Internal Revenue Bulletin 2013-44 (PDF rendition): IRS Notices

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

# Internal Revenue bulletin
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## HIGHLIGHTS OF THIS ISSUE

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

## INCOME TAX

### T.D. 9637, page 427

These final regulations remove any reference to, or requirement
of reliance on, credit ratings in regulations under the Internal
Revenue Code and provide substitute standards of credit-
worthiness where appropriate, pursuant to the Dodd-Frank Act.

### REG-124148-05, page 444

Research expenditures under Section 174. Theses proposed
regulations provide guidance on the treatment of amounts paid
or incurred in connection with the development of tangible
property, including pilot models. Comments requested by De-
cember 5, 2013. A public hearing is scheduled for January 8,
2014.

### REG-161948-05, page 449

These proposed regulations apply when a corporation that is
subject to U.S. income tax acquires loss property tax-free from
a liquidating subsidiary, from shareholders or others in a cap-
ital contribution, or from another corporation or person in a
reorganization, and the loss in the acquired property accrued
outside the U.S. tax system. The proposed regulations provide
guidance for preventing the importation of loss in such cases
by requiring the bases of the assets received to be equal to
value.

### Notice 2013-60, page 431

Clarification of Notice 2013-29. Notice 2013-29 provided two
methods to determine when construction has begun on a
qualified energy facility. This notice clarifies Notice 2013-29
regarding (i) the determination of whether a taxpayer satisfies
either of those methods with respect to a facility, (ii) the
applicability of the "master contract" provision in that notice,
and (iii) the effect of a transfer of a facility after construction
has begun.

### Notice 2013-63, page 436

In order to provide emergency housing relief needed as a result
of the devastation caused by severe storms, flooding, land-
slides, and mudslides in Colorado, this notice temporarily sus-
pends certain requirements under § 142(d) for qualified resi-
dential rental projects financed with exempt facility bonds
issued by state and local governments under § 142. To that
end, this Notice suspends the income requirements during a
temporary housing period that ends September 30, 2014, for
units of a Project within which units are occupied by displaced
individuals. It also provides certain modifications to the begin-
ning and ending dates of the qualified project period for a
Project occupied by displaced individuals, provides that dis-
placed persons are not to be considered transient, and pro-
vides 60 days for correcting non-compliant Projects at the end
of the temporary housing period.

### Notice 2013-64, page 438

The Internal Revenue Service is suspending certain require-
ments under § 42 of the Code for low-income housing credit
projects to provide emergency housing relief needed as a
result of the devastation caused by recent weather-related
disasters in the State of Colorado.

(Continued on the next page)

Finding Lists begin on page ii.
Index for July through October begins on page iv.

Department of the Treasury
Internal Revenue Service

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## EXEMPT ORGANIZATIONS

### Announcement 2013-42, page 464

The IRS has revoked its determination that the following orga-
nizations qualify as organizations described in sections
501(c)(3) and 170(c)(2) of the Code: American College of
Forensic Examiners International, Inc. of Springfield, MO., B &
L Grace Foundation of Fresno, CA., Big Apple Day School of
Brooklyn, NY., BuildClean of Houston, TX., Foster Care Net-
work, Inc. of Goodyear, AZ., Generational Arts Limited of New
York, NY., Help End Hunger Now Foundation of Troy, MI., IDA
Foundation for Autism and Alzheimer's Research and Solution,
Inc. of Homestead, FL., J. D. Davis Community Service, Inc., of
Inglewood, CA., Joy Center, Inc. of Stuart, FL., Lifeskills 411 of
Richmond, CA., The Music Box Lurrine Burgess of Los Angeles,
CA., and One World Hunger of Union Center, CA.

## EMPLOYMENT TAX

### Notice 2013-61, page 432

This notice provides guidance for employers and employees to
make claims for refund or adjustments of overpayments of
Federal Insurance Contributions Act (FICA) taxes and Federal
income tax withholding resulting from the Supreme Court de-
cision in United States v. Windsor, 570 U.S. _ , 133 S.Ct.
2675 (2013) decision and Revenue Ruling 2013-17, 2013-38
I.R.B. 201.

