The paragraphs of section 6033 of the Internal Revenue Code (Code) outline various requirements for an annual information return to be filed by organizations that are exempt from tax under section 501(a) or described in section 527, including exceptions to the filing requirement. Section 6033(a)(1) requires certain organizations that are exempt from tax under section 501(a) (“tax-exempt organizations”) to file annual information returns that include gross income, receipts and disbursements, and “such other information for the purpose of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe.” The annual information returns required under section 6033 are Forms 990, “Return of Organization Exempt From Income Tax;” 990-EZ, “Short Form Return of Organization Exempt From Income Tax;” 990-PF, “Return of Private Foundation;” and 990-BL, “Information and Initial Excise Tax Return for Black Lung Benefit Trusts and Certain Related Persons.” Annual returns filed by tax-exempt organizations, tax-exempt political organizations described in section 527(e) (“section 527 organizations”), and nonexempt private foundations described in section 6033(d) and section 4947(a)(1) trusts (which are both treated as section 501(c)(3) organizations for this purpose) are information returns intended to help ensure that the filing organizations comply with applicable federal tax laws. Additionally, most information on these annual returns under section 6104 of the Code is available for public inspection.

Section 6033(a)(3) provides a list of organizations that are excepted from the filing requirements imposed under section 6033(a)(1). Specifically, section 6033(a)(3)(A)(ii) provides that section 6033(a)(1) shall not apply to any organization (other than a private foundation) that is described in section 6033(a)(3)(C) whose gross receipts are not normally more than $5,000 annually. The list of organizations provided in section 6033(a)(3)(C) includes certain fraternal beneficiary societies, orders or associations described in section 501(c)(8); certain organizations described in section 501(c)(3) (such as religious organizations and educational organizations described in section 170(b)(1)(A)(ii)); and organizations described in section 501(c)(1) that are corporations wholly owned by the United States or any agency or instrumentality thereof or wholly-owned subsidiaries of such corporations.

Section 6033(a)(3)(B) provides discretionary authority to the Secretary to relieve any organization required to file under section 6033(a)(1) (other than supporting organizations described in section 509(a)(3)) from filing an information return where he determines that such filing is “not necessary to the efficient administration of the internal revenue laws.”

Section 6033(b) provides a list of items that are required to be furnished annually by organizations described in section 501(c)(3), “at such time and in such manner as the Secretary may by forms or regulations prescribe.” The statutory list of items required to be furnished annually has been amended by Congress from time to time to account for additional requirements of organizations described in section 501(c)(3). Section 6033(b) was updated by the Taxpayer Bill of Rights 2, Public Law 104-168, in 1996 to include items in sections 6033(b)(10) (relating to taxes imposed on certain lobbying and political expenditures by organizations described in sections 501(c)(3)) and 6033(b)(11) (relating to taxes imposed with respect to an organization, an organization manager, or any disqualified person under section 4958).

Section 6033(g)(2) provides that a political organization (as defined by section 527(e)(1)) that has gross receipts of $25,000 or more for a taxable year¹ shall file an annual return containing the information required by section 6033(a)(1) for organizations exempt from taxation under section 501(a). The statute authorizes the Secretary to modify the information required to be reported to require only information that is necessary for purposes of carrying out section 527 and such other information as the Secretary deems necessary to carry out the provisions of section 6033(g).

Section 6033(h) provides additional reporting requirements for controlling organizations, within the meaning of section 512(b)(13). Section 6033(h) requires controlling organizations to include on their returns any (1) interest, annuities, royalties, or rents received from each controlled entity (within the meaning of section 512(b)(13)), (2) any loans made to each such controlled entity, and (3) any transfers of funds between such controlling organization and each such controlled entity.

Section 6033(k) provides additional reporting requirements for sponsoring organizations described in section 4966(d)(1). Section 6033(k) requires each such organization to report on its annual return (1) the total number of donor advised funds (as defined in section 4966(d)(2)) it owns at the end of such taxable year, (2) the aggregate value of assets held in such funds at the end of such taxable year, and (3) the aggregate contributions to and grants made from such funds during such taxable year.

Section 6033(l) provides additional reporting requirements for supporting organizations described in section 509(a)(3). Section 6033(l) requires each supporting organization to report on its annual return (1) the supported organizations (as defined in section 509(f)(3)) with respect to which such organization provides support; (2) whether the organization meets the requirements of clause (i), (ii), or (iii) of section 509(a)(3)(B); and (3) a certification that the organization meets the requirements of section 509(a)(3)(C).

The general rule of confidentiality of returns is found in section 6103, which states that returns and return information shall be confidential, and, except as authorized by this title, no person having access to this information shall disclose any return or return information obtained by him in any manner.

One of the exceptions to the general rule of confidentiality can be found in section 6104. In general, under section 6104(b), the Secretary must make the annual returns filed under section 6033 available to the public. However, the Secretary is not authorized to disclose to the public the name or address of any contributor to any tax-exempt organization other than a private foundation (as defined in section 509(a), including trusts described in section 4947(a)(1) that are treated as private foundations) or a section 527 organization. Section 301.6104(b)-1(b)(2) provides that although the names and addresses are not to be disclosed, the amounts of contributions to an organization shall be made available for public inspection unless the disclosure of such information can reasonably be expected to identify any contributor.

In addition to the required disclosure by the Secretary, section 6104(d) and §301.6104(d)-1 require certain tax-exempt organizations to provide their annual information returns upon request by a member of the public. Similar to the restrictions on disclosing contributor information placed on the Secretary by section 6104(b), an organization, other than a private foundation or a section 527 organization, is not required to disclose the names and addresses of its contributors under section 6104(d)(3)(A).

The current Treasury Regulations (“final regulations”) reflect many of the statutory requirements of section 6033. Consistent with section 6033(a)(1), §1.6033-2(a)(1) of the final regulations states that “except as provided in section 6033(a)(3) and paragraph (g) [of §1.6033-2], every organization exempt from taxation under section 501(a) shall file an annual information return specifically setting forth its items of gross income, gross receipts and disbursements, and such other information as may be prescribed in the instructions, issued with respect to the return.”

Although the information to be reported for any particular year is set forth in the form and instructions, the final regulations under section 6033 provide a list of “information generally required to be furnished by an organization exempt under section 501(a)” on the annual return. The list provided in §1.6033-2(a)(2)(ii) of the final regulations generally tracks the list set forth for section 501(c)(3) organizations in section 6033(b), though not all items in section 6033(b) are currently included in the regulations because the statute has been amended following the original issuance of the regulations, and not all statutory changes were subsequently reflected in the regulations. The list in the regulations includes, but is not limited to, gross income for the year; dues and assessments from members and affiliates for the year; expenses incurred within the year attributable to gross income; disbursements (including prior years’ accumulations) made within the year for the purposes for which it is exempt; a balance sheet showing its assets, liabilities, and net worth as of the beginning and end of such year; the total of the contributions, gifts, grants and similar amounts received by it during the taxable year; the names and addresses of all officers, directors, or trustees (or any person having responsibilities or powers similar to those of officers, directors or trustees) of the organization; and certain compensation and payment information.

As relevant here, §1.6033-2(a)(2)(ii)(f) provides that organizations required to file an annual information return generally must provide the names and addresses of persons who contribute $5,000 or more during the taxable year. This provision is more expansive than section 6033(b)(5), which applies specifically to organizations described in section 501(c)(3). In addition, §1.6033-2(a)(2)(iii)(d) provides that organizations described in section 501(c)(7) (social clubs), section 501(c)(8) (fraternal beneficiary societies), or section 501(c)(10) (domestic fraternal societies) generally must report the name of each person who contributes more than $1,000 to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals.

Incorporating section 6033(a)(3), §1.6033-2(g)(1) provides a list of organizations that are not required to file an annual return under section 6033(a)(1). Within that list, §1.6033-2(g)(1)(iii) provides that organizations described in section 6033(a)(3)(C) whose gross receipts are generally not more than $5,000 annually are not required to file the return required under section 6033(a)(1). Further, §1.6033-2(g)(6) provides that the Commissioner may relieve any organization or class of organizations (other than a supporting organization described in section 509(a)(3)) from filing, in whole or in part, the annual return required under section 6033 where the Commissioner “determines that such returns are not necessary for the efficient administration of the internal revenue laws.”

Accordingly, other than with regard to supporting organizations, section 6033 and the final regulations in this part issued under section 6033 provide the Commissioner with broad discretionary authority to determine what information is reported and to grant relief, in whole or in part, from the annual filing requirements of tax-exempt organizations if it is determined that the information is not necessary for the efficient administration of the internal revenue laws.

For decades, the Commissioner has exercised the discretion under section 6033(a)(3)(B) and §1.6033-2(g)(6) to relieve organizations of filing requirements in section 6033 through subregulatory guidance such as revenue procedures and annual information return instructions (for example, Rev. Proc. 95-48, 1995-2 C.B. 418, and Rev. Proc. 96-10, 1996-1 C.B. 577). Revenue Procedure 83-23, 1983-1 C.B. 687, represents one such exercise of this discretion. In that revenue procedure, the Commissioner increased to $25,000 the minimum amount of gross receipts normally required to be received in a year by an organization exempt under section 501(a) to trigger a filing requirement under section 6033(a). That revenue procedure also expanded the group of tax-exempt organizations not required to file an annual information return due to a gross receipts threshold beyond those listed in section 6033(a)(3)(C). Revenue Procedure 2011-15, 2011-3 I.R.B. 322, further increased this gross receipts threshold amount to $50,000 for most organizations exempt under section 501(a).² Revenue Procedure 2011-15 also relieved most foreign organizations and organizations formed in a United States possession from a filing requirement under section 6033(a) if their gross receipts from sources within the United States do not exceed the $50,000 threshold and if they have no significant activity (including lobbying and political activity and the operation of a trade or business, but excluding investment activity) in the United States.

