* * * * *

* * * * *

(b) * * *

(9) Examples.

* * * * *

Par. 3. Section 1.6038A–1 is amended as follows:

1. Add a sentence at the end of paragraph (c)(1).

2. Revise the first sentence of paragraph (h).

3. Revsie the first sentence of paragraph (i)(1).

4. Add a sentence at the end of paragraph (n)(1).

5. Add a sentence at the end of paragraph (n)(2).

The additions and revisions read as follows:

* * * * *

(c) * * *

(1) * * * A domestic business entity that is wholly owned by one foreign person and that is otherwise classified under § 301.7701–3(b)(1)(ii) of this chapter as disregarded as an entity separate from its owner is treated as an entity separate from its owner and classified as a domestic corporation for purposes of section 6038A. See § 301.7701–2(c)(2)(vi) of this chapter.

* * * * *

(h) * * * A reporting corporation (other than an entity that is a reporting corporation as a result of being treated as a corporation under § 301.7701–2(c)(2)(vi) of this chapter) that has less than $10,000,000 in U.S. gross receipts for a taxable year is not subject to §§ 1.6038A–3 and 1.6038A–5 for that taxable year.* * *

(i) * * *

(1) * * * A reporting corporation (other than an entity that is a reporting corporation as a result of being treated as a corporation under § 301.7701–2(c)(2)(vi) of this chapter) is not subject to §§ 1.6038A–3 and 1.6038A–5 for any taxable year in which the aggregate value of all gross payments it makes to and receives from foreign related parties with respect to related party transactions (including monetary consideration, nonmonetary consideration, and the value of transactions involving less than full consideration) is not more than $5,000,000 and is less than 10 percent of its U.S. gross income. * * *

* * * * *

(n) * * *

(1) * * * However, § 1.6038A–1 as it applies to entities that are reporting corporations as a result of being treated as a corporation under § 301.7701–2(c)(2)(vi) of this chapter applies to taxable years of such reporting corporations beginning after December 31, 2016, and ending on or after December 13, 2017.

(2) * * * Section 1.6038A–2 as it applies to entities that are reporting corporations as a result of being treated as a corporation under § 301.7701–2(c)(2)(vi) of this chapter applies to taxable years of such reporting corporations beginning after December 31, 2016, and ending on or after December 13, 2017.

* * * * *

Par. 4. Section 1.6038A–2 is amended as follows:

1. Revise the second sentence of paragraph (a)(2).

2. Revise paragraph (b)(3)(vii).

3. Remove the word “and” at the end of paragraph (b)(3)(ix).

4. Remove the undesignated paragraph following paragraph (b)(3)(x).

5. Remove the period at the end of paragraph (b)(3)(x) and add “; and” in its place.

6. Add paragraphs (b)(3)(xi) and (b)(9).

7. Add a sentence at the end of paragraph (d).

8. Revise the first sentence of paragraph (e)(3).

9. Revise paragraph (e)(4).

The additions and revisions read as follows:

(a) * * *

(2) * * * However, if neither party to the transaction is a United States person as defined in section 7701(a)(30) (which, for purposes of section 6038A, includes an entity that is a reporting corporation as a result of being treated as a corporation under § 301.7701–2(c)(2)(vi) of this chapter) and the transaction—

* * * * *

(b) * * *

(3) * * *

(vii) Amounts loaned and borrowed (except open accounts resulting from sales and purchases reported under other items listed in this paragraph (b)(3) that arise and are collected in full in the ordinary course of business), to be reported as monthly averages or outstanding balances at the beginning and end of the taxable year, as the form shall prescribe;

* * * * *

(xi) With respect to an entity that is a reporting corporation as a result of being treated as a corporation under § 301.7701–2(c)(2)(vi) of this chapter, any other transaction as defined by § 1.482–1(i)(7), such as amounts paid or received in connection with the formation, dissolution, acquisition and disposition of the entity, including contributions to and distributions from the entity.

* * * * *

(9) Examples. The following examples illustrate the application of paragraph (b)(3) of this section:

Example 1. (i) In year 1, W, a foreign corporation, forms and contributes assets to X, a domestic limited liability company that does not elect to be treated as a corporation under § 301.7701–3(c) of this chapter. In year 2, W contributes funds to X. In year 3, X makes a payment to W. In year 4, X, in liquidation, distributes its assets to W.

(ii) In accordance with § 301.7701–3(b)(1)(ii) of this chapter, X is disregarded as an entity separate from W. In accordance with § 301.7701–2(c)(2)(vi) of this chapter, X is treated as an entity separate from W and classified as a domestic corporation for purposes of section 6038A. In accordance with paragraphs (a)(2) and (b)(3) of this section, each of the transactions in years 1 through 4 is a reportable transaction with respect to X. Therefore, X has a section 6038A reporting and record maintenance requirement for each of those years.

Example 2. (i) The facts are the same as in Example 1 of this paragraph (b)(9) except that, in year 1, W also forms and contributes assets to Y, another domestic limited liability company that does not elect to be treated as a corporation under § 301.7701–3(c) of this chapter. In year 1, X and Y form and contribute assets to Z, another domestic limited liability company that does not elect to be treated as a corporation under § 301.7701–3(c) of this chapter. In year 2, X transfers funds to Z. In year 3, Z makes a payment to Y. In year 4, Z distributes its assets to X and Y in liquidation.

(ii) In accordance with § 301.7701–3(b)(1)(ii) of this chapter, Y and Z are disregarded as entities separate from each other, W, and X. In accordance with § 301.7701–2(c)(2)(vi) of this chapter, Y, Z and X are treated as entities separate from each other and W, and are classified as domestic corporations for purposes of section 6038A. In accordance with paragraph (b)(3) of this section, each of the transactions in years 1 through 4 involving Z is a reportable transaction with respect to Z. Similarly, W’s contribution to Y and Y’s contribution to Z in year 1, the payment to Y in year 3, and the distribution to Y in year 4 are reportable transactions with respect to Y. Moreover, X’s contribution to Z in Year 1, X’s funds transfer to Z in year 2, and the distribution to X in year 4 are reportable transactions with respect to X. Therefore, Z has a section 6038A reporting and record maintenance requirement for years 1 through 4; Y has a section 6038A reporting and record maintenance requirement for years 1, 3, and 4; and X has a section 6038A reporting and record maintenance requirement in years 1, 2, and 4 in addition to its section 6038A reporting and record maintenance described in Example 1 of this paragraph (b)(9).

* * * * *

(d) * * * In the case of an entity that is a reporting corporation as a result of being treated as a corporation under § 301.7701–2(c)(2)(vi) of this chapter, Form 5472 must be filed at such time and in such manner as the Commissioner may prescribe in forms or instructions.

(e) * * *

(3) * * * A reporting corporation (other than an entity that is a reporting corporation as a result of being treated as a corporation under § 301.7701–2(c)(2)(vi) of this chapter) is not required to make a return of information on Form 5472 with respect to a related foreign corporation for a taxable year for which a U.S. person that controls the foreign related corporation makes a return of information on Form 5471 that is required under section 6038 and this section, if that return contains information required under § 1.6038–2(f)(11) with respect to the reportable transactions between the reporting corporation and the related corporation for that taxable year.* * *

(4) Transactions with a foreign sales corporation. A reporting corporation (other than an entity that is a reporting corporation as a result of being treated as a corporation under § 301.7701–2(c)(2)(vi) of this chapter) is not required to make a return of information on Form 5472 with respect to a related corporation that qualifies as a foreign sales corporation for a taxable year for which the foreign sales corporation files Form 1120–FSC.

* * * * *

(a) * * * But see paragraphs (c)(2)(iii) through (vi) of this section for special rules that apply to an eligible entity that is otherwise disregarded as an entity separate from its owner.

* * * * *

(c) * * *

(2) * * *

(vi) Special rule for reporting under section 6038A—(A) In general. An entity that is disregarded as an entity separate from its owner for any purpose under this section is treated as an entity separate from its owner and classified as a corporation for purposes of section 6038A if—

(1) The entity is a domestic entity; and

(2) One foreign person has direct or indirect sole ownership of the entity.

(B) Definitions—(1) Indirect sole ownership. For purposes of paragraph (c)(2)(vi)(A)(2) of this section, indirect sole ownership means ownership by one person entirely through one or more other entities disregarded as entities separate from their owners or through one or more grantor trusts, regardless of whether any such disregarded entity or grantor trust is domestic or foreign.

(2) Entity disregarded as separate from its owner. For purposes of paragraph (c)(2)(vi)(B)(1) of this section, an entity disregarded as an entity separate from its owner is an entity described in paragraph (c)(2)(i) of this section.

(3) Grantor trust. For purposes of paragraph (c)(2)(vi)(B)(1) of this section, a grantor trust is any portion of a trust that is treated as owned by the grantor or another person under subpart E of subchapter J of chapter 1 of the Code.

(C) Taxable year. The taxable year of an entity classified as a corporation for section 6038A purposes pursuant to paragraph (c)(2)(vi)(A) of this section is—

(1) The same as the taxable year of the foreign person described in paragraph (c)(2)(vi)(A)(2) of this section, if that foreign person has a U.S. income tax or information return filing obligation for its taxable year; or

(2) The calendar year, if paragraph (c)(2)(vi)(C)(1) of this section does not apply, unless otherwise provided in forms, instructions, or published guidance.

* * * * *

(e) * * *

(9) Reporting required under section 6038A. Paragraph (c)(2)(vi) of this section applies to taxable years of entities beginning after December 31, 2016, and ending on or after December 13, 2017.

Approved: November 15, 2016.

The Treasury Department and the IRS received a variety of comments in response to the proposed elimination of the favorable treatment of transfers of foreign goodwill and going concern value provided by the 1986 temporary regulations. Two comments supported the treatment of foreign goodwill and going concern value under the proposed regulations. One comment asserted that allowing intangible property to be transferred outbound in a tax-free manner is inconsistent with the policies of section 367. Other comments acknowledged the concerns about tax avoidance described in the preamble to the proposed regulations, but requested specific exceptions for transfers of foreign goodwill and going concern value in situations that the comments asserted were not abusive. Other comments disagreed more fundamentally with the approach taken and stated that the Treasury Department and the IRS should withdraw the proposed regulations entirely. Many of these comments asserted that eliminating the favorable treatment of transfers of foreign goodwill and going concern value would be an invalid exercise of regulatory authority under section 367.

Overall, the comments indicated widely divergent understandings of the nature of foreign goodwill and going concern value. Accordingly, the comments also widely differed in their proffered justifications for an exception for foreign goodwill and going concern value and in the recommended contours of an appropriate exception. The variance in the comments regarding these fundamental issues highlights the difficulty of permitting some form of favorable treatment for foreign goodwill and going concern value while preventing tax avoidance.

As described in greater detail in Part I.B of this Summary of Comments and Explanation of Revisions, and consistent with the proposed regulations, the final regulations eliminate the favorable treatment of foreign goodwill and going concern value contained in the 1986 temporary regulations. The Treasury Department and the IRS have determined that this change is necessary to carry out the tax policy embodied in section 367 in a fair, impartial, and reasonable manner, taking into account the intent of Congress, the realities of relevant transactions, the need for the IRS to administer the rules and monitor compliance, and the overall integrity of the federal tax system. In particular, the final regulations are consistent with the policy and intent of the statute, which does not reference foreign goodwill or going concern value, and with Congress’ expectation that the Secretary would exercise the regulatory authority under section 367 to require gain recognition when property is transferred offshore under circumstances that present a potential for tax avoidance.

The Treasury Department and the IRS received numerous comments addressing the proposed regulations’ treatment of foreign goodwill and going concern value. One comment asserted that the ATB exception must apply to transfers of foreign goodwill and going concern value, because (i) foreign goodwill and going concern value is not a section 936(h)(3)(B) intangible, and so is subject to section 367(a) rather than section 367(d), and (ii) the legislative history indicates that Congress expected that the transfer of such value should be tax-free. The comment further asserted that, because goodwill and going concern value is inextricably linked to the conduct of an active trade or business, the ATB exception necessarily encompasses such transfers. Other comments asserted that finalizing the proposed regulations would represent an unreasonable exercise of regulatory authority because the proposed regulations eliminated the favorable treatment of all transfers of purported foreign goodwill and going concern value, rather than just those transfers that the Treasury Department and the IRS determine are abusive.

Several comments asserted that the proposed regulations are inconsistent with Congressional intent and cited statements from the legislative history to section 367, such as the following:

H.R. Rep. No. 98–432, pt. 2, at 1317–19 (1984).

Comments also asserted that it is inappropriate to use regulatory authority under section 367 to address transfer pricing concerns under section 482.

The Treasury Department and the IRS considered the 1984 legislative history to section 367 in issuing the 1986 temporary regulations. The 1986 temporary regulations gave effect to the statements in the legislative history indicating that Congress anticipated that the transfer of goodwill and going concern value developed by a foreign branch to a newly organized foreign corporation generally would not result in abuse of the U.S. tax system, and, on that basis, that such transfers would benefit from nonrecognition treatment. As a result, the 1986 temporary regulations provide nonrecognition treatment for foreign goodwill and concern value. The 1986 temporary regulations did not provide a conceptual definition of foreign goodwill and going concern value but, in effect, provided a rule for valuing it by describing foreign goodwill and going concern value as the residual value of a business operation conducted outside of the United States after all other tangible and intangible assets have been identified and valued. § 1.367(a)–1T(d)(5)(iii).

The Treasury Department and the IRS also took into account the 1984 legislative history in issuing the proposed regulations and these final regulations. In doing so, the Treasury Department and the IRS also considered that, in amending section 367 in 1984, Congress did not choose to statutorily mandate any particular treatment of foreign goodwill and going concern value and instead delegated broad authority to the Secretary to promulgate regulations under section 367 to carry out its purposes in this complex area. The Treasury Department and the IRS further considered that the legal and factual context in which the 1984 legislative history was drafted has changed significantly over the last 32 years.

Before 1993, goodwill and going concern value was not amortizable. As a result, in 1984, much of the case law and policy debate regarding goodwill and going concern value involved sales of business operations at arm’s length between unrelated parties, where the taxpayer attempted to minimize the value of goodwill in order to maximize the value of amortizable intangibles. See, for example, Newark Morning Ledger Co. v. United States, 507 U.S. 546 (1993). In 1989, the General Accounting Office analyzed data with respect to unresolved tax cases involving purchased intangibles and found that, presumably in order to minimize the amount of unamortizable goodwill, taxpayers had identified 175 different types of customer-based intangibles that were distinct from goodwill. See General Accounting Office, Report to the Joint Committee on Taxation: Issues and Policy Proposals Regarding Tax Treatment of Intangible Assets, at 3 (Aug. 1991).

In 1993, Congress addressed these valuation disputes between taxpayers and the IRS by enacting section 197, which, similar to the approach taken by the proposed regulations, did not directly address the underlying disagreement about the relative size of goodwill but substantially reduced the stakes of the disagreement. That is, by generally providing for the amortization of goodwill over 15 years, the enactment of section 197 generally eliminated the incentive that existed in 1984, when Congress enacted section 367(d) in its present form, for taxpayers to argue that goodwill has relatively minor value.

Other law changes since 1984 have increased the relevance of section 367(d) and the incentive for taxpayers to overstate the value attributable to goodwill and going concern value. Before 1997, amounts received under section 367(d) were treated as ordinary income from U.S. sources. In 1997, Congress amended section 367(d)(2)(C) to provide that amounts received under section 367(d) are treated as ordinary income that is sourced in the same manner as a royalty, and thus potentially as from sources outside the United States. Taxpayer Relief Act of 1997, Public Law 105–34, 111 Stat. 788. The 1997 amendments increased the relevance of section 367(d) and the exception for foreign goodwill and going concern value because, before 1997, the consequences under the foreign tax credit limitation of the treatment of section 367(d) deemed royalties as U.S. source income represented a substantial disincentive for taxpayers to structure transactions in a way that would be subject to section 367(d).

Additionally, the so-called “check-the-box” regulations of § 301.7701–3, published December 18, 1996 (TD 8697, 61 FR 66584), and Congress’s enactment in 2006 of the subpart F “look-thru” rule in section 954(c)(6) (Tax Increase Prevention and Reconciliation Act of 2005, Public Law 109–222, 120 Stat. 345), increased the potential benefit to taxpayers from transferring high-value intangibles offshore by reducing obstacles to redeploying cash earned in overseas operations among foreign affiliates without incurring U.S. tax. Both of these changes also facilitate, in certain circumstances, the ability of foreign subsidiaries to license transferred intangibles to affiliates without incurring subpart F income.

Finally, on January 5, 2009, the Treasury Department and the IRS issued temporary regulations under section 482 (TD 9441, 74 FR 340) related to cost sharing arrangements (subsequently finalized at TD 9568, 76 FR 80082 (Dec. 22, 2011)). The 2009 cost sharing regulations, in particular the supplemental guidance in § 1.482–7T(g) on transfer pricing methods applicable in determining the arm’s length price for a platform contribution transaction or PCT (so-called “buy-in payments”), were intended, in part, to address inappropriate income shifting from intangible transfers under the prior cost sharing regulations. Although the prior cost sharing regulations did not provide any favorable treatment for foreign goodwill and going concern value, in the experience of the IRS, taxpayers took positions under those regulations that allowed a domestic cost sharing participant to transfer intangibles to a foreign cost sharing participant for development under a cost sharing arrangement without fully compensating the domestic cost sharing participant for the value of the transferred intangibles. It is also the experience of the IRS that the 2009 cost sharing regulations limited taxpayers’ ability to use PCTs in cost sharing arrangements to shift high value intangibles offshore without appropriate compensation, thereby increasing the relative appeal of transferring intangibles in a transaction subject to section 367. Thus, taxpayers began using transactions subject to section 367 to transfer intangibles intended for development under a cost sharing arrangement rather than as part of a PCT.

Moreover, since Congress enacted section 367(d) in its current form in 1984, the relative importance of intangibles in the economy and in the profitability of business has increased greatly. According to a joint report issued by the Economic and Statistics Administration and the U.S. Patent and Trademark Office, “IP use permeates all aspects of the economy with increasing intensity and extends to all parts of the U.S.” Justin Antonipillai, Economics and Statistics Administration, & Michelle K. Lee, U.S. Patent and Trademark Office, Intellectual Property and the U.S. Economy, at p.30 (2016). This growing importance is reflected in the significant increase in the portion of business values attributable to intangible assets in the years since 1984, with one study indicating that intangibles accounted for only 32 percent of the market value of the S&P 500 in 1985, but accounted for 84 percent by 2015. Annual Study of Intangible Asset Market Value from Ocean Tomo, LLC (Mar. 4, 2015, 12:00AM), http://www.oceantomo.com/2015/03/04/2015-intangible-asset-market-value-study/. Growth in the share of business values attributable to section 936 intangibles during this period, together with the statutory and regulatory changes discussed in the preceding paragraphs, have increased the incentives for taxpayers to transfer such valuable intangibles to related offshore affiliates in transactions subject to section 367(d) and to misattribute intangible value from enumerated section 936 intangibles to foreign goodwill and going concern value in the context of such transactions.

Since 1984, taxpayers have reversed their positions regarding the significance of goodwill and going concern value in response to the enactment of sections 197 and 367(d), and now commonly assert that such value constitutes a large percentage – even the vast majority – of an enterprise’s value. The IRS’s experience administering section 367(d) has, once again, highlighted the abuse potential that arises from the need to distinguish value attributable to nominally distinct intangibles that are used together in a single trade or business. Specifically, the uncertainty inherent in distinguishing between value attributable to goodwill and going concern value and value attributable to other intangible property makes any exception to income recognition for the outbound transfer of goodwill and going concern value unduly difficult to administer and prone to tax avoidance. Of course, any rule that provides for the tax-free transfer of one type of property, while the transfer of other types of property remains taxable, provides an incentive to improperly allocate value away from the taxable property and onto the tax-free property. This problem is acute, however, in cases involving the offshore reorganization of entire business divisions that include high-value, interrelated intangibles, because goodwill and going concern value are particularly difficult to distinguish (perhaps are even indistinguishable) from the enumerated section 936 intangibles. See, for example, International Multifoods Corp. v. Commissioner, 108 T.C. 25, 42 (1997) (noting that it “is well established that trademarks embody goodwill”). See also Joint Committee on Taxation, Present Law and Background Related to Possible Income Shifting and Transfer Pricing, (JCX-37-10) July 20, 2010, at 110 (noting that unique intangible property is difficult to value because it is rarely, if ever, transferred to third parties).

These statutory, regulatory, and market developments since Congress amended section 367(d) in 1984, as well as the experience of the IRS in administering section 367 over that period, inform the manner in which the Treasury Department and the IRS seek to give effect to the intent of Congress in this complex area of law. As a starting point, the Treasury Department and the IRS observe that the statutory grants of authority in section 367(a) and (d), coupled with the absence of any specific statutory protection for transfers of goodwill and going concern value, form the basis for the broad authority of the Treasury Department and the IRS to design the appropriate parameters for the taxation of outbound transfers. The 1984 legislative history expressed an expectation that outbound transfers of foreign goodwill and going concern value would not lead to abuse of the U.S. tax system and, on the basis of that expectation, anticipated that the Secretary would exercise the regulatory authority under section 367 in a manner that would allow taxpayers to transfer foreign goodwill and going concern value outbound without current U.S. tax. The legislative history also explains that Congress expected the Secretary to use the “regulatory authority to provide for recognition in cases of transfers involving the potential of tax avoidance.” Accordingly, the administrative discretion to determine the contours of nonrecognition treatment must be exercised in light of the income recognition objectives of the statute and informed by the IRS’s experience in administering the exception.

The Treasury Department and the IRS have determined that the premise of the expectation noted in the legislative history that an exception to recognition treatment would apply to foreign goodwill and going concern value—namely, that outbound transfers of foreign goodwill and going concern value would not lead to abuse—is inconsistent with the experience of the IRS in administering section 367(d), and consequently no longer supports such an exception. Rather, based on the IRS’s experience over the past three decades, the Treasury Department and the IRS have determined that the favorable treatment of foreign goodwill and going concern value has interfered with the application of the general rule in section 367(d) that requires income recognition upon the outbound transfer of section 936 intangibles due to the inherent difficulty of distinguishing value attributable to goodwill and going concern value from value attributable to enumerated section 936 intangibles, coupled with taxpayer efforts to maximize the value allocated to goodwill and going concern value.

The Treasury Department and the IRS also observe that the 1984 legislative history explains that the 1984 amendments to section 367(d) were made in response to challenges the IRS faced in administering the prior regime. That regime required a taxpayer to clear its purpose for transferring property offshore with the IRS. See H.R. Rep. 98–432, pt. 2, at 1315. The 1984 reworking of section 367 was intended to promote administrability by making the analysis of outbound transfers more objective. Other passages from the legislative history show that the general purpose of the amendments to section 367 was to close “serious loopholes,” and that the 1984 revisions were intended to strengthen the application of that section. Id.

Accordingly, the Treasury Department and the IRS do not view the legislative history as mandating an exception for transfers of goodwill and going concern value developed by a foreign branch, or as indicating that Congress anticipated, or would have condoned, the extent of the claims regarding foreign goodwill and going concern value that the IRS has in fact encountered. To the contrary, the Treasury Department and the IRS have concluded that the statutory purpose of the income recognition provisions in section 367(d) is incompatible with the favorable treatment of foreign goodwill and going concern value reflected in the 1986 temporary regulations. In particular, taking into account the statutory, regulatory, and market developments since 1984 and the experience of the IRS in administering section 367(d) under the 1986 temporary regulations, the Treasury Department and the IRS have determined that, at this juncture, the approach most consistent with the intent of Congress in 1984, including the directive to use regulatory authority “to provide for recognition in cases of transfers involving the potential of tax avoidance,” is to remove the favorable treatment for foreign goodwill and going concern value in the 1986 temporary regulations.

The Treasury Department and the IRS also disagree with the notion expressed in comments that the proposed regulations inappropriately attempt to solve section 482 transfer pricing problems under the authority of section 367. Congress made clear in adding the commensurate with income language to both sections 367(d) and 482 in 1986 that the provisions are closely related, and it is within the authority of the Treasury Department and the IRS to consider valuation concerns in administering section 367. Section 1231(e)(1) and (2) of the Tax Reform Act of 1986, Public Law 99–514, 100 Stat. 2085, 2562–3.