## EXCISE TAX

### T.D. 9637, page 427

These final regulations remove any reference to, or require-
ment of reliance on, credit ratings in regulations under the
Internal Revenue Code and provide substitute standards of
credit-worthiness where appropriate, pursuant to the Dodd-
Frank Act.

## ADMINISTRATIVE

Notice 2013-65, page 440

Optional special per diem rates. This notice provides the
2013-2014 special per diem rates for taxpayers to use in
substantiating the amount of ordinary and necessary business
expenses incurred while traveling away from home. The notice
includes (1) the special transportation industry rate, (2) the rate
for the incidental expenses only deduction, and (3) the rates
and list of high-cost localities for the high-low substantiation
method.

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## The IRS Mission

Provide America's taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the law with integrity and fairness to all.

## Introduction

The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly.

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

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

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

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

The Bulletin is divided into four parts as follows:

### Part I .- 1986 Code.

This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.

### Part II .- Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.

Part III .- Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury's Office of the Assistant Sec-
retary (Enforcement).

### Part IV .- Items of General Interest.

This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.

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

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

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## Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 150 .- Definitions
and Special Rules
T.D. 9637

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 48

Modification of Treasury
Regulations Pursuant to
Section 939A of the Dodd-
Frank Wall Street Reform and
Consumer Protection Act

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final regulations and removal
of temporary regulations.

SUMMARY: This document contains fi-
nal regulations that remove any reference
to, or requirement of reliance on, "credit
ratings" in regulations under the Internal
Revenue Code (Code) and provides sub-
stitute standards of credit-worthiness
where appropriate. This action is required
by the Dodd-Frank Wall Street Reform
and Consumer Protection Act. These reg-
ulations affect persons subject to various
provisions of the Code.

DATES: Effective Date: These regula-
tions are effective on September 6, 2013.

Applicability Dates: For dates of appli-
cability, see §§1.150-1(a)(4), 1.171-1 (f),
1.197-2(b)(7), 1.249-1(f)(3), 1.475(a)-
4(d)(4), 1.860G-2(g)(3), 1.1001-3(d), (e),
and (g), and 48.4101-1(1)(5).

### FOR FURTHER INFORMATION

CONTACT: Arturo Estrada, (202) 622-
3900 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

#### Background

Section 939A(a) of the Dodd-Frank
Wall Street Reform and Consumer Protec-
tion Act, Public Law 111-203 (124 Stat.
1376 (2010)) (the "Dodd-Frank Act"), re-
quires each Federal agency to review its

regulations that require the use of an as-
sessment of credit-worthiness of a secu-
rity or money market instrument, and to
review any references or requirements in
its regulations regarding credit ratings.
Section 939A(b) directs each agency to
modify any regulation identified in the
review required under section 939A(a) by
removing any reference to, or requirement
of reliance on, credit ratings and substitut-
ing a standard of credit-worthiness that
the agency deems appropriate. Numerous
provisions under the Internal Revenue
Code (Code) are affected.

These regulations amend the Income
Tax Regulations (26 CFR part 1) under
sections 150, 171, 197, 249, 475, 860G,
and 1001 of the Code (the existing regu-
lations). These sections were added to the
Code during different years to serve dif-
ferent purposes. These regulations also
amend the Manufacturers and Retailers
Excise Tax Regulations (26 CFR part 48)
under section 4101, which provides regis-
tration requirements related to Federal
fuel taxes.

On July 6, 2011, temporary regulations
(TD 9533) under sections 150, 171, 197,
249, 475, 860G, and 1001 of the Code
were published in the Federal Register
(76 FR 39278) that modify or eliminate
the reference to credit ratings in the rele-
vant regulations. Additional temporary
regulations (26 CFR part 48) under sec-
tion 4101 were published as part of TD
9533. A notice of proposed rulemaking
(REG-118809-11) cross-referencing the
temporary regulations was published in
the Federal Register the same day (76 FR
39341). No written comments responding
to the notice of proposed rulemaking were
received. No public hearing was requested
or held. The regulations are adopted as
proposed without substantive changes.

