These regulations finalize the rules proposed in REG–108508–08 (published April 15, 2008), providing guidance regarding the minimum required contribution rules that apply to sponsors of single-employer defined benefit plans under section 430 and the related excise tax rules of section 4971. These regulations also make changes to § 1.430(f)–1 (relating to elections with respect to a plan’s prefunding balance and funding standard carryover balance), § 1.430(h)(2)–1 (relating to interest rates) and § 1.436–1 (relating to benefit restrictions).

Section 1.430(a)–1 provides rules under section 430(a) for determining the minimum required contribution for a plan year for a single-employer defined benefit plan (including a multiple employer plan under section 413(c)) subject to section 430. The determination of the amount of the minimum required contribution for a plan year depends on whether the value of plan assets, as reduced to reflect certain funding balances pursuant to section 430(f)(4)(B) (but not below zero), is less than or at least equal to the plan’s funding target for the plan year. If this value of plan assets is less than the funding target for the plan year, the minimum required contribution for that plan year is equal to the sum of the plan’s target normal cost for the plan year plus any applicable shortfall amortization installments and waiver amortization installments. If this value of plan assets equals or exceeds the funding target for the plan year, the minimum required contribution for that plan year is equal to the target normal cost of the plan for the plan year reduced (but not below zero) by any such excess.

The regulations provide that the shortfall amortization installments with respect to a shortfall amortization base established for a plan year generally are the annual amounts necessary to amortize that shortfall amortization base in level annual installments over the 7-year period beginning with that plan year. As provided in § 1.430(h)(2)–1(f)(2), these installments are determined assuming that the installments are paid on the valuation date for each plan year and using the interest rates applicable under section 430(h)(2)(C) or (D). The shortfall amortization installments are determined using the interest rates that apply for the plan year for which the shortfall amortization base is established and are not redetermined in subsequent plan years to reflect changes in interest rates under section 430(h)(2) for those subsequent plan years. The regulations also provide that shortfall amortization installments are not redetermined even if the valuation date for a plan changes after the plan year for which the shortfall amortization base was established. In such a case, the dates on which the installments are assumed to be paid are changed to the anniversaries of the new valuation date, and the difference in present value attributable to this change is reflected in any new shortfall amortization base.

Under the regulations, in general, a shortfall amortization base is established for a plan year only if the value of plan assets (reduced, but not below zero, by the prefunding balance if an election is made to use any portion of the prefunding balance to offset the minimum required contribution for the plan year) is less than the funding target for the plan year. This shortfall amortization base (which can be either positive or negative) is equal to the funding shortfall for the plan year, minus the sum of the present values of any remaining shortfall amortization installments and waiver amortization installments (determined in accordance with § 1.430(h)(2)–1(f)(2) using the interest rates that apply for the current plan year rather than the amortization rates that were applied when the amortization installments were determined). For this purpose, the funding shortfall for any plan year is the excess (if any) of the funding target for the plan year over the value of plan assets for the plan year (as reduced to reflect the subtraction of the funding standard carryover balance and prefunding balance to the extent provided under § 1.430(f)–1(c)).

Commenters noted that the special rule of section 430(c)(5) can produce anomalous results in certain cases where the prefunding balance is greater than the excess of the plan assets (without reduction for such balance) over the funding target. One case in which this occurs is for a plan with no funding standard carryover balance and actuarial gains that would have caused the shortfall amortization base (and related shortfall amortization installments) to be negative. In such a case, if a small portion of the prefunding balance is used to offset the minimum required contribution, then it is possible that the minimum required contribution would be reduced by even more than the amount so used.

Another case raised by commenters – with results that are not only anomalous but also potentially circular — is a situation in which a plan has a funding standard carryover balance and the plan sponsor’s election to use a portion of the prefunding balance (in addition to using the funding standard carryover balance) to offset the minimum required contribution would result in the establishment of a negative shortfall amortization base and a minimum required contribution that is smaller than the funding standard carryover balance. As a result, none of the prefunding balance can be used to offset the minimum required contribution (because no prefunding balance can be used to offset the minimum required contribution as long as the plan has a funding standard carryover balance), and the minimum required contribution must be recalculated. This results in the recalculated minimum required contribution being large enough that some of the prefunding balance would be needed to fully offset that minimum required contribution, and the first calculation would once again apply.

After consideration of these comments, the IRS and the Treasury Department have concluded that the statutory provisions require this result in these limited factual situations. However, a plan sponsor can avoid the circular results by electing to reduce the funding standard carryover balance to an amount that is too small to offset the entire minimum required contribution. After that reduction, in order to offset the entire minimum required contribution, the plan sponsor must use the full remaining funding standard carryover balance plus at least some portion of the prefunding balance. The regulations include an example of a plan sponsor reducing the funding standard carryover balance in order to avoid the circularity (Example 10 of § 1.430(a)–1(g)).

The proposed regulations did not count contributions under section 436(b)(2), (c)(2), and (e)(2) either toward minimum required contributions for the current year or as included in plan assets for that year. Commenters suggested that any contribution under section 436(b)(2), (c)(2), or (e)(2) should be reflected in plan assets for purposes of section 430 if the corresponding increase in funding target is required to be reflected. This would have the effect of reducing the funding shortfall for the plan year. However, under sections 436(b)(2), (c)(2), and (e)(2), these contributions are characterized as “in addition to any minimum required contribution under section 430.” The final regulations adopt the rule as proposed because it reflects this requirement of the statute. This rule is also consistent with section 430(f)(6)(B)(iii), which excludes section 436 contributions from the amount that may be added to the plan’s prefunding balance. The final regulations do not include any special rule that would reduce the funding shortfall for a plan year to take into account section 436 contributions for the plan year (by either including section 436 contributions in plan assets or modifying the definition of funding shortfall). Any such section 436 contributions will be part of plan assets when measured for the following plan year and, accordingly, will reduce any positive shortfall amortization base (or increase any negative shortfall amortization base) that would otherwise be established for that following year.

Under the regulations, the waiver amortization installments with respect to a waiver amortization base established for a plan year are the annual amounts necessary to amortize that waiver amortization base in level annual installments over the 5-year period beginning with the following plan year. As provided in § 1.430(h)(2)–1(f)(2), these installments are determined assuming that the installments are paid on the valuation date for each plan year and using the interest rates applicable under section 430(h)(2). Thus, if a plan uses the segment rates, the installments are determined by applying the first segment rate to the first four installments and the second segment rate to the fifth (and final) installment. The waiver amortization installments established with respect to a waiver amortization base are determined using the interest rates that apply for the plan year for which the waiver is granted (even though the first installment with respect to the waiver amortization base is not due until the subsequent plan year) and are not redetermined in subsequent plan years to reflect changes in interest rates under section 430(h)(2) for those subsequent plan years.

The regulations provide rules for determining the amount of a minimum required contribution for a short plan year. Under the regulations, the amortization installments are prorated for a short plan year. The regulations do not provide for any proration of the target normal cost. Instead, the determination of target normal cost must reflect benefits that accrue or are expected to accrue during the short plan year.^[6] The regulations also provide rules for the treatment of amortization installments in subsequent plan years to take into account the proration of these installments for short plan years and to clarify the treatment of these installments in the event of a change in valuation date.

In light of the rules in the proposed regulations for determining the amount of a minimum required contribution for a short plan year (which would normally be followed by another plan year with its own minimum required contribution), questions have arisen about how to determine the minimum required contribution for a plan year if the plan terminates before the last day of the year. Under Revenue Ruling 79–237 (1979–2 CB 190) (see 26 CFR 601.601(d)(2)(ii)(b)), the minimum funding requirements apply for the year that a plan terminates but not for later years. These regulations clarify that the rules for short plan years apply for the year of termination by specifying that if a plan terminates before the last day of a plan year, then, for purposes of section 430, the plan is treated as having a short plan year that ends on the termination date. As a result, the minimum required contribution for such a plan is determined based on that short plan year. If a plan terminates before the date that would otherwise have been the valuation date for a plan year, then the valuation date for the plan year must be changed so that it falls within the short plan year.

The rules for terminated plans include a definition of termination date that is consistent with the 1982 proposed regulations under § 1.412(b)–4(d)(1) and Revenue Ruling 89–87 (1989–2 CB 2) (see 26 CFR 601.601(d)(2)(ii)(b)). These final regulations provide that, in the case of a plan subject to Title IV of ERISA, the termination date is the plan’s termination date established under section 4048(a) of ERISA.

In the case of a plan not subject to Title IV of ERISA, the regulations provide that the termination date is the plan’s termination date established by the plan administrator, provided that the termination date may be no earlier than the date on which all actions necessary to effect the plan termination (other than the distribution of plan assets) are taken. However, a plan is not treated as terminated on that date if the plan assets are not distributed as soon as administratively feasible after that date. Whether plan assets are distributed as soon as administratively feasible is determined based on all the relevant facts and circumstances. A distribution of plan assets that was delayed merely for the purpose of obtaining a higher value than current market value is generally not deemed to have been made as soon as administratively feasible. Additionally, if the plan assets are not distributed within one year following the plan’s termination date established by the plan administrator, the distribution is presumed not to have been made as soon as administratively feasible. However, a plan is not treated as failing to meet the requirement to make distributions of plan assets as soon as administratively feasible after that date to the extent that a delay in distributing plan assets is attributable to either: (1) circumstances beyond the control of the plan administrator; or (2) the period of time necessary to obtain a determination letter from the Commissioner on the plan’s qualified status upon its termination, provided that the request for a determination letter is timely and the distributions of plan assets are made as soon as administratively feasible after the letter is obtained.

The regulations update the 2009 regulations to reflect the modification under HATFA to the 5-year period for which the first segment rate applies. In accordance with section 430(h)(2)(C)(i) prior to its amendment by HATFA, § 1.430(h)(2)–1(b)(2)(i) provided that, for a plan with a valuation date that is the first day of the plan year, the first segment rate was used to determine present value of benefits expected to be payable during the 5-year period beginning on the first day of the plan year. Section 1.430(h)(2)–1(b)(2)(ii), labeled “Plans with valuation dates other than the first day of the plan year,” was reserved. The preamble to the 2009 regulations notes that the IRS and the Treasury Department continue to believe that applying the first segment rate to benefits that are expected to be payable during the 5-year period beginning on the valuation date is the best method of valuing assets and liabilities as of the valuation date. Because section 430(h)(2)(C)(i) was then inconsistent with that interpretation and it was anticipated that a technical correction might later adopt that approach, the 2009 regulations reserved the issue of guidance on the interest rates to be used by plans with valuation dates other than the first day of the plan year.

This anticipated technical correction was made in section 2003(d) of HATFA, and the regulations reflect this technical correction. Under the regulations, in general, the first segment rate is used to determine the present value of benefits expected to be payable during the 5-year period beginning on the valuation date for the plan year. However, with respect to a plan year beginning before January 1, 2014, for a plan with a valuation date other than the first day of the plan year, the 5-year period beginning on the first day of the plan year is permitted to be used in lieu of the 5-year period beginning on the valuation date. Thus, taxpayers must follow the statute as amended for this technical correction for plan years beginning on or after January 1, 2014, and are permitted to apply this technical correction for earlier years as well.

The regulations under section 430(j) provide rules related to the payment of minimum required contributions, including rules for the payment of quarterly contributions, liquidity requirements, and determining the plan year to which a contribution applies. Under these rules, if the plan has unpaid minimum required contributions that have not yet been corrected at the time a contribution is made, then the contribution is treated as a contribution for the earliest plan year for which there is an unpaid minimum required contribution to the extent necessary to correct that unpaid minimum required contribution.

Any amount of the contribution in excess of the amount needed to correct that unpaid minimum required contribution is treated as a contribution for the next earliest plan year for which there is an unpaid minimum required contribution that has not yet been corrected to the extent necessary to correct that unpaid minimum required contribution. This allocation to the earliest year with unpaid minimum required contributions is automatic and must be shown on the actuarial report (Schedule SB, “Single-Employer Defined Benefit Plan Actuarial Information” of Form 5500, “Annual Return/Report of Employee Benefit Plan”) for the earliest plan year for which a timely contribution could be allocated.

The regulations further provide that if the plan has no unpaid minimum required contributions for prior plan years at the time the contribution is made, or a portion of the contribution corrects all unpaid minimum required contributions, then the contribution (or the remainder of the contribution which is not used to correct an unpaid minimum required contribution) made during the current plan year but before the deadline for contributions for a prior plan year may be designated as a contribution for either that prior plan year or the current plan year. This designation is established by the completion (and filing, if required) of the actuarial report (Schedule SB, “Single-Employer Defined Benefit Plan Actuarial Information” of Form 5500, “Annual Return/Report of Employee Benefit Plan”) for the plan year for which the contribution is designated, and this designation cannot be changed after the actuarial report is completed (and filed, if required) except as provided in guidance published in the Internal Revenue Bulletin. The regulations provide that any payment of the minimum required contribution under section 430 for a plan year that is made on a date other than the valuation date for that plan year is adjusted for interest for the period between the valuation date and the payment date, generally using the effective interest rate for the plan for that plan year determined pursuant to § 1.430(h)(2)–1(f)(1). The direction of the adjustment depends on whether the contribution is paid before or after the valuation date for the plan year. If the contribution is paid after the valuation date for the plan year, the contribution is discounted to the valuation date. If the contribution is paid before the valuation date for the plan year (which could only occur in the case of a small plan described in section 430(g)(2)(B)), the contribution is increased for interest to the valuation date.

Under the regulations, a payment of the minimum required contribution under section 430 for a plan year can be made no earlier than the first day of the plan year. The deadline for any payment of any minimum required contribution for a plan year is 8% months after the close of the plan year. If any portion of a minimum required contribution is not paid by this deadline, an excise tax applies under section 4971.

The regulations provide rules for accelerated quarterly contributions for plans with funding shortfalls. These rules are similar to the rules provided under Notice 89–52 (1989–1 CB 692) (see 26 CFR 601.601(d)(2)(ii)(b)), but have been updated to reflect statutory changes. These statutory changes include changes regarding which plans are subject to the quarterly contribution requirements as well as the interest rates applicable to missed quarterly contributions.

Under the regulations, in any case in which a plan has a funding shortfall for the preceding plan year, the employer maintaining the plan must make required quarterly installments for the current plan year. The amount of each required quarterly installment is equal to 25 percent of the required annual payment. For this purpose, the required annual payment is equal to the lesser of 90 percent of the minimum required contribution under section 430(a) for the plan year or 100 percent of the minimum required contribution under section 430(a) (determined without regard to any funding waiver under section 412) for the preceding plan year. These minimum required contributions are determined under section 430 as of the valuation date for each year and are not adjusted for interest. The regulations provide that, for purposes of determining the required annual payment, the minimum required contribution for a plan year is determined without reflecting the use of the prefunding balance or funding standard carryover balance to offset the minimum required contribution for either the current year or the prior year and without regard to any installment acceleration amount under section 430(c)(7).

Pursuant to section 430(j)(3)(C), the regulations provide that the due dates for the four required quarterly installments with respect to a full plan year are as follows: the first installment is due on the 15th day of the 4th plan month, the second installment is due on the 15th day of the 7th plan month, the third installment is due on the 15th day of the 10th plan month, and the fourth installment is due on the 15th day following the end of the plan year. In the case of a short plan year, the regulations provide rules for determining the amount of the required quarterly installments and the due dates for those installments.^[7] The regulations also provide rules for determining the amount of the required quarterly installments if the prior plan year was a short plan year and rules for determining the plan month in the case of a plan year that does not begin on the first day of a calendar month.

As was the case in Notice 89–52, the regulations provide that a plan sponsor generally can use a plan’s funding balances to satisfy quarterly contribution requirements. However, this rule is subject to the limitation on the use of funding balances by underfunded plans pursuant to section 430(f)(3)(C). Consistent with the approach taken in Notice 89–52, a contribution for a prior plan year in excess of the required minimum contribution must actually have been made and the plan sponsor’s election to add the excess to the prefunding balance must have taken effect before a plan can elect to use the corresponding portion of the prefunding balance to satisfy the quarterly contribution requirements. A plan sponsor’s election to use the plan’s funding balances under section 430(f) satisfies the requirement to pay an installment on the date of the election, to the extent of the amount elected, as adjusted with interest at the plan’s effective interest rate under section 430(h)(2)(A) for the plan year from the election date through the due date of the installment. The amount of a plan’s funding balances available for such an election is increased with interest from the beginning of the plan year to the date of the election. The net effect of these two adjustments is an increase in the plan’s funding balances from the beginning of the plan year to the due date of the installment.

A plan sponsor that elects to use the plan’s prefunding balance or funding standard carryover balance toward satisfaction of the plan’s quarterly contribution requirement before the plan’s effective interest rate for the plan year has been determined should assume, in order to ensure that the quarterly contribution requirements are satisfied, that the effective interest rate is equal to the lowest of the three segment rates (generally the first segment rate) to adjust the elected amount. Because the satisfaction of these installments is determined on a cumulative basis, if the use of funding balances is more than enough to satisfy an installment requirement, then the excess is carried forward to use to satisfy later installments.

The preamble to the proposed regulations noted that the proposed rules under section 430(f) would have provided that the amount of the funding balance used to satisfy the quarterly contribution requirements could not later be added back to the prefunding balance. The October 2009 final regulations under section 430(f) provide a different rule. Under those final regulations, to the extent that a contribution is included in the present value of excess contributions solely because the minimum required contribution has been offset by an election to use the funding standard carryover balance or prefunding balance, the contribution is adjusted for investment experience to reflect the actual rate of return on plan assets under the rules of § 1.430(f)–1(b)(3). Thus, to the extent that a quarterly installment is satisfied through the use of a funding balance but the plan sponsor replenishes its funding balances by subsequently making a contribution for the plan year that is added to the prefunding balance, the amount that may be added to the prefunding balance on account of that subsequent contribution is based on the actual rate of return for the plan year.

The proposed regulations would have credited interest on an early election to use a funding balance for purposes of satisfying the quarterly contribution requirement, but would not have credited interest on an early contribution for this purpose. Commenters asked for early contributions to be credited with interest toward quarterly contribution requirements on the same basis as an early election to use a funding balance. The final regulations make this change.

For required installments due after the valuation date, the proposed regulations would have provided that, if the employer fails to pay the full amount of a required installment when due, then the contribution that constitutes a late payment of the required installment for the period of time that begins on the due date for the required installment and that ends on the date of payment is adjusted using the effective interest rate for the plan for that plan year determined pursuant to § 1.430(h)(2)–1(f)(1) plus 5 percentage points. This increased interest rate would not have applied to installments that are due before the valuation date for the plan year because the application of an increased interest rate for such a contribution would not have had the intended effect of increasing the minimum required contribution and section 430(j)(3) did not provide for special rules for valuation dates other than the beginning of the plan year. The proposed regulations included a reserved paragraph for the treatment of quarterly installments that are due before the valuation date. However, the preamble to the proposed regulations described a rule that the IRS and the Treasury Department were considering for inclusion in the final regulations if legislation were enacted authorizing special rules for the application of the quarterly installment requirements for plans with valuation dates other than the first day of the plan year.

Section 101(b)(2)(G)(iii) of WRERA added section 430(j)(3)(E)(iii) which provides authority for special quarterly contribution rules for plans with valuation dates other than the first day of the plan year. Pursuant to this authority, the final regulations provide for any late quarterly installment (and any late election to use the funding balances to satisfy a quarterly installment) to be discounted for interest from the date of the late contribution or election to the due date for the installment using an interest rate equal to the plan’s effective interest rate under section 430(h)(2)(A) for the plan year plus 5 percentage points. The discounted amount is then treated as if it were contributed or elected on the due date and further adjusted for interest from the due date to the valuation date. This approach is mathematically equivalent to the approach suggested in the preamble of the proposed regulations if compound interest is used.

The proposed regulations would have permitted plans to satisfy the requirement to pay quarterly installments with an election to use funding balances. The preamble to those regulations asked for comments on the utility of standing elections with respect to funding balances. Commenters uniformly favored permitting this use of standing elections.

These final regulations include rules for providing a standing election to satisfy quarterly installments. Under these rules, a plan sponsor may provide a standing election in writing to the plan’s enrolled actuary to use the funding standard carryover balance and the prefunding balance to satisfy any otherwise unpaid portion of a required installment under section 430(j)(3). The otherwise unpaid portion of a required installment is the amount necessary to satisfy the required installment rules under section 430(j) based on quarterly installment amounts equal to 25 percent of the minimum required contribution under section 430 for the preceding plan year. Under the regulations, if the amount of the prefunding and funding standard carryover balances available is less than the amount needed to satisfy any otherwise unpaid portion of a required installment, then the entire amount available will be used under the standing election. Any election made pursuant to a standing election is deemed to occur on the later of the last date for making the required installment under section 430(j)(3) and the date the standing election is provided to the enrolled actuary.

The regulations provide that, generally, any standing election to use the funding balances to satisfy quarterly installments remains in effect for the plan with respect to the enrolled actuary named in the election, unless the standing election is revoked or the plan’s enrolled actuary is changed. However, a plan sponsor may suspend operation of a standing election for the remainder of a plan year by providing written notice to the enrolled actuary. In addition, if the current year’s minimum required contribution has been determined by the plan’s enrolled actuary, the plan sponsor may replace the standing election for the remainder of the plan year with a formula election to use (to the extent available) the funding balances as necessary so that the remaining required installments satisfy the required installment rules under section 430(j) based on quarterly installment amounts taking into account the determination of the current year’s minimum required contribution.

The regulations provide rules for the liquidity requirements that generally apply to plans for which quarterly contributions are required. Under the regulations, if a plan sponsor of a plan (other than a small plan described in section 430(g)(2)(B)) is required to pay quarterly installments pursuant to section 430(j)(3), then the plan sponsor is treated as failing to pay the full amount of the required installment for a quarter to the extent that the value of the liquid assets contributed after the end of that quarter and on or before the due date for the installment is less than the liquidity shortfall (as defined in section 430(j)(4)(E)) for that quarter. Thus, in order to satisfy the quarterly contribution requirement for a quarter, liquid assets in the amount of the liquidity shortfall must be contributed after the end of that quarter and on or before the due date for the installment. However, the regulations provide that if the amount of a required installment for a quarter is increased by reason of this rule, this increase generally is limited to the amount which, when added to the current required installment (determined without regard to the increase) and prior required installments for the plan year, is necessary to increase the funding target attainment percentage for the plan year to 100 percent (taking into account the expected increase in the funding target due to benefits accruing or earned during the plan year). The use of funding balances or the contribution of illiquid assets cannot remedy a liquidity shortfall.^[8]

The regulations provide that the term liquidity shortfall generally means, with respect to any required installment, an amount equal to the excess (as of the last day of the quarter for which that installment is due) of the base amount with respect to the quarter, over the value (as of the last day of the quarter) of the plan’s liquid assets. For this purpose, the regulations provide that the term base amount generally means, with respect to any quarter, an amount equal to three times the sum of the adjusted disbursements from the plan for the 12 months ending on the last day of such quarter. However, if the generally applicable base amount for a quarter exceeds an amount equal to two times the sum of the adjusted disbursements from the plan for the 36 months ending on the last day of the quarter and the enrolled actuary for the plan certifies to the satisfaction of the Commissioner that such excess is the result of nonrecurring circumstances, the base amount with respect to that quarter is determined without regard to amounts related to those nonrecurring circumstances.

In response to comments, the regulations provide special rules for applying the liquidity requirements to a multiple employer plan to which section 413(c)(4)(A) applies.^[9] Under these rules, the liquidity requirement is satisfied for the plan if it would be satisfied if the plan were a single-employer plan that is not a multiple employer plan. However, if the plan does not satisfy the liquidity requirement on this basis, then the liquidity requirement must be applied separately for each employer under the plan, as if each employer maintained a separate plan. In this case, the value of plan assets as of the end of each quarter under a multiple employer plan must be allocated among the employers sponsoring the plan.

The rules under the regulations relating to the liquidity requirements are similar to the rules provided under Revenue Ruling 95–31, but have been updated to reflect statutory changes. For example, the definition of liquid assets under the proposed regulations is the same as the definition of liquid assets under Revenue Ruling 95–31. Unlike Revenue Ruling 95–31, the regulations measure satisfaction of a liquidity shortfall by reference to contributions made after the end of the quarter and by the due date for the installment (while including contributions made during the plan quarter in plan assets). Although this may appear to be a change from the rules of Revenue Ruling 95–31, the two formulations are mathematically identical.

Under section 430(j)(4)(C), any unpaid liquidity amount is treated as unpaid until the close of the quarter in which the due date for that installment occurs. Under the proposed regulations, section 430(j)(4)(C) would have applied only for purposes of applying the additional interest for late quarterly installments, and the unpaid liquidity amount due during a quarter would have been treated as unpaid until a contribution of liquid assets satisfied that requirement, even if the period of underpayment extended beyond the end of the quarter. Some commenters objected to the approach in the proposed regulations and suggested that section 430(j)(4)(C) should be interpreted so that the unpaid liquidity amount is treated as paid at the end of the quarter for all purposes.

After consideration of the comments received, the IRS and the Treasury Department have modified the final regulations to provide that, pursuant to section 430(j)(4)(C), any portion of a required installment for a quarter that is treated as unpaid by reason of the liquidity requirements is treated as unpaid until the close of the quarter in which the due date for the installment occurs (without regard to any contribution of liquid assets that is made after the due date of the required installment). After the close of the quarter in which the due date for such an installment occurs, any portion of the required installment that was treated as unpaid solely by reason of the liquidity requirements is no longer treated as unpaid (but any portion of the required installment that would be treated as unpaid without regard to the liquidity requirements must be satisfied in accordance with the generally applicable continuing requirement to pay quarterly installments). The requirement to satisfy a liquidity shortfall applies separately with respect to each quarter. In many cases, the failure to contribute sufficient liquid assets to satisfy a liquidity shortfall for a quarter will result in a liquidity shortfall for future quarters until sufficient liquid assets have been contributed to satisfy the liquidity shortfall.

Section 430(j)(3)(A) provides that if the employer fails to pay the full amount of a required installment, the amount of interest charged on the underpayment for the period of underpayment is determined by increasing the rate of interest otherwise used to adjust the contribution to the valuation date under section 430(j)(2) by 5 percentage points. In general, the period of underpayment is the period between the date the installment is due and the date it is paid. However, under section 430(j)(4)(C), any portion of an installment that is treated as not paid by reason of the liquidity requirement continues to be treated as unpaid until the close of the quarter in which the due date for that installment occurs.

Accordingly, the regulations provide that, to the extent that an unpaid liquidity amount is satisfied with a contribution of liquid assets during the quarter in which it is due, the increased rate of interest applies for purposes of discounting a contribution for the period between the last day of the quarter and the due date of the contribution. By contrast, any portion of the required installment that would be due without regard to the liquidity requirement will remain due after the end of the quarter, and the regulations provide for the use of the increased rate of interest for purposes of discounting a contribution that is applied to that portion from the date of actual payment to the due date.

To the extent that a portion of the unpaid liquidity amount is no longer treated as unpaid after the close of the quarter, the regulations provide a special rule to reflect the requirement to use a higher rate of interest on late required installments by converting that requirement into an interest charge that increases the minimum required contribution. This ensures that the amount of the contributions necessary to satisfy the minimum funding requirements reflects the effect of the additional interest required under section 430(j)(2) even if a portion of the unpaid liquidity amount is no longer considered unpaid after the close of the quarter. Otherwise, the sponsor of a plan with an unpaid liquidity amount could avoid an additional interest adjustment by merely deferring making a contribution until after the close of the quarter in which the liquidity amount was due, and would therefore be treated more favorably than a plan sponsor who made a contribution toward the unpaid liquidity amount within that quarter.

Under this special rule, the increase in the minimum required contribution attributable to any unpaid liquidity amount that is no longer treated as unpaid after the close of the quarter is equal to the difference between (1) the amount that is no longer treated as unpaid, discounted for interest from the end of the quarter to the valuation date using the plan’s effective interest rate, and (2) the amount that is no longer treated as unpaid, discounted for interest from the end of the quarter to the due date of the required installment using the plan’s effective interest rate plus 5 percent, and further discounted for interest from the due date of the installment to the valuation date using the plan’s effective interest rate. The regulations include an example illustrating the calculation of the increase in the minimum required contribution due to an unpaid liquidity amount that is no longer treated as unpaid after the close of the quarter in which it is due.

Under the regulations, this increase in the minimum required contribution to reflect an interest adjustment for unpaid liquidity amounts is disregarded when calculating the required annual payment under section 430(j)(3)(D)(ii) (which is used to determine the amount of required quarterly installments).

In addition to the adjustment to reflect the higher interest rate, the regulations identify two further consequences of failing to satisfy the liquidity requirement. Section 206(e) of ERISA and section 401(a)(32) of the Code provide rules regarding the suspension of accelerated distributions for a plan with an unpaid liquidity shortfall. Also, section 4971(f) provides an excise tax with respect to the failure to pay a liquidity shortfall.

The proposed regulations included an ordering rule providing that if an employer makes a contribution of liquid assets that is allocated toward the required installment for a quarter, but the contribution is less than the total amount needed to satisfy the quarterly installment for the quarter, then the contribution would be first attributed toward satisfying the quarterly installment without regard to the liquidity requirement. So that all contributions of liquid assets apply toward satisfaction of the liquidity requirement, the final regulations provide that any contribution of liquid assets for a quarter applies toward satisfying the liquidity requirement (as well as the otherwise applicable quarterly installment).

These regulations set forth the definitions that were modified by PPA ’06 that apply for purposes of applying the rules of section 4971. These definitions are substantially the same as the definitions in the proposed regulations, but they have been modified to reflect certain changes made by the CSEC Act.

The regulations define the term accumulated funding deficiency to have the meaning given to that term by section 431, in the case of a multiemployer plan, or by section 433, in the case of a CSEC plan. A plan’s accumulated funding deficiency for a plan year takes into account all charges and credits to the funding standard account under section 412 for plan years before the first plan year for which section 431 or section 433 applies to the plan.

The regulations define the term unpaid minimum required contribution, with respect to any plan year, as the portion of the minimum required contribution under section 430 for the plan year for which contributions have not been made on or before the due date for the plan year under section 430(j)(1) (after taking into account interest adjustments and any offsets from use of the funding balances). The regulations provide that a plan’s accumulated funding deficiency under section 412 for the pre-effective plan year is treated as an unpaid minimum required contribution for that plan year until correction is made. Unlike the determination of accumulated funding deficiency which applied under section 412 prior to PPA ’06, the total amount of unpaid minimum required contributions that is subject to the excise tax under section 4971 is not adjusted with interest. However, as described in the following paragraph, correction of an unpaid minimum required contribution does require a contribution that includes an adjustment for interest.

The regulations define the term correct as it applies to an accumulated funding deficiency or an unpaid minimum required contribution. With respect to an accumulated funding deficiency under a multiemployer plan or a CSEC plan, the regulations adopt the same definition of correct that was proposed to apply to a multiemployer plan. Under the regulations, the correction of an unpaid minimum required contribution under a single-employer plan for a plan year requires the contribution, to or under the plan, of the amount that, when discounted to the valuation date for the plan year for which the unpaid minimum required contribution is due at the appropriate rate of interest, equals or exceeds the unpaid minimum required contribution. For this purpose, the appropriate rate of interest is the plan’s effective interest rate for the plan year for which the unpaid minimum required contribution is due except to the extent that the payments are subject to a higher discount rate provided under section 430(j)(3) or (j)(4). With respect to an unpaid minimum required contribution, the regulations provide an ordering rule under which a contribution is attributable first to the earliest plan year of any unpaid minimum required contribution for which correction has not yet been made. With respect to an accumulated funding deficiency under section 412 for the pre-effective plan year that is treated as an unpaid minimum required contribution, the regulations provide that correction requires the contribution, to or under the plan, of the amount of that accumulated funding deficiency adjusted with interest from the end of the pre-effective plan year to the date of the contribution at the plan’s valuation interest rate for the pre-effective plan year.

The regulations define the term single-employer plan to mean a plan to which the minimum funding requirements of section 412 apply that is not a multiemployer plan as described in section 414(f). Thus, the regulations clarify that the term single-employer plan includes a multiple employer plan to which section 413(c) applies.

Section 4971, as amended by PPA ’06, imposes an excise tax on unpaid minimum required contributions for all years until corrected. In contrast to the pre-PPA ’06 rule (under which an accumulated funding deficiency could be corrected by improvement in the plan’s funded status sufficient to trigger a full funding limitation credit), an unpaid minimum required contribution may only be corrected by making the contribution as described under the regulations. Like the proposed regulations, the final regulations apply this rule to unpaid minimum required contributions for all years, without special treatment for pre-PPA ‘06 funding deficiencies. The final regulations do not reflect comments asking for preservation of the full funding rule with respect to pre-PPA ’06 funding deficiencies, because the statute provides the same rules with respect to unpaid contributions for all years.

The regulations contain modifications to § 1.430(f)–1(f)(2) and (f)(3) and adds § 1.436–1(h)(4)(iii)(C)(9) to provide the IRS with authority to issue published guidance

to extend certain deadlines. These changes accommodate plan sponsor actions in response to retroactive changes in the minimum funding requirements and are the modifications that the IRS indicated were expected to be made in Q&A–G–7 of Notice 2012–61 (which provided guidance regarding MAP–21) and in sections IV and V of Notice 2014–53 (which provided guidance regarding HATFA).

(a) In general—(1) Overview. This section sets forth rules for determining a plan’s minimum required contribution for a plan year under section 430(a). Section 430 and this section apply to single-employer defined benefit plans (including multiple employer plans as defined in section 413(c)) that are subject to section 412 but do not apply to multiemployer plans (as defined in section 414(f)). Paragraph (b) of this section defines a plan’s minimum required contribution for a plan year. Paragraph (c) of this section provides rules for determining shortfall amortization installments. Paragraph (d) of this section provides rules for determining waiver amortization installments. Paragraph (e) of this section provides for early deemed amortization of shortfall and waiver amortization bases for fully funded plans. Paragraph (f) of this section provides definitions that apply for purposes of this section. Paragraph (g) of this section provides examples that illustrate the application of this section. Paragraph (h) of this section provides effective/applicability dates and transition rules.

(2) Special rules for multiple employer plans—(i) In general. In the case of a multiple employer plan to which section 413(c)(4)(A) applies, the rules of section 430 and this section are applied separately for each employer under the plan, as if each employer maintained a separate plan. Thus, the minimum required contribution is computed separately for each employer under such a multiple employer plan. In the case of a multiple employer plan to which section 413(c)(4)(A) does not apply (that is, a plan described in section 413(c)(4)(B) that has not made the election for section 413(c)(4)(A) to apply), the rules of section 430 and this section are applied as if all participants in the plan were employed by a single employer.

(ii) CSEC plans. A CSEC plan (that is, a plan that fits within the definition of a CSEC plan in section 414(y) for plan years beginning on or after January 1, 2014 and for which the election under section 414(y)(3)(A) has not been made) is not subject to the rules of section 430. See section 433 for the minimum funding rules that apply to CSEC plans.

(b) Definition of minimum required contribution—(1) In general. In the case of a defined benefit plan that is subject to section 430, except as offset under section 430(f) and § 1.430(f)–1, the minimum required contribution for a plan year is determined as the applicable amount determined under paragraph (b)(2) of this section or paragraph (b)(3) of this section, reduced by the amount of any funding waiver under section 412(c) that is granted for the plan year. See paragraph (b)(4) of this section for special rules for a plan maintained by a commercial passenger airline (or other eligible employer) for which an election under section 402 of the Pension Protection Act of 2006, Public Law 109–280 (120 Stat. 780), as amended (PPA ’06), has been made, and see section 430(j) and § 1.430(j)–1(b) for rules regarding the required interest adjustment for a contribution that is paid on a date other than the valuation date for the plan year. See also § 1.430(j)–1(d)(3)(iv)(B) for rules regarding an increase to the minimum required contribution in certain circumstances for a plan with an unpaid liquidity amount.

(2) Plan assets less than funding target—(i) General rule. For any plan year in which the value of plan assets (as reduced to reflect the subtraction of certain funding balances as provided under § 1.430(f)–1(c), but not below zero) is less than the funding target for the plan year, the minimum required contribution for that plan year is equal to the sum of—

(A) The target normal cost for the plan year;

(B) The total (not less than zero) of the shortfall amortization installments as described in paragraph (c) of this section determined with respect to any shortfall amortization base for the plan year and for each preceding plan year for which the shortfall amortization base has not been fully taken into account (generally, the 6 preceding plan years); and

(C) The total of the waiver amortization installments as described in paragraph (d) of this section determined with respect to any waiver amortization base for all preceding plan years for which the waiver amortization base has not been fully taken into account (generally, the 5 preceding plan years).

