e)(3), atany time during the calendar year.

(e) Qualifying child support test. Theindividual must not provide more thanone-half of the individual’s own supportfor the calendar year in which the taxpay-er’s taxable year begins. See § 1.152–4(a)for rules relating to the definition andsources of an individual’s support.

(f) Joint return test. The individualmust not file a joint return, other thansolely to claim a refund of estimated orwithheld taxes, under section 6013 withthe individual’s spouse for the taxableyear beginning in the calendar year inwhich the taxpayer’s taxable year begins.


(g) Child who is eligible to be claimedas a qualifying child by more than onetaxpayer—(1) In general. Under section152(c)(4), if an individual satisfies thedefinition of a qualifying child for two ormore taxpayers (eligible taxpayers) for ataxable year beginning in the same calen-dar year, the following rules apply.

(i) More than one eligible parent. Ifmore than one eligible taxpayer is a parentof the individual (eligible parent), any oneof the eligible parents may claim the in-dividual as a qualifying child. However, ifmore than one eligible parent claims theindividual as a qualifying child, and thoseeligible parents do not file a joint returnwith each other, the individual is treatedas the qualifying child of the eligible par-ent claiming the individual with whom theindividual resides for the longest period oftime during the taxable year as determinedunder § 1.152–4(c)(3). If the individualresides for the same amount of time dur-ing the taxable year with each eligibleparent claiming the child, the individual istreated as the qualifying child of the eli-gible parent with the highest adjustedgross income who claims the individual.

(ii) Eligible parent not claiming. If atleast one eligible taxpayer is a parent ofthe individual, but no eligible parentclaims the individual as a qualifying child,the individual may be treated as the qual-ifying child of another eligible taxpayeronly if that taxpayer’s adjusted gross in-come exceeds both the adjusted gross in-come of each eligible parent of the indi-vidual and the adjusted gross income ofeach other eligible taxpayer, if any.

(iii) One eligible parent and other eli-gible taxpayer(s). Except as provided inparagraph (g)(1)(i) or (ii) of this section, ifthere are two or more eligible taxpayers,only one of whom is the parent of theindividual, the individual is treated as thequalifying child of the eligible parent.

(iv) No eligible parent. If no eligibletaxpayer is a parent of the individual, theindividual is treated as the qualifyingchild of the eligible taxpayer with thehighest adjusted gross income for the tax-able year.

(2) Determination of adjusted gross in-come of a person who files a joint return.For purposes of section 152 and the re-lated regulations, the adjusted gross in-come of each person who files a joint

return is the total adjusted gross incomeshown on the joint return.

(3) Coordination with other provisions.Except to the extent that section 152(e)and § 1.152–5 apply, if more than onetaxpayer may claim a child as a qualifyingchild, the child is treated as the qualifyingchild of only one taxpayer for purposes ofhead of household filing status under sec-tion 2(b), the child and dependent carecredit under section 21, the child tax creditunder section 24, the earned income creditunder section 32, the exclusion from in-come for dependent care assistance undersection 129, and the dependency exemp-tion under section 151. Thus, the taxpayerclaiming the individual as a qualifyingchild under any one of these sections isthe only taxpayer who may claim anycredit or exemption under these other sec-tions for that same individual for a taxableyear beginning in the same calendar yearas the taxpayer’s taxable year. If section152(e) applies, however, the noncustodialparent may claim the child as a qualifyingchild for purposes of the dependency ex-emption and the child tax credit, and an-other person may claim the child for pur-poses of one or more of these otherprovisions. See § 1.152–5 for rules undersection 152(e).

(4) Examples. The following examplesillustrate the rules in this paragraph (g). Inthe examples, each taxpayer uses the cal-endar year as the taxpayer’s taxable year,the child is a qualifying child (as de-scribed in section 152(c) and this section)of each taxpayer, and, except to the extentindicated, each taxpayer meets the re-quirements to claim the benefit(s) de-scribed in the example.

Example 1. (i) A and B, parents of Child, aremarried to each other. A, B, and Child share thesame principal place of abode for the first 8 monthsof the year. Thus, both parents satisfy the qualifyingchild residency test of paragraph (c) of this section.For the last 4 months of the year, the parents liveapart from each other, and B and Child share thesame principal place of abode. Section 152(e), relat-ing to divorced or separated parents, does not apply.The parents file as married filing separately for thetaxable year, and both parents claim Child as aqualifying child.

(ii) Under paragraph (g)(1)(i) of this section,Child is treated as a qualifying child of B for allpurposes, because Child resided with B for the lon-ger period of time during the taxable year. Becausesection 152(e) does not apply, Child may not betreated as a qualifying child of A for any purpose.

Example 2. (i) The facts are the same as inExample 1 of this paragraph (g)(4), except that Bdoes not claim Child as a qualifying child.

(ii) Because A and B are not both claiming thesame child as a qualifying child, under paragraph(g)(1)(i) of this section, Child is treated as a quali-fying child of A.