Similarly, consistent with past exercises of authority under section 6033 and the implementing regulations, the Treasury Department and the IRS issued Rev. Proc. 2018-38, 2018-31 I.R.B. 280, granting tax-exempt organizations required to file the Form 990 or Form 990–EZ, other than those described in section 501(c)(3), relief from reporting the names and addresses of contributors on Schedules B, “Schedule of Contributors,” filed with Form 990 or 990-EZ (or completing the similar portions of Part IV of the Form 990–BL). Revenue Procedure 2018-38 also provides that organizations described in sections 501(c)(7), (8), or (10) need not provide, on their annual information returns required under section 6033, the names and addresses of persons who contributed more than $1,000 during the taxable year to be used for exclusively charitable purposes. Revenue Procedure 2018-38 does not affect the information required to be reported on Forms 990, 990-EZ, or 990-PF by organizations described in section 501(c)(3) (which for purposes of section 6033 include nonexempt charitable trusts described in section 4947(a)(1) and nonexempt private foundations described in section 6033(d)) or section 527 organizations.

On July 30, 2019, the United States District Court for the District of Montana released its decision in the case of Bullock, et al. v. IRS, No. 4:18-cv-00103-BMM (D. Mont. Jul. 30, 2019). The court noted that “the substance of [the Commissioner’s] ultimate decision [on reporting the names and addresses of contributors] remains subject to the Commissioner’s discretion,” but set aside Rev. Proc. 2018-38 and held that the IRS should have followed the notice and comment procedures of the APA in providing the reporting relief set forth in Rev. Proc. 2018-38.

The proposed regulations contained in this notice of proposed rulemaking modify the final regulations under section 6033 to align them with certain statutory amendments to section 6033 that have not previously been reflected in the regulations and to update the regulations to encompass certain instances in which the Commissioner has previously exercised discretion under the statute and regulations to relieve organizations, in whole or in part, from the filing requirements set forth in section 6033 or the regulations in this part issued under section 6033. The Code provides discretion to the Secretary, and his or her delegate,³ to determine what information is necessary for the efficient administration of the federal tax laws involving tax-exempt organizations. The Secretary has previously exercised that discretion through various forms or guidance. These proposed regulations would incorporate certain past exercises of discretion into a single location for ease of use. These proposed changes are also intended to update the regulations so that they more fully present the current reporting requirements for most tax-exempt organizations.

Specifically, as further discussed later in this preamble, these changes include the following: (1) Adding items listed in section 6033(b)(10) and (11), as applicable, to the list of items generally required to be reported; (2) adding other statutory reporting requirements for controlling organizations, sponsoring organizations, and supporting organizations; (3) amending the gross receipts threshold (with an additional requirement for foreign organizations and United States possession organizations) that triggers a filing requirement under section 6033 for organizations exempt under section 501(a) (other than private foundations and supporting organizations); (4) clarifying that section 527 organizations with gross receipts greater than $25,000 generally are subject to the reporting requirements under section 6033(a)(1) as if they were exempt from taxes under section 501(a); and (5) specifying that only organizations described in section 501(c)(3) and section 527 organizations generally would continue to be required to provide names and addresses of contributors on their Forms 990, Forms 990-EZ, and Forms 990-PF.

The Treasury Department and the IRS request comments on any other grants of section 6033 related reporting relief announced pursuant to past exercises of the Commissioner’s discretion that should be incorporated into the regulations or any other clarifications to reflect statutory changes. For example, these proposed regulations do not incorporate Rev. Proc. 96-10, 1996-1 C.B. 138, which relieves from a filing requirement under section 6033(a) certain organizations that are operated, controlled, or supervised by one or more churches, integrated auxiliaries, or conventions or associations of churches because it is unclear whether Rev. Proc. 96-10 currently has practical application. The relevant language provided indicates that these types of organizations are likely supporting organizations under section 509(a)(3). Section 509(a)(3) provides public charity status to organizations, known as supporting organizations, that are operated, supervised, or controlled by, or in connection with, one or more specified organizations described in section 509(a)(1) or (2), which includes churches, conventions or associations of churches, and some integrated auxiliaries of churches.

The Pension Protection Act of 2006, Public Law 109-280, modified the Secretary’s general discretion under section 6033(a)(3)(B) so that the Secretary is no longer permitted to relieve a supporting organization of its filing requirements. The Treasury Department and the IRS expect that few, if any, organizations meeting the requirements of Rev. Proc. 96-10 may still rely on this revenue procedure given the 2006 statutory change; thus, incorporating the provisions of Rev. Proc. 96-10 into regulations is unnecessary. However, the Treasury Department and the IRS request comments on the continued usefulness of Rev. Proc. 96-10.

In addition, Rev. Proc. 95-48 grants reporting relief for governmental units and affiliates of governmental units. The Treasury Department and the IRS are considering whether the reporting relief in this revenue procedure should be updated and whether such relief should be incorporated into the regulations under section 6033 and request comments on the relief provided in this revenue procedure, as well as whether any other reporting relief should be specified or added.

ITEMS REQUIRED IN ANNUAL INFORMATION RETURNS

Section 6033(a)(1) provides that the Secretary, or his or her delegate, may by forms or regulations prescribe “other information for the purpose of carrying out the internal revenue laws” to be reported on an annual return required under section 6033. This authority is reflected in §1.6033-2(a)(1). Consistent with these grants of discretion, §1.6033-2(a)(2)(ii) provides a general list of items that a tax-exempt organization may expect to provide on its annual information return required by section 6033.

As previously stated in this preamble, the Treasury Department and the IRS have determined that the regulations should be updated to reflect certain additional items listed in section 6033(b) for organizations described in section 501(c)(3).

Therefore, these proposed regulations would amend §1.6033-2(a)(2)(ii) by adding two new provisions to reflect items that have been added to section 6033(b) but that have not yet been added to the list in the regulations of items generally required to be reported on an organization’s annual information return. These items are those found in section 6033(b)(10) (relating to taxes imposed on certain lobbying and political expenditures by organizations described in section 501(c)(3)) and 6033(b)(11) (relating to taxes imposed with respect to an organization, an organization manager, or any disqualified person on any excess benefit transaction under section 4958). In addition, a cross-reference to §1.6033-2(a)(1) has been added to the introductory sentence of §1.6033-2(a)(2)(ii).

In an effort to further increase the ability of a taxpayer generally to find its reporting requirements in one place, the Treasury Department and the IRS are also incorporating into the regulations the statutory reporting requirements found in section 6033(h) for controlling organizations (as defined in section 512(b)(13)), section 6033(k) for sponsoring organizations (as defined in section 4966(d)(1)), and section 6033(l) for supporting organizations (as defined in section 509(a)(3)).

While these amendments to the regulations are part of an effort to further increase the ability of a taxpayer generally to find its reporting requirements in one place, tax-exempt organizations will continue to find their current annual return reporting requirements in the forms and instructions found at irs.gov. The Treasury Department and the IRS request comments on any other requirements in section 6033 that should be incorporated into §1.6033-2.

GROSS RECEIPTS FILING THRESHOLD

Section 6033(a)(1)(B) grants the Secretary, or his or her delegate, discretion to relieve any organization (except an organization described in section 509(a)(3)) from the requirement to file a return if the Secretary determines that the filing is not necessary to the efficient administration of the internal revenue laws and §1.6033-2(g)(6) specifies that this relief from filing may be granted in whole or in part.

The Treasury Department and the IRS have previously determined that the efficient administration of the tax laws does not require the filing of returns by organizations that are exempt under section 501(a) (other than private foundations and supporting organizations) that normally have less than $50,000 in gross receipts annually, except for foreign organizations and organizations formed in a United States possession that have significant activity (including lobbying and political activity and the operation of a trade or business, but excluding investment activity) in the United States. Rev. Proc. 2011-15. This threshold seeks to balance the efficient use of resources for both tax-exempt organizations and the IRS with ensuring compliance with the tax laws by tax-exempt organizations, particularly since such organizations must continue to file Form 990-N under section 6033(i). This notice of proposed rulemaking proposes to amend §1.6033-2(g)(1)(iii) to reflect the $50,000 gross receipts filing threshold currently in effect, rather than the $5,000 gross receipts threshold found in section 6033(a)(3)(A)(ii), and the application of the $50,000 threshold to organizations other than those listed in section 6033(a)(3)(C). Thus, the proposed regulations would provide that the gross receipts threshold for all organizations (other than private foundations and supporting organizations) formed in the United States would be $50,000. The notice of proposed rulemaking also proposes simply to incorporate the previously granted relief from the filing requirement under section 6033(a) for foreign organizations and organizations formed in a United States possession (other than private foundations and supporting organizations) that is currently found in Rev. Proc. 2011-15.

The proposed regulations will also specify that the Commissioner retains discretion to provide possible further increases in this amount pursuant to §1.6033-2(g)(6). Therefore, the Treasury Department and the IRS also propose amending §1.6033-2(g)(6) to clarify that the Commissioner has authority to further provide relief through forms, instructions to forms, or guidance published in the Internal Revenue Bulletin.

CLARIFYING THE TREATMENT OF SECTION 527 ORGANIZATIONS

Section 6033(g)(2) provides that section 527 organizations shall file an annual return containing the information required by section 6033(a)(1) for tax-exempt organizations. As noted previously in this preamble, the Treasury Department and the IRS have determined that the regulations should more fully reflect the requirements of section 6033 for tax-exempt organizations. The Treasury Department and the IRS propose to add §1.6033-2(a)(5) to state the current requirement that section 527 organizations, subject to the filing exceptions provided by section 6033(g)(3) or as permitted under section 6033(g)(4), follow the reporting requirements under section 6033(a)(1) in the same manner as tax-exempt organizations, except when the Commissioner revises those requirements as appropriate to carry out the purposes of section 527. The proposed §1.6033-2(a)(5) would also state the current requirement that section 527 organizations, like organizations described in section 501(c)(3), must continue to report the names and addresses of contributors on the section 527 organizations’ annual Forms 990 or Forms 990-EZ. The addition of §1.6033-2(a)(5) does not affect the current reporting requirements of section 527 organizations.

The Treasury Department and the IRS request comments on the proposed clarification of the treatment of section 527 organizations found in §1.6033-2(a)(5).