#### Explanation of Provisions

These regulations remove references to
"credit ratings" and "credit agencies" or
functionally similar terms in the existing
regulations. Some changes involve simple
word deletions or substitutions. Others re-
flect the revision of one or more sentences
to remove the credit rating references.

Where appropriate, substitute standards of
credit-worthiness replace the prior refer-
ences to credit ratings, credit agencies, or
functionally similar terms. Language revi-
sions serve solely to remove the refer-
ences prohibited by section 939A of the
Dodd-Frank Act and no additional
changes to the existing regulations are in-
tended.

## Special Analyses

It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866, as supplemented by Executive Or-
der 13563. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions. Because the regulations do not im-
pose a collection of information on small
entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursuant
to section 7805(f) of the Code, these reg-
ulations have been submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business. No comments
were received.

## Drafting Information

These regulations were drafted by per-
sonnel in the Office of Associate Chief
Counsel (Financial Institutions and Prod-
ucts), the Office of Associate Chief Coun-
sel (Income Tax and Accounting), the Of-
fice of the Associate Chief Counsel
(International) and the Office of the Asso-
ciate Chief Counsel (Passthroughs and
Special Industries). However, other per-
sonnel from the IRS and the Treasury
Department participated in the develop-
ment of the regulations.

*****

## Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 48
are amended as follows:

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# 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 1.150-1 is amended as
follows:

1\. Paragraph heading (a)(2) is revised.

2\. Paragraph (a)(4) is revised.

3\. In paragraph (b), the definition of
Issuance costs is revised.

The revisions read as follows:

§1.150-1 Definitions.

(a) * * *

(2) Effective/applicability date

* * * * *

(4) Additional exception to the general
applicability date. Section 1.150-1(b), Is-
suance costs, applies on and after July 6,
2011.

(b) * * *

Issuance costs means costs to the ex-
tent incurred in connection with, and al-
locable to, the issuance of an issue within
the meaning of section 147(g). For exam-
ple, issuance costs include the following
costs but only to the extent incurred in
connection with, and allocable to, the bor-
rowing: underwriters' spread; counsel
fees; financial advisory fees; fees paid to
an organization to evaluate the credit
quality of an issue; trustee fees; paying
agent fees; bond registrar, certification,
and authentication fees; accounting fees;
printing costs for bonds and offering doc-
uments; public approval process costs; en-
gineering and feasibility study costs; guar-
antee fees, other than for qualified
guarantees (as defined in §1.148-4(f));
and similar costs.

* * * * *

## §1.150-1T [Removed]

Par. 3. Section 1.150-1T is removed.

Par. 4. Section 1.171-1(f) Example 2 is
revised to read as follows:

§1.171-1 Bond premium.

* * * * *

(f) * * *

Example 2. Convertible bond-(i) Facts. On Jan-
uary 1, A purchases for $1,100 B corporation's bond
maturing in three years from the purchase date, with
a stated principal amount of $1,000, payable at ma-
turity. The bond provides for unconditional pay-

ments of interest of $30 on January 1 and July 1 of
each year. In addition, the bond is convertible into 15
shares of B corporation stock at the option of the
holder. On the purchase date, B corporation's non-
convertible, publicly-traded, three-year debt of com-
parable credit quality trades at a price that reflects a
yield of 6.75 percent, compounded semiannually.