Example 3. (i) Child, Child’s parent (D), andGrandparent share the same principal place of abode.D is not married and is not a qualifying child ordependent of Grandparent, and Grandparent is notD’s dependent. Section 152(e), relating to divorcedor separated parents, does not apply. Under para-graph (a) of this section, Child meets the definitionof a qualifying child of both D and Grandparent. Dclaims Child as a qualifying child for purposes of thechild and dependent care credit under section 21, theearned income credit under section 32, and the de-pendency exemption under section 151. Grandparentclaims Child as a qualifying child for purposes ofhead of household filing status under section 2(b).

(ii) Under paragraph (g)(1)(iii) of this section,Child is treated as the qualifying child of D for allpurposes, because D is eligible to claim and claimsChild as D’s qualifying child. Because D is eligibleto claim and claims Child as D’s qualifying child,under paragraph (g)(3) of this section, Child may notbe treated as a qualifying child of Grandparent forany purpose. Grandparent erroneously claimed Childas Grandparent’s qualifying child for purposes ofhead of household filing status under section 2(b). IfD had not claimed Child as D’s qualifying child forany purpose, under paragraph (g)(1)(ii) of this sec-tion, Grandparent could have claimed Child asGrandparent’s qualifying child if Grandparent’s ad-justed gross income (AGI) exceeded D’s AGI. Inthat situation, under paragraph (g)(3) of this section,Grandparent could have claimed Child as Grandpar-ent’s qualifying child for purposes of any of thechild-related tax benefits, provided that Grandparenthad met the requirements of those sections.

Example 4. (i) The facts are the same as inExample 3 of this paragraph (g)(4), except thatChild’s parents, D and E, are married to each otherand share the same principal place of abode withChild and Grandparent for the entire taxable year.Under paragraph (a) of this section, Child meets thedefinition of a qualifying child of both parents andGrandparent. D and E file a joint return for thetaxable year and do not claim Child as a qualifyingchild for any purpose.

(ii) Because D or E may claim Child as a qual-ifying child but neither claims Child as a qualifyingchild for any purpose, under paragraph (g)(1)(ii) ofthis section, Grandparent may claim Child as a qual-ifying child if Grandparent’s AGI exceeds the totalAGI reported on the joint return of D and E.

Example 5. (i) The facts are the same as inExample 4 of this paragraph (g)(4), except that D andE are divorced from each other, E moved into aseparate residence during that year and is the non-custodial parent, and section 152(e), relating to di-vorced or separated parents, applies. E attaches toE’s return a Form 8332 on which D agrees to releaseD’s claim to a dependency exemption for Child andE claims Child as a qualifying child for purposes ofthe dependency exemption and the child tax credit.


(ii) Under paragraph (g)(3) of this section, Childis treated as a qualifying child of E for purposes ofthe dependency exemption and the child tax credit.Child may be treated as a qualifying child of D forpurposes of the earned income credit. If D claimsChild as a qualifying child for purposes of the earnedincome credit, under paragraph (g)(1)(iii) of thissection, Child may not be treated as a qualifyingchild of Grandparent for any purpose.

Example 6. (i) F and G, parents of two children,are married to each other. F, G, and both childrenshare the same principal place of abode for the entiretaxable year. F and G file as married filing separatelyfor the taxable year. F claims the older child as aqualifying child for purposes of the child tax credit,dependency exemption, and the child and dependentcare credit. G claims the younger child as a qualify-ing child for purposes of the same three tax benefits.

(ii) The older child is treated as a qualifying childof F and the younger child is treated as a qualifyingchild of G. The tiebreaker rule of paragraph (g)(1)(i)of this section does not apply because F and G arenot claiming the same child as a qualifying child.


§ 1.152–3 Qualifying relative.

(a) In general. The term qualifying rel-ative of a taxpayer for a taxable yearmeans an individual who satisfies the testsdescribed in paragraphs (b), (c), (d), and(e) of this section. See, however, section152(e) and § 1.152–5 for a special rule fora child of divorced or separated parents orparents who live apart.

(b) Qualifying relative relationshiptest. The individual must bear one of thefollowing relationships to the taxpayer:

(1) A child or descendant of a child;(2) A brother, sister, stepbrother, or

stepsister;(3) A father or mother, or an ancestor of

either;(4) A stepfather or stepmother;(5) A niece or nephew;(6) An aunt or uncle;(7) A son-in-law, daughter-in-law,

father-in-law, mother-in-law, brother-in-law, or sister-in-law; or

(8) An individual (other than one whoat any time during the taxable year wasthe taxpayer’s spouse, determined withoutregard to section 7703) who for the tax-able year of the taxpayer has the sameprincipal place of abode as the taxpayerand is a member of the taxpayer’s house-hold. See § 1.2–2(c) for the definition of amember of the household, and § 1.152–4(c) for rules relating to the meaning of

principal place of abode and the meaningof temporary absence.

(c) Gross income test—(1) In general.The individual’s gross income for the cal-endar year in which the taxable year be-gins must be less than the exemptionamount as defined in section 151(d).