REPORTING OF NAMES AND ADDRESSES OF CONTRIBUTORS

Section 6033 does not specify that the names and addresses of contributors to tax-exempt organizations, other than those described in section 501(c)(3), be reported on annual information returns. Consistent with the Secretary’s broad discretion under section 6033(a) to set forth information reporting requirements “for the purpose of carrying out the internal revenue laws ... by forms or regulations,” §1.6033-2(a)(2)(ii) of the final regulations provides a list of items that are generally required to be included in the annual filings of organizations exempt under section 501(a). The proposed regulations would amend the final regulations to clarify that the need to provide the names and addresses of substantial contributors will generally apply only to tax-exempt organizations described in section 501(c)(3). This clarification is consistent with the limited application of the requirement in section 6033(b)(5). As discussed in the prior section of this preamble, section 527 organizations must also continue to report the names and addresses of substantial contributors.

In exercising this discretion, the Treasury Department and the IRS seek to balance the IRS’s need for the information against the costs and risks associated with reporting of the information. The IRS does not need the names and addresses of substantial contributors to tax-exempt organizations not described in section 501(c)(3) to be reported annually on Schedule B of Form 990 or Form 990-EZ in order to carry out the internal revenue laws, including provisions dealing with transfer taxes. A requirement to annually report such information—rather than providing it to the IRS as required upon examination—increases compliance costs for affected tax-exempt organizations and consumes IRS resources in connection with the redaction of such information as required in section 6104(b). Some have expressed concern regarding the potential use of the names and addresses of substantial contributors when evaluating possible private benefit or inurement. Tax-exempt organizations continue to be required to file Schedule L of Form 990 or Form 990-EZ identifying transactions between the exempt organization and interested persons (including substantial contributors), which may indicate possible risks of private benefit or inurement. The primary utility of the names and addresses of substantial contributors, however, arises during examination of a tax-exempt organization, at which point such information may be collected from the relevant tax-exempt organization. Under the proposed rule, tax-exempt organizations are still required to report the amounts of contributions from each substantial contributor as required by the Schedule B of the Form 990 and 990-EZ as well as maintain the names and addresses of substantial contributors should the IRS need this information on a case-by-case basis, which the Treasury Department and the IRS have concluded is sufficient for the efficient administration of the Code.

The Treasury Department and the IRS are also concerned that the requirement to report the names and addresses of substantial contributors poses a risk of inadvertent disclosure of information that is not open to public inspection because this information on Schedule B generally must be redacted from an otherwise disclosable information return. The IRS has experienced incidents of inadvertent disclosure and has taken other steps to reduce future occurrences of such disclosures. By reducing the number of organizations providing the names and addresses of contributors on Schedule B, the potential for inadvertent disclosure of names and addresses can be decreased further.

Finally, the Treasury Department and the IRS note that the change in annual reporting to the IRS of the names and addresses of substantial contributors will have no effect on information currently available to the public. Sections 6103 and 6104 prohibit the IRS from publicly disclosing the names and addresses of contributors to tax-exempt organizations (other than private foundations). With respect to such tax-exempt organizations, any names and addresses of substantial contributors on Schedule B are not made public and disclosure restrictions prohibit making such information available for use by other agencies for enforcement purposes, unless a specific exception applies.⁴ The Treasury Department and the IRS are aware of concerns raised regarding campaign finance laws; however, Congress has not tasked the IRS with the enforcement of campaign finance laws. Furthermore, the Code generally prohibits the IRS from disclosing any names and addresses of such organizations’ substantial contributors to federal agencies for non-tax investigations, including campaign finance matters, except in narrowly prescribed circumstances.⁵

Accordingly, the Treasury Department and the IRS are proposing to modify the regulations to no longer specify that tax-exempt organizations (other than organizations described in section 501(c)(3)) are generally required to report the names and addresses of their substantial contributors on their annual information returns. However, as noted previously in this preamble, tax-exempt organizations must continue to report the amounts of contributions from each substantial contributor as well as maintain the names and addresses of their substantial contributors in their books and records in accordance with section 6001 and §1.6001-1(a) and (c) in order to permit the IRS to efficiently administer the internal revenue laws through examinations of specific taxpayers. The records retained will enable organizations to substantiate upon examination the number of certain contributors and the amounts of their contributions and to facilitate the reporting of information on certain financial transactions between organizations and certain contributors. The Treasury Department and the IRS request comments on concerns regarding the efficient administration of the Code without the annual reporting of the names and addresses of substantial contributors for tax-exempt organizations other than those described in section 501(c)(3) and section 527 organizations.

The Treasury Department and the IRS propose to revise §1.6033-2(a)(2)(ii)(f) to provide that organizations described in section 501(c)(3) generally would be required to continue to provide names and addresses of contributors of more than $5,000 on their Forms 990, 990-EZ, and 990-PF. Similarly, §1.6033-2(a)(2)(iii)(d) would be revised to remove reference to the provision of names of contributors who contribute over $1,000 for a specific charitable purpose to organizations described in sections 501(c)(7), (8), and (10).

These regulations are proposed to be effective as of the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register. While these regulations are not effective until these rules are adopted as final in the Federal Register, under section 7805(b)(7), a tax-exempt organization may choose to apply the final regulations to returns filed after September 6, 2019. After issuing the final regulations, the Treasury Department and the IRS will withdraw any revenue procedures superseded by the final regulations.

This regulation is not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Department of the Treasury and the Office of Management and Budget regarding review of tax regulations.

PAPERWORK REDUCTION ACT

The collection of information contained in this notice is reflected in the collection of information for Forms 990 and 990-EZ that have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507(c)) under control numbers 1545-0047 and 1545-1150, respectively. To the extent there is a decrease in burden as a result of this change, the decrease in burden will be reflected in the updated burden estimates for the Forms 990 and 990-EZ. The requirement to maintain records to substantiate information on the Form 990 or 990-EZ is already contained in the burden associated with the control numbers for those forms and remains unchanged.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and return information are confidential, as required by 26 U.S.C. 6103.

REGULATORY FLEXIBILITY ACT

It is hereby certified that these final regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that these regulations reflect statutory requirements and reporting relief previously announced through forms, instructions to forms, or guidance published in the Internal Revenue Bulletin. The collection of information contained in these proposed regulations instead maintains a current recordkeeping obligation while removing a filing burden. Accordingly, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f), this regulation has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Before these proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES heading. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in the Federal Register.

The principal authors of these regulations are personnel from the Office of the Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the Treasury Department and the IRS participated in their development.

IRS Revenue Procedures, Revenue Rulings, Notices, and other guidance cited in this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov.

Income taxes, Reporting and recordkeeping requirements.

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

PART 1—INCOME TAXES

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

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

Par. 2. Section 1.6033-2 is amended by:

The revisions and additions read as follows:

§1.6033-2 Returns by exempt organizations and returns by certain nonexempt organizations.

(a) * * *

(2) * * *

(ii) * * *

(f) The total of the contributions, gifts, grants and similar amounts received by it during the taxable year, and, in the case of an organization described in section 501(c)(3), the names and addresses of all persons that contributed, bequeathed, or devised $5,000 or more (in money or other property) during the taxable year. * * *

* * * * *

(k) In the case of organizations described in section 501(c)(3), the respective amounts (if any) of the taxes imposed on the organization, or any organization manager of the organization, during the taxable year under any of the following provisions (and the respective amounts (if any) of reimbursements paid by the organization during the taxable year with respect to taxes imposed on any such organization manager under any of such provisions):

(1) Section 4911 (relating to tax on excess expenditures to influence legislation);

(2) Section 4912 (relating to tax on disqualifying lobbying expenditures of certain organizations); and

(3) Section 4955 (relating to taxes on political expenditures of section 501(c)(3) organizations), except to the extent that, by reason of section 4962, the taxes imposed under such section are not required to be paid or are credited or refunded.

(l) In the case of organizations described in section 501(c)(3), (4), or (29), the respective amounts (if any) of—

(1) The taxes imposed with respect to the organization on any organization manager, or any disqualified person, during the taxable year under section 4958 (relating to taxes on excess benefit transactions); and

(2) Reimbursements paid by the organization during the taxable year with respect to taxes imposed under such section, except to the extent that, by reason of section 4962, the taxes imposed under such section are not required to be paid or are credited or refunded.

* * * * *

(iii) * * *

(d)(1) Organizations described in section 501(c)(7), (8), or (10) that receive contributions or bequests to be used exclusively for purposes described in section 170(c)(4), 2055(a)(3), or 2522(a)(3), must attach a schedule with respect to all gifts that aggregate more than $1,000 from any one person showing the total amount of the contributions or bequests from each such person, the specific purpose or purposes for which such amount was received, and the specific use or uses to which such amount was put. * * *

* * * * *

(5) Political organizations, as defined by section 527(e)(1), that have gross receipts of $25,000 or more for the taxable year (or in the case of a qualified State or local political organization, as defined in section 527(e)(5), that has gross receipts of $100,000 or more for the taxable year) generally must comply with the requirements of section 6033 and this section in the same manner as organizations exempt from tax under section 501(a), except to the extent that the Commissioner may modify such requirements through forms, instructions to forms, or guidance published in the Internal Revenue Bulletin as appropriate for carrying out the purposes of section 527. For the purposes of this section, all references to organizations exempt from tax under section 501(a) shall include political organizations referred to in section 6033(g), other than those referred to in section 6033(g)(3) and except to the extent the Commissioner exercises discretion under section 6033(g)(4). This discretion may be exercised through forms, instructions to forms, or guidance published in the Internal Revenue Bulletin. In addition to the reporting requirements applicable to organizations exempt under section 501(a), such political organizations generally must report the names and addresses of all persons that contributed, bequeathed, or devised $5,000 or more (in money or other property) during the taxable year.

(6) Each controlling organization (within the meaning of section 512(b)(13)) that is subject to the requirements of section 6033(a) shall include on its annual return such information required by that return regarding –

(i) Any interest, annuities, royalties, or rents received from each controlled entity (within the meaning of section 512(b)(13));

(ii) Any loans made to each such controlled entity; and

(iii) Any transfers of funds between such controlling organization and each such controlled entity.

(7) Every organization described in section 4966(d)(1) shall, on its annual return for the taxable year—

(i) List the total number of donor advised funds (as defined in section 4966(d)(2)) it owns at the end of such taxable year;

(ii) Report the aggregate value of assets held in such funds at the end of such taxable year; and

(iii) Report the aggregate contributions to and grants made from such funds during such taxable year.