For these reasons, the Treasury Department and the IRS disagree with comments asserting that the Treasury Department and the IRS lack the authority to eliminate the favorable treatment that applied to foreign goodwill and going concern value under the 1986 temporary regulations.

Several comments generally favored retaining both the nonrecognition treatment for foreign goodwill and going concern value and its current measurement as the residual value of a foreign business operation. Other comments, however, acknowledged the problems associated with the residual valuation approach but supported an exception determined on some other basis. Some of these comments included suggestions for other ways to define goodwill and going concern value and for determining the amount that should qualify for nonrecognition. The Treasury Department and the IRS have determined that none of the comments provided a sufficiently administrable approach that would reliably ensure that section 367 applies with respect to the full value of all section 936 intangibles.

The proposed regulations specifically requested comments on a potential exception that would apply to situations where there is limited potential for abuse. As an example, the comment solicitation posited the incorporation, in response to regulatory pressure or compulsion, of a financial services business that previously had operated as a branch in another country. The Treasury Department and the IRS received several comments in response to this solicitation.

Several comments suggested that the final regulations provide an exception that would continue to permit favorable treatment of transfers of foreign goodwill and going concern value that occur as a result of the incorporation of a branch in a country that exerts regulatory pressure (either implicit or explicit) upon the U.S. transferor to conduct its operations in that country in corporate form. According to these comments, the incorporation of a branch in these circumstances is not motivated by tax considerations but rather occurs in order to comply with local law or regulations.

The regulations under section 367 provide that certain property is deemed to be transferred for use in the active conduct of a trade or business outside of the United States when the transfer is either legally required by the local foreign government as a necessary condition of doing business or is compelled by a genuine threat of immediate expropriation by the local foreign government. Section 367 and the regulations thereunder do not, however, provide exceptions to the requirement to recognize income or gain when assets that are not eligible for the ATB exception, such as section 936 intangibles and assets described in section 367(a)(3)(B), are transferred in this circumstance. Accordingly, the policy of section 367 and the regulations thereunder is not to expand on the types of assets that are eligible for the ATB exception in this circumstance. Moreover, the mere fact that a taxpayer is compelled or pressured to incorporate its branch does not mean that the taxpayer has any less incentive to reduce the tax consequences of such incorporation by adopting the aggressive valuation positions that the proposed regulations were intended to prevent. Therefore, the final regulations do not provide a special exception to continue the favorable treatment of foreign goodwill and going concern value in this circumstance. Notably, some taxpayers that are pressured to incorporate branch operations in these circumstances can avoid being subject to section 367 by incorporating the branch using an eligible entity described in § 301.7701–2 that could elect to be treated as a disregarded entity for U.S. federal income tax purposes.

Several comments recommended an exception for transfers of foreign goodwill and going concern value by taxpayers in certain industries, such as banking and finance, life insurance, and industries that primarily provide services to third parties, asserting that such businesses do not possess the types of highly valuable intangibles about which they believe the Treasury Department and the IRS are concerned. The comments did not provide any basis, however, for the Treasury Department and the IRS to conclude that taxpayers in particular industries consistently lack valuable intangibles of the kind listed in section 936(h)(3)(B), even though the prevalence of specific types of intangibles may differ across industries. Additionally, the ability and incentive to allocate value away from other intangibles, such as trademarks, and toward goodwill or going concern value is not limited to particular industries. As a general matter, the Treasury Department and the IRS attempt, to the extent possible, to avoid issuing guidance based on industry classifications that are not clearly and closely tied to specific tax policy concerns. Accordingly, the final regulations do not provide any industry-specific exceptions.

Based on these comments, the Treasury Department and the IRS considered whether it would be possible to provide an exception for tax-free transfers of foreign goodwill and going concern value developed by a foreign branch that did not possess or otherwise benefit from the use of any highly valuable enumerated section 936 intangibles. If the absence of such highly valuable intangibles could be reliably determined, the concerns regarding the potential to attribute value away from such intangibles and toward goodwill and going concern value would be mitigated. However, such an exception would require the development and administration of standards to determine whether any enumerated section 936 intangible was highly valuable, an exercise that would be as difficult (and in many circumstance would be no different) than the exercise of distinguishing value attributable to foreign goodwill and going concern value from value attributable to other intangibles transferred together with it. Such an exception also would require a careful examination of the particular facts of a transferor’s assets and business as a threshold matter to confirm that valuable enumerated section 936 intangibles are not made available for the benefit of the transferee foreign corporation, either through a separate but related transfer to the foreign corporation or through a service provided to the foreign corporation using such intangibles. Accordingly, the Treasury Department and the IRS did not adopt this potential exception in these final regulations.

Several comments suggested maintaining the favorable treatment of foreign goodwill and going concern value in situations in which section 367 applies to the incorporation of a long-standing foreign branch or a branch that conducts an active foreign business operation. The Treasury Department and the IRS acknowledge that conditioning favorable treatment for foreign goodwill and going concern value on the presence of a robust foreign branch would increase the likelihood that the business at issue has substantive foreign operations. However, in situations where the exception would continue to apply, the requirement of a robust foreign branch would not address the potential for tax avoidance that motivated the proposed regulations when value must be allocated between foreign goodwill and going concern value, on the one hand, and enumerated section 936 intangibles, on the other hand. Thus, the final regulations do not adopt the comments suggesting an exception for goodwill and going concern value developed by a foreign branch that is subsequently incorporated because, when applicable, such an exception would not address the administrative difficulties in identifying and separately valuing the property that is and is not eligible for the exception, and therefore would be insufficient to prevent the potential for tax avoidance.

Other comments suggested that the regulations provide new rules for determining foreign goodwill and going concern value, such that an exception for such transfers could be provided that would be less susceptible to the abuses described in the preamble to the proposed regulations. That is, the comments suggested determining goodwill and going concern value using an approach that differs from that in existing § 1.367(a)–1T(d)(5)(iii), which treats it as the residual after other intangibles are valued.

Several of these comments suggested determining foreign goodwill and going concern value by classifying intangibles as routine and non-routine and permitting value attributable to routine intangibles to be transferred tax-free under an exception. One comment asserted that goodwill is relatively easy to value as compared to certain enumerated section 936 intangibles but did not explain why or how goodwill is more easily valued or how to reliably allocate value between goodwill and enumerated section 936 intangibles. Another comment asserted that goodwill can be valued based on the premise that it is the kind of asset that enables an existing business to produce “routine” or “normal” operating profits or cash flow during the period that a new business would be assembling its assets and workforce and attracting a customer base, but the comment did not explain how to determine “routine” or “normal” operating profits.

Another comment recommended determining foreign goodwill and going concern value using a formulaic approach based on sales and general and administrative expenses, asserting that routine expenses for operational costs and compensation are closely associated with the business activities that give rise to goodwill and going concern value. The comment did not provide any support for this premise. As a general matter, cost-based methods (in comparison with market-based and income-based methods) are not a reliable means of valuing intangible property because the value of intangible property does not necessarily bear any predictable relationship to the costs of developing the property. The comment suggesting a cost-based approach did not demonstrate that determining goodwill and going concern value in the section 367(d) context is a situation where costs are a reliable measure of value (regardless of whether goodwill and going concern value are section 936(h)(3)(B) intangibles). Accordingly, the Treasury Department and the IRS have determined that a rule that determined foreign goodwill and going concern value based on certain expenses would be inappropriate.

Another comment proposed, for branches incorporated in a jurisdiction with which the United States has an income tax treaty in effect, using the earnings before interest, taxes, depreciation, and amortization of the branch as reported to foreign tax authorities as reliable data on which to base a valuation. An exception based on information reported to a foreign country’s tax authority, which may be based on that jurisdiction’s generally accepted accounting standards, does not address the concerns expressed by the Treasury Department and the IRS in the preamble to the proposed regulations. Most significantly, the comment does not explain how this information would be useful in determining the value of foreign goodwill and going concern value or distinguishing value attributable to enumerated section 936 intangibles from that of other property, nor have the Treasury Department and the IRS been able to identify how it would be useful. Accordingly, this recommendation has not been adopted.

In summary, none of the proposed approaches for more directly valuing foreign goodwill and going concern value offer a principled and administrable basis for allocating value between foreign goodwill and going concern value that would be subject to an exception and other intangibles that would not. The Treasury Department and the IRS therefore concluded that the proposed approaches would not provide a meaningful improvement over the residual value approach in the 1986 temporary regulations as a conceptual or administrative matter.

Several comments suggested that the favorable treatment for transfers of foreign goodwill and going concern value could be maintained while addressing the concerns that prompted the issuance of the proposed regulations by capping the amount that can qualify for the exception, either on a non-rebuttable basis or in the absence of a ruling. For example, one comment suggested that the excepted amount should not exceed 25 percent of the branch’s net enterprise value, unless a ruling is obtained from the IRS. The comment asserted that 25 percent represents a modest portion of a branch’s value that is likely to be attributable to branch goodwill and going concern value. Another comment suggested that the excepted amount should not exceed 50 percent of the total value of the assets transferred to the foreign corporation. Although such formulaic caps would limit the potential tax avoidance from improperly attributing value from enumerated section 936 intangibles to foreign goodwill and going concern value that is eligible for an exception, the amount excepted under such an approach would still potentially reflect value properly attributable to enumerated section 936 intangibles. That is, with respect to amounts claimed below the cap, a formulaic cap would not relieve the IRS of the need to distinguish foreign goodwill and going concern value from enumerated section 936 intangibles, a key challenge that motivated the approach of the proposed regulations. Moreover, the Treasury Department and the IRS have determined that the discretionary ruling practice proposed by one comment would require an onerous commitment of IRS resources (which the comment acknowledged are constrained), and, without detailed procedures for both identifying and valuing foreign goodwill and going concern value, would simply accelerate the disputes that occur under the 1986 temporary regulations. As a result, the final regulations do not adopt the recommendations to use a formulaic cap to limit the amount of foreign goodwill and going concern value.

One comment stated that U.S. citizens may conduct professional services outside the United States as sole practitioners, or in partnership with other practitioners, and observed that the incorporation of such a business would entail a section 351 contribution subject to section 367 (assuming the transferee entity was classified as a corporation for U.S. federal income tax purposes). According to the comment, because any goodwill in such a scenario would relate to foreign customers and a foreign business or professional license, there could be no abuse warranting taxation under section 367.

The Treasury Department and the IRS do not agree that the outbound transfer of value developed in such cases will necessarily not result in abuse of the U.S. tax system. The potential for abuse in a transfer subject to section 367 arises not just from the possibility that value associated with U.S. customers would be denominated as foreign goodwill, but also from the fundamental difficulty in reliably distinguishing value attributable to enumerated section 936 intangibles from value attributable to other intangibles, an issue that is no different in the professional services context. Therefore, the final regulations do not adopt this comment.

One comment proposed maintaining the favorable treatment of foreign goodwill and going concern value for transfers to joint venture companies, particularly cases in which the U.S. transferor is going into business with one or more unrelated foreign parties (third parties) and in which the U.S. transferor’s interest in the joint venture is equal to or less than 50 percent. According to the comment, the U.S. transferor in this situation has a financial incentive to segregate its intangibles contributed to the joint venture from its other property. The presence of a third party, however, would not necessarily reduce the U.S. transferor’s incentive to attribute value to foreign goodwill and going concern value, rather than to enumerated section 936 intangibles, in order to minimize the tax consequences of the transfer, since such a distinction may be irrelevant to the third party. Accordingly, the final regulations do not adopt this proposal.

Several comments requested that the Treasury Department and the IRS address whether goodwill and going concern value should be characterized as a section 936(h)(3)(B) intangible, and thus subject to section 367(d), or instead as property subject to section 367(a). Comments also requested that the regulations provide certainty to taxpayers that have taken the position that goodwill and going concern value is not described in section 936(h)(3)(B) by providing that such taxpayers will be permitted to treat goodwill and going concern value as property subject to section 367(a) rather than section 367(d).

As discussed in the preamble to the proposed regulations, the Treasury Department and the IRS acknowledge that taxpayers have taken different positions regarding the scope of section 936(h)(3)(B) and that the issue is more significant following the elimination of the favorable treatment for foreign goodwill and going concern value. Any enumerated section 936 intangible, and any item similar to such specifically enumerated intangibles, is subject to the regime provided by section 367(d). The Treasury Department and the IRS have determined that it would be inconsistent with the policy underlying section 367(d) to permit intangible property that is described in section 936(h)(3)(B) to be subject to section 367(a). Accordingly, the Treasury Department and the IRS have determined that it is appropriate to retain the approach provided in the proposed regulations, which allows taxpayers to apply section 367(d) to certain property that otherwise would be taxed under section 367(a) but which continues to require taxpayers to apply section 367(d) to all property described in section 936(h)(3)(B). Because the identification of items that are neither explicitly listed in section 936(h)(3)(B)(i) through (v) nor explicitly listed as potentially qualifying for the ATB exception generally will require a case-by-case functional and factual analysis, the final regulations do not address the characterization of such items as similar items (within the meaning of section 936(h)(3)(B)(vi)) or as something else. In general, potential rules under section 367 for identifying and valuing transferred property are beyond the scope of these final regulations.

The proposed regulations eliminated the 20-year limitation on useful life for intangible property subject to section 367(d) that was included in § 1.367(d)–1T(c)(3), because of concerns that the limitation results in less than all of the income attributable to transferred intangible property being taken into account by the U.S. transferor. In the preamble to the proposed regulations, the Treasury Department and the IRS solicited comments on how to simplify the administration of section 367(d) inclusions for property with a very long useful life in the absence of the 20-year limitation. In response to this comment solicitation, several comments requested that the final regulations restore the 20-year limitation on useful life because it promotes administrability for both taxpayers and the IRS.

After considering the comments received, the Treasury Department and the IRS agree that a 20-year limitation on inclusions may promote administrability for both taxpayers and the IRS in cases where the useful life of the transferred property is indefinite or is reasonably anticipated to exceed twenty years. Accordingly, in such cases, the final regulations provide that taxpayers may, in the year of transfer, choose to take into account section 367(d) inclusions only during the 20-year period beginning with the first year in which the U.S transferor takes into account income pursuant to section 367(d). However, the Treasury Department and the IRS have determined that this optional limitation should not affect the present value of all amounts included by the taxpayer under section 367(d). Accordingly, the final regulations specifically require a taxpayer that chooses to limit section 367(d) inclusions to a 20-year period to include, during that period, amounts that reasonably reflect amounts that, in the absence of the limitation, would be required to be included over the useful life of the transferred property following the end of the 20-year period. This requirement is consistent with the requirement in section 367(d) to include amounts that are commensurate with the income attributable to the transferred intangible during its full useful life, without limitation. The requirement of the final regulations that inclusions during the limited 20-year period begin in the first year in which in which the U.S transferor takes into account income pursuant to section 367(d) reflects the possibility of delays between the year the intangible property is transferred and the first year in which exploitation of the transferred property results in taxable income being earned by the transferee and included under section 367(d) by the transferor.

One comment also suggested that the IRS be precluded from making commensurate-with-income adjustments for taxable years beginning more than 20 years after the outbound transfer. In response to this comment, the final regulations provide that, if a taxpayer chooses to limit inclusions under section 367(d) to a 20-year period, no adjustments will be made for taxable years beginning after the conclusion of the 20-year period. Thus, after the statute of limitations expires for taxable years during the 20-year period, a taxpayer will have no further section 367(d) inclusions as a result of the Commissioner’s examination of taxable years that begin after the end of the 20-year period. However, consistent with the commensurate-with-income principle, for purposes of determining whether income inclusions during the 20-year period are commensurate with the income attributable to the transferred property, and whether adjustments should be made for taxable years during that period while the statute of limitations for such taxable years is open, the Commissioner may take into account information with respect to taxable years after that period, such as the income attributable to the transferred property during those later years.

The final regulations revise the definition of useful life to provide that useful life includes the entire period during which exploitation of the transferred intangible property is reasonably anticipated to affect the determination of taxable income, in order to appropriately account for the fact that exploitation of intangible property can result in both revenue increases and cost decreases. A comment asserted that including use in subsequently developed intangibles within the useful life of the transferred intangible property would be too difficult to administer and was not consistent with the arm’s length standard. The Treasury Department and the IRS disagree with this comment. The value of many types of intangible property is derived not only from use of the intangible property in its present form, but also from its use in further development of the next generation of that intangible and other property. For example, if a software developer were to sell all of its copyright rights in its software to an unrelated party, and the copyright rights are expected to derive value both from the exclusive right to use the current generation computer code to make and sell current generation software products and from the exclusive right to use the current generation code in the development of other versions of the software, which will then be used to make and sell future generation software products, the software developer would expect to be compensated for the latter right. That is, if the software has value in developing a future generation of products, the software developer would not ignore the value of the use of the software in future research and development and hand over those rights free of charge, and an uncontrolled purchaser would be willing to compensate the developer to obtain such rights.

Several comments requested that the final regulations apply to transfers occurring after their date of publication, and not relate back to the date the proposed regulations were issued. These comments asserted that the proposed regulations change long-standing law in a way that would prejudice taxpayers that had arranged their business operations based on the 1986 temporary regulations. Others speculated that the final regulations might deviate from the proposed regulations to such an extent that substantial confusion would result for taxpayers attempting to determine their tax results in the interim period before the final regulations were published. Finally, one comment asserted that an applicability date relating back to the proposed regulations would violate the Administrative Procedure Act (APA), specifically 5 U.S.C. § 553, which provides that the effective date of certain final regulations must be at least 30 days after their date of publication.

After considering these comments, the Treasury Department and the IRS have determined that the proposed applicability date, under which the final regulations would apply to transfers occurring on or after September 14, 2015, should be retained. The proposed regulations were issued to curtail the potential for abuse that exists under the 1986 temporary regulations from treating value that should be attributed to enumerated section 936 intangibles instead as exempt foreign goodwill or going concern value. The proposed effective date was intended to prevent taxpayers from using the time while the proposed regulations were pending to accelerate transfers subject to section 367 in order to take abusive positions under the 1986 temporary regulations before the finalization of the proposed regulations.

The Treasury Department and the IRS have statutory authority to issue regulations applicable at least as of the date the proposed regulations were filed with the Federal Register. The pre-1996 version of section 7805(b)—which governs regulations related to statutory provisions enacted before July 30, 1996, such as section 367—provides express retroactive rulemaking authority by stating that the Secretary may prescribe the extent, if any, to which any ruling or regulation shall be applied without retroactive effect. Section 7805(b) (1995). Because section 7805(b) is the more specific statute, it controls over the general notice requirements of 5 U.S.C. § 553. See, for example, Redhouse v. Commissioner, 728 F.2d 1249, 1253 (9th Cir. 1984); Wing v. Commissioner, 81 T.C. 17, 28–30 & n.17 (1983).

Finally, the Treasury Department and the IRS disagree with the comment that differences between the proposed and final regulations may create confusion. The final regulations are a logical outgrowth of the proposed regulations in light of the comments received and their consideration by the Treasury Department and the IRS. In particular, the final regulations do not differ from the proposed regulations with respect to the elimination of the favorable treatment for transfers of foreign goodwill and going concern value. Furthermore, a transfer of property that is subject to recognition treatment under section 367 under the final regulations would also have been subject to such treatment under section 367 under the proposed regulations.

For these reasons, the final regulations generally apply to transfers occurring on or after September 14, 2015, the date the proposed regulations were filed with the Federal Register, and to transfers occurring before September 14, 2015, resulting from entity classification elections made under § 301.7701–2 that are filed on or after September 14, 2015.

Although section 367(a)(3)(B)(iii) provides that the ATB exception does not apply, and therefore that section 367(a)(1) applies, to foreign currency or other property denominated in foreign currency, current § 1.367(a)–5T(d)(2) generally provides that section 367(a)(1) nonetheless does not apply to certain transfers of property denominated in the currency of the country in which the transferee foreign corporation is organized. The proposed regulations eliminated this regulatory exception from the general rule in section 367(a)(3)(B)(iii) that turns off the ATB exception for such property. One comment recommended clarifying the regulations under section 367(a) by adopting the language and concepts reflected in the changes to the foreign currency rules in subpart J that were made after the publication of the 1986 temporary regulations. In response to this comment, § 1.367(a)–2(c)(3) of the final regulations, which corresponds to existing § 1.367(a)–5T(d)(2), reflects amendments that increase consistency with the rules in sections 987 and 988. In particular, the terms “foreign currency” and “property denominated in foreign currency” are no longer used. Rather, proposed § 1.367(a)–2(c)(3) is revised to refer to nonfunctional currency and other property that gives rise to a section 988 transaction of the taxpayer described in section 988(c)(1)(B), or that would give rise to such a section 988 transaction if it were acquired, accrued, or entered into directly by the taxpayer. The Treasury Department and the IRS consider that these modifications do not substantially change the scope of property subject to the rule at § 1.367(a)–5T(d)(2).

Other comments suggested that regulations address many outstanding issues in the context of section 367 that were not addressed in the proposed regulations. These suggestions include guidance to address the following topics: (i) the valuation of intangibles subject to section 367(d) and the forms that deemed payments should take, including guidance providing parity with the section 482 form-of-payment rules; (ii) whether a receivable is created upon an audit-related adjustment; (iii) the tax basis consequences under section 367(d), including how section 367(d) applies to intangibles subject to the section 197 anti-churning rules; (iv) coordination of the general rules and disposition rules in section 367(d); (v) issues raised in connection with Notice 2012–39 (2012–31 IRB 95); (vi) the definition of “property” for purposes of section 367; and (vii) the subsequent transfer rules under the ATB exception.

The Treasury Department and the IRS generally agree that additional guidance under section 367(a) and (d) is desirable and would benefit both taxpayers and the government. However, these issues are beyond the scope of this project. For example, while the Treasury Department and the IRS are aware that there is uncertainty regarding the application of the subsequent transfer rules to transactions involving hybrid partnerships, the Treasury Department and the IRS have determined that transactions involving partnerships merit a more holistic consideration and that this regulation package is not the appropriate vehicle to address the issue. Consequently, the regulations finalize the subsequent transfer rules in § 1.367(a)–2T(c) (located in § 1.367(a)–2(g) of these final regulations), but the Treasury Department and the IRS expect those rules will be amended after a more detailed consideration of transactions involving partnerships.

This section lists the paragraphs contained in §§ 1.367(a)–1 through 1.367(a)–8.

(a) Scope.

(b) General rules.

(1) Foreign corporation not considered a corporation for purposes of certain transfers.

(2) Cases in which foreign corporate status is not disregarded.

(3) Determination of value.

(4) In general.

(5) Treatment of certain property as subject to section 367(d).

(c) [Reserved].

(d) Definitions.

(1) United States person.

(2) Foreign corporation.

(3) Transfer.

(4) Property.

(5) Intangible property.

(6) Operating intangibles.

(e) Close of taxable year in certain section 368(a)(1)(F) reorganizations.

(f) Exchanges under sections 354(a) and 361(a) in certain section 368(a)(1)(F) reorganizations.

(1) Rule

(2) Rule applies regardless of whether a continuance under applicable law.

(g) Effective/applicability dates.

(a) Scope and general rule.

(1) Scope.

(2) General rule.

(b) Eligible property.

(c) Exception for certain property.

(1) Inventory.

(2) Installment obligations, etc.

(3) Nonfunctional currency, etc.

(4) Certain leased tangible property.

(d) Active conduct of a trade or business outside the United States.

(1) In general.

(2) Trade or business.

(3) Active conduct.

(4) Outside of the United States.

(5) Use in the trade or business.

(6) Active leasing and licensing.

(e) Special rules for certain property to be leased.

(1) Leasing business of the foreign corporation.

(2) De minimis leasing by the foreign corporation.

(3) Aircraft and vessels leased in foreign commerce.

(f) Special rules for oil and gas working interests.

(1) In general.

(2) Active use of working interest.

(3) Start-up operations.

(4) Other applicable rules.

(g) Property retransferred by the foreign corporation.

(1) General rule.

(2) Exception.

(h) Compulsory transfers of property.

(i) [Reserved].

(j) Failure to comply with reporting requirements of section 6038B.

(1) Failure to comply.

(2) Relief for certain failures to comply that are not willful.

(k) Effective/applicability dates.

(1) In general.

(2) Foreign currency exception.

(a) In general.

(1) Overview.

(2) Exceptions for certain exchanges of stock or securities.

(3) Cross-references.

(b) Transfers of stock or securities of foreign corporations.

(1) General rule.

(2) Certain transfers subject to sections 367(a) and (b).