(ii) Special rule for short plan years—(A) Proration of amortization installments. In determining the minimum required contribution in the case of a plan year that is shorter than 12 months (and is not a 52-week plan year of a plan that uses a 52-53 week plan year), the shortfall amortization installments and waiver amortization installments that are taken into account under paragraphs (b)(2)(i)(B) and (C) of this section are determined by multiplying the amount of those installments that would be taken into account for a 12-month plan year by a fraction, the numerator of which is the duration of the short plan year and the denominator of which is 1 year.

(B) Effect on subsequent years. In plan years after the short plan year, installments with respect to a shortfall amortization base or waiver amortization base continue to be taken into account under paragraphs (b)(2)(i)(B) and (C) of this section until the total amount of those installments, as originally determined when the base was established, has been taken into account. Thus, in the case of a plan that has a short plan year, an additional partial installment will be taken into account under paragraphs (b)(2)(i)(B) and (C) of this section for the plan year that ends after the end of the original amortization period (generally 7 years for shortfall amortization bases and 5 years for waiver amortization bases) in an amount determined so that the total of the amortization installments (including the prorated installment payable for the short plan year and the additional partial installment) is equal to the total of the amortization installments as originally determined.

(3) Plan assets equal or exceed funding target. For any plan year in which the value of plan assets (as reduced to reflect the subtraction of certain funding balances as provided under § 1.430(f)–1(c), but not below zero) equals or exceeds the funding target for the plan year, the minimum required contribution for that plan year is equal to the target normal cost for the plan year reduced (but not below zero) by that excess.

(4) Special rules for commercial passenger airlines—(i) In general. This paragraph (b)(4) provides special rules for a plan maintained by a commercial passenger airline (or an employer whose principal business is providing catering services to a commercial passenger airline) for which an election under section 402(a)(1) of PPA ’06 has been made. See paragraph (c)(4) of this section for special rules for a plan maintained by a commercial passenger airline (or an employer whose principal business is providing catering services to a commercial passenger airline) for which an election under section 402(a)(2) of PPA ’06 has been made.

(ii) Determinations during 17-year amortization period. If an election described in section 402(a)(1) of PPA ’06 applies for the plan year with respect to an eligible plan described in section 402(c)(1) of PPA ’06, then the plan’s minimum required contribution for purposes of section 430 of the Internal Revenue Code (Code) for the plan year is equal to the amount necessary to amortize (at an interest rate of 8.85 percent) the unfunded liability of the plan in equal installments over the remaining amortization period. For this purpose, the unfunded liability means the excess of the accrued liability under the plan determined using the unit credit funding method and an interest rate of 8.85 percent over the value of assets (as determined under section 430(g)(3) and § 1.430(g)–1(c)), and the remaining amortization period is the 17-plan-year period beginning with the first plan year for which the election was made, reduced by 1 year for each plan year after the first plan year for which the election was made. In addition, the section 430(f)(3) election to apply funding balances against the minimum required contribution does not apply to a plan to which the election described in section 402(a)(1) of PPA ’06 applies for the plan year.

(iii) Determinations following the election period. If an election described in section 402(a)(1) of PPA ’06 applied to the plan for any preceding plan year but does not apply for the current plan year, then the plan’s minimum required contribution for purposes of section 430 of the Code for the plan year is determined without regard to that election. For the first plan year for which that election no longer applies to the plan, any prefunding balance or funding standard carryover balance is reduced to zero.

(5) Terminated plans—(i) Short plan year. If a plan’s termination date occurs during a plan year but before the last day of a plan year, then, for purposes of section 430, the plan is treated as having a short plan year that ends on the termination date.

(ii) Valuation date. If a plan’s termination date is before the date that would otherwise have been the valuation date for a plan year, then the valuation date for the plan year must be changed so that it falls within the short plan year pursuant to § 1.430(g)–1(b)(2)(i). See § 1.430(g)–1(b)(2)(iv) for a rule providing automatic approval of changes in the valuation date that are required by section 430.

(c) Shortfall amortization installments—(1) In general. Except as otherwise provided in paragraphs (c)(3) and (4) of this section, the shortfall amortization installments with respect to a shortfall amortization base established for a plan year are the annual amounts necessary to amortize that shortfall amortization base in level annual installments over the 7-year period beginning with that plan year. See § 1.430(h)(2)–1(e) and (f) for rules regarding interest rates used for determining shortfall amortization installments and the date within each plan year on which the installments are assumed to be paid. The shortfall amortization installments are determined using the interest rates that apply for the plan year for which the shortfall amortization base is established and are not redetermined in subsequent plan years to reflect any changes in the valuation date or changes in interest rates under section 430(h)(2) for those subsequent plan years.

(2) Shortfall amortization base—(i) In general. Unless the value of plan assets (as reduced to reflect the subtraction of certain funding balances as provided under § 1.430(f)–1(c)(2), but not below zero) is equal to or greater than the funding target for the plan year, a shortfall amortization base is established for the plan year equal to—

(A) The funding shortfall for the plan year; minus

(B) The amount attributable to future installments determined under paragraph (c)(2)(ii) of this section.

(ii) Amount attributable to future installments. The amount attributable to future installments is equal to the sum of the present values (determined in accordance with § 1.430(h)(2)–1(e) and (f) using the interest rates that apply for the current plan year) of—

(A) The shortfall amortization installments that have been determined for the plan year and any succeeding plan year with respect to the shortfall amortization bases for any plan year preceding the plan year; and

(B) The waiver amortization installments that have been determined for the plan year and any succeeding plan year with respect to the waiver amortization bases for any plan year preceding the plan year.

(iii) Timing assumption for installments after change in valuation date. For purposes of determining the present value in paragraph (c)(2)(ii) of this section, the shortfall amortization installments and waiver amortization installments are assumed to be paid on the valuation date for the current plan year and anniversaries thereof even if the valuation date for a subsequent plan year is not the same as the valuation date for the plan year for which a shortfall amortization base or waiver amortization base was established. For example, assume that a plan has a July 1 to June 30 plan year and a valuation date that is the first day of the plan year, and that the plan year for the plan is changed to the calendar year, so that the plan has a short plan year beginning July 1, 2017 and ending December 31, 2017 and a calendar plan year thereafter. In this case—

(A) For the July 1, 2017 actuarial valuation, the shortfall amortization payments with respect to shortfall amortization bases established for all prior plan years are assumed to be paid on July 1, 2017 and anniversaries thereof; and

(B) For the January 1, 2018 actuarial valuation, the shortfall amortization payments with respect to shortfall amortization bases established for all prior plan years are assumed to be paid on January 1, 2018 and anniversaries thereof.

(iv) Transition rule. See paragraph (h)(4) of this section for a transition rule under which only a portion of the funding target is taken into account in determining whether a shortfall amortization base is established under this paragraph (c)(2).

(3) Election of funding relief for certain plans—(i) Funding relief under the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010. See section 430(c)(2)(D) and section 430(c)(7) for special rules that apply to determine the amount of shortfall amortization installments with respect to shortfall amortization bases established for plan years ending on or after October 10, 2009 and beginning before January 1, 2012, for which the relief under section 430(c)(2)(D) is elected.

(ii) Funding relief related to eligible charity plans. See section 104(d)(3)(B) through (F) of PPA ’06, which reflects amendments made by section 103(b)(2) of the Cooperative and Small Employer Charity Pension Flexibility Act of 2014, Public Law 113–97 (128 Stat. 1137), for special rules that apply to determine the amount of shortfall amortization installments with respect to plan years beginning on or after January 1, 2014, in the case of an eligible charity plan for which the relief under section 104(d)(3)(A) of PPA ’06 is elected.

(iii) Election by commercial passenger airline under section 402(a)(2) of PPA ’06. If an election described in section 402(a)(2) of PPA ’06 has been made for an eligible plan described in section 402(c)(1) of PPA ’06, then the minimum required contribution for purposes of section 430 is determined under generally applicable rules, except that the shortfall amortization base for the first plan year for which section 430 applies to the plan is amortized over 10 years (rather than over 7 years as provided in paragraph (c)(1) of this section) in accordance with § 1.430(h)(2)–1(e) and (f) using the interest rates that apply for purposes of determining the target normal cost for the first plan year for which section 430 applies to the plan. In such a case, the shortfall amortization installments with respect to the shortfall amortization base for that plan year will continue to be included in determining the minimum required contribution for 10 years rather than 7 years. See also § 1.430(h)(2)–1(b)(6) for a special rule for determining the funding target in the case of a plan for which an election under section 402(a)(2) of PPA ’06 has been made.

(d) Waiver amortization installments—(1) In general. For purposes of this section, the waiver amortization installments with respect to a waiver amortization base established for a plan year are the annual amounts necessary to amortize that waiver amortization base in level annual installments over the 5-year period beginning with the following plan year. See § 1.430(h)(2)–1(e) and (f) for rules regarding interest rates used for determining waiver amortization installments and the date within each plan year on which the installments are assumed to be paid. The waiver amortization installments established with respect to a waiver amortization base are determined using the interest rates that apply for the plan year for which the waiver is granted (even though the first installment with respect to the waiver amortization base is not due until the subsequent plan year) and are not redetermined in subsequent plan years to reflect any changes in the valuation date or changes in interest rates under section 430(h)(2) for those subsequent plan years.

(2) Waiver amortization base—(i) In general. For purposes of this section, a waiver amortization base is established for each plan year for which a waiver of the minimum funding standard has been granted in accordance with section 412(c). The amount of the waiver amortization base is equal to the waived funding deficiency under section 412(c)(3) for the plan year.

(ii) Transition rule. See paragraph (h)(3) of this section for the treatment of funding waivers granted for plan years beginning before 2008.

(e) Early deemed amortization upon attainment of funding target. In any case in which the funding shortfall for a plan year is zero, for purposes of determining the minimum required contribution for that plan year and subsequent plan years—

(1) The shortfall amortization bases for all preceding plan years (and all shortfall amortization installments determined with respect to those bases) are reduced to zero; and

(2) The waiver amortization bases for all preceding plan years (and all waiver amortization installments determined with respect to those bases) are reduced to zero.

(f) Definitions—(1) In general. The definitions set forth in this paragraph (f) apply for purposes of this section.

(2) Funding shortfall. The term funding shortfall means the excess (if any) of—

(i) The funding target for a plan year; over

(ii) The value of plan assets for the plan year (as reduced to reflect the subtraction of the funding standard carryover balance and prefunding balance to the extent provided under § 1.430(f)–1(c), but not below zero).

(3) Funding target. The term funding target means the plan’s funding target for a plan year determined under § 1.430(d)–1(b)(2), § 1.430(i)–1(c), or § 1.430(i)–1(e)(1), whichever applies to the plan for the plan year.

(4) Target normal cost. The term target normal cost means the plan’s target normal cost for a plan year determined under § 1.430(d)–1(b)(1), § 1.430(i)–1(d), or § 1.430(i)–1(e)(2), whichever applies to the plan for the plan year.

(5) Termination date—(i) Plans subject to Title IV of ERISA. In the case of a plan subject to Title IV of the Employee Retirement Income Security Act of 1974, as amended (ERISA), the termination date means the plan’s termination date established under section 4048(a) of ERISA.

(ii) Other plans—(A) In general. In the case of a plan not subject to Title IV of ERISA, the termination date means the plan’s termination date established by the plan administrator, provided that the termination date may be no earlier than the date on which all actions necessary to effect the plan termination (other than the distribution of plan assets) are taken.

(B) Requirement for prompt distribution. A plan is not treated as terminated on the applicable date described in paragraph (f)(5)(ii)(A) of this section if the assets are not distributed as soon as administratively feasible after that date. Whether distribution of plan assets is made as soon as administratively feasible is to be determined under all the relevant facts and circumstances. In general, distribution of plan assets is deemed to have been made as soon as administratively feasible to the extent that any delay in distribution was because of circumstances outside the control of the plan administrator. However, distribution of plan assets that was delayed merely for the purpose of obtaining a higher value than current market value is generally not deemed to have been made as soon as administratively feasible.

(C) Presumption applicable to prompt distribution requirement. Except as provided in paragraph (f)(5)(ii)(D) of this section, distribution of plan assets which is not completed within one year following the applicable date described in paragraph (f)(5)(ii)(A) of this section is presumed not to have been made as soon as administratively feasible.

(D) Exception to prompt distribution presumption for obtaining determination letter from Commissioner. A plan is not treated as failing to meet the requirement to distribute plan assets as soon as administratively feasible after the proposed termination date if the delay is attributable to the period of time necessary to obtain a determination letter from the Commissioner on the plan’s qualified status upon its termination, provided that the request for a determination letter is timely and the distribution of plan assets is made as soon as administratively feasible after the letter is obtained.

(6) Transition funding shortfall—(i) In general. The term transition funding shortfall means the excess, if any, of—

(A) The applicable percentage of the funding target for a plan year; over

(B) The value of plan assets for the plan year (as reduced to reflect the subtraction of the funding standard carryover balance and prefunding balance to the extent provided under § 1.430(f)–1(c), but not below zero).

(ii) Applicable percentage. For purposes of this paragraph (f)(6), the applicable percentage is determined in accordance with the following table:

(g) Examples. The following examples illustrate the rules of this section. Unless otherwise indicated, these examples are based on the following assumptions: section 430 applies to determine the minimum required contribution for plan years beginning on or after January 1, 2008; the plan year is the calendar year; the valuation date is January 1; the plan’s prefunding balance and funding standard carryover balance are equal to $0; the plan sponsor did not elect any funding relief under section 430(c)(2)(D) for any plan year; and the plan has not received any funding waivers for any relevant time periods.

Example 1. (i) Plan A has a funding target of $2,500,000 and assets totaling $1,800,000 as of January 1, 2016. For purposes of this example, the segment interest rates used for the January 1, 2016 valuation are assumed to be 5.26% for the first segment interest rate and 5.82% for the second segment interest rate. No shortfall or waiver amortization bases have been established for prior plan years.

(ii) A $700,000 shortfall amortization base is established for 2016, which is equal to the $2,500,000 funding target less $1,800,000 of assets.

(iii) With respect to the new shortfall amortization base of $700,000, there is a shortfall amortization installment of $116,852 (which is the amount necessary to amortize the $700,000 shortfall amortization base over 7 years) for each year from 2016 through 2022. The amount of this shortfall amortization installment is determined by discounting the first five installments using the first segment interest rate of 5.26%, and by discounting the sixth and seventh installments using the second segment rate of 5.82%.

Example 2. (i) The facts are the same as in Example 1, except that the plan was granted a funding waiver for 2014, resulting in five annual waiver amortization installments of $70,000 each, beginning with the 2015 plan year.

(ii) As of January 1, 2016, the present value of the remaining waiver amortization installments is $259,702, which is determined by discounting the remaining four waiver amortization installments of $70,000 each to January 1, 2016, using the first segment rate of 5.26%. See paragraph (c)(2)(ii) of this section.

(iii) A $440,298 shortfall amortization base is established for 2016, which is equal to the $2,500,000 funding target, less $1,800,000 of assets, less $259,702 (which is the present value of the remaining four waiver amortization installments).

(iv) With respect to this shortfall amortization base of $440,298, there is a shortfall amortization installment of $73,500 (which is equal to the $440,298 shortfall amortization base amortized over 7 years) for each year from 2016 through 2022.

Example 3. (i) The facts are the same as in Example 2. Plan A has a $100,000 target normal cost for the 2016 plan year and was granted a funding waiver for 2016 to the largest extent permitted under section 412(c).

(ii) If the funding waiver for 2016 had not been granted, the minimum required contribution for 2016 would have been $243,500. This is equal to the $100,000 target normal cost, plus the $70,000 waiver amortization installment from the 2014 waiver, plus the $73,500 January 1, 2016 shortfall amortization installment.

(iii) In accordance with section 412(c)(1)(C), the portion of the minimum required contribution attributable to the amortization of the 2014 funding waiver cannot be waived. Therefore, the maximum amount of the January 1, 2016 minimum required contribution that can be waived is $173,500.

(iv) In accordance with paragraph (d) of this section, a waiver amortization base of $173,500 is established as of January 1, 2016 to be amortized over 5 years beginning with the 2017 plan year. Although the waiver amortization installments for the 2016 funding waiver are not included in the minimum required contribution until 2017, the amount of those installments is determined based on the interest rates used for the 2016 plan year.

(v) The waiver amortization installments with respect to the 2016 funding waiver are calculated using the first segment interest rate of 5.26% for the first four installments (calculated as of January 1, 2017 through January 1, 2020) and the second segment interest rate of 5.82% for the final installment payable as of January 1, 2021. Accordingly, the waiver amortization installments with respect to the 2016 funding waiver are $40,554 each, payable beginning January 1, 2017.

Example 4. (i) The facts are the same as in Example 3. As of January 1, 2017, Plan A has a funding target of $2,750,000 and assets totaling $1,900,000. For purposes of this example, the first segment rate used for the 2017 valuation is assumed to be 5.50%, the second segment rate is assumed to be 6.00%, and the third segment rate is assumed to be 6.50%.

(ii) As of January 1, 2017, the present value of the remaining three waiver amortization installments with respect to the 2014 waiver is $199,242, which is determined using the first segment rate of 5.50%.

(iii) As of January 1, 2017, the present value of the remaining five waiver amortization installments with respect to the 2016 waiver is $182,701, which is determined using the first segment rate of 5.50%.

(iv) As of January 1, 2017, the present value of the remaining six shortfall amortization installments with respect to the 2016 shortfall amortization base is $386,052, which is determined using the first segment rate of 5.50% for the first five installments and the second segment rate of 6.00% for the sixth installment.

(v) A shortfall amortization base of $82,005 is established for 2017, which is equal to the $2,750,000 funding target, reduced by the sum of $1,900,000 of assets, $199,242 (the present value of the remaining waiver amortization installments with respect to the 2014 waiver), $182,701 (the present value of the remaining waiver amortization installments with respect to the 2016 waiver), and $386,052 (the present value of the remaining installments with respect to the 2016 shortfall amortization base).

(vi) With respect to this shortfall amortization base of $82,005, there is a shortfall amortization installment of $13,766 (which is the amount necessary to amortize the $82,005 shortfall amortization base over 7 years) for each year from 2017 through 2023.

Example 5. (i) As of January 1, 2016, a plan has a funding target of $2,500,000, a target normal cost of $175,000, and assets totaling $2,450,000. As of January 1, 2016, there are six remaining installments of $60,000 each with respect to the only shortfall amortization base for the plan, which was established for the 2015 plan year. Also as of January 1, 2016, there are five remaining installments of $25,000 each with respect to the only waiver amortization base for the plan, which was established for the 2015 plan year. For purposes of this example, the segment interest rates used for the January 1, 2016, valuation are assumed to be 5.26% for the first segment interest rate and 5.82% for the second segment interest rate.

(ii) A shortfall amortization base of –$379,812 is established for 2016, which is equal to the $2,500,000 funding target, reduced by the sum of $2,450,000 of assets, $316,696 (the present value of the remaining installments with respect to the 2015 shortfall amortization base) and $113,116 (the present value of the remaining installments with respect to the 2015 funding waiver).

(iii) The shortfall amortization installment for the 2016 shortfall amortization base is –$63,403, which is the amount necessary to amortize the –$379,812 shortfall amortization base over seven years. The first five shortfall amortization installments are discounted using the first segment rate of 5.26% and the sixth and seventh shortfall amortization installments are discounted using the second segment rate of 5.82%.

(iv) The sum of the shortfall amortization installments is equal to –$3,403 ($60,000 plus –$63,403). However, in accordance with paragraph (b)(2)(i)(B) of this section, for purposes of determining the minimum required contribution for a plan year, the total of the shortfall amortization installments for a plan year is limited so that it is not less than zero.

(v) The minimum required contribution as of January 1, 2016 is $200,000. This is equal to the sum of the target normal cost of $175,000, the total of the shortfall amortization installments (as limited) of $0, and the waiver amortization installment of $25,000.

(vi) The shortfall amortization bases are not set to zero as of January 1, 2016, even though the sum of the shortfall amortization installments was set to zero for the 2016 plan year. Therefore, as of January 1, 2017 (unless the plan has a funding shortfall of zero as of that date), the shortfall amortization base established as of January 1, 2015 will have five remaining installments of $60,000 each and the shortfall amortization base established as of January 1, 2016 will have six remaining installments of –$ 63,403 each. Similarly, the waiver amortization base will have four remaining installments of $25,000 each.

Example 6. (i) The facts are the same as in Example 5, except that Plan A has assets totaling $2,550,000 as of January 1, 2016.

(ii) Because the assets of $2,550,000 exceed the funding target of $2,500,000, no new shortfall amortization base is established under paragraph (c)(2) of this section.

(iii) Furthermore, under paragraph (e) of this section, all shortfall amortization bases and waiver amortization bases (and all shortfall amortization installments and waiver amortization installments associated with those bases) are reduced to zero as of January 1, 2016.

(iv) The minimum required contribution for the 2016 plan year is $125,000, which is equal to the $175,000 target normal cost less the excess of the assets over the funding target ($2,550,000 minus $2,500,000).

Example 7. (i) The actuarial valuation for Plan B as of January 1, 2016, based on a 12-month plan year, results in a target normal cost of $110,000 and a shortfall amortization installment for 2016 of $185,000, attributable to a shortfall amortization base established January 1, 2016. There are no other shortfall or waiver amortization bases for Plan B as of January 1, 2016. The plan year for Plan B is changed to April 1 through March 31, effective April 1, 2016, resulting in a short plan year beginning January 1, 2016 and ending March 31, 2016.

(ii) The target normal cost for the short plan year is redetermined in order to reflect the fact that there is a short plan year. An actuarial valuation shows that the target normal cost is $25,000 for the short plan year based on the accruals for that short plan year (determined in accordance with 29 CFR 2530.204–2(e)).

(iii) In accordance with paragraph (b)(2)(ii)(A) of this section, the shortfall amortization base is prorated to reflect the three months covered by the short plan year. Accordingly, the shortfall amortization installment for the short plan year is $46,250 (that is, $185,000 multiplied by 3/12).

(iv) The total minimum required contribution for the short plan year is $71,250 (that is, the sum of the target normal cost of $25,000 plus the shortfall amortization installment of $46,250).

Example 8. (i) The facts are the same as in Example 7. For purposes of this example, assume that the first segment rate for the plan year beginning April 1, 2016 is 5.30%, and the second segment rate is 5.80%.

(ii) The present value of the remaining shortfall amortization installments with respect to the January 1, 2016 shortfall amortization base is equal to $1,074,937. This is determined by discounting the remaining installments (6 full-year installments of $185,000 each due April 1, 2016 through April 1, 2021, and a final 9-month installment of $138,750 due April 1, 2022) using the first segment rate of 5.30% for the first five installments and the second segment rate of 5.80% for the remaining installments.

Example 9. (i) As of January 1, 2016, Plan C has a funding target of $1,100,000, a target normal cost of $20,000, and an actuarial value of assets of $1,150,000. Prior to establishing any shortfall amortization base for 2016, the total of the shortfall amortization installments for 2016 is $30,000 and the present value of the remaining shortfall amortization installments (including installments for the 2016 plan year) is $150,000. Based on the segment rates used for the 2016 plan year, the 7-year amortization factor for any shortfall amortization base established for 2016 is 5.9887. The funding standard carryover balance as of January 1, 2016 is $40,000 and the prefunding balance is $60,000. The plan sponsor intends to use both balances to offset the minimum required contribution for 2016.

(ii) In accordance with sections 430(c) and 430(f)(4)(A), the test to determine whether Plan C is exempt from establishing a new shortfall amortization base for 2016 is initially applied based on assets reduced by the prefunding balance, because the plan sponsor intends to use the prefunding balance to offset the minimum required contribution. Therefore, the actuarial value of assets used for this purpose is $1,150,000 minus $60,000, or $1,090,000. This is less than the funding target of $1,100,000, so a new shortfall amortization base is established for 2016.

(iii) The funding shortfall as of January 1, 2016 is the difference between the funding target and the actuarial value of assets, where the actuarial value of assets is reduced by both the funding standard carryover balance and the prefunding balance. Accordingly, the value of assets used for this calculation is $1,050,000 (that is, $1,150,000 – $40,000 – $60,000), and the funding shortfall is $50,000 (that is, $1,100,000 – $1,050,000).

(iv) The shortfall amortization base established as of January 1, 2016 is the difference between the funding shortfall of $50,000 and the $150,000 present value of remaining shortfall amortization installments for bases established in prior years (that is, − $100,000). The shortfall amortization installment attributable to this base is − $100,000 ÷ 5.9887, or − $16,698.

(v) The preliminary minimum required contribution is the sum of the target normal cost, the shortfall amortization installments for bases established prior to 2016, and the shortfall amortization installment for the new base established for 2016, or $33,302 (that is, $20,000 + $30,000 – $16,698). However, this amount is less than the funding standard carryover balance. Because section 430(f)(3)(B) and § 1.430(f)–1(d)(2) require that the funding standard carryover balance be used before using the prefunding balance, this means that the full minimum required contribution will be offset without using the prefunding balance. Accordingly, the plan sponsor will not be electing to use any portion of the prefunding balance to offset the minimum required contribution for 2016.

(vi) Because the plan sponsor is not using the prefunding balance to offset the minimum required contribution, the test to determine whether Plan C is exempt from establishing a new shortfall amortization base for 2016 must be applied without subtracting the prefunding balance from the actuarial value of plan assets. Because the full actuarial value of assets of $1,150,000 is higher than the funding target of $1,100,000, the plan is exempt from establishing a new shortfall amortization base for 2016. However, the actuarial value of plan assets is reduced by both balances when determining the funding shortfall, which is used to determine whether the shortfall amortization bases established prior to 2016 are reduced to zero. Because the funding shortfall is greater than zero as of January 1, 2016 (as calculated in paragraph (iii) of this Example 9), the shortfall amortization bases established before the 2016 plan year are retained.

(vii) The minimum required contribution for 2016 is the sum of the target normal cost and the shortfall amortization installments, or $50,000 ($20,000 + $30,000). Because this is larger than the funding standard account carryover balance of $40,000, the plan sponsor can only offset $40,000 of the minimum required contribution and must contribute $10,000 to meet the minimum funding requirements. The prefunding balance cannot be used to offset the remaining $10,000 minimum funding requirement because doing so would require recalculating the minimum required contribution as illustrated in paragraphs (ii) through (v) of this Example 9 and the minimum required contribution would be too small to use the prefunding balance.

Example 10. (i) The facts are the same as in Example 9, except that, in lieu of making the cash contribution required in Example 9, the plan sponsor elects to reduce the funding standard carryover balance by $9,000.

(ii) Because the plan sponsor intends to use the prefunding balance to offset the minimum required contribution, the test to determine whether Plan C is exempt from establishing a shortfall amortization base for 2016 is based on the actuarial value of assets reduced by the prefunding balance. The actuarial value of assets reduced for the prefunding balance ($1,090,000) is less than the funding target ($1,100,000), so a new shortfall amortization base is established for 2016.

(iii) The remaining funding standard carryover balance is $31,000 (that is, $40,000 minus the elected reduction of $9,000). The funding shortfall as of January 1, 2016 is the difference between the funding target and the actuarial value of assets, where the actuarial value of assets is reduced by both the remaining funding standard carryover balance and the prefunding balance. Accordingly, the value of assets used for this calculation is $1,059,000 (that is, $1,150,000 – $31,000 – $60,000), and the funding shortfall is $41,000 (that is, $1,100,000 – $1,059,000).

(iv) The shortfall amortization base established as of January 1, 2016 is the difference between the funding shortfall of $41,000 and the $150,000 present value of remaining shortfall amortization installments for bases established in prior years (that is, − $109,000). The shortfall amortization installment attributable to this base is − $109,000 ÷ 5.9887, or − $18,201.

(v) The minimum required contribution is the sum of the target normal cost, the shortfall amortization installments for bases established prior to 2016, and the shortfall amortization installment for the new base established for 2016, or $31,799 (that is, $20,000 + $30,000 – $18,201). This amount is larger than the remaining funding standard carryover balance of $31,000. Therefore, the plan sponsor can offset the full minimum required contribution using the remaining $31,000 of the funding standard carryover balance and $799 of the prefunding balance. Because a portion of the prefunding balance is used to offset the minimum required contribution, the test under section 430(c)(5) is applied by subtracting the prefunding balance from the actuarial value of assets as illustrated in paragraph (ii) of this Example 10, and no further adjustments are required to the minimum required contribution.

Example 11. (i) An amendment to Plan D was adopted during 2015, scheduled to be effective February 1, 2016. The actuary determines that, as of January 1, 2016, the amendment would increase Plan D’s funding target by $300,000, if the amendment is permitted to take effect. As of February 1, 2016, prior to taking into account the amendment, the presumed adjusted funding target attainment percentage (AFTAP) for Plan D is less than 80% but not less than 60%. Plan D’s sponsor makes a section 436 contribution (under section 436(c)(2)(A)) of $300,000, adjusted for interest as required under § 1.436–1(f)(2)(i)(A)(2), to allow the amendment to take effect.

(ii) Because the plan amendment was adopted prior to the valuation date for 2016 and becomes effective during the 2016 plan year, under § 1.430(d)–1(d)(1)(i), the plan amendment must be taken into account in the funding target as of January 1, 2016. However, because the section 436 contribution is made for the 2016 plan year, it is not included in Plan D’s actuarial value of assets as of January 1, 2016.

(iii) The funding shortfall as of January 1, 2016 is calculated as the amount of the funding target (taking into account the plan amendment) minus the actuarial value of assets, where the value of assets is reduced by any funding standard carryover balance and prefunding balance as of that date. Because the funding target takes into account the increase of $300,000 attributable to the plan amendment but the actuarial value of assets does not include the section 436 contribution, the funding shortfall is $300,000 higher than it would have been had the plan amendment not been allowed to take effect.

(iv) The funding shortfall as of January 1, 2017 will reflect both the cost of the plan amendment and the value of the section 436 contribution made during 2016. Therefore, in the absence of any other factors affecting the shortfall amortization base, it is expected that a negative shortfall amortization base will be established as of January 1, 2017 as a result of the section 436 contribution made during 2016.

Example 12. (i) Plan E has a calendar year plan year and in 2015 had 97 participants. Plan E has a valuation date of July 1. A shortfall amortization base of $300,000 was established with the July 1, 2016 valuation. The plan had no other shortfall or waiver amortization bases. For purposes of this example, assume that the first segment rate for the 2016 plan year is 5.50% and the second segment rate is 6.00%. Accordingly, the shortfall amortization installments are determined as seven annual installments of $50,358 each, payable as of each July 1 beginning July 1, 2016.

(ii) Sometime after January 1, 2016, the number of participants in Plan E increased to over 100 during 2016, and therefore the valuation date was changed to January 1 effective with the 2017 plan year. As of January 1, 2017, Plan E has a funding target of $2,000,000, plan assets of $1,600,000, and a zero funding standard carryover balance and prefunding balance. For purposes of this example, assume that as of January 1, 2017, the first segment rate is 5.75% and the second segment rate is 6.25%.

(iii) In accordance with paragraph (c)(1) of this section, the amount of the shortfall amortization installments for the base established July 1, 2016 is not adjusted for the change in valuation date. As of January 1, 2017, the outstanding balance of the shortfall amortization base established as of July 1, 2016 is $263,047, determined as the present value of the remaining shortfall amortization installments, calculated as if the shortfall amortization installments of $50,358 are payable annually on January 1 instead of July 1.

(iv) A new shortfall amortization base of $136,953 is established effective January 1, 2017 equal to the difference between the funding shortfall of $400,000 and the outstanding balance of the shortfall amortization base established as of July 1, 2016 ($263,047). The shortfall amortization installment for this base is calculated as $23,139.

(v) The total shortfall amortization installment for the 2017 plan year is $73,497, equal to the sum of the installments for the shortfall amortization base established July 1, 2016 ($50,358) and the base established January 1, 2017 ($23,139). The total amortization installment is determined as an amount payable as of January 1 regardless of the fact that the installment for the first base was initially calculated as an amount payable on July 1.

Example 13. (i) A funding waiver of $300,000 was granted for Plan F for the 2006 plan year. The valuation interest rate for the January 1, 2007 actuarial valuation is 8.50% (which exceeds 150% of the applicable federal mid-term rate). The first segment rate for the January 1, 2008 valuation of Plan F is 5.26%.

(ii) The waiver amortization charge for the plan year beginning January 1, 2007 is $70,166, which is equal to the $300,000 funding waiver base amortized over 5 years at the valuation interest rate of 8.50%.

(iii) The annual waiver amortization installment for 2008 and later years is equal to the amortization charge for the 2007 plan year, or $70,166. As of January 1, 2008, the present value of the remaining waiver amortization installments is $260,318, which is determined by discounting the remaining four waiver amortization installments of $70,166 to January 1, 2008, using the first segment rate of 5.26%.

Example 14. (i) As of January 1, 2008, Plan G has a funding target of $2,500,000, plan assets of $1,800,000 and a funding standard carryover balance of $100,000. Plan G has not received a funding waiver for any past plan year. Plan G was in existence during 2007, and in the 2007 plan year was not subject to the deficit reduction contribution in section 412(l) of the Code as it existed prior to PPA ‘06.

(ii) Plan G qualifies for the transition rule in section 430(c)(5) of the Code (as in effect prior to amendments made by the Tax Increase Prevention Act of 2014, Public Law 113–295, 128 Stat. 4010) and paragraph (h)(4) of this section. Because Plan G’s assets are less than 92% of its funding target, a shortfall amortization base must be established as of January 1, 2008.

(iii) Under the transition rule in paragraph (h)(4) of this section, the shortfall amortization base for 2008 is determined using only 92% of Plan G’s funding target, or $2,300,000. For purposes of this calculation, the value of assets is reduced by the funding standard carryover balance for a net asset figure of $1,700,000 (that is, $1,800,000 minus $100,000). Accordingly, the shortfall amortization base as of January 1, 2008 is equal to $600,000.

(h) Effective/applicability dates and transition rules—(1) Statutory effective date/applicability date. Section 430 generally applies to plan years beginning on or after January 1, 2008. The applicability of section 430 for purposes of determining the minimum required contribution is delayed for certain plans in accordance with sections 104 through 106 of PPA ’06.

(2) Effective date/applicability date of regulations. This section applies to plan years beginning on or after January 1, 2016. For plan years beginning before January 1, 2016, plans are permitted to rely on the provisions set forth in this section for purposes of satisfying the requirements of section 430(a).

(3) Treatment of pre-PPA ‘06 funding waivers. In the case of a plan that has received a funding waiver under section 412 for a plan year for which section 430 was not yet effective with respect to the plan for purposes of determining the minimum required contribution, the waiver is treated as giving rise to a waiver amortization base and the amortization charges with respect to that funding waiver are treated as waiver amortization installments as described in paragraph (d) of this section. With respect to such a pre-existing funding waiver, the amount of the waiver amortization installment is equal to the amortization charge with respect to that waiver determined using the interest rate or rates that applied for the pre-effective plan year.

(4) Transition rule for determining shortfall amortization base—(i) In general. Except as provided in paragraph (h)(4)(ii) of this section, in the case of plan years beginning after December 31, 2007 and before January 1, 2011, for purposes of applying the rules of paragraph (c)(2) of this section—

(A) The applicable percentage (as described in paragraph (f)(6)(ii) of this section) of the funding target is substituted for the funding target; and

(B) The transition funding shortfall is substituted for the funding shortfall.

(ii) Transition rule not available for new plans or deficit reduction plans. The transition rule of paragraph (h)(4)(i) of this section does not apply to a plan—

(A) That was not in effect for a plan year beginning in 2007; or

(B) That was subject to section 412(l) for the last plan year beginning during 2007, determined after the application of sections 412(l)(6) and (9) (regardless of whether the deficit reduction contribution for that plan year was equal to zero).

(5) Pre-effective plan year—(i) In general. For purposes of this section, the pre-effective plan year for a plan is the last plan year beginning before section 430 applies to the plan to determine the minimum required contribution. Thus, except for plans with a delayed effective date as described in paragraph (h)(1) of this section, the pre-effective plan year for a plan is the last plan year beginning before January 1, 2008.