(ii) Determination of basis. A's basis for deter-
mining loss on the sale or exchange of the bond is
$1,100. As of the purchase date, discounting the
remaining payments on the bond at the yield at
which B's similar nonconvertible bonds trade (6.75
percent, compounded semiannually) results in a
present value of $980. Thus, the value of the con-
version option is $120. Under paragraph
(e)(1)(iii)(A) of this section, A's basis is $980
($1,100-$120) for purposes of this section and
§§1.171-2 through 1.171-5. The sum of all amounts
payable on the bond other than qualified stated in-
terest is $1,000. Because A's basis (as determined
under paragraph (e)(1)(iii)(A) of this section) does
not exceed $1,000, A does not acquire the bond at a
premium.

(iii) Applicability date. Notwithstand-
ing §1.171-5(a)(1), this Example 2 ap-
plies to bonds acquired on or after July 6,
2011.

# §1.171-1T [Removed]

Par. 5. Section 1.171-1T is removed.

Par. 6. Section 1.197-2 is amended by
revising paragraph (b)(7) to read as fol-
lows:

§1.197-2 Amortization of goodwill and
certain other intangibles.

* * * * *

(b) * * *

(7) Supplier-based intangibles-(i) In
general. Section 197 intangibles include
any supplier-based intangible. A supplier-
based intangible is the value resulting
from the future acquisition, pursuant to
contractual or other relationships with
suppliers in the ordinary course of busi-
ness, of goods or services that will be sold
or used by the taxpayer. Thus, the amount
paid or incurred for supplier-based intan-
gibles includes, for example, any portion
of the purchase price of an acquired trade
or business attributable to the existence of
a favorable relationship with persons pro-
viding distribution services (such as fa-
vorable shelf or display space at a retail
outlet), or the existence of favorable sup-
ply contracts. The amount paid or incurred
for supplier-based intangibles does not in-
clude any amount required to be paid for
the goods or services themselves pursuant
to the terms of the agreement or other

relationship. In addition, see the excep-
tions in paragraph 2(c) of this section,
including the exception in paragraph
2(c)(6) of this section for certain rights to
receive tangible property or services from
another person.

(ii) Applicability date. This section ap-
plies to supplier-based intangibles ac-
quired after July 6, 2011.

* * * * *

# §1.197-2T [Removed]

Par. 7. Section 1.197-2T is removed.

Par. 8. Section 1.249-1 is amended by
revising paragraphs (e)(2)(ii) and (f)(3) to
read as follows:

## §1.249-1 Limitation on deduction of bond premium on repurchase.

* * * * *

(e) * * *

(2) * * *

(ii) In determining the amount under
paragraph (e)(2)(i) of this section, appro-
priate consideration shall be given to all
factors affecting the selling price or yields
of comparable nonconvertible obligations.
Such factors include general changes in
prevailing yields of comparable obliga-
tions between the dates the convertible
obligation was issued and repurchased
and the amount (if any) by which the
selling price of the nonconvertible obliga-
tion was affected by reason of any change
in the issuing corporation's credit quality
or the credit quality of the obligation dur-
ing such period (determined on the basis
of widely published financial information
or on the basis of other relevant facts and
circumstances which reflect the relative
credit quality of the corporation or the
comparable obligation).

* * * * *

(f) * * *

(3) Portion of repurchase premium at-
tributable to cost of borrowing. Paragraph
(e)(2)(ii) of this section applies to any
repurchase of a convertible obligation oc-
curring on or after July 6, 2011.

* * * * *

# §1.249-1T [Removed]

Par. 9. Section 1.249-1T is removed.
Par. 10. Section 1.475(a)-4 is amended
by revising paragraph (d)(4) Example 1,

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Example 2, and Example 3 to read as
follows:

§1.475(a)-4 Valuation safe harbor.

* * * * *

(d) * * *

(4) * * *

Example 1. (i) X, a calendar year taxpayer, is a
dealer in securities within the meaning of section
475(c)(1). X generally maintains a balanced portfo-
lio of interest rate swaps and other interest rate
derivatives, capturing bid-ask spreads and keeping
its market exposure within desired limits (using, if
necessary, additional derivatives for this purpose). X
uses a mark-to-market method on a statement that it
is required to file with the United States Securities
and Exchange Commission and that satisfies para-
graph (d)(2) of this section with respect to both the
contracts with customers and the additional deriva-
tives. When determining the amount of any gain or
loss realized on a sale, exchange, or termination of a
position, X makes a proper adjustment for amounts
taken into account respecting payments or receipts.
X and all of its counterparties on the derivatives have
the same general credit quality as each other.