(2) Income of disabled or handicappedindividuals. For purposes of paragraph(c)(1) of this section, the gross income ofan individual who is permanently andtotally disabled, as defined in section22(e)(3), at any time during the taxableyear does not include income for servicesperformed by the individual at a shelteredworkshop, as defined in section 152(d)(4)(B), if—

(i) The principal reason for the individ-ual’s presence at the workshop is theavailability of medical care there; and

(ii) The individual’s income arisessolely from activities at the workshop thatare incident to the medical care.

(d) Qualifying relative support test—(1) In general. The individual must re-ceive over one-half of the individual’ssupport from the taxpayer for the calendaryear in which the taxpayer’s taxable yearbegins. See § 1.152–4(a) for rules relatingto support.

(2) Certain income of taxpayer’sspouse. A payment to a spouse that isincludible in the payee spouse’s gross in-come under section 71 (relating to ali-mony and separate maintenance pay-ments) or section 682 (relating to incomeof an estate or trust in the case of divorce)is not treated as a payment by the payorspouse for the support of any dependent.

(3) Support from stepparent. Any sup-port provided to or for the benefit of anindividual by a stepparent of the individ-ual is treated as support provided by theindividual’s parent who is married to thestepparent.

(4) Multiple support agreements. Ifmore than one-half of an individual’s sup-port is provided by two or more personstogether, a taxpayer is treated as havingcontributed over one-half of the support ofthat individual for the calendar year if—

(i) No one person contributes more thanone-half of the individual’s support;

(ii) Each member of the group that col-lectively contributes more than one-halfof the support of the individual wouldhave been entitled to claim the individual

as a dependent for a taxable year begin-ning in that calendar year but for the factthat the group member alone did not con-tribute more than one-half of the individ-ual’s support;

(iii) The taxpayer claiming the individ-ual as a qualifying relative contributesmore than 10 percent of the individual’ssupport; and

(iv) Each other group member whocontributes more than 10 percent of thesupport of the individual furnishes to thetaxpayer claiming the individual as a de-pendent a written declaration that theother person will not claim the individualas a dependent for any taxable year begin-ning in that calendar year.

(e) Not a qualifying child test—(1) Ingeneral. The individual must not be aqualifying child of the taxpayer or of anyother taxpayer for any taxable year begin-ning in the calendar year in which thetaxpayer’s taxable year begins. An indi-vidual is not a qualifying child of a per-son, however, if that person is not re-quired to file an income tax return undersection 6012, and either does not file anincome tax return or files an income taxreturn solely to claim a refund of esti-mated or withheld taxes.

(2) Examples. The following examplesillustrate the rules in this paragraph (e). Ineach example, each taxpayer uses the cal-endar year as the taxpayer’s taxable year,and except to the extent otherwise indi-cated, each taxpayer meets the require-ments to claim the benefits described inthe example.

Example 1. For the taxable year, B providesmore than one-half of the support of an unrelatedfriend, C, and C’s 3-year-old child, D, who aremembers of B’s household. No taxpayer other than Cis eligible to claim D as a qualifying child. C has nogross income, is not required by section 6012 to filea Federal income tax return, and does not file aFederal income tax return for the taxable year. Underparagraph (e)(1) of this section, because C does nothave a filing requirement and does not file an incometax return, D is not treated as a qualifying child of C,and B may claim both C and D as B’s qualifyingrelatives.

Example 2. The facts are the same as in Example1 of this paragraph (e)(2) except that C has earnedincome of $1,500 during the taxable year, had in-come tax withheld from C’s wages, and is not re-quired by section 6012 to file an income tax return.C files an income tax return solely to obtain a refundof withheld taxes and does not claim the earnedincome credit under section 32. Under paragraph(e)(1) of this section, because C does not have afiling requirement and files only to obtain a refund of


withheld taxes, D is not treated as a qualifying childof C, and B may claim both C and D as B’s quali-fying relatives.

Example 3. The facts are the same as in Example2 of this paragraph (e)(2) except that C’s earnedincome is more than the amount of the dependencyexemption for that year. C files an income tax returnfor the taxable year to obtain a refund of withheldtaxes and claims the earned income credit. BecauseC filed an income tax return to obtain the earnedincome credit and not solely to obtain a refund ofwithheld taxes, D is a qualifying child of a taxpayer(C), and B may not claim D as a qualifying relative.B also may not claim C as a qualifying relativebecause C fails the gross income test under para-graph (c) of this section.

Par. 16. Redesignate § 1.152–4 as § 1.152–5, and add a new § 1.152–4 to read asfollows:

§ 1.152–4 Rules for a qualifying childand a qualifying relative.