(c) Transfers of stock or securities of domestic corporations.

(1) General rule.

(2) Ownership presumption.

(3) Active trade or business test.

(4) Special rules.

(5) Definitions.

(6) Reporting requirements of U.S. target company.

(7) Ownership statements.

(8) Certain transfers in connection with performance of services.

(9) Private letter ruling option.

(10) Examples.

(11) Effective date.

(d) Indirect stock transfers in certain nonrecognition transfers.

(1) In general.

(2) Special rules for indirect transfers.

(3) Examples.

(e) [Reserved].

(f) Failure to file statements.

(1) Failure to file.

(2) Relief for certain failures to file that are not willful.

(g) Effective/applicability dates.

(1) Rules of applicability.

(2) Election.

(h) Former 10-year gain recognition agreements.

(i) [Reserved].

(j) Transition rules regarding certain transfers of domestic or foreign stock or securities after December 16, 1987, and prior to July 20, 1998.

(1) Scope.

(2) Transfers of domestic or foreign stock or securities: additional substantive rules.

(k) [Reserved].

(a) Depreciated property used in the United States.

(1) In general.

(2) U.S. depreciated property.

(3) Property used within and without the United States.

(b) Effective/applicability dates.

(a) through (b)(1) [Reserved].

(2) No active conduct exception.

(c)(1) [Reserved].

(2) Gain limitation.

(3) [Reserved].

(4) Transfers of certain intangible property.

(d) through (i) [Reserved].

(j) Effective/applicability dates.

(a) Scope and purpose.

(b) General rule.

(1) Nonrecognition exchanges enumerated in section 367(a)(1).

(2) Nonrecognition exchanges not enumerated in section 367(a)(1).

(c) Elective exception.

(1) Control.

(2) Gain recognition.

(3) Basis adjustments required for control group members.

(4) Agreement to amend or file a U.S. income tax return.

(5) Election and reporting requirements.

(d) Section 361 exchange followed by successive distributions to which section 355 applies.

(e) Other rules.

(1) Section 367(a) property with respect to which gain is recognized.

(2) Relief for certain failures to comply that are not willful.

(3) Anti-abuse rule.

(4) Certain income inclusions under § 1.367(b)–4.

(5) Certain gain under § 1.367(a)–6.

(f) Definitions.

(g) Examples.

(h) Applicable cross-references.

(i) [Reserved].

(j) Effective/applicability dates.

(1) In general.

(2) Section 367(d) property.

(a) Scope.

(b) Definitions and special rules.

(1) Definitions.

(2) Special rules.

(c) Gain recognition agreement.

(1) Terms of agreement.

(2) Content of gain recognition agreement.

(3) Description of transferred stock or securities and other information.

(4) Basis adjustments for gain recognized.

(5) Terms and conditions of a new gain recognition agreement.

(6) Cross-reference.

(d) Filing requirements.

(1) General rule.

(2) Special requirements.

(3) Common parent as agent for U.S. transferor.

(e) Signatory.

(1) General rule.

(2) Signature requirement.

(f) Extension of period of limitations on assessments of tax.

(1) General rule.

(2) New gain recognition agreement.

(g) Annual certification.

(h) Use of security.

(i) [Reserved].

(j) Triggering events.

(1) Disposition of transferred stock or securities.

(2) Disposition of substantially all of the assets of the transferred corporation.

(3) Disposition of certain partnership interests.

(4) Disposition of stock of the transferee foreign corporation.

(5) Deconsolidation.

(6) Consolidation.

(7) Death of an individual; trust or estate ceases to exist.

(8) Failure to comply.

(9) Gain recognition agreement filed in connection with indirect stock transfers and certain triangular asset reorganizations.

(10) Gain recognition agreement filed pursuant to paragraph (k)(14) of this section.

(k) Triggering event exceptions.

(1) Transfers of stock of the transferee foreign corporation to a corporation or partnership.

(2) Complete liquidation of U.S. transferor under sections 332 and 337.

(3) Transfers of transferred stock or securities to a corporation or partnership.

(4) Transfers of substantially all of the assets of the transferred corporation.

(5) Recapitalizations and section 1036 exchanges.

(6) Certain asset reorganizations.

(7) Certain triangular reorganizations.

(8) Complete liquidation of transferred corporation.

(9) Death of U.S. transferor.

(10) Deconsolidation.

(11) Consolidation.

(12) Intercompany transactions.

(13) Deemed asset sales pursuant to section 338(g) elections.

(14) Other dispositions or events.

(l) [Reserved].

(m) Receipt of boot in nonrecognition transactions.

(1) Dispositions of transferred stock or securities.

(2) Dispositions of assets of transferred corporation.

(n) Special rules for distributions with respect to stock.

(1) Certain dividend equivalent redemptions treated as dispositions.

(2) Gain recognized under section 301(c)(3).

(o) Dispositions or other events that terminate or reduce the amount of gain subject to the gain recognition agreement.

(1) Taxable disposition of stock of the transferee foreign corporation.

(2) Gain recognized in connection with certain nonrecognition transactions.

(3) Gain recognized under section 301(c)(3).

(4) Dispositions of substantially all of the assets of a domestic transferred corporation.

(5) Certain distributions or transfers of transferred stock or securities to U.S. persons.

(6) Dispositions or other event following certain intercompany transactions.

(7) Expropriations under foreign law.

(p) Relief for certain failures to file or failures to comply that are not willful.

(1) In general.

(2) Procedures for establishing that a failure to file or failure to comply was not willful.

(3) Examples.

(q) Examples.

(1) Presumed facts and references.

(2) Examples.

(r) Effective/applicability date.

(1) General rule.

(2) Applicability to transfers occurring before March 13, 2009.

(3) Applicability to requests for relief submitted before November 19, 2014.

Par. 3. Section 1.367(a)–1 is revised to read as follows:

(a) Scope. Section 367(a)(1) provides the general rule concerning certain transfers of property by a United States person (referred to at times in this section as the “U.S. person” or “U.S. transferor”) to a foreign corporation. Paragraph (b) of this section provides general rules explaining the effect of section 367(a)(1). Paragraph (c) of this section describes transfers of property that are described in section 367(a)(1). Paragraph (d) of this section provides definitions that apply for purposes of sections 367(a) and (d) and the regulations thereunder. Paragraphs (e) and (f) of this section provide rules that apply to certain reorganizations described in section 368(a)(1)(F). Paragraph (g) of this section provides dates of applicability. For rules concerning the reporting requirements under section 6038B for certain transfers of property to a foreign corporation, see § 1.6038B–1.

(b) General rules—(1) Foreign corporation not considered a corporation for purposes of certain transfers. If a U.S. person transfers property to a foreign corporation in connection with an exchange described in section 351, 354, 356, or 361, then, pursuant to section 367(a)(1), the foreign corporation will not be considered to be a corporation for purposes of determining the extent to which gain is recognized on the transfer. Section 367(a)(1) denies nonrecognition treatment only to transfers of items of property on which gain is realized. Thus, the amount of gain recognized because of section 367(a)(1) is unaffected by the transfer of items of property on which loss is realized (but not recognized).

(2) Cases in which foreign corporate status is not disregarded. For circumstances in which section 367(a)(1) does not apply to a U.S. transferor’s transfer of property to a foreign corporation, and thus the foreign corporation is considered to be a corporation, see §§ 1.367(a)–2, 1.367(a)–3, and 1.367(a)–7.

(3) Determination of value. In cases in which a U.S. transferor’s transfer of property to a foreign corporation constitutes a controlled transaction as defined in § 1.482–1(i)(8), the value of the property transferred is determined in accordance with section 482 and the regulations thereunder.

(4) Character, source, and adjustments—(i) In general. If a U.S. person is required to recognize gain under section 367 upon a transfer of property to a foreign corporation, then —

(A) The character and source of such gain are determined as if the property had been disposed of in a taxable exchange with the transferee foreign corporation (unless otherwise provided by regulation); and

(B) Appropriate adjustments to earnings and profits, basis, and other affected items will be made according to otherwise applicable rules, taking into account the gain recognized under section 367(a)(1). For purposes of applying section 362, the foreign corporation’s basis in the property received is increased by the amount of gain recognized by the U.S. transferor under section 367(a) and the regulations issued pursuant to that section. To the extent the regulations provide that the U.S. transferor recognizes gain with respect to a particular item of property, the foreign corporation increases its basis in that item of property by the amount of such gain recognized. For example, §§ 1.367(a)–2, 1.367(a)–3, and 1.367(a)–4 provide that gain is recognized with respect to particular items of property. To the extent the regulations do not provide that gain recognized by the U.S. transferor is with respect to a particular item of property, such gain is treated as recognized with respect to items of property subject to section 367(a) in proportion to the U.S. transferor’s gain realized in such property, after taking into account gain recognized with respect to particular items of property transferred under any other provision of section 367(a). For example, § 1.367(a)–6 provides that branch losses must be recaptured by the recognition of gain realized on the transfer but does not associate the gain with particular items of property. See also § 1.367(a)–1(c)(3) for rules concerning transfers by partnerships or of partnership interests.

(C) The transfer will not be recharacterized for U.S. Federal tax purposes solely because the U.S. person recognizes gain in connection with the transfer under section 367(a)(1). For example, if a U.S. person transfers appreciated stock or securities to a foreign corporation in an exchange described in section 351, the transfer is not recharacterized as other than an exchange described in section 351 solely because the U.S. person recognizes gain in the transfer under section 367(a)(1).

(ii) Example. The rules of this paragraph (b)(4) are illustrated by the following example.

Example. Domestic corporation DC transfers inventory with a fair market value of $ 1 million and adjusted basis of $ 800,000 to foreign corporation FC in exchange for stock of FC that is described in section 351(a). Title passes within the United States. Pursuant to section 367(a), DC is required to recognize gain of $200,000 upon the transfer. Under the rule of this paragraph (b)(4), the gain is treated as ordinary income (sections 1201 and 1221) from sources within the United States (section 861) arising from a taxable exchange with FC. Appropriate adjustments to earnings and profits, basis, etc., will be made as if the transfer were subject to section 351. Thus, for example, DC’s basis in the FC stock received, and FC’s basis in the transferred inventory, will each be increased by the $200,000 gain recognized by DC, pursuant to sections 358(a)(1) and 362(a), respectively.

(5) Treatment of certain property as subject to section 367(d). A U.S. transferor may apply section 367(d) and § 1.367(d)–1, rather than section 367(a) and the regulations thereunder, to a transfer of property to a foreign corporation that otherwise would be subject to section 367(a), provided that the property is not eligible property, as defined in § 1.367(a)–2(b) but determined without regard to § 1.367(a)–2(c). A U.S. transferor and any other U.S. transferor that is related (within the meaning of section 267(b) or 707(b)(1)) to the U.S. transferor must consistently apply this paragraph (b)(5) to all property described in this paragraph (b)(5) that is transferred to one or more foreign corporations pursuant to a plan. A U.S. transferor applies the provisions of this paragraph (b)(5) in the form and manner set forth in § 1.6038B–1(d)(1)(iv) and (v).

(c)(1) through (c)(3)(i) reserved. For further guidance, see § 1.367(a)–1T(c)(1) through (c)(3)(i).

(ii) Transfer of partnership interest treated as transfer of proportionate share of assets—(A) In general. If a U.S. person transfers an interest as a partner in a partnership (whether foreign or domestic) in an exchange described in section 367(a)(1), then that person is treated as having transferred a proportionate share of the property of the partnership in an exchange described in section 367(a)(1). Accordingly, the applicability of the exception to section 367(a)(1) provided in § 1.367(a)–2 is determined with reference to the property of the partnership rather than the partnership interest itself. A U.S. person’s proportionate share of partnership property is determined under the rules and principles of sections 701 through 761 and the regulations thereunder.

(c)(3)(i)(A) Example through (7) reserved. For further guidance, see § 1.367(a)–1T(c)(3)(i)(A) Example through (7).

(d) Definitions. The following definitions apply for purposes of sections 367(a) and (d) and the regulations thereunder.

(1) United States person. The term “United States person” includes those persons described in section 7701(a)(30). The term includes a citizen or resident of the United States, a domestic partnership, a domestic corporation, and any estate or trust other than a foreign estate or trust. (For definitions of these terms, see section 7701 and the regulations thereunder.) For purposes of this section, an individual with respect to whom an election has been made under section 6013(g) or (h) is considered to be a resident of the United States while such election is in effect. A nonresident alien or a foreign corporation will not be considered a United States person because of its actual or deemed conduct of a trade or business within the United States during a taxable year.

(2) Foreign corporation. The term “foreign corporation” has the meaning set forth in section 7701(a)(3) and (5) and § 301.7701–5.

(3) Transfer. For purposes of section 367 and regulations thereunder, the term “transfer” means any transaction that constitutes a transfer for purposes of section 332, 351, 354, 355, 356, or 361, as applicable. A person’s entering into a cost sharing arrangement under § 1.482–7 or acquiring rights to intangible property under such an arrangement shall not be considered a transfer of property described in section 367(a)(1). See § 1.6038B–1T(b)(4) for the date on which the transfer is considered to be made.

(4) Property. For purposes of section 367 and the regulations thereunder, the term “property” means any item that constitutes property for purposes of section 351, 354, 355, 356, or 361, as applicable.

(5) Intangible property. The term “intangible property” means either property described in section 936(h)(3)(B) or property to which a U.S. person applies section 367(d) pursuant to paragraph (b)(5) of this section, but does not include property described in section 1221(a)(3) or a working interest in oil and gas property.

(6) Operating intangibles. An operating intangible is any property described in section 936(h)(3)(B) of a type not ordinarily licensed or otherwise transferred in transactions between unrelated parties for consideration contingent upon the licensee’s or transferee’s use of the property. Examples of operating intangibles may include long-term purchase or supply contracts, surveys, studies, and customer lists.

(f) Exchanges under sections 354(a) and 361(a) in certain section 368(a)(1)(F) reorganizations—(1) Rule. In every reorganization under section 368(a)(1)(F), where the transferor corporation is a domestic corporation, and the acquiring corporation is a foreign corporation, there is considered to exist—

(i) A transfer of assets by the transferor corporation to the acquiring corporation under section 361(a) in exchange for stock (or stock and securities) of the acquiring corporation and the assumption by the acquiring corporation of the transferor corporation’s liabilities;

(ii) A distribution of the stock (or stock and securities) of the acquiring corporation by the transferor corporation to the shareholders (or shareholders and security holders) of the transferor corporation; and

(iii) An exchange by the transferor corporation’s shareholders (or shareholders and security holders) of their stock (or stock and securities) of the transferor corporation for stock (or stock and securities) of the acquiring corporation under section 354(a).

(2) Rule applies regardless of whether a continuance under applicable law. For purposes of paragraph (f)(1) of this section, it shall be immaterial that the applicable foreign or domestic law treats the acquiring corporation as a continuance of the transferor corporation.

(g) Effective/applicability dates. (1) through (3) [Reserved]. For further guidance, see § 1.367(a)–1T(g)(1) through (3).

(4) The rules in paragraphs (b)(4)(i)(B) and (b)(4)(i)(C) of this section apply to transfers occurring on or after April 18, 2013. For guidance with respect to paragraph (b)(4)(i)(B) of this section before April 18, 2013, see 26 CFR part 1 revised as of April 1, 2012. The rules in paragraph (e) of this section apply to transactions occurring on or after March 31, 1987. The rules in paragraph (f) of this section apply to transactions occurring on or after January 1, 1985.

(5) Paragraphs (a), (b)(1) through (b)(4)(i)(B), (b)(4)(ii) through (b)(5), (c)(3)(ii)(A), (d) introductory text through (d)(2), (d)(4) through (d)(6) of this section apply to transfers occurring on or after September 14, 2015, and to transfers occurring before September 14, 2015, resulting from entity classification elections made under § 301.7701–3 that are filed on or after September 14, 2015. For transfers occurring before this section is applicable, see §§ 1.367(a)–1 and 1.367(a)–1T as contained in 26 CFR part 1 revised as of April 1, 2016.

Par. 4. Section 1.367(a)–1T is amended by removing and reserving paragraphs (a), (b)(1), (b)(2), (b)(3), (b)(4)(i)(A), (b)(4)(ii), (c)(3)(ii)(A), (d) introductory text, (d)(1), (d)(2), (d)(4), and (d)(5), and adding and reserving new paragraphs (b)(5) and (d)(6).

Par. 5. Section 1.367(a)–2 is revised to read as follows:

(a) Scope and general rule—(1) Scope. Paragraph (a)(2) of this section provides the general exception to section 367(a)(1) for certain property transferred for use in the active conduct of a trade or business. Paragraph (b) of this section describes property that is eligible for the exception provided in paragraph (a)(2) of this section. Paragraph (c) of this section describes property that is not eligible for the exception provided in paragraph (a)(2) of this section. Paragraph (d) of this section provides general rules, and paragraphs (e) through (h) of this section provide special rules, for determining whether property is used in the active conduct of a trade or business outside of the United States. Paragraph (i) of this section is reserved. Paragraph (j) of this section provides relief for certain failures to comply with the reporting requirements under paragraph (a)(2)(iii) of this section that are not willful. Paragraph (k) of this section provides dates of applicability. The rules of this section do not apply to a transfer of stock or securities in an exchange subject to § 1.367(a)–3.

(2) General rule. Except as otherwise provided in §§ 1.367(a)–4, 1.367(a)–6, and 1.367(a)–7, section 367(a)(1) does not apply to property transferred by a United States person (U.S. transferor) to a foreign corporation if—

(i) The property constitutes eligible property;

(ii) The property is transferred for use by the foreign corporation in the active conduct of a trade or business outside of the United States, as determined under paragraph (d), (e), (f), (g), or (h) of this section, as applicable; and

(iii) The U.S. transferor complies with the reporting requirements of section 6038B and the regulations thereunder.

(b) Eligible property. Except as provided in paragraph (c) of this section, eligible property means—

(1) Tangible property;

(2) A working interest in oil and gas property; and

(3) A financial asset. For purposes of this section, a financial asset is—

(i) A cash equivalent;

(ii) A security within the meaning of section 475(c)(2), without regard to the last sentence of section 475(c)(2) (referencing section 1256) and without regard to section 475(c)(4), but excluding an interest in a partnership;

(iii) A commodities position described in section 475(e)(2)(B), 475(e)(2)(C), or 475(e)(2)(D); and

(iv) A notional principal contract described in § 1.446–3(c)(1).

(c) Exception for certain property. Notwithstanding paragraph (b) of this section, property described in paragraph (c)(1), (2), (3), or (4) of this section does not constitute eligible property.

(1) Inventory. Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business (including raw materials and supplies, partially completed goods, and finished products).

(2) Installment obligations, etc. Installment obligations, accounts receivable, or similar property, but only to the extent that the principal amount of any such obligation has not previously been included by the taxpayer in its taxable income.

(3) Nonfunctional currency, etc.—(i) In general. Property that gives rise to a section 988 transaction of the taxpayer described in section 988(c)(1)(A) through (C), without regard to section 988(c)(1)(D) and (E), or that would give rise to such a section 988 transaction if it were acquired, accrued, entered into, or disposed of directly by the taxpayer.

(ii) Limitation of gain required to be recognized. If section 367(a)(1) applies to a transfer of property described in paragraph (c)(3)(i) of this section, then the gain required to be recognized is limited to the gain realized as part of the same transaction upon the transfer of property described in paragraph (c)(3)(i) of this section, less any loss realized as part of the same transaction upon the transfer of property described in paragraph (c)(3)(i) of this section. This limitation applies in lieu of the rule in § 1.367(a)–1(b)(1). No loss is recognized with respect to property described in this paragraph (c)(3).

(4) Certain leased tangible property. Tangible property with respect to which the transferor is a lessor at the time of the transfer, unless either the foreign corporation is the lessee at the time of the transfer or the foreign corporation will lease the property to third persons.

(d) Active conduct of a trade or business outside the United States—(1) In general. Except as provided in paragraphs (e), (f), (g), and (h) of this section, to determine whether property is transferred for use by the foreign corporation in the active conduct of a trade or business outside of the United States, four factual determinations must be made:

(i) What is the trade or business of the foreign corporation (see paragraph (d)(2) of this section);

(ii) Do the activities of the foreign corporation constitute the active conduct of that trade or business (see paragraph (d)(3) of this section);

(iii) Is the trade or business conducted outside of the United States (see paragraph (d)(4) of this section); and

(iv) Is the transferred property used or held for use in the trade or business (see paragraph (d)(5) of this section)?

(2) Trade or business. Whether the activities of the foreign corporation constitute a trade or business is determined based on all the facts and circumstances. In general, a trade or business is a specific unified group of activities that constitute (or could constitute) an independent economic enterprise carried on for profit. For example, the activities of a foreign selling subsidiary could constitute a trade or business if they could be independently carried on for profit, even though the subsidiary acts exclusively on behalf of, and has operations fully integrated with, its parent corporation. To constitute a trade or business, a group of activities must ordinarily include every operation which forms a part of, or a step in, a process by which an enterprise may earn income or profit. In this regard, one or more of such activities may be carried on by independent contractors under the direct control of the foreign corporation. (However, see paragraph (d)(3) of this section.) The group of activities must ordinarily include the collection of income and the payment of expenses. If the activities of the foreign corporation do not constitute a trade or business, then the exception provided by this section does not apply, regardless of the level of activities carried on by the corporation. The following activities are not considered to constitute by themselves a trade or business for purposes of this section:

(i) Any activity giving rise to expenses that would be deductible only under section 212 if the activities were carried on by an individual; or

(ii) The holding for one’s own account of investments in stock, securities, land, or other property, including casual sales thereof.

(3) Active conduct. Whether a trade or business is actively conducted by the foreign corporation is determined based on all the facts and circumstances. In general, a corporation actively conducts a trade or business only if the officers and employees of the corporation carry out substantial managerial and operational activities. A corporation may be engaged in the active conduct of a trade or business even though incidental activities of the trade or business are carried out on behalf of the corporation by independent contractors. In determining whether the officers and employees of the corporation carry out substantial managerial and operational activities, however, the activities of independent contractors are disregarded. On the other hand, the officers and employees of the corporation are considered to include the officers and employees of related entities who are made available to and supervised on a day-to-day basis by, and whose salaries are paid by (or reimbursed to the lending related entity by), the foreign corporation. See paragraph (d)(6) of this section for the standard that applies to determine whether a trade or business that produces rents or royalties is actively conducted. The rule of this paragraph (d)(3) is illustrated by the following example.

Example. X, a domestic corporation, and Y, a foreign corporation not related to X, transfer property to Z, a newly formed foreign corporation organized for the purpose of combining the research activities of X and Y. Z contracts all of its operational and research activities to Y for an arm’s-length fee. Z’s activities do not constitute the active conduct of a trade or business.

(4) Outside of the United States. Whether the foreign corporation conducts a trade or business outside of the United States is determined based on all the facts and circumstances. Generally, the primary managerial and operational activities of the trade or business must be conducted outside the United States and immediately after the transfer the transferred assets must be located outside the United States. Thus, the exception provided by this section would not apply to the transfer of the assets of a domestic business to a foreign corporation if the domestic business continued to operate in the United States after the transfer. In such a case, the primary operational activities of the business would continue to be conducted in the United States. Moreover, the transferred assets would be located in the United States. However, it is not necessary that every item of property transferred be used outside of the United States. As long as the primary managerial and operational activities of the trade or business are conducted outside of the United States and substantially all of the transferred assets are located outside the United States, incidental items of transferred property located in the United States may be considered to have been transferred for use in the active conduct of a trade or business outside of the United States.

(5) Use in the trade or business. Whether property is used or held for use by the foreign corporation in a trade or business is determined based on all the facts and circumstances. In general, property is used or held for use in the foreign corporation’s trade or business if it is—

(i) Held for the principal purpose of promoting the present conduct of the trade or business;

(ii) Acquired and held in the ordinary course of the trade or business; or

(iii) Otherwise held in a direct relationship to the trade or business. Property is considered held in a direct relationship to a trade or business if it is held to meet the present needs of that trade or business and not its anticipated future needs. Thus, property will not be considered to be held in a direct relationship to a trade or business if it is held for the purpose of providing for future diversification into a new trade or business, future expansion of trade or business activities, future plant replacement, or future business contingencies.

(6) Active leasing and licensing. For purposes of paragraph (d)(3) of this section, whether a trade or business that produces rents or royalties is actively conducted is determined under the principles of section 954(c)(2)(A) and the regulations thereunder, but without regard to whether the rents or royalties are received from an unrelated party. See §§ 1.954–2(c) and (d).