(ii) Under X's valuation method, as of each val-
uation date, X determines a mid-market probability
distribution of future cash flows under the deriva-
tives and computes the present values of these cash
flows. In computing these present values, X uses an
industry standard yield curve that is appropriate for
obligations by persons with this same general credit
quality. In addition, based on information that in-
cludes its own knowledge about the counterparties,
X adjusts some of these present values either upward
or downward to reflect X's reasonable judgment
about the extent to which the true credit status of
each counterparty's obligation, taking credit en-
hancements into account, differs from the general
credit quality used in the yield curve to present value
the derivatives.

(iii) X's methodology does not violate the re-
quirement in paragraph (d)(3)(iii) of this section that
the same cost or risk not be taken into account,
directly or indirectly, more than once.

(iv) Applicability date. This Example 1 applies to
valuations of securities on or after July 6, 2011.

Example 2. (i) The facts are the same as in
Example 1, except that X uses a better credit quality
in determining the yield curve to discount the pay-
ments to be received under the derivatives. Based on
information that includes its own knowledge about
the counterparties, X adjusts these present values to
reflect X's reasonable judgment about the extent to
which the true credit status of each counterparty's
obligation, taking credit enhancements into account,
differs from this better credit quality obligation.

(ii) X's methodology does not violate the re-
quirement in paragraph (d)(3)(iii) of this section that
the same cost or risk not be taken into account,
directly or indirectly, more than once.

(iii) Applicability date. This Example 2 applies to
valuations of securities on or after July 6, 2011.

Example 3. (i) The facts are the same as in
Example 1, except that, after computing present val-
ues using the discount rates that are appropriate for

obligors with the same general credit quality, and
based on information that includes X's own knowl-
edge about the counterparties, X adjusts some of
these present values either upward or downward to
reflect X's reasonable judgment about the extent to
which the true credit status of each counterparty's
obligation, taking credit enhancements into account,
differs from a better credit quality.

(ii) X's methodology violates the requirement in
paragraph (d)(3)(iii) of this section that the same cost
or risk not be taken into account, directly or indi-
rectly, more than once. By using the same general
credit quality discount rate, X's method takes into
account the difference between risk-free obligations
and obligations with that lower credit quality. By
adjusting values for the difference between a higher
credit quality and that lower credit quality, X takes
into account risks that it had already accounted for
through the discount rates that it used. The same
result would occur if X judged some of its counter-
parties' obligations to be of a higher credit quality
but X failed to adjust the values of those obligations
to reflect the difference between a higher credit qual-
ity and the lower credit quality.

(iii) Applicability date. This Example 3 applies to
valuations of securities on or after July 6, 2011.
* * * * *

## §1.475(a)-4T [Removed]

Par. 11. Section 1.475(a)-4T is re-
moved.

Par. 12. Section 1.860G-2 is amended
by revising paragraphs (g)(3)(ii)(B),
(g)(3)(ii)(C) and (g)(3)(ii)(D) to read as
follows:

§1.860G-2 Other rules.

* * * * *

(g) * * *

(3) * * *

(ii) * * *

(B) Presumption that a reserve is rea-
sonably required. The amount of a reserve
fund is presumed to be reasonable (and an
excessive reserve is presumed to have
been promptly and appropriately reduced)
if it does not exceed the amount required
by a third party insurer or guarantor, who
does not own directly or indirectly (within
the meaning of section 267(c)) an interest
in the REMIC (as defined in §1.860D-
1(b)(1)), as a condition of providing credit
enhancement.