(8) Every organization described in section 509(a)(3) shall, on its annual return—

(i) List the supported organizations (as defined in section 509(f)(3)) with respect to which such organization provides support;

(ii) Specify whether the organization meets the requirements of clause (i), (ii), or (iii) of section 509(a)(3)(B); and

(iii) Certify that the organization meets the requirements of section 509(a)(3)(C).

* * * * *

(g) * * *

(1) * * *

(iii) Except as provided in paragraph (g)(1)(viii) of this section, an organization described in section 501(c) (other than a private foundation or a supporting organization described in section 509(a)(3)) the gross receipts of which in each taxable year are normally not more than $50,000 (as described in paragraph (g)(3) of this section);

* * * * *

(viii) A foreign organization (described in paragraph (k)(1) of this section) or a United States possession organization (described in paragraph (k)(2) of this section) (other than a private foundation or a supporting organization described in section 509(a)(3)) –

(A) The gross receipts of which in each taxable year from sources within the United States (as determined under paragraph (k)(3) of this section) are normally not more than $50,000 (as described in paragraph (g)(3) of this section); and

(B) That has no significant activity (including lobbying and political activity and the operation of a trade or business, but excluding investment activity) in the United States.

* * * * *

(3) For purposes of paragraphs (g)(1)(iii) and (viii) of this section, the gross receipts (as defined in paragraph (g)(4) of this section) of an organization are normally not more than $50,000 if:

(i) In the case of an organization that has been in existence for 1 year or less, the organization has received, or donors have pledged to give, gross receipts of $75,000 or less during the first taxable year of the organization;

(ii) In the case of an organization which has been in existence for more than one but less than 3 years, the average of the gross receipts received by the organization in its first 2 taxable years is $60,000 or less; and

(iii) In the case of an organization which has been in existence for 3 years or more, the average of the gross receipts received by the organization in the immediately preceding 3 taxable years, including the year for which the return would be required to be filed, is $50,000 or less.

* * * * *

(5) An organization that is not required to file an annual return by virtue of paragraphs (g)(1)(iii) and (viii) of this section must submit an annual electronic notification as described in section 6033(i). See §1.6033-6.

(6) * * * This discretion may be exercised through forms, instructions to forms, or guidance published in the Internal Revenue Bulletin.

* * * * *

(k) Foreign organizations and United States possession organizations—(1) Foreign organization. For purposes of this section, a “foreign organization” is any organization not described in section 170(c)(2)(A).

(2) United States possession organization. For purposes of this section, a “United States possession organization” is any organization created or organized in a possession of the United States.

(3) Source of funds. For purposes of paragraph (g)(1)(viii) of this section, the source of an organization’s gross receipts from gifts, grants, contributions or membership fees is determined by applying the rules found in §53.4948-1(b) of this chapter. For purposes of paragraph (g)(1)(viii) of this section, the source of an organization’s gross receipts other than gifts, grants, contributions, and membership fees is determined by applying the rules in sections 861 through 865 and the regulations in this part issued under section 861 through 865. For purposes of applying this paragraph (k)(3) regarding United States possession organizations, a United States person does not include individuals who are bona fide residents of a United States possession.

(l) * * *

(5) Paragraphs (a)(2)(ii)(f), (a)(2)(iii)(d)(1), (g)(1)(iii) and (viii), and (g)(3) of this section apply to annual information returns filed after [DATE OF PUBLICATION OF FINAL REGULATIONS IN THE FEDERAL REGISTER]. Under section 7805(b)(7) an organization may choose to apply the paragraphs listed in this paragraph (l)(5) to returns filed after September 6, 2019.

Kirsten Wielobob

Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on September 6, 2019, 11:15 a.m., and published in the issue of the Federal Register for September 10, 2019, 84 F.R. 47447)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations regarding the items of income and deduction which are included in the calculation of built-in gains and losses under section 382 of the Internal Revenue Code (Code), and reflecting numerous changes made to the Code by the enactment of recent tax legislation. These proposed regulations would affect corporations that experience an ownership change for purposes of section 382. This document also proposes to withdraw the following IRS notices and incorporate their subject matter, as appropriate, into these proposed regulations under section 382: Notice 87-79, Notice 90-27, Notice 2003-65, and Notice 2018-30.

DATES: Written or electronic comments must be received by November 12, 2019. Written or electronic requests for a public hearing and outlines of topics to be discussed at the public hearing must be received by November 12, 2019.

ADDRESSES: Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-125710-18) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment received to its public docket, whether submitted electronically or in hard copy. Send hard copy submissions to: Internal Revenue Service, CC:PA:LPD:PR (REG-125710-18), Room 5203, Post Office Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (indicate REG-125710-18), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Concerning proposed regulations, Kevin M. Jacobs at (202) 317-5332 or Marie C. Milnes-Vasquez at (202) 317-7700; concerning submissions of comments or requests for a public hearing, Regina L. Johnson at (202) 317-6901 (not toll free numbers).

SUPPLEMENTARY INFORMATION:

Section 7805(b)(1)(A) and (B) of the Code generally provides that no temporary, proposed, or final regulation relating to the internal revenue laws may apply to any taxable period ending before the earliest of (A) the date on which such regulation is filed with the Federal Register, or (B) in the case of a final regulation, the date on which a proposed or temporary regulation to which the final regulation relates was filed with the Federal Register.

Except as otherwise provided in the following sentence, these regulations are proposed to be effective for ownership changes occurring after the date the Treasury decision adopting these proposed regulations as final regulations is published in the Federal Register. However, taxpayers and their related parties, within the meaning of sections 267(b) and 707(b)(1), may apply these proposed regulations to any ownership change occurring during a taxable year with respect to which the period described in section 6511(a) has not expired, so long as the taxpayers and all of their related parties consistently apply the rules of these proposed regulations to such ownership change and all subsequent ownership changes that occur before the applicability date of final regulations.

The following publications are proposed to be withdrawn and obsoleted effective the day after the date the Treasury decision adopting these proposed regulations as final regulations is published in the Federal Register:

Notice 87-79 (1987-2 C.B. 387)

Notice 90-27 (1990-1 C.B. 336)

Notice 2003-65 (2003-2 C.B. 747)

Notice 2018-30 (2018-21 I.R.B. 610)

Before the proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the “ADDRESSES” heading. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. All comments will be available at www.regulations.gov for public inspection and copying. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, then notice of the date, time, and place for the public hearing will be published in the Federal Register.

The principal authors of this notice of proposed rulemaking are Kevin M. Jacobs and Marie C. Milnes-Vasquez of the Office of Associate Chief Counsel (Corporate). However, other personnel from the Treasury Department and the IRS participated in their development.

IRS Revenue Procedures, Revenue Rulings, notices, and other guidance cited in this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov.

Income taxes, Reporting and recordkeeping requirements.

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

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by revising the entry for §1.382-7 to read in part as follows:

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

Section 1.382-7 also issued under 26 U.S.C. 382(h)(3)(B)(ii) and (m).

* * * * *

Par. 2. Section 1.382-1 is amended by:

a. Under §1.382-2, adding reserved entries for (a)(7) and (8) and entries for (a)(9) through (13), and (b)(4); and

b. Revising the entry for §1.382-7.

The additions and revision read as follows:

§1.382-1 Table of contents.

* * * * *

§1.382-2 General rules for ownership change.

(a) * * *

(7) [Reserved]

(8) [Reserved]

(9) Net unrealized built-in gain.

(10) Net unrealized built-in loss.

(11) Recognized built-in gain.

(12) Recognized built-in loss.

(13) Section 382 regulations.

(b) * * *

(4) Rules provided in paragraphs (a)(9) through (13) of this section.

* * * * *

§1.382-7 Built-in gains and losses.

(a) Overview.

(b) Definitions.

(1) Change year.

(2) Cost recovery deduction.

(3) First-year nonrecourse COD income.

(4) First-year recourse COD income.

(5) Inadequately secured nonrecourse liabilities.

(6) Negative section 163(j) expense.

(7) Nonrecourse liabilities.

(8) Pre-change excess recourse liabilities.

(9) Recognition period.

(10) Section 382 asset.

(11) Section 382 excess business interest expense.

(12) Taxable income or timing limitation.

(c) Net unrealized built-in gains and losses.

(1) In general.

(2) Consistency rules.

(i) In general.

(ii) Members of consolidated groups.

(3) Computation of net unrealized built-in gain and net unrealized built-in loss.

(i) In general.

(ii) Adjustments related to discharge of indebtedness.

(A) In general.

(B) Exception for first-year recourse COD income.

(1) Discharge of indebtedness income included in gross income.

(2) Excluded discharge of indebtedness income reducing post-ownership change attributes.

(3) Excluded discharge of indebtedness income reducing basis.

(iii) Additional operating rules.

(A) Value of contingent liabilities.

(B) Inventory.

(C) Limitation on total amount of adjustment to NUBIL/NUBIG regarding recourse COD income.

(D) Timing of adjustments described in paragraphs (c)(3)(ii)(B)(1) through (3) of this section.

(E) Adjusted basis of the loss corporation’s section 382 assets.

(F) [Reserved]

(d) Recognized built-in gain and loss.

(1) In general.

(2) Recognized built-in gain.

(i) In general.

(ii) Disposition of an asset.

(iii) Income from discharge of indebtedness attributable to certain recourse liabilities.

(iv) Income from discharge of indebtedness attributable to certain nonrecourse liabilities.

(A) Treatment as RBIG.

(B) Adjustment to basis.

(C) Limitation on total amount of RBIG regarding nonrecourse COD income.

(D) No adjustment to the NUBIG/NUBIL computation.

(v) Installment method.

(vi) Prepaid income.

(3) Recognized built-in loss.

(i) In general.

(ii) Disposition of an asset.

(iii) Cost recovery deductions.

(iv) Bad debt expense.

(v) Deductions for payments on certain liabilities.

(vi) Deduction for section 382 excess business interest expense.

(A) In general.

(B) No adjustment to the NUBIG/NUBIL computation.

(4) Additional recognized built-in gain and loss items.

(5) Section 382 disallowed business interest carryforwards.

(e) General operating rules.

(1) Anti-duplication rule.

(2) References to the principles of regulations under section 1374.

(f) Examples.

(g) Applicability dates.

(1) In general.

(2) Paragraph (d)(2)(vi) of this section.

* * * * *

Par. 3. Section 1.382-2 is amended by adding reserved paragraphs (a)(7) and (8) and paragraphs (a)(9) through (13) and (b)(4) to read as follows:

§1.382-2 General rules for ownership change.