(e) Special rules for certain property to be leased—(1) Leasing business of the foreign corporation. Except as otherwise provided in this paragraph (e), tangible property that will be leased to another person by the foreign corporation will be considered to be transferred for use by the foreign corporation in an active trade or business outside the United States only if—

(i) The foreign corporation’s leasing of the property constitutes the active conduct of a leasing business, as determined under paragraph (d)(6) of this section;

(ii) The lessee of the property is not expected to, and does not, use the property in the United States; and

(iii) The foreign corporation has a need for substantial investment in assets of the type transferred.

(2) De minimis leasing by the foreign corporation. Tangible property that will be leased to another person by the foreign corporation but that does not satisfy the conditions of paragraph (e)(1) of this section will, nevertheless, be considered to be transferred for use in the active conduct of a trade or business if either—

(i) The property transferred will be used by the foreign corporation in the active conduct of a trade or business but will be leased during occasional brief periods when the property would otherwise be idle, such as an airplane leased during periods of excess capacity; or

(ii) The property transferred is real property located outside the United States and—

(A) The property will be used primarily in the active conduct of a trade or business of the foreign corporation; and

(B) Not more than ten percent of the square footage of the property will be leased to others.

(3) Aircraft and vessels leased in foreign commerce. For purposes of satisfying paragraph (e)(1) of this section, an aircraft or vessel, including component parts such as an engine leased separately from the aircraft or vessel, that will be leased to another person by the foreign corporation will be considered to be transferred for use in the active conduct of a trade or business if—

(i) The employees of the foreign corporation perform substantial managerial and operational activities of leasing aircraft or vessels outside the United States; and

(ii) The leased property is predominantly used outside the United States, as determined under § 1.954–2(c)(2)(v).

(f) Special rules for oil and gas working interests—(1) In general. A working interest in oil and gas property will be considered to be transferred for use in the active conduct of a trade or business if—

(i) The transfer satisfies the conditions of paragraph (f)(2) or (f)(3) of this section;

(ii) At the time of the transfer, the foreign corporation has no intention to farm out or otherwise transfer any part of the transferred working interest; and

(iii) During the first three years after the transfer there are no farmouts or other transfers of any part of the transferred working interest as a result of which the foreign corporation retains less than a 50-percent share of the transferred working interest.

(2) Active use of working interest. A working interest in oil and gas property that satisfies the conditions in paragraphs (f)(1)(ii) and (iii) of this section will be considered to be transferred for use in the active conduct of a trade or business if—

(i) The U.S. transferor is regularly and substantially engaged in exploration for and extraction of minerals, either directly or through working interests in joint ventures, other than by reason of the property that is transferred;

(ii) The terms of the working interest transferred were actively negotiated among the joint venturers;

(iii) The working interest transferred constitutes at least a five percent working interest;

(iv) Before and at the time of the transfer, through its own employees or officers, the U.S. transferor was regularly and actively engaged in—

(A) Operating the working interest, or

(B) Analyzing technical data relating to the activities of the venture;

(v) Before and at the time of the transfer, through its own employees or officers, the U.S. transferor was regularly and actively involved in decision making with respect to the operations of the venture, including decisions relating to exploration, development, production, and marketing; and

(vi) After the transfer, the foreign corporation will for the foreseeable future satisfy the requirements of subparagraphs (iv) and (v) of this paragraph (f)(2).

(3) Start-up operations. A working interest in oil and gas property that satisfies the conditions in paragraphs (f)(1)(ii) and (iii) of this section but that does not satisfy all the requirements of paragraph (f)(2) of this section will, nevertheless, be considered to be transferred for use in the active conduct of a trade or business if—

(i) The working interest was acquired by the U.S. transferor immediately before the transfer and for the specific purpose of transferring it to the foreign corporation;

(ii) The requirements of paragraphs (f)(2)(ii) and (iii) of this section are satisfied; and

(iii) The foreign corporation will for the foreseeable future satisfy the requirements of paragraph (f)(2)(iv) and (v) of this section.

(4) Other applicable rules. A working interest in oil and gas property that is not described in paragraph (f)(1) of this section may nonetheless qualify for the exception to section 367(a)(1) contained in this section depending upon the facts and circumstances.

(g) Property retransferred by the foreign corporation—(1) General rule. Property will not be considered to be transferred for use in the active conduct of a trade or business outside of the United States if—

(i) At the time of the transfer, it is reasonable to believe that, in the reasonably foreseeable future, the foreign corporation will sell or otherwise dispose of any material portion of the property other than in the ordinary course of business; or

(ii) Except as provided in paragraph (g)(2) of this section, the foreign corporation receives the property in an exchange described in section 367(a)(1), and, as part of the same transaction, transfers the property to another person. For purposes of the preceding sentence, a subsequent transfer within six months of the initial transfer will be considered to be part of the same transaction, and a subsequent transfer more than six months after the initial transfer may be considered to be part of the same transaction under step-transaction principles.

(2) Exception. Notwithstanding paragraph (g)(1) of this section, the active conduct exception provided by this section shall apply to the initial transfer if—

(i) The initial transfer is followed by one or more subsequent transfers described in section 351 or 721; and

(ii) Each subsequent transferee is either a partnership in which the preceding transferor is a general partner or a corporation in which the preceding transferor owns common stock; and

(iii) The ultimate transferee uses the property in the active conduct of a trade or business outside the United States.

(h) Compulsory transfers of property. Property is presumed to be transferred for use in the active conduct of a trade or business outside of the United States, if—

(1) The property was previously in use in the country in which the foreign corporation is organized; and

(2) The transfer is either:

(i) Legally required by the foreign government as a necessary condition of doing business; or

(ii) Compelled by a genuine threat of immediate expropriation by the foreign government.

(i) [Reserved].

(j) Failure to comply with reporting requirements of section 6038B—(1) Failure to comply. For purposes of the exception to the application of section 367(a)(1) provided in paragraph (a)(2) of this section, a failure to comply with the reporting requirements of section 6038B and the regulations thereunder (failure to comply) has the meaning set forth in § 1.6038B–1(f)(2).

(2) Relief for certain failures to comply that are not willful—(i) In general. A failure to comply described in paragraph (j)(1) of this section will be deemed not to have occurred for purposes of satisfying the requirements of this section if the taxpayer demonstrates that the failure was not willful using the procedure set forth in this paragraph (j)(2). For this purpose, willful is to be interpreted consistent with the meaning of that term in the context of other civil penalties, which would include a failure due to gross negligence, reckless disregard, or willful neglect. Whether a failure to comply was a willful failure will be determined by the Director of Field Operations, Cross Border Activities Practice Area, Large Business & International (or any successor to the roles and responsibilities of such position, as appropriate) (Director) based on all the facts and circumstances. The taxpayer must submit a request for relief and an explanation as provided in paragraph (j)(2)(ii)(A) of this section. Although a taxpayer whose failure to comply is determined not to be willful will not be subject to gain recognition under this section, the taxpayer will be subject to a penalty under section 6038B if the taxpayer fails to demonstrate that the failure was due to reasonable cause and not willful neglect. See § 1.6038B–1(b)(1) and (f). The determination of whether the failure to comply was willful under this section has no effect on any request for relief made under § 1.6038B–1(f).

(ii) Procedures for establishing that a failure to comply was not willful—(A) Time and manner of submission. A taxpayer’s statement that the failure to comply was not willful will be considered only if, promptly after the taxpayer becomes aware of the failure, an amended return is filed for the taxable year to which the failure relates that includes the information that should have been included with the original return for such taxable year or that otherwise complies with the rules of this section, and that includes a written statement explaining the reasons for the failure to comply. The amended return must be filed with the Internal Revenue Service at the location where the taxpayer filed its original return. The taxpayer may submit a request for relief from the penalty under section 6038B as part of the same submission. See § 1.6038B–1(f).

(B) Notice requirement. In addition to the requirements of paragraph (j)(2)(ii)(A) of this section, the taxpayer must comply with the notice requirements of this paragraph (j)(2)(ii)(B). If any taxable year of the taxpayer is under examination when the amended return is filed, a copy of the amended return and any information required to be included with such return must be delivered to the Internal Revenue Service personnel conducting the examination. If no taxable year of the taxpayer is under examination when the amended return is filed, a copy of the amended return and any information required to be included with such return must be delivered to the Director.

(3) For illustrations of the application of the willfulness standard of this paragraph (j), see the examples in § 1.367(a)–8(p)(3).

(4) Paragraph (j) applies to requests for relief submitted on or after November 19, 2014.

(k) Effective/applicability dates—(1) In general. Except as provided in paragraphs (j)(4) and (k)(2) of this section, the rules of this section apply to transfers occurring on or after September 14, 2015, and to transfers occurring before September 14, 2015, resulting from entity classification elections made under § 301.7701–3 that are filed on or after September 14, 2015. For transfers occurring before this section is applicable, see §§ 1.367(a)–2, –2T, –4, –4T, –5, and –5T as contained in 26 CFR part 1 revised as of April 1, 2016.

(2) Foreign currency exception. Notwithstanding paragraph (c)(3)(i) of this section, § 1.367(a)–5T(d)(2) as contained in 26 CFR part 1 revised as of April 1, 2016, applies to transfers of property denominated in a foreign currency occurring before December 16, 2016, other than transfers occurring before that date resulting from entity classification elections made under § 301.7701–3 that are filed on or after that date.

Par. 6. Section 1.367(a)–2T is removed.

Par. 7. For each section listed in the following the table, remove the language in the “Remove” column and add in its place the language in the “Add” column.

Par. 8. Section 1.367(a)–4 is revised to read as follows:

(a) Depreciated property used in the United States—(1) In general. A U.S. person that transfers U.S. depreciated property (as defined in paragraph (a)(2) of this section) to a foreign corporation in an exchange described in section 367(a)(1), must include in its gross income for the taxable year in which the transfer occurs ordinary income equal to the gain realized that would have been includible in the transferor’s gross income as ordinary income under section 617(d)(1), 1245(a), 1250(a), 1252(a), 1254(a), or 1255(a), whichever is applicable, if at the time of the transfer the U.S. person had sold the property at its fair market value. Recapture of depreciation under this paragraph (a) is required regardless of whether the exception to section 367(a)(1) provided by § 1.367(a)–2(a)(2) applies to the transfer of the U.S. depreciated property. However, the transfer of the U.S. depreciated property may qualify for the exception with respect to realized gain that is not included in ordinary income pursuant to this paragraph (a).

(2) U.S. depreciated property. U.S. depreciated property subject to the rules of this paragraph (a) is any property that—

(i) Is either mining property (as defined in section 617(f)(2)), section 1245 property (as defined in section 1245(a)(3)), section 1250 property (as defined in section 1250(c)), farm land (as defined in section 1252(a)(2)), section 1254 property (as defined in section 1254(a)(3)), or section 126 property (as defined in section 1255(a)(2)); and

(ii) Has been used in the United States or has been described in section 168(g)(4) before its transfer.

(3) Property used within and without the United States. (i) If U.S. depreciated property has been used partly within and partly without the United States, then the amount required to be included in ordinary income pursuant to this paragraph (a) is reduced to an amount determined in accordance with the following formula:

(ii) For purposes of the fraction in paragraph (a)(3)(i) of this section, the “full recapture amount” is the amount that would otherwise be included in the transferor’s income under paragraph (a)(1) of this section. “U.S. use” is the number of months that the property either was used within the United States or has been described in section 168(g)(4), and was subject to depreciation by the transferor or a related person. “Total use” is the total number of months that the property was used (or available for use), and subject to depreciation, by the transferor or a related person. For purposes of this paragraph (a)(3), property is not considered to have been in use outside of the United States during any period in which such property was, for purposes of section 168, treated as property not used predominantly outside the United States pursuant to section 168(g)(4). For purposes of this paragraph (a)(3), the term “related person” has the meaning set forth in § 1.367(d)–1(h).

(b) Effective/applicability dates. The rules of this section apply to transfers occurring on or after September 14, 2015, and to transfers occurring before September 14, 2015, resulting from entity classification elections made under § 301.7701–3 that are filed on or after September 14, 2015. For transfers occurring before this section is applicable, see §§ 1.367(a)–4 and 1.367(a)–4T as contained in 26 CFR part 1 revised as of April 1, 2016.

Par. 9. § 1.367(a)–4T is removed.

Par. 10. Section 1.367(a)–5 is removed and reserved.

Par. 11. § 1.367(a)–5T is removed.

Par. 12. Section 1.367(a)–6 is revised to read as follows:

(a) through (b)(1) [Reserved]. For further guidance, see § 1.367(a)–6T(a) through (b)(1).

(b)(2) No active conduct exception. The rules of this paragraph (b) apply regardless of whether any of the assets of the foreign branch satisfy the active trade or business exception of § 1.367(a)–2(a)(2).

(c)(1) [Reserved]. For further guidance, see § 1.367(a)–6T(c)(1).

(2) Gain limitation. The gain required to be recognized under paragraph (b)(1) of this section will not exceed the aggregate amount of gain realized on the transfer of all branch assets (without regard to the transfer of any assets on which loss is realized but not recognized).

(3) [Reserved].

(4) Transfers of certain intangible property. Gain realized on the transfer of intangible property (computed with reference to the fair market value of the intangible property as of the date of the transfer) that is an asset of a foreign branch is taken into account in computing the limitation on loss recapture under paragraph (c)(2) of this section. For rules relating to the crediting of gain recognized under this section against income deemed to arise by operation of section 367(d), see § 1.367(d)–1(g)(3).

(d) through (i) [Reserved]. For further guidance, see § 1.367(a)–6T(d) through (i).

(j) Effective/applicability dates. The rules of this section apply to transfers occurring on or after September 14, 2015, and to transfers occurring before September 14, 2015, resulting from entity classification elections made under § 301.7701–3 that are filed on or after September 14, 2015. For transfers occurring before this section is applicable, see § 1.367(a)–6T as contained in 26 CFR part 1 revised as of April 1, 2016.

Par. 13. Section 1.367(a)–6T is amended by

1. Removing and reserving paragraphs (b)(2), (c)(2), and (c)(4).

2. Adding and reserving paragraph (j).

Par. 14. Section 1.367(a)–7 is amended by:

1. Revising paragraph (f)(11).

2. Redesignating paragraph (j) as (j)(1) and revising the first sentence, and adding paragraph (j)(2).

The revision and addition read as follows:

* * * * *

(f) * * *

(11) Section 367(d) property is intangible property as defined in § 1.367(a)–1(d)(5).

* * * * *

(j) Effective/applicability dates—(1) In general. Except for paragraph (e)(2) of this section, and as provided in paragraph (j)(2) of this section, this section applies to transfers occurring on or after April 18, 2013. * * *

(2) Section 367(d) property. The definition provided in paragraph (f)(11) of this section applies to transfers occurring on or after September 14, 2015, and to transfers occurring before September 14, 2015, resulting from entity classification elections made under § 301.7701–3 that are filed on or after September 14, 2015. For transfers occurring before this section is applicable, see § 1.367(a)–7 as contained in 26 CFR part 1 revised as of April 1, 2016.

Par. 15. For each section listed in the following table, remove the language in the “Remove” column and add in its place the language in the “Add” column.

Par. 16. For each section listed in the following table, remove the language in the “Remove” column and add in its place the language in the “Add” column.

Par. 17. Section 1.367(d)–1 is added to read as follows:

(a) [Reserved]. For further guidance, see § 1.367(d)–1T(a).

(b) Property subject to section 367(d). Section 367(d) and the rules of this section apply to the transfer of intangible property, as defined in § 1.367(a)–1(d)(5), by a U.S. person to a foreign corporation in an exchange described in section 351 or 361. See section 367(a) and the regulations thereunder for the rules that apply to the transfer of any property other than intangible property.

(c)(1) through (2) [Reserved]. For further guidance, see § 1.367(d)–1T(c)(1) and (2).

(3) Useful life—(i) In general. For purposes of determining the period of inclusions for deemed payments under § 1.367(d)–1T(c)(1), the useful life of intangible property is the entire period during which exploitation of the intangible property is reasonably anticipated to affect the determination of taxable income, as of the time of transfer. Exploitation of intangible property includes any direct or indirect use or transfer of the intangible property, including use without further development, use in the further development of the intangible property itself (and any exploitation of the further developed intangible property), and use in the development of other intangible property (and any exploitation of the other developed intangible property).

(ii) Procedure to limit inclusions to 20 years. In cases where the useful life of the transferred property is indefinite or is reasonably anticipated to exceed twenty years, taxpayers may, in lieu of including amounts during the entire useful life of the intangible property, choose in the year of transfer to increase annual inclusions during the 20-year period beginning with the first year in which the U.S transferor takes into account income pursuant to section 367(d), to reflect amounts that, but for this paragraph (c)(3)(ii), would have been required to be included following the end of the 20-year period. See § 1.6038B–1(d)(1)(iv) for guidance on reporting this choice of method. If the taxpayer applies this method during the 20-year period, no adjustments will be made for taxable years beginning after the conclusion of the 20-year period. However, for purposes of determining whether amounts included during the 20-year period are commensurate with the income attributable to the transferred intangible property, the Commissioner may take into account information with respect to taxable years after that period, such as the income attributable to the transferred property during those later years. The application of this paragraph (c)(3)(ii) must be reflected in a statement (titled “Application of 20-Year Inclusion Period to Section 367(d) Transfers”) attached to a timely filed original federal income tax return (including extensions) for the year of the transfer. An increase to the deemed payment rate made pursuant to this paragraph (c)(3)(ii) will be irrevocable, and a failure to timely file the statement under this paragraph (c)(3)(ii) may not be remedied.

(iii) Example. Property subject to section 367(d) is transferred from USP, a domestic corporation, to FA, a foreign corporation wholly owned by USP. The useful life of the transferred property, inclusive of derivative works, at the time of transfer is indefinite but is reasonably anticipated to exceed 20 years. In the first five years following the transfer, sales related to the property are expected to be $100x, $130x, $160x, $180x and $187.2x, respectively. Thereafter, for the remainder of the property’s useful life, sales are expected to grow by four percent annually. In the first five years following the transfer, operating profits attributable to the property are expected to be $5x, $8x, $11x, $12.5x, and $13x, respectively. Thereafter, for the remainder of the property’s useful life, operating profits are expected to grow by four percent annually. It is determined that the appropriate discount rate for sales and operating profits is 10 percent. The present value of operating profits through the property’s indefinite useful life is $185x. The present value of sales through the property’s indefinite useful life is $2698x. Accordingly, the sales based royalty rate during the property’s useful life is 6.8 percent ($185x/$2698x). The taxpayer may choose to take income inclusions into account over a 20-year period. The present value of sales through the 20-year period is $1787x. Accordingly, the sales based royalty rate under the 20-year option is increased to 10.3 percent ($185x/$1787x).

(c)(4) through (g)(2) (introductory text) [Reserved]. For further guidance, see § 1.367(d)–1T(c)(4) through (g)(2) (introductory text).

(g)(2)(i) The intangible property transferred constitutes an operating intangible, as defined in § 1.367(a)–1(d)(6).

(g)(2)(ii) through (iii)(D) [Reserved]. For further guidance, see § 1.367(d)–1T(g)(2)(ii) through (iii)(D).

(E) The transferred intangible property will be used in the active conduct of a trade or business outside of the United States within the meaning of § 1.367(a)–2 and will not be used in connection with the manufacture or sale of products in or for use or consumption in the United States.

(g)(2)(iii) undesignated concluding paragraph [Reserved]. For further guidance, see § 1.367(d)–1T(g)(2)(iii) undesignated concluding paragraph.

(3) Intangible property transferred from branch with previously deducted losses. (i) If income is required to be recognized under section 904(f)(3) and the regulations thereunder or under § 1.367(a)–6 upon the transfer of intangible property of a foreign branch that had previously deducted losses, then the income recognized under those sections with respect to that property is credited against amounts that would otherwise be required to be recognized with respect to that same property under paragraphs (c) through (f) of this section in either the current or future taxable years. The amount recognized under section 904(f)(3) or § 1.367(a)–6 with respect to the transferred intangible property is determined in accordance with the following formula:

(ii) For purposes of the formula in paragraph (g)(3)(i) of this section, the “loss recapture income” is the total amount required to be recognized by the U.S. transferor pursuant to section 904(f)(3) or § 1.367(a)–6. The “gain from intangible property” is the total amount of gain realized by the U.S. transferor pursuant to section 904(f)(3) and § 1.367(a)–6 upon the transfer of items of property that are subject to section 367(d). “Gain from intangible property” does not include gain realized with respect to intangible property by reason of an election under paragraph (g)(2) of this section. The “gain from all branch assets” is the total amount of gain realized by the transferor upon the transfer of items of property of the branch for which gain is realized.

(g)(4) through (i) [Reserved]. For further guidance, see § 1.367(d)–1T(g)(4) through (i).

(j) Effective/applicability dates. This section applies to transfers occurring on or after September 14, 2015, and to transfers occurring before September 14, 2015, resulting from entity classification elections made under § 301.7701–3 that are filed on or after September 14, 2015. For transfers occurring before this section is applicable, see § 1.367(d)–1T as contained in 26 CFR part 1 revised as of April 1, 2016.

Par. 18. Section 1.367(d)–1T is amended by removing and reserving paragraphs (b), (c)(3), and (g)(2)(i), (g)(2)(iii)(E), and (g)(3).

Par. 19. Section 1.367(e)–2 is amended by

1. Revising paragraph (b)(3)(iii).

2. Revising paragraph (e)(4)(ii)(B).

The revisions read as follows.

* * * * *

(b) * * *

(3) * * *

(iii) Other rules. For other rules that may apply, see sections 381, 897, 1248, and § 1.482–1(f)(2)(i)(C).

* * * * *

(e) * * *

(4) * * *

(ii) * * *

(B) The period of limitations on assessment of tax for the taxable year in which gain is required to be reported will be extended until the close of the third full taxable year ending after the date on which the domestic liquidating corporation, foreign distributee corporation, or foreign liquidating corporation, as applicable, furnishes to the Director of Field Operations, Cross Border Activities Practice Area of Large Business & International (or any successor to the roles and responsibilities of such position, as appropriate) (Director) the information that should have been provided under this section.

* * * * *

Par. 20. Section 1.884–5 is amended in paragraph (e)(3)(ii)(A) by removing the citation “§ 1.367(a)–2T(b)(5),” and adding the citation “§ 1.367(a)–2(d)(5)” in its place.

Par. 21. Section 1.1248–8 is amended in paragraph (b)(2)(iv)(B)(1)(ii) by removing the citation “§§ 1.367(a)–6T,” and adding the citation “§ 1.367(a)–6” in its place.

Par. 22. Section 1.1248(f)–2 is amended in the last sentence of paragraph (e) by removing the citation “§ 1.367(a)–2T,” and adding the citation “§ 1.367(a)–2” in its place.

Par. 23. Section 1.6038B–1 is amended by:

1. Removing the citation “§ 1.367(a)–1T(c),” in the fourth sentence of paragraph (b)(1)(i) and adding the citation “§ 1.367(a)–1(c)” in its place.

2. Revising paragraphs (c)(1) through (5) and (d).

3. Revising the first sentence of paragraph (g)(1).

4. Adding paragraph (g)(7).

The additions and revision read as follows:

* * * * *

(c) * * *

(1) through (4) introductory text [Reserved]. For further guidance, see § 1.6038B–1T(c)(1) through (4) introductory text.

(i) Active business property. Describe any transferred property that qualifies under § 1.367(a)–2(a)(2). Provide here a general description of the business conducted (or to be conducted) by the transferee, including the location of the business, the number of its employees, the nature of the business, and copies of the most recently prepared balance sheet and profit and loss statement. Property listed within this category may be identified by general type. For example, upon the transfer of the assets of a manufacturing operation, a reasonable description of the property to be used in the business might include the categories of office equipment and supplies, computers and related equipment, motor vehicles, and several major categories of manufacturing equipment. However, any property that is includible in both paragraphs (c)(4)(i) and (iii) of this section (property subject to depreciation recapture under § 1.367(a)–4(a)) must be identified in the manner required in paragraph (c)(4)(iii) of this section. If property is considered to be transferred for use in the active conduct of a trade or business under a special rule in paragraph (e), (f), or (g) of § 1.367(a)–2, specify the applicable rule and provide information supporting the application of the rule.