(C) Presumption may be rebutted. The
presumption in paragraph (g)(3)(ii)(B) of
this section may be rebutted if the
amounts required by the third party in-
surer are not commercially reasonable
considering the factors described in para-
graph (g)(3)(ii)(A) of this section.

(D) Applicability date. Paragraphs
(g)(3)(ii)(B) and (g)(3)(ii)(C) of this sec-
tion apply on and after July 6, 2011.
* * * * *

### §1.860G-2T [Removed]

Par. 13. Section 1.860G-2T is re-
moved.

Par. 14. Section 1.1001-3 is amended
as follows:

1\. Paragraph (d) Example 9 is revised.

2\. Paragraph (e)(4)(iv)(B) is revised.

3\. Paragraph (e)(5)(ii)(B)(2) is revised.

4\. Paragraph (g) Examples 1, 5 and 8
are revised.

The revisions read as follows:

#### §1.1001-3 Modifications of debt instruments.

* * * * *

(d) * * *

Example 9. Holder's option to increase interest
rate. (i) A corporation issues an 8-year note to a bank
in exchange for cash. Under the terms of the note,
the bank has the option to increase the rate of interest
by a specified amount if certain covenants in the note
are breached. The bank's right to increase the inter-
est rate is a unilateral option as described in para-
graph (c)(3) of this section.

(ii) A covenant in the note is breached. The bank
exercises its option to increase the rate of interest.
The increase in the rate of interest occurs by opera-
tion of the terms of the note and does not result in a
deferral or a reduction in the scheduled payments or
any other alteration described in paragraph (c)(2) of
this section. Thus, the change in interest rate is not a
modification.

(iii) Applicability date. This Example 9 applies to
modifications occurring on or after July 6, 2011.

* * * * *

(e) * * *

(4) * * *

(iv) * * *

(B) Nonrecourse debt instruments (1)
A modification that releases, substitutes,
adds or otherwise alters a substantial
amount of the collateral for, a guarantee
on, or other form of credit enhancement
for a nonrecourse debt instrument is a
significant modification. A substitution of
collateral is not a significant modification,
however, if the collateral is fungible or
otherwise of a type where the particular
units pledged are unimportant (for exam-
ple, government securities or financial in-
struments of a particular type and credit
quality). In addition, the substitution of a
similar commercially available credit en-
hancement contract is not a significant

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modification, and an improvement to the
property securing a nonrecourse debt in-
strument does not result in a significant
modification.

(2) Applicability date. Paragraph (e)(4)
(iv)(B)(1) of this section applies to modifi-
cations occurring on or after July 6, 2011.

* * * * *

(5) * * *

(ii) * * *

(B) * * *

(2) Original collateral (i) A modification
that changes a recourse debt instrument to a
nonrecourse debt instrument is not a signif-
icant modification if the instrument contin-
ues to be secured only by the original col-
lateral and the modification does not result
in a change in payment expectations. For
this purpose, if the original collateral is fun-
gible or otherwise of a type where the par-
ticular units pledged are unimportant (for
example, government securities or financial
instruments of a particular type and credit
quality), replacement of some or all units of
the original collateral with other units of the
same or similar type and aggregate value is
not considered a change in the original col-
lateral.

(ii) Applicability date. Paragraph
(e)(5)(ii)(B)(2)(i) of this section applies to
modifications occurring on or after July 6,
2011.

* * * * *

(g) * * *

Example 1. Modification of call right. (i) Under
the terms of a 30-year, fixed-rate bond, the issuer can
call the bond for 102 percent of par at the end of ten
years or for 101 percent of par at the end of 20 years.
At the end of the eighth year, the holder of the bond
pays the issuer to waive the issuer's right to call the
bond at the end of the tenth year. On the date of the
modification, the issuer's credit quality is approxi-
mately the same as when the bond was issued, but
market rates of interest have declined from that date.

(ii) The holder's payment to the issuer changes
the yield on the bond. Whether the change in yield is
a significant modification depends on whether the
yield on the modified bond varies from the yield on
the original bond by more than the change in yield as
described in paragraph (e)(2)(ii) of this section.