(ii) Eligible charity plans. An eligible charity plan (as described in section 104(d) of PPA ’06, which reflects amendments made by section 202(b)(2) of PRA 2010, Public Law No.111–192, 124 Stat. 1280 (June 25, 2010)) that applies section 430 to the first plan year beginning on or after January 1, 2008 has a pre-effective plan year that is the last plan year beginning before January 1, 2008 and a second pre-effective plan year that is the last plan year that precedes the plan year for which section 430 again applies to the plan. (Section 430 does not apply to such a plan for plan years beginning on or after January 1, 2009 and before January 1, 2017, unless the plan ceases to be an eligible charity plan, or an election under section 104(d)(2) or 104(d)(4) of PPA ’06 is made for the plan not to be treated as an eligible charity plan, as of an earlier date.)

Par. 3. Section 1.430(f)–1 is amended as follows:

1. The paragraph heading for paragraph (b)(5) is removed.

2. Paragraph (b)(5)(i) is redesignated as paragraph (b)(5).

3. The paragraph heading of newly redesignated paragraph (b)(5) is revised to read “Special rule for quarterly contributions”.

4. The text of the newly redesignated paragraph (b)(5) is amended by removing the words “that are due on or after the valuation date for the plan year for which they are due” from the first sentence.

5. Paragraph (b)(5)(ii) is removed.

6. The paragraph heading for paragraph (d)(1)(i)(B) is removed.

7. Paragraph (d)(1)(i)(B)(1) is redesignated as paragraph (d)(1)(i)(B).

8. The paragraph heading of the newly redesignated paragraph (d)(1)(i)(B) is revised to read “Special rule for late election with respect to quarterly contributions.”

9. The text of the newly redesignated paragraph (d)(1)(i)(B) is amended by removing the words “that is due on or after the valuation date” from the first sentence; removing the word “discounted” and adding in its place “adjusted” in the first sentence; and removing the phrase “further discounted” and adding in its place “further adjusted” in the second sentence.

10. Paragraph (d)(1)(i)(B)(2) is removed.

11. Paragraph (f)(1)(i) is amended by removing the phrase “as provided in paragraph (f)(1)(ii) of this section” and adding in its place “as provided in this paragraph (f)(1)” in two places.

12. Paragraph (f)(1)(iii) is added.

13. Paragraph (f)(2)(i) is amended by removing the phrase “as described in section 430(j)(1)” and adding in its place “as described in section 430(j)(1), or such later date as prescribed in guidance published in the Internal Revenue Bulletin”.

14. Paragraph (f)(3)(i) is amended by removing the words “Except as otherwise provided in this paragraph (f)(3)” and adding in their place the words “Except as otherwise provided in this paragraph (f)(3) or in guidance published in the Internal Revenue Bulletin”.

The revisions and additions read as follows:

* * * * *

(f) * * *(1) * * *

(iii) Standing election to satisfy installments through use of funding balances—(A) In general. A plan sponsor may provide a standing election in writing to the plan’s enrolled actuary to use (to the extent available) the funding standard carryover balance and the prefunding balance to satisfy any otherwise unpaid portion of a required installment under section 430(j)(3). Any use pursuant to a standing election under this paragraph (f)(1)(iii) is deemed to occur on the later of the last date for making the required installment and the date the standing election is provided to the enrolled actuary.

(B) Otherwise unpaid portion of a required installment. For purposes of paragraph (f)(1)(iii)(A) of this section, the otherwise unpaid portion of a required installment equals the amount necessary to satisfy the required installment rules under section 430(j) based on the installment amounts determined as if the required annual payment were the amount described in § 1.430(j)–1(c)(5)(ii)(B). Thus, the amount of the prefunding and funding standard carryover balances used under a standing election is the amount that is needed to satisfy an installment in the amount of 25 percent of the minimum required contribution for the prior plan year, plus installments in that amount with respect to all earlier required installment due dates for the plan year, taking into account prior contributions for the plan year and prior elections to use the funding standard carryover balance and prefunding balance for the plan year.

(C) Duration of standing election. Generally, any standing election under this paragraph (f)(1)(iii) remains in effect for the plan with respect to the enrolled actuary named in the election, unless either of the events described in paragraph (f)(1)(ii)(A) or (B) of this section occurs with respect to the standing election. However, a plan sponsor may suspend application of a standing election for the remaining installments with respect to a plan year by providing, in writing to the plan’s enrolled actuary, notice that the standing election is not to apply for the remainder of the plan year. In addition, once the current year’s minimum required contribution has been determined, a plan sponsor may modify application of a standing election for the remaining installments with respect to a plan year by providing, in writing to the plan’s enrolled actuary, a replacement formula election to use the funding standard carryover balance and prefunding balance (to the extent available) so that the otherwise unpaid portions of the remaining required installments satisfy the required installment rules under section 430(j), taking into account the determination of the current year’s minimum required contribution pursuant to § 1.430(j)–1(c)(5)(ii)(A), prior contributions for the plan year and prior elections to use the prefunding and funding standard carryover balances.

* * * * *

Par. 4. Section 1.430(h)(2)–1(b)(2) is revised to read as follows:

* * * * *

(b) * * *

(2) Benefits payable within 5 years—(i) In general. In the case of benefits expected to be payable during the 5-year period beginning on the valuation date for the plan year, the interest rate used in determining the present value of the benefits that are included in the target normal cost and the funding target for the plan is the first segment rate with respect to the applicable month, as described in paragraph (c)(2)(i) of this section.

(ii) Special rule for plan years beginning before January 1, 2014. With respect to a plan year beginning before January 1, 2014, for a plan with a valuation date other than the first day of the plan year, the 5-year period beginning on the first day of the plan year is permitted to be used in lieu of the 5-year period beginning on the valuation date for the plan year under paragraph (b)(2)(i) of this section.

* * * * *

Par. 5. Section 1.430(j)–1 is added to read as follows:

(a) In general—(1) Overview. This section provides rules related to the payment of minimum required contributions, including the payment of required installments. Section 430(j) and this section apply to single-employer defined benefit plans (including multiple employer plans as defined in section 413(c)) but do not apply to multiemployer plans (as defined in section 414(f)). Paragraph (b) of this section describes the general timing requirement for minimum required contributions. Paragraph (c) of this section describes the accelerated required installment schedule for plans with a funding shortfall in the preceding plan year. Paragraph (d) of this section provides rules regarding liquidity requirements. Paragraph (e) of this section provides definitions. Paragraph (f) of this section provides examples that illustrate the rules of this section. Paragraph (g) of this section sets forth effective/applicability dates and transition rules.

(2) Special rules for multiple employer plans—(i) In general. In the case of a multiple employer plan to which section 413(c)(4)(A) applies, the rules of section 430 and this section are applied separately for each employer under the plan, as if each employer maintained a separate plan. Thus, for example, required installments are determined separately for each employer under such a multiple employer plan. In the case of a multiple employer plan to which section 413(c)(4)(A) does not apply (that is, a plan described in section 413(c)(4)(B) that has not made the election for section 413(c)(4)(A) to apply), the rules of section 430 and this section are applied as if all participants in the plan were employed by a single employer.

(ii) CSEC plans. A CSEC plan (that is, a plan that fits within the definition of a CSEC plan in section 414(y) for plan years beginning on or after January 1, 2014 and for which the election under section 414(y)(3)(A) has not been made) is not subject to the rules of section 430. See section 433 for the minimum funding rules that apply to CSEC plans.

(3) Applicability of section 430(j) to plans of commercial passenger airlines—(i) In general. Except as otherwise provided in this section, the rules of section 430(j) and this section apply to a plan for which an election described in section 402 of the Pension Protection Act of 2006, Public Law 109–280 (120 Stat. 780 (2006)), as amended (PPA ’06), has been made in the same manner as those rules apply to any other plan subject to section 430.

(ii) Special rules for plans for which election was made pursuant to section 402(a)(1) of PPA ’06. For purposes of applying the rules of section 430(j) and this section to a plan with respect to which the election under section 402(a)(1) of PPA ’06 has been made, the effective interest rate for the plan is deemed to be 8.85 percent during the period for which the election applies. In addition, see paragraph (e)(4)(ii) of this section for a special determination of the funding shortfall for a plan for which the election in section 402(a)(1) of PPA ’06 has been made.

(b) General timing requirement for minimum required contributions—(1) Earliest date for contributions. A payment made before the first day of the plan year cannot be applied toward the minimum required contribution under section 430 for that plan year.

(2) Deadline for contributions. The deadline for any payment of any minimum required contribution for a plan year is 8% months after the close of the plan year. See section 4971 and the regulations thereunder regarding an excise tax that applies with respect to minimum required contributions not paid by this deadline. For additional rules that may apply in the case of a failure to pay minimum required contributions by this deadline, see also section 430(k) of the Code and sections 101(d) and 4043 of the Employee Retirement Income Security Act of 1974, as amended (ERISA).

(3) Allocation of contribution to a plan year—(i) Plans with unpaid minimum required contributions that have not been corrected. If a plan has unpaid minimum required contributions within the meaning of § 54.4971(c)–1(c) of this chapter that have not yet been corrected within the meaning of § 54.4971(c)–1(d)(2) of this chapter at the time a contribution is made, then the contribution is treated as a late contribution for the earliest plan year for which there is an unpaid minimum required contribution (to the extent necessary to correct that unpaid minimum required contribution). To the extent the contribution exceeds the amount necessary to correct the earlier unpaid minimum required contribution, the excess is treated as a late contribution for the next earliest plan year for which there is an unpaid minimum required contribution (to the extent necessary to correct that next earliest unpaid minimum required contribution). The allocation of the contribution under the preceding sentence is repeated until all unpaid minimum required contributions have been corrected, or until the entire contribution is allocated, whichever comes first.

(ii) Plans without unpaid minimum required contributions. If a contribution is made during the current plan year but before the deadline under paragraph (b)(2) of this section for contributions for a prior plan year, and the plan has no unpaid minimum required contribution for any plan year at the time the contribution is made, then the contribution may be designated as a contribution for either that prior plan year or the current plan year. Similarly, if a contribution made during the current plan year but before the deadline under paragraph (b)(2) of this section for contributions for a prior plan year is more than enough to correct a plan’s unpaid minimum required contributions for all plan years, the portion of a contribution that was not used to correct unpaid minimum required contributions may be designated as a contribution for either that prior plan year or the current plan year.

(iii) Method of allocating contributions—(A) Reporting for contributions to correct unpaid minimum required contributions. The allocation of a contribution under the rules of paragraph (b)(3)(i) of this section to correct unpaid minimum required contributions is automatic and must be shown on the actuarial report (Schedule SB, “Single-Employer Defined Benefit Plan Actuarial Information” of Form 5500, “Annual Return/Report of Employee Benefit Plan”) for the earliest plan year with respect to which, as of the date of the contribution, the deadline for making contributions under paragraph (b)(2) of this section has not passed. See § 1.430(g)–1(d)(1) for the rules for determining the plan year for which these contributions are taken into account in determining the value of plan assets.

(B) Designation of plan year if no unpaid minimum contribution. In the case of a contribution described in paragraph (b)(3)(ii) of this section, the designation is established by the completion (and filing, if required) of the actuarial report (Schedule SB, “Single-Employer Defined Benefit Plan Actuarial Information” of Form 5500, “Annual Return/Report of Employee Benefit Plan”) for the plan year for which the contribution is designated and cannot be changed after the actuarial report that reflects the contribution is completed (and filed, if required) except as provided in guidance published in the Internal Revenue Bulletin. Thus, a contribution that has been designated for a plan year on an actuarial report pursuant to this paragraph (b)(3)(iii)(B) generally cannot be redesignated as a contribution for either an earlier or later plan year.

(4) Adjustment for interest—(i) In general. Except as provided in this paragraph (b)(4), any payment toward the minimum required contribution under section 430 for a plan year that is paid on a date other than the valuation date for that plan year is adjusted for interest for the period between the valuation date and the payment date, at the plan’s effective interest rate for that plan year determined pursuant to § 1.430(h)(2)–1(f)(1). The direction of the adjustment depends on whether the contribution is paid before or after the valuation date for the plan year. If the contribution is paid after the valuation date for the plan year, the contribution is discounted to the valuation date using the plan’s effective interest rate. By contrast, if the contribution is paid before the valuation date for the plan year (which could only occur in the case of a small plan described in section 430(g)(2)(B)), the contribution is increased for interest using the plan’s effective interest rate.

(ii) Interest adjustment for late quarterly installments. In the case of a plan that must make required installments under the rules of paragraph (c) of this section, to the extent a contribution for a plan year constitutes a late required installment, the adjustment for interest for the period between the valuation date and the payment date is made in two steps. In the first step, the portion of the contribution that constitutes a late required installment is adjusted for interest from the date of the contribution to the due date for the installment by discounting it using the plan’s effective interest rate for that plan year determined pursuant to § 1.430(h)(2)–1(f)(1) plus 5 percentage points. In the second step, this discounted amount is treated as if it were contributed on the installment due date for purposes of the interest adjustment under paragraph (b)(4)(i) of this section. However, a contribution made toward the unpaid liquidity amount (as defined in paragraph (d)(3) of this section) that is made before the close of the quarter in which it is due is adjusted under paragraph (b)(4)(iii) of this section.

(iii) Interest adjustment for unpaid liquidity amounts. In the case of a plan that is subject to the liquidity requirement rules of paragraph (d) of this section, to the extent a contribution made during a quarter constitutes a payment of the unpaid liquidity amount for that quarter as described in paragraph (d)(3) of this section, the adjustment for interest for the period between the valuation date and the payment date is made in two steps. In the first step, the portion of the contribution that constitutes a payment of the unpaid liquidity amount is increased for interest from the date of the contribution to the last day of the quarter, at the plan’s effective interest rate for that plan year determined pursuant to § 1.430(h)(2)–1(f)(1). In the second step, this adjusted amount is treated as if it were contributed on the last day of that quarter for purposes of the interest adjustment for late required installments under the rules of paragraph (b)(4)(ii) of this section. See paragraph (d)(3)(iv)(B) of this section for an increase to the minimum required contribution that gives effect to this interest adjustment for unpaid liquidity amounts in the event a portion of the required installment is no longer treated as unpaid after the close of the quarter under paragraph (d)(3)(iv)(A) of this section.

(c) Accelerated quarterly installments required for underfunded plans—(1) Plans subject to quarterly installment requirement. The plan sponsor of a plan that has a funding shortfall for the preceding plan year is required to pay the installments described in paragraph (c)(5) of this section by the due dates described in paragraph (c)(6) of this section. See paragraph (b)(4)(ii) of this section, section 430(k) of the Internal Revenue Code (Code) (regarding the imposition of a lien), and sections 101(d) and 4043 of ERISA (regarding notice to participants and beneficiaries and to the Pension Benefit Guaranty Corporation) for examples of consequences that generally apply following a failure to make required installments.

(2) Satisfaction of quarterly installment requirement. A plan sponsor may satisfy the requirement to pay an installment under paragraph (c)(1) of this section by one or a combination of the following—

(i) Making a contribution for the plan year which is allocated among the required installments under the rules of paragraph (c)(3) of this section; and

(ii) Making an election to use some or all of the plan’s prefunding balance or funding standard carryover balance in accordance with the rules of paragraph (c)(4) of this section.

(3) Satisfaction of quarterly installment requirement with contributions—(i) Contributions allocated to earliest quarterly installments. For purposes of this section, a contribution for a plan year is allocated among the required installments for the plan year under the rules of paragraph (c)(3)(ii) or (iii) of this section, whichever is applicable. Which rule applies depends on whether, at the time the contribution is made, the plan sponsor has unpaid required installments (that is, the plan sponsor has not fully satisfied all required installments for which the due date has passed, taking into account the special rule with respect to the unpaid liquidity amounts in paragraph (d)(3)(iv)(A) of this section).

(ii) Early contributions increased with interest. If a plan has no unpaid required installments for a plan year at the time a contribution for the plan year is made, then the contribution is allocated to the required installments (if any) for the plan year due on or after the date of the contribution under the rules of this paragraph (c)(3)(ii). The contribution is allocated in the order in which those installments occur, and the amount allocated to each required installment is limited to the amount necessary to satisfy the required installment (including satisfaction of the liquidity requirement under paragraph (d)(1) of this section, taking into account the special rule with respect to the unpaid liquidity amounts in paragraph (d)(3)(iv)(A) of this section) taking into account any interest as described in the next sentence. If the contribution is made before the due date of the installment to which it is allocated, then the amount credited toward the installment includes interest on the contribution from the date of the contribution to the due date of the required installment (except as provided in paragraph (d)(2) of this section). This interest adjustment is made using an interest rate equal to the plan’s effective interest rate under § 1.430(h)(2)–1(f)(1) for the plan year.

(iii) Allocation of contributions to late required installments without interest—(A) In general. If a plan has any unpaid required installments for a plan year at the time a contribution for the plan year is made, then the contribution is allocated to those unpaid required installments under the rules of this paragraph (c)(3)(iii). The contribution is allocated in the order in which those unpaid required installments occur, and the amount allocated to each required installment is limited to the amount that satisfies the required installment without any adjustment for interest. If a contribution is allocated to an unpaid required installment under this paragraph (c)(3)(iii), then that contribution is adjusted for interest under the rules of paragraph (b)(4) of this section (regarding interest adjustments for late quarterly installments) for purposes of determining the extent to which that contribution satisfies the minimum required contribution for the plan year.

(B) Bifurcation of contributions that exceed unpaid required installments. Any amount of a contribution described in paragraph (c)(3)(iii)(A) of this section that is not used to satisfy the unpaid required installments for the plan year is allocated toward any remaining required installments for the plan year under the rules of paragraph (c)(3)(ii) of this section.

(4) Satisfaction of quarterly installment requirements through use of funding balances. A plan sponsor may satisfy the requirement to pay an installment under paragraph (c)(1) of this section by making an election to use some or all of the plan’s prefunding balance or funding standard carryover balance under section 430(f). Such an election is subject to the rules of § 1.430(f)–1 and cannot exceed the available amount of the plan’s prefunding balance and funding standard carryover balance determined under § 1.430(f)–1(d)(1)(ii) as of the date of the election. The amount elected is allocated toward satisfaction of the required installments in the same manner as a contribution made on the date of the election. Thus, the amount of an election to use the plan’s prefunding balance or funding standard carryover balance is increased with interest under the rules of paragraph (c)(3)(ii) of this section or is credited against the earliest unpaid required installment under the rules of paragraph (c)(3)(iii) of this section. See § 1.430(f)–1(f)(1)(iii) for rules permitting the use of a standing election for purposes of satisfying required installments through use of funding balances. See § 1.430(f)–1(d)(1)(i)(B) for rules relating to late elections to use the funding standard carryover balance or prefunding balance to satisfy the required installment rules.

(5) Amount of required installment—(i) In general. For purposes of this section, the amount of any required installment due for a plan year is equal to 25 percent of the required annual payment for the plan year as described in paragraph (c)(5)(ii) of this section.

(ii) Required annual payment. The required annual payment for a plan year is equal to the lesser of—

(A) 90 percent of the minimum required contribution under section 430 for the plan year; or

(B) 100 percent of the minimum required contribution under section 430 (determined without regard to any funding waiver under section 412) for the preceding plan year.

(iii) Treatment of funding balances. For purposes of paragraph (c)(5)(ii) of this section, the minimum required contribution for a plan year is determined without regard to the use of the prefunding balance or funding standard carryover balance for the current year or the prior year. However, see paragraph (c)(4) of this section regarding a plan sponsor’s election to use the plan’s prefunding balance or funding standard carryover balance for the current year in order to satisfy the requirement to pay an installment.

(iv) Disregard of certain amounts. For purposes of paragraph (c)(5)(ii) of this section, the minimum required contribution for a plan year is determined without regard to the installment acceleration amount for the plan year determined under section 430(c)(7) or any increase to the minimum required contribution under paragraph (d)(3)(iv)(B) of this section (relating to an unpaid liquidity amount).

(6) Due dates for installments. For purposes of this section, there is a required installment for each quarter of the plan year, and the due dates for the required installments with respect to a full plan year are set forth in the following table:

(7) Special rules for short plan years—(i) In general. In the case of a short plan year, the rules of this paragraph (c) are modified as provided in this paragraph (c)(7).

(ii) Current plan year is short plan year—(A) Amount of required annual payment. In determining the required annual payment pursuant to paragraph (c)(5)(ii) of this section for a short plan year, the amount otherwise determined under paragraph (c)(5)(ii)(B) of this section (based on the prior year’s minimum required contribution) is multiplied by a fraction, the numerator of which is the duration of the short plan year and the denominator of which is 1 year. This rule applies to the year that contains the plan’s termination date if that date is before the date that would otherwise be the end of the plan year (because the plan is treated as having a short plan year for purposes of section 430 pursuant to § 1.430(a)–1(b)(5)).

(B) Number and due dates of installments. If the plan has a short plan year, then an installment is due 15 days after the end of that short plan year. In addition, an installment is required for each due date determined under paragraph (c)(6) of this section that falls within the short plan year. Thus, for example, if the short plan year ends before the 15^th day of the 4^th plan month of the plan year, there will be only one installment for that short plan year, and that installment will be due on the 15^th day after the end of the short plan year.

(C) Amount of installments. The amount of each installment required to be paid for the short plan year is equal to the required annual payment determined pursuant to paragraph (c)(5)(ii) of this section (as modified by paragraph (c)(7)(ii)(A) of this section) divided by the number of installments determined pursuant to paragraph (c)(7)(ii)(B) of this section.

(D) No increase in prior required installments. If a plan is amended to have a short plan year (including as a result of plan termination) and the required installments determined under paragraph (c)(7)(ii)(C) of this section are greater than the required installments determined without regard to the amendment, then—

(1) The required installments for which the due dates occur before the end of the short plan year are determined without regard to the amendment, and

(2) The required installment due on the 15^th day after the end of the short plan year is increased to the extent necessary so that the total of the required installments for the year is the required annual payment determined under paragraph (c)(5)(ii) of this section, determined taking into account the rules of paragraph (c)(7)(ii)(A) of this section.

(iii) Prior plan year is short plan year. If the prior plan year is a short plan year, the amount otherwise determined under paragraph (c)(5)(ii)(B) of this section (based on the prior year’s minimum required contribution) is multiplied by a fraction, the numerator of which is 1 year and the denominator of which is the duration of the short plan year.

(d) Liquidity requirement in connection with quarterly installments—(1) In general—(i) Additional requirement with respect to quarterly installments. Except as provided in this paragraph (d)(1), if a plan sponsor is required to pay the installments described in paragraph (c) of this section, then the plan sponsor is treated as failing to pay the full amount of the required installment for a quarter to the extent that the value of the liquid assets paid in the required installment after the end of that quarter and on or before the due date for the installment is less than the liquidity shortfall for that quarter. If the amount of any required installment is increased by reason of this paragraph (d)(1)(i), in no event shall this increase exceed the amount which, when added to the current required installment (determined without regard to the increase) and prior required installments for the plan year (not including any portion of a required installment that is no longer treated as unpaid under paragraph (d)(3)(iv)(A) of this section), is necessary to increase the funding target attainment percentage for the plan year to 100 percent (taking into account the expected increase in the funding target due to benefits accruing or earned during the plan year).

(ii) Small plan exception. The liquidity requirement of this paragraph (d) does not apply to a plan for any plan year for which the plan is a small plan described in § 1.430(g)–1(b)(2).

(2) Satisfaction of liquidity requirement. The additional requirement with respect to a required installment under paragraph (d)(1) of this section can be satisfied only with an actual contribution of liquid assets that, after application of paragraph (c)(3) of this section, is allocated to satisfy the required installment for the quarter. The liquidity requirement cannot be satisfied through the use of funding balances, and satisfaction of this requirement is determined without taking into account the increase for interest for early contributions set forth in paragraph (c)(3)(ii) of this section. Any contribution of liquid assets that is allocated to satisfy the required installment for a quarter applies for purposes of determining whether the requirements of paragraph (d)(1) of this section are satisfied, even if the contribution is less than the total amount needed to satisfy the requirements of paragraph (c) of this section for the quarter (taking into account any increase in the required installment under this paragraph (d)).

(3) Failure to satisfy liquidity requirement—(i) Treatment as failure to satisfy quarterly installment. If an employer fails to satisfy the additional requirement with respect to a required installment for a quarter under paragraph (d)(1) of this section, the portion of that required installment that is treated as not paid by reason of paragraph (d)(1) of this section (the unpaid liquidity amount for that quarter) is treated as an underpayment of the required installment. See paragraph (c)(1) of this section for examples of consequences of underpayment of a required installment.

(ii) Late satisfaction of liquidity requirement. The rules of paragraph (d)(2) of this section apply to determine whether a contribution made after the deadline for a required installment satisfies the liquidity requirement of paragraph (d)(1) of this section. However, pursuant to section 430(j)(4)(C), the unpaid liquidity amount is treated as unpaid until the end of the quarter in which the due date for that installment occurs, even if liquid assets in that amount are contributed during that quarter (but after the due date for the installment). See paragraph (b)(4)(iii) of this section for the application of this rule for purposes of applying the additional interest for late required installments.

(iii) Additional consequences of failure to pay liquidity shortfall. See section 206(e) of ERISA and section 401(a)(32) of the Code (regarding suspension of accelerated distributions for a plan with an unpaid liquidity amount). See also section 4971(f) regarding an excise tax imposed in the event of a failure to pay a liquidity shortfall.

(iv) Treatment in subsequent quarter—(A) Adjustment to required installment. After the close of the quarter in which the due date of a required installment occurs, any portion of the installment that was treated as unpaid solely by reason of paragraph (d)(1) of this section, and that was not satisfied with a contribution of liquid assets during that quarter, is no longer treated as unpaid (but any portion of the installment that would be treated as unpaid without regard to paragraph (d)(1) of this section must be satisfied in accordance with the rules of paragraph (c) of this section).

(B) Increase to minimum required contribution for additional interest. If a portion of the required installment is no longer treated as unpaid by reason of paragraph (d)(3)(iv)(A) of this section, then the minimum required contribution for the plan year for which the installment was due is increased by an amount equal to—

(1) The portion of the required installment that is no longer treated as unpaid by reason of paragraph (d)(3)(iv)(A) of this section, discounted for interest for the period from the last day of the quarter that includes the due date of the required installment to the valuation date, using the plan’s effective interest rate for the plan year (determined pursuant to § 1.430(h)(2)–1(f)(1)); minus

(2) The portion of the required installment that is no longer treated as unpaid by reason of paragraph (d)(3)(iv)(A) of this section, discounted for interest for the period from the last day of the quarter that includes the due date of the required installment to the due date of the installment, using the plan’s effective interest rate for the plan year plus 5 percentage points, and further discounted for interest for the period from the due date of the required installment to the valuation date using the plan’s effective interest rate for the plan year.

(e) Definitions—(1) In general. The definitions set forth in this paragraph (e) apply for purposes of this section.

(2) Adjusted disbursements—(i) In general. The term adjusted disbursements means, with respect to a time period, the amount described in paragraph (e)(2)(ii) of this section if the time period is within a single plan year, or the amount described in paragraph (e)(2)(iii) of this section if the time period spans more than one plan year.

(ii) Period within a single plan year. With respect to a period within a plan year, the adjusted disbursements are the disbursements from the plan during that period reduced by the product of—

(A) The plan’s funding target attainment percentage determined under section 430(d)(2) for the plan year that contains that period; and

(B) The sum of the purchases of annuities and payments of single sums for that period.

(iii) Period spanning more than one plan year. With respect to a period of time that spans more than one plan year, the adjusted disbursements are the sum of the adjusted disbursements determined separately under paragraph (e)(2)(ii) of this section for each portion of a plan year that is included in the time period for which adjusted disbursements are determined.

(3) Disbursements from the plan. The term disbursements from the plan means all disbursements from the plan’s trust, including purchases of annuities, payments of single sums and other benefits, and payments of administrative expenses.

(4) Funding shortfall—(i) In general. Except as otherwise provided in this paragraph (e)(4), the term funding shortfall has the same meaning as under § 1.430(a)–1(f)(2).

(ii) Special rule for plans of commercial passenger airlines. In the case of a plan year for which an election described in section 402(a)(1) of PPA ’06 is in effect, the term funding shortfall means the unfunded liability for that plan year determined under § 1.430(a)–1(b)(4)(ii).

(iii) Special rule for first effective plan year. See paragraph (g)(5)(ii) of this section for a calculation of the funding shortfall for the plan’s pre-effective plan year.

(iv) Special rule for plan spinoffs and mergers. [Reserved]

(5) Liquid assets—(i) In general. The term liquid assets means cash, marketable securities, and other assets described in this paragraph (e)(5)(i). For this purpose, marketable securities include financial instruments such as stocks and other equity interests, evidences of indebtedness (including certificates of deposit), options, futures contracts, and other derivatives, for which there is a liquid financial market, and other interests in entities (such as partnerships, trusts, or regulated investment companies) for which there is a liquid financial market. For purposes of the preceding sentence, a liquid financial market is an established financial market described in § 1.1092(d)–1(b) (other than an interbank market or an interdealer market described in § 1.1092(d)–1(b)(1)(v) and (vi), respectively). Any security that is issued or guaranteed by the government of the United States or an agency or instrumentality thereof for which there is an established financial market described in § 1.1092(d)–1(b) is a marketable security. Finally, any financial instrument or other interest in an entity that, under its terms, contains a right by which the instrument or other interest may immediately be redeemed, exchanged, or converted into cash or a marketable security, is a marketable security, provided there are no restrictions on the exercise of that right.

(ii) Insurance and annuity contracts. Other assets that are treated as liquid assets of a plan are insurance, annuity, or other contracts issued by an insurance company that is licensed to do business under the laws of any State, but only if the insurance, annuity, or other contract—

(A) Contains an unrestricted right by which the insurance, annuity or other contract may immediately be redeemed, exchanged, or converted into cash or a marketable security;

(B) Provides for substantially equal monthly disbursements to the extent provided in paragraph (e)(5)(iii) of this section; or

(C) Is benefit responsive within the meaning of paragraph (e)(5)(iv) of this section.

(iii) Insurance and annuity contracts providing for substantially equal periodic payments. If the contract provides for substantially equal monthly disbursements (for example, an annuity contract in pay status), the only portion of the contract that may be treated as liquid assets for a quarter is the amount equal to 36 times the monthly disbursement (in the month containing the last day of the quarter) which is available under the terms of the contract, provided there are no restrictions on the right to disbursements.

(iv) Benefit responsive insurance and annuity contracts. A contract is considered benefit responsive if, under applicable law and contractual provisions, the plan has the right to receive disbursements from the contract in order to pay plan benefits for any participant in the plan, without restrictions on that right.

(v) Restrictions. For purposes of this paragraph (e)(5), a restriction on a redemption, exchange, or conversion right, or a restriction on a right to receive a disbursement, may result not only from applicable law or contractual provisions, but also from rehabilitation, conservatorship, receivership, insolvency, bankruptcy, or similar proceedings.

(6) Liquidity shortfall—(i) In general. Except as modified in paragraph (e)(6)(iii) of this section with respect to multiple employer plans, the term liquidity shortfall means, with respect to any required installment, an amount equal to the excess (as of the last day of the quarter for which that installment is due) of—

(A) The base amount with respect to the quarter, over

(B) The value (as of the last day of the quarter) of the plan’s liquid assets.

(ii) Base amount—(A) In general. For purposes of this paragraph (e)(6), the term base amount means, with respect to any quarter, an amount equal to 3 times the sum of the adjusted disbursements from the plan for the 12 months ending on the last day of that quarter.

(B) Special rule. If the generally applicable base amount for a quarter (as determined under paragraph (e)(6)(ii)(A) of this section) exceeds an amount equal to 2 times the sum of the adjusted disbursements from the plan for the 36 months ending on the last day of the quarter and the enrolled actuary for the plan certifies to the satisfaction of the Commissioner that such excess is the result of nonrecurring circumstances, then the base amount with respect to that quarter is determined without regard to amounts related to those nonrecurring circumstances.

(iii) Multiple employer plans—(A) Satisfaction of liquidity requirement as if plan were not a multiple employer plan. For a multiple employer plan to which section 413(c)(4)(A) applies, the liquidity requirement of paragraph (d)(1)(i) of this section is satisfied if the liquidity requirement would be satisfied if the plan were a single-employer plan that is not a multiple employer plan to which section 413(c)(4)(A) applies.

(B) Failure to satisfy the liquidity requirement on a plan-wide basis. For a multiple employer plan to which section 413(c)(4)(A) applies, if the plan does not satisfy the liquidity requirement in accordance with paragraph (e)(6)(iii)(A) of this section, then the liquidity requirement must be applied separately for each employer under the plan, as if each employer maintained a separate plan. Thus, the value of plan assets as of the end of each quarter under such a multiple employer plan must be allocated among the employers sponsoring the plan, and the liquidity shortfall must be determined for each employer based on that allocation. See section 413(c)(7)(B) and paragraph (a)(2) of this section.

(7) Plan month—(i) Plan year begins on the first day of a calendar month. For a plan year that begins with the first day of a calendar month, the term plan month means any calendar month that begins during the plan year.

(ii) Plan year begins on a date other than the first day of a calendar month. For a plan year that begins on a date other than the first day of a calendar month, the first day of each plan month is the day of the calendar month that corresponds to the day of the calendar month that is the first day of the plan year. Thus, for example, if the first day of a plan year is January 15, then a plan month starts on the 15^th of each calendar month. However, if a calendar month does not contain a day that corresponds to the day of the calendar month that is the first day of the plan year (for example, if a calendar month has only 30 days and the first day of the plan year is the 31^st day of a calendar month), then the first day of the plan month that begins during that calendar month is the last day of that calendar month.

(8) Quarter. The term quarter means, with respect to any required installment, the 3-plan-month period preceding the plan month in which the due date for that installment occurs.

(9) Short plan year. The term short plan year means a plan year that is shorter than 12 months (and is not a 52-week plan year of a plan that uses a 52-53 week plan year).

(f) Examples. The following examples illustrate the rules of this section. Unless otherwise indicated, these examples are based on the following assumptions: section 430 applies to determine the minimum required contribution for plan years beginning on or after January 1, 2008; the plan year is the calendar year; the valuation date is January 1; the plan sponsor is required to pay the installments described in paragraph (c) of this section; the plan does not have a liquidity shortfall; and the plan sponsor has not elected any funding relief under section 430(c)(2)(D) for any plan year. In addition, these examples assume that, under the funding method used for the plan, interest adjustments are calculated to the nearest half month (rather than days) for transactions that occur on the 1^st and 15^th of a calendar month.

Example 1. (i) Plan A has a funding standard carryover balance of $15,000 and a prefunding balance of zero as of January 1, 2016, and the plan’s funding ratio for 2015 (determined under § 1.430(f)–1(d)(3)) was over 80%. The minimum required contribution for Plan A (determined prior to any offset for the funding standard carryover balance) is $100,000 for 2016 and is $125,000 for 2017. The effective interest rate for the 2017 plan year is 5.90%.

(ii) The required annual payment for 2017 is equal to the lesser of (a) 100% of the 2016 minimum required contribution ($100,000) or (b) 90% of the 2017 minimum required contribution (90% of $125,000, or $112,500). Therefore, each required installment for 2017 is 25% of $100,000, or $25,000.

(iii) Installments of $25,000 each are due by April 15, 2017, July 15, 2017, October 15, 2017, and January 15, 2018. The final contribution for the 2017 plan year is due by September 15, 2018. The amount of this final contribution is equal to $125,000, less the contributions made prior to that date, with all contributions adjusted to the valuation date using the effective interest rate for the 2017 plan year. If the plan sponsor makes each required installment on the date due, the remaining amount due is determined as follows:

(A) The contribution paid April 15, 2017 is adjusted by discounting the contribution amount for 3% months at the effective interest rate ($25,000 ÷ 1.0590^(3.5/12)= $24,585).

(B) The contribution paid July 15, 2017 is discounted for 6% months at the effective interest rate ($25,000 ÷ 1.0590 ^(6.5/12) = $24,236).

(C) The contribution paid October 15, 2017 is discounted for 9% months at the effective interest rate ($25,000 ÷ 1.0590^(9.5/12)= $23,891).

(D) The contribution paid January 15, 2018 is discounted for 12% months at the effective interest rate ($25,000 ÷ 1.0590^(12.5/12) = $23,551).