(a) Support—(1) In general. The termsupport includes food, shelter, clothing,medical and dental care, education, andsimilar items. Support does not include anindividual’s Federal, State, and local in-come taxes paid from the individual’sown income or assets, Social Security andMedicare taxes under section 3101 paidfrom the individual’s own income, lifeinsurance premiums, or funeral expenses.In determining whether an individual pro-vided more than one-half of the individu-al’s own support for purposes of § 1.152–2(e), or whether a taxpayer provided morethan one-half of an individual’s supportfor purposes of § 1.152–3(d), the amountof support provided by the individual, orthe taxpayer, is compared to the totalamount of the individual’s support fromall sources. For these purposes, except asotherwise provided in this paragraph (a),the amount of an individual’s total supportis the amount of support from all sources,and includes support the individual pro-vides and amounts that are excludablefrom gross income. Generally, the amountof an item of support is the amount ofexpense paid or incurred to furnish theitem of support. If the item of supportfurnished is property or a benefit, such aslodging, however, the amount of the itemof support is the fair market value of theitem.

(2) Payments made during the year forunpaid or future support. For purposes ofdetermining the amount of support pro-vided in a calendar year, an amount paid

in a calendar year after the calendar yearin which the liability is incurred is treatedas paid in the year of payment. An amountpaid in a calendar year before due,whether or not made in the form of a lumpsum payment in settlement of a person’sliability for support, is treated as supportpaid during the calendar year of paymentrather than the calendar year when pay-ment is due. A payment of a liability fromamounts set aside in trust in a prior year istreated as made in the year in which theliability is paid.

(3) Governmental payments—(i) Gov-ernmental payments as support—(A) Ingeneral. Except as provided in paragraph(a)(3)(iii) of this section, governmentalpayments and subsidies for an item ofsupport are support provided by a thirdparty, the government.

(B) Examples. Payments of TemporaryAssistance for Needy Families (42 U.S.C.601–619), low-income housing assistance(42 U.S.C. 1437f), Supplemental Nutri-tion Assistance Program benefits (7U.S.C. chapter 51), Supplemental Secu-rity Income payments (42 U.S.C. 1381–1383f), foster care maintenance payments,and adoption assistance payments aregovernmental payments and subsidies foran item of support as described in para-graph (a)(3)(i)(A) of this section.

(ii) Governmental payments based on ataxpayer’s contributions—(A) In general.Except as provided in paragraph (a)(3)(iii)of this section, governmental paymentsbased on a taxpayer’s earnings and con-tributions into the Social Security systemare support provided by the individual forwhose benefit the payments are made tothe extent those payments are used for thatindividual’s support.

(B) Examples. Social Security old agebenefits under section 202(b) of Title II ofthe Social Security Act (SSA) (42 U.S.C.402) are governmental payments based ona taxpayer’s earnings and contributionsinto the Social Security system as de-scribed in paragraph (a)(3)(ii)(A) of thissection. Similarly, Social Security survi-vor and disability insurance benefits paidunder section 202(d) of the SSA to, or forthe benefit of, the child of a deceased ordisabled parent are treated as support pro-vided by the child to the extent thosepayments are used for the child’s support.

(iii) Payments used for support of an-other individual. Governmental paymentsand subsidies described in paragraph(a)(3)(i) of this section and governmentalpayments described in paragraph (a)(3)(ii)of this section that are used by the recip-ient or other intended beneficiary to sup-port another person are support of thatperson provided by the recipient or otherintended beneficiary, rather than supportprovided by a third party, the government.

(4) Medical insurance. Medical insur-ance premiums, including Part A BasicMedicare premiums, if any, under TitleXVIII of the Social Security Act (42U.S.C. 1395c to 1395i–5), Part B Supple-mental Medicare premiums under TitleXVIII of the Social Security Act (42U.S.C. 1395j to 1395w–6), Part C Medi-care � Choice Program premiums underTitle XVIII of the Social Security Act (42U.S.C. 1395w–21 to 1395w–29), and PartD Voluntary Prescription Drug BenefitMedicare premiums under Title XVIII ofthe Social Security Act (42 U.S.C.1395w–101 to 1395w–154), are treated assupport. Medical insurance proceeds, in-cluding benefits received under MedicarePart A, Part B, Part C, and Part D, are nottreated as items of support and are disre-garded in determining the amount of theindividual’s support. Services provided toan individual under the medical and dentalcare provisions of the Armed Forces Act(10 U.S.C. chapter 55) are not treated assupport and are disregarded in determin-ing the amount of the individual’s support.

(5) Medical care payments from per-sonal injury claim. Payments for the med-ical care of an injured individual from athird party, including a third party’s insur-ance company, in satisfaction of a legalclaim for the personal injury of the indi-vidual are not treated as items of supportand are disregarded in determining theamount of the individual’s support.

(6) Scholarships. Amounts a studentwho is the child of the taxpayer receivesas a scholarship for study at an educa-tional organization described in section170(b)(1)(A)(ii) are not treated as an itemof support and are disregarded in deter-mining the amount of the student’s sup-port.

(b) Relationship test—(1) Joint return.A taxpayer may satisfy the relationshiptest described in § 1.152–2(b) (relating to


a qualifying child) or in § 1.152–3(b) (re-lating to a qualifying relative) if a de-scribed relationship exists between an in-dividual and the taxpayer claiming thatindividual as a qualifying child or quali-fying relative, even though the taxpayerfiles a joint return with his or her spousewho does not have a described relation-ship with the individual.