(a) * * *

(7)-(8) [Reserved]

(9) Net unrealized built-in gain. The term net unrealized built-in gain means a positive amount determined under §1.382-7(c)(3).

(10) Net unrealized built-in loss. The term net unrealized built-in loss means a negative amount determined under §1.382-7(c)(3).

(11) Recognized built-in gain. The term recognized built-in gain has the meaning provided in §1.382-7(d)(2).

(12) Recognized built-in loss. The term recognized built-in loss has the meaning provided in §1.382-7(d)(3).

(13) Section 382 regulations. The term section 382 regulations means this section and §§1.382-3 through 1.382-12.

(b) * * *

(4) Rules provided in paragraphs (a)(9) through (13) of this section. The rules of paragraphs (a)(9) through (13) of this section apply to any ownership change occurring after date of publication of Treasury decision adopting these proposed regulations as final regulations in the Federal Register. However, taxpayers and their related parties, within the meaning of sections 267(b) and 707(b)(1), may apply the rules of paragraphs (a)(9) through (13) of this section to any ownership change occurring during a taxable year with respect to which the period described in section 6511(a) has not expired, so long as the taxpayers and their related parties consistently apply the rules of paragraphs (a)(9) through (13) of this section and §1.382-7 to such ownership change and all ownership changes occurring in subsequent taxable years.

Par. 4. Section 1.382-7 is revised to read as follows:

§1.382-7 Built-in gains and losses.

(a) Overview. This section provides rules governing the determination of a loss corporation’s net unrealized built-in gain or net unrealized built-in loss, as well as its recognized built-in gains and recognized built-in losses for purposes of section 382 and the section 382 regulations. Paragraph (b) of this section provides definitions of terms used for purposes of this section. Paragraph (c) of this section provides the rules regarding the determination of a loss corporation’s net unrealized built-in gain or net unrealized built-in loss. Paragraph (d) of this section provides the rules regarding the determination of a loss corporation’s recognized built-in gain or recognized built-in loss. Paragraph (e) of this section provides an anti-duplication rule to prevent duplicate inclusion of items in the computation of net unrealized built-in gain or net unrealized built-in loss, or in the computation of recognized built-in gain or recognized built-in loss. Paragraph (f) of this section provides examples illustrating the rules of this section. Paragraph (g) of this section provides applicability dates for the rules of this section.

(b) Definitions. The following definitions apply for purposes of this section.

(1) Change year. The term change year has the meaning provided in §1.382-6(g)(1).

(2) Cost recovery deduction. The term cost recovery deduction means any deduction for depreciation under section 167 or section 168, any deduction for the amortization of intangibles (for example, under section 167 or 197) and amortizable expenditures (for example, under section 195(b)(1)(B), section 248 or section 1245(a)(2)(C)), or any deduction for depletion under section 611.

(3) First-year nonrecourse COD income. The term first-year non-recourse COD income means any income from discharge of indebtedness that the loss corporation recognizes (including income that is excluded from gross income under section 108(a)(1)) during the first twelve months of the recognition period on inadequately secured nonrecourse liabilities.

(4) First-year recourse COD income. The term first-year recourse COD income means any income from discharge of indebtedness (including from liabilities described in paragraph (c)(3)(i)(C) of this section) that the loss corporation recognizes (including income that is excluded from gross income under section 108(a)(1)) during the first twelve months of the recognition period on all of the loss corporation’s liabilities immediately before the ownership change (excluding nonrecourse liabilities) to the extent of its pre-change excess recourse liabilities.

(5) Inadequately secured nonrecourse liabilities. The term inadequately secured nonrecourse liabilities means any nonrecourse liability of which, immediately before the ownership change:

(i) The adjusted issue price (within the meaning of §1.1275-1(b)) of the nonrecourse liability; exceeds

(ii) The fair market value of the property (determined without regard to section 7701(g) and §1.1001-2(a)(4)(i)) which secures such nonrecourse liability.

(6) Negative section 163(j) expense. The term negative section 163(j) expense has the meaning provided in §1.163(j)-6(h)(1).

(7) Nonrecourse liabilities. The term nonrecourse liabilities has the same meaning as the term nonrecourse liability has in §1.1001-2(a)(4)(i).

(8) Pre-change excess recourse liabilities. The term pre-change excess recourse liabilities means:

(i) If the loss corporation is under the jurisdiction of a court under title 11 of the United States Code on the change date, in an action that results in a discharge of recourse liabilities of the loss corporation, then the amount of all of the loss corporation’s liabilities immediately before the ownership change (excluding nonrecourse liabilities) that are discharged by order of the court in that action; or

(ii) In all other cases, an amount equal to the excess, if any, of:

(A) The aggregate adjusted issue price (within the meaning of §1.1275-1(b)) of the loss corporation’s liabilities immediately before the ownership change, excluding—

(1) Recourse liabilities to the extent that they would not be included in the determination of whether the loss corporation is insolvent within the meaning of section 108(d)(3), and

(2) Nonrecourse liabilities; over

(B) The sum of the fair market value of the assets that the loss corporation owns immediately before the ownership change, reduced, but not below zero, by the amount of nonrecourse liabilities that is secured by such assets immediately before the ownership change.

(9) Recognition period. The term recognition period has the meaning provided in section 382(h)(7)(A).

(10) Section 382 asset. The term section 382 asset means any asset that the loss corporation owns immediately before the ownership change, including goodwill and other intangible assets, but excluding those assets described in section 382(h)(3)(B)(ii). For purposes of this definition, all accounts receivable, other than those that were acquired in the ordinary course of the loss corporation’s business, are treated as items described in section 382(h)(3)(B)(ii).

(11) Section 382 excess business interest expense. The term section 382 excess business interest expense means the amount of business interest expense of a partnership for a taxable year that was disallowed under §1.163(j)-2(b) but not suspended under section 704(d).

(12) Taxable income or timing limitation. The term taxable income or timing limitation means:

(i) A limitation set forth in the Internal Revenue Code of 1986, as amended (Code), on the amount of a deduction that may otherwise be claimed by a loss corporation, based on, or derived from, any amount of a loss corporation’s taxable income (see, for example, section 170(b)(2)(A)); or

(ii) A limitation set forth in the Code that defers the timing of a deduction that is otherwise allowable under the Code or regulations (see, for example, sections 267(a)(2) and 469).

(c) Net unrealized built-in gains and losses—(1) In general. This paragraph (c) provides rules regarding the calculation of a loss corporation’s net unrealized built-in gain or net unrealized built-in loss for purposes of section 382 and the section 382 regulations. See paragraph (e)(1) of this section (regarding anti-duplication).

(2) Consistency rules—(i) In general. No amount is included in the calculation of net unrealized built-in gain or net unrealized built-in loss if the amount is properly allocable to the pre-change period (within the meaning of §1.382-6(g)(2)) pursuant to §1.382-6 and is included in the determination of the loss corporation’s taxable income or net operating loss for the change year.

(ii) Members of consolidated groups. If a loss corporation enters or leaves a consolidated group on the date of an ownership change for purposes of section 382, the principles of §1.1502-76(b) apply in determining the treatment of any taxable item for purposes of this section. Accordingly, items that are includible (under the end of the day rule (within the meaning of §1.1502-76(b)(1)(ii)(A)) or otherwise) in the taxable year that ends as a result of the change in status of a loss corporation (S) are not treated as recognized or taken into account during the recognition period for purposes of section 382 and the section 382 regulations. See §1.1502-28(b)(11) (regarding allocation of excluded COD income under end of the day rule principles). Moreover, no such item is included in the determination of net unrealized built-in gain or net unrealized built-in loss. For example, if income from the discharge of indebtedness is includable in the taxable year that ends as a result of S’s change in status, that income is neither treated as taken into account during the recognition period nor included in the determination of net unrealized built-in gain or net unrealized built-in loss. Further, the determination of net unrealized built-in gain or net unrealized built-in loss excludes the fair market value and basis of any asset that is disposed of on the change date if the gain or loss from that asset is includible in the taxable year that ends as a result of S’s change in status. In contrast, items that are includible (under the next day rule (within the meaning of §1.1502-76(b)(1)(ii)(B)) or otherwise) in the taxable year that begins as a result of S’s change in status are treated as occurring in the recognition period, and those items (and the basis and fair market value of any assets that generate those items) are among the amounts included in the determination of net unrealized built-in gain or loss.

(3) Computation of net unrealized built-in gain and net unrealized built-in loss—(i) In general. A loss corporation’s net unrealized built-in gain, if positive, or net unrealized built-in loss, if negative, is the amount equal to—

(A) The sum of the amount that would be realized (taking into account section 382(h)(8)) if, immediately before the ownership change, the loss corporation—

(1) Had satisfied each inadequately secured nonrecourse liability by surrendering to the creditor all of the assets securing that debt; and

(2) Had sold all of its section 382 assets (other than those assets described in paragraph (c)(3)(i)(A)(1) of this section) at fair market value to an unrelated third party with the hypothetical buyer assuming no liabilities; decreased by

(B) The aggregate adjusted basis of the loss corporation’s section 382 assets immediately before the ownership change; decreased by

(C) The amount of any non-contingent liability of the loss corporation immediately before the ownership change for which the loss corporation would be allowed a deduction (including a deduction for a capital loss) on payment of the liability (determined without regard to any taxable income or timing limitation); decreased by

(D) The estimated value of any liability of the loss corporation that is contingent immediately before the ownership change, for which, upon the removal of the contingency, the loss corporation would be allowed a deduction (including a deduction for a capital loss) on payment or accrual (determined without regard to any taxable income or timing limitation); increased or decreased by

(E) The loss corporation’s section 481 adjustments that would be taken into account on the sale referred to in paragraph (c)(3)(i)(A) of this section; increased by

(F) The amount that would be treated as recognized built-in gain under paragraph (d)(2) of this section if all amounts (except for amounts described in paragraph (d)(2)(ii) of this section) were properly taken into account during the recognition period; decreased by

(G) The amount that would be treated as recognized built-in loss under paragraph (d)(3) of this section if all amounts (except for amounts described in paragraph (d)(3)(ii) of this section) were properly taken into account during the recognition period.