(E) The sum of the above contributions for the 2017 plan year paid through January 15, 2018, adjusted for interest to the valuation date, is $96,263. The remaining amount due for the 2017 plan year is $125,000 minus $96,263, or $28,737, as of January 1, 2017.

(iv) If the final contribution is made on September 15, 2018, the remaining amount due must be increased for interest at the plan’s effective interest rate for the 20% months between January 1, 2017 and September 15, 2018 (so that, when it is discounted with interest for those 20% months, the resulting amount will equal $28,737). Therefore, the remaining contribution due on September 15, 2018 is $28,737 x 1.0590^(20.5/12) = $31,694.

Example 2. (i) The facts are the same as in Example 1, except that the plan sponsor elects to use the $15,000 funding standard carryover balance as of January 1, 2016, to offset the minimum required contribution for the 2016 plan year. The plan sponsor makes a contribution on January 1, 2016 of $85,000, which satisfies the minimum contribution requirement for 2016.

(ii) The required installments for 2017 are unaffected by the plan sponsor’s election to offset the minimum required contribution by the funding standard carryover balance for 2016. Therefore, the required annual payment for 2017 is $100,000 (determined as the lesser of (a) 100% of $100,000 or (b) 90% of $125,000) and the amount of each required installment for the 2017 plan year is 25% of the required annual payment, or $25,000.

Example 3. (i) The facts are the same as in Example 1. Plan A’s funding standard carryover balance has increased to $17,000 as of January 1, 2017, based on the actual rate of return of plan assets during the 2016 plan year. Plan A’s funding ratio for 2016 (determined under § 1.430(f)–1(d)(3)) is over 80%. On March 15, 2017, the plan sponsor elects to use the entire amount of the funding standard carryover balance to offset the minimum required contribution for 2017.

(ii) The plan sponsor’s election to use the funding standard carryover balance to offset the minimum required contribution is treated as satisfying the requirement to make a required installment to the extent of the amount elected, adjusted with interest for the period from the beginning of the plan year to the due date of the installment using the plan’s effective interest rate for the 2017 plan year. This adjustment is made for the 2.5-month period from the beginning of the plan year to the date of the election as provided in § 1.430(f)–1(b)(5), and for the one-month period from the date of the election to the due date for the installment, as provided in paragraphs (c)(3)(ii) and (c)(4) of this section. Therefore, the $17,000 funding standard carryover balance as of January 1, 2017 offsets $17,000 x 1.0590^(2.5/12) x 1.0590^(1/12)or $17,287 of the $25,000 required installment due April 15, 2017, and the remaining contribution due on April 15, 2017 is $25,000 minus $17,287, or $7,713.

(iii) The interest adjustments in paragraph (ii) of this Example 3 are based on the effective interest rate even if that rate is not determined by the time that the required installment is due. If the plan’s effective interest rate for the plan year has not been determined at the time that the required installment is due, the actual amount of the required installment satisfied by the use of the funding standard carryover balance is determined after the effective interest rate is determined. If the extent to which the funding standard carryover balance satisfies the required installment is overestimated and the result is that the full amount of the required installment is not paid by the due date, the plan is subject to the consequences for late or unpaid required installments as described in paragraph (c)(1) of this section.

Example 4. (i) The facts are the same as in Example 3. The plan sponsor makes a contribution of $7,713 (which is equal to the remaining portion of the first required installment) on April 15, 2017. For the 2017 plan year, the plan sponsor makes another contribution of $200,000 on June 30, 2017. No further contributions are made for the 2017 plan year.

(ii) The contributions made for the 2017 plan year are adjusted to the valuation date using the plan’s effective interest rate for the 2017 plan year. The contribution paid April 15, 2017 is discounted for the 3% months between January 1, 2017 and the date of payment, using the effective interest rate of 5.90% ($7,713 ÷ 1.0590^(3.5/12) = $7,585). The contribution paid June 30, 2017 is discounted for 6 months using the effective interest rate ($200,000 ÷ 1.0590^(6/12) = $194,349), for a total interest-adjusted contribution of $201,934.

(iii) The present value of the excess contribution for 2017 is based on the net contribution required for that year, which is the minimum required contribution minus the offset for the funding standard carryover balance, or $108,000 (that is, $125,000 minus $17,000). Accordingly, the present value of the excess contribution for 2017 is $201,934 minus $108,000, or $93,934. All or a portion of this amount may be credited to the prefunding balance at the election of the plan sponsor.

Example 5. (i) The facts are the same as in Example 3. The plan sponsor pays the required installment of $7,713 on April 15, 2017 and installments of $25,000 each on July 15, 2017 and October 15, 2017. However, only $10,000 of the installment due on January 15, 2018 is paid. No additional contributions are made until the final contribution for the plan year of $55,000 is paid on September 15, 2018.

(ii) The 2017 Schedule SB shows that the contributions for the plan year exceed the minimum required contribution. This is determined by comparing the net contribution requirement of $108,000 (equal to the minimum required contribution of $125,000 offset by $17,000 for the amount of funding standard carryover balance used) and the interest-adjusted contributions made for the 2017 plan year, developed as shown:

(A) The contribution paid April 15, 2017 is adjusted by discounting the contribution amount for 3% months at the effective interest rate ($7,713 ÷ 1.0590^(3.5/12)= $7,585).

(B) The contribution paid July 15, 2017 is discounted for 6% months at the effective interest rate ($25,000 ÷ 1.0590 ^(6.5/12) = $24,236).

(C) The contribution paid October 15, 2017 is discounted for 9% months at the effective interest rate ($25,000 ÷ 1.0590^(9.5/12)= $23,891).

(D) The contribution paid January 15, 2018 is discounted for 12% months at the effective interest rate ($10,000 ÷ 1.0590^(12.5/12)= $9,420).

(E) Pursuant to paragraph (b)(4)(ii) of this section, the interest rate used to adjust the $15,000 underpayment of the required installment due January 15, 2018 is increased by 5 percentage points for the 8-month period of underpayment (January 15, 2018 through September 15, 2018). Accordingly, $15,000 of the contribution paid on September 15, 2018 is discounted using a rate of 10.90% for 8 months to the due date of January 15, 2018, and is then further adjusted using the 5.90% effective interest rate for the 12% months between the required installment due date of January 15, 2018 and the valuation date of January 1, 2017. This portion of the September 15, 2018 contribution results in an adjusted amount of $13,189 as of January 1, 2017 ($15,000 ÷ 1.1090^(8/12) ÷ 1.0590^(12.5/12)).

(F) The remaining $40,000 of the contribution paid on September 15, 2018 is discounted using the effective interest rate of 5.90% for the 20%-month period between the date of payment and the valuation date. This portion of the payment is therefore adjusted to $36,268 as of the valuation date (that is, $40,000 ÷ 1.0590^(20.5/12)).

(G) The sum of the contributions (as calculated in paragraphs (ii)(A) through (F) of this Example 5) for the 2017 plan year paid through September 15, 2018, adjusted for interest to the valuation date, is $114,589. This is greater than the net contribution required for the 2017 plan year of $108,000.

Example 6. (i) The facts are the same as in Example 5, except that the plan sponsor does not make the contribution on September 15, 2018.

(ii) The 2017 Schedule SB shows an unpaid minimum required contribution of $42,868 as of January 1, 2017. This is equal to the difference between the net contribution required for 2017 of $108,000 (the minimum required contribution of $125,000, offset by $17,000 for the amount of the funding standard carryover balance used) and $65,132 (the interest-adjusted contributions made for the 2017 plan year before the 8% month deadline, as illustrated in paragraphs (ii)(A) through (ii)(D) of Example 5).

Example 7. (i) The facts are the same as in Example 1, except that the plan year is changed to an August 1 – July 31 plan year effective August 1, 2017. This results in a short plan year beginning January 1, 2017 and ending July 31, 2017. The minimum required contribution for the 7-month period covered by the plan year is calculated as $72,917 in accordance with § 1.430(a)–1(b)(2)(ii).

(ii) As provided in paragraph (c)(7) of this section, a required installment is due 15 days after the end of the short plan year (August 15, 2017), and required installments are also due on the regularly scheduled due dates for required installments that occur within the short plan year (April 15, 2017 and July 15, 2017).

(iii) The required installments are determined based on the lesser of (a) 90% of the minimum required contribution for the short plan year ending July 31, 2017 (90% of $72,917, or $65,625) or (b) 7/12 of 100% of the 2016 minimum required contribution ($100,000 x 7/12, or $58,333). The required installments are thus based on $58,333 because that is the smaller amount.

(iv) The amount of each required installment is determined by dividing the amount determined in paragraph (iii) of this Example 7 by the number of required installments for the short plan year. This calculation results in required installments of $19,444 each (that is, $58,333 divided by 3 installments).

(v) The deadline for the remaining payment is 8% months after the end of the short plan year, or April 15, 2018. If the plan sponsor pays the minimum required amount at each installment date, does not elect to offset any amounts by any funding standard carryover or prefunding balance, and makes a final payment on April 15, 2018, then the remaining payment is $17,429, determined as follows:

(A) The contribution paid April 15, 2017 is adjusted by discounting the contribution amount for 3% months at the effective interest rate ($19,444 ÷ 1.0590^(3.5/12)= $19,122).

(B) The contribution paid July 15, 2017 is discounted for 6% months at the effective interest rate ($19,444 ÷ 1.0590 ^(6.5/12) = $18,850).

(C) The contribution paid August 15, 2017 is discounted for 7% months at the effective interest rate ($19,444 ÷ 1.0590^(7.5/12)= $18,760).

(D) The sum of the contributions for the 2017 plan year paid through August 15, 2017, adjusted for interest to the valuation date, is $56,732. The remaining amount paid April 15, 2018 for the 2017 plan year is ($72,917 – $56,732) x 1.059^(15.5/12) = $17,429.

Example 8. (i) Plan B has an August 10 to August 9 plan year.

(ii) For the plan year that begins on August 10, 2017, a plan month begins on the 10th day of each calendar month. Accordingly, the due dates for the required installments for that plan year are November 24, 2017, February 24, 2018, May 24, 2018 and August 24, 2018. The deadline for the final contribution for the plan year is April 24, 2019.

Example 9. (i) Plan C has a funding standard carryover balance of $0 and a prefunding balance of $65,000 as of January 1, 2017. Plan C’s funding ratio for 2016 (determined under § 1.430(f)–1(d)(3)) was over 80%. The minimum required contribution for Plan C (determined prior to any offset for the funding standard carryover balance) is $120,000 for 2016. Required installments for the 2016 plan year were made timely, and the final installment of the minimum required contribution for the 2016 plan year is due on September 15, 2017 in the amount of $40,000.

(ii) Prior to April 15, 2017, the plan sponsor makes a standing election to use Plan C’s funding balances to offset any otherwise unpaid required installments and any otherwise unpaid minimum required contribution. On June 1, 2017, the actuary completes the 2017 valuation and notifies the plan sponsor that the minimum required contribution for the 2017 plan year is $100,000. The effective interest rate for the 2017 plan year is 5.90%. No contributions are made for the 2017 plan year until September 15, 2018.

(iii) The first required installment for the 2017 plan year is due on April 15, 2017. Under § 1.430(f)–1(f)(1)(iii)(B), the amount of the prefunding balance used as of April 15, 2017 pursuant to the standing election is 25% of the $120,000 required annual payment for the 2016 plan year ($30,000). The prefunding balance is reduced by this amount, adjusted for the 3%-month period between the January 1, 2017 valuation date and the April 15, 2017 due date, using the effective rate for Plan C for 2017 ($30,000 ÷ 1.0590^(3.5/12), or $29,503). The prefunding balance is available to offset the April 15, 2017 required installment even though the minimum required contribution for the 2016 plan year has not yet been made, because the standing election to use Plan C’s balances to offset the minimum required contribution for the 2016 plan year does not take effect until the due date for that contribution, or September 15, 2017. Therefore, as of April 15, 2017, the prefunding balance still exists and may be used to offset the required installment due as of that date.

(iv) The second required installment for the 2017 plan year is due on July 15, 2017, after the actuary determined the minimum required contribution for the 2017 plan year. The required annual payment for 2017 is equal to the lesser of (a) 100% of the 2017 minimum required contribution ($120,000) or (b) 90% of the 2017 minimum required contribution (90% of $100,000, or $90,000). Therefore, each required installment for 2017 is 25% of $90,000, or $22,500.

(v) Although the amount of the required installments for 2017 ($22,500) is smaller than the amount based on the 2016 minimum required contribution ($30,000), under § 1.430(f)–1(f)(1)(iii)(B), the amount of the prefunding balance used under the standing election continues to be the $30,000 based on the minimum required contribution for the 2016 plan year. Alternatively, the plan sponsor can make a replacement formula election to use the prefunding balance to cover the remaining required installments for the 2017 plan year as described in § 1.430(f)–1(f)(1)(iii)(C), based on required installments of $22,500 each.

(vi) The use of $30,000 of the prefunding balance as of April 15, 2017 pursuant to the standing election is irrevocable, and therefore the prefunding balance is not adjusted to reflect the fact that the first required installment for the 2017 plan year (based on the actual 2017 minimum required contribution) is lower than $30,000.

(vii) However, the excess of the $30,000 of prefunding balance used on April 15, 2017 over the first required installment is allocated toward the second required installment. In addition, if the plan sponsor makes a replacement formula election in accordance with § 1.430(f)–1(f)(1)(iii)(C), the amount of prefunding balance used pursuant to that election takes into account the actual required installment. In this case, the amount of the prefunding balance used to satisfy the July 15, 2017 required installment is $14,437. This amount is determined by (1) calculating the excess of the amount of the prefunding balance used on April 15, 2017 over the amount of the required installment due on that date ($30,000 minus $22,500 = $7,500), and adjusting it for the 3 months from April 15, 2017 to July 15, 2017, using the effective interest rate ($7,500 x 1.0590^(3/12) = $7,608), (2) deducting that amount from the required installment due July 15, 2017, to determine the net amount due as of that date ($22,500 – $7,608 = $14,892), and (3) adjusting the net amount to the valuation date of January 1, 2017 for the 6%-month period between the valuation date and the due date for the required installment, using the effective interest rate for Plan C for 2017 ($14,892 ÷ 1.0590^(6.5/12) = $14,437).

Example 10. (i) The facts are the same as in Example 9, except that Plan C’s prefunding balance as of January 1, 2017 is only $20,000, and Plan C’s sponsor makes a contribution larger than the minimum required contribution for the 2016 plan year on March 1, 2017.

(ii) The amount of the April 15, 2017 required installment that is satisfied by the plan sponsor’s election to offset the prefunding balance is calculated by increasing the January 1, 2017 prefunding balance with interest for 3% months to April 15, 2017, using the effective interest rate for Plan C for 2017. This results in an offset of $20,337 ($20,000 x 1.0590^(3.5/12)). A cash contribution of $2,163 ($22,500 minus $20,337) is needed to satisfy the required installment on that date.

(iii) The excess contribution made for the 2016 plan year cannot be used to offset the remainder of the April 15, 2017 required installment even though it was contributed prior to the date the installment is due, because the sponsor had not yet elected to credit the excess contribution to the prefunding balance. If the plan sponsor elects at a later date to credit the excess contribution to the prefunding balance, the amount can be used to offset required installments due on or after the date of that election. However, note that if Plan C’s actuary reflected the excess contribution for 2016 in certifying the 2017 adjusted funding target attainment percentage (AFTAP) used to apply benefit restrictions under section 436, a later election to credit the excess contribution to the prefunding balance would reduce the AFTAP and could cause Plan C to violate section 436.

Example 11. (i) Plan D is not a small plan described in § 1.430(g)–1(b)(2). The valuation date for Plan D is January 1, and Plan D’s funding target attainment percentage (FTAP) was 82% as of January 1, 2016 and is 90% as of January 1, 2017. The amount needed to increase the plan’s FTAP for the 2017 plan year to 100% (including the expected increase in the funding target due to benefits accruing or earned during the plan year) is $500,000. Before taking the liquidity requirement of paragraph (d) of this section into account, the plan sponsor of Plan D is required to pay installments for the 2017 plan year in the amount of $50,000 each. During the 12-month period ending March 31, 2017, periodic annuity payments of $425,000 and single sum payments of $200,000 were made by Plan D. Of the single sum payments, $125,000 were made during the 2016 plan year and $75,000 were made during the 2017 plan year. None of these payments were due to nonrecurring circumstances. In addition, administrative expenses of $25,000 were paid from the plan trust during the 12-month period ending March 31, 2017. As of March 31, 2017, the reported value of Plan D’s assets is $1,500,000, and the fair market value of Plan D’s liquid assets is $1,300,000.

(ii) The amount of the adjusted disbursements from Plan D for the 12-month period ending March 31, 2017 is calculated as the sum of the annuity benefits, single sum payments, and administrative expenses paid during the 12-month period, reduced by the product of the plan’s FTAP and the sum of the single sum payments and any payments for annuities purchased during the plan year. This results in adjusted disbursements for the period of $480,000 (that is, $425,000 plus $200,000 plus $25,000, reduced by 82% of $125,000 in single sum payments during 2016 and 90% of $75,000 in single sum payments during 2017).

(iii) The base amount is calculated in accordance with paragraph (e)(6)(ii) of this section as three times the adjusted disbursements determined in paragraph (ii) of this Example 11, or $1,440,000.

(iv) The liquidity shortfall is the difference between the base amount of $1,440,000 determined in paragraph (iii) of this Example 11 and the $1,300,000 in liquid assets as of March 31, 2017, or $140,000. The required installment due on April 15, 2017 is therefore $140,000, since this amount is larger than the $50,000 installment otherwise required, but less than the $500,000 needed to increase the plan’s FTAP (including the expected increase in the funding target due to benefits accruing or earned during the plan year) to 100%.

(v) Note that any contributions of liquid assets made through March 31, 2017 are reflected for purposes of determining the fair market value of Plan D’s liquid assets as of March 31, 2017 and are not applied toward satisfying the liquidity requirement as of April 15, 2017. Similarly, any funding standard carryover balance or prefunding balance as of January 1, 2017 cannot be applied to offset the liquidity requirement. Only contributions made in cash or other liquid assets made after March 31, 2017 and by April 15, 2017 can be used to timely satisfy this requirement.

Example 12. (i) The facts are the same as in Example 11. The plan sponsor makes a cash contribution for the 2017 plan year of $30,000 on April 15, 2017, and makes an additional cash contribution for the 2017 plan year of $110,000 on April 30, 2017. The effective interest rate for Plan D for the 2017 plan year is 5.90%.

(ii) Under paragraph (d)(3)(i) of this section, the underpayment of the required installment due April 15, 2017 is $110,000 (that is, $140,000 minus $30,000).

(iii) Because the $110,000 contribution was made after the due date for the required installment (which reflects an unpaid liquidity amount) but during the quarter in which the installment was due, and because that contribution does not exceed the unpaid liquidity amount for the quarter, the special interest adjustment under paragraph (b)(4)(iii) of this section applies to the entire amount of the contribution. Accordingly, the contribution is adjusted for interest in two steps for the purpose of determining the portion of the minimum required contribution that is satisfied by the contribution. In the first step, the contribution is adjusted using the effective interest rate for the 2-month period from the payment date of April 30, 2017 to June 30, 2017, the last day of the quarter during which the liquidity requirement was due ($110,000 x 1.0590^(2/12) = $111,056). In the second step, this amount is adjusted as if that amount had been paid on June 30, 2017. Accordingly, this amount ($111,056) is discounted for interest at a rate of 10.90% (the effective interest rate for the 2017 plan year of 5.90%, increased by 5 percentage points) for the 2%-month period from June 30, 2017 to the April 15, 2017 due date for the installment, and is further discounted using the effective interest rate of 5.90% for the 3%-month period between April 15, 2017 and the valuation date of January 1, 2017. Therefore, the April 30, 2017 contribution is adjusted to $106,886 as of January 1, 2017 ($111,056 ÷ 1.1090^(2.5/12) ÷ 1.0590^(3.5/12)).

(iv) The $140,000 contributed during April 2017 is needed to satisfy the required installment due April 15, 2017 (determined taking into account the liquidity shortfall as of March 31, 2017), and so the full amount is applied to satisfy that installment. No portion of those contributions is applied to the required installments for subsequent quarters, and no additional payments are needed to satisfy the required installment due April 15, 2017 (because the $110,000 payment satisfies both the unpaid liquidity amount and the remaining amount of the required installment described under paragraph (c)(5) of this section).

Example 13. (i) The facts are the same as in Example 12, except that the plan sponsor does not make the second cash contribution of $110,000 on April 30, 2017, but instead makes a second cash contribution of $75,000 for the 2017 plan year on July 15, 2017. The base amount as of June 30, 2017 calculated in accordance with paragraph (e)(6)(ii) of this section is $1,500,000, and the fair market value of liquid assets as of that date is $1,400,000.

(ii) Under paragraph (d)(3)(i) of this section, the underpayment of the required installment due April 15, 2017 is $110,000 (that is, $140,000 minus $30,000).

(iii) As of June 30, 2017, no portion of the $110,000 underpayment of the required installment due April 15, 2017 has been satisfied. Under paragraph (d)(3)(iv)(A) of this section, to the extent that the amount due April 15, 2017 solely because of the liquidity requirement under paragraph (d)(1) of this section is not satisfied with a contribution of liquid assets during the quarter, this amount is no longer considered unpaid. Of the $110,000 underpayment of the required installment that was due on April 15, 2017, $20,000 would have been due without regard to the liquidity requirement under paragraph (d)(1) of this section and $90,000 was due solely because of that liquidity requirement. Accordingly, as of July 1, 2017, $90,000 of the required installment due on April 15, 2017 is no longer treated as unpaid and $20,000 of that required installment continues to be treated as unpaid.

(iv) Under paragraph (d)(3)(iv)(B) of this section, the interest adjustment in paragraph (b)(4)(iii) of this section for the $90,000 portion of the installment due April 15, 2017 that is no longer treated as unpaid is given effect through an increase in the minimum required contribution. This increase to the minimum required contribution is $837, which is determined as the difference between:

(A) The $90,000 portion of the required installment that is no longer treated as unpaid by reason of paragraph (d)(3)(iv)(A) of this section, discounted for the 6-month period between June 30, 2017 (the last day of the quarter in which the liquidity amount was due) to January 1, 2017 (the valuation date) using the plan’s effective interest rate for 2017 (5.90%), resulting in $87,457 (that is, $90,000 ÷ 1.0590^(6/12)), and

(B) The $90,000 portion of the required installment that is no longer treated as unpaid by reason of paragraph (d)(3)(iv)(A) of this section, discounted for the 2%-month period between June 30, 2017 and the April 15, 2017 due date using the plan’s effective interest rate increased by 5 percentage points (10.90%), and further discounted for the 3%-month period between April 15, 2017 and January 1, 2017 valuation date using the plan’s effective interest rate, for a result of $86,620 (that is, $90,000 ÷ 1.1090^(2.5/12) ÷ 1.0590^(3.5/12)).

(v) The remainder of the required installment that was due on April 15, 2017 without regard to the liquidity requirement ($20,000) remains unpaid until the July 15, 2017 contribution is made. Under paragraph (c) of this section, $20,000 of the July 15, 2017 contribution must be allocated to the required installment due on April 15, 2017. The interest adjustment under paragraph (b)(4)(ii) of this section applies to that $20,000 portion of the contribution because it is a late payment of a required installment. Accordingly, $20,000 of the July 15, 2017 contribution is adjusted to April 15, 2017, using an interest rate of 10.90% for the 3-month period between July 15, 2017 and the April 15, 2017 due date, and further adjusted using the effective interest rate of 5.90% for 3% months between April 15, 2017 and the January 1, 2017 valuation date. Therefore, the portion of the July 15, 2017 contribution attributable to the April 15, 2017 required installment is adjusted to $19,166 as of January 1, 2017 ($20,000 ÷ 1.1090^(3/12) ÷ 1.0590^(3.5/12)).

(vi) The liquidity shortfall is recalculated as of June 30, 2017 as $100,000 (that is, the base amount of $1,500,000 minus the value of liquid assets of $1,400,000). This amount is larger than the $50,000 required installment otherwise applicable, and so the amount of the required installment due on July 15, 2017 is $100,000. Of the $75,000 contribution made on July 15, 2017, $20,000 is applied to satisfy the remainder of the required installment due April 15, 2017, and the remaining $55,000 is applied toward the required installment due July 15, 2017. An additional contribution of $45,000 in liquid assets is needed to satisfy the required installment due July 15, 2017.

(vii) If instead there were no liquidity shortfall as of June 30, 2017, the required installment due July 15, 2017 would be $50,000. Of the $75,000 contribution made on July 15, 2017, $20,000 would be applied to satisfy the remainder of the required installment due April 15, 2017, $50,000 would be applied to satisfy the required installment due on July 15, 2017, and the remaining $5,000 would be applied toward the next required installment.

Example 14. (i) Plan E, which is a small plan described in section 430(g)(2)(B), has a calendar year plan year and a valuation date of December 31. The required installments for the 2017 plan year are $30,000 each and each of the required installments is paid on the due date. The effective interest rate for Plan E for the 2017 plan year is 5.90%.

(ii) The total contributions made for the plan year and before the valuation date, adjusted with interest to the valuation date, equal $92,402. This is developed as shown below:

(A) The contribution paid April 15, 2017 is adjusted by increasing the contribution amount for 8% months at the effective interest rate ($30,000 x 1.0590^(8.5/12)= $31,243).

(B) The contribution paid July 15, 2017 is increased for 5% months at the effective interest rate ($30,000 x 1.0590 ^(5.5/12) = $30,799).

(C) The contribution paid October 15, 2017 is increased for 2% months at the effective interest rate ($30,000 x 1.0590^(2.5/12)= $30,360).

(iii) Pursuant to § 1.430(g)–1(d)(2), the interest-adjusted value of the contributions for the 2017 plan year that are made before the valuation date is subtracted from the December 31, 2017 plan assets in determining the value of plan assets for the December 31, 2017 actuarial valuation.

Example 15. (i) The facts are the same as in Example 14, except that the first contribution for the 2017 plan year is made on May 15, 2017 in the amount of $40,000. The remaining amount of each required installment is paid on the date it is due.

(ii) In accordance with paragraph (c)(3)(iii) of this section, the amount of the required installment due on April 15, 2017 remains at $30,000, even though the associated contribution was not paid until May 15, 2017. Therefore, $30,000 of the payment is allocated to the April 15, 2017 required installment and the remaining $10,000 is allocated to the installment due on July 15, 2017.

(iii) Under paragraph (c)(3)(ii) of this section, the portion of the May 15, 2017 contribution allocated to the July 15, 2017 required installment is increased for interest for the 2 months between the date of the contribution and the due date, using the effective interest rate for 2017. Therefore, the amount allocated to the July 15, 2017 installment is $10,096 (that is, $10,000 x 1.0590^(2/12)). The remaining installment due July 15, 2017 is $30,000 minus $10,096, or $19,904.

(iv) The total amount credited against the minimum required contribution is $122,062 as of December 31, 2017. This amount is calculated as shown below:

(A) The portion of the May 15, 2017 contribution allocated to the April 15, 2017 required installment is first adjusted for the 1 month between the due date and the payment date using the effective interest rate plus 5% ($30,000 ÷ 1.1090^(1/12) = $29,742). This amount is then adjusted using the effective interest rate, for the 8% months between the due date of April 15, 2017 and the valuation date of December 31, 2017 ($29,742 x 1.0590^(8.5/12)= $30,975).

(B) The remaining portion of the May 15, 2017 contribution ($10,000) is increased for the 7% months between the date of the contribution and the valuation date at the effective interest rate ($10,000 x 1.0590^(7.5/12) = $10,365).

(C) The contribution paid July 15, 2017 is increased for 5% months at the effective interest rate ($19,904 x 1.0590 ^(5.5/12) = $20,434).

(D) The contribution paid October 15, 2017 is increased for 2% months at the effective interest rate ($30,000 x 1.0590^(2.5/12)= $30,360).

(E) The contribution paid January 15, 2018 is discounted for % month at the effective interest rate ($30,000 ÷ 1.0590^(0.5/12) = $29,928).

(v) The amount deducted from valuation assets as of December 31, 2017 for contributions made before the valuation date is determined without regard to the special interest adjustment for late payment of the required installment due April 15, 2017 (and without regard to the contribution paid on January 15, 2018).

Example 16. (i) Plan F has a required installment of $10,000 per quarter for the 2016 plan year. The plan sponsor makes a contribution of $9,993 on April 10, 2016. The effective interest rate for Plan F for the 2016 plan year is 5.90%.

(ii) In accordance with paragraph (c)(3)(ii) of this section, the contribution is increased for interest at the effective interest rate, for the 5 days between the contribution date and the due date for the required installment. Therefore, the amount credited against the required installment due April 15, 2016 is $10,001 ($9,993 x 1.0590^(5/365)), and the required installment is satisfied.

Example 17. (i) The facts are the same as in Example 16, except that a contribution of $8,000 is made on April 20, 2016.

(ii) In accordance with paragraph (c)(3)(iii) of this section, the amount of the required installment due on April 15, 2016 remains at $10,000, even though the associated contribution was not paid until after the due date, and so $2,000 ($10,000 – $8,000) of the required installment remains unpaid as of April 20, 2016.

(iii) The amount of the April 20, 2016 contribution credited against the minimum required contribution for 2016 is $7,858. This amount is determined by first adjusting the contribution for the 5 days between the due date for the required installment and the date of the contribution using the effective interest rate for Plan F for the 2016 plan year, plus 5% ($8,000 ÷ 1.1090^(5/365) = $7,989). The result is further adjusted for the 105 days from the due date for the required installment to the valuation date of January 1, 2016 using the effective interest rate of 5.90% ($7,989 ÷ 1.0590^(105/365) = $7,858).

(iv) Alternatively, the amount of the April 20, 2016 contribution credited against the minimum required contribution for 2016 could be determined using 3 % months between the due date for the required installment and the January 1, 2016 valuation date, as long as the calculation is done consistently for each contribution and for each plan year. Using this approach, the amount adjusted to the April 15, 2016 due date (using the effective interest rate for Plan F for the 2016 plan year plus 5%) is adjusted to January 1, 2016 for 3% months at the effective interest rate for Plan F for the 2016 plan year. Under this approach, the amount credited against the minimum required contribution is $7,856 ($8,000 ÷ 1.1090^(5/365) ÷ 1.0590 ^(3.5/12)).

Example 18. (i) Plan G has a funding standard carryover balance of $15,000 and a prefunding balance of $50,000 as of January 1, 2016. Plan G’s required installments are $25,000 each for the 2017 plan year, and the final installment of the minimum required contribution for the 2016 plan year is due on September 15, 2017, in the amount of $40,000. Plan G’s funding ratios for both 2015 and 2016 (determined under § 1.430(f)–1(d)(3)) were over 80%. No elections were made to reduce or use Plan G’s funding balances during 2016. The effective interest rate for Plan G for the 2016 and 2017 plan years are 5.40% and 5.90%, respectively.

(ii) On April 15, 2017, Plan G’s sponsor elected to use the balances to offset the required installment due on that date. The amount of the required installment is adjusted to January 1, 2017, using the effective interest rate for 2017 to determine the amount by which the balances are reduced. Accordingly, this election results in a reduction of $24,585 ($25,000 ÷ 1.0590^(3.5/12)) in the funding balances as of January 1, 2017.

(iii) On September 15, 2017, Plan G’s sponsor elected to use the balances to offset the remaining minimum required contribution for the 2016 plan year due on that date. This amount is adjusted to January 1, 2016, using the effective interest rate for 2016 to determine the amount by which the balances are reduced. Accordingly, this election results in a reduction of $36,563 ($40,000 ÷ 1.0540^(20.5/12)) in Plan G’s funding balances as of January 1, 2016.

(iv) Section 430(f)(3)(B) and § 1.430(f)–1(d)(2) require that the funding standard carryover balance be exhausted before the prefunding balance is used to offset required contribution amounts. Although the due date for the April 15, 2017 required installment occurs earlier than the due date for the 2016 minimum required contribution, for this purpose contributions for the 2016 plan year are deemed to occur before those for the 2017 plan year. Therefore, the election to offset the 2016 minimum required contribution will eliminate Plan G’s funding standard carryover balance, and the 2017 required installment due April 15, 2017 will be offset by the prefunding balance.

(g) Effective/applicability dates and transition rules—(1) Statutory effective date/applicability date. Section 430 generally applies to plan years beginning on or after January 1, 2008. The applicability of section 430 for purposes of determining the minimum required contribution is delayed for certain plans in accordance with sections 104 through 106 of PPA ’06.

(2) Effective date/applicability date of regulations. This section applies to plan years beginning on or after January 1, 2016. For plan years beginning before January 1, 2016, plans are permitted to rely on the provisions set forth in this section for purposes of satisfying the requirements of section 430(j).

(3) First effective plan year. For purposes of this section, the first effective plan year for a plan is the first plan year after the pre-effective plan year.

(4) Pre-effective plan year. For purposes of this section, the pre-effective plan year is the plan year described in § 1.430(a)–1(h)(5).

(5) Special rules relating to first effective plan year—(i) Determination of minimum required contribution for pre-effective plan year. In the case of the plan’s first effective plan year, the minimum required contribution for the preceding plan year for purposes of paragraph (c)(5)(ii)(B) of this section is equal to the minimum required contribution under section 412 for the pre-effective plan year (determined without regard to any funding waiver under section 412), determined as of the last day of the pre-effective plan year and without regard to the plan’s credit balance.

(ii) Determination of funding shortfall for pre-effective plan year—(A) First effective plan year that begins during 2008. In general, in the case of a plan with a first effective plan year that begins during 2008, the funding shortfall for the pre-effective plan year that precedes it is determined pursuant to paragraph (e)(4) of this section. However, for this purpose, the plan’s current liability for the pre-effective plan year under section 412(l)(7) (as in effect for the pre-effective plan year) is permitted to be used in place of the plan’s funding target for the pre-effective plan year. In addition, for this purpose, the value of plan assets that was used for the pre-effective plan year is permitted to be used in place of the value of plan assets computed pursuant to § 1.430(g)–1(c) for the pre-effective plan year, provided that the value of plan assets that was used for the pre-effective plan year was not less than 90 percent nor more than 110 percent of the value of plan assets computed pursuant to § 1.430(g)–1(c). If the value of plan assets that was used for the pre-effective plan year was less than 90 percent of the value of plan assets computed pursuant to § 1.430(g)–1(c), then 90 percent of the value of plan assets computed pursuant to § 1.430(g)–1(c) is permitted to be used as the value of plan assets for the pre-effective plan year. If the value of plan assets that was used for the pre-effective plan year was more than 110 percent of the value of plan assets computed pursuant to § 1.430(g)–1(c), then 110 percent of the value of plan assets computed pursuant to § 1.430(g)–1(c) is permitted to be used as the value of plan assets for the pre-effective plan year. Finally, for this purpose, the value of plan assets is permitted to be determined without subtraction for the plan’s credit balance for the pre-effective plan year.

(B) First effective plan year begins after 2008. In the case of a plan with a first effective plan year that begins after December 31, 2008, the determination of the funding shortfall for the pre-effective plan year that immediately precedes it is made in accordance with paragraph (e)(4)(i) of this section. Thus, the funding shortfall for the pre-effective plan year is based on the funding target for the pre-effective plan year and the value of plan assets is determined under § 1.430(g)–1(c) for the pre-effective plan year, even though section 430(g) did not apply to the plan for purposes of determining the minimum required contribution for the pre-effective plan year.

Par. 6. Section 1.436–1 is amended as follows:

1. Paragraph (h)(4)(iii)(C)(7) is amended by removing the word “or”.

2. Paragraph (h)(4)(iii)(C)(8) is amended by removing the word “percentage.” and adding the words “percentage; or” in its place.

3. Paragraph (h)(4)(iii)(C)(9) is added.

The additions read as follows:

* * * * *

(h) * * *

(4) * * *

(iii) * * *

(C) * * *

(9) Any other event prescribed in guidance published in the Internal Revenue Bulletin.

* * * * *

(a) In general. This section sets forth definitions that apply for purposes of applying the rules of section 4971.

(b) Accumulated funding deficiency—(1) Multiemployer plans. With respect to a multiemployer plan defined in section 414(f), the term accumulated funding deficiency has the meaning given to that term by section 431. A plan’s accumulated funding deficiency for a plan year takes into account all charges and credits to the funding standard account under section 412 for plan years before the first plan year for which section 431 applies to the plan.