(2) Divorce or death of spouse. If therelationship between the taxpayer and anindividual claimed by that taxpayer as adependent results from a marriage, thetaxpayer’s qualifying relationship with theindividual continues after the terminationof the marriage by divorce or death.

(c) Principal place of abode—(1) Ingeneral. The term principal place ofabode of a person means the primary ormain home or dwelling where the personresides. A person’s principal place ofabode need not be the same physical lo-cation throughout the taxable year andmay be temporary lodging such as ahomeless shelter or relief housing result-ing from displacement caused by a naturaldisaster.

(2) Temporary absence. The taxpayerand an individual have the same principalplace of abode despite a temporary ab-sence by either person because of specialcircumstances. An absence is temporary ifthe person would have resided at the placeof abode but for the absence and, underthe facts and circumstances, it is reason-able to assume that the person will returnto reside at the place of abode. An indi-vidual who does not reside with the tax-payer because of a temporary absence istreated as residing with the taxpayer. Forexample, a nonpermanent failure to oc-cupy the abode by reason of illness, edu-cation, business, vacation, military ser-vice, institutionalized care for a child whois totally and permanently disabled (asdefined in section 22(e)(3)), or incarcera-tion may be treated as a temporary ab-sence because of special circumstances. Ifan infant must remain in a hospital for aperiod of time after birth and would haveresided with the taxpayer during that pe-riod but for the hospitalization, the infantis treated as having the same principalplace of abode as the taxpayer during theperiod of hospitalization.

(3) Residing with taxpayer for morethan one-half of the taxable year—(i) In

general. An individual has the same prin-cipal place of abode as the taxpayer formore than one-half of the taxable year ifthe individual resides with the taxpayerfor at least 183 nights during the taxpay-er’s taxable year, or 184 nights if thetaxable year includes a leap day.

(ii) Nights of residence—(A) Nightscounted. For purposes of determiningwhether an individual resides with the tax-payer for more than one-half of the tax-able year, an individual resides with ataxpayer for a night if the individualsleeps—(1) At the taxpayer’s principal place ofabode, whether or not the taxpayer is pres-ent; or(2) In the company of the taxpayer whenthe individual does not sleep at the tax-payer’s principal place of abode (for ex-ample, when the taxpayer and the individ-ual are on vacation).

(B) Night straddling two taxable years.If an individual resides with a taxpayer fora night that extends over two taxableyears, that night is allocated to the taxableyear in which the night begins.

(C) Exception for a parent who worksat night. If, in a calendar year, because ofa taxpayer’s nighttime work schedule, anindividual resides for at least 183 days, or184 days if the taxable year includes aleap day, but not nights with the taxpayer,the individual is treated as residing withthe taxpayer for more than one-half of thetaxable year.

(D) Absences. An individual who doesnot reside with a taxpayer for a nightbecause of a temporary absence as de-scribed in paragraph (c)(2) of this sectionis treated as residing with the taxpayer forthat night if the individual would haveresided with the taxpayer for that night butfor the absence.

(4) Examples. The following examplesillustrate the rules of this paragraph (c). Ineach example, each taxpayer uses the cal-endar taxable year, and section 152(e)does not apply.

Example 1. B and C are the divorced parents ofChild. In 2015, Child sleeps at B’s principal place ofabode for 210 nights and at C’s principal place ofabode for 155 nights. Under paragraph (c)(3) of thissection, Child resides with B for at least 183 nightsduring 2015 and has the same principal place ofabode as B for more than one-half of 2015.

Example 2. D and E are the divorced parents ofChild, and Grandparent is E’s parent. In 2015, Childresides with D for 140 nights, with E for 135 nights,

and with Grandparent for the last 90 nights of theyear. None of these periods is a temporary absence.Under paragraph (c)(3) of this section, Child doesnot have the same principal place of abode as D, E,or Grandparent for more than one-half of 2015.

Example 3. The facts are the same as in Example2 of this paragraph (c)(4), except that, for the 90-dayperiod that Child lives with Grandparent, E is tem-porarily absent on military service. Child would havelived with E if E had not been absent during thatperiod. Under paragraphs (c)(2) and (c)(3)(ii)(D) ofthis section, Child is treated as residing with E for225 nights in 2015 and, therefore, Child has the sameprincipal place of abode as E for more than one-halfof 2015.

Example 4. The facts are the same as in Example2 of this paragraph (c)(4), except that, for the last 90days of the year Child, who is 18, moves into Child’sown apartment and begins full-time employment.Because Child’s absence is not temporary, underparagraph (c)(2) of this section, Child is not treatedas residing with D or E for the 90 nights. Underparagraph (c) of this section, Child does not have thesame principal place of abode as D or E for morethan one-half of 2015.