(ii) Stock or securities. Describe any transferred stock or securities, including the class or type, amount, and characteristics of the transferred stock or securities, as well as the name, address, place of incorporation, and general description of the corporation issuing the stock or securities.

(iii) Depreciated property. Describe any property that is subject to depreciation recapture under § 1.367(a)–4(a). Property within this category must be separately identified to the same extent as was required for purposes of the previously claimed depreciation deduction. Specify with respect to each such asset the relevant recapture provision, the number of months that such property was in use within the United States, the total number of months the property was in use, the fair market value of the property, a schedule of the depreciation deduction taken with respect to the property, and a calculation of the amount of depreciation required to be recaptured.

(iv) Property not transferred for use in the active conduct of a trade or business. Describe any property that is eligible property, as defined in § 1.367(a)–2(b) taking into account the application of § 1.367(a)–2(c), that was transferred to the foreign corporation but not for use in the active conduct of a trade or business outside the United States (and was therefore not listed under paragraph (c)(4)(i) of this section).

(v) Property transferred under compulsion. If property qualifies for the exception of § 1.367(a)–2(a)(2) under the rules of paragraph (h) of that section, provide information supporting the claimed application of such exception.

(vi) Certain ineligible property. Describe any property that is described in § 1.367(a)–2(c) and that therefore cannot qualify under § 1.367(a)–2(a)(2) regardless of its use in the active conduct of a trade or business outside of the United States. The description must be divided into the relevant categories, as follows:

(vii) Other property that is ineligible property. Describe any property, other than property described in § 1.367(a)–2(c), that cannot qualify under § 1.367(a)–2(a)(2) regardless of its use in the active conduct of a trade or business outside of the United States and that is not subject to the rules of section 367(d) under § 1.367(a)–1(b)(5) (treatment of certain property as subject to section 367(d)). Each item of property must be separately identified.

(viii) [Reserved]. For further guidance, see § 1.6038B–1T(c)(4)(viii).

(5) Transfer of foreign branch with previously deducted losses. If the property transferred is property of a foreign branch with previously deducted losses subject to §§ 1.367(a)–6 and –6T, provide the following information:

(i) through (iv) [Reserved]. For further information, see § 1.6038B–1T(c)(5)(i) through (iv).

* * * * *

(d)(1) through (1)(iii) [Reserved]. For further guidance, see § 1.6038B–1T(d)(1) through (1)(iii).

(iv) Intangible property transferred. Provide a description of the intangible property transferred, including its adjusted basis. Generally, each item of intangible property must be separately identified, including intangible property described in § 1.367(d)–1(g)(2)(i). Identify all property that is subject to the rules of section 367(d) under § 1.367(a)–1(b)(5) (treatment of certain property as subject to section 367(d)). Describe any property for which the income required to be taken into account under section 367(d) and the regulations thereunder will be recognized over a 20-year period pursuant to § 1.367(d)–1(c)(3)(ii). Estimate the anticipated income or cost reductions attributable to the intangible property’s use beyond the 20-year period.

(v)–(vi) [Reserved]. For further guidance, see § 1.6038B–1T(d)(1)(v) through (1)(vi).

(vii) Coordination with loss rules. List any intangible property subject to section 367(d) the transfer of which also gives rise to the recognition of gain under section 904(f)(3) or §§ 1.367(a)–6 or –6T. Provide a calculation of the gain required to be recognized with respect to such property, in accordance with the provisions of § 1.367(d)–1(g)(3).

(d)(1)(viii) through (d)(2) [Reserved]. For further guidance, see § 1.6038B–1T(d)(1)(viii) through (d)(2).

* * * * *

(g) Effective/applicability dates. (1) This section applies to transfers occurring on or after July 20, 1998, except as provided in paragraphs (g)(2) through (g)(7) of this section, and except for transfers of cash made in tax years beginning on or before February 5, 1999 (which are not required to be reported under section 6038B), and transfers described in paragraph (e) of this section (which applies to transfers that are subject to §§ 1.367(e)–1(f) and 1.367(e)–2(e)). * * *

* * * * *

(7) Paragraphs (c)(4)(i) through (vii), (c)(5), and (d)(1)(iv) and (vii) of this section apply to transfers occurring on or after September 14, 2015, and to transfers occurring before September 14, 2015, resulting from entity classification elections made under § 301.7701–3 that are filed on or after September 14, 2015. For guidance with respect to paragraphs (c)(4), (c)(5), and (d)(1) of this section before this section is applicable, see §§ 1.6038B–1 and 1.6038B–1T as contained in 26 CFR part 1 revised as of April 1, 2016.

Par. 24. Section 1.6038B–1T is amended by removing and reserving paragraphs (c)(4)(i) through (c)(5) introductory text, and (d)(1)(iv) and (vii).

Approved: November 23, 2016

A taxpayer is eligible for a premium tax credit only if the taxpayer is an applicable taxpayer. To be an applicable taxpayer, a taxpayer’s household income generally must be between 100 percent and 400 percent of the Federal poverty line (FPL) for the taxpayer’s family size. The existing regulations in § 1.36B–2(b)(6) allow a taxpayer whose household income is below 100 percent of the applicable FPL to be treated as an applicable taxpayer if (1) the taxpayer or a family member enrolls in a qualified health plan, (2) an Exchange estimates at the time of enrollment that the taxpayer’s household income for the taxable year will be between 100 and 400 percent of the applicable FPL, (3) advance credit payments are authorized and paid for one or more months during the taxable year, and (4) the taxpayer would be an applicable taxpayer but for the fact that the taxpayer’s household income for the taxable year is below 100 percent of the applicable FPL.

An applicable taxpayer is allowed a premium tax credit for a month only if one or more members of the applicable taxpayer’s family is enrolled in one or more qualified health plans through an Exchange and is not eligible for minimum essential coverage in that month. Section 36B(c)(2), § 1.36B–2(a). In general, government-sponsored programs are minimum essential coverage. Section 1.36B–2(c)(1). Under § 1.36B–2(c)(2)(v), an individual is treated as not eligible for Medicaid, the Children’s Health Insurance Program (CHIP), or a similar program for a period of coverage under a qualified health plan if, when the individual enrolls in the qualified health plan, an Exchange determines or considers (within the meaning of 45 CFR 155.302(b)) the individual to be ineligible for such program.

In addition, coverage under an eligible employer-sponsored plan is generally minimum essential coverage.^[1] However, an individual who may (but does not) enroll in an employer-sponsored plan is generally considered eligible for that plan only if the plan is considered affordable and provides minimum value. Section 36B(c)(2)(C), § 1.36B–2(c)(3). In addition, under the employee safe harbor in § 1.36B–2(c)(3)(v)(A)(3), an employer-sponsored plan is not considered affordable for a plan year if, when the employee or a related individual enrolls in a qualified health plan for a period coinciding with the plan year, an Exchange determines that the employer-sponsored plan is not affordable for that plan year.

The existing regulations describing the employee safe harbor contain an exception for reckless disregard for the facts. Under the exception, the safe harbor does not apply in situations in which an Exchange determines that an individual is not eligible for affordable employer-sponsored coverage because an individual, with reckless disregard of the facts, provides incorrect information to the Exchange regarding affordability of the plan.

The proposed regulations add two additional intentional or reckless disregard exceptions to provisions regarding eligibility determinations by the Exchanges. First, to reduce the likelihood that individuals who recklessly or intentionally provide inaccurate information to an Exchange will benefit from the rule in § 1.36B–2(b)(6) (regarding an Exchange determination that the taxpayer’s household income for the taxable year will be between 100 and 400 percent of the applicable FPL), the proposed regulations provide that a taxpayer whose household income is below 100 percent of the applicable FPL for the taxpayer’s family size does not receive the benefit of that rule if, with intentional or reckless disregard for the facts, the taxpayer provided incorrect information to an Exchange for the year of coverage.

Second, the proposed regulations provide that an individual who was determined or considered by an Exchange to be ineligible for Medicaid, CHIP, or a similar program (such as a Basic Health Program) does not receive the benefit of the rule in § 1.36B–2(c)(2)(v) (regarding an Exchange determination that an individual was not eligible for coverage under Medicaid, CHIP, or a similar program) if, with intentional or reckless disregard for the facts, the individual (or a person claiming a personal exemption for the individual) provided incorrect information to an Exchange for the year of coverage.

In each of the three instances in the existing and proposed section 36B regulations where an intentional or reckless disregard for the facts exception is provided, the proposed regulations clarify that a reckless disregard of the facts occurs if the taxpayer makes little or no effort to determine whether the information provided to the Exchange is accurate under circumstances that demonstrate a substantial deviation from the standard of conduct a reasonable person would observe. The proposed regulations also provide that a disregard of the facts is intentional if the taxpayer knows the information provided to the Exchange is inaccurate.

Commenters asked that the final regulations clarify how the IRS will determine whether an individual has acted with reckless or intentional disregard of the facts, and how these standards will be applied and enforced. Some commenters requested that the final regulations clarify the definition of “reckless disregard” and provide examples. Other commenters expressed concern that the proposed rule would make taxpayers responsible for information provided by third parties who provide assistance with enrollment. Thus, the commenters recommended that the final regulations clarify that an individual is only responsible for information he or she provides to the Exchange and is not responsible for information provided by third parties. The commenters also suggested that the final regulations provide that individuals who use an expert to assist with enrolling in coverage should not be considered to have acted recklessly when relying on the expert’s professional advice. Other commenters requested that the final regulations require that individuals be notified of the consequences of potential income-based eligibility fraud.

A commenter also stated that, under the final regulations, the IRS should have the burden of showing that a taxpayer’s incorrect information was provided to the Exchange with intentional or reckless disregard for the facts. One commenter suggested that the final regulations clarify that the reckless or intentional disregard for the facts exceptions will be applied on an individual basis. In addition, the commenter asked that the final regulations address how the intentional or reckless disregard for the facts exception, as it applies to the employee safe harbor in § 1.36B–2(c)(3)(v)(A)(3), will be implemented by the Exchanges.

Finally, one commenter requested that the final regulations not adopt the intentional or reckless disregard for the facts exceptions.

After careful consideration of the comments received, the final regulations adopt the intentional or reckless disregard for the facts exception, and the definition of its terms, to the section 36B eligibility safe harbors for household income below 100 percent of the FPL, government programs such as Medicaid, and employer-sponsored coverage. As clarified in the proposed and final regulations, the intentional or reckless disregard for the facts exception applies only when the taxpayer knowingly provides inaccurate information to the Exchange or makes little or no effort to determine whether the information provided is accurate under circumstances that demonstrate a substantial deviation from the standard of conduct of a reasonable person. The commenters’ concerns are further addressed in this preamble.

These final regulations, in adopting the intentional or reckless disregard for the facts exceptions set forth in the proposed regulations without modification, do not create new or heightened standards or rules for determining whether a taxpayer acted with intentional or reckless disregard for the facts. Rather, the phrase “intentional or reckless disregard for the facts” as used in the section 36B regulations has a similar meaning and application currently used in other areas of the Code. For example, an intentional or reckless disregard standard also is applied in determining eligibility for other tax credits such as the earned income tax credit and the American opportunity tax credit, see sections 32(k) and 25A(i)(7)(A).

The IRS is responsible for enforcement of the intentional or reckless disregard for the facts exceptions during an examination of a taxpayer’s tax return. Thus, the IRS must make the initial showing of facts demonstrating intentional or reckless behavior. Exchanges have no role in enforcing or implementing this standard, although other provisions of law provide Exchanges the authority to impose penalties on individuals who provide incorrect information to an Exchange.

To provide additional clarity, in general, the intentional or reckless disregard for the facts exception only applies to the conduct of the individual attesting to the Exchange. Thus, an individual is only responsible for the information that he or she provides to the Exchange and is not liable for inaccurate information provided by third parties, such as an employer.

An individual’s attestations, however, may affect the eligibility of all individuals who are listed on a Marketplace Application for Health Coverage and who the taxpayer intends at the time of enrollment to claim as a dependent. For example, if a taxpayer, with intentional or reckless disregard for the facts, provides incorrect information to an Exchange concerning his household income and receives advance credit payments for coverage of himself and his three dependents, and his actual household income is below 100% of the applicable FPL, then the taxpayer is not an applicable taxpayer and a premium tax credit is not allowed for his coverage or the coverage of his three dependents.

Similarly, many individuals solicit and receive assistance with enrollment and completing the Marketplace Application for Health Coverage. To ensure effective and efficient enrollment through the Exchange, the Department of Health and Human Services uses Navigators, as described at 45 CFR 155.210, to assist potential applicants. In addition, the Marketplaces administer a program for individuals and entities to apply for and receive recognition as a certified application counselor, as defined in 45 CFR 155.225, who may formally offer and provide enrollment assistance to individuals and small businesses. Finally, 45 CFR 155.220 provides standards under which agents and brokers may register and facilitate enrollments through the Marketplaces. Navigators, certified application counselors, agents, and brokers (collectively, authorized advisors) receive comprehensive training on enrollment and completion of a Marketplace Application for Health Coverage, and individuals are encouraged to use them when making enrollment and advance credit payment decisions. Accordingly, for purposes of the final regulations, an individual does not act recklessly when following the advice of an authorized advisor, so long as the individual provided the authorized advisor with necessary and accurate information. Whether reliance on advice provided by a person other than an authorized advisor is reckless will depend on all of the relevant facts and circumstances, including whether reliance was reasonable and whether the taxpayer provided necessary and accurate information to the other person.

To illustrate, assume Individual D is told by a Navigator that the child support payments D receives from her former spouse are included in her household income in determining whether she is eligible for advance credit payments. Relying on that information, D reports on a Marketplace Application for Health Coverage that her household income for the year of coverage will be over 100 percent of the applicable FPL for D’s family size, and D receives the benefit of advance credit payments for the year. When filing her tax return for the year of coverage, D learns that child support payments are not included in her household income for the year of coverage and, thus, her household income is actually under 100 percent of the applicable FPL. D is not considered to have acted with intentional or reckless disregard for the facts because she relied on the advice of a Navigator in providing the information that the Marketplace used to determine whether she was eligible for advance credit payments. Thus, the provision in § 1.36B–2(b)(6) that allows a taxpayer whose household income is below 100 percent of the applicable FPL to be treated as an applicable taxpayer will apply to D despite the fact that her household income for the taxable year is below 100 percent of the applicable FPL.

In contrast, assume Individual E told the Navigator assisting with E’s Marketplace Application for Health Coverage that E’s lowest-cost option for purchasing self-only employer-sponsored coverage that provides minimum value would cost E $10,000 for the taxable year, when in fact E knew that he could purchase such coverage for $5,000. Based on the information E provided, the Navigator advises E that he should indicate on his Marketplace Application for Health Coverage that his required contribution for employer-sponsored coverage is $10,000. E follows this advice and consequently receives the benefit of advance credit payments for the year. During a subsequent examination, the IRS determines that E could have purchased employer-sponsored coverage that provides minimum value for $5,000. For the year of coverage, E is not considered to have reasonably relied on the advice of a Navigator in providing information to the Marketplace because E knowingly provided inaccurate information to the Navigator. Thus, the employee safe harbor in § 1.36B–2(c)(3)(v)(A)(3) does not apply to E.

The proposed regulations provide that the Nonappropriated Fund Health Benefits Program of the Department of Defense (the Program) is treated as an eligible employer-sponsored plan for purposes of determining if an individual is eligible for minimum essential coverage under section 36B. This treatment conforms the regulations under section 36B to the regulations under section 5000A, which treat the Program as an eligible employer-sponsored plan. Thus, if coverage under the Program does not provide minimum value (under § 1.36B–2(c)(3)(vi)) or is not considered affordable (under § 1.36B–2(c)(3)(v)) for an individual who does not enroll in the coverage, he or she is not treated as eligible for minimum essential coverage under the Program for purposes of premium tax credit eligibility.

One commenter requested that the final regulations clarify how Marketplaces will determine and verify whether an offer of coverage under the Program provides minimum value and is affordable. In general, employers are required to provide certain information to employees about the coverage that they offer, including information that is relevant to affordability and minimum value. These regulations do not make any changes to those requirements.

The existing section 36B regulations provide that an individual is eligible for minimum essential coverage through an eligible employer-sponsored plan if the individual had the opportunity to enroll in the plan and the plan is affordable and provides minimum value. Because in some instances individuals may not be allowed an annual opportunity to decide whether to enroll in eligible employer-sponsored coverage, the proposed regulations provide that if an individual declines to enroll in employer-sponsored coverage for a plan year and does not have the opportunity to enroll in that coverage for one or more succeeding plan years, for purposes of section 36B, the individual is treated as ineligible for that coverage for the succeeding plan year or years for which there is no enrollment opportunity. This rule relating to eligibility for employer-sponsored coverage is proposed to apply for taxable years beginning after December 31, 2016.^[2]

One commenter sought clarification on how this rule relating to eligibility for employer-sponsored coverage applies to employers with fiscal-year employer plans. The commenter also requests a delay in the effective date to allow additional time for implementation.

The rule in the proposed regulations relating to eligibility for employer-sponsored coverage applies to fiscal year plans in the same manner that it applies to calendar year plans. For example, assume an employer offers an employee affordable, minimum value coverage for a plan year of April 1, 2017 through March 30, 2018. In addition, under the terms of the employer’s plan, if the employee declines the coverage beginning on April 1, 2017, the employee is precluded from enrolling for the plan year of April 1, 2018 through March 30, 2019, absent a special enrollment period. Under the proposed regulations, the employee is treated as eligible for this employer-sponsored coverage only for the period between April 1, 2017 and March 31, 2018. Thus, assuming the employee does not enroll in the employer-sponsored coverage through a special enrollment period, the employee is not considered eligible for this employer coverage during the period April 1, 2018 through March 31, 2019.

The final regulations do not adopt the commenter’s suggestion to delay the applicability date of the provision relating to eligibility for employer-sponsored coverage to a year after 2017. The Treasury Department and the IRS believe that it would be unfair to employees and their family members who do not have an annual opportunity to enroll in coverage offered to them by an employer to delay the applicability date of this provision. Consequently, the final regulations provide that this provision is applicable for taxable years beginning after December 31, 2016.

The proposed regulations provide rules on the effect of payments made available under opt-out arrangements on an employee’s required contribution for purposes of eligibility for the premium tax credit and an exemption from the section 5000A individual shared responsibility provision.^[3] An opt-out arrangement is an arrangement under which a payment (called an opt-out payment) is made available to an employee by an employer only if the employee declines coverage under an eligible employer-sponsored plan offered by the employer. Prior to the proposed regulations, the Treasury Department and the IRS released Notice 2015–87, 2015–52 I.R.B. 889, which also addressed the effect of opt-out arrangements on an employee’s required contribution.

Several comments on the proposed rule were received. The Treasury Department and the IRS continue to examine the issues raised by opt-out arrangements and expect to finalize regulations on the effect of opt-out arrangements on an employee’s required contribution at a later time.

As provided in Notice 2015–87, Q&A 9, and reiterated in the proposed rule, the regulations on opt-out arrangements generally will apply only for periods after the applicability of those final regulations. Until those final regulations are applicable, individuals and employers can continue to rely on the guidance provided in Notice 2015–87 and on the proposed rule, including transition relief as clarified and expanded in section 2.f of the preamble to the proposed rule (for opt-out arrangements contained in collective bargaining agreements in effect before December 16, 2015). See 81 FR 44,561.

Accordingly, until the applicability date of final regulations on opt-out arrangements, individuals may treat opt-out payments made available under unconditional opt-out arrangements (as defined in the Background section of the preamble to the proposed regulations (see 81 FR 44,560)) as increasing the employee’s required contribution for purposes of sections 36B and 5000A. In addition, for the same period, an individual who can demonstrate that he or she meets the condition(s) (in addition to declining the employer’s health coverage) that must be satisfied to receive an opt-out payment under a conditional opt-out arrangement (as defined in the Background section of the preamble to the proposed regulations (see 81 FR 44,560)), may treat the amount of the conditional opt-out payment as increasing the employee’s required contribution for purposes of sections 36B and 5000A.

In contrast, until the applicability date of final regulations on opt-out arrangements, employers are not required to increase an employee’s required contribution by the amount of an opt-out payment made available under an opt-out arrangement (other than a payment made available under a non-relief-eligible opt-out arrangement^[4]) for purposes of section 6056 (Form 1095–C, Employer-Provided Health Insurance Offer and Coverage), and an opt-out payment made available under an opt-out arrangement (other than a payment made available under a non-relief-eligible opt-out arrangement) will not be treated as increasing an employee’s required contribution for purposes of any potential consequences under section 4980H.

The proposed regulations provide that if an individual who is enrolled in a qualified health plan for which advance credit payments are made informs the Exchange that the individual is or will soon be eligible for other minimum essential coverage and that advance credit payments should be discontinued, but the Exchange does not discontinue advance credit payments for the first calendar month beginning after the month the individual notifies the Exchange, the individual is treated as eligible for the other minimum essential coverage no earlier than the first day of the second calendar month beginning after the first month the individual may enroll in the other minimum essential coverage. Similarly, if a determination is made that an individual is eligible for Medicaid or CHIP but advance credit payments are not discontinued for the first calendar month beginning after the eligibility determination, the individual is treated as eligible for Medicaid or CHIP no earlier than the first day of the second calendar month beginning after the determination.

Commenters noted that the proposed regulations do not address how the IRS will identify and verify scenarios in which an individual requested prospective discontinuation of advance credit payments but there was a delay in the discontinuation. The commenters also pointed out that consumers may request an accelerated termination if the Exchange and health plan issuer allow it and the proposed regulations do not address how these scenarios will be handled. Consequently, the commenters requested that the IRS issue clear instructions and guidance for taxpayers and tax preparers for situations in which there is a delay discontinuing or terminating advance credit payments to ensure that taxpayers will not be subject to penalties or repayment of advance credit payments for which they are not responsible.

The Instructions to Form 8962, Premium Tax Credit (PTC), and Publication 974, Premium Tax Credit, will include a discussion of this rule concerning eligibility for certain non-Marketplace minimum essential coverage when the discontinuance of advance credit payments is delayed. Furthermore, the IRS intends to, in Questions and Answers on www.irs.gov, address situations in which there is a delay in the discontinuance of advance credit payments and the taxpayer is allowed a premium tax credit for a month for which the taxpayer receives a Form 1095–B or Form 1095–C showing that the taxpayer was enrolled in non-Marketplace minimum essential coverage.

Commenters requested that the final regulations acknowledge that this rule concerning eligibility for non-Marketplace minimum essential coverage when there has been a delay in the discontinuance of advance credit payments does not change the obligations of health plan issuers for prior years, notwithstanding that the rule in the proposed regulations may be relied on by taxpayers for taxable years beginning after December 31, 2013. Although the obligations of health plan issuers are generally outside the scope of these regulations, it is the understanding of the Treasury Department and the IRS, in consultation with the Department of Health and Human Services (HHS), that this rule regarding when an individual is eligible for certain non-Marketplace coverage does not affect the obligations of health plan issuers or the deadlines imposed by or on those issuers.

One commenter requested that the rule extend to other situations, such as when an individual receiving the benefit of advance credit payments is incarcerated after disposition of charges. Under section 1312(f)(1)(B) of the Affordable Care Act (42 U.S.C. 18032(f)(1)(B)), incarcerated individuals may not be enrolled through a Marketplace. However, unlike an individual enrolled in minimum essential coverage outside of the Marketplace, if there is a delay in disenrolling the incarcerated individual and discontinuing the advance credit payments, neither section 36B nor its regulations prohibit a taxpayer from claiming a premium tax credit for an incarcerated individual’s Marketplace coverage. Thus, the final regulations do not adopt this comment.

The same commenter also requested a change in the rule concerning delays in discontinuance of advance credit payments after a Medicaid or CHIP determination. Under the proposed regulations, if there is a delay in discontinuance of advance credit payments following a Medicaid or CHIP eligibility determination, the individual is treated as eligible for Medicaid or CHIP no earlier than the first day of the second calendar month beginning after the determination. The commenter stated that, under the final regulations, an individual should be treated as eligible for Medicaid or CHIP no earlier than the first day of the second calendar month beginning after the eligibility determination is communicated to the Exchange.