(2) CSEC plans. With respect to a CSEC plan (that is, a plan that fits within the definition of a CSEC plan in section 414(y) for plan years beginning on or after January 1, 2014 and for which the election under section 414(y)(3)(A) has not been made), the term accumulated funding deficiency means the CSEC accumulated funding deficiency determined under section 433. A plan’s CSEC accumulated funding deficiency for a plan year takes into account all charges and credits to the funding standard account under section 412 for plan years before the first plan year for which section 433 applies to the plan.

(c) Unpaid minimum required contribution—(1) In general. The term unpaid minimum required contribution means, with respect to any plan year, the portion of the minimum required contribution under section 430 for the plan year for which contributions have not been made on or before the due date for the plan year under section 430(j)(1). The unpaid minimum required contribution is determined after taking into account the interest adjustment to contributions under § 1.430(j)–1(b)(4) and any offsets from use of the funding balances under § 1.430(f)–1(d).

(2) Accumulated funding deficiency for pre-effective plan year. For purposes of this section, a plan’s accumulated funding deficiency under section 412 for the pre-effective plan year is treated as an unpaid minimum required contribution for that plan year until correction is made under the rules of paragraph (d)(2) of this section.

(d) Correct—(1) Accumulated funding deficiency. With respect to an accumulated funding deficiency for a plan year that is described in paragraph (b) of this section, the term correct means to contribute, to or under the plan, the amount necessary to reduce the accumulated funding deficiency as of the end of that plan year to zero. To reduce the deficiency to zero, the contribution must include interest at the plan’s valuation interest rate for the period between the end of that plan year and the date of the contribution (determined taking into account the rules of section 431(c)(8) or section 433(c)(9), as applicable).

(2) Unpaid minimum required contribution—(i) In general. With respect to an unpaid minimum required contribution for a plan year, the term correct means to contribute, to or under the plan, an amount that, when discounted to the valuation date for the plan year for which the unpaid minimum required contribution is due at the appropriate rate of interest, equals or exceeds the unpaid minimum required contribution. For this purpose, the appropriate rate of interest is the plan’s effective interest rate for the plan year for which the unpaid minimum required contribution is due except to the extent that the payments are subject to additional interest as provided under section 430(j)(3) or (4).

(ii) Pre-PPA accumulated funding deficiency. With respect to the accumulated funding deficiency under section 412 for the pre-effective plan year that is described in paragraph (c)(2) of this section, the term correct means to contribute, to or under the plan, the amount of that accumulated funding deficiency increased with interest from the end of the pre-effective plan year to the date of the contribution at the plan’s valuation interest rate for the pre-effective plan year.

(iii) Ordering rule. For purposes of section 4971 and this section, a contribution is attributable first to the earliest plan year of any unpaid minimum required contribution for which correction has not yet been made.

(3) Corrective action of certain retroactive plan amendments. Certain retroactive plan amendments that meet the requirements of section 412(d)(2) may reduce the minimum required contribution for a plan year, which would reduce the accumulated funding deficiency or the amount of the unpaid minimum required contribution for a plan year.

(e) Taxable period—(1) In general. The term taxable period means the period beginning with the end of the plan year in which there is an accumulated funding deficiency or unpaid minimum required contribution, whichever is applicable, and ending on the earlier of:

(i) The date of mailing of a notice of deficiency under section 6212 with respect to the tax imposed by section 4971(a); or

(ii) The date on which the tax imposed by section 4971(a) is assessed.

(2) Special rule. Where a notice of deficiency referred to in paragraph (e)(1)(i) of this section is not mailed because a waiver of the restrictions on assessment and collection of a deficiency has been accepted or because the deficiency is paid, the date of filing of the waiver or the date of such payment, respectively, is treated as the end of the taxable period.

(f) Single-employer plan. The term single-employer plan means a plan to which the minimum funding requirements of section 412 apply that is not a multiemployer plan as described in section 414(f). The term single-employer plan includes a multiple employer plan to which section 413(c) applies, other than a CSEC plan as described in paragraph (b)(2) of this section.

(g) Examples. The following examples illustrate the rules of this section.

Example 1. (i) Plan A, a single-employer defined benefit plan, has a calendar year plan year and a January 1 valuation date. The sponsor of Plan A has a calendar taxable year. Plan A has no funding shortfall as of January 1, 2008, and Plan A has no unpaid minimum required contributions for 2008 or any earlier plan year. The minimum required contribution for the 2009 plan year is $250,000. The plan sponsor makes one contribution for 2009 on July 1, 2009 in the amount of $200,000, and the sponsor does not make an election to use the prefunding balance or funding standard carryover balance to offset the minimum required contribution for 2009. The effective interest rate for Plan A for the 2009 plan year is 5.90%.

(ii) The contribution paid July 1, 2009 is discounted for 6 months (to the valuation date) at the effective interest rate ($200,000 ÷ 1.0590^(6/12) = $194,349). The unpaid minimum required contribution for the 2009 plan year is $250,000 minus $194,349, or $55,651. The excise tax due under section 4971(a) is 10% of the unpaid minimum required contribution, or $5,565.

Example 2. (i) The facts are the same as in Example 1. The plan sponsor makes an additional contribution of $175,000 on December 31, 2010.

(ii) Under the ordering rule in paragraph (d)(2)(iii) of this section, the contribution made on December 31, 2010 is applied first to correct the unpaid minimum required contribution for 2009. The portion of the contribution paid December 31, 2010 that is required to eliminate the unpaid minimum required contribution for 2009 (taking into account the 2009 effective interest rate for the 24 months between January 1, 2009 and the payment date of December 31, 2010), is $55,651 multiplied by 1.059^(24/12) or $62,412. The remaining payment of $112,588 ($175,000 minus $62,412) is applied to the contribution required for the 2010 plan year.

Example 3. (i) Plan B, a single-employer defined benefit plan, has a calendar year plan year. The sponsor of Plan B has a calendar taxable year. Plan B has an accumulated funding deficiency of $100,000 as of December 31, 2007, including additional interest due to late required installments during 2007. The valuation interest rate for the 2007 plan year is 7.5%.

(ii) In accordance with paragraph (c)(2) of this section, the accumulated funding deficiency under section 412 as of December 31, 2007 is considered an unpaid minimum required contribution until it is corrected. Pursuant to paragraph (d)(2)(ii) of this section, the amount needed to correct that accumulated funding deficiency is $100,000 plus interest at the valuation interest rate of 7.5% for the period between December 31, 2007 and the date of payment of the contribution.

(iii) The funding shortfall as of January 1, 2008 is calculated as the difference between the funding target and the value of assets as of that date. The assets are not adjusted by the amount of the accumulated funding deficiency. The fact that the contribution was not made for the 2007 plan year means that the January 1, 2008 funding shortfall is larger than it would have been otherwise.

Example 4. (i) The facts are the same as in Example 3. The minimum required contribution for the 2008 plan year is $125,000, but the plan sponsor does not make any required contributions for 2008.

(ii) The total unpaid minimum required contribution as of December 31, 2008 is the sum of the $100,000 accumulated funding deficiency under section 412 from 2007 and the $125,000 unpaid minimum required contribution for 2008, or $225,000. The section 4971(a) excise tax applies to the aggregate unpaid minimum required contributions for all plan years that remain unpaid as of the end of 2008. In this case, there is an unpaid minimum required contribution of $100,000 for the 2007 plan year and an unpaid minimum required contribution of $125,000 for the 2008 plan year. The section 4971(a) excise tax is 10% of the aggregate of those unpaid amounts, $22,500.

Example 5. (i) The facts are the same as in Example 4, except that the plan sponsor makes a contribution of $150,000 on December 31, 2008. No additional contributions are paid through September 15, 2009. Required installments of $25,000 each are due April 15, 2008, July 15, 2008, October 15, 2008, and January 15, 2009. Plan B’s effective interest rate for the 2008 plan year is 5.75%.

(ii) In accordance with paragraph (c)(2) of this section, the accumulated funding deficiency under section 412 as of December 31, 2007 is treated as an unpaid minimum required contribution until it is corrected.

(iii) The December 31, 2008 contribution is first applied to the 2007 accumulated funding deficiency under section 412 that is treated as an unpaid minimum required contribution. Accordingly, the amount needed to correct the 2007 unpaid required minimum contribution ($100,000 multiplied by 1.075, or $107,500) is applied to eliminate this unpaid minimum required contribution for the 2007 plan year.

(iv) The remaining $42,500 December 31, 2008 contribution ($150,000 minus $107,500) is then applied to the 2008 minimum required contribution. This amount is first allocated to the required installment due April 15, 2008. In accordance with § 1.430(j)–1(b)(4)(ii) of this chapter, the adjustment for interest on late required installments is increased by 5 percentage points for the period of underpayment. Therefore, $25,000 of the remaining December 31, 2008 contribution is discounted using an interest rate of 10.75% for the 8%-month period between the payment date of December 31, 2008 and the required installment due date of April 15, 2008, and at the 5.75% effective interest rate for the 3% months between April 15, 2008 and January 1, 2008. This portion of the December 31, 2008 contribution results in an adjusted amount of $22,880 (that is, $25,000 ÷ 1.1075^(8.5/12) ÷ 1.0575^(3.5/12)) as of January 1, 2008.

(v) The remaining December 31, 2008 contribution is then applied to the required installment due July 15, 2008. The $17,500 balance of the December 31, 2008 contribution ($150,000 minus $107,500 minus $25,000) is paid after the due date for the second required installment. Accordingly, the remaining $17,500 contribution is adjusted using an interest rate of 10.75% for the 5%-month period between the payment date of December 31, 2008 and the required installment due date of July 15, 2008, and at the 5.75% effective interest rate for the 6% months between July 15, 2008 and January 1, 2008. This portion of the December 31, 2008 contribution results in an adjusted amount of $16,202 (that is, $17,500 ÷ 1.1075^(5.5/12) ÷ 1.0575^(6.5/12)) as of January 1, 2008.

(vi) The remaining unpaid minimum required contribution for 2008 is $125,000 minus the interest-adjusted amounts of $22,880 and $16,202 applied towards the 2008 minimum required contribution as determined in paragraphs (iv) and (v) of this Example 5. This results in an unpaid minimum required contribution of $85,918 for 2008. The section 4971(a) excise tax is 10% of the unpaid minimum required contribution, or $8,592.

Example 6. (i) Plan C, a single-employer defined benefit plan, has a calendar year plan year and a January 1 valuation date, and has no funding standard carryover balance or prefunding balance as of January 1, 2008. Plan C’s sponsor has a calendar taxable year. The minimum required contributions for Plan C are $100,000 for the 2008 plan year, $110,000 for the 2009 plan year, $125,000 for the 2010 plan year, and $135,000 for the 2011 plan year. No contributions for these plan years are made until September 15, 2012, at which time the plan sponsor contributes $273,000 (which is exactly enough to correct the unpaid minimum required contributions for the 2008 and 2009 plan years).

(ii) The excise tax under section 4971(a) for the 2008 taxable year is 10% of the aggregate unpaid minimum required contributions for all plan years remaining unpaid as of the end of any plan year ending within the 2008 taxable year. Accordingly, the excise tax for the 2008 taxable year is $10,000 (that is, 10% of $100,000). The excise tax for the 2009 taxable year is $21,000 (that is, 10% of the sum of $100,000 and $110,000) and the excise tax for the 2010 taxable year is $33,500 (that is, 10% of the sum of $100,000, $110,000, and $125,000).

(iii) The contribution made on September 15, 2012 is applied to correct the unpaid minimum required contributions for the 2008 and 2009 plan years by the deadline for making contributions for the 2011 plan year. Therefore, the excise tax under section 4971(a) for the 2011 taxable year is based only on the remaining unpaid minimum required contributions for the 2010 and 2011 plan years, or $26,000 (that is, 10% of the sum of $125,000 and $135,000).

(iv) The plan sponsor may also be required to pay an excise tax of 100% under section 4971(b), if the unpaid minimum required contributions are not corrected by the end of the taxable period.

(h) Effective/applicability dates and transition rules—(1) Statutory effective date—(i) In general. In general, the amendments made to section 4971 by section 114 of the Pension Protection Act of 2006, Public Law 109–280, 120 Stat. 780 (2006), as amended (PPA ’06), apply to taxable years beginning on or after January 1, 2008, but only with respect to a plan year that—

(A) Begins on or after January 1, 2008; and

(B) Ends with or within any such taxable year.

(ii) Plans with delayed PPA ’06 effective dates. In the case of a plan for which the effective date of section 430 for purposes of determining the minimum required contribution is delayed in accordance with sections 104 through 106 of PPA ‘06, the amendments made to section 4971 by section 114 of PPA ‘06 apply to taxable years beginning on or after January 1, 2008, but only with respect to a plan year—

(A) To which section 430 applies to determine the minimum required contribution of the plan; and

(B) That ends with or within any such taxable year.

(2) Effective date of regulations. This section is effective for taxable years beginning on or after the statutory effective date described in paragraph (h)(1) of this section, but in no event does this section apply to taxable years ending before April 15, 2008.

(3) Pre-effective plan year. For purposes of this section, the pre-effective plan year for a plan is the plan year described in § 1.430(a)–1(h)(5) of this chapter. Thus, except for plans with a delayed effective date under paragraph (h)(1)(ii) of this section, the pre-effective plan year for a plan is the last plan year beginning before January 1, 2008.

John Dalrymple, Deputy Commissioner for Services and Enforcement.

Approved: July 17, 2015.

Mark J. Mazur, Assistant Secretary of the Treasury (Tax Policy).

(a)* * *

(6) * * *

(ii) Legging out. With respect to a qualifying debt instrument and hedge that are properly identified as a qualified hedging transaction, “legging out” of integrated treatment under this paragraph (a) means that the taxpayer disposes of or otherwise terminates all or any portion of the qualifying debt instrument or the hedge before maturity of the qualified hedging transaction. For purposes of the preceding sentence, if the taxpayer changes a material term of the qualifying debt instrument (for example, exercises an option to change the interest rate or index, or the maturity date) or the hedge (for example, changes the interest or exchange rates underlying the hedge, or the expiration date) before maturity of the qualified hedging transaction, the taxpayer will be deemed to have disposed of or otherwise terminated all or any portion of the qualifying debt instrument or the hedge, as applicable. A taxpayer that disposes of or terminates a qualified hedging transaction (that is, disposes of or terminates both the qualifying debt instrument and the hedge in their entirety on the same day) is considered to have disposed of or otherwise terminated the synthetic debt instrument rather than legging out. See paragraph (a)(9)(iv) of this section, Example 10 for an illustration of this rule. If a taxpayer legs out of integrated treatment, the following rules apply:

(A) The transaction will be treated as a qualified hedging transaction during the time the requirements of this paragraph (a) were satisfied.

(B) If all of the instruments comprising the hedge (each such instrument, a component) are disposed of or otherwise terminated, the qualifying debt instrument is treated as sold or otherwise terminated by the taxpayer for its fair market value on the date the hedge is disposed of or otherwise terminated (the leg-out date), and any gain or loss (including gain or loss resulting from factors other than movements in exchange rates) from the identification date to the leg-out date is realized and recognized on the leg-out date. The spot rate on the leg-out date is used to determine exchange gain or loss on the debt instrument for the period beginning on the leg-out date and ending on the date such instrument matures or is disposed of or otherwise terminated. Proper adjustment must be made to reflect any gain or loss taken into account. The netting rule of § 1.988–2(b)(8) applies. See paragraph (a)(9)(iv) of this section, Example 4 and Example 5 for an illustration of this rule.

(C) If a hedge has more than one component (and such components have been properly identified as being part of the qualified hedging transaction) and at least one but not all of the components that comprise the hedge has been disposed of or otherwise terminated, or if part of any component of the hedge has been terminated (whether a hedge consists of a single or multiple components), the date such component (or part thereof) is disposed of or terminated is considered the leg-out date and the qualifying debt instrument is treated as sold or otherwise terminated by the taxpayer for its fair market value in accordance with the rules of paragraph (a)(6)(ii)(B) of this section on such leg-out date. In addition, all of the remaining components (or parts thereof) that have not been disposed of or otherwise terminated are treated as sold by the taxpayer for their fair market value on the leg-out date, and any gain or loss from the identification date to the leg-out date is realized and recognized on the leg-out date. To the extent relevant, the spot rate on the leg-out date is used to determine exchange gain or loss on the remaining components (or parts thereof) for the period beginning on the leg-out date and ending on the date such components (or parts thereof) are disposed of or otherwise terminated. See paragraph (a)(9)(iv) of this section, Example 11 for an illustration of this rule.

(D) If the qualifying debt instrument is disposed of or otherwise terminated in whole or in part, the date of such disposition or termination is considered the leg-out date. Accordingly, the hedge (including all components making up the hedge in their entirety) that is part of the qualified hedging transaction is treated as sold by the taxpayer for its fair market value on the leg-out date, and any gain or loss from the identification date to the leg-out date is realized and recognized on the leg-out date. To the extent relevant, the spot rate on the leg-out date is used to determine exchange gain or loss on the hedge (including all components thereof) for the period beginning on the leg-out date and ending on the date such hedge is disposed of or otherwise terminated.

(E) Except as provided in paragraph (a)(8)(iii) of this section (regarding identification by the Commissioner), the part of the qualified hedging transaction that has not been disposed of or otherwise terminated (that is, the remaining debt instrument in its entirety even if partially hedged, or the remaining components of the hedge) cannot be part of a qualified hedging transaction for any period after the leg-out date.

(F) If a taxpayer legs out of a qualified hedging transaction and realizes a net gain with respect to the debt instrument that is disposed of or otherwise terminated, then paragraph (a)(6)(ii)(B), (C), and (D) of this section, as appropriate, will not apply if during the period beginning 30 days before the leg-out date and ending 30 days after that date the taxpayer enters into another transaction that, taken together with any remaining components of the hedge, hedges at least 50 percent of the remaining currency flow with respect to the qualifying debt instrument that was part of the qualified hedging transaction or, if appropriate, an equivalent amount under the hedge (or any remaining components thereof) that was part of the qualified hedging transaction. Similarly, in a case in which a hedge has multiple components that are part of a qualified hedging transaction, if the taxpayer legs out of a qualified hedging transaction by terminating one such component or a part of one or more such components and realizes a net gain with respect to the terminated component, components, or portions thereof, then paragraphs (a)(6)(ii)(B), (C), and (D) of this section, as appropriate, will not apply if the remaining components of the hedge (including parts thereof) by themselves hedge at least 50 percent of the remaining currency flow with respect to the qualifying debt instrument that was part of the qualified hedging transaction. See paragraph (a)(9)(iv) of this section, Example 11 for an illustration of this rule.

* * * * *

(9) * * *

(iv) * * *

Example 11. (i) K is a domestic corporation with the U.S. dollar as its functional currency. On January 1, 2013, K borrows 100 British pounds (£) for two years at a 10% rate of interest payable on December 31 of each year with no principal payment due until maturity on December 31, 2014. Assume that the spot rate on January 1, 2013, is £1=$1. On the same date, K enters into two swap contracts with an unrelated counterparty that economically results in the transformation of the fixed rate £100 borrowing to a floating rate dollar borrowing. The terms of the swaps are as follows:

(A) Swap #1, Currency swap. On January 1, 2013, K will exchange £100 for $100.

(1) On December 31 of both 2013 and 2014, K will exchange $8 for £10;

(2) On December 31, 2014, K will exchange $100 for £100.

(B) Swap #2, Interest rate swap. On December 31 of both 2013 and 2014, K will pay LIBOR times a notional principal amount of $100 and will receive 8% times the same $100 notional principal amount.

(ii) Assume that K properly identifies the pound borrowing and the swap contracts as a qualified hedging transaction as provided in paragraph (a)(8)(i) of this section and that the other relevant requirements of paragraph (a) of this section are satisfied.

(iii) On January 1, 2014, the spot exchange rate is £1=$2; the U.S. dollar LIBOR rate of interest is 9%; the market value of K’s note in pounds has not changed; and K terminates swap #2. Because interest rates have increased from 8% to 9%, K will incur a loss of ($.92) (the present value of the ($1) difference between the 8% and 9% interest payments discounted at the current interest rate of 9%) with respect to the termination of such swap on January 1, 2014. Pursuant to paragraph (a)(6)(ii)(C) of this section, K must treat swap #1 as having been sold for its fair market value on the leg-out date, which is the date swap #2 is terminated. K must realize and recognize gain of $100.92 (the present value of £110 discounted in pounds to equal £100 x $2 ($200) less the present value of $108 ($99.08)). The loss inherent in the pound borrowing from January 1, 2013 to January 1, 2014 is realized and recognized on January 1, 2014. Such loss is exchange loss in the amount of $100 (the present value of £110 that was to be paid at the end of the year discounted at pound interest rates to equal £100 times the change in exchange rates: (£100 x $1, the spot rate on January 1, 2013) – (£100 x $2, the spot rate on January 1, 2014)). Pursuant to paragraph (a)(6)(ii)(E) of this section, except as provided in paragraph (a)(8)(iii) of this section (regarding identification by the Commissioner), the pound borrowing and currency swap cannot be part of a qualified hedging transaction for any period after the leg-out date.

(iv) Assume the facts are the same as in paragraph (iii) of this Example except that on January 1, 2014, the U.S. dollar LIBOR rate of interest is 7% rather than 9%. When K terminates swap #2, K will realize gain of $0.93 (the present value of the ($1) difference between the 8% and 7% interest payments discounted at the current interest rate of 7%) received with respect to the termination on January 1, 2014. Fifty percent or more of the remaining pound cash flow of the pound borrowing remains hedged after the termination of swap #2. Accordingly, under paragraph (a)(6)(ii)(F) of this section, paragraphs (a)(6)(ii)(B) and (C) of this section do not apply, and the gain on swap #1 and the loss on the qualifying debt instrument are not taken into account. Thus, K will

include in income $0.93 realized from the termination of swap #2.

(10) * * *

(iv) Effective/applicability dates for legging in and legging out rules. (A) The rules of paragraph (a)(6)(i) of this section are effective for qualified hedging transactions that are legged into after March 17, 1992.

(B) The rules of paragraph (a)(6)(ii) and Example 11 of paragraph (a)(9)(iv) of this section apply to leg-outs that occur on or after September 6, 2012.

* * * * *

DETERMINATION COVERING SPECIFIC MATTERS

Under section 7121 of the Internal Revenue Code of 1986, as amended (the “Code”), the taxpayer (as identified on the signature page of this agreement by taxpayer’s name and address) (herein referred to as “Taxpayer”) and the Commissioner of Internal Revenue (the “Commissioner”) make the following closing agreement (this “Closing Agreement”):

WHEREAS, the Business Profits article of the income tax convention between the United States and Treaty Country (as identified on the signature page of this Closing Agreement), under which benefits are being claimed (the “Convention”), exempts insurance or reinsurance premiums paid to a resident of Treaty Country from the Federal excise tax imposed by section 4371 et seq. of the Code (the “Insurance Excise Tax”) only to the extent that (i) Taxpayer does not reinsure such risks with a person not entitled to exemption from such tax under the Convention or any other income tax convention between the United States and another country, (ii) the premium was a receipt of a business of insurance carried on by an enterprise of Treaty Country, and (iii) the insurer or reinsurer qualifies under the Limitation on Benefits article of the Convention;

WHEREAS, section 3.01 of Rev. Proc. 2003–78 provides that the person otherwise required to remit the Insurance Excise Tax on account of premiums paid to a foreign insurance or reinsurance company may consider the premium exempt from the Insurance Excise Tax under an income tax treaty if premiums are paid to an insurer or reinsurer that is a resident for treaty purposes of a country with which the United States has a treaty containing an excise tax exemption and, prior to filing the return for the taxable period, such person has knowledge that Taxpayer has in effect for such taxable period a closing agreement with the Internal Revenue Service to be liable as a United States taxpayer for the Insurance Excise Tax pursuant to section 4371 et seq., subject to an applicable exemption under the Convention or any other convention from the Insurance Excise Tax; and

WHEREAS, Taxpayer represents that it is and anticipates continuing to be eligible for benefits under the Convention.

IT IS HEREBY DETERMINED AND AGREED THAT:

(1) Taxpayer shall, for purposes of this closing agreement, be liable as a United States taxpayer for the Insurance Excise Tax on premiums pursuant to section 4371 et seq., subject to an applicable exemption from the Insurance Excise Tax under the Convention or any other convention.

(2)(a) Returns of Insurance Excise Tax due under and pursuant to this Closing Agreement and section 4371 et seq. of the Code shall be made by Taxpayer, or by Taxpayer’s authorized representative on Taxpayer’s behalf, by filing Form 720, Quarterly Federal Excise Tax Return, for each return period covered by this Closing Agreement.

(b) For purposes of determining the tax with respect to premiums received on policies issued by the Taxpayer that do not qualify for an exemption under the Convention because Taxpayer reinsures, in whole or in part, a policy of insurance or reinsurance with any person(s) not entitled to exemption from the Insurance Excise Tax under the Convention or any other convention, the tax reportable on the return (Form 720) shall be computed on the basis of the percentage of such policies reinsured. For purposes of the preceding sentence, Taxpayer may consider a reinsurer to be entitled to exemption from the excise tax if the reinsurer is a party to a closing agreement with the Internal Revenue Service, pursuant to Rev. Proc. 2003–78 or a predecessor revenue procedure, under the Convention or an income tax convention between the United States and another country.

(c) Forms 720 shall be filed with the Internal Revenue Service Center, Cincinnati, OH 45999–0009.

(d) Taxpayer, or Taxpayer’s authorized representative, shall make the required Federal tax deposits of the Insurance Excise Tax in such manner and at such times as are provided in the Federal tax regulations and in the instructions for Form 720.

(3) Taxpayer agrees that this Closing Agreement is not intended to modify the liability for the Insurance Excise Tax under section 4371 et seq. of the Code.

(4) Taxpayer agrees that, for purposes of determining its Insurance Excise Tax liability pursuant to this Closing Agreement and for purposes of verifying Taxpayer’s entitlement to benefits under the Convention, Taxpayer will maintain for a period of 6 years from the end of each taxable period to which this Closing Agreement applies (i) accounts and records of items of insurance and reinsurance, and (ii) records to establish eligibility for benefits under the Convention, in each case, that will be made available upon written request by the Internal Revenue Service at the place mutually agreed upon by the Service and Taxpayer. Taxpayer will be allowed 60 days, or other period of time determined as reasonable by the Service within which to make available its accounts and records.

(5) If it is determined that there is an underpayment in respect of any Insurance Excise Tax determined to be due pursuant to this Closing Agreement and section 4371 et seq. of the Code, the Internal Revenue Service shall issue a statement of notice and demand for the tax due plus any interest and applicable penalties. Notice of any underpayment shall be sent to Taxpayer at the name and address shown on the Form 720, if a Form 720 was filed for the period for which an underpayment is determined by the Internal Revenue Service, or otherwise to Taxpayer’s registered address in Treaty Country. Payment of all additional amounts due shall be made in accordance with the terms specified in the statement of notice and demand. Collection of such amounts not paid per notice and demand shall be in accordance with paragraph (6) hereof.

(6)(a) As security for payment of tax, Taxpayer shall cause an irrevocable letter of credit to be issued by a United States bank that is a member of the Federal Reserve System, or by a United States branch or agency of a foreign bank that is on the National Association of Insurance Commissioners list of banks from which letters of credit may be accepted, in favor of the Internal Revenue Service in the amount of $75,000, unless the Internal Revenue Service determines that circumstances warrant a letter of credit in an increased amount. Such letter of credit must be effective as of the date that the Closing Agreement is signed by the Commissioner or his delegate, and must provide that it will be automatically extended by the issuing bank for periods of one year, without amendment, from the then relevant expiration date unless the issuing bank notifies the Internal Revenue Service in writing at least 90 days prior to the then relevant expiration date by registered mail that the issuing bank will not extend the letter of credit for any additional period.

(b) The Service may issue a statement of notice and demand with respect to:

(i) Any tax shown on a Form 720 (original, amended, or substitute for return) that is not paid with such return; or

(ii) Any proposed additional liability for the Insurance Excise Tax sustained by the Internal Revenue Service Regional Director of Appeals having jurisdiction over such matter, if the time for filing a protest of such proposed liability has expired, provided that the statement of notice and demand has been issued as provided in paragraph (5) hereof.

(c) If, after the conditions in paragraph (6)(b) hereof have been met, the tax, interest, and any applicable penalties are not paid in accordance with the terms of the statement of notice and demand, collection of such amounts will be made by resorting to such letter of credit, to the extent thereof, before any levy or proceeding in court for collection is instituted against Taxpayer.

(d) If such letter of credit is drawn upon, it must be reinstated to $75,000, or such higher amount as determined by the Internal Revenue Service pursuant to paragraph (6)(a) of this Closing Agreement, within 60 days after the date drawn upon.

(7)(a) Solely by reason of the execution by Taxpayer and the Commissioner of this Closing Agreement, any person otherwise required to remit the Insurance Excise Tax on insurance or reinsurance premiums pursuant to section 46.4374–1(c) of the Excise Tax Regulations may consider premiums paid to Taxpayer after the effective date of this Closing Agreement as exempt under the Convention from the Insurance Excise Tax, unless such person has knowledge that the foreign insurer or reinsurer did not qualify for benefits under the Convention during the relevant taxable period.

(b) Taxpayer agrees that the Commissioner or his or her authorized delegate may disclose, by publication or otherwise, Taxpayer’s name as an insurer or reinsurer that has entered into a closing agreement under this revenue procedure.

(8) Taxpayer agrees to promptly notify the Competent Authority of Treaty Country and the Internal Revenue Service of any change that results in Taxpayer no longer qualifying for benefits under the Convention with respect to the Insurance Excise Tax. Taxpayer also agrees to promptly notify any person that has previously relied on this Closing Agreement and is required to remit the Insurance Excise Tax on account of premiums paid to Taxpayer that Taxpayer is not entitled to exemption from the Insurance Excise Tax.

(9) The statement submitted in accordance with section 3.04(1)(a) of Rev. Proc. 2003–78 is valid for the period provided in section 1.1441–1(e)(4)(ii) of the Treasury Regulations, or any successor regulations, beginning on the effective date of this Closing Agreement. On or before the expiration of the original validity period, or any subsequent validity period, Taxpayer will file with the Commissioner the same statement, signed under penalties of perjury, along with one copy of the closing agreement to the address set forth in subparagraph (e) of paragraph (10).

(10)(a) This Closing Agreement shall continue in effect until terminated as provided in subparagraph (b) of this paragraph.

(b) This Closing Agreement may be terminated by either Taxpayer or the Commissioner by giving the other written notice of the notifying party’s intent to terminate. The decision to terminate is solely at the discretion of the party giving such notice. This Closing Agreement shall be terminated at the close of the last day of the quarterly return period immediately following the return period within which the written notice of termination is given. Taxpayer agrees that the Commissioner or his or her authorized delegate may disclose, by publication or otherwise, Taxpayer’s name as an insurer or reinsurer whose closing agreement under this revenue procedure has been terminated.

(c) Taxpayer hereby agrees to file a return, Form 720, marked “Final Return” for the taxable period within which this Closing Agreement terminates pursuant to subparagraph (b) of this paragraph, in accordance with rules provided in the Federal tax regulations and the instructions for Form 720. Taxpayer also agrees to furnish a duplicate of such “Final Return” to the address set forth in subparagraph (e) of this paragraph.

(d) Taxpayer agrees that the letter of credit issued pursuant to paragraph (6) hereof shall remain in effect for a period of not less than 60 days after the “Final Return” has been filed in accordance with subparagraph (c) hereof, or until the examination of Taxpayer’s returns is completed and any additional tax due has been paid, whichever is later.

(e) Taxpayer agrees to file the statement required by paragraph (9) and the duplicate Form 720 required by subparagraph (c) of this paragraph at the following address:

Internal Revenue Service

Attn: SE:LB:IN:IBC:FPP

1111 Constitution Ave, NW, M3–413

Washington, DC 20224

WHEREAS, the determinations set forth above are hereby agreed to by Taxpayer:

This Closing Agreement is final and conclusive except:

(1) the matter it relates to may be reopened in the event of fraud, malfeasance, or misrepresentation of material fact;

(2) it is subject to the Code sections that expressly provide that effect be given to their provisions (including any stated exception for section 7122) notwithstanding any other law or rule of law; and

(3) if it relates to a tax period ending after the date of this agreement, it is subject to any change or modification of applicable statutes or tax conventions that apply to that tax period.

IN WITNESS WHEREOF, the above parties have subscribed their names to these presents, in triplicate.

Date ______________________________

By ________________________________

Title _______________________________

(Name of Taxpayer and authorized representative)

Address ____________________________

Taxpayer Identification Number __________

(If the applicant does not already have a TIN, one will be supplied by the Service pursuant to the completed Form SS–4 submitted with the request for the closing agreement)

Treaty Country _______________________

Commissioner of the Internal Revenue

By _________________________________

Associate Chief Counsel (International)

Date _______________________________

By _________________________________

Director, International

Date _______________________________

Under section 7121 of the Internal Revenue Code of 1986, as amended (the “Code”), the taxpayer (as identified on the signature page of this agreement by taxpayer’s name and address) (herein referred to as “Taxpayer”) and the Commissioner of Internal Revenue (the “Commissioner”) make the following closing agreement (this “Closing Agreement”):

WHEREAS, the Business Profits article of the income tax convention between the United States and Treaty Country (as identified on the signature page of this Closing Agreement), under which benefits are being claimed (the “Convention”), exempts insurance or reinsurance premiums paid to a resident of Treaty Country from the Federal excise tax imposed by section 4371 et seq. of the Code (the “Insurance Excise Tax”) only to the extent that (i) the policy was not entered into as part of a conduit arrangement, (ii) the premium was a receipt of a business of insurance carried on by an enterprise of Treaty Country, and (iii) the insurer or reinsurer qualifies under the Limitation on Benefits article of the Convention;

WHEREAS, section 3.01 of Rev. Proc. 2003–78 provides that the person otherwise required to remit the Insurance Excise Tax on account of premiums paid to a foreign insurance or reinsurance company may consider the premium exempt from the Insurance Excise Tax under an income tax treaty if premiums are paid to an insurer or reinsurer that is a resident for treaty purposes of a country with which the United States has a treaty containing an excise tax exemption and, prior to filing the return for the taxable period, such person has knowledge that Taxpayer has in effect for such taxable period a closing agreement with the Internal Revenue Service to be liable as a United States taxpayer for the Insurance Excise Tax pursuant to section 4371 et seq., subject to an applicable exemption under the Convention or any other convention from the Insurance Excise Tax; and

WHEREAS, Taxpayer represents that it is and anticipates continuing to be eligible for benefits under the Convention.

IT IS HEREBY DETERMINED AND AGREED THAT:

(1) Taxpayer shall, for purposes of this closing agreement, be liable as a United States taxpayer for the Insurance Excise Tax on premiums pursuant to section 4371 et seq., subject to an applicable exemption from the Insurance Excise Tax under the Convention or any other convention.

(2)(a) Returns of Insurance Excise Tax due under and pursuant to this Closing Agreement and section 4371 et seq. of the Code shall be made by Taxpayer, or by Taxpayer’s authorized representative on Taxpayer’s behalf, by filing Form 720, Quarterly Federal Excise Tax Return, for each return period covered by this Closing Agreement.

(b) For purposes of determining the tax with respect to premiums received on policies issued by the Taxpayer that do not qualify for an exemption under the Convention because Taxpayer, as part of a conduit arrangement, reinsures, in whole or in part, a policy of insurance or reinsurance with any person(s) not entitled to exemption from the Insurance Excise Tax under the Convention or any other convention, the tax reportable on the return (Form 720) shall be computed on the basis of the percentage of such policies reinsured. For purposes of the preceding sentence, Taxpayer may consider a reinsurer to be entitled to exemption from the excise tax if the reinsurer is a party to a closing agreement with the Internal Revenue Service, pursuant to Rev. Proc. 2003–78 or a predecessor revenue procedure, under the Convention or an income tax convention between the United States and another country.

(c) Forms 720 shall be filed with the Internal Revenue Service Center, Cincinnati, OH 45999–0009.

(d) Taxpayer, or Taxpayer’s authorized representative, shall make the required Federal tax deposits of the Insurance Excise Tax in such manner and at such times as are provided in the Federal tax regulations and in the instructions for Form 720.

(3) Taxpayer agrees that this Closing Agreement is not intended to modify the liability for the Insurance Excise Tax under section 4371 et seq. of the Code.