(iii) If the change in yield is not a significant mod-
ification, the elimination of the issuer's call right must
also be tested for significance. Because the specific
rules of paragraphs (e)(2) through (e)(6) of this section
do not address this modification, the significance of the
modification must be determined under the general rule
of paragraph (e)(1) of this section.

(iv) Applicability date. This Example 1 applies to
modifications occurring on or after July 6, 2011.

* * * * *

Example 5. Assumption of mortgage with in-
crease in interest rate. (i) A recourse debt instrument

with a 9 percent annual yield is secured by an office
building. Under the terms of the instrument, a pur-
chaser of the building may assume the debt and be
substituted for the original obligor if the purchaser is
equally or more creditworthy than the original obli-
gor and if the interest rate on the instrument is
increased by one-half percent (50 basis points). The
building is sold, the purchaser assumes the debt, and
the interest rate increases by 50 basis points.

(ii) If the purchaser's acquisition of the building
does not satisfy the requirements of paragraph
(e)(4)(i)(B) or paragraph (e)(4)(i)(C) of this section,
the substitution of the purchaser as the obligor is a
significant modification under paragraph (e)(4)(i)(A)
of this section.

(iii) If the purchaser acquires substantially all of
the assets of the original obligor, the assumption of
the debt instrument will not result in a significant
modification if there is not a change in payment
expectations and the assumption does not result in a
significant alteration.

(iv) The change in the interest rate, if tested
under the rules of paragraph (e)(2) of this section,
would result in a significant modification. The
change in interest rate that results from the transac-
tion is a significant alteration. Thus, the transaction
does not meet the requirements of paragraph
(e)(4)(i)(C) of this section and is a significant mod-
ification under paragraph (e)(4)(i)(A) of this section.

(v) Applicability date. This Example 5 applies to
modifications occurring on or after July 6, 2011.

* * * * *

Example 8. Substitution of credit enhancement
contract. (i) Under the terms of a recourse debt
instrument, the issuer's obligations are secured by a
letter of credit from a specified bank. The debt in-
strument does not contain any provision allowing a
substitution of a letter of credit from a different bank.
The specified bank, however, encounters financial
difficulty. The issuer and holder agree that the issuer
will substitute a letter of credit from another bank.

(ii) Under paragraph (e)(4)(iv)(A) of this section,
the substitution of a different credit enhancement con-
tract is not a significant modification of a recourse debt
instrument unless the substitution results in a change in
payment expectations. While the substitution of a new
letter of credit by a different bank does not itself result
in a change in payment expectations, such a substitu-
tion may result in a change in payment expectations
under certain circumstances (for example, if the obli-
gor's capacity to meet payment obligations is depen-
dent on the letter of credit and the substitution substan-
tially enhances that capacity from primarily speculative
to adequate).

(iii) Applicability date. This Example 8 applies to
modifications occurring on or after July 6, 2011.

** * * *

# §1.1001-3T [Removed]

Par. 15. Section 1.1001-3T is removed.
PART 48-MANUFACTURERS AND
RETAILERS EXCISE TAXES

Par. 16. The authority citation for part
48 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 17. Section 48.4101-1 is amended
as follows:

1\. Paragraph (f)(4)(ii)(B) is revised.

2\. Paragraph (l)(5) is revised.

The revisions read as follows:

§48.4101-1 Taxable fuel; registration.

* * * * *

(f) * * *

(4) * * *

(ii) * * *

(B) Basis for determination. The deter-
mination under §48.4101-1(f)(4)(ii) must
be based on all information relevant to the
applicant's financial status.

** * * *

(l) * * *

(5) Applicability date. Paragraph (f)(4)(ii)
(B) of this section applies on and after July
6, 2011.

## §48.4101-1T [Removed]

Par. 18. Section 48.4101-1T is re-
moved.

Beth Tucker,
Deputy Commissioner for
Operations Support.

Approved August 14, 2013.