(ii) Adjustments related to discharge of indebtedness—(A) In general. Except as provided in paragraph (c)(3)(ii)(B) of this section, no amount of discharge of indebtedness income recognized during the recognition period that is included in gross income under section 61(a)(12) or excluded under section 108(a) is added to the computation of the loss corporation’s net unrealized built-in gain or net unrealized built-in loss. See paragraphs (c)(2) and (c)(3)(iii)(C) of this section for limitations on amounts that can be included in the computation of net unrealized built-in gain and net unrealized built-in loss.

(B) Exception for first-year recourse COD income. A loss corporation may apply the provisions of this paragraph (c)(3)(ii)(B) to all of its first-year recourse COD income, subject to the timing rules of paragraphs (c)(3)(iii)(D) of this section. An adjustment that is made pursuant to this paragraph (c)(3)(ii)(B) can cause a loss corporation that would otherwise have a net unrealized built-in loss to have a net unrealized built-in gain or to meet the requirements of section 382(h)(3)(B) such that the loss corporation’s net unrealized built-in gain or net unrealized built-in loss is zero. See paragraphs (c)(2) and (c)(3)(iii)(C) of this section for limitations on amounts that can be included in the computation of net unrealized built-in gain and net unrealized built-in loss.

(1) Discharge of indebtedness income included in gross income. The amount calculated under paragraph (c)(3)(i) of this section is increased by the amount of all first-year recourse COD income that is included in gross income under section 61(a)(12). This amount of first-year recourse COD income is treated as recognized built-in gain. See paragraph (d)(2)(iii) of this section.

(2) Excluded discharge of indebtedness income reducing post-ownership change attributes. The amount calculated under paragraph (c)(3)(i) of this section is increased by the amount of all first-year recourse COD income that is excluded under section 108(a), to the extent section 108(b) reduces attributes that are not pre-change losses, as defined in §1.382-2(a)(2), including reduction under section 1017(a) of the basis of the loss corporation’s assets that were not held at the time of the ownership change. This amount of first-year recourse COD income is treated as recognized built-in gain. See paragraph (d)(2)(iii) of this section. This paragraph (c)(3)(ii)(B)(2) does not apply to amounts of first-year recourse COD income corresponding to debt whose discharge results in reduction under section 1017(a) of the basis of the loss corporation’s assets that were held at the time of the ownership change.

(3) Excluded discharge of indebtedness income reducing basis. A loss corporation decreases the amount of basis that is described in paragraph (c)(3)(i)(B) of this section by the amount of first-year recourse COD income that is excluded under section 108(a), to the extent that section 1017(a) reduces the basis of the loss corporation’s section 382 assets. No other adjustment to the computation in paragraph (c)(3)(i) of this section is made with respect to the first-year recourse COD income described in this paragraph (c)(3)(ii)(B)(3), and this amount of first-year recourse COD income is not treated as recognized built-in gain.

(iii) Additional operating rules—(A) Value of contingent liabilities. If any liability described in paragraph (c)(3)(i)(C) of this section is reflected on the face of the most recently issued applicable financial statement, within the meaning of section 451(b)(3) and the regulations in this part under section 451 of the Internal Revenue Code (determined without regard to whether the taxpayer has another statement described in section 451(b)(3) and the regulations in this part under section 451 of the Inernal Revenue Code), then the estimated value of a liability is the amount of such liability reflected on the most current applicable financial statement as of the change date. The estimated value of any liability described in paragraph (c)(3)(i)(C) of this section is not adjusted to reflect the actual amount of liability that is established on removal of the contingency.

(B) Inventory. The principles of §1.1374-7 apply to determine the amount realized under paragraph (c)(3)(i)(A) of this section with regard to inventory.

(C) Limitation on total amount of adjustment to NUBIL/NUBIG regarding recourse COD income. The total amount of increases in the calculation of net unrealized built-in gain or loss under paragraph (c)(3)(i) of this section related to first-year recourse COD income under paragraph (c)(3)(ii)(B) of this section is limited to the loss corporation’s liabilities immediately before the ownership change (excluding nonrecourse liabilities) to the extent of its pre-change excess recourse liabilities defined in paragraph (b)(8)(i) or (ii) of this section, as applicable.

(D) Timing of adjustments described in paragraphs (c)(3)(ii)(B)(1) through (3) of this section. If a loss corporation chooses to apply the provisions of this paragraph (c)(3)(iii)(D) to all of its first-year recourse COD income, then it must make the adjustments described in paragraphs (c)(3)(ii)(B)(1) through (3) of this section, in their entirety as of the change date. However, a loss corporation may make these adjustments only if—

(1) The statement described in §1.382-11 reflects such adjustments or;

(2) The loss corporation files an amended return for the taxable year that includes the change date and includes an amended §1.382-11 statement (entitled “AMENDED STATEMENT PURSUANT TO §1.382-11(a) BY [INSERT NAME AND EMPLOYER IDENTIFICATION NUMBER OF TAXPAYER], A LOSS CORPORATION,”) to reflect such adjustments.

(E) Adjusted basis of the loss corporation’s section 382 assets. The adjustments of this paragraph (c)(3)(iii)(E) apply for purposes of determining the adjusted basis of loss corporation’s assets under section 382(h)(2)(A)(ii)(II) and (B)(ii)(I) and the computation of net unrealized built-in gain and loss under section 382(h)(6)(C) and paragraph (c)(3)(i)(B) of this section. The loss corporation’s basis in its section 382 assets is adjusted immediately before the ownership change by the amount of any adjustment that would apply if the section 382 asset were sold immediately before the ownership change. For example, the loss corporation’s basis in a partnership interest is adjusted to the extent §1.163(j)-6(h)(3)(i) would have required an adjustment if the loss corporation had disposed of all or substantially all of its partnership interest immediately before the ownership change.

(F) [Reserved]

(d) Recognized built-in gain and loss—(1) In general. This paragraph (d) provides rules for determining whether an item is recognized built-in gain or recognized built-in loss for purposes of section 382(h) and the section 382 regulations. Except as expressly provided in this paragraph (d), no amount is treated as recognized built-in gain or recognized built-in loss if that amount was not properly included in the computation of the loss corporation’s net unrealized built-in gain or net unrealized built-in loss pursuant to paragraph (c)(3) of this section.

(2) Recognized built-in gain—(i) In general. Except as otherwise provided in this paragraph (d)(2) and in paragraph (d)(4) of this section, subject to section 382(h)(1)(A)(ii), an item of income that is properly taken into account during the recognition period is a recognized built-in gain only if the item would have been properly included in gross income before the change date by an accrual method taxpayer (disregarding any method of accounting for which an election by the taxpayer must be made unless the taxpayer actually elected that method). As a result, for example, cost recovery deductions on an appreciated asset claimed during the recognition period are not treated as generating recognized built-in gain.

(ii) Disposition of an asset. The gain recognized on the disposition of an asset during the recognition period is recognized built-in gain to the extent provided in section 382(h)(2)(A). Income included as a dividend under section 61(a)(7) (including amounts treated as dividends under section 1248) and inclusions of income with respect to stock (excluding gain recognized on the disposition of stock), for example under section 951(a) and 951A(a), are not treated as recognized built-in gain.

(iii) Income from discharge of indebtedness attributable to certain recourse liabilities. If a loss corporation chooses to apply the provisions of paragraph (c)(3)(ii)(B) of this section, then the amounts described in paragraphs (c)(3)(ii)(B)(1) and (2) of this section are treated as recognized built-in gain on the date recognized. Otherwise, no income from the discharge of indebtedness attributable to recourse liabilities is recognized built-in gain.

(iv) Income from discharge of indebtedness attributable to certain nonrecourse liabilities. Except as provided in this paragraph (d)(2)(iv), no income from the discharge of indebtedness attributable to nonrecourse liabilities is recognized built-in gain.

(A) Treatment as RBIG. Notwithstanding paragraph (d)(2)(i) of this section, the amount of all first-year nonrecourse COD income that is included in gross income under section 61(a)(12) or first-year nonrecourse COD income that is excluded under section 108(a), to the extent section 108(b) reduces attributes that are not pre-change losses, as defined in §1.382-2(a)(2), is recognized built-in gain on the date recognized. This paragraph (d)(2)(iv)(A) does not apply to amounts of first-year nonrecourse COD income corresponding to debt whose discharge results in reduction of basis described in section 1017(a).

(B) Adjustment to basis. First-year nonrecourse COD income that is excluded under section 108(a) and reduces the basis of the loss corporation’s assets that the loss corporation owned immediately before the ownership change is not recognized built-in gain. However, first-year nonrecourse COD income that is excluded under section 108(a) and reduces the basis of assets that the loss corporation did not own immediately before the ownership change is recognized built-in gain.

(C) Limitation on total amount of RBIG regarding nonrecourse COD income. The amount of first-year non-recourse COD income treated as recognized built-in gain under this paragraph (d)(2)(iv) is limited to the excess of adjusted issue price of debt over fair market value of property measured under paragraph (e)(5) of this section.

(D) No adjustment to the NUBIG/NUBIL computation. The computation under paragraph (c)(3)(i) of this section is not adjusted to reflect recognized built-in gain amounts related to this paragraph (d)(2)(iv). Nonetheless, for purposes of determining the limitations on amounts of recognized built-in gain or loss under section 382(h)(2)(A)(ii)(II) and (B)(ii)(I), the adjusted basis of the loss corporation’s section 382 assets reflects the reduction, if any, described in paragraph (d)(2)(iv)(B) of this section.

(v) Installment method. The amount of income reported under the installment method (see section 453) that is treated as recognized built-in gain is determined under the principles of §1.1374-4(h) (determined without regard to §1.1374-2(a)(2)). Further, if a loss corporation that is a member (selling or distributing member) of a consolidated group (as defined in §1.1502-1(h)) transfers a built-in gain asset to a member of the same consolidated group (transferee member) before or during the recognition period, the gain is deferred under §1.1502-13, and before the close of the recognition period, the transferee member sells the built-in gain asset in a sale reportable under the installment method, then any deferred gain is RBIG when taken into account by the selling or distributing member, even if the gain is taken into account after the close of the recognition period.