(4) Taxpayer agrees that, for purposes of determining its Insurance Excise Tax liability pursuant to this Closing Agreement and for purposes of verifying Taxpayer’s entitlement to benefits under the Convention, Taxpayer will maintain for a period of 6 years from the end of each taxable period to which this Closing Agreement applies (i) accounts and records of items of insurance and reinsurance, and (ii) records to establish eligibility for benefits under the Convention, in each case, that will be made available upon written request by the Internal Revenue Service at the place mutually agreed upon by the Service and Taxpayer. Taxpayer will be allowed 60 days, or other period of time determined as reasonable by the Service within which to make available its accounts and records.

(5) If it is determined that there is an underpayment in respect of any Insurance Excise Tax determined to be due pursuant to this Closing Agreement and section 4371 et seq. of the Code, the Internal Revenue Service shall issue a statement of notice and demand for the tax due plus any interest and applicable penalties. Notice of any underpayment shall be sent to Taxpayer at the name and address shown on the Form 720, if a Form 720 was filed for the period for which an underpayment is determined by the Internal Revenue Service, or otherwise to Taxpayer’s registered address in Treaty Country. Payment of all additional amounts due shall be made in accordance with the terms specified in the statement of notice and demand. Collection of such amounts not paid per notice and demand shall be in accordance with paragraph (6) hereof.

(6)(a) As security for payment of tax, Taxpayer shall cause an irrevocable letter of credit to be issued by a United States bank that is a member of the Federal Reserve System, or by a United States branch or agency of a foreign bank that is on the National Association of Insurance Commissioners list of banks from which letters of credit may be accepted, in favor of the Internal Revenue Service in the amount of $75,000, unless the Internal Revenue Service determines that circumstances warrant a letter of credit in an increased amount. Such letter of credit must be effective as of the date that the Closing Agreement is signed by the Commissioner or his delegate, and must provide that it will be automatically extended by the issuing bank for periods of one year, without amendment, from the then relevant expiration date unless the issuing bank notifies the Internal Revenue Service in writing at least 90 days prior to the then relevant expiration date by registered mail that the issuing bank will not extend the letter of credit for any additional period.

(b) The Service may issue a statement of notice and demand with respect to:

(i) Any tax shown on a Form 720 (original, amended, or substitute for return) that is not paid with such return; or

(ii) Any proposed additional liability for the Insurance Excise Tax sustained by the Internal Revenue Service Regional Director of Appeals having jurisdiction over such matter, if the time for filing a protest of such proposed liability has expired, provided that the statement of notice and demand has been issued as provided in paragraph (5) hereof.

(c) If, after the conditions in paragraph (6)(b) hereof have been met, the tax, interest, and any applicable penalties are not paid in accordance with the terms of the statement of notice and demand, collection of such amounts will be made by resorting to such letter of credit, to the extent thereof, before any levy or proceeding in court for collection is instituted against Taxpayer.

(d) If such letter of credit is drawn upon, it must be reinstated to $75,000, or such higher amount as determined by the Internal Revenue Service pursuant to paragraph (6)(a) of this Closing Agreement, within 60 days after the date drawn upon.

(7)(a) Solely by reason of the execution by Taxpayer and the Commissioner of this Closing Agreement, any person otherwise required to remit the Insurance Excise Tax on insurance or reinsurance premiums pursuant to section 46.4374–1(c) of the Excise Tax Regulations may consider premiums paid to Taxpayer after the effective date of this Closing Agreement as exempt under the Convention from the Insurance Excise Tax, unless such person has knowledge that the foreign insurer or reinsurer did not qualify for benefits under the Convention during the relevant taxable period.

(b) Taxpayer agrees that the Commissioner or his or her authorized delegate may disclose, by publication or otherwise, Taxpayer’s name as an insurer or reinsurer that has entered into a closing agreement under this revenue procedure.

(8) Taxpayer agrees to promptly notify the Competent Authority of Treaty Country and the Internal Revenue Service of any change that results in Taxpayer no longer qualifying for benefits under the Convention with respect to the Insurance Excise Tax. Taxpayer also agrees to promptly notify any person that has previously relied on this Closing Agreement and is required to remit the Insurance Excise Tax on account of premiums paid to Taxpayer that Taxpayer is not entitled to exemption from the Insurance Excise Tax.

(9) The statement submitted in accordance with section 3.04(1)(a) of Rev. Proc. 2003–78 is valid for the period provided in section 1.1441–1(e)(4)(ii) of the Treasury Regulations, or any successor regulations, beginning on the effective date of this Closing Agreement. On or before the expiration of the original validity period, or any subsequent validity period, Taxpayer will file with the Commissioner the same statement, signed under penalties of perjury, along with one copy of the closing agreement to the address set forth in subparagraph (e) of paragraph (10).

(10)(a) This Closing Agreement shall continue in effect until terminated as provided in subparagraph (b) of this paragraph.

(b) This Closing Agreement may be terminated by either Taxpayer or the Commissioner by giving the other written notice of the notifying party’s intent to terminate. The decision to terminate is solely at the discretion of the party giving such notice. This Closing Agreement shall be terminated at the close of the last day of the quarterly return period immediately following the return period within which the written notice of termination is given. Taxpayer agrees that the Commissioner or his or her authorized delegate may disclose, by publication or otherwise, Taxpayer’s name as an insurer or reinsurer whose closing agreement under this revenue procedure has been terminated.

(c) Taxpayer hereby agrees to file a return, Form 720, marked “Final Return” for the taxable period within which this Closing Agreement terminates pursuant to subparagraph (b) of this paragraph, in accordance with rules provided in the Federal tax regulations and the instructions for Form 720. Taxpayer also agrees to furnish a duplicate of such “Final Return” to the address set forth in subparagraph (e) of this paragraph.

(d) Taxpayer agrees that the letter of credit issued pursuant to paragraph (6) hereof shall remain in effect for a period of not less than 60 days after the “Final Return” has been filed in accordance with subparagraph (c) hereof, or until the examination of Taxpayer’s returns is completed and any additional tax due has been paid, whichever is later.

(e) Taxpayer agrees to file the statement required by paragraph (9) and the duplicate Form 720 required by subparagraph (c) of this paragraph at the following address:

Internal Revenue Service

Attn: SE:LB:IN:IBC:FPP

1111 Constitution Ave, NW, M3–413

Washington, DC 20224

WHEREAS, the determinations set forth above are hereby agreed to by Taxpayer:

This Closing Agreement is final and conclusive except:

(1) the matter it relates to may be reopened in the event of fraud, malfeasance, or misrepresentation of material fact;

(2) it is subject to the Code sections that expressly provide that effect be given to their provisions (including any stated exception for section 7122) notwithstanding any other law or rule of law; and

(3) if it relates to a tax period ending after the date of this agreement, it is subject to any change or modification of applicable statutes or tax conventions that apply to that tax period.

IN WITNESS WHEREOF, the above parties have subscribed their names to these presents, in triplicate.

Date ______________________________

By ________________________________

Title _______________________________

(Name of Taxpayer and authorized representative)

Address ____________________________

Taxpayer Identification Number __________

(If the applicant does not already have a TIN, one will be supplied by the Service pursuant to the completed Form SS–4 submitted with the request for the closing agreement)

Treaty Country _______________________

Commissioner of the Internal Revenue

By _________________________________

Associate Chief Counsel (International)

Date _______________________________

By _________________________________

Director, International

Date _______________________________

Section 28.2801–2 of the proposed regulations defines terms for purposes of new chapter 15. The proposed regulations define the term “citizen or resident of the United States” as an individual who is a citizen or resident of the United States under the estate and gift tax rules of chapter 11 and chapter 12, respectively, in subtitle B of the Code. Accordingly, whether an individual is a “resident” is based on domicile in the United States, notwithstanding that section 877A adopts the income tax definition of that term. The Treasury Department and the IRS believe that, because section 2801 imposes a tax subject to subtitle B, the tax definition of resident under subtitle B generally should apply for purposes of section 2801. See §§ 20.0–1(b)(1) and 25.2501–1(b).

The proposed regulations generally define the term “covered gift” by reference to the definition of gift for purposes of chapter 12 of subtitle B. The proposed regulations define the term “covered bequest” as any property acquired directly or indirectly because of the death of a covered expatriate. Such property generally is property that would have been includible in the gross estate of the covered expatriate under chapter 11 of subtitle B, had the covered expatriate been a U.S. citizen or resident at the time of death.

Section 2801 defines “covered expatriate” by reference to the section 877A(g)(1) definition of that term. Section 877A(g)(1) generally provides that an individual who expatriates on or after June 17, 2008, is a covered expatriate if, on the expatriation date, (1) the individual’s average annual net income tax liability is greater than $124,000 (indexed for inflation) for the previous five taxable years, (2) the individual’s net worth is at least $2,000,000 (not indexed), or (3) the individual fails to certify under penalty of perjury that he or she has complied with all U.S. tax obligations for the five preceding taxable years. See section 877A(g)(1); Notice 2009–85, 2009–45 I.R.B. 598. The proposed regulations provide that, if an expatriate meets the definition of a covered expatriate, the expatriate is considered a covered expatriate for purposes of section 2801 at all times after the expatriation date, except during any period beginning after the expatriation date during which such individual is subject to United States estate or gift tax as a U.S. citizen or resident.

Additionally, the proposed regulations define for purposes of section 2801 the terms “domestic trust,” “foreign trust,” “electing foreign trust,” “U.S. recipient,” “power of appointment,” and “indirect acquisition of property.”

Section 28.2801–3 addresses the rules in section 2801(e) and includes rules and several exceptions applicable to the definitions of covered gift and covered bequest. Exceptions include taxable gifts reported on a covered expatriate’s timely filed gift tax return, and property included in the covered expatriate’s gross estate and reported on such expatriate’s timely filed estate tax return, provided that the gift or estate tax due is timely paid. Qualified disclaimers of property made by a covered expatriate are excepted from the definitions of a covered gift and covered bequest. In addition, charitable donations that would qualify for the estate or gift tax charitable deduction are excepted from the terms “covered gift” and “covered bequest.”

Section 28.2801–3(c)(4) provides that a gift or bequest to a covered expatriate’s U.S. citizen spouse is excepted from the terms “covered gift” and “covered bequest” if the gift or bequest, if given by a U.S. citizen or resident, would qualify for the gift or estate tax marital deduction. In the case of a gift or bequest in trust, this means that, to the extent the gift or bequest to the trust (or to a separate share of the trust) would qualify for the estate or gift tax marital deduction, the gift or bequest is not a covered gift or covered bequest. A gift or bequest of a partial or terminable interest in property that a covered expatriate makes to his or her spouse is excepted from the definitions of a covered gift and covered bequest only to the extent that such gift or bequest is qualified terminable interest property (QTIP), as defined in section 2523(f) or section 2056(b)(7), and a valid QTIP election is made. To the extent a covered gift or covered bequest is made to a non-electing foreign trust (or to a separate share of such a trust), a distribution from the trust (or from the separate share of the trust) to the U.S. citizen spouse of the covered expatriate who funded the trust (whether in whole or in part) will not qualify for the exception. Note that gifts and bequests made by a covered expatriate to his or her noncitizen spouse are subject to an annual limit under section 2523(i). Furthermore, a bequest from a covered expatriate to his or her noncitizen surviving spouse who is a U.S. resident is not a covered bequest to the extent the bequest is made to a qualified domestic trust (QDOT) that satisfies the requirements of section 2056A and the corresponding regulations, and for which a valid QDOT election is made.

Section 28.2801–3(d) provides rules to implement section 2801(e)(4) regarding covered gifts and covered bequests made in trust, including transfers of property in trust that are subject to a general power of appointment granted by the covered expatriate. In identifying the recipient of such covered gifts and covered bequests made in trust, the proposed regulations do not adopt the gift tax rule of treating the trust beneficiary or holder of an immediate right to withdraw the property as the recipient of that property. Instead, for purposes of section 2801, the proposed regulations treat transfers in trust that constitute covered gifts and covered bequests as transfers to the trust, to be taxed under the rules in section 2801(e)(4). Specifically, the proposed regulations provide that, if a covered expatriate makes a transfer in trust and such transfer is a covered gift or covered bequest, the transfer is treated as a covered gift or covered bequest to the trust, without regard to the beneficial interests in the trust or whether any person has a general power of appointment or a power of withdrawal over trust property. Under section 2801(e)(4), the transfer to the trust will be taxed either to the trust receiving the covered gift or covered bequest, in the case of a domestic trust or electing foreign trust, or to the U.S. beneficiaries or distributees of a non-electing foreign trust as trust distributions are made.

Section 28.2801–3(e) provides two rules addressing covered gifts and covered bequests arising from powers of appointment. First, consistent with the rules in chapters 11 and 12, the proposed regulations confirm that the exercise, release, or lapse of a covered expatriate’s general power of appointment for the benefit of a U.S. citizen or resident is a covered gift or covered bequest. Second, the proposed regulations provide that a covered expatriate’s grant of a general power of appointment over property not held in trust is a covered gift or covered bequest to the powerholder as soon as both the power is exercisable and the transfer of the property subject to the power is irrevocable. See also § 28.2801–4(d)(5)(ii). The preceding sentence applies only for purposes of section 2801, and should not be interpreted as having any impact on the determination of whether the grant of a general power of appointment over property not in trust is a completed gift for Federal gift tax purposes, which is a question to be resolved under chapter 12 without regard to this provision.

Section 28.2801–4 provides specific rules regarding who is liable for the payment of the section 2801 tax. Generally, the U.S. citizen or resident who receives the covered gift or covered bequest is liable. Similarly, the proposed regulations provide rules explaining that a domestic trust that receives a covered gift or covered bequest is treated as a U.S. citizen and thus is liable for payment of the section 2801 tax imposed under this section. An electing foreign trust also is treated as a U.S. citizen. See §§ 28.2801–2(b) and 28.2801–5(d). However, a non-electing foreign trust is not liable for the section 2801 tax. Instead, a U.S. citizen or resident who receives a distribution from a non-electing foreign trust is liable for the section 2801 tax on the receipt of that distribution to the extent the distribution is attributable to covered gifts or covered bequests to that trust. Under section 2801(e)(4)(B)(ii), that U.S. citizen or resident may be entitled to a limited deduction under section 164 against income tax for the section 2801 tax paid on the distribution. The deduction is limited to the extent that the section 2801 tax is imposed on that portion of the distribution that is reported in the gross income of the U.S. citizen or resident. Section 28.2801–4(a)(3)(ii) of the proposed regulations describes how to compute that deduction.

Section 28.2801–4(a)(2)(ii) of the proposed regulations provides that, in the case of a domestic trust or an electing foreign trust, the trust’s payment of the section 2801 tax for which the trust is liable does not result in a taxable distribution under section 2621 of the Code to any beneficiary of the trust for generation-skipping transfer (GST) tax purposes. This provision is consistent with the GST tax consequences of a trust’s payment of tax, which differ depending upon whether the trust or the trust beneficiary is liable for the tax being paid.

Section 28.2801–4(a)(2)(iv) provides a special rule for certain non-electing foreign trusts that become domestic trusts (migrated foreign trusts). A migrated foreign trust will be treated solely for purposes of section 2801 as a domestic trust for the entire year during which the change from foreign trust to domestic trust occurred. The trust must file a timely Form 708 for the year in which the trust becomes a domestic trust and must report and pay the section 2801 tax on all covered gifts and covered bequests received by the trust during the year it becomes a domestic trust as well as on the portion of the trust’s value attributable to any covered gifts and covered bequests received by the trust prior to the year in which it becomes a domestic trust determined as of December 31 of the year prior to the year it becomes a domestic trust.

Section 28.2801–4(a)(2)(iii) of the proposed regulations provides rules for charitable remainder trusts (CRTs), as defined in section 664, contributions to which are made by covered expatriates for the benefit of one or more charitable organizations described in section 170(c) and a U.S. citizen or resident other than such a charitable organization (non-charitable U.S. citizen or resident). Section 2801(e)(3) indicates that the value of the charitable organization’s remainder interest in a CRT is excluded from the definition of a covered gift or covered bequest. The value of the interest of the non-charitable U.S. citizen or resident in such contributions to the CRT is a covered gift or covered bequest, unless otherwise excluded.

Under section 664, a CRT must be a domestic trust. Accordingly, when a covered expatriate contributes a covered gift or covered bequest to a CRT, the CRT is liable for the payment of the section 2801 tax attributable to the value of the non-charitable U.S. person’s interest in the trust. Section 664(d)(1)(B) and (d)(2)(B) and § 1.664–3(a)(4) of the Income Tax Regulations provide that no amount other than the annuity or unitrust amount may be paid “to or for the use of any person other than an organization described under section 170(c).” This rule has been applied in Revenue Ruling 82–128 (1982–2 CB 71) to disqualify a trust as a CRT if the trust could be required to pay estate taxes by reason of the applicable state apportionment statute. Thus, if the CRT’s liability for payment of section 2801 tax attributable to the non-charitable recipient’s interest in the CRT were to be deemed comparable to the CRT’s liability for payment of estate tax, the CRT would not qualify as a CRT under section 664.

A CRT’s liability for payment of the section 2801 tax is distinguishable from a CRT’s liability for payment of estate tax because the section 2801 tax is imposed expressly on the CRT under a federal tax statute, section 2801(e)(4)(A). In addition, the section 2801 tax is imposed on the CRT as a primary obligation of the CRT, rather than an obligation imposed on the CRT for the payment of a liability belonging to or attributable to another taxpayer. Accordingly, a CRT’s payment of the section 2801 tax on the portion of each transfer to the CRT that is a covered gift or covered bequest is not a distribution to or for the use of any person within the meaning of section 664(d)(1)(B) and (d)(2)(B), and the CRT’s liability for such a payment will not cause the trust to be disqualified as a CRT defined in section 664. The proposed regulations confirm that the charitable remainder interest’s share of each transfer to the CRT is not a covered gift or covered bequest and provide the method for computing the net covered gifts and covered bequests that are taxable to the CRT under section 2801.

Section 28.2801–4 of the proposed regulations also provides guidance on how to compute the section 2801 tax. Generally, the section 2801 tax is determined by reducing the total amount of covered gifts and covered bequests received during the calendar year by the section 2801(c) amount, which is the dollar amount of the per-donee exclusion in effect under section 2503(b) for that calendar year ($14,000 in 2015), and then multiplying the net amount by the highest estate or gift tax rate in effect during that calendar year. The reference to section 2503(b) in section 2801 is included solely to provide a dollar amount by which to decrease the U.S. recipient’s aggregate covered gifts and covered bequests received during that calendar year to determine the amount subject to the section 2801 tax; section 2801 does not incorporate the substantive rule of section 2503(b) that applies to donors of gifts under chapter 12. The resulting tax then is reduced by any estate or gift tax paid to a foreign country with regard to those transfers. See § 28.2801–4(e).

The value of a covered gift or covered bequest is the fair market value of the property on the date of its receipt by the U.S. citizen or resident. Section 28.2801–4(c) provides that the value of a covered gift is determined by applying the federal gift tax valuation principles under section 2512 and chapter 14 and the corresponding regulations. Similarly, the value of a covered bequest is determined by applying the federal estate tax valuation principles under section 2031 and chapter 14 and the corresponding regulations, but without regard to sections 2032 and 2032A.

The proposed regulations identify the date of the receipt of a covered gift or covered bequest by a U.S. citizen or resident. See § 28.2801–4(d). In general, a covered gift is received on the same date it is given for purposes of chapter 12. In general, a covered bequest is received on the date the property is distributed from the estate or the covered expatriate’s revocable trust. However, in the case of property that passes by operation of law or beneficiary designation upon the covered expatriate’s death, the date of receipt is the date of death. The proposed regulations provide more detail with regard to the determination of the date of receipt of covered gifts and covered bequests received from a non-electing foreign trust, those received pursuant to powers of appointment, and those received indirectly.

Section 28.2801–5 of the proposed regulations provides guidance on the treatment of foreign trusts under section 2801. If a covered gift or covered bequest is made to a foreign trust, the section 2801 tax applies to any distribution from that trust, whether of income or corpus, to a recipient that is a U.S. citizen or resident, unless the foreign trust elects to be treated as a domestic trust for purposes of section 2801. The proposed regulations define the term “distribution” broadly to include any direct, indirect, or constructive transfer from a foreign trust, including each disbursement from such a trust pursuant to the exercise, release, or lapse of a power of appointment.

The section 2801 tax applies only to the portion of a distribution from a non-electing foreign trust that is attributable to covered gifts and covered bequests contributed to the foreign trust. Section 28.2801–5(c) of the proposed regulations provides that the amount of the distribution attributable to covered gifts and covered bequests is determined by multiplying the total distribution by a ratio, as in effect at the time of the distribution, that is redetermined after each contribution to the trust. The proposed regulations explain how to compute that ratio and provide that each distribution from the foreign trust is considered to be made proportionally from the covered and non-covered portions of the trust, without any tracing with regard to particular assets. One effect of this rule is that the portion of a distribution from a foreign trust that is attributable to covered gifts and covered bequests contributed to the foreign trust includes the ratable portion of any appreciation and income that has accrued on the foreign trust’s assets since the contribution of the covered gifts and covered bequests to the foreign trust.

Section 2801(e)(4)(B)(iii) provides that, solely for purposes of section 2801, a foreign trust may elect to be treated as a domestic trust. Consequently, the section 2801 tax is imposed on the electing foreign trust when it receives covered gifts and covered bequests, rather than on the U.S. trust beneficiaries when distributions are made from the trust. The election may be made for a calendar year whether or not the foreign trust received a covered gift or covered bequest during that calendar year. Section 28.2801–5(d)(3) of the proposed regulations provides guidance on the time and manner of making the election. In order for an election to be valid, the trustee of the foreign trust must satisfy several requirements. The trustee must make the election on a timely filed Form 708 and, if tax is due, timely pay the section 2801 tax (as computed under § 28.2801–5(d)(3)(iii)) by the due date of the Form 708 for that year and include a computation of how the applicable ratio and tax liability were calculated. Further, the trustee must designate and authorize a U.S. agent for purposes of section 2801, and must agree to file annually a Form 708 either to certify that no covered gifts or covered bequests were received by the foreign trust during the calendar year, or to report and, if tax is due, pay the section 2801 tax on covered gifts and covered bequests received by the foreign trust during the calendar year. The trustee also must report the portion of the trust attributable to covered gifts and covered bequests and all distributions attributable to covered gifts and covered bequests made to U.S. recipients in years prior to the year of the election. Finally, the trustee must notify the permissible U.S. distributees of the trust that the trustee is making the election to be treated as a domestic trust for purposes of section 2801.

Under § 28.2801–5(d)(3)(iii), an electing foreign trust that received covered gifts or covered bequests in prior calendar years when the election to be treated as a domestic trust was not in effect also must pay the section 2801 tax liability for all prior calendar years at the time the election is made on Form 708. Such liability is based on the fair market value of the trust attributable to covered gifts and covered bequests as of the last day of the calendar year immediately preceding the year for which the election is made, using the ratio calculated and then in effect under § 28.2801–5(c). If the trustee is unable to determine the portion of the trust attributable to covered gifts and covered bequests, then the fair market value of the entire trust as of the last day of the calendar year immediately preceding the year for which the election is made is subject to the section 2801 tax.

A valid election to be treated as a domestic trust is effective as of the beginning of the calendar year for which the Form 708 is filed. The effect of a valid election is that, as of such effective date of the election and until the election is terminated, U.S. citizens and residents receiving a distribution from that foreign trust will not be subject to section 2801 tax on that distribution. Instead, the electing foreign trust, like a domestic trust, must report and pay the section 2801 tax on each covered gift and covered bequest as it is received. The election, however, will not change the section 2801 tax liability of the U.S. recipients with regard to distributions made from the trust prior to the effective date of the election. The election has no impact outside of section 2801 on the taxation or reporting of trust distributions to U.S. persons.

If the IRS asserts that additional section 2801 tax is due from the electing foreign trust because, for example, the trust undervalued the covered gift or covered bequest or failed to report all covered gifts and covered bequests, then the IRS will notify the trustee of the foreign trust and the U.S. agent of the additional tax due on the asserted additional value or additional covered gifts or covered bequests, including any penalties and interest, and request payment by the due date identified in the IRS letter. If the trustee of the electing foreign trust and the IRS are unable to come to an agreement and the trustee fails to timely pay the additional tax and other asserted amounts, then the election is deemed to be an “imperfect election.” This means that the election terminates as of the first day of the calendar year for which the IRS asserts that the additional section 2801 tax is due. In this event, the covered gifts and covered bequests for which the return was timely filed, but only to the extent of the value on which the section 2801 tax was timely paid, are no longer considered to be covered gifts or covered bequests for purposes of determining the ratio under § 28.2801–5(c)(1), and distributions relating to such amounts will not be taxable to a U.S. citizen or resident who receives a trust distribution. However, with regard to the asserted additional value or additional covered gifts or covered bequests on which the trust did not timely pay the section 2801 tax asserted by the IRS, the foreign trust is not an electing foreign trust and thus is not the taxpayer responsible for the payment of that additional section 2801 tax. Instead, as of the effective date of the termination of the trust’s election, the usual rule of section 2801(e)(4)(B) applies with regard to the taxation of distributions from foreign trusts. Specifically, the U.S. citizens or residents who receive any trust distributions on or after the effective date of the terminated election should take into consideration the additional value or additional covered gifts or covered bequests asserted by the IRS in determining the ratio under § 28.2801–5(c)(1) to be applied to such distributions. If the U.S. recipient does not take the additional value or additional covered gifts or covered bequests asserted by the IRS into consideration in computing that ratio, and the IRS challenges the computation of that ratio during its review of the U.S. recipient’s Form 708 reporting the distribution, the IRS’s assertion of the additional value or additional covered gifts or covered bequests then will become an issue to be resolved as part of the usual examination process for the U.S. recipient’s Form 708. See § 28.2801–5(e), Example 4.

An electing foreign trust’s failure to file the Form 708 on an annual basis or to timely pay its section 2801 tax terminates that foreign trust’s election to be treated as a domestic trust as of the first day of the calendar year for which the certification is not timely made or for which its section 2801 tax is not timely paid. But see § 28.2801–5(d)(6) in the case of a dispute as to the amount of section 2801 tax owed by an electing foreign trust. In the event of the termination of the election, the trustee should notify the permissible U.S. distributees of the effective date of the termination and that each U.S. recipient of a distribution made from the foreign trust on or after that date is subject to the section 2801 tax to the extent the distribution is attributable to covered gifts or covered bequests. After an election is terminated, a foreign trust is not prohibited from making a new election to be treated as a domestic trust by complying with all applicable requirements.

Section 28.2801–6(a) addresses how the basis rules under sections 1014, 1015(a), and 1022 impact the determination of the U.S. recipient’s basis in the covered gift or covered bequest. Unlike section 1015(d), which generally allows gift tax paid on the gift to be added to the donee’s basis, section 2801 does not provide a similar basis adjustment for the payment of the section 2801 tax.

Section 28.2801–6(b) clarifies the applicability of the GST tax to certain section 2801 transfers and cross-references the GST rules.

Section 28.2801–6(c) discusses the interaction of section 2801 and the information reporting provisions of sections 6039F and 6048(c). Generally, pursuant to section 6039F and Notice 97–34, 1997–1 CB 422, a U.S. person (other than an organization described in section 501(c) and exempt from tax under section 501(a)) who receives a gift or bequest (including a covered gift or covered bequest) from a foreign person (other than through a foreign trust) must report such gift or bequest on Part IV of Form 3520, “Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts,” if the total value of such gifts and bequests exceeds a certain threshold. A U.S. citizen or resident, as defined under § 28.2801–2(b) and thus including a domestic trust as defined in § 28.2801–2(c), but not including a foreign trust that elects to be treated as a domestic trust, is included within the definition of a U.S. person for purposes of section 6039F.

Under section 6039F(c)(1)(A), if a U.S. person fails to furnish all of the information regarding the gift or bequest in accordance with the requirements of Form 3520, and any related guidance, within the time prescribed (in the case of a U.S. citizen or resident, the time for filing the Form 1040, including extensions), then, absent reasonable cause, a monthly penalty of 5 percent of the amount of the gift or bequest (not to exceed 25 percent) may be imposed until such information is furnished. In addition, the tax consequences of the receipt of such gift or bequest may be determined by the Secretary. Taxpayers should be aware that the information reported on Part IV of Form 3520, whether or not timely filed, may be considered in determining whether a U.S. citizen or resident received a covered gift or covered bequest.

Pursuant to section 6048(c) and Notice 97–34, a U.S. person must report any distributions received from a foreign trust on Part III of Form 3520. Under section 6677(a), a penalty of the greater of $10,000 or 35 percent of the gross value of the distribution may be imposed on a U.S. person who fails to timely report the distribution. A U.S. citizen or resident, as defined in § 28.2801–2(b), but not including a foreign trust that elects to be treated as a domestic trust, generally would be required to report such a distribution under section 6048(c).

Further, if adequate records are not provided to determine the treatment of such a distribution, to the extent provided in Notice 97–34, as modified by the instructions to Form 3520 and any subsequent guidance, such distribution may be treated as an accumulation distribution includible in the gross income of the distributee. Taxpayers similarly should be aware that information reported on Part III of Form 3520 may be used to determine if a U.S. citizen or resident received a trust distribution attributable to a covered gift or covered bequest.

Finally, § 28.2801–6(d) addresses the section 6662 accuracy-related penalties on underpayments of tax, the section 6651 failure to file and pay penalties, and the section 6695A penalty on substantial and gross valuation misstatements attributable to incorrect appraisals. The Treasury Department and the IRS recognize that taxpayers have had to defer their tax reporting and payment obligations with respect to covered gifts and covered bequests received after the effective date of section 2801 (as described in Notice 2009–85). Thus, there may be circumstances under which a taxpayer who received a covered gift or covered bequest in a year prior to the issuance of final regulations may have difficulty in complying with the deferred filing and payment requirements with respect to those receipts. A taxpayer who establishes that such failure in this regard is due to reasonable cause and not to willful neglect will not be subject to the section 6651 penalties for failure to file or pay. The determination of whether an exception to the other penalties applies will be made on a case-by-case basis.

Section 28.2801–7 provides guidance on the responsibility of a U.S. recipient, as defined in § 28.2801–2(e), to determine if tax under section 2801 is due. The Treasury Department and the IRS realize that, because the tax imposed by this section is imposed on the U.S. citizen or resident receiving a covered gift or covered bequest, rather than on the donor or decedent covered expatriate making the gift or bequest, U.S. taxpayers may have difficulty determining whether they are liable for any tax under section 2801. Nevertheless, the same standard of due diligence that applies to any other taxpayer to determine whether the taxpayer has a tax liability or a filing requirement also applies to U.S. citizens and residents under this section. Accordingly, it is the responsibility of each U.S. citizen or resident receiving a gift or bequest, whether directly or indirectly, from an expatriate (as defined in section 877A(g)(2)) to determine its tax obligations under section 2801. Thus, the burden is on that U.S. citizen or resident to determine whether the expatriate was a covered expatriate (as defined in section 877A(g)(1)) and, if so, whether the gift or bequest was a covered gift or covered bequest.

The Treasury Department and the IRS understand that a U.S. citizen or resident receiving a gift or bequest from an expatriate may be unable to obtain directly from the expatriate, the expatriate’s attorney, the expatriate’s executor, or other reliable sources the information necessary to make the above determinations. If the IRS receives a request from a U.S. citizen or resident who received a gift from an expatriate who has consented to the disclosure of certain return information to that donee, a gift from an expatriate who is deceased at the time of the request, or a bequest from an expatriate, the IRS may in certain circumstances disclose to such U.S. citizen or resident the return or return information of the donor or decedent expatriate that may assist the U.S. citizen or resident in determining whether the donor or decedent was a covered expatriate and whether the transfer was a covered gift or covered bequest. See section 6103. The types of information and requirements and procedures for requesting such information will be set forth in guidance published in the Internal Revenue Bulletin.

Although the IRS, if authorized, may disclose returns and return information upon request, the IRS will not make the determinations as to whether an expatriate from whom a gift or bequest was received was a covered expatriate or whether the gift or bequest was a covered gift or covered bequest. Furthermore, the U.S. citizen or resident receiving a gift or bequest from an expatriate may not rely on any information provided by the IRS that the U.S. citizen or resident knows or has reason to know is incorrect. These determinations are the responsibility of the U.S. citizen or resident.

The proposed regulations provide that, if a living expatriate donor does not authorize the IRS to release to a U.S. citizen or resident the donor’s relevant return or return information, there is a rebuttable presumption that the expatriate donor is a covered expatriate and that each gift from that expatriate to a U.S. citizen or resident is a covered gift. A taxpayer who reasonably concludes that a gift or bequest is not subject to section 2801 and intends to rebut the presumption may choose to file a protective return to start the period for assessment of any section 2801 tax. See §§ 28.2801–7(b)(2), 28.6011–1(b).

The proposed regulations also include administrative regulations that address filing and payment due dates, returns, extension requests, and recordkeeping requirements with respect to the section 2801 tax. See §§ 28.6001–1, 28.6011–1, 28.6060–1, 28.6071–1, 28.6081–1, 28.6091–1, 28.6101–1, 28.6107–1, 28.6109–1, 28.6151–1, 28.6694–1, 28.6694–2, 28.6694–3, 28.6694–4, 28.6695–1, 28.6696–1, 28.7701–1. Section 28.6011–1(a) provides the return requirements to report the receipt of covered gifts and covered bequests from covered expatriates using Form 708.

The Treasury Department and the IRS will permit the filing of a protective Form 708, unaccompanied by any payment of tax under section 2801, in limited circumstances when a U.S. citizen or resident receives a gift or bequest from an expatriate and reasonably concludes, after exercising due diligence, that the gift or bequest is not a covered gift or covered bequest from a covered expatriate. The mere absence of information confirming that the expatriate is a covered expatriate or that the gift or bequest is a covered gift or covered bequest is not a sufficient basis for a protective return. Section 28.6011–1(b)(i) provides that filing a protective Form 708, together with the required attachments, will start the period for the assessment of any section 2801 tax.

The IRS intends to issue Form 708 once these regulations are published as final regulations in the Federal Register. The IRS will provide the due date for filing Form 708 and for payment of the section 2801 tax liability in the final regulations. Consistent with Announcement 2009–57, U.S. recipients will be given a reasonable period of time after the date the final regulations are published in the Federal Register to file the Form 708 and to pay the section 2801 tax on covered gifts and covered bequests received on or after June 17, 2008, and before the date of publication of the final regulations in the Federal Register. Interest will not accrue on the section 2801 tax liability for any taxable years until the due date for payment, as specified in the final regulations, has passed.

This section lists the captions in §§ 28.2801–1 through 28.2801–7.

(a) In general.

(b) Effective/applicability date.

(a) Overview.

(b) Citizen or resident of the United States.

(c) Domestic trust.

(d) Foreign trust.

(1) In general.

(2) Electing foreign trust

(e) U.S. recipient.

(f) Covered bequest.

(g) Covered gift.

(h) Expatriate and covered expatriate.

(i) Indirect acquisition of property.

(j) Power of appointment.

(k) Effective/applicability date.

(a) Covered gift.

(b) Covered bequest.

(c) Exceptions to covered gift and covered bequest.

(1) Reported taxable gifts.

(2) Property reported as subject to estate tax.

(3) Transfers to charity.

(4) Transfers to spouse.

(5) Qualified disclaimers.

(d) Covered gifts and covered bequests made in trust.

(e) Powers of appointment.

(1) Covered expatriate as holder of power.

(2) Covered expatriate as grantor of power.

(f) Examples.

(g) Effective/applicability date.

(a) Liability for tax.

(1) U.S. citizen or resident.

(2) Domestic trust.

(i) In general.

(ii) Generation-skipping transfer tax.

(iii) Charitable remainder trust.

(iv) Migrated foreign trust.

(3) Foreign trust.

(i) In general.

(ii) Income tax deduction.

(b) Computation of tax.

(1) In general.

(2) Net covered gifts and covered bequests.

(c) Value of covered gift or covered bequest.

(d) Date of receipt.

(1) In general.

(2) Covered gift.

(3) Covered bequest.

(4) Foreign trusts.

(5) Powers of appointment.

(i) Covered expatriate as holder of power.

(ii) Covered expatriate as grantor of power.

(6) Indirect receipts.

(e) Reduction of tax for foreign estate or gift tax paid.

(f) Examples.