Example 5. F and G are the divorced parents ofChild. In 2015, Child sleeps at F’s principal place ofabode for 170 nights and at G’s principal place ofabode for 170 nights. Child spends 25 nights of theyear away from F and G at a summer camp. Childwould have spent those nights with F if Child hadnot gone to summer camp. Under paragraphs (c)(2)and (c)(3)(ii)(D) of this section, Child is treated asresiding with F for 195 nights and, therefore, Childhas the same principal place of abode as F for morethan one-half of 2015.

Example 6. H and J are the divorced parents ofChild. In 2015, Child sleeps at H’s principal place ofabode for 180 nights and at J’s principal place ofabode for 180 nights. For 5 nights during that year,Child sleeps at Grandparent’s abode or at the houseof a friend. Child would have spent all 5 nights atH’s house if Child had not slept at Grandparent’s ora friend’s house. Under paragraphs (c)(2) and(c)(3)(ii)(D) of this section, Child is treated as resid-ing with H for 185 nights and, therefore, Child hasthe same principal place of abode as H for more thanone-half of 2015.

(d) Residence for a portion of a taxableyear because of special circumstances—(1) Individual who is born or dies duringthe year. If an individual is born or diesduring a taxpayer’s taxable year, the res-idency test for a qualifying child is treatedas met if the taxpayer and the individualhave the same principal place of abode formore than one-half of the portion of thetaxable year during which the individualis alive. If an individual is born or diesduring a taxpayer’s taxable year, the rela-tionship test for a qualifying relative whois a member of the taxpayer’s householdis treated as met if the taxpayer and theindividual have the same principal placeof abode for the entire portion of the tax-


able year during which the individual isalive.

(2) Adopted child or foster child. If,during a taxpayer’s taxable year, the tax-payer adopts a child, a child is lawfullyplaced with a taxpayer for legal adoptionby that taxpayer, or an eligible foster childis placed with a taxpayer, the residencytest for a qualifying child and the resi-dency requirement under § 1.152–1(a)(2)(iii) for a child who is not a citizenor national of the United States are treatedas met if the taxpayer and the child havethe same principal place of abode formore than one-half of the portion of thetaxable year as required for a qualifyingchild, or for the entire taxable year asrequired for a noncitizen, following theplacement of the child with the taxpayer.

(e) Missing child—(1) Qualifying child.A child of the taxpayer who is presumed bylaw enforcement authorities to have beenkidnapped by someone who is not a mem-ber of the family of either the child or thetaxpayer, and who had for the taxable yearin which the kidnapping occurred thesame principal place of abode as the tax-payer for more than one-half of the por-tion of the taxable year before the date ofthe kidnapping, is treated as meeting theresidency test for a qualifying child, asdescribed in § 1.152–2(c), of the taxpayerfor all taxable years ending during theperiod that the child is missing. Also, thechild is treated as meeting the residencytest in the year of the child’s return if thechild has the same principal place ofabode as the taxpayer for more than one-half of the portion of the taxable yearfollowing the date of the child’s return.

(2) Qualifying relative. A child of thetaxpayer who is presumed by law enforce-ment authorities to have been kidnappedby someone who is not a member of thefamily of either the child or the taxpayer,and who was a qualifying relative of thetaxpayer for the portion of the taxableyear before the date of the kidnapping, istreated as a qualifying relative, as de-scribed in section 152(d) and § 1.152–3,of the taxpayer for all taxable years end-ing during the period that the child ismissing. Also, the child is treated as aqualifying relative of the taxpayer in theyear of the child’s return if the child is aqualifying relative of the taxpayer for the

portion of the taxable year following thedate of the child’s return.

(3) Age limitation. The special rulesprovided in this paragraph (e) cease toapply as of the first taxable year of thetaxpayer beginning after the calendar yearin which there is a determination that thechild is dead or, if earlier, in which thechild would have attained age 18.

(4) Application. This paragraph (e) ap-plies solely for purposes of determiningsurviving spouse or head of householdfiling status under section 2, the child taxcredit under section 24, the earned incomecredit under section 32, and the depen-dency exemption under section 151.

Par.17 In newly redesignated § 1.152–5, paragraphs (e)(2), (e)(3)(iii), and (h) arerevised to read as follows:

§ 1.152–5 Special rule for a child ofdivorced or separated parents orparents who live apart.

* * * * *(e) * * *(2) Attachment to return—(i) In gen-

eral. A noncustodial parent must attach acopy of the written declaration to the pa-rent’s original or amended return for eachtaxable year for which the noncustodialparent claims an exemption for the child.A noncustodial parent may submit a copyof the written declaration to the IRS dur-ing an examination to substantiate a claimto a dependency exemption for a child. Acopy of a written declaration attached toan amended return, or provided during anexamination, will not meet the require-ment of this paragraph (e) if the custodialparent signed the written declaration afterthe custodial parent filed a return claiminga dependency exemption for the child forthe year at issue, and the custodial parenthas not filed an amended return to removethat claim to a dependency exemption forthe child.

(ii) Examples. The following examplesillustrate the rules of this paragraph (e).