The final regulations do not adopt this comment. The commenter is likely concerned about a situation in which the office that made a Medicaid or CHIP determination for an individual does not promptly notify the Marketplace of that status and the individual remains enrolled in Marketplace coverage with advance credit payments for multiple months. However, individuals enrolled in Marketplace coverage with advance credit payments who are determined eligible for Medicaid or CHIP should also promptly notify their Marketplace to discontinue the advance credit payments. Amending the rule to delay eligibility until the second month after the determination is communicated to the Marketplace effectively allows individuals who fail to promptly communicate with their Marketplaces to be dual enrolled for multiple months with advance credit payments.

Under existing § 1.36B–3(c)(1)(ii), a month is a coverage month for an individual only if the share of the premium for the individual’s coverage for the month not covered by advance credit payments is paid by the unextended due date of the income tax return for the year of coverage of the taxpayer claiming a personal exemption for the individual.

As discussed in the preamble to the proposed regulations, instances arise in which an individual is initially determined ineligible for advance credit payments, does not enroll in a qualified health plan pending the individual’s appeal of the determination, and is later determined to be eligible for advance credit payments through the appeals process. If the individual then elects to be retroactively enrolled in an Exchange health plan, the deadline for paying premiums for the retroactive coverage may be after the unextended due date for filing an income tax return for the year of coverage. To address this issue, the proposed regulations provide that a taxpayer who is eligible for advance credit payments pursuant to an eligibility appeal for a member of the taxpayer’s coverage family who, based on the appeals decision, retroactively enrolls in a qualified health plan, is considered to have met the requirement in § 1.36B–3(c)(1)(ii) for a month if the taxpayer pays the individual’s share of the premium for coverage under the plan for the month on or before the 120th day following the date of the appeals decision (the appeal premium payment period).

A commenter opined that to ensure accurate and consistent identification and reporting of payment deadlines, the triggering event that begins the appeal premium payment period under the section 36B regulations should align with the triggering event provided in 45 CFR 155.400(e)(1)(iii), which provides as follows: “For coverage to be effectuated under retroactive effective dates, . . . the deadline for making the binder payment must be no earlier than 30 calendar days from the date the issuer receives the enrollment transaction.” The commenter notes that the date the appeal premium payment period begins under the proposed regulations (the date of the appeals decision) is different from the date the period begins under 45 CFR 155.400(e)(1)(iii) (the date the issuer receives the enrollment transaction) and suggests that the final regulations conform to the language in 45 CFR 155.400(e)(1)(iii) because qualified health plan issuers would not know the date of the appeals decision and would not know whether the premium payment was made within 120 days of the appeals decision. The commenter also opined that the 120-day period in the proposed regulations may be too long for some retroactive enrollment scenarios, such as a situation in which an individual is enrolled in retroactive coverage for only a few months. The commenter also suggested that the appeal premium payment rule in the section 36B regulations should apply only in situations in which the appeal decision is after the individual’s unextended due date for filing an income tax return for the year of coverage.

The final regulations do not adopt the suggested changes. The purpose of the appeal premium payment period in the section 36B regulations is to ensure that taxpayers who pay their premiums within a reasonable time following a favorable appeal decision may qualify for a premium tax credit. On the other hand, the payment date rule in 45 CFR 155.400(e)(1)(iii) relates to when the payment must be made to effectuate the retroactive coverage. Qualified health plan issuers need to know the date they received the enrollment transaction and thus whether the premium payments were timely made to effectuate the retroactive coverage, but have no need to know whether the payments were made within 120 days of the appeal decision. In addition, the 120-day period is needed to provide equitable treatment, whether the appeal decision is before or after the unextended due date for filing an income tax return for the year of coverage. It would be inequitable to allow a taxpayer who gets a favorable appeal decision five days after the unextended due date of his or her tax return the benefit of the 120-day appeal premium payment period but not extend the same benefit to a taxpayer who gets an appeal decision five days before the unextended due date.

Under the existing section 36B regulations, if a member of a taxpayer’s coverage family is enrolled in a stand-alone dental plan, the portion of the monthly premium for the stand-alone dental plan allocable to pediatric dental benefits is added to the taxpayer’s monthly enrollment premium in determining the taxpayer’s premium assistance amount for the month. Under the existing regulations, however, the portion of the monthly premium for a stand-alone dental plan allocable to pediatric dental benefits does not affect the taxpayer’s applicable benchmark plan premium.

Because the existing regulations frustrate the goal of section 36B of making coverage for essential health benefits affordable to individuals eligible for the premium tax credit, the proposed regulations provide that, if an Exchange offers one or more silver-level qualified health plans that do not include pediatric dental benefits, the applicable benchmark plan is determined by ranking (1) the premiums for the silver-level qualified health plans that include pediatric dental benefits offered by the Exchange and (2) the aggregate of the premiums for the silver-level qualified health plans offered by the Exchange that do not include pediatric dental benefits plus the portion of the premium allocable to pediatric dental benefits for stand-alone dental plans offered by the Exchange. In constructing this ranking, the proposed regulations provide that the premium for the lowest-cost silver plan that does not include pediatric dental benefits is added to the lowest cost portion of the premium for a stand-alone dental plan that is allocable to pediatric dental benefits, and similarly, the premium for the second lowest-cost silver plan that does not include pediatric dental benefits is added to the second-lowest cost portion of the premium for a stand-alone dental plan that is allocable to pediatric dental benefits. The second lowest-cost amount from this combined ranking of premiums is the taxpayer’s applicable benchmark plan premium. Finally, the proposed regulations provide that the rule for determining the applicable benchmark plan for situations in which an Exchange offers one or more silver-level qualified health plans that do not cover pediatric dental benefits (the pediatric dental rule) is applicable for taxable years beginning after December 31, 2018.

One commenter noted that the effect of the rule in the proposed regulations relating to pediatric dental benefits is that some taxpayers will have a lower monthly premium assistance amount as compared to their monthly premium assistance amount under the existing section 36B regulations. In particular, the commenter pointed to Example 4 of § 1.36B–3(f)(9) of the proposed regulations in which the taxpayer’s benchmark plan premium is lower under the rules of the proposed regulations than under the existing section 36B regulations. Under this example, the applicable benchmark plan premium would be based on the lowest-cost rather than the second-lowest-cost silver-level qualified health plan. The commenter suggested that this is likely not a result intended by the Treasury Department and the IRS and recommended that the final regulations include a revision to the language of the proposed regulations to fix this unintended result.

The final regulations adopt the recommendation in this comment. Under the final regulations, if one or more silver-level qualified health plans offered through an Exchange do not cover pediatric dental benefits, the premium for the applicable benchmark plan is determined based on the second lowest-cost option among (i) the silver-level qualified health plans that are offered by the Exchange to the members of the coverage family and that provide pediatric dental benefits; and (ii) the silver-level qualified health plans that are offered by the Exchange to the members of the coverage family that do not provide pediatric dental benefits in conjunction with the second lowest-cost portion of the premium for a stand-alone dental plan (within the meaning of section 1311(d)(2)(B)(ii) of the Affordable Care Act (42 U.S.C. 18031(d)(2)(B)(ii))) offered by the Exchange to the members of the coverage family that is properly allocable to pediatric dental benefits. Thus, under the final regulations, if a taxpayer’s coverage family is able to enroll in one or more silver-level qualified health plans that do not provide pediatric dental benefits, the second lowest-cost portion of the premium for a stand-alone dental plan offered by the Exchange to the members of the coverage family that is properly allocable to pediatric dental benefits is added to the premium for each of those silver-level plans in determining the taxpayer’s applicable benchmark plan.

One commenter requested clarification on how to determine the portion of the premium of a stand-alone dental plan properly allocable to the cost of pediatric dental benefits. According to the commenter, the portion of a plan’s premium that is allocable to each essential health benefit (EHB) is determined by using an EHB factor (a multiplier that applies to the plan and represents the portion of the total benefit package that represents the EHB), and the EHB factor does not change based on who is purchasing the plan and what benefits they are eligible to use. The commenter asks for clarification on if, and how, an EHB factor is to be applied to a stand-alone dental plan and whether a stand-alone dental plan should have a different EHB factor apply based on whether children, or only adults, are enrolled in the plan.

The determination of the portion of the premium of a stand-alone dental plan properly allocable to pediatric dental benefits is outside the scope of these regulations. However, HHS has confirmed that, under its guidance, if no members of a taxpayer’s coverage family are eligible for pediatric dental benefits, the portion of the premium allocable to pediatric dental benefits for all stand-alone dental plans the family may enroll in is $0.

Another commenter stated that the pediatric dental rule in the proposed regulations is inconsistent with the provisions of section 36B. Specifically, the commenter contends that the clear meaning of section 36B(b)(3)(E) is that the portion of a stand-alone pediatric dental plan premium allocable to pediatric dental benefits is added only to the enrollment premium, not the benchmark plan premium, in computing the premium tax credit, and is added only for taxpayers who have a family member who enrolls in a stand-alone dental plan. In addition, the commenter opines that the pediatric dental rule in the proposed regulations is overly complex and provides minimal benefit to a small group of taxpayers.

The Treasury Department and the IRS disagree that the pediatric dental rule is inconsistent with the provisions of section 36B. Although, as noted by the commenter, section 36B(b)(3)(E) relates only to the portion of a stand-alone dental plan premium that is added to a taxpayer’s enrollment premium, the proposed regulations do not rely upon an interpretation of section 36B(b)(3)(E). Rather, as discussed in the preamble of the proposed regulations, the pediatric dental rule is based on statutory references to “self-only coverage” and “family coverage” in section 36B(b)(3)(B)(ii), and is consistent with the overall goal of section 36B, which is to make affordable the coverage of each of the essential health benefits described in section 1302(b) of the Affordable Care Act for individuals eligible for a premium tax credit. As discussed, that coverage may be obtained from either a qualified health plan covering all of the essential health benefits or one covering all benefits except pediatric dental in combination with a stand-alone dental plan. Finally, although the pediatric dental rule does add some complexity to the determination of a taxpayer’s applicable benchmark plan, the rule will, in general, not result in more complexity to taxpayers because they generally use the benchmark plan premium amount reported to them by Exchanges to compute their premium tax credit. In addition, the pediatric dental rule in the final regulations, which, for stand-alone dental plans, considers just the second lowest-cost portion of the premium properly allocable to pediatric dental benefits in the determination of a taxpayer’s applicable benchmark plan, is less complex than the rule in the proposed regulations, which requires consideration of both the lowest-cost and the second lowest-cost portion.

Other commenters supported the pediatric dental rule and asked that taxpayers be allowed to compute their applicable benchmark plan using the pediatric dental rule in the proposed regulations for taxable years beginning before January 1, 2019. However, taxpayers must know their benchmark plan premium amount to properly compute their premium tax credit and, consequently, Exchanges must provide this information to taxpayers. Because this pediatric dental rule involves a change in the manner in which a taxpayer’s applicable benchmark plan is determined, Exchanges need time to implement the new rule and have indicated that they are likely unable to do so for taxable years beginning before January 1, 2019. Consequently, the final regulations do not adopt this comment.

Under existing § 1.36B–3(f)(4), if members of a taxpayer’s family reside in different states and enroll in separate qualified health plans, the premium for the taxpayer’s applicable benchmark plan is the sum of the premiums for the applicable benchmark plans for each group of family members living in the same state. Because this rule may not accurately reflect the cost of available coverage for a taxpayer whose family members reside in different locations in the same state, the proposed regulations provide that if members of a taxpayer’s coverage family reside in different locations, whether within the same state or in different states, the taxpayer’s benchmark plan premium is the sum of the premiums for the applicable benchmark plans for each group of coverage family members residing in different locations, based on the plans offered to the group through the Exchange for the rating area where the group resides. The proposed regulations provide that the rules for calculating the premium tax credit operate the same for families residing in multiple locations within a state and families residing in multiple states.

One commenter expressed concern that the rule in the proposed regulations concerning the benchmark plan premium for members of the coverage family residing in different locations could result in unequal treatment of separate families, particularly in Marketplaces in which there are many rating areas within a relatively small geographic area and numerous plans are available for enrollment in many or all rating areas. Thus, the commenter asked that Marketplaces be allowed to use their own benchmark plan rating methodology rather than the rule in the proposed regulations for members of the coverage family who reside in different locations within a state.

The final regulations do not adopt this comment. The amount of a taxpayer’s premium tax credit depends on the taxpayer’s applicable benchmark plan and the premium for that plan. Allowing Exchanges to use different methodologies to determine the benchmark plan premium could result in inequitable treatment of taxpayers in different locations. One Exchange’s methodology would undoubtedly provide a more generous benchmark plan premium for taxpayers who enroll in a qualified health plan through that Exchange as compared to taxpayers who enroll through another Exchange using a different methodology.

Another commenter asked that the final regulations clarify how the rule relating to family members residing in different locations works for farm workers who frequently migrate to find agricultural work, especially those who stay enrolled in the same plan despite the relocations. The rule concerning family members residing in different locations has no unique effect for individuals who frequently move to new locations and thus the final regulations include no new rules addressing this situation. HHS regulations at 45 CFR 155.335(e) require individuals who move to a new rating area to inform the Exchange in the new rating area of their move. The move may require a recomputation of the individual’s advance credit payments, or perhaps necessitate the individual to enroll in a new qualified health plan, both of which are determined by the Exchange in the new rating area.

Existing § 1.36B–3(f)(3) provides that if one or more silver-level plans offered through an Exchange do not cover all members of a taxpayer’s coverage family under one policy (for example, because an issuer will not cover a taxpayer’s dependent parent on the same policy the taxpayer enrolls in), the premium for the applicable benchmark plan may be the premium for a single policy or for more than one policy, whichever is the second lowest-cost silver option. Because this rule is complex for taxpayers and difficult for Exchanges and the IRS to administer, the proposed regulations delete the existing rule and provide a new rule in its place. Under the proposed regulations, if a silver-level plan offers coverage to all members of a taxpayer’s coverage family who reside in the same location under a single policy, the plan premium taken into account for purposes of determining the applicable benchmark plan is the premium for that policy. However, if a silver-level plan would require multiple policies to cover all members of a taxpayer’s coverage family who reside in the same location, the plan premium taken into account for purposes of determining the applicable benchmark plan is the sum of the premiums for self-only policies under the plan for each member of the coverage family who resides in the same location. The proposed regulations also requested comments on an alternative rule under which the sum of the premiums for self-only policies under a plan for each member of the taxpayer’s coverage family would always be used to determine a taxpayer’s applicable benchmark plan.

One commenter asked that the final regulations adopt the alternative rule discussed in the preamble to the proposed regulations concerning the determination of a taxpayer’s applicable benchmark plan, not the rules in the proposed regulations, which vary based on whether a single policy or multiple policies are needed to cover a taxpayer’s family. The commenter opined that this alternative rule has the potential to streamline the applicable benchmark plan calculation with minimal impact to the amount of premium tax credit a taxpayer is allowed.

The final regulations do not adopt this comment. Under HHS regulations, the qualified health plan premium for a taxpayer with three dependents is not increased by adding one or more additional dependents to the taxpayer’s family. 45 CFR 147.102(c)(1). That is, the portion of the premium due to the taxpayer’s dependents is capped at three dependents and does not increase as a result of adding more dependents to the family. However, if the alternative rule suggested by the commenter is adopted, a taxpayer with four or more dependents would have a higher benchmark plan premium than a similarly-situated taxpayer with three dependents even though the additional dependents do not add to the cost of the coverage for the taxpayer with four or more dependents. Thus, aggregating the sum of the self-only policies under a plan for each member of a taxpayer’s coverage family may provide an undue benefit to taxpayers with four or more dependents. Accordingly, this approach should be limited to situations in which a silver-level plan requires multiple policies to cover all members of a taxpayer’s coverage family who reside in the same location.

Under the proposed regulations, the changes to the rules concerning the determination of a taxpayer’s applicable benchmark plan are proposed to be applicable for tax years beginning after December 31, 2018. Commenters noted that State-based Marketplaces often have very different eligibility and enrollment systems from the Federally-Facilitated Marketplace and from each other, and the changes to the applicable benchmark plan rules will require significant changes to their systems and long timelines for implementation. Consequently, the commenters asked that the Treasury Department and the IRS provide flexibility to State-based Marketplaces and provide ample time between the effective date of the final regulations and the date the states must implement the benchmark plan changes.

The final regulations do not alter the applicability date for the rule for computing the benchmark plan. Doing so would permit inequitable treatment of taxpayers in different locations and potentially have an adverse impact on certain taxpayers. Thus, the final regulations provide that the changes to the benchmark plan rules are applicable for taxable years beginning after December 31, 2018.

The proposed regulations provide that when multiple families enroll in a single qualified health plan and advance credit payments are made for the coverage, the enrollment premiums reported by the Exchange for each family are the family’s allocable share of the enrollment premiums, which is based on the proportion of each family’s applicable benchmark plan premium. One commenter requested clarification that this reporting rule applies only in situations in which a taxpayer requests financial assistance through advance credit payments or cost-sharing reductions, or is seeking to enroll in Medicaid. The final regulations, like the proposed regulations, provide that the Exchange must report a portion of the plan’s enrollment premium to each enrolled family if multiple families enroll in a single qualified health plan and advance credit payments are made for coverage under the plan. The portion reported is based on the proportion of each family’s applicable benchmark plan premium.

The proposed regulations also provide that, if an individual’s coverage in a qualified health plan is terminated before the last day of a month, or if an individual is enrolled in coverage after the first day of a month and the coverage is effective on the date of the individual’s birth, adoption, or placement for adoption or in foster care, or on the effective date of a court order, an Exchange must report the enrollment premiums for the month (excluding the premium allocated to benefits in excess of essential health benefits), reduced by any amount that was refunded because the enrollment was for less than a full month. This reporting requirement was proposed to apply for taxable years beginning after December 31, 2016.

One commenter expressed concern with the rule requiring that Exchanges reduce the reported enrollment premium by any amounts of the enrollment premiums that are refunded by the issuer of the qualified health plan. The commenter stated that this requirement is not something that currently is captured by its reporting system, and updating the system would require an effort that would be out of scale with the small size of the population enrolled for less than a full month. The commenter suggests that refund information could be obtained when a taxpayer computes his or her premium tax credit on the taxpayer’s Federal income tax return. Alternatively, the commenter requested that this requirement become effective for a taxable year later than 2017. To provide enrollment systems additional time to implement the updates and system modifications necessary to accurately report refunds for partial months of coverage, the final regulations delay the applicability date for this rule by two years, so that it applies for taxable years beginning after December 31, 2018. Exchanges able to comply with the reporting rule before that date are encouraged to do so.

* * * * *

* * * * *

(b) * * *

(6) * * *

(i) In general.

(ii) Exceptions.

* * * * *

(c) * * *

(3) * * *

(v) * * *

(A) * * *

(7) Opt-out arrangements.

* * * * *

(4) Special eligibility rules.

(i) Related individual not claimed as a personal exemption deduction.

(ii) Exchange unable to discontinue advance credit payments.

(A) In general.

(B) Medicaid or CHIP.

(5) Related individuals not claimed as a personal exemption deduction.

(d) [Reserved]

(e) Effective/applicability dates.

* * * * *

* * * * *

(c) * * *

(4) Appeals of coverage eligibility.

(d) * * *

(1) Premium assistance amount.

(2) Examples.

* * * * *

(f) * * *

(3) Silver-level plan not covering pediatric dental benefits.

(4) Family members residing in different locations.

(5) Single or multiple policies needed to cover the family.

(i) Policy covering a taxpayer’s family.

(ii) Policy not covering a taxpayer’s family.

(6) Plan not available for enrollment.

(7) Benchmark plan terminates or closes to enrollment during the year.

(8) Only one silver-level plan offered to the coverage family.

(9) Examples.

* * * * *

(m) [Reserved]

(n) Effective/applicability date.

* * * * *

(c) * * *

(3) * * *

(iii) Partial month of coverage.

(A) In general.

(B) Certain mid-month enrollments.

* * * * *

Par. 3. Section 1.36B–1 is amended by revising paragraphs (l), (m), and (o) to read as follows:

* * * * *

(l) Self-only coverage. Self-only coverage means health insurance that covers one individual and provides coverage for the essential health benefits as defined in section 1302(b)(1) of the Affordable Care Act (42 U.S.C. 18022).

(m) Family coverage. Family coverage means health insurance that covers more than one individual and provides coverage for the essential health benefits as defined in section 1302(b)(1) of the Affordable Care Act (42 U.S.C. 18022).

* * * * *

(o) Effective/applicability date. Except for paragraphs (l) and (m), this section applies to taxable years ending after December 31, 2013. Paragraphs (l) and (m) of this section apply to taxable years beginning after December 31, 2018. Paragraphs (l) and (m) of § 1.36B–1 as contained in 26 CFR part I edition revised as of April 1, 2016, apply to taxable years ending after December 31, 2013, and beginning before January 1, 2019.

Par. 4. Section 1.36B–2 is amended by:

1. Revising paragraph (b)(6) introductory text and paragraphs (b)(6)(i) and (ii).

2. Adding three sentences to the end of paragraph (c)(2)(v).

3. Revising paragraph (c)(3)(i).

4. Revising paragraph (c)(3)(iii)(A).

5. Removing the sentence at the end of the paragraph (c)(3)(v)(A)(3) and adding in its place three new sentences.

6. Adding paragraph (c)(3)(v)(A)(7).

7. Revising paragraph (c)(4).

8. Removing and reserving paragraph (d).

9. Adding paragraph (e).

The revisions and additions read as follows:

* * * * *

(b) * * *

(6) Special rule for taxpayers with household income below 100 percent of the Federal poverty line for the taxable year—(i) In general. A taxpayer (other than a taxpayer described in paragraph (b)(5) of this section) whose household income for a taxable year is less than 100 percent of the Federal poverty line for the taxpayer’s family size is treated as an applicable taxpayer for the taxable year if—

(A) The taxpayer or a family member enrolls in a qualified health plan through an Exchange for one or more months during the taxable year;

(B) An Exchange estimates at the time of enrollment that the taxpayer’s household income will be at least 100 percent but not more than 400 percent of the Federal poverty line for the taxable year;

(C) Advance credit payments are authorized and paid for one or more months during the taxable year; and

(D) The taxpayer would be an applicable taxpayer if the taxpayer’s household income for the taxable year was at least 100 but not more than 400 percent of the Federal poverty line for the taxpayer’s family size.

(ii) Exceptions. This paragraph (b)(6) does not apply for an individual who, with intentional or reckless disregard for the facts, provides incorrect information to an Exchange for the year of coverage. A reckless disregard of the facts occurs if the taxpayer makes little or no effort to determine whether the information provided to the Exchange is accurate under circumstances that demonstrate a substantial deviation from the standard of conduct a reasonable person would observe. A disregard of the facts is intentional if the taxpayer knows the information provided to the Exchange is inaccurate.

* * * * *

(c) * * *

(2) * * *

(v) * * * This paragraph (c)(2)(v) does not apply for an individual who, with intentional or reckless disregard for the facts, provides incorrect information to an Exchange for the year of coverage. A reckless disregard of the facts occurs if the taxpayer makes little or no effort to determine whether the information provided to the Exchange is accurate under circumstances that demonstrate a substantial deviation from the standard of conduct a reasonable person would observe. A disregard of the facts is intentional if the taxpayer knows that information provided to the Exchange is inaccurate.

* * * * *

(3) * * *

(i) In general. For purposes of section 36B, an employee who may enroll in an eligible employer-sponsored plan (as defined in section 5000A(f)(2) and the regulations under that section) that is minimum essential coverage, and an individual who may enroll in the plan because of a relationship to the employee (a related individual), are eligible for minimum essential coverage under the plan for any month only if the plan is affordable and provides minimum value. Except for the Nonappropriated Fund Health Benefits Program of the Department of Defense, established under section 349 of the National Defense Authorization Act for Fiscal Year 1995 (Public Law 103–337; 10 U.S.C. 1587 note), government-sponsored minimum essential coverage is not an eligible employer-sponsored plan. The Nonappropriated Fund Health Benefits Program of the Department of Defense is considered eligible employer–sponsored coverage, but not government-sponsored coverage, for purposes of determining if an individual is eligible for minimum essential coverage under this section.

* * * * *

(iii) * * *

(A) Failure to enroll in plan. An employee or related individual may be eligible for minimum essential coverage under an eligible employer-sponsored plan for a month during a plan year if the employee or related individual could have enrolled in the plan for that month during an open or special enrollment period for the plan year. If an enrollment period relates to coverage for not only the upcoming plan year (or the current plan year in the case of an enrollment period other than an open enrollment period), but also coverage in one or more succeeding plan years, this paragraph (c)(3)(iii)(A) applies only to eligibility for the coverage in the upcoming plan year (or the current plan year in the case of an enrollment period other than an open enrollment period).