(g) Effective/applicability date.

(a) In general.

(b) Distribution defined.

(c) Amount of distribution attributable to covered gift or covered bequest.

(1) Section 2801 ratio.

(i) In general.

(ii) Computation.

(2) Effect of reported transfer and tax payment.

(3) Inadequate information to calculate section 2801 ratio.

(d) Foreign trust treated as domestic trust.

(1) Election required.

(2) Effect of election.

(3) Time and manner of making the election.

(i) When to make the election.

(ii) Requirements for a valid election.

(iii) Section 2801 tax payable with the election.

(iv) Designation of U.S. agent.

(A) In general.

(B) Role of designated agent.

(C) Effect of appointment of agent.

(4) Annual certification or filing requirement.

(5) Duration of status as electing foreign trust.

(i) In general.

(ii) Termination.

(iii) Subsequent elections.

(6) Dispute as to amount of section 2801 tax owed by electing foreign trust.

(i) Procedure.

(ii) Effect of timely paying the additional section 2801 tax amount.

(iii) Effect of failing to timely pay the additional section 2801 tax amount (imperfect election).

(A) In general.

(B) Notice to permissible beneficiaries.

(C) Reasonable cause.

(D) Interim period.

(7) No overpayment caused solely by virtue of defect in election.

(e) Examples.

(f) Effective/applicability date.

(a) Determination of basis.

(b) Generation-skipping transfer tax.

(c) Information returns.

(1) Gifts and bequests.

(2) Foreign trust distributions.

(3) Penalties and use of information.

(d) Application of penalties.

(1) Accuracy-related penalties on underpayments.

(2) Penalty for substantial and gross valuation misstatements attributable to incorrect appraisals.

(3) Penalty for failure to file a return and to pay tax.

(e) Effective/applicability date.

(a) Responsibility of recipients of gifts and bequests from expatriates.

(b) Disclosure of return and return information.

(1) In general.

(2) Rebuttable presumption.

(c) Effective/applicability date.

(a) In general. Section 2801 of the Internal Revenue Code (Code) imposes a tax (section 2801 tax) on covered gifts and covered bequests, including distributions from foreign trusts attributable to covered gifts or covered bequests, received by a United States citizen or resident (U.S. citizen or resident) from a covered expatriate during a calendar year. Domestic trusts, as well as foreign trusts electing to be treated as domestic trusts for purposes of section 2801, are subject to tax under section 2801 in the same manner as if the trusts were U.S. citizens. See section 2801(e)(4)(A)(i) and (e)(4)(B)(iii). Accordingly, the section 2801 tax is paid by the U.S. citizen or resident, domestic trust, or foreign trust electing to be treated as a domestic trust for purposes of section 2801 that receives the covered gift or covered bequest. For purposes of this part 28, references to a U.S. citizen or U.S. citizens are considered to include a domestic trust and a foreign trust electing to be treated as a domestic trust for purposes of section 2801.

(b) Effective/applicability date. This section applies on and after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. Once these regulations have been published as final regulations in the Federal Register, taxpayers may rely upon the final rules of this part for the period beginning June 17, 2008, and ending on the date preceding the date these regulations are published as final regulations in the Federal Register.

(a) Overview. This section provides definitions of terms applicable solely for purposes of section 2801 and the corresponding regulations.

(b) Citizen or resident of the United States. A citizen or resident of the United States (U.S. citizen or resident) is an individual who is a citizen or resident of the United States under the rules applicable for purposes of chapter 11 or 12 of the Code, as the case may be, at the time of receipt of the covered gift or covered bequest. Furthermore, for purposes of this part 28, references to U.S. citizens also include domestic trusts, as well as foreign trusts electing to be treated as a domestic trust under § 28.2801–5(d). See § 28.2801–1(a)(1).

(c) Domestic trust. The term domestic trust means a trust defined in section 7701(a)(30)(E). For purposes of this part 28, references to a domestic trust include a foreign trust that elects under § 28.2801–5(d) to be treated as a domestic trust solely for purposes of section 2801.

(d) Foreign trust. (1) In general. The term foreign trust means a trust defined in section 7701(a)(31).

(2) Electing foreign trust. The term electing foreign trust is a foreign trust that has in effect a valid election to be treated as a domestic trust solely for purposes of section 2801. See § 28.2801–5(d).

(e) U.S. recipient. The term U.S. recipient means a citizen or resident of the United States, a domestic trust, and an electing foreign trust that receives a covered gift or covered bequest, whether directly or indirectly, during the calendar year. The term U.S. recipient includes U.S. citizens or residents receiving a distribution from a foreign trust not electing to be treated as a domestic trust for purposes of section 2801 if the distributions are attributable (in whole or in part) to one or more covered gifts or covered bequests received by the foreign trust. This term also includes the U.S. citizen or resident shareholders, partners, members, or other interest-holders, as the case may be (if any), of a domestic entity that receives a covered gift or covered bequest.

(f) Covered bequest. The term covered bequest means any property acquired directly or indirectly by reason of the death of a covered expatriate, regardless of its situs and of whether such property was acquired by the covered expatriate before or after expatriation from the United States. The term also includes distributions made by reason of the death of a covered expatriate from a foreign trust that has not elected under § 28.2801–5(d) to be treated as a domestic trust for purposes of section 2801 to the extent the distributions are attributable to covered gifts or covered bequests made to the foreign trust. See § 28.2801–3 for additional rules and exceptions applicable to the term covered bequest.

(g) Covered gift. The term covered gift means any property acquired by gift directly or indirectly from an individual who is a covered expatriate at the time the property is received by a U.S. citizen or resident, regardless of its situs and of whether such property was acquired by the covered expatriate before or after expatriation from the United States. The term also includes distributions made, other than by reason of the death of a covered expatriate, from a foreign trust that has not elected under § 28.2801–5(d) to be treated as a domestic trust for purposes of section 2801 to the extent the distributions are attributable to covered gifts or covered bequests made to the foreign trust. See § 28.2801–3 for additional rules and exceptions applicable to the term covered gift.

(h) Expatriate and covered expatriate. The term expatriate has the same meaning for purposes of section 2801 as that term has in section 877A(g)(2). The term covered expatriate has the same meaning for purposes of section 2801 as that term has in section 877A(g)(1). The determination of whether an individual is a covered expatriate is made as of the expatriation date as defined in section 877A(g)(3), and if an expatriate meets the definition of a covered expatriate, the expatriate is considered a covered expatriate for purposes of section 2801 at all times after the expatriation date. However, an expatriate (as defined in section 877A(g)(2)) is not treated as a covered expatriate for purposes of section 2801 during any period beginning after the expatriation date during which such individual is subject to United States estate or gift tax (chapter 11 or chapter 12 of subtitle B) as a U.S. citizen or resident. See section 877A(g)(1)(C). An individual’s status as a covered expatriate will be determined as of the date of the most recent expatriation, if there has been more than one.

(i) Indirect acquisition of property. An indirect acquisition of property, as referred to in the definitions of a covered gift and covered bequest, includes—

(1) Property acquired as a result of a transfer that is a covered gift or covered bequest to a corporation or other entity other than a trust or estate, to the extent of the respective ownership interest of the recipient U.S. citizen or resident in the corporation or other entity;

(2) Property acquired by or on behalf of a U.S. citizen or resident, either from a covered expatriate or from a foreign trust that received a covered gift or covered bequest, through one or more other foreign trusts, other entities, or a person not subject to the section 2801 tax;

(3) Property paid by a covered expatriate, or distributed from a foreign trust that received a covered gift or covered bequest, in satisfaction of a debt or liability of a U.S. citizen or resident, regardless of the payee of that payment or distribution;

(4) Property acquired by or on behalf of a U.S. citizen or resident pursuant to a non-covered expatriate’s power of appointment granted by a covered expatriate over property not in trust, unless the property previously was subjected to section 2801 tax upon the grant of the power or the covered expatriate had no more than a non-general power of appointment over that property; and

(5) Property acquired by or on behalf of a U.S. citizen or resident in other transfers not made directly by the covered expatriate to the U.S. citizen or resident.

(j) Power of appointment. The term power of appointment refers to both a general and non-general power of appointment. A general power of appointment is as defined in sections 2041(b) and 2514(c) of the Code and a non-general power of appointment is any power of appointment that is not a general power of appointment.

(k) Effective/applicability date. This section applies on and after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. Once these regulations have been published as final regulations in the Federal Register, taxpayers may rely upon the final rules of this part for the period beginning June 17, 2008, and ending on the date preceding the date these regulations are published as final regulations in the Federal Register.

§ 28.2801–3 Rules and exceptions applicable to covered gifts and covered bequests.

(a) Covered gift. Subject to the provisions of paragraphs (c), (d), and (e) of this section, the term gift as used in the definition of covered gift in § 28.2801–2(g) has the same meaning as in chapter 12 of subtitle B, but without regard to the exceptions in section 2501(a)(2), (a)(4), and (a)(5), the per-donee exclusion under section 2503(b) for certain transfers of a present interest, the exclusion under section 2503(e) for certain educational or medical expenses, and the waiver of certain pension rights under section 2503(f).

(b) Covered bequest. Subject to the provisions of paragraphs (c), (d), and (e) of this section, property acquired “by reason of the death of a covered expatriate” as described in the definition of covered bequest in § 28.2801–2(f) includes any property that would have been includible in the gross estate of the covered expatriate under chapter 11 of subtitle B if the covered expatriate had been a U.S. citizen at the time of death. Therefore, in addition to the items described in § 28.2801–2(f), the term covered bequest includes, without limitation, property or an interest in property acquired by reason of a covered expatriate’s death—

(1) By bequest, devise, trust provision, beneficiary designation or other contractual arrangement, or by operation of law;

(2) That was transferred by the covered expatriate during life, either before or after expatriation, and which would have been includible in the covered expatriate’s gross estate under section 2036, section 2037, or section 2038 had the covered expatriate been a U.S. citizen at the time of death;

(3) That was received for the benefit of a covered expatriate from such covered expatriate’s spouse, or predeceased spouse, for which a valid qualified terminable interest property (QTIP) election was made on such spouse’s, or predeceased spouse’s, Form 709, “U.S. Gift (and Generation-Skipping Transfer) Tax Return,” Form 706, “United States Estate (and Generation-Skipping Transfer) Tax Return,” or Form 706–NA, “United States Estate (and Generation-Skipping Transfer) Tax Return, Estate of nonresident not a citizen of the United States,” which would have been included in the covered expatriate’s gross estate under section 2044 if the covered expatriate was a U.S. citizen at the time of death; or

(4) That otherwise passed from the covered expatriate by reason of death, such as—

(i) Property held by the covered expatriate and another person as joint tenants with right of survivorship or as tenants by the entirety, but only to the extent such property would have been included in the covered expatriate’s gross estate under section 2040 if the covered expatriate had been a U.S. citizen at the time of death;

(ii) Any annuity or other payment that would have been includible in the covered expatriate’s gross estate if the covered expatriate had been a U.S. citizen at the time of death;

(iii) Property subject to a general power of appointment held by the covered expatriate at death; or

(iv) Life insurance proceeds payable upon the covered expatriate’s death that would have been includible in the covered expatriate’s gross estate under section 2042 if the covered expatriate had been a U.S. citizen at the time of death.

(c) Exceptions to covered gift and covered bequest. The following transfers from a covered expatriate are exceptions to the definition of covered gift and covered bequest.

(1) Reported taxable gifts. A transfer of property that is a taxable gift under section 2503(a) and is reported on the donor’s timely filed Form 709 is not a covered gift, provided that the donor also timely pays the gift tax, if any, shown as due on that return. A transfer excluded from the definition of a taxable gift, such as a transfer of a present interest not in excess of the annual exclusion amount under section 2503(b), is not excluded from the definition of a covered gift under this paragraph (c)(1) even if reported on the donor’s Form 709.

(2) Property reported as subject to estate tax. Property that is included in the gross estate of the covered expatriate and is reported on a timely filed Form 706 or Form 706–NA is not a covered bequest, provided that the estate also timely pays the estate tax, if any, shown as due on that return. For this purpose, estate tax imposed on distributions from or on the remainder of a qualified domestic trust (QDOT) are deemed to be reported on a timely filed Form 706, if the tax due thereon was timely paid. Thus, if the covered expatriate’s gross estate is not of sufficient value to require the filing of a Form 706–NA, for example, and no Form 706–NA is timely filed, the property passing from that covered expatriate is not excluded from the definition of a covered bequest under the rule of this paragraph (c)(2). Further, this exclusion does not apply to the property not on such a form, whether or not subject to United States estate tax (that is, non U.S.-situs property that passes to U.S. citizens or residents).

(3) Transfers to charity. A gift to a donee described in section 2522(b) or a bequest to a beneficiary described in section 2055(a) is not a covered gift or covered bequest to the extent a charitable deduction under section 2522 or section 2055 would have been allowed if the covered expatriate had been a U.S. citizen or resident at the time of the transfer.

(4) Transfers to spouse. A transfer from a covered expatriate to the covered expatriate’s spouse is not a covered gift or covered bequest to the extent a marital deduction under section 2523 or section 2056 would have been allowed if the covered expatriate had been a U.S. citizen or resident at the time of the transfer. To the extent that a gift or bequest to a trust (or to a separate share of the trust) would qualify for the marital deduction, the gift or bequest is not a covered gift or covered bequest. For purposes of this paragraph (c)(4), a marital deduction is deemed not to be allowed for qualified terminable interest property (QTIP) or for property in a qualified domestic trust (QDOT) unless a valid QTIP and/or QDOT election is made. The term covered bequest also does not include assets in a QDOT funded for the benefit of a covered expatriate by the covered expatriate’s predeceased spouse, but only if a valid election was made on the predeceased spouse’s Form 706 or Form 706–NA to treat the trust as a QDOT.

(5) Qualified disclaimers. A transfer pursuant to a covered expatriate’s qualified disclaimer, as defined in section 2518(b), is not a covered gift or covered bequest from that covered expatriate.

(d) Covered gifts and covered bequests made in trust. For purposes of section 2801, when a covered expatriate transfers property to a trust in a transfer that is a covered gift or covered bequest as determined under this section, the transfer of property is treated as a covered gift or covered bequest to the trust, without regard to the beneficial interests in the trust or whether any person has a general power of appointment or a power of withdrawal over trust property. Accordingly, the rules in section 2801(e)(4) and § 28.2801–4(a) apply to determine liability for payment of the section 2801 tax. The U.S. recipient of a covered gift or a covered bequest to a domestic trust or an electing foreign trust is the domestic or electing foreign trust, and the U.S. recipient of a covered gift or a covered bequest to a non-electing foreign trust is any U.S. citizen or resident receiving a distribution from the non-electing foreign trust. See § 28.2801–2(e) for the definition of a U.S. recipient.

(e) Powers of appointment—(1) Covered expatriate as holder of power. The exercise or release of a general power of appointment held by a covered expatriate over property, whether or not in trust (even if that covered expatriate was a U.S. citizen or resident when the general power of appointment was granted), for the benefit of a U.S. citizen or resident is a covered gift or covered bequest. The lapse of a general power of appointment is treated as a release to the extent provided in sections 2041(b)(2) and 2514(e). Furthermore, the exercise of a power of appointment by a covered expatriate that creates another power of appointment as described in section 2041(a)(3) or section 2514(d) for the benefit of a U.S. citizen or resident is a covered gift or a covered bequest.

(2) Covered expatriate as grantor of power. The grant by a covered expatriate to an individual who is a U.S. citizen or resident of a general power of appointment over property not transferred in trust by the covered expatriate is a covered gift or covered bequest to the powerholder. For the rule applying to the grant by a covered expatriate of a general power of appointment over property in trust, see paragraph (d) of this section.

(f) Examples. The provisions of this section are illustrated by the following examples:

Example 1. Transfer to spouse. In Year 1, CE, a covered expatriate domiciled in Country F, a foreign country with which the United States does not have a gift tax treaty, gives $300,000 cash to his wife, W, a U.S. resident and citizen of Country F. Under paragraph (c)(4) of this section, the $100,000 exemption for a noncitizen spouse, as indexed for inflation in Year 1, is excluded from the definition of a covered gift under section 2801 because only that amount of the transfer would have qualified for the gift tax marital deduction if CE had been a U.S. citizen at the time of the gift. See sections 2801(e)(3) and 2523(i). The remaining amount ($300,000 less the $100,000 exemption for a noncitizen spouse as indexed for inflation), however, is a covered gift from CE to W. W must timely file Form 708, “U.S. Return of Gifts or Bequests from Covered Expatriates,” and timely pay the tax. See §§ 28.6011–1(a), 28.6071–1(a), and 28.6151–1(a). W also must report the transfer on Form 3520, “Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts,” and any other required form. See § 28.2801–6(c)(1).

Example 2. Reporting property as subject to estate tax. (i) CE, a covered expatriate domiciled in Country F, a foreign country with which the United States does not have an estate tax treaty, owns a condominium in the United States with son, S, a U.S. citizen. CE and S each contributed their actuarial share of the purchase price when purchasing the condominium and own it as joint tenants with rights of survivorship. On December 14, Year 1, CE dies. At the time of CE’s death, the fair market value of CE’s share of the condominium, $250,000, is included in CE’s gross estate under sections 2040 and 2103.

(ii) On September 14 of the following calendar year, Year 2, the executor of CE’s estate timely files a Form 4768, “Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes,” requesting a 6-month extension of time to file Form 706–NA, and a 1-year extension of time to pay the estate tax. The IRS grants both extensions but CE’s executor fails to file the Form 706–NA until after March 14 of the calendar year immediately following Year 2.

(iii) S learns that the executor of CE’s estate did not timely file Form 706–NA. Because CE is a covered expatriate, S received a covered bequest as defined under § 28.2801–2(f) and paragraph (b) of this section. S must timely file Form 708 and pay the section 2801 tax. See §§ 28.6011–1(a), 28.6071–1(a), and 28.6151–1(a). S also must file Form 3520 to report a large gift or bequest from a foreign person, and any other required form. See § 28.2801–6(c)(1).

Example 3. Covered gift in trust with grant of general power of appointment over trust property. (i) On October 20, Year 1, CE, a covered expatriate domiciled in Country F, a foreign country with which the United States does not have a gift tax treaty, transfers $500,000 in cash from an account in Country F to an irrevocable foreign trust created on that same date. Under section 2511(a), no gift tax is imposed on the transfer and thus, CE is not required to file a U.S. gift tax return. Under the terms of the foreign trust, A, CE’s child and a U.S. resident, and Q, A’s child and a U.S. citizen, may receive discretionary distributions of income and principal during life. At A’s death, the assets remaining in the foreign trust will be distributed to B, CE’s other U.S. resident child, or if B is not living at the time of A’s death, then to CE’s then-living issue, per stirpes. The terms of the foreign trust also allow A to appoint trust principal and/or income to A, A’s estate, A’s creditors, the creditors of A’s estate, or A’s issue at any time. On March 5, Year 2, A exercises this power to appoint and causes the trustee to distribute $100,000 to Q.

(ii) On October 20, Year 1, the irrevocable foreign trust receives a covered gift for purposes of section 2801, but no section 2801 tax is imposed at that time. On March 5, Year 2, when Q receives $100,000 from the irrevocable foreign trust pursuant to the exercise of A’s power of appointment, Q has received a distribution attributable to a covered gift and section 2801 tax is imposed on Q as of the date of the distribution. See § 28.2801–4(d). Q must timely file Form 708 to report the covered gift from a foreign person (specifically, from CE). See section 6039F(a) and §§ 28.6011–1(a), 28.6071–1(a), and 28.6151–1(a). Under section 2501, A makes a taxable gift to Q of $100,000 when A exercises the general power of appointment for Q’s benefit. See section 2514(b). Accordingly, A must report A’s $100,000 gift to Q on a timely filed Form 709. See section 6019. Because A is considered the transferor of the $100,000 for gift and GST tax purposes, the distribution to Q is not a generation-skipping transfer under chapter 13. See § 26.2652–1(a)(1). Furthermore, because the $100,000 is being distributed from a foreign trust, Q must report the gift on a Form 3520 as a distribution from a foreign trust. See § 28.2801–6(c)(2).

Example 4. Lapse of power of appointment held by covered expatriate. (i) A, a U.S. citizen, creates an irrevocable domestic trust for the benefit of A’s issue, CE, and CE’s children. CE is a covered expatriate, but CE’s children are U.S. citizens. CE has the right to withdraw $5,000 in each year in which A makes a contribution to the trust, but the withdrawal right lapses 30 days after the date of the contribution. In Year 1, A funds the trust, but CE fails to exercise CE’s right to withdraw $5,000 within 30 days of the contribution. The $5,000 lapse is not considered to be a release of the power, so it is neither a gift for U.S. gift tax purposes, nor a covered gift for purposes of section 2801 under paragraph (e)(1) of this section.

(g) Effective/applicability date. This section applies on and after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. Once these regulations have been published as final regulations in the Federal Register, taxpayers may rely upon the final rules of this part for the period beginning June 17, 2008, and ending on the date preceding the date these regulations are published as final regulations in the Federal Register.

§ 28.2801–4 Liability for and payment of tax on covered gifts and covered bequests; computation of tax.

(a) Liability for tax—(1) U.S. citizen or resident. A U.S. citizen or resident who receives a covered gift or covered bequest is liable for payment of the section 2801 tax.

(2) Domestic trust—(i) In general. A domestic trust that receives a covered gift or covered bequest is treated as a U.S. citizen and is liable for payment of the section 2801 tax. See section 2801(e)(4)(A)(i) and § 28.2801–2(b).

(ii) Generation-skipping transfer tax. A trust’s payment of the section 2801 tax does not result in a taxable distribution under section 2621 to any trust beneficiary for purposes of the generation-skipping transfer tax to the extent that the trust, rather than the beneficiary, is liable for the section 2801 tax.

(iii) Charitable remainder trust. A domestic trust qualifying as a charitable remainder trust (as that term is defined in § 1.664–1(a)(1)(iii)(a)) is subject to section 2801 when it receives a covered gift or covered bequest. Section 2801(e)(3) excepts from the definition of covered gift and covered bequest property with respect to which a deduction under section 2522 or section 2055, respectively, would have been allowed if the covered expatriate had been a U.S. citizen or resident at the time of the transfer. See § 28.2801–3(c)(3). As a result, the charitable remainder interest’s share of each transfer to the charitable remainder trust is not a covered gift or covered bequest. To compute the amount of covered gifts and covered bequests taxable to the charitable remainder trust for a calendar year, the charitable remainder trust will (A) calculate, in accordance with the regulations under section 664 and as of the date of the trust’s receipt of the contribution, the value of the remainder interest in each contribution received in such calendar year that would have been a covered gift or covered bequest without regard to section 2801(e)(3), (B) subtract the remainder interest in each such contribution from the amount of that contribution to compute the annuity or unitrust (income) interest in that contribution, and (C) add the total of such income interests, each of which is the portion of the contribution that constitutes a covered gift or covered bequest to the trust. The charitable remainder trust then computes its section 2801 tax in accordance with paragraph (b) of this section.

(iv) Migrated foreign trust. A foreign trust (other than one electing to be treated as a domestic trust under § 28.2801–5(d)) that has previously received a covered gift or covered bequest and that subsequently becomes a domestic trust as defined under section 7701(a)(30)(E) (migrated foreign trust), must file a timely Form 708, “U.S. Return of Gifts or Bequests from Covered Expatriates,” for the taxable year in which the trust becomes a domestic trust. The section 2801 tax, if any, must be paid by the due date of that Form 708. On that Form 708, the section 2801 tax is calculated in the same manner as if such trust was making an election under § 28.2801–5(d) to be treated as a domestic trust solely for purposes of the section 2801 tax. Accordingly, the trustee must report and pay the section 2801 tax on all covered gifts and covered bequests received by the trust during the year in which the trust becomes a domestic trust, as well as on the portion of the trust’s value at the end of the year preceding the year in which the trust becomes a domestic trust that is attributable to all prior covered gifts and covered bequests. Because the migrated foreign trust will be treated solely for purposes of section 2801 as a domestic trust for the entire year during which it became a domestic trust, distributions made to U.S. citizens or residents during that year but before the date on which the trust became a domestic trust will not be subject to section 2801.

(3) Foreign trust—(i) In general. A foreign trust that receives a covered gift or covered bequest is not liable for payment of the section 2801 tax unless the trust makes an election to be treated as a domestic trust solely for purposes of section 2801 as provided in § 28.2801–5(d). Absent such an election, each U.S. recipient is liable for payment of the section 2801 tax on that person’s receipt, either directly or indirectly, of a distribution from the foreign trust to the extent that the distribution is attributable to a covered gift or covered bequest made to the foreign trust. See § 28.2801–5(b) and (c) regarding distributions from foreign trusts.

(ii) Income tax deduction. The U.S. recipient of a distribution from a foreign trust is allowed a deduction against income tax under section 164 in the calendar year in which the section 2801 tax is paid or accrued. The amount of the deduction is equal to the portion of the section 2801 tax attributable to such distribution, but only to the extent that portion of the distribution is included in the U.S. recipient’s gross income. The amount of the deduction allowed under section 164 is calculated as follows:

(A) First, the U.S. recipient must determine the total amount of distribution(s) from the foreign trust treated as covered gifts and covered bequests received by that U.S. recipient during the calendar year to which the section 2801 tax payment relates.

(B) Second, of the amount determined in paragraph (a)(3)(ii)(A) of this section, the U.S. recipient must determine the amount that also is includable in the U.S. recipient’s gross income for that calendar year. For purposes of this paragraph (a)(3)(ii)(B), distributions from foreign trusts includable in the U.S. recipient’s gross income are deemed first to consist of the portion of those distributions, if any, that are attributable to covered gifts and covered bequests.

(C) Finally, the U.S. recipient must determine the portion of the section 2801 tax paid for that calendar year that is attributable to the amount determined in paragraph (a)(3)(ii)(B) of this section, the covered gifts and covered bequests received from the foreign trust that are also included in the U.S. recipient’s gross income. This amount is the allowable deduction. Thus, for a calendar year taxpayer, the deduction is determined by multiplying the section 2801 tax paid during the calendar year by the ratio of the amount determined in paragraph (a)(3)(ii)(B) of this section to the total covered gifts and covered bequests received by the U.S. recipient during the calendar year to which that tax payment relates (that is, 2801 tax liability x [foreign trust distributions attributable to covered gifts and covered bequests that are also included in gross income / total covered gifts or covered bequests received]).

(b) Computation of tax—(1) In general. The section 2801 tax is computed by multiplying the net covered gifts and covered bequests (as defined in paragraph (b)(2) of this section) received by a U.S. recipient during the calendar year by the greater of—

(i) The highest rate of estate tax under section 2001(c) in effect for that calendar year; or

(ii) The highest rate of gift tax under section 2502(a) in effect for that calendar year. See paragraph (f) of this section, Example 1.

(2) Net covered gifts and covered bequests. The net covered gifts and covered bequests received by a U.S. recipient during the calendar year is the total value of all covered gifts and covered bequests received by that U.S. recipient during the calendar year, less the section 2801(c) amount, which is the dollar amount of the per-donee exclusion in effect under section 2503(b) for that calendar year.

(c) Value of covered gift or covered bequest. The value of a covered gift or covered bequest is the fair market value of the property as of the date of its receipt by the U.S. recipient. See paragraph (d) of this section regarding the determination of the date of receipt. As in the case of chapters 11 and 12, the fair market value of a covered gift or covered bequest is the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a covered gift is determined in accordance with the federal gift tax valuation principles of section 2512 and chapter 14 and the corresponding regulations. The fair market value of a covered bequest is determined by applying the federal estate tax valuation principles of section 2031 and chapter 14 and the corresponding regulations, but without regard to sections 2032 and 2032A.

(d) Date of receipt—(1) In general. The section 2801 tax is imposed upon the receipt of a covered gift or covered bequest by a U.S. recipient.

(2) Covered gift. The date of receipt of a covered gift is the same as the date of the gift for purposes of chapter 12 as if the covered expatriate had been a U.S. citizen at the time of the transfer. Thus, for a gift of stock, if the covered expatriate delivers a properly endorsed stock certificate to the U.S. recipient, the date of delivery is the date of receipt for purposes of this section. Alternatively, if the covered expatriate delivers the stock certificate to the issuing corporation or its transfer agent in order to transfer title to the U.S. recipient, the date of receipt is the date the stock is transferred on the books of the corporation. For a transfer of assets by a covered expatriate to a domestic revocable trust, the trust receives the transfer on the date the covered expatriate relinquishes the right to revoke the trust. If, before the donor’s relinquishment of the right to revoke the trust, the revocable trust distributes property to a U.S. citizen or resident not in discharge of a support or other obligation of the donor, then the U.S. recipient receives a covered gift on the date of that distribution. For an asset subject to a claim of right of another involving a bona fide dispute, the date of receipt is the date on which such claim is extinguished.

(3) Covered bequest. The date of receipt of a covered bequest is the date of distribution from the estate or the decedent’s revocable trust rather than the date of death of the covered expatriate. However, the date of receipt is the date of death for property passing on the death of the covered expatriate by operation of law, or by beneficiary designation or other contractual agreement. Notwithstanding the previous sentences, for an asset subject to a claim of right of another involving a bona fide dispute, the date of receipt is the date on which such claim is extinguished.

(4) Foreign trusts. The date of receipt by a U.S. citizen or resident of property from a foreign trust that has not elected to be treated as a domestic trust under § 28.2801–5(d) is the date of its distribution from the foreign trust.

(5) Powers of appointment—(i) Covered expatriate as holder of power. In the case of the exercise, release, or lapse of a power of appointment held by a covered expatriate that is a covered gift pursuant to § 28.2801–3(e)(1), the date of receipt is the date of the exercise, release, or lapse of the power. In the case of the exercise, release, or lapse of a power of appointment held by a covered expatriate that is a covered bequest pursuant to § 28.2801–3(e)(1), the date of receipt is (A) the date the property subject to the power is distributed from the decedent’s estate or revocable trust when the power of appointment is over property in such estate or trust, or (B) the date of the covered expatriate’s death when the power of appointment is over property passing on the covered expatriate’s death by operation of law, by beneficiary designation, or by other contractual agreement.

(ii) Covered expatriate as grantor of power. The date of receipt of property subject to a general power of appointment granted by a covered expatriate to a U.S. citizen or resident over property not transferred in trust that constitutes a covered gift or covered bequest pursuant to § 28.2801–3(e)(2) is the first date on which both the power is exercisable by the U.S. citizen or resident and the property subject to the general power has been irrevocably transferred by the covered expatriate. The date of receipt of property subject to a general power of appointment over property in a domestic trust or an electing foreign trust is determined in accordance with paragraphs (d)(2) and (d)(3) of this section, and over property in a non-electing foreign trust is determined in accordance with paragraph (d)(4) of this section. See § 28.2801–3(d) for the rule applying to covered gifts and covered bequests made in trust.

(6) Indirect receipts. The date of receipt by a U.S. citizen or resident of a covered gift or covered bequest received indirectly from a covered expatriate is the date of its receipt, as determined under paragraph (d)(2) or (d)(3) of this section, by the U.S. citizen or resident who is the first recipient of that property from the covered expatriate to be subject to section 2801 with regard to that property. For example, the date of receipt of property (i) subject to a non-general power of appointment over property not held in trust given by a covered expatriate to a foreign person (other than another covered expatriate) is the date that property is received by the U.S. citizen or resident in whose favor the power was exercised, and (ii) received through one or more entities not subject to section 2801 is the date of its receipt by the U.S. citizen or resident from a conduit entity.

(e) Reduction of tax for foreign estate or gift tax paid. The section 2801 tax is reduced by the amount of any gift or estate tax paid to a foreign country with respect to the covered gift or covered bequest. For this purpose, the term foreign country includes possessions and political subdivisions of foreign states. However, no reduction is allowable for interest and penalties paid in connection with those foreign taxes. To claim the reduction of section 2801 tax, the U.S. recipient must attach to the Form 708 a copy of the foreign estate or gift tax return and a copy of the receipt or cancelled check for payment of the foreign estate or gift tax. The U.S. recipient also must report, on an attachment to the Form 708:

(1) The amount of foreign estate or gift tax paid with respect to each covered gift or covered bequest and the amount and date of each payment thereof;

(2) A description and the value of the property with respect to which such taxes were imposed;

(3) Whether any refund of part or all of the foreign estate or gift tax has been or will be claimed or allowed, and the amount; and

(4) All other information necessary for the verification and computation of the amount of the reduction of section 2801 tax.

(f) Examples. The provisions of this section are illustrated by the following examples:

Example 1. Computation of tax. In Year 1, A, a U.S. citizen, receives a $50,000 covered gift from B and an $80,000 covered bequest from C. Both B and C are covered expatriates. In Year 1, the highest estate and gift tax rate is 40 percent and the section 2801(c) amount is $14,000. A’s section 2801 tax for Year 1 is computed by multiplying A’s net covered gifts and covered bequests by 40 percent. A’s net covered gifts and covered bequests for Year 1 are $116,000, which is determined by reducing A’s total covered gifts and covered bequests received during Year 1, $130,000 ($50,000 + $80,000), by the section 2801(c) amount of $14,000. A’s section 2801 tax liability is then reduced by any foreign estate or gift tax paid under paragraph (e) of this section. Assuming A, B, and C paid no foreign estate or gift tax on the transfers, A’s section 2801 tax liability for Year 1 is $46,400 ($116,000 x 0.4).

Example 2. Deduction of section 2801 tax for income tax purposes. In Year 1, B receives a covered bequest of $25,000. Also in Year 1, B receives an aggregate $500,000 of distributions from a non-electing foreign trust of which $100,000 was attributable to a covered gift. In Year 1, the highest estate and gift tax rate is 40 percent and the section 2801(c) amount is $14,000. Based on information provided by the trustee of the foreign trust, B includes $50,000 of the aggregate distributions from the foreign trust in B’s gross income for Year 1. Under paragraph (a)(3)(ii) of this section, B (a cash basis taxpayer) is entitled to an income tax deduction under section 164 for the calendar year in which the section 2801 tax is paid. In Year 2, B timely reports the distributions from the foreign trust and pays $44,400 in section 2801 tax (($125,000 – $14,000) x 0.4). In Year 2, B is entitled to an income tax deduction because B paid the section 2801 tax in Year 2 on the Year 1 covered gift and covered bequest. B’s Year 2 income tax deduction is computed as follows:

(i) $100,000 of B’s total covered gifts and covered bequests of $125,000 received in Year 1 consisted of the portion of the distributions from the foreign trust attributable to covered gifts and covered bequests received by the trust. See paragraph (a)(3)(ii)(A) of this section.

(ii) $50,000 of the $500,000 of trust distributions were includable in B’s gross income for Year 1. This amount is deemed to consist first of distributions subject to the section 2801 tax ($100,000). Thus, the entire amount included in B’s gross income ($50,000) also is subject to the section 2801 tax, and is used in the numerator to determine the income tax deduction available to B. See paragraph (a)(3)(ii)(B) of this section.

(iii) The portion of B’s section 2801 tax liability attributable to distributions from a foreign trust is $17,760 ($44,400 x ($50,000/$125,000)). Therefore, B’s deduction under section 164 is $17,760. See paragraph (a)(3)(ii)(C) of this section.

Example 3. Date of receipt; bona fide claim. On October 10, Year 1, CE, a covered expatriate, died testate as a resident of Country F, a foreign country with which the United States does not have an estate tax treaty. CE designated his son, S, as the beneficiary of CE’s retirement account. S is a U.S. citizen. CE’s wife, W, who is a citizen and resident of Country F, elects to take her elective share of CE’s estate under local law. S contests whether the retirement account is property subject to the elective share. S and W agree to settle their respective claims by dividing CE’s assets equally between them. On December 15 of Year 2, Country F’s court enters an order accepting the terms of the settlement agreement and dismissing the case. Under paragraph (d)(3) of this section, S received a covered bequest of one-half of CE’s retirement account on December 15, Year 2, when W’s claim of right was extinguished.

(g) Effective/applicability date. This section applies on and after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. Once these regulations have been published as final regulations in the Federal Register, taxpayers may rely upon the final rules of this part for the period beginning June 17, 2008, and ending on the date preceding the date these regulations are published as final regulations in the Federal Register.

§ 28.2801–5 Foreign trusts.

(a) In general. The section 2801 tax is imposed on a U.S. recipient who receives distributions, whether of income or principal, from a foreign trust to the extent the distributions are attributable to one or more covered gifts or covered bequests made to that foreign trust. See paragraph (d) of this section regarding a foreign trust’s election to be treated as a domestic trust for purposes of section 2801.