Example 1. Custodial parent (CP) files her 2015return on March 1, 2016, and claims a dependencyexemption for Child. At noncustodial parent’s (NCP)request, CP signs a Form 8332 for the 2015 tax yearon April 15, 2016. On April 15, NCP files his returnclaiming a dependency exemption for Child andattaches the signed Form 8332 to his return. Undersection 152(e) and paragraph (b) of this section, NCPis allowed a dependency exemption for Child for

2015, and CP is not allowed a dependency exemp-tion for Child for that year.

Example 2. The facts are the same as in Example1 of this paragraph (e)(2)(ii), except NCP files onApril 15, 2016, a request for an extension to file histax return because he does not have a signed Form8332. CP signs the Form 8332 for the 2015 tax yearin August of 2016, and NCP files his return a weeklater. NCP claims a dependency exemption for Childand attaches the signed Form 8332 to his return.Under section 152(e) and paragraph (b) of this sec-tion, NCP is allowed a dependency exemption forChild for 2015, and CP is not allowed a dependencyexemption for Child for that year.

Example 3. CP files his 2015 return on March 1,2016, and claims a dependency exemption for Child.NCP files her return on April 15, 2016, and does notclaim a dependency exemption for Child, eventhough her divorce decree allocates the dependencyexemption for Child to her. CP signs a Form 8332for the 2015 tax year in August of 2016, and NCPfiles an amended return a week later and attaches thesigned Form 8332 to her amended return claiming adependency exemption for Child. Under paragraph(e)(2) of this section, NCP is not allowed a depen-dency exemption for Child for 2015 if CP has notamended his return to remove a claim to the depen-dency exemption for Child for that year.

(3) * * *(iii) Attachment to return. The parent

revoking the written declaration must at-tach a copy of the revocation to the pa-rent’s original or amended return for eachtaxable year for which the parent claims achild as a dependent as a result of therevocation. The parent revoking the writ-ten declaration must keep a copy of therevocation and evidence of delivery of thenotice to the other parent, or of the rea-sonable efforts to provide actual notice. Aparent may submit a copy of a revocationto the IRS during an examination to sub-stantiate a claim to a dependency exemp-tion for the child.* * * * *

(h) Applicability date—(1) In general.Except as provided in paragraph (h)(2) ofthis section, this section applies to taxableyears beginning after July 2, 2008.

(2) Exception. Paragraphs (e)(2) and(e)(3)(iii) of this section apply to taxableyears beginning after the date these regu-lations are published as final regulationsin the Federal Register.

§ 1.6013–1 [Amended]

Par. 18. Section 1.6013–1 is amendedby removing paragraph (e).


PART 301—PROCEDURE ANDADMINISTRATION

Par. 19. The authority citation for part301 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 20. Section 301.6109–3 is

amended by:1. Revising the first sentence and add-

ing a sentence to the end of the para-graph in paragraph (a)(1).

2. Revising paragraphs (b), (c)(1)(ii),the fourth and fifth sentences of(c)(2) introductory text, and para-graph (d).

The revisions and addition read as fol-lows:

§ 301.6109–3 IRS adoption taxpayeridentification numbers.

(a) In general—(1) Definition. An IRSadoption taxpayer identification number(ATIN) is a temporary taxpayer identify-ing number assigned by the Internal Rev-enue Service (IRS) to a child (other thanan alien individual as defined in§ 301.6109–1(d)(3)(i)) who has beenplaced lawfully with a prospective adop-

tive parent for legal adoption by that per-son. * * * A child lawfully placed with aprospective adoptive parent for legaladoption includes a child placed for legaladoption by the child’s parent or parentsby blood, an authorized placementagency, or any other person authorized byState law to place a child for legal adop-tion.* * * * *

(b) Definitions—(1) Authorized place-ment agency has the same meaning as in§ 1.152–1(b)(1)(iv).

(2) Child means a child who has notbeen adopted but has been placed lawfullywith a prospective adoptive parent for le-gal adoption by that person.

(3) Prospective adoptive parent meansa person in whose household a child hasbeen placed lawfully for legal adoption bythat person.

(c) * * *(1) * * *(ii) The child has been placed lawfully

with the prospective adoptive parent forlegal adoption by that person;* * * * *

(2) * * * In addition, the applicationmust include documentary evidence the

IRS prescribes to establish that a child hasbeen placed lawfully with the prospectiveadoptive parent for legal adoption by thatperson. Examples of acceptable documen-tary evidence establishing lawful place-ment for a legal adoption may include—* * * * *

(d) Applicability date—(1) In general.Except as otherwise provided in para-graph (d)(2) of this section, the provisionsof this section apply to income tax returnsdue (without regard to extension) on orafter April 15, 1998.

(2) Exception. Paragraphs (a)(1), (b),(c)(1)(ii), and (c)(2) of this section applyto income tax returns due (without regardto extension) on or after the date theseregulations are published as final regula-tions in the Federal Register.

John DalrympleDeputy Commissioner for Services and

Enforcement.



Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe theeffect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds thatthe same principle also applies to B, theearlier ruling is amplified. (Compare withmodified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the newruling does more than restate the sub-

stance of a prior ruling, a combination ofterms is used. For example, modified andsuperseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that isself contained. In this case, the previouslypublished ruling is first modified and then,as modified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further namesin subsequent rulings. After the originalruling has been supplemented severaltimes, a new ruling may be published thatincludes the list in the original ruling andthe additions, and supersedes all prior rul-ings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in currentuse and formerly used will appear in ma-terial published in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.ER—Employer.

ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.PRS—Partnership.

PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D.—Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z—Corporation.

Bulletin No. 2017–7 February 13, 2017i

Numerical Finding List1

Bulletin 2017–1 through 2017–7

Action on Decision:

2017-1, 2016-7 I.R.B. 868

Notices:

2017-1, 2017-2 I.R.B. 3672017-2, 2017-4 I.R.B. 5392017-3, 2017-2 I.R.B. 3682017-4, 2017-4 I.R.B. 5412017-5, 2017-6 I.R.B. 7792017-6, 2017-3 I.R.B. 4222017-7, 2017-3 I.R.B. 4232017-8, 2017-3 I.R.B. 4232017-9, 2017-4 I.R.B. 5422017-10, 2017-4 I.R.B. 5442017-12, 2017-5 I.R.B. 7422017-13, 2017-6 I.R.B. 7802017-14, 2017-6 I.R.B. 7832017-15, 2017-6 I.R.B. 7832017-16, 2017-7 I.R.B. 913

Proposed Regulations:

REG-137604-07, 2017-7 I.R.B. 920REG-128276-12, 2017-2 I.R.B. 369REG-103477-14, 2017-5 I.R.B. 746REG-112324-15, 2017-4 I.R.B. 547REG-127203-15, 2017-7 I.R.B. 918REG-131643-15, 2017-6 I.R.B. 865REG-134438-15, 2017-2 I.R.B. 373REG-112800-16, 2017-4 I.R.B. 569REG-123829-16, 2017-5 I.R.B. 764REG-123841-16, 2017-5 I.R.B. 766REG-133353-16, 2017-2 I.R.B. 372REG-134247-16, 2017-5 I.R.B. 744

Revenue Procedures:

2017-1, 2017-1 I.R.B. 12017-2, 2017-1 I.R.B. 1062017-3, 2017-1 I.R.B. 1302017-4, 2017-1 I.R.B. 1462017-5, 2017-1 I.R.B. 2302017-7, 2017-1 I.R.B. 2692017-12, 2017-3 I.R.B. 4242017-13, 2017-6 I.R.B. 7872017-14, 2017-3 I.R.B. 4262017-15, 2017-3 I.R.B. 4372017-16, 2017-3 I.R.B. 5012017-18, 2017-5 I.R.B. 7432017-19, 2017-7 I.R.B. 9132017-21, 2017-6 I.R.B. 7912017-22, 2017-6 I.R.B. 863

Revenue Procedures:—Continued

2017-23, 2017-7 I.R.B. 9152017-24, 2017-7 I.R.B. 916

Revenue Rulings:

2017-1, 2017-3 I.R.B. 3772017-2, 2017-2 I.R.B. 3642017-3, 2017-4 I.R.B. 5222017-4, 2017-6 I.R.B. 776

Treasury Decisions:

9794, 2017-2 I.R.B. 2739795, 2017-2 I.R.B. 3269796, 2017-3 I.R.B. 3809801, 2017-2 I.R.B. 3559802, 2017-2 I.R.B. 3619803, 2017-3 I.R.B. 3849804, 2017-3 I.R.B. 4069806, 2017-4 I.R.B. 5249807, 2017-5 I.R.B. 5739808, 2017-5 I.R.B. 5809809, 2017-5 I.R.B. 6649810, 2017-6 I.R.B. 7759811, 2017-7 I.R.B. 8699814, 2017-7 I.R.B. 878

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2016–27 through 2016–52 is in Internal Revenue Bulletin2016–52, dated December 26, 2016.

February 13, 2017 Bulletin No. 2017–7ii

Finding List of Current Actions onPreviously Published Items1

Bulletin 2017–1 through 2017–7

Notices:

2002-1Amplified byNotice 2017-1, 2017-2 I.R.B. 367

2011-86Obsoleted byNotice 2017-1, 2017-2 I.R.B. 367

2016-29Modified byNotice 2017-6, 2017-3 I.R.B. 422

Revenue Procedures:

2013-22Clarified byRev. Proc. 2017-18, 2017-05 I.R.B. 743

2015-57Modified byRev. Proc. 2017-24, 2017-07 I.R.B. 916

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2016–27 through 2016–52 is in Internal Revenue Bulletin2016–52, dated December 26, 2016.

Bulletin No. 2017–7 February 13, 2017iii

INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue

Bulletins are available at www.irs.gov/irb/.

We Welcome Comments About the Internal Revenue BulletinIf you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we

would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page(www.irs.gov) or write to the Internal Revenue Service, Publishing Division, IRB Publishing Program Desk, 1111 Constitution Ave.NW, IR-6230 Washington, DC 20224.

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