* * * * *

(v) * * *

(A) * * *

(3) * * * This paragraph (c)(3)(v)(A)(3) does not apply for an individual who, with intentional or reckless disregard for the facts, provides incorrect information to an Exchange concerning the portion of the annual premium for coverage for the employee or related individual under the plan. A reckless disregard of the facts occurs if the taxpayer makes little or no effort to determine whether the information provided to the Exchange is accurate under circumstances that demonstrate a substantial deviation from the standard of conduct a reasonable person would observe. A disregard of the facts is intentional if the taxpayer knows that the information provided to the Exchange is inaccurate.

* * * * *

(7) Opt-out arrangements. [Reserved]

* * * * *

(4) Special eligibility rules—(i) Related individual not claimed as a personal exemption deduction. An individual who may enroll in minimum essential coverage because of a relationship to another person eligible for the coverage, but for whom the other eligible person does not claim a personal exemption deduction under section 151, is treated as eligible for minimum essential coverage under the coverage only for months that the related individual is enrolled in the coverage.

(ii) Exchange unable to discontinue advance credit payments—(A) In general. If an individual who is enrolled in a qualified health plan for which advance credit payments are made informs the Exchange that the individual is or will soon be eligible for other minimum essential coverage and that advance credit payments should be discontinued, but the Exchange does not discontinue advance credit payments for the first calendar month beginning after the month the individual informs the Exchange, the individual is treated as eligible for the other minimum essential coverage no earlier than the first day of the second calendar month beginning after the first month the individual may enroll in the other minimum essential coverage.

(B) Medicaid or CHIP. If a determination is made that an individual who is enrolled in a qualified health plan for which advance credit payments are made is eligible for Medicaid or CHIP but the advance credit payments are not discontinued for the first calendar month beginning after the eligibility determination, the individual is treated as eligible for the Medicaid or CHIP no earlier than the first day of the second calendar month beginning after the eligibility determination.

(d) [Reserved]

(e) Effective/applicability date. (1) Except as provided in paragraph (e)(2) of this section, this section applies to taxable years ending after December 31, 2013.

(2) Paragraph (b)(6)(ii), the last three sentences of paragraph (c)(2)(v), paragraph (c)(3)(i), paragraph (c)(3)(iii)(A), the last three sentences of paragraph (c)(3)(v)(A)(3), and paragraph (c)(4) of this section apply to taxable years beginning after December 31, 2016. Paragraphs (b)(6), (c)(3)(i), (c)(3)(iii)(A), and (c)(4) of § 1.36B–2 as contained in 26 CFR part I edition revised as of April 1, 2016, apply to taxable years ending after December 31, 2013, and beginning before January 1, 2017.

Par. 5. Section 1.36B–3 is amended by:

1. Redesignating paragraph (c)(4) as paragraph (c)(5) and adding a new paragraph (c)(4).

2. Revising paragraph (d)(1).

3. Revising paragraph (d)(2).

4. Revising paragraph (f).

5. Adding paragraph (n).

The revisions and additions read as follows:

* * * * *

(c) * * *

(4) Appeals of coverage eligibility. A taxpayer who is eligible for advance credit payments pursuant to an eligibility appeal decision implemented under 45 CFR § 155.545(c)(1)(ii) for coverage of a member of the taxpayer’s coverage family who, based on the appeal decision, retroactively enrolls in a qualified health plan is considered to have met the requirement in paragraph (c)(1)(ii) of this section for a month if the taxpayer pays the taxpayer’s share of the premiums for coverage under the plan for the month on or before the 120th day following the date of the appeals decision.

* * * * *

(d) * * *

(1) Premium assistance amount. The premium assistance amount for a coverage month is the lesser of—

(i) The premiums for the month, reduced by any amounts that were refunded, for one or more qualified health plans in which a taxpayer or a member of the taxpayer’s family enrolls (enrollment premiums); or

(ii) The excess of the adjusted monthly premium for the applicable benchmark plan (benchmark plan premium) over 1/12 of the product of a taxpayer’s household income and the applicable percentage for the taxable year (the taxpayer’s contribution amount).

(2) Examples. The following examples illustrate the rules of paragraph (d)(1) of this section.

Example 1. Taxpayer Q is single and has no dependents. Q enrolls in a qualified health plan with a monthly premium of $400. Q’s monthly benchmark plan premium is $500, and his monthly contribution amount is $80. Q’s premium assistance amount for a coverage month is $400 (the lesser of $400, Q’s monthly enrollment premium, and $420, the difference between Q’s monthly benchmark plan premium and Q’s contribution amount).

Example 2. (i) Taxpayer R is single and has no dependents. R enrolls in a qualified health plan with a monthly premium of $450. The difference between R’s benchmark plan premium and contribution amount for the month is $420.

(ii) The issuer of R’s qualified health plan is notified that R died on September 20. The issuer terminates coverage as of that date and refunds the remaining portion of the September enrollment premiums ($150) for R’s coverage.

(iii) R’s premium assistance amount for each coverage month from January through August is $420 (the lesser of $450 and $420). Under paragraph (d)(1) of this section, R’s premium assistance amount for September is the lesser of the enrollment premiums for the month, reduced by any amounts that were refunded ($300 ($450 – $150)) or the difference between the benchmark plan premium and the contribution amount for the month ($420). R’s premium assistance amount for September is $300, the lesser of $420 and $300.

Example 3. The facts are the same as in Example 2 of this paragraph (d)(2), except that the qualified health plan issuer does not refund any enrollment premiums for September. Under paragraph (d)(1) of this section, R’s premium assistance amount for September is $420, the lesser of $450 and $420.

* * * * *

(f) Applicable benchmark plan—(1) In general. Except as otherwise provided in this paragraph (f), the applicable benchmark plan for each coverage month is the second- lowest-cost silver plan (as described in section 1302(d)(1)(B) of the Affordable Care Act (42 U.S.C. 18022(d)(1)(B))) offered to the taxpayer’s coverage family through the Exchange for the rating area where the taxpayer resides for—

(i) Self-only coverage for a taxpayer—

(A) Who computes tax under section 1(c) (unmarried individuals other than surviving spouses and heads of household) and is not allowed a deduction under section 151 for a dependent for the taxable year;

(B) Who purchases only self-only coverage for one individual; or

(C) Whose coverage family includes only one individual; and

(ii) Family coverage for all other taxpayers.

(2) Family coverage. The applicable benchmark plan for family coverage is the second lowest-cost silver plan that would cover the members of the taxpayer’s coverage family (such as a plan covering two adults if the members of a taxpayer’s coverage family are two adults).

(3) Silver-level plan not covering pediatric dental benefits. If one or more silver-level qualified health plans offered through an Exchange do not cover pediatric dental benefits, the premium for the applicable benchmark plan is determined based on the second lowest-cost option among—

(i) The silver-level qualified health plans that are offered by the Exchange to the members of the coverage family and that provide pediatric dental benefits; and

(ii) The silver-level qualified health plans that are offered by the Exchange to the members of the coverage family that do not provide pediatric dental benefits in conjunction with the second lowest-cost portion of the premium for a stand-alone dental plan (within the meaning of section 1311(d)(2)(B)(ii) of the Affordable Care Act (42 U.S.C. 18031(d)(2)(B)(ii))) offered by the Exchange to the members of the coverage family that is properly allocable to pediatric dental benefits determined under guidance issued by the Secretary of Health and Human Services.

(4) Family members residing in different locations. If members of a taxpayer’s coverage family reside in different locations, the taxpayer’s benchmark plan premium is the sum of the premiums for the applicable benchmark plans for each group of coverage family members residing in different locations, based on the plans offered to the group through the Exchange where the group resides. If all members of a taxpayer’s coverage family reside in a single location that is different from where the taxpayer resides, the taxpayer’s benchmark plan premium is the premium for the applicable benchmark plan for the coverage family, based on the plans offered through the Exchange to the taxpayer’s coverage family for the rating area where the coverage family resides.

(5) Single or multiple policies needed to cover the family—(i) Policy covering a taxpayer’s family. If a silver-level plan or a stand-alone dental plan offers coverage to all members of a taxpayer’s coverage family who reside in the same location under a single policy, the premium (or allocable portion thereof, in the case of a stand-alone dental plan) taken into account for the plan for purposes of determining the applicable benchmark plan under paragraphs (f)(1), (f)(2), and (f)(3) of this section is the premium for this single policy.

(ii) Policy not covering a taxpayer’s family. If a silver-level qualified health plan or a stand-alone dental plan would require multiple policies to cover all members of a taxpayer’s coverage family who reside in the same location (for example, because of the relationships within the family), the premium (or allocable portion thereof, in the case of a standalone dental plan) taken into account for the plan for purposes of determining the applicable benchmark plan under paragraphs (f)(1), (f)(2), and (f)(3) of this section is the sum of the premiums (or allocable portion thereof, in the case of a stand-alone dental plan) for self-only policies under the plan for each member of the coverage family who resides in the same location.

(6) Plan not available for enrollment. A silver-level qualified health plan or a stand-alone dental plan that is not open to enrollment by a taxpayer or family member at the time the taxpayer or family member enrolls in a qualified health plan is disregarded in determining the applicable benchmark plan.

(7) Benchmark plan terminates or closes to enrollment during the year. A silver-level qualified health plan or a stand-alone dental plan that is used for purposes of determining the applicable benchmark plan under this paragraph (f) for a taxpayer does not cease to be the applicable benchmark plan for a taxable year solely because the plan or a lower cost plan terminates or closes to enrollment during the taxable year.

(8) Only one silver-level plan offered to the coverage family. If there is only one silver-level qualified health plan or one stand-alone dental plan offered through an Exchange that would cover all members of a taxpayer’s coverage family who reside in the same location (whether under one policy or multiple policies), that plan is used for purposes of determining the taxpayer’s applicable benchmark plan.

(9) Examples. The following examples illustrate the rules of this paragraph (f). Unless otherwise stated, in each example the plans are open to enrollment to a taxpayer or family member at the time of enrollment and are offered through the Exchange for the rating area where the taxpayer resides:

Example 1. Single taxpayer enrolls in Exchange coverage. Taxpayer A is single, has no dependents, and enrolls in a qualified health plan. The Exchange in the rating area in which A resides offers only silver-level qualified health plans that provide pediatric dental benefits. Under paragraphs (f)(1) and (f)(2) of this section, A’s applicable benchmark plan is the second lowest cost silver plan providing self-only coverage for A.

Example 2. Single taxpayer enrolls with dependent child through an Exchange where all qualified health plans provide pediatric dental benefits. Taxpayer B is single and claims her 12-year old daughter, C, as a dependent. B purchases family coverage for herself and C. The Exchange in the rating area in which B and C reside offers qualified health plans that provide pediatric dental benefits but does not offer qualified health plans without pediatric dental benefits. Under paragraphs (f)(1) and (f)(2) of this section, B’s applicable benchmark plan is the second lowest-cost silver plan providing family coverage to B and C.

Example 3. Single taxpayer enrolls with dependent child through an Exchange where one or more qualified health plans do not provide pediatric dental benefits. (i) Taxpayer D is single and claims his 10-year old son, E, as a dependent. The Exchange in the rating area in which D and E reside offers three silver-level qualified health plans, one of which provides pediatric dental benefits (S1) and two of which do not (S2 and S3), in which D and E may enroll. The Exchange also offers two stand-alone dental plans (DP1 and DP2) available to D and E. The monthly premiums allocable to essential health benefits for the silver-level plans are as follows:

S1 – $650

S2 – $620

S3 – $590

(ii)The monthly premiums, and the portion of the premium allocable to pediatric dental benefits, for the two dental plans are as follows:

DP1 – $50 ($20 allocable to pediatric dental benefits)

DP2 – $40 ($15 allocable to pediatric dental benefits).

(iii) Under paragraph (f)(3) of this section, D’s applicable benchmark plan is the second lowest cost option among the following offered by the rating area in which D resides: silver-level qualified health plans providing pediatric dental benefits ($650 for S1) and the silver-level qualified health plans not providing pediatric dental benefits, in conjunction with the second lowest-cost portion of the premium for a stand-alone dental plan properly allocable to pediatric dental benefits ($590 for S3 in conjunction with $20 for DP1 = $610 and $620 for S2 in conjunction with $20 for DP1 = $640). Under paragraph (e) of this section, the adjusted monthly premium for D’s applicable benchmark plan is $640.

Example 4. Single taxpayer enrolls with dependent adult through an Exchange where one or more qualified health plans do not provide pediatric dental benefits. (i) The facts are the same as in Example 3, except Taxpayer D’s coverage family consists of D and D’s 22-year old son, F, who is a dependent of D. The monthly premiums allocable to essential health benefits for the silver-level plans are as follows:

S1 – $630

S2 – $590

S3 – $580

(ii) Because no one in D’s coverage family is eligible for pediatric dental benefits, $0 of the premium for a stand-alone dental plan is allocable to pediatric dental benefits in determining D’s applicable benchmark plan. Consequently, under paragraphs (f)(1), (f)(2), and (f)(3) of this section, D’s applicable benchmark plan is the second lowest-cost option among the following options offered by the rating area in which D resides: silver-level qualified health plans providing pediatric dental benefits ($630 for S1) and the silver-level qualified health plans not providing pediatric dental benefits, in conjunction with the second lowest-cost portion of the premium for a stand-alone dental plan properly allocable to pediatric dental benefits ($580 for S3 in conjunction with $0 for DP1 = $580 and $590 for S2 in conjunction with $0 for DP1 = $590). Under paragraph (e) of this section, the adjusted monthly premium for D’s applicable benchmark plan is $590.

Example 5. Single taxpayer enrolls with dependent and nondependent. Taxpayer G is single and resides with his 25-year old daughter, H, and with his 14-year old son, I. G may claim I, but not H, as a dependent. G, H, and I enroll in coverage through the Exchange in the rating area in which they all reside. The Exchange offers only silver-level plans providing pediatric dental benefits. Under paragraphs (f)(1) and (f)(2) of this section, G’s applicable benchmark plan is the second lowest-cost silver plan covering G and I. However, H may qualify for a premium tax credit if H is otherwise eligible. See paragraph (h) of this section.

Example 6. Change in coverage family. Taxpayer J is single and has no dependents when she enrolls in a qualified health plan. The Exchange in the rating area in which she resides offers only silver-level plans that provide pediatric dental benefits. On August 1, J has a child, K, whom she claims as a dependent. J enrolls in a qualified health plan covering J and K effective August 1. Under paragraphs (f)(1) and (f)(2) of this section, J’s applicable benchmark plan for January through July is the second lowest-cost silver plan providing self-only coverage for J, and J’s applicable benchmark plan for the months August through December is the second lowest-cost silver plan covering J and K.

Example 7. Minimum essential coverage for some coverage months. Taxpayer L claims his 6-year old daughter, M, as a dependent. L and M are enrolled for the entire year in a qualified health plan that offers only silver-level plans that provide pediatric dental benefits. L, but not M, is eligible for government-sponsored minimum essential coverage for September to December. Thus, under paragraph (c)(1)(iii) of this section, January through December are coverage months for M, and January through August are coverage months for L. Because, under paragraphs (d) and (f)(1) of this section, the premium assistance amount for a coverage month is computed based on the applicable benchmark plan for that coverage month, L’s applicable benchmark plan for January through August is the second lowest-cost option covering L and M. Under paragraph (f)(1)(i)(C) of this section, L’s applicable benchmark plan for September through December is the second lowest-cost silver plan providing self-only coverage for M.

Example 8. Family member eligible for minimum essential coverage for the taxable year. The facts are the same as in Example 7, except that L is not eligible for government-sponsored minimum essential coverage for any months and M is eligible for government sponsored minimum essential coverage for the entire year. Under paragraph (f)(1)(i)(C) of this section, L’s applicable benchmark plan is the second lowest-cost silver plan providing self-only coverage for L.

Example 9. Benchmark plan premium for a coverage family with family members who reside in different locations. (i) Taxpayer N’s coverage family consists of N and her three dependents O, P, and Q. N, O, and P reside together but Q resides in a different location. The monthly applicable benchmark plan premium for N, O, and P is $1,000 and the monthly applicable benchmark plan premium for Q is $220.

(ii) Under paragraph (f)(4) of this section, because the members of N’s coverage family reside in different locations, the monthly premium for N’s applicable benchmark plan is the sum of $1,000, the monthly premiums for the applicable benchmark plan for N, O, and P, who reside together, and $220, the monthly applicable benchmark plan premium for Q, who resides in a different location than N, O, and P. Consequently, the premium for N’s applicable benchmark plan is $1,220.

Example 10. Aggregation of silver-level policies for plans not covering a family under a single policy. (i) Taxpayers R and S are married and live with S’s mother, T, whom they claim as a dependent. The Exchange for their rating area offers self-only and family coverage at the silver level through Issuers A, B, and C, which each offer only one silver-level plan. The silver-level plans offered by Issuers A and B do not cover R, S, and T under a single policy. The silver-level plan offered by Issuer A costs the following monthly amounts for self-only coverage of R, S, and T, respectively: $400, $450, and $600. The silver-level plan offered by Issuer B costs the following monthly amounts for self-only coverage of R, S, and T, respectively: $250, $300, and $450. The silver-level plan offered by Issuer C provides coverage for R, S, and T under one policy for a $1,200 monthly premium.

(ii) Under paragraph (f)(5) of this section, Issuer C’s silver-level plan that covers R, S, and T under one policy ($1,200 monthly premium) and Issuer A’s and Issuer B’s silver-level plans that do not cover R, S and T under one policy are considered in determining R’s and S’s applicable benchmark plan. In addition, under paragraph (f)(5)(ii) of this section, in determining R’s and S’s applicable benchmark plan, the premium taken into account for Issuer A’s plan is $1,450 (the aggregate premiums for self-only policies covering R ($400), S ($450), and T ($600) and the premium taken into account for Issuer B’s plan is $1,000 (the aggregate premiums for self-only policies covering R ($250), S ($300), and T ($450). Consequently, R’s and S’s applicable benchmark plan is the Issuer C silver-level plan covering R’s and S’s coverage family and the premium for their applicable benchmark plan is $1,200.

Example 11. Benchmark plan premium for a taxpayer with family members who cannot enroll in one policy and who reside in different locations. (i) Taxpayer U’s coverage family consists of U, U’s mother, V, and U’s two daughters, W and X. U and V reside together in Location 1 and W and X reside together in Location 2. The Exchange in the rating area in which U and V reside does not offer a silver-level plan that covers U and V under a single policy, whereas all the silver-level plans offered through the Exchange in the rating area in which W and X reside cover W and X under a single policy. Both Exchanges offer only silver-level plans that provide pediatric dental benefits. The silver plan offered by the Exchange for the rating area in which U and V reside that would cover U and V under self-only policies with the second-lowest aggregate premium costs $400 a month for self-only coverage for U and $600 a month for self-only coverage for V. The monthly premium for the second-lowest cost silver plan covering W and X that is offered by the Exchange for the rating area in which W and X reside is $500.

(ii) Under paragraph (f)(5)(ii) of this section, because multiple policies are required to cover U and V, the members of U’s coverage family who reside together in Location 1, the premium taken into account in determining U’s benchmark plan is $1,000, the sum of the premiums for the second-lowest aggregate cost of self-only policies covering U ($400) and V ($600) offered by the Exchange to U and V for the rating area in which U and V reside. Under paragraph (f)(5)(i) of this section, because all silver-level plans offered by the Exchange in which W and X reside cover W and X under a single policy, the premium for W and X’s coverage that is taken into account in determining U’s benchmark plan is $500, the second-lowest cost silver policy covering W and X that is offered by the Exchange for the rating area in which W and X reside. Under paragraph (f)(4) of this section, because the members of U’s coverage family reside in different locations, U’s monthly benchmark plan premium is $1,500, the sum of the premiums for the applicable benchmark plans for each group of family members residing in different locations ($1,000 for U and V, who reside in Location 1, plus $500 for W and X, who reside in Location 2).

Example 12. Qualified health plan closed to enrollment. Taxpayer Y has two dependents, Z and AA. Y, Z, and AA enroll in a qualified health plan through the Exchange for the rating area where the family resides. The Exchange, which offers only qualified health plans that include pediatric dental benefits, offers silver-level plans J, K, L, and M, which are, respectively, the first, second, third, and fourth lowest cost silver plans covering Y’s family. When Y’s family enrolls, Plan J is closed to enrollment. Under paragraph (f)(6) of this section, Plan J is disregarded in determining Y’s applicable benchmark plan. Plan L is Y’s applicable benchmark plan

Example 13. Benchmark plan closes to new enrollees during the year. (i) Taxpayers BB, CC, and DD each have coverage families consisting of two adults. In that rating area, Plan 2 is the second lowest cost silver plan and Plan 3 is the third lowest cost silver plan covering the two adults in each coverage family offered through the Exchange. The BB and CC families each enroll in a qualified health plan that is not the applicable benchmark plan (Plan 4) in November during the annual open enrollment period. Plan 2 closes to new enrollees the following June. Thus, on July 1, Plan 3 is the second lowest cost silver plan available to new enrollees through the Exchange. The DD family enrolls in a qualified health plan in July.

(ii) Under paragraphs (f)(1), (f)(2), (f)(3), and (f)(7) of this section, with BB’s and CC’s applicable benchmark plan for all coverage months during the year is plan 2. DD’s applicable benchmark plan is Plan 3, because Plan 2 is not open to enrollment through the Exchange when the DD family enrolls.

Example 14. Benchmark plan terminates for all enrollees during the year. The facts are the same as in Example 13, except that Plan 2 terminates for all enrollees on June 30. Under paragraphs (f)(1), (f)(2), (f)(3), and (f)(7) of this section, Plan 2 is BB’s and CC’s applicable benchmark plan for all coverage months during the year, and Plan 3 is DD’s applicable benchmark plan.

Example 15. Exchange offers only one silver-level plan. Taxpayer EE’s coverage family consists of EE, his spouse FF, and their two dependent children GG and HH, who all reside together. The Exchange for the rating area in which they reside offers only one silver-level plan that EE’s family may enroll in and the plan does not provide pediatric dental benefits. The Exchange also offers one stand-alone dental plan in which the family may enroll. Under paragraph (f)(8) of this section, the silver-level plan and the stand-alone dental plan offered by the Exchange are used for purposes of determining EE’s applicable benchmark plan under paragraph (f)(3) of this section. Moreover, the lone silver-level plan and the lone stand-alone dental plan offered by the Exchange are used for purposes of determining EE’s applicable benchmark plan regardless of whether these plans cover EE’s family under a single policy or multiples policies.

* * * * *

(n) Effective/applicability date. (1) Except as provided in paragraph (n)(2) of this section, this section applies to taxable years ending after December 31, 2013.

(2) Paragraphs (c)(4), (d)(1) and (d)(2) of this section apply to taxable years beginning after December 31, 2016. Paragraph (f) of this section applies to taxable years beginning after December 31, 2018. Paragraphs (d)(1) and (d)(2) of § 1.36B–3, as contained in 26 CFR part I edition revised as of April 1, 2016, applies to taxable years ending after December 31, 2013, and beginning before January 1, 2017. Paragraph (f) of § 1.36B–3, as contained in 26 CFR part I edition revised as of April 1, 2016, applies to taxable years ending after December 31, 2013, and beginning before January 1, 2019.

Par. 6. Section 1.36B–5 is amended by:

1. Adding a sentence to the end of paragraph (c)(3)(i).

2. Adding paragraphs (c)(3)(iii) and (h).

The additions read as follows:

* * * * *

(c) * * *

(3) * * *

(i) * * * If advance credit payments are made for coverage under the plan, the enrollment premiums reported to each family under paragraph (c)(1)(viii) of this section are the premiums allocated to the family under § 1.36B–3(h) (allocating enrollment premiums to each taxpayer in proportion to the premiums for each taxpayer’s applicable benchmark plan).

* * * * *

(iii) Partial month of coverage.—(A) In general. Except as provided in paragraph (c)(3)(iii)(B) of this section, if an individual is enrolled in a qualified health plan after the first day of a month, the amount reported for that month under paragraphs (c)(1)(iv), (c)(1)(v), and (c)(1)(viii) of this section is $0.