(b) Distribution defined. For purposes of determining whether a U.S. recipient has received a distribution from a foreign trust, the term distribution means any direct, indirect, or constructive transfer from a foreign trust. This determination is made without regard to whether any portion of the trust is treated as owned by the U.S. recipient or any other person under subpart E of part I, subchapter J, chapter 1 of the Code (pertaining to grantors and others treated as substantial owners) and without regard to whether the U.S. recipient of the transfer is designated as a beneficiary by the terms of the trust. For purposes of section 2801, the term distribution also includes each disbursement from a foreign trust pursuant to the exercise, release, or lapse of a power of appointment, whether or not a general power. In addition to the reporting requirements under this section, see section 6048(c) regarding the information reporting requirement for U.S. persons receiving a distribution or deemed distribution from a foreign trust during the year.

(c) Amount of distribution attributable to covered gift or covered bequest—(1) Section 2801 ratio—(i) In general. A foreign trust may have received covered gifts and covered bequests as well as contributions that were not covered gifts or covered bequests. Under such circumstances, the fair market value of the foreign trust at any time consists in part of a portion of the trust attributable to the covered gifts and covered bequests it has received (covered portion) and in part of a portion of the trust attributable to other contributions (non-covered portion). The covered portion of the trust includes the ratable portion of appreciation and income that has accrued on the foreign trust’s assets from the date of the contribution of the covered gifts and covered bequests to the foreign trust. For purposes of section 2801, the amount of each distribution from the foreign trust, whether made from the income or principal of the trust, that is considered attributable to the foreign trust’s covered gifts and covered bequests is determined on a proportional basis, by reference to the section 2801 ratio (as described in paragraph (c)(1)(ii) of this section), and not by the identification or tracing of particular trust assets. Specifically, this portion of each distribution is determined by multiplying the distributed amount by the percentage of the trust that consists of its covered portion immediately prior to that distribution (section 2801 ratio). Thus, for example, the section 2801 ratio of a foreign trust whose assets are comprised exclusively of covered gifts or covered bequests and the income and appreciation thereon, would be 1 and the full amount of each distribution from that foreign trust to a U.S. citizen or resident would be subject to section 2801.

(ii) Computation. The section 2801 ratio, which must be redetermined after each contribution to the foreign trust, is computed by using the following fraction:

where,

X = The value of the trust attributable to covered gifts and covered bequests, if any, immediately before the contribution (pre-contribution value); this value is determined by multiplying the fair market value of the trust assets immediately prior to the contribution by the section 2801 ratio in effect immediately prior to the current contribution. This amount will be zero for all years prior to the year in which the foreign trust receives its first covered gift or covered bequest;

Y = The portion, if any, of the fair market value of the current contribution that constitutes a covered gift or covered bequest; and

Z = The fair market value of the trust immediately after the current contribution.

See paragraph (e) of this section, Example 1, for an illustration of this computation.

(2) Effect of reported transfer and tax payment. Once a section 2801 tax has been timely paid on property that thereafter remains in a foreign trust, that property is no longer considered to be, or to be attributable to, a covered gift or covered bequest to the foreign trust for purposes of the computation described in paragraph (c)(1)(ii) of this section. For purposes of the prior sentence, a section 2801 tax is deemed to have been timely paid on amounts for which no section 2801 tax was due as long as those amounts were reported as a covered gift or covered bequest on a timely filed Form 708, “U.S. Return of Gifts or Bequests from Covered Expatriates.”

(3) Inadequate information to calculate section 2801 ratio. If the trustee of the foreign trust does not have sufficient books and records to calculate the section 2801 ratio, or if the U.S. recipient is unable to obtain the necessary information with regard to the foreign trust, the U.S. recipient must proceed upon the assumption that the entire distribution for purposes of section 2801 is attributable to a covered gift or covered bequest.

(d) Foreign trust treated as domestic trust—(1) Election required. To be considered an electing foreign trust, so that the foreign trust is treated as a domestic trust solely for purposes of the section 2801 tax, a valid election is required.

(2) Effect of election. (i) A valid election subjects the electing foreign trust to the section 2801 tax on (A) all covered gifts and covered bequests received by the foreign trust during that calendar year, (B) the portion of the trust attributable to covered gifts and covered bequests received by the trust in prior years, as determined in paragraph (d)(3)(iii) of this section, and (C) all covered gifts and covered bequests received by the foreign trust during calendar years subsequent to the first year in which the election is effective, unless and until the election is terminated. To the extent that covered gifts and covered bequests are subject to the section 2801 tax under the prior sentence, those trust receipts are no longer treated as a covered gift or covered bequest for purposes of determining the portion of the trust attributable to covered gifts and covered bequests. Therefore, upon making a valid election, the foreign trust’s section 2801 ratio described in paragraph (c)(1)(ii) of this section will be zero until the effective date of any termination of the election and the subsequent receipt of any covered gift or covered bequest, and a distribution made from the foreign trust while this election is in effect is not taxable under section 2801 to the recipient trust beneficiary.

(ii) This election has no effect on any distribution from the foreign trust that was made to a U.S. recipient in a calendar year prior to the calendar year for which the election is made. Thus, even after a valid election is made, a distribution to a U.S. recipient in a calendar year prior to the calendar year for which the election is made that was attributable to one or more covered gifts or covered bequests continues to be a distribution attributable to one or more covered gifts or covered bequests and the section 2801 ratio in place at the time of the distribution continues to apply to that distribution. Furthermore, an election under this section does not relieve the U.S. recipient from the information reporting requirements of section 6048(c).

(3) Time and manner of making the election—(i) When to make the election. The election is made on a timely filed Form 708 for the calendar year for which the foreign trust seeks to subject itself to the section 2801 tax as described in paragraph (d)(2)(i) of this section. The election may be made for a calendar year whether or not the foreign trust received a covered gift or covered bequest during that calendar year. See § 28.6071–1.

(ii) Requirements for a valid election. To make a valid election to be treated as a domestic trust for purposes of section 2801, the electing foreign trust must timely file a Form 708 and must, on such form—

(A) Make the election, timely pay the section 2801 tax, if any, as determined under paragraph (d)(3)(iii) of this section, and include a computation illustrating how the trustee of the electing foreign trust calculated both the section 2801 ratio described in paragraph (c)(1)(ii) of this section and the section 2801 tax;

(B) Designate and authorize a U.S. agent as provided in paragraph (d)(3)(iv) of this section;

(C) Agree to file Form 708 annually;

(D) List the amount and year of all prior distributions attributable to covered gifts and covered bequests made to a U.S. recipient and provide the name, address, and taxpayer identification number of each U.S. recipient; and

(E) Notify each permissible distributee that the trustee is making the election under this paragraph (d) and provide to the IRS a list of the name, address, and taxpayer identification number of each permissible distributee. For this purpose, a permissible distributee is any U.S. citizen or resident who:

(1) Currently may or must receive distributions from the trust, whether of income or principal;

(2) May withdraw income or principal from the trust, regardless of whether the right arises or lapses upon the occurrence of a future event; or

(3) Would have been described in paragraph (d)(3)(ii)(E)(1) of this section if either the interests of all persons described in (d)(3)(ii)(E)(1) or (E)(2) had just terminated or the trust had just terminated.

(iii) Section 2801 tax payable with the election. To make a valid election to be treated as a domestic trust for purposes of section 2801, the electing foreign trust must timely pay the section 2801 tax on all covered gifts and covered bequests received by the electing foreign trust in the calendar year for which the Form 708 is being filed. In some cases, an electing foreign trust may have received covered gifts or covered bequests in prior calendar years during which no such election was in effect. In those cases, the trustee must also, at the same time, report and pay the tax on the fair market value, determined as of the last day of the calendar year immediately preceding the year for which the Form 708 is being filed, of the portion of the trust attributable to covered gifts and covered bequests received by such trust in prior calendar years (except as provided in paragraph (d)(6)(iii) of this section with regard to an imperfect election). That portion is determined by multiplying the fair market value of the trust, as of the December 31 immediately preceding the year for which the election is made, by the section 2801 ratio in effect on that date, as calculated under paragraph (c)(1)(ii) of this section. If the trustee does not have sufficient books and records to determine what amount of the corpus and undistributed income is attributable to undistributed prior covered gifts and covered bequests, then that amount is deemed to be the entire fair market value of the trust as of that December 31. See paragraph (c)(3) of this section.

(iv) Designation of U.S. agent—(A) In general. The trustee of an electing foreign trust must designate and authorize a U.S. person, as defined in section 7701(a)(30), to act as an agent for the trust solely for purposes of section 2801. By designating a U.S. agent, the trustee of the foreign trust agrees to provide the agent with all information necessary to comply with any information request or summons issued by the Secretary. Such information may include, without limitation, copies of the books and records of the trust, financial statements, and appraisals of trust property.

(B) Role of designated agent. Acting as an agent for the trust for purposes of section 2801 includes serving as the electing foreign trust’s agent for purposes of section 7602 (“Examination of books and witnesses”), section 7603 (“Service of summons”), and section 7604 (“Enforcement of summons”) with respect to—

(1) Any request by the Secretary to examine records or produce testimony related to the proper identification or treatment of covered gifts or covered bequests contributed to the electing foreign trust and distributions attributable to such contributions; and

(2) Any summons by the Secretary for records or testimony related to the proper identification or treatment of covered gifts or covered bequests contributed to the electing foreign trust and distributions attributable to such contributions.

(C) Effect of appointment of U.S. agent. An electing foreign trust that appoints such an agent is not considered to have an office or a permanent establishment in the United States, or to be engaged in a trade or business in the United States, solely because of the agent’s activities as an agent pursuant to this section.

(4) Annual certification or filing requirement. The trustee of an electing foreign trust must file a timely Form 708 annually either to report and pay the section 2801 tax on all covered gifts and covered bequests received by the trust during the calendar year, or to certify that the electing foreign trust did not receive any covered gifts or covered bequests during the calendar year.

(5) Duration of status as electing foreign trust—(i) In general. A valid election (one that meets all of the requirements of paragraph (d)(3) of this section) is effective as of January 1 of the calendar year for which the Form 708 on which the election is made is filed. The election, once made, applies for all calendar years until the election is terminated as described in paragraph (d)(5)(ii) of this section.

(ii) Termination. An election to be treated as a domestic trust for purposes of section 2801 is terminated either by the failure of the foreign trust to make the annual filing, together with any payment of the section 2801 tax, as required by paragraph (d)(4) of this section, or by the failure of the foreign trust to timely pay any additional amount of section 2801 tax (in accordance with the requirements of paragraph (d)(6)(ii) of this section) with respect to recalculations described in paragraph (d)(6) of this section (a failure that results in an imperfect election). A termination, if any, is effective as of the beginning of the calendar year for which the trustee fails to make the annual filing required by paragraph (d)(4) of this section or for which the trustee fails to pay any of the amounts described in this paragraph (d)(5)(ii). In the case of a terminated election, the trustee should notify promptly each permissible distributee, as defined in paragraph (d)(3)(ii)(E) of this section, that the foreign trust’s election was terminated as of January 1 of the applicable year (with the actual year of the termination being set forth in the notice), and that each U.S. recipient of a distribution made from the foreign trust on and after that date is subject to the section 2801 tax on the portion of each such distribution that is attributable to covered gifts and covered bequests. See paragraph (d)(6)(iii)(B) of this section for an additional notification requirement in the case of an imperfect election.

(iii) Subsequent elections. If a foreign trust’s election is terminated under paragraph (d)(5)(ii) of this section, the foreign trust is not prohibited from making another election in a future year, subject to the requirements of paragraph (d)(3) of this section.

(6) Dispute as to amount of section 2801 tax owed by electing foreign trust— (i) Procedure. If the Commissioner disputes the value of a covered gift or covered bequest, or otherwise challenges the computation of the section 2801 tax, that is reported on the electing foreign trust’s timely filed Form 708 for any calendar year, the Commissioner will issue a letter (but not a notice of deficiency as defined in section 6212) to the trustee of the electing foreign trust and the appointed U.S. agent that details the disputed information and the proper amount of section 2801 tax as recalculated. The foreign trust must pay the additional amount of section 2801 tax including interest and penalties, if any, in accordance with the requirements of paragraph (d)(6)(ii) of this section, on or before the due date specified in the letter to maintain its election.

(ii) Effect of timely paying the additional section 2801 tax amount. If the trustee of the foreign trust timely pays the additional amount(s) specified in the Commissioner’s letter, or such other amount as agreed to by the Commissioner, and enters into a closing agreement with the IRS as described in section 7121, then the foreign trust’s election to be treated as a domestic trust under paragraph (d) of this section remains in effect. In addition, in the absence of fraud, malfeasance, or misrepresentation of a material fact, that payment, in conjunction with the closing agreement, will be deemed to render any determination of value to which the closing agreement applies as final and binding on both the IRS and the foreign trust. Thus, subsequently, the IRS will not be able to challenge the section 2801 tax due from either the foreign trust or any of its beneficiaries who are U.S. citizens or residents for the year for which that Form 708 was filed by the foreign trust, except with respect to any covered gifts or covered bequests not reported on that return, and neither the foreign trust nor any of its beneficiaries will be able to file a claim for refund with respect to section 2801 tax paid by the foreign trust on the covered gifts and covered bequests reported on that Form 708.

(iii) Effect of failing to timely pay the additional section 2801 tax amount (imperfect election)—(A) In general. If the foreign trust fails to timely pay the additional amount of section 2801 tax with interest and penalties, if any, claimed to be due by the IRS in accordance with the requirements of paragraph (d)(6)(ii) of this section, then the foreign trust’s valid election is terminated and becomes an imperfect election. The foreign trust’s election is terminated, and is converted into an imperfect election, retroactively as of the first day of the calendar year for which was filed the Form 708 with respect to which the additional amount of section 2801 tax is claimed to be due by the IRS. Thus, the value the foreign trust has reported on the Form 708 and on which the trust has paid the section 2801 tax is no longer considered to be attributable to covered gifts or covered bequests when computing the section 2801 ratio described in paragraph (c)(1)(ii) of this section applicable to distributions made by the foreign trust to U.S. recipients during the calendar year for which the Form 708 was filed and thereafter. The U.S. recipients of distributions from the foreign trust, however, should take into consideration the additional value determined by the IRS, on which the foreign trust did not timely pay the section 2801 tax, when computing the section 2801 ratio to be applied to a distribution from the trust. See paragraph (c) of this section. Any disagreement with regard to that additional value will be an issue to be resolved as part of the review of that U.S. recipient’s own Form 708 reporting a distribution.

(B) Notice to permissible beneficiaries. If the trustee of the foreign trust fails to remit the additional payment of the section 2801 tax including all interest and penalties, if any, in accordance with the requirements of paragraph (d)(6)(ii) of this section, by the due date stated in the IRS letter, the trustee should notify promptly each permissible distributee, as defined in paragraph (d)(3)(ii)(E) of this section, of the amount of additional value on which the foreign trust did not timely pay the section 2801 tax as determined by the IRS and that:

(1) The foreign trust’s election was terminated as of January 1 of the applicable year (with the actual year of the termination being set forth in the notice); and

(2) Each U.S. recipient of a distribution made from the foreign trust on and after that termination date is subject to the section 2801 tax on the portion of each such distribution attributable to covered gifts and covered bequests.

(C) Reasonable cause. If a U.S. recipient received a distribution from such trust on or after January 1 of the year for which the election was terminated and the election became an imperfect election, provided the U.S. recipient files a Form 708 and pays the section 2801 tax within a reasonable period of time after being notified by the trustee of the foreign trust or otherwise becoming aware that a valid election was not in effect when the distribution was made, the U.S. recipient’s failure to timely file and pay are due to reasonable cause and not willful neglect for purposes of section 6651. For this purpose, a reasonable period of time is not more than six months after the U.S. recipient is notified by the trustee or the U.S. recipient otherwise becomes aware that a valid election is not in effect.

(D) Interim period. If a foreign trust’s valid election is terminated and becomes an imperfect election, there is a period of time (interim period) after the effective date of the termination of the election during which both the foreign trust and its U.S. beneficiaries are likely to continue to comply with section 2801 as it applies to an electing foreign trust with a valid election in place. The interim period begins on the effective date of the termination of the foreign trust’s election that resulted in an imperfect election as described in paragraph (d)(6)(iii)(A) of this section, and ends on December 31 of the calendar year immediately preceding the calendar year in which the additional section 2801 tax claimed by the IRS is due. As under the rule in paragraph (d)(6)(iii)(A) of this section regarding imperfect elections, the covered gifts and covered bequests received by the foreign trust during this interim period, which the foreign trust has reported on its timely filed Form 708 and on which the foreign trust has timely paid the section 2801 tax, are no longer considered to be covered gifts and covered bequests for purposes of computing the section 2801 ratio described in paragraph (c)(1)(ii) of this section as it applies to distributions made by non-electing foreign trusts to their U.S. beneficiaries. In addition, each distribution made by the foreign trust to a U.S. citizen or resident during this interim period must be reported on that U.S. recipient’s Form 708 by applying the section 2801 ratio to that distribution. Once the interim period has ended, the foreign trust has no election in place and the rules of section 2801(e)(4)(B)(i) will apply until the foreign trust subsequently (if ever) makes another valid election to be treated as a domestic trust for purposes of section 2801.

(7) No overpayment caused solely by virtue of defect in election. Any remittance of section 2801 tax made by a foreign trust electing to be treated as a domestic trust does not become an overpayment solely by virtue of a defect in the election. Instead, if at some subsequent time the IRS determines that the election was not in fact a valid election, then the election shall be considered valid only with respect to the covered gifts or covered bequests on which the section 2801 tax was timely paid by the foreign trust and each covered gift and covered bequest on which the section 2801 tax has been timely paid is no longer treated as a covered gift or covered bequest for purposes of determining the portion of the foreign trust attributable to covered gifts and covered bequests. See paragraphs (d)(2)(i) and (d)(6)(iii) of this section.

(e) Examples. The provisions of this section are illustrated by the following examples:

Example 1. Computation of section 2801 ratio. A and B each contribute $100,000 to a foreign trust. A (but not B) is a covered expatriate and A’s contribution is a covered gift. The section 2801 ratio immediately after these two contributions is 0.50, computed as follows: the pre-contribution value of the trust ($0) times the pre-contribution section 2801 ratio (-0-), plus the current covered gift ($100,000), divided by the post-contribution fair market value of the trust ($200,000). See § 28.2801–5(c). Therefore, 50 percent of each distribution from the trust is subject to the section 2801 tax until the next contribution is made to the trust. If the trustee distributes $40,000 to C, a U.S. citizen, before the trust receives any other contributions, then $20,000 ($40,000 x 0.5) is a covered gift to C.

Example 2. Computation of section 2801 ratio when multiple contributions are made to foreign trust. (i) In 2005, A, a U.S. citizen, established and funded an irrevocable foreign trust with $200,000 and reported the transfer as a completed gift. On January 1 of each of the following three years (2006 through 2008), A contributed an additional $100,000 to the foreign trust. A reported A’s contributions to the foreign trust as completed gifts on timely filed Forms 709, for calendar years 2005 through 2008. On August 8, 2008, a date after the effective date of section 2801 (June 17, 2008), A expatriated and became a covered expatriate. On January 1 of a year after 2008 (Year X), A makes an additional $100,000 contribution to the trust. The aggregate $600,000 contributed to the trust by A, both before and after expatriation, are the only contributions to the trust. Each year, the trustee of the foreign trust provides beneficiary B, a U.S. citizen, with an accounting of the trust showing each receipt and disbursement of the trust during that year, including the date and amount of each contribution by A.

(ii) The fair market value of the trust was $610,000 immediately prior to A’s contribution to the trust on January 1, Year X. Therefore, upon the Year X contribution of A’s first and only covered gift, the portion of the trust attributable to covered gifts and covered bequests (covered portion) changed from zero to 0.14 ([(section 2801 ratio of 0 x $610,000 fair market value pre-contribution) plus the $100,000 covered gift]/ $710,000 fair market value post-contribution). See paragraph (c) of this section.

(iii) In February of Year X, B received a distribution of $225,000 from the foreign trust. Although A contributed a total of $600,000 to the foreign trust, A contributed only $100,000 while A was a covered expatriate. Under paragraph (c) of this section, the portion of the $225,000 distribution from the foreign trust attributable to a covered gift is $31,500 ($225,000 x 0.14 (section 2801 ratio)) because the distribution is made proportionally from the covered and non-covered portions of the trust. See paragraph (c)(1) of this section. Accordingly, B received a covered gift of $31,500.

(iv) Pursuant to the terms of the foreign trust, the trust made a terminating distribution on August 5, Year X, when B turned 35, and B received the balance of the appreciated trust, $505,000. The portion of this distribution attributable to covered gifts and covered bequests is $70,700 ($505,000 x 0.14). Therefore, B has received covered gifts from the foreign trust during Year X in the total amount of $102,200 ($31,500 + $70,700).

Example 3. Termination of foreign trust election. The trustee of a foreign trust that received a covered gift makes a valid election to be treated as a domestic trust under § 28.2801–5(d) for Year 1. However, the trustee fails to file timely the Form 708 for the next year, Year 2. The foreign trust election is terminated as of January 1, Year 2, under paragraph (d)(5)(ii) of this section. Thus, any distributions made to U.S. recipients during Year 1 have a section 2801 ratio of zero and are not subject to the section 2801 tax. However, any such distributions made during Year 2 are subject to the section 2801 tax to the extent the distributions are attributable to a covered gift or covered bequest received by the trust during Year 2. Unless the trustee makes a new election as described in paragraph (d)(5)(iii) of this section, beginning in Year 2, the foreign trust’s section 2801 ratio must be recomputed each time the foreign trust receives a contribution.

Example 4. Imperfect election by foreign trust. (i) In Year 1, CE, a covered expatriate, gives a 20 percent limited partnership interest in a closely held business to a foreign trust created for the benefit of CE’s child, A, who is a U.S. citizen. The limited partnership interest is a covered gift. The trustee of the foreign trust makes a valid election to have the trust treated as a domestic trust for purposes of section 2801, trustee timely files a Form 708, and timely pays the section 2801 tax on the reported fair market value of the covered gift ($500,000). Later in Year 1, the trust makes a $100,000 distribution to A.

(ii) In Year 2, CE contributes $200,000 in cash to the foreign trust. The cash is a covered gift. The trustee of the foreign trust timely files a Form 708 reporting the transfer and pays the section 2801 tax. The trust does not make a distribution to any beneficiary during Year 2. Late in Year 3, the IRS disputes the reported value of the partnership interest transferred in Year 1 and determines that the proper valuation on the date of the gift was $800,000. In Year 3, the IRS issues a letter to the trustee of the foreign trust detailing its finding of the increased valuation and of the resulting additional section 2801 tax including accrued interest, if any, due on or before a later date in Year 3 specified in the letter. The foreign trust fails to pay the additional section 2801 tax liability on or before that due date.

(iii) Under paragraph (d)(6)(iii) of this section, the foreign trust’s election for Year 1 is an imperfect election; although it timely filed its return reporting the transfer and paid the tax, it failed to timely pay the additional section 2801 tax when the IRS notified the trust of an additional amount of section 2801 tax claimed to be due. Accordingly, the foreign trust’s election is deemed to have terminated as of January 1 of Year 1. In computing the foreign trust’s section 2801 ratio upon the receipt of the covered gift in Year 1, the $500,000 of value on which the section 2801 tax was timely paid is no longer deemed to be a covered gift. See paragraph (d)(6)(iii) of this section. When the trustee advises A of the letter from the IRS, A must file a late Form 708 reporting the portion of the Year 1 distribution attributable to covered gifts and covered bequests. Although A may owe section 2801 tax and interest, A will not owe any penalties under section 6651 as long as A files the Form 708 and pays the tax within a reasonable period of time after A receives notice of the termination of the election from the trustee of the foreign trust or otherwise becomes aware of the termination of the election. See paragraph (d)(6)(iii)(C) of this section.

(iv) When A files the Form 708, the IRS will verify whether A treated the $300,000 undervaluation claimed by the IRS as a covered gift in computing the section 2801 ratio. As with any other item reported on that return, A has the burden to prove the value of the covered gift to the foreign trust, and the IRS may challenge that value. If A treats the $300,000 as a covered gift to the trust, under paragraph (c)(1)(ii) of this section, the section 2801 ratio after the Year 1 contribution is 0.375 ($0 + ($300,000)/$800,000)). Thus, 37.5 percent of all distributions made to A from the foreign trust during Year 1 are subject to the section 2801 tax.

(v) The foreign trust’s timely filing of the Form 708 for Year 2 and the timely payment of the section 2801 tax shown on that return is not a valid election under paragraph (d)(5)(iii) of this section because the trust did not timely pay the section 2801 tax on all covered gifts and covered bequests in prior years as required in paragraph (d)(3) of this section, that is, the tax on the additional $300,000 of value of the Year 1 transfer. However, under paragraph (d)(6)(iii)(D) of this section, because the foreign trust timely filed and paid the section 2801 tax on the Year 2 covered gift of $200,000, and the additional unpaid tax was not due until Year 3, the $200,000 amount is no longer considered a covered gift for purposes of computing the section 2801 ratio.

Example 5. Subsequent election after termination of foreign trust election. The facts are the same as in Example 4. In Year 3, the foreign trust does not receive a covered gift or covered bequest. However, the trustee decides that making another election to be treated as a domestic trust would be in the best interests of the trust’s beneficiaries. Accordingly, by the due date for the Form 708 for Year 3, the trustee timely files the return and pays the section 2801 tax on the portion of the trust attributable to covered gifts and covered bequests. See paragraph (d)(5)(iii) of this section. The trustee calculates the portion of the trust attributable to covered gifts and covered bequests received by the trust in prior calendar years by multiplying the fair market value of the trust on December 31, Year 2, by the section 2801 ratio in effect on that date. See paragraph (d)(3)(iii) of this section. The foreign trust is an electing foreign trust in Year 3.

(f) Effective/applicability date. This section applies on and after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. Once these regulations have been published as final regulations in the Federal Register, taxpayers may rely upon the final rules of this part for the period beginning June 17, 2008, and ending on the date preceding the date these regulations are published as final regulations in the Federal Register.

(a) Determination of basis. For purposes of determining the U.S. recipient’s basis in property received as a covered gift or covered bequest, see sections 1015 and 1014, respectively. However, section 1015(d) does not apply to increase the basis in a covered gift to reflect the tax paid under this section. For purposes of determining a U.S. recipient’s basis in property received as a covered bequest from a decedent who died during 2010 and whose executor elected under section 301(c) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 not to have the estate tax provisions apply, see section 1022.

(b) Generation-skipping transfer tax. Transfers made by a nonresident not a citizen of the United States (NRA transferor) are subject to generation-skipping transfer (GST) tax only to the extent those transfers are subject to federal estate or gift tax as defined in § 26.2652–1(a)(2). In applying this rule, taxable distributions from a trust and taxable terminations are subject to the GST tax only to the extent the NRA transferor’s contributions to the trust were subject to federal estate or gift tax as defined in § 26.2652–1(a)(2). See § 26.2663–2. A transfer is subject to federal estate or gift tax, regardless of whether a federal estate or gift tax return reporting the transfer is timely filed and regardless of whether chapter 15 applies because of a covered expatriate’s failure to timely file and pay the section 2801 tax, if applicable.

(c) Information returns—(1) Gifts and bequests. Pursuant to section 6039F and the corresponding regulations, and to the extent provided in Notice 97–34, 1997–1 CB 422, and Form 3520, Part IV, each U.S. person (other than an organization described in section 501(c) and exempt from tax under section 501(a)) who treats an amount received from a foreign person (other than through a foreign trust) as a gift or bequest (including a covered gift or covered bequest) must report such gift or bequest on Part IV of Form 3520 if the value of the total of such gifts and bequests exceeds a certain threshold. A U.S. citizen or resident, as defined in § 28.2801–2(b) but not including a foreign trust that elects to be treated as a domestic trust, is included within the definition of a U.S. person for purposes of section 6039F.

(2) Foreign trust distributions. Pursuant to section 6048(c) and the corresponding regulations, and to the extent provided in Notice 97–34 and Part III of Form 3520, U.S. persons must report each distribution received during the taxable year from a foreign trust on Part III of Form 3520. Under section 6677(a), a penalty of the greater of $10,000 or 35 percent of the gross value of the distribution may be imposed on a U.S. person who fails to timely report the distribution. A U.S. citizen or resident as defined in § 28.2801–2(b), but not including a foreign trust that elects to be treated as a domestic trust, generally is required to report such a distribution under section 6048(c).

(3) Penalties and use of information. The filing of Form 706, Form 706–NA, Form 708, or Form 709 does not relieve a U.S. citizen or resident who is required to file Form 3520 from any penalties imposed under section 6677(a) for failure to comply with section 6048(c), or from any penalties imposed under section 6039F(c) for failure to comply with section 6039F(a). Pursuant to section 6039F(c)(1)(A), the Secretary may determine the tax consequences of the receipt of a purported foreign gift or bequest.

(d) Application of penalties—(1) Accuracy-related penalties on underpayments. The section 6662 accuracy-related penalty may be imposed upon any underpayment of tax attributable to—

(i) A substantial valuation understatement under section 6662(g) of a covered gift or covered bequest; or

(ii) A gross valuation misstatement under section 6662(h) of a covered gift or covered bequest.

(2) Penalty for substantial and gross valuation misstatements attributable to incorrect appraisals. The section 6695A penalty for substantial and gross valuation misstatements attributable to incorrect appraisals may be imposed upon any person who prepares an appraisal of the value of a covered gift or covered bequest.

(3) Penalty for failure to file a return and to pay tax. See section 6651 for the application of a penalty for the failure to file Form 708, or the failure to pay the section 2801 tax.

(e) Effective/applicability date. This section applies on and after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. Once these regulations have been published as final regulations in the Federal Register, taxpayers may rely upon the final rules of this part for the period beginning June 17, 2008, and ending on the date preceding the date these regulations are published as final regulations in the Federal Register.

(a) Responsibility of recipients of gifts and bequests from expatriates. It is the responsibility of the taxpayer (in this case, the U.S. citizen or resident receiving a gift or bequest from an expatriate or a distribution from a foreign trust funded at least in part by an expatriate) to ascertain the taxpayer’s obligations under section 2801, which includes making the determination of whether the transferor is a covered expatriate and whether the transfer is a covered gift or covered bequest.

(b) Disclosure of return and return information—(1) In general. In certain circumstances, the Internal Revenue Service (IRS) may be permitted, upon request of a U.S. citizen or resident in receipt of a gift or bequest from an expatriate, to disclose to the U.S. citizen or resident return or return information of the donor or decedent expatriate that may assist the U.S. citizen or resident in determining whether the donor or decedent was a covered expatriate and whether the transfer was a covered gift or covered bequest. The U.S. citizen or resident may not rely upon this information, however, if the U.S. citizen or resident knows, or has reason to know, that the information received from the IRS is incorrect. The circumstances under which such information may be disclosed to a U.S. citizen or resident, and the procedures for requesting such information from the IRS, will be as provided by publication in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b)).

(2) Rebuttable presumption. Unless a living donor expatriate authorizes the disclosure of his or her relevant return or return information to the U.S. citizen or resident receiving the gift, there is a rebuttable presumption that the donor is a covered expatriate and that the gift is a covered gift. A taxpayer who reasonably concludes that a gift or bequest is not subject to section 2801 may file a protective Form 708 in accordance with § 28.6011–1(b) to start the period for the assessment of any section 2801 tax.

(c) Effective/applicability date. This section applies on and after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. Once these regulations have been published as final regulations in the Federal Register, taxpayers may rely upon the final rules of this part for the period beginning June 17, 2008, and ending on the date preceding the date these regulations are published as final regulations in the Federal Register.

(a) In general. Every U.S. recipient as defined in § 28.2801–2(e) subject to taxation under chapter 15 of the Internal Revenue Code must keep, for the purpose of determining the total amount of covered gifts and covered bequests, such permanent books of account or records as are necessary to establish the amount of that person’s aggregate covered gifts and covered bequests, and the other information required to be shown on Form 708, “United States Return of Tax for Gifts and Bequests from Covered Expatriates.” All documents and vouchers used in preparing the Form 708 must be retained by the person required to file the return so as to be available for inspection whenever required.

(b) Supplemental information. In order that the Internal Revenue Service (IRS) may determine the correct tax, the U.S. recipient as defined in § 28.2801–2(e) must furnish such supplemental information as may be deemed necessary by the IRS. Therefore, the U.S. recipient must furnish, upon request, copies of all documents relating to the covered gift or covered bequest, appraisals of any items included in the aggregate amount of covered gifts and covered bequests, copies of balance sheets and other financial statements obtainable by that person relating to the value of stock or other property constituting the covered gift or covered bequest, and any other information obtainable by that person that may be necessary in the determination of the tax. See section 2801 and the corresponding regulations. For every policy of life insurance listed on the return, the U.S. recipient must procure a statement from the insurance company on Form 712 and file it with the IRS office where the return is filed. If specifically requested by the Commissioner, the insurance company must file this statement directly with the Commissioner.

(a) Return required. The return of any tax to which this part 28 applies must be made on Form 708, “United States Return of Tax for Gifts and Bequests from Covered Expatriates,” according to the instructions applicable to the form. With respect to each covered gift and covered bequest received during the calendar year, the U.S. recipient as defined in § 28.2801–2(e) must include on Form 708 the information set forth in § 25.6019–4. The U.S. recipient must file Form 708 for each calendar year in which a covered gift or covered bequest is received. The U.S. recipient who receives the covered gift or covered bequest during the calendar year is the person required to file the return. A U.S. recipient is not required to file such form, however, for a calendar year in which the total fair market value of all covered gifts and covered bequests received by that person during that calendar year is less than or equal to the section 2801(c) amount, which is the dollar amount of the per-donee exclusion in effect under section 2503(b) for that calendar year.

(b) Protective return. (i) A U.S. citizen or resident (as defined in § 28.2801–2(b)) that receives a gift or bequest from an expatriate and reasonably concludes that the gift or bequest is not a covered gift or a covered bequest from a covered expatriate may file a protective Form 708 in order to start the period for assessment of tax. To be a protective Form 708, it must provide all of the information otherwise required on Form 708, along with an affidavit, signed under penalties of perjury, setting forth the information on which that U.S. citizen or resident has relied in concluding that the donor or decedent, as the case may be, was not a covered expatriate, or that the transfer was not a covered gift or a covered bequest, as well as that person’s efforts to obtain other information that might be relevant to these determinations. If that U.S. citizen or resident has obtained information from the Internal Revenue Service (IRS) (as described in § 28.2801–7(b)(1)), it must attach a copy of such information. The U.S. citizen or resident also must attach a copy of a completed Form 3520, Part III, for all trust distributions, or Part IV for all gifts and bequests, if applicable. If the return meets the requirements of this paragraph (b)(i), and if the IRS does not assess a section 2801 tax liability for that tax year within the limitations period for assessment stated in section 6501, the IRS may not later assess a section 2801 tax with regard to any transfer reported on that Form 708.

(ii) A U.S. citizen or resident who receives a gift or bequest from an expatriate and who files a protective Form 708 meeting the requirements of paragraph (b)(i) of this section showing no tax due, absent fraud or other special factors, will not be subject to any additions to tax for late filing under section 6651(a)(1) or for late payment under section 6651(a)(2), even if the gift or bequest is determined to be a covered gift or covered bequest from a covered expatriate within the limitations period for assessment stated in section 6501. Notwithstanding the foregoing, however, if a U.S. citizen or resident knows, or has reason to know, that the information provided by the IRS or any other source is incorrect or incomplete, that U.S. citizen or resident may not rely on that information, and except as provided in the preceding paragraph (b)(i) of this section, may be subject to all of the generally applicable provisions governing assessment of tax, collection of tax, and penalties. See sections 6501, 6502, 6651 and 6662.

(c) Effective/applicability dates. This section applies on and after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register.

§ 28.6060–1 Reporting requirements for tax return preparers.

(a) In general. A person that employs one or more signing tax return preparers to prepare a return or claim for refund of any tax to which this part 28 applies, other than for the person, at any time during a return period, must satisfy the recordkeeping and inspection requirements in the manner stated in § 1.6060–1 of this chapter.

(b) Effective/applicability date. This section applies to returns and claims for refund filed on or after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register.