(vi) Prepaid income. Any amount received prior to the change date that is attributable to performance occurring on or after the change date is not recognized built-in gain. Examples to which this paragraph (c)(2)(vi) applies include income received prior to the change date that is deferred under sections 451(c) or 455.

(3) Recognized built-in loss—(i) In general. Except as otherwise provided in paragraphs (d)(3) and (4) of this section, subject to section 382(h)(1)(B)(ii), any deduction properly allowed during the recognition period is treated as recognized built-in loss if an accrual-method taxpayer would have been allowed a deduction for the item against gross income before the change date (taking into account any additional methods of accounting actually used by the loss corporation). For purposes of this paragraph (d)(3), in determining whether an accrual-method taxpayer would have been allowed a deduction before the change date, no taxable income or timing limitation applies. See paragraph (e) of this section for an anti-duplication rule.

(ii) Disposition of an asset. The loss recognized on the disposition of an asset during the recognition period is treated as a recognized built-in loss to the extent provided in section 382(h)(2)(B).

(iii) Cost recovery deductions. The amount of cost recovery deductions with respect to any section 382 asset for any taxable year during the recognition period is treated as recognized built-in loss to the extent of the excess, if any, of—

(A) The greater of the amount of cost recovery deductions allowed or allowable with respect to the period; over

(B) The amount of cost recovery deductions that would have been allowable if the adjusted basis on the change date equaled the fair market value of the section 382 asset, taking into account the depreciation or amortization method, as applicable; the useful life; the recovery period or amortization period, as applicable; and the convention (cost recovery schedule) actually used by the loss corporation.

(iv) Bad debt expense. Any bad debt deduction under section 166 that arises during the recognition period from debt owed to the loss corporation immediately before the ownership change is a recognized built-in loss to the extent it does not exceed the amount described in section 382(h)(2)(B)(ii).

(v) Deductions for payments on certain liabilities. A deduction for the payment of a liability that is described in paragraph (c)(3)(i)(C) or (D) of this section is a recognized built-in loss to the extent of the amount or the estimated amount of the liability, as applicable, immediately before the ownership change, that was included in the loss corporation’s computation of net unrealized built-in loss or net unrealized built-in gain under paragraph (c)(3) of this section.

(vi) Deduction for section 382 excess business interest expense—(A) In general. A deduction attributable to section 382 excess business interest expense during the recognition period is recognized built-in loss to the extent the section 382 excess business interest expense is allocated to the loss corporation pursuant to §1.163(j)-6(f)(2) and is attributable to either a pre-change period (within the meaning of §1.382-6(g)(2)) or a taxable year prior to the ownership change. Solely for purposes of determining whether this paragraph (d)(3)(vi) applies;

(1) The principles of §1.382-6(a) apply (unless the taxpayer made an election pursuant to §1.382-6(b), in which case the principles of §1.382-6(b) apply) to determine the extent the section 382 excess business interest expense is attributable to a pre-change period and

(2) Section 1.163(j)-6(g)(2)(i) applies to section 382 excess business interest expense that was allocated to the loss corporation in the order of the taxable years in which the section 382 excess business interest expense was allocated to the loss corporation pursuant to §1.163(j)-6(f)(2), beginning with the earliest taxable year.

(B) No adjustment to the NUBIG/NUBIL computation. The computation of a loss corporation’s net unrealized built-in gain or net unrealized built-in loss is not adjusted to reflect recognized built-in loss amounts related to this paragraph (d)(3)(vi).

(4) Additional recognized built-in gain and loss items. The following additional items of income, gain, deduction, or loss are treated as recognized built-in gain or recognized built-in loss, as applicable:

(i) Positive and negative section 481(a) adjustments, to the extent provided in §1.1374-4(d)(1);

(ii) Any item of income properly taken into account during the recognition period under the completed contract method (as described in §1.460-4(d)) and similar items of deduction, to the extent provided in §1.1374-4(g); and

(iii) The distributive share of a partnership item to the extent provided by the principles of §1.1374-4(i).

(5) Section 382 disallowed business interest carryforwards. Section 382 disallowed business interest carryforwards are not treated as recognized built-in losses.

(e) General operating rules—(1) Anti-duplication rule. Appropriate adjustments must be made in applying the provisions of this section to ensure that no item of economic gain or loss is duplicated in the computation of net unrealized built-in gain or net unrealized built-in loss, or in the computation of recognized built-in gain or recognized built-in loss. Additionally, appropriate adjustments must be made in applying the provisions of this section to ensure that no amount of net unrealized built-in gain or net unrealized built-in loss is utilized in a duplicative manner, and that the limitations on the total amount of adjustment to net unrealized built-in loss and net unrealized built-in gain take into account amounts of income from discharge of indebtedness that are excluded under section 108(a) and reduce the basis of the loss corporation’s assets.

(2) References to the principles of regulations under section 1374. All references in this section to the principles of a regulation in this part under section 1374 of the Internal Revenue Code must be interpreted, as necessary, to be consistent with the rules and principles of this section.

(f) Examples. The examples in this paragraph (f) illustrate the application of the provisions of this section. For purposes of the examples in this paragraph (f), LossCo is a loss corporation that files its return on a calendar year basis, that uses the accrual method of accounting, and that has an ownership change on the last day of the taxable year (Year 0). Further, LossCo satisfies the threshold requirement of section 382(h)(3)(B)(i). Additionally, the stated facts of the example include all relevant corporate activity, property, and taxable items.

(1) Example 1. Impact of certain liabilities on computation of net unrealized built-in loss and amount treated as recognized built-in loss—(i) Facts. Immediately before the ownership change, LossCo has a section 382 asset with a fair market value of $100 and an adjusted basis of $90, a liability of $30 for which LossCo will be allowed a deduction upon payment (fixed liability), and an estimated contingent liability of $20, for which, upon removal of the contingency and payment, LossCo will be allowed a deduction (contingent liability). In Year 1, LossCo settles and pays off the contingent liability for $25. In Year 2, LossCo pays off the fixed liability for $30.

(ii) Analysis—(A) Computation of net unrealized built-in loss. Under paragraph (c)(3)(i) of this section, LossCo has a net unrealized built-in loss of $40 ($100, the amount LossCo would realize if it sold all its assets to an unrelated third party (paragraph (c)(i)(A)(2) of this section), decreased by $140 (the sum of the fixed liability ($30) (paragraph (c)(i)(B) of this section), the estimated value of the contingent liability ($20) (paragraph (c)(i)(C) of this section) and the aggregate adjusted basis in the asset ($90) (paragraph (c)(i)(D) of this section)).

(B) Settlement of the contingent liability. Upon settlement and payment of the contingent liability in Year 1, LossCo is entitled to a deduction of $25 (disregarding application of any limitation). Under paragraph (d)(3)(vi) of this section, $20 of the deduction (the estimated value of the liability at the time of the ownership change) is recognized built-in loss and $5 is not subject to section 382. After Year 1, pursuant to section 382(h)(1)(B)(ii), the maximum amount of recognized built-in loss that LossCo can have is $20 ($40 net unrealized built-in loss, less the $20 recognized built-in loss in Year 1).

(C) Payment of the fixed liability. Upon paying the fixed liability in Year 2, LossCo is entitled to a deduction of $30 (disregarding application of any limitation). Under paragraph (d)(3)(vi) of this section, $30 of the deduction would have been recognized built-in loss, but the amount of recognized built-in loss is limited by section 382(h)(1)(B)(ii). As a result, of the $30 deduction, $20 is a recognized built-in loss and $10 is not subject to section 382.

(2) Example 2. Cost recovery deductions—(i) Facts. Immediately before the ownership change, LossCo has a net unrealized built-in loss of $300 that is attributable to a non-depreciable asset with a fair market value of $500 and an adjusted basis of $650, and a patent with a fair market value of $125 and an adjusted basis of $275. The patent is an “amortizable section 197 intangible” as defined in section 197(c) and has a 15-year amortization period. As of the change date in Year 0, the patent has a remaining amortization period under section 197 of 5 years. For Year 1, LossCo calculates a $55 amortization deduction for the patent.

(ii) Analysis. Under paragraph (d)(3)(iii) of this section, the amount of cost recovery deduction on the patent that is a recognized built-in loss is the excess, if any, of the amount of cost recovery deductions allowed or allowable over the amount of cost recovery deductions that would have been allowable if the adjusted basis on the change date had equaled the fair market value of the patent, taking into account the amortization method, amortization period, and convention (cost recovery schedule) actually used by the loss corporation. LossCo would have been allowed a cost recovery deduction of $25 if the adjusted basis of the patent on the change date had equaled its fair market value taking into account the cost recovery schedule actually used by LossCo, ($125 fair market value divided by remaining amortization period of 5 years). Accordingly, $30 of the Year 1 cost recovery deduction is recognized built-in loss ($55 allowed and allowable cost recovery deduction, less the $25 cost recovery deduction that would have been allowable if the adjusted basis on the change date equaled the fair market value of the patent). The remaining $25 is not subject to section 382.

(3) Example 3. Forgiveness of pre-change excess recourse liabilities—(i) Facts. On Date 1, immediately before the ownership change, LossCo has two assets: Asset 1, which has a fair market value of $100, an adjusted basis of $80, and is subject to a nonrecourse liability with an adjusted issue price of $120 (Liability 1); and Asset 2, which has a fair market value of $100, an adjusted basis of $90, and is subject to a nonrecourse liability with an adjusted issue price of $60 (Liability 2). Additionally, LossCo has a recourse liability with an adjusted issue price of $60. On Date 2, eleven months after the change date, the creditor forgives $20 of the recourse liability, which gives rise to discharge of indebtedness income that is excluded under 108(a), and for which LossCo elects to reduce the basis of Asset 1 and Asset 2 pursuant to section 108(b)(5).

(ii) Analysis—(A) Calculation of net unrealized built-in gain. The nonrecourse liability to which Asset 1 is subject is an inadequately secured nonrecourse liability, because the adjusted issue price of the liability ($120) exceeds the fair market value of the property securing the liability ($100). As a result, pursuant to paragraph (c)(3)(i)(A)(1) of this section, in determining its net unrealized built-in gain, LossCo is treated as satisfying Liability 1 by surrendering to the creditor Asset 1, resulting in an amount realized of $120. Additionally, pursuant to paragraph (c)(3)(i)(A)(2) of this section, LossCo is treated as selling Asset 2 and having an amount realized of $100. As a result, LossCo has a net unrealized built-in gain of $50 ($120 amount realized on Asset 1, plus the $100 amount realized on Asset 2, less the $170 aggregate adjusted basis of LossCo’s section 382 assets). See paragraph (c)(3)(i) of this section.