(B) Certain mid-month enrollments. For information reporting that is due on or after January 1, 2019, if an individual’s qualified health plan is terminated before the last day of a month, or if an individual is enrolled in coverage after the first day of a month and the coverage is effective on the date of the individual’s birth, adoption, or placement for adoption or in foster care, or on the effective date of a court order, the amount reported under paragraphs (c)(1)(iv) and (c)(1)(v) of this section is the premium for the applicable benchmark plan for a full month of coverage (excluding the premium allocated to benefits in excess of essential health benefits), and the amount reported under paragraph (c)(1)(viii) of this section is the enrollment premium for the month required to be reported under paragraphs (c)(1)(viii)(A), (B), and (C) of this section, reduced by any amounts that were refunded.

* * * * *

(h) Effective/applicability date. Except for the last sentence of paragraph (c)(3)(i) of this section and paragraph (c)(3)(iii) of this section, this section applies to taxable years ending after December 31, 2013. The last sentence of paragraph (c)(3)(i) of this section and paragraph (c)(3)(iii) of this section apply to taxable years beginning after December 31, 2018. Paragraph (c)(3) of § 1.36B–5 as contained in 26 CFR part I edition revised as of April 1, 2016, applies to information reporting for taxable years ending after December 31, 2013, and beginning before January 1, 2019.

Par. 7. Section 1.5000A–3 is amended by adding a new paragraph (e)(3)(ii)(G) to read as follows:

* * * * *

(e) * * *

(3) * * *

(ii) * * *

(G) Opt-out arrangements. [Reserved]

* * * * *

Par. 8. Section 1.6011–8 is revised to read as follows:

(a) Requirement of return. Except as otherwise provided in this paragraph (a), a taxpayer who receives the benefit of advance payments of the premium tax credit under section 36B must file an income tax return for that taxable year on or before the due date for the return (including extensions of time for filing) and reconcile the advance credit payments. However, if advance credit payments are made for coverage of an individual for whom no taxpayer claims a personal exemption deduction, the taxpayer who attests to the Exchange to the intention to claim a personal exemption deduction for the individual as part of the determination that the taxpayer is eligible for advance credit payments must file a tax return and reconcile the advance credit payments.

(b) Effective/applicability date. Except as otherwise provided, this section applies for taxable years beginning after December 31, 2016. Paragraph (a) of § 1.6011–8 as contained in 26 CFR part I edition revised as of April 1, 2016, applies to taxable years ending after December 31, 2013, and beginning before January 1, 2017.

For rules regarding the time for providing disclosure of a transaction described in section 2.01 of this notice, see § 1.6011–4(e). However, if, under § 1.6011–4(e)(1), a taxpayer is required to file a disclosure statement with respect to a transaction described in section 2.01 of this notice after November 1, 2016, and prior to May 1, 2017, that disclosure statement will be considered to be timely filed if the taxpayer alternatively files the disclosure with the Office of Tax Shelter Analysis by May 1, 2017 (because April 30 is a Sunday). In addition, for purposes of disclosure of transactions described in section 2.01 of this notice, the 90-day period provided in § 1.6011–4(e)(2)(i) is extended to 180 days.

For rules regarding the time for providing disclosure of a transaction described in section 2.01 of this notice, see § 301.6111–3(e). However, if, under § 301.6111–3(e), a material advisor is required to file a disclosure statement with respect to a transaction described in section 2.01 of this notice by January 31, 2017, that disclosure statement will be considered to be timely filed if the material advisor files the disclosure with the Office of Tax Shelter Analysis by May 1, 2017 (because April 30 is a Sunday).

(1) QI may rely on a valid Form W–8IMY provided by the partnership or trust and may rely on a withholding statement that meets the requirements of §1.1441–5(c)(3)(iv) or (e)(5)(iv), and §1.1471–3(c)(3)(iii)(B) (if the payment is a withholdable payment) and that provides information for all partners, beneficiaries, or owners together with valid Forms W–8 or, in the case of a partnership or trust that is a certified deemed-compliant FFI, documentary evidence permitted under the applicable know-your-customer rules from each partner, beneficiary, or owner, and, for a withholdable payment, documentation that meets the requirements of §1.1471–3(d) to establish the partner’s, beneficiary’s, or owner’s chapter 4 status. The withholding statement need not provide any allocation information.

(2) QI must treat payments to the partnership or trust as allocated solely to a partner, beneficiary, or owner that is subject to the highest rate of withholding under chapter 3 and must withhold at that rate.

(3) QI may pool report amounts distributed to, or included in the distributive share of, the partnership’s or trust’s direct partners, beneficiaries, or owners in chapter 3 reporting pools on Form 1042–S as described in section 8.03(B) of this Agreement.

(4) After QI has withheld in accordance with section 4.05(B)(2) of this Agreement, it may file a separate Form 1042–S for any partner, beneficiary, or owner who requests that it do so. If QI issues a separate Form 1042–S for any partner, beneficiary, or owner, it cannot include such partner, beneficiary, or owner in its chapter 3 reporting pool. If QI has already filed a Form 1042–S and included the partner, beneficiary, or owner in a chapter 3 reporting pool, it must file an amended return to reduce the amount of the payment reported to reflect the amount allocated to the recipient on the recipient’s specific Form 1042–S. QI may file a separate Form 1042–S for a partner, beneficiary, or owner only if the partnership or trust provides a withholding statement that includes allocation information for the requesting partner, beneficiary, or owner and only if the partnership or trust has agreed in writing to make available to QI or QI’s reviewer the records that substantiate the allocation information included in its withholding statement.

(5) QI may not include any payments made to a partnership or trust to which QI is applying the rules of this section 4.05 in any collective refund claim made under section 9.04 of this Agreement.

(1) QI may rely on a valid Form W–8IMY provided by the partnership or trust, together with a withholding statement described in §1.1441–5(c)(3)(iv) or (e)(5)(iv) and §1.1471–3(c)(3)(iii)(B) (if the payment is a withholdable payment) that includes all information necessary for QI to fulfill its withholding, reporting, and filing obligations under this Agreement. The withholding statement may include chapter 3 withholding rate pools for partners, beneficiaries, or owners that are not intermediaries, flow-through entities (or persons holding interests in the partnership or trust through such entities), U.S. persons, or passive NFFEs with one or more substantial U.S. owners (or one or more controlling persons that is a specified U.S. person), and the partnership or trust need not provide to QI documentation for these partners, beneficiaries, or owners. The withholding statement may also include a chapter 4 withholding rate pool of nonparticipating FFIs described in section 6.03 of this Agreement for payments of amounts subject to chapter 4 withholding. Notwithstanding the preceding sentences of this section 4.06(B)(1), the partnership or trust is required to disclose to QI any interest holder that is a passive NFFE with substantial U.S. owners (or controlling persons that are specified U.S. persons) or that is a U.S. non-exempt recipient, as well as the account holders or interest holders of any nonqualified intermediary or flow-through entity, respectively, which has an interest in the partnership or trust, and to provide all of the documentation and other information relating to those account holders and interest holders that is required for the QI, or another withholding agent, to report the payments made to those account holders and interest holders to the extent required by sections 8.02(B) and 8.05 of this Agreement.

(2) Timing of Withholding. QI must withhold on the date it makes a payment to the partnership or trust based on a withholding statement provided by the partnership or trust on which QI is permitted to rely. The amount allocated to each partner, beneficiary, or owner in the withholding statement may be based on a reasonable estimate of the partner’s, beneficiary’s, or owner’s distributive share of income subject to withholding for the year. The partnership or trust must correct the estimated allocations to reflect the partner’s, beneficiary’s, or owner’s actual distributive share and must provide this corrected information to QI on the earlier of the date that the statement required under section 6031(b) (i.e., Schedule K-1) or the Beneficiary Statement or Owner Statement is mailed or otherwise provided to the partner, beneficiary, or owner, or the due date for furnishing the statement (whether or not the partnership or trust is required to prepare and furnish the statement). If that date is after the due date (without regard to extensions) for QI’s Forms 1042 and 1042–S for the calendar year, QI may withhold and report any adjustments required by the corrected information in the following calendar year.

(3) Payments Reportable Under Chapters 3 and 4. QI shall report on Form 1042–S all amounts subject to chapters 3 and 4 withholding distributed to, or included in the distributive share of, the partnership or trust as follows:

(a) For a direct partner, beneficiary, or owner of the partnership or trust that is a nonparticipating FFI, QI shall report an amount subject to withholding using the chapter 4 reporting pool described in section 8.03(A) of this Agreement with the partnership or trust reported as a recipient.

(b) For a direct partner, beneficiary, or owner of the partnership or trust that is a foreign person for which no withholding is required under chapter 4 (other than an intermediary, agent, or flow-through entity described below), QI shall report an amount subject to chapter 3 withholding using the chapter 3 reporting pools described in section 8.03(B) of this Agreement with the partnership or trust reported as a recipient.

(c) For a direct or indirect partner, beneficiary, or owner of the partnership or trust that is a nonqualified intermediary or foreign flow-through entity, QI shall report payments of amounts subject to chapter 4 withholding in a chapter 4 withholding rate pool of nonparticipating FFIs using the chapter 4 reporting pool for such partner, beneficiary, or owner with the nonqualified intermediary or foreign flow-through entity reported as the recipient, and QI shall report payments of amounts subject to chapter 3 withholding for which no chapter 4 withholding is required by reporting the payments as made to specific recipients as described in section 8.02 of this Agreement.

(4) Form 1099 Reporting and Backup Withholding. The agreement between QI and the partnership or trust must also provide that QI shall include all reportable payments made by the partnership or trust in QI’s Forms 945 and 1099 to the extent required under this section 4.06(B)(4). QI shall file Forms 1099 and backup withhold, if required, on reportable payments made by QI to U.S. non-exempt recipient that are direct or indirect partners, beneficiaries, or owners of the partnership or trust in accordance with the terms of this Agreement.

(5) Form 8966 Reporting Requirements. The agreement between QI and the partnership or trust must also provide that QI shall report all withholdable payments made by the partnership or trust on Form 8966 to the extent required under this section 4.06(B)(5). If the partnership or trust is itself a passive NFFE and if any of its partners, beneficiaries, or owners is a passive NFFE with one or more substantial U.S. owners (or one or more controlling persons that is a specified U.S. person), QI shall file Forms 8966 to report all withholdable payments made by QI to any such passive NFFE in accordance with sections 8.04 and 8.05 of this Agreement.

(C) Other Requirements of Agency Agreement. QI shall require the partnership or trust to provide QI with all the information necessary for QI to meet its obligations under this Agreement. No provisions shall be contained in the agreement between QI and the partnership or trust that preclude, and no provisions of this Agreement shall be construed to preclude, the partnership or trust’s joint and several liability for tax, penalties, and interest under chapters 3, 4, and 61 and section 3406, to the extent that the underwithholding, penalties, and interest have not been collected from QI and the underwithholding or failure to report amounts correctly on Forms 945, 1042, 1042–S, 1099, or 8966 is due to the partnership’s or trust’s failure to properly perform its obligations under its agreement with QI. Nothing in the agreement between QI and the partnership or trust shall be construed to limit the partnership’s or trust’s requirements under chapter 4 as a certified deemed-compliant FFI, owner-documented FFI, NFFE, or exempt beneficial owner. Further, nothing in the agreement between QI and the partnership or trust shall permit the partnership or trust to assume primary chapters 3 and 4 withholding responsibility or primary Form 1099 reporting and backup withholding responsibility.

(1) QI that is an FFI. If QI is an FFI, for each account holder for whom QI is acting under this Agreement, QI is required to perform the due diligence procedures under its FATCA requirements as a participating FFI, registered deemed-compliant FFI, or registered deemed-compliant Model 1 IGA FFI to determine if the account is a U.S. account (or U.S. reportable account) and to determine each account holder that is a nonparticipating FFI and, if applicable, recalcitrant account holder (or non-consenting U.S. account). If an account holder receiving the payment is not the payee, QI is also required to establish the chapter 4 status of the payee or payees to determine whether withholding applies under chapter 4. For purposes of this section 5, with respect to documenting an account holder for chapter 4 purposes, documentary evidence also includes any documentary evidence allowed under an applicable IGA.

To the extent an account holder receives a payment with respect to which QI has determined that withholding is not required under chapter 4, QI shall obtain, unless already collected, documentation that meets the requirements of this section 5 to determine whether the account holder is a foreign person for which QI is required to withhold under chapter 3 or a U.S. payee for which QI is required to backup withhold under section 3406 or report on Form 1099 under chapter 61. See, however, section 8.06 of this Agreement providing the circumstances in which reporting of U.S. accounts (or U.S. reportable accounts) under its FATCA requirements as a participating FFI, registered deemed-compliant FFI, or registered deemed-compliant Model 1 IGA FFI satisfies QI’s Form 1099 reporting responsibilities. See Notice 2014–33, 2014–21 I.R.B. 1033, modifying the time in which QI is required to implement the applicable due diligence procedures under its FATCA requirements as a participating FFI, registered deemed-compliant FFI, or registered deemed-compliant Model 1 IGA FFI with respect to an obligation held by an entity that is opened, issued, or executed on or after July 1, 2014, and before January 1, 2015.

(2) QI that is an NFFE. If QI is an NFFE, QI is required to document the chapter 4 status of each account holder for whom QI is acting to determine if withholding and reporting apply under section 1471 or 1472 on withholdable payments made to the account holder. QI is required to obtain, unless already collected, a valid Form W–8 or Form W–9 from each account holder to determine whether QI is required to withhold under chapter 3 or 4 or report on Form 1099 under chapter 61 and backup withhold under section 3406. The allowance in this section 5 for QI to obtain documentary evidence does not apply if QI is an NFFE. QI may, however, obtain appropriate documentary evidence as additional documentation to establish the foreign status of an account holder.

Sec. 5.02. Documentation for Foreign Account Holders. QI may treat an account holder as a foreign beneficial owner of an amount if the account holder provides a valid Form W–8 (other than Form W–8IMY unless provided by a QI that is acting as a QDD or assuming primary withholding responsibility for a substitute interest payment) or valid documentary evidence that supports the account holder’s status as a foreign person. QI may not treat an account holder that provides documentation indicating that it is a bank, broker, intermediary, or agent (such as an attorney) as a beneficial owner unless QI receives a statement, in writing and signed by a person with authority to sign such a statement, stating that such account holder is the beneficial owner of the income. Further, QI may not reduce the rate of withholding with respect to an indirect account holder that is a foreign beneficial owner unless the certification provided by the direct account holder is a valid Form W–8IMY, and then only to the extent that QI can reliably associate the payment with valid documentation that establishes that withholding does not apply under chapter 4 in the case of a withholdable payment made to the account holder and establishes that the indirect account holder is entitled to a reduced rate of withholding under chapter 3.

Sec. 5.03. Beneficial Owner’s Claim of Treaty Benefits. To the extent an account holder receives a payment that is not subject to withholding under chapter 4, QI may not reduce the rate of withholding under chapter 3 based on a beneficial owner’s claim of treaty benefits unless QI obtains the documentation required by section 5.03(A) of this Agreement. In addition, QI agrees to establish procedures to inform account holders of the terms of limitation on benefits provisions of a treaty (whether or not those provisions are contained in a separate article entitled Limitation on Benefits) under which the account holder is claiming benefits. For accounts held by an entity opened or documented on or after January 1, 2017, QI is required to obtain a Form W–8BEN–E with the appropriate limitation on benefits certification or, if QI is allowed to and obtains documentary evidence, the written certification included in the treaty statement as described in section 5.03(B) of this Agreement. For accounts maintained by QI prior to January 1, 2017, that were documented with documentary evidence and for which treaty benefits are being claimed, QI is required to obtain the appropriate limitation on benefits statement prior to January 1, 2019.

(A) Treaty Documentation. The documentation required by this section 5.03(A) is as follows:

(1) The account holder has provided a properly completed Form W–8BEN or Form W–8BEN–E on which a claim of treaty benefits is made, including, for an entity, the appropriate limitation on benefits and section 894 certifications, as provided in §1.1441–6(b)(1). A U.S. TIN or foreign TIN shall not be required, however, if the beneficial owner is a direct account holder. An indirect account holder is required to have a either a U.S. TIN or foreign TIN to claim treaty benefits unless it is claiming treaty benefits on income from marketable securities;

(2) The account holder has provided documentary evidence that has been obtained pursuant to the know-your-customer rules that apply to the account holder, and the account holder, if it is an entity, has made the treaty statement (if applicable) required by section 5.03(B) of this Agreement; or

(3) The account holder provides the type of documentary evidence required under §1.1441–6 to establish entitlement to a reduced rate of withholding under a treaty, and the account holder, if it is an entity, has made the treaty statement (if applicable) required by section 5.03(B) of this Agreement.

(B) Treaty Statement. The treaty statement required by an entity account holder under this section 5.03(B) is as follows:

[Name of entity account holder] meets all provisions of the applicable treaty that are necessary to claim a reduced rate of withholding, including any limitation on benefits provisions, and derives the income within the meaning of section 894, and the regulations thereunder, as the beneficial owner.

QI is only required to obtain the treaty statement required by this section 5.03(B) from an account holder that is an entity. QI shall not be required to obtain a treaty statement required by this section 5.03(B) from an individual who is a resident of an applicable treaty country or from the government, or its political subdivisions, of a treaty country. QI is required to collect and report (as required on Form 1042–S) the specific category of limitation on benefits provision from all of its entity account holders, including a government (or its political subdivisions).

Sec. 5.04. Documentation for International Organizations. To the extent an account holder receives a payment that is not subject to withholding under chapter 4, QI may not treat the account holder as an international organization entitled to an exemption from withholding under section 892 unless the name provided on the documentation (including a Form W–8EXP) is the name of an entity designated as an international organization by executive order pursuant to 22 United States Code 288 through 288(f) and the documentation is valid under section 5.10 of this Agreement. If an international organization is not claiming benefits under section 892 but under another Code exception, the provisions of section 5.02 of this Agreement shall apply rather than the provisions of this section 5.04.

If the responsible officer has identified an event of default or a material failure that QI has not corrected as of the date of this certification (or such an event of default or material failure has otherwise been identified), the responsible officer cannot make the certification of effective internal controls under this Part A and must make the qualified certification under Part B, below.

The responsible officer certifies to the following, check each statement to confirm:

If the responsible officer has identified an event of default or a material failure that QI has not corrected as of the date of this certification, check the applicable statements to confirm:

1. QI filed an amended Form 1042 to report additional tax liability based on the results of the periodic review or the findings of any other procedure, process, or review undertaken by the responsible officer in preparation for his or her certification of internal controls. Y/N

Check the applicable statements to confirm. If QI is a Compliance QI and identifies a material failure or event of default, it should also indicate which QI in the consolidated compliance group is associated with the material failure or event of default. For 2017, a material failure relevant to a QDD has not occurred unless the QDD failed to make a good faith effort to comply with the section 871(m) regulations and the relevant provisions of the QI agreement relating to its QDD obligations.

1. The responsible officer has determined that as of the date of the review, there are no material failures with respect to QI’s compliance with the QI Agreement.

2. The responsible officer has determined that as of the date of the review, there are one or more material failures with respect to QI’s compliance with the QI Agreement and that appropriate actions have been or will be taken to prevent such failures from reoccurring.

a. The following material failures were identified:

3. The material failure identified in the review has been corrected by the time of this certification. Y/N/NA

4. Did any PAI of QI inform QI that it has had a material failure with respect to its agreement with QI? Y/N/NA

5. Did any partnerships or trusts to which QI applies the agency and/or joint account option inform QI that it has had a material failure with respect to its obligations as described in the QI Agreement? Y/N/NA

6. An event of default as defined in section 11.06 of the QI Agreement has been identified. Y/N

Check the applicable statements to confirm.

1. For the most recent certification period, the periodic review has not identified any significant change in circumstances, as described in section 11.04(A), (D), (E), or (H) of the QI Agreement.

2. For the most recent certification period, the periodic review has identified the following significant change(s) in circumstances:

3. Describe any significant changes in circumstances identified in Question 2 (and, if 2.d is selected, include the date on which the QI ceased to qualify as an eligible entity).

Complete the applicable section and check the applicable statement to confirm.

Sample of QI Accounts. The reviewer selects a random sample of accounts from a portion of the population of all QI accounts. The portion of the population will consist of: (1) all accounts held by U.S. persons (or account holders presumed to be U.S. persons) that received a reportable payment and (2) all accounts held by non-U.S. persons (or account holders presumed to be non-U.S. persons) that received a reportable amount.

(a) Sample Size Calculations. If PAI accounts or Agency Accounts have been added to the sample of QI accounts because the PAI or Agency Partnership or Trust did not perform its own periodic review, a separate sample size calculation should also be performed for the PAI accounts or the Agency Accounts as if they were part of a separate QI sample. If multiple samples are used, the sample size for the each sample (including for any additional PAI accounts or Agency Accounts) is calculated independently. The sample size for each sample is the lesser of (1) the number of sample units determined using the sample formula in section II.A.2(c) , or (2) 25 percent of the total number of sample units in the population. However, in determining the sample size, the reviewer must adhere to the guidelines for minimum stratum sample sizes in sections II.A.3 and II.A.4 of this Appendix. This may result in a sample size greater than the sample size resulting from using the formula in sections II.A.2(b) and II.A.2(c) of this section. The minimum sample size of any sample shall not be less than 60. A sample size larger than calculated under this section may be used without contacting the Financial Intermediaries Program.

(b) Sample Size Adjustments. The variable P “error rate” should be set equal to 5 percent for the sample of QI accounts.

(c) Sample Formula. The number of sample units to be reviewed is determined using the sample formula as follows:

where t= 1.645 (confidence coefficient at 95 percent one-sided)

P= 5 percent (error rate) for the QI account sample

Q= 1-P

d = 2 percent (precision level)

N= total population

Sample of QI Accounts. The reviewer must segregate all of the QI accounts into the following strata. While segregating accounts, steps should be taken to ensure all partnerships and trusts for which the QI has utilized the joint account option are placed into the appropriate direct account stratum (stratum 1) while the underlying partners, beneficiaries, or owners of the partnerships or trusts are excluded from the indirect stratum (stratum 3). Such underlying accounts will be selected for review in accordance with section II.A.7 of this Appendix.

Further substratification by dollar amounts may be used in accordance with section II.A.6 of this Appendix.

The reviewer must allocate the number of sample units for each sample (including for any PAI accounts or Agency Accounts added to the sample of QI accounts) independently of the other samples. The reviewer must allocate the number of sample units in the sample determined under section II.A.2 of this Appendix to each stratum described in section II.A.3 by multiplying the number of sample units in the sample, as determined under section II.A.2, by a fraction, the numerator of which is the total number of sample units in the stratum and the denominator of which is the total number of sample units in the population. If the allocation of sample units to a stratum using the above method results in a sample size of a stratum that is less than 60 and less than the actual number of sample units in the stratum, the minimum allocation to that stratum is the lesser of (1) 60 sample units or (2) the total number of sample units in the stratum. If there are fewer than 60 sample units in any stratum, all sample units in that stratum must be examined, and the difference between 60 and the number of sample units in the stratum must be reallocated to the remaining strata on a pro rata basis. If there are 60 or more sample units in the stratum, but the allocation, as determined under the fraction above, is less than 60 sample units, the number of sample units to be used in the sample from that stratum is 60.

The reviewer must select for the documentation review sample units from each stratum identified in section II.A.3 of this Appendix by using a random number generator. Random numbers should be drawn separately for each sample (including for any PAI or Agency Account added to the sample of QI accounts) including the use of separate seeds. Information regarding the random number generator used must be included in the records as required in section III.D of this Appendix. This information must be sufficient to allow the IRS to replicate the random numbers as well as to allow the reviewer to continue the sequences of randomly generated numbers if it is determined additional sample units need to be reviewed. This information must include the name and version of the random number generator, the seed numbers used or generated, specification of any options selected, and the computer equipment on which it was run.

For each sample (including for any PAI or Agency Account added to the sample of QI accounts), the reviewer may further stratify by dollar amounts for that sample without submitting a request for approval when the reviewer is otherwise selecting the sample in accordance with this Appendix. Reportable amounts for foreign recipients and reportable payments for U.S. recipients are to be considered in the substratification. If the reviewer chooses to substratify under this section, the reviewer must comply with the following rules:

When reviewing documentation of partners, beneficiaries, or owners of a partnership or trust to which a QI has applied the joint account option to determine the rate of withholding the QI should have applied to the partnership or trust, the reviewer may limit the review to the number of partners, beneficiaries, or owners by referring to the table below.