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

(Filed by the Office of the Federal Register on September 5,
2013, 8:45 a.m., and published in the issue of the Federal
Register for September 6, 2013, 78 F.R. 54758)

# Section 6402 .- Authority to Make Credits or Refunds

Special administrative procedures for
making adjustments or claiming refunds
of overpayments of FICA taxes and in-
come tax withholding resulting from
United States v. Windsor and Rev. Rul.
2013-17, are set forth in Notice 2013-61.
See page 432.

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# Part III. Administrative, Procedural, and Miscellaneous

## Clarification of Notice 2013-29

Notice 2013-60

### SECTION 1. PURPOSE

The American Taxpayer Relief Act of
2012, Pub. L. No. 112-240, 126 Stat.
2313 (ATRA), modified the definition of a
qualified facility under section 45(d) of
the Internal Revenue Code by replacing
the placed in service requirement with a
begin construction requirement. A tax-
payer will be eligible to receive the re-
newable electricity production tax credit
(PTC) under section 45, or the energy
investment tax credit (ITC) under section
48 in lieu of the PTC, with respect to a
facility if construction of such facility be-
gins before January 1, 2014. Notice 2013-
29, 2013-20 I.R.B. 1085, provides two
methods to determine when construction
has begun on such a facility. This notice
clarifies Notice 2013-29 regarding (i) the
determination of whether a taxpayer sat-
isfies either of those methods with respect
to a facility, (ii) the applicability of the
"master contract" provision in that notice,
and (iii) the effect of a transfer of a facility
after construction has begun.

## SECTION 2. BACKGROUND

Notice 2013-29 provides two methods
that a taxpayer may use to establish that
construction of a qualified facility has be-
gun. A taxpayer may establish the begin-
ning of construction by starting physical
work of a significant nature as described
in section 4 of the notice (Physical Work
Test). Alternatively, a taxpayer may es-
tablish the beginning of construction by
meeting the safe harbor provided in sec-
tion 5 of the notice (Safe Harbor). These
methods require that a taxpayer make con-
tinuous progress towards completion once
construction has begun (as set forth in
sections 4.06 (Continuous Construction
Test) and 5.02 (Continuous Efforts Test)
of Notice 2013-29, respectively). Notice
2013-29 provides that a taxpayer may en-
ter into a master contract for purposes of
the Physical Work Test in section 4.03(2).
Notice 2013-29 does not address the ef-

fect of a transfer of a facility after con-
struction has begun.

The Treasury Department and the Inter-
nal Revenue Service have received a signif-
icant number of questions regarding the ap-
plication of the Continuous Construction
and Continuous Efforts Tests in Notice
2013-29, the applicability of the master
contract provision for purposes of the Safe
Harbor, and the effect that a transfer of a
facility after construction has begun will
have on its ability to qualify for the PTC or
ITC. In response to these questions, this
notice provides a method that will allow
taxpayers to be deemed to satisfy both the
Continuous Construction and Continuous
Efforts Tests. In addition, this notice pro-
vides that the master contract provision in
Notice 2013-29 also applies for purposes of
the Safe Harbor, and that the transfer of a
facility after construction has begun will not
prevent a facility from qualifying for the
PTC or ITC.

## SECTION 3. CONTINUOUS CONSTRUCTION/CONTINUOUS EFFORTS TESTS

.01 In general. Section 4.01 of Notice
2013-29, setting forth the Physical Work
Test, provides:

The Internal Revenue Service will
closely scrutinize, and may determine
that construction has not begun on a fa-
cility before January 1, 2014, if a tax-
payer does not maintain a continuous
program of construction as determined
under section 4.06.

Section 4.06(1) provides that whether a tax-
payer maintains a continuous program of
construction will be determined by the rel-
evant facts and circumstances. Section
4.06(2) provides that certain disruptions in
the taxpayer's construction of a facility that
are beyond the taxpayer's control will not be
considered to indicate that a taxpayer has
failed to maintain a continuous program of
construction, and sets forth a