(B) Forgiveness of the recourse liability. Pursuant to paragraph (c)(3)(ii)(A) of this section, the forgiveness of the recourse liability will not impact the calculation of LossCo’s net unrealized built-in gain, unless it chooses to apply the provisions of paragraph (c)(3)(ii)(B) of this section to all of its first-year recourse COD income. The recourse liability is a pre-change excess recourse liability to the extent its adjusted issue price ($60) exceeds the fair market value of LossCo’s section 382 assets, reduced, but not below zero, by the amount of nonrecourse liability that is secured by such assets immediately before the ownership change ($0 for Asset 1 and $40 for Asset 2), or $20. As a result, the first-year recourse COD income is $20 (the $20 income to the extent of the pre-change excess recourse liability). If LossCo chooses to apply the provisions of (c)(3)(ii)(B) of this section, then, pursuant to paragraph (c)(3)(ii)(B)(3) of this section, LossCo decreases by $20 the amount of basis it uses to compute its net unrealized built-in gain. As a result, LossCo has a net unrealized built-in gain of $70 ($120 amount realized on Asset 1, plus $100 amount realized on Asset 2, less $150 aggregate adjusted basis of LossCo’s section 382 assets. See paragraph (c)(3)(i)(D) of this section. The first-year recourse COD income is not recognized built-in gain.

(4) Example 4. Forgiveness of a recourse liability that is not a pre-change excess recourse liability—(i) Facts. The facts are the same as in paragraph (f)(3)(i) (Example 3) of this section, except that, as of the date of the ownership change, LossCo also owns Asset 3, which has a fair market value of $80 and an adjusted basis of $50. Additionally, LossCo includes the $20 of cancellation of indebtedness income in gross income that was recognized on Date 2 under section 61(a)(12).

(ii) Analysis—(A) Calculation of net unrealized built-in gain. As in paragraph (f)(3)(ii)(A) (Example 3) of this section, the nonrecourse liability on Asset 1 is an inadequately secured nonrecourse liability, and as a result, pursuant to paragraph (c)(3)(i)(A)(1) of this section, the amount realized with respect to Asset 1 is $120. Additionally, pursuant to paragraph (c)(3)(i)(A)(2) of this section, LossCo is treated as selling Asset 2 and Asset 3 for an amount realized of $180 ($100, plus $80). As a result, LossCo has a net unrealized built-in gain of $80 ($120 amount realized on Asset 1, plus $100 amount realized on Asset 2, plus $80 amount realized on Asset 3, less $220 aggregate adjusted basis of LossCo’s section 382 assets. See paragraph (c)(3)(i)(D) of this section.

(B) Forgiveness of the recourse liability. The forgiveness of the recourse liability will not impact the calculation of LossCo’s net unrealized built-in gain under paragraph (c)(3)(ii)(A) of this section. The adjustment provided under paragraph (c)(3)(ii)(B) of this section for certain recourse liabilities is not available (and the cancellation of indebtedness is not recognized built-in loss) because the recourse liability does not constitute a pre-change excess recourse liability. See paragraph (b)(4) and (8) of this section. The recourse liability is not a pre-change excess recourse liability because its adjusted issue price ($60) does not exceed the fair market value of the LossCo’s section 382 assets, reduced, but not below zero, by the amount of nonrecourse liability that is secured by such assets immediately before the ownership change ($0 for Asset 1, $40 for Asset 2, and $80 for Asset 3).

(5) Example 5. Computing net unrealized built-in gain or loss of a partner that is allocated section 382 excess business interest expense—(i) Facts. LossCo and unrelated Corp A are equal partners in partnership PRS. LossCo has a basis of $100 in its PRS interest, which has a fair market value of $90. In Year 1, PRS pays or accrues $100 of section 382 excess business interest expense, which is allocated equally to LossCo and Corp A. At the end of Year 1, LossCo has an ownership change. In Year 2, PRS has $80 of excess taxable income (within the meaning of §1.163(j)-1(b)(15)), of which $40 is allocated to LossCo pursuant to §1.163(j)-6(f)(2). LossCo’s section 163(j) limitation (within the meaning of §1.163(j)-1(b)(31)) for Year 2 is $25, and LossCo pays or accrues $60 of other business interest expense in Year 2. LossCo’s section 382 limitation for Year 2 is $30.

(ii) Analysis—(A) Year 1—(1) Basis reduction to reflect allocation of excess business interest expense. Pursuant to section 163(j)(4) and §1.163(j)-6, a partner in a partnership reduces its adjusted basis in its partnership interest by the amount of excess business interest expense allocated to that partner. As a result, LossCo’s basis in its PRS interest is reduced from $100 to $50 in Year 1.

(2) Calculation of net unrealized built-in gain or loss. LossCo experiences an ownership change at the end of Year 1. Paragraph (c)(3)(iii)(E) of this section provides that, in computing a loss corporation’s net unrealized built-in gain or loss, the amount of the corporation’s basis in its section 382 assets is adjusted immediately before the ownership change by the amount of any adjustment that would apply if the section 382 asset were sold immediately before the ownership change. If LossCo had sold its PRS interest immediately before the ownership change, §1.163(j)-6(h)(3)(i) would have required LossCo to increase its basis in the PRS interest by $50, the amount of its remaining excess business interest expense. As a result, for purposes of section 382(h)(6)(C) and paragraph (c)(3)(i)(B) of this section, LossCo’s basis in its PRS interest is adjusted by the same amount. Thus, for purposes of computing LossCo’s net unrealized gain or loss, LossCo’s basis in its PRS interest is increased to $100 immediately before the ownership change.

(B) Year 2—(1) Treatment of excess business interest expense as paid or accrued. Pursuant to §1.163(j)-6(g)(2)(i), because LossCo is allocated $40 of excess taxable income from PRS in Year 2, LossCo treats $40 of its excess business interest expense (from Year 1) as paid or accrued in Year 2. LossCo’s remaining $10 of excess business interest expense from Year 1 continues to be characterized as excess business interest expense in succeeding years. See §1.163(j)-6(g)(2)(ii).

(2) Section 163(j) deduction. In Year 2, LossCo is treated as having paid or accrued $100 of business interest expense ($40 of excess business interest expense that is treated as business interest expense under §1.163(j)-6(g)(2)(i), and $60 of business interest expense that LossCo actually paid or accrued in Year 2). Because LossCo has a section 163(j) limitation of $25, LossCo can deduct only $25 of its $100 Year 2 business interest expense (see §1.163(j)-2(b)). Pursuant to §1.383-1(d)(1)(ii), LossCo is treated as deducting $25 of its section 382 excess business interest expense that is treated as business interest expense in Year 2, because this amount is a recognized built-in loss. No adjustment is made to the computation of LossCo’s net unrealized built-in gain or loss to reflect the $25 of LossCo’s recognized built-in loss. See paragraph (c)(3)(vi) of this section. Both LossCo’s $15 of Year 1 excess business interest expense that was treated as business interest expense in Year 2 and the $60 of other business interest expense that was paid or accrued in Year 2 is disallowed in Year 2 under §1.163(j)-2(b). These amounts are treated as disallowed business interest expense carryforwards into Year 3 under §1.163(j)-2(c), with the $15 carryforward being subject to section 382 limitation. See paragraph (d)(3)(vi) of this section.

(g) Applicability dates—(1) In general. This section applies to any ownership change occurring after date of publication of Treasury decision adopting these proposed regulations as final regulations in the Federal Register. For ownership changes occurring on or before the date the Treasury decision adopting these proposed regulations as final regulations is published in the Federal Register, see §1.382-7 as contained in 26 CFR part 1, revised April 1, 2009. However, taxpayers and their related parties, within the meaning of sections 267(b) and 707(b)(1), may apply the rules of this section to any ownership change occurring during a taxable year with respect to which the period described in section 6511(a) has not expired, as long as the taxpayers and their related parties consistently apply the rules of this section and §1.382-7(a)(9) through (13) to such ownership change and all subsequent ownership changes that occur before the applicability date of final regulations.

(2) Paragraph (d)(2)(vi) of this section. Paragraph (d)(2)(vi) of this section applies to loss corporations that have undergone an ownership change on or after June 11, 2010. For loss corporations that have undergone an ownership change before June 11, 2010, see §1.382-7T as contained in 26 CFR part 1, revised April 1, 2009.

Kirsten Wielobob,

Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on September 9, 2019, 8:45 a.m., and published in the issue of the Federal Register for September 10, 2019, 84 F.R. 47455)

¹ In the case of a qualified State or local political organization described in section 527(e)(5), $25,000 is replaced by $100,000.

² An organization that is not required to file an annual return by virtue of Rev. Proc. 2011-15 must submit a Form 990-N e-Postcard annually in electronic format as described in section 6033(i)(1). Rev. Proc. 2011-15, section 3.03.

³ Section 7701(a)(11)(B) provides that the term “Secretary” means the Secretary of the Treasury or his delegate, which may include the Commissioner.

⁴ The confidentiality and disclosure of tax returns and return information in both tax and non-tax investigations is governed by section 6103. Section 6103 contains several provisions authorizing the disclosure of returns and return information to Federal law enforcement agencies under prescribed circumstances after meeting specified procedural requirements. For example, these include disclosures to the Department of Justice (DOJ) for the investigation and prosecution of non-tax Federal crimes via an ex parte court order or via a request from the highest ranking official of a Federal agency or the highest officials within DOJ and in the course of an investigation after referral to and approval by DOJ as a Grand Jury Tax Investigation.

In the context of states, sections 6103 and 6104 authorize disclosure of certain returns and return information to the states for specified purposes. Generally, section 6103(d) authorizes disclosure to state tax agencies for state tax administration, while section 6104(c) permits disclosure of return information, in the case of organizations other than those described in section 501(c)(1) or (3), to an appropriate state officer to the extent necessary in administering state laws relating to the solicitation or administration of charitable funds or charitable assets of such organizations. Some states may also independently obtain donor information from the organizations.

⁵ See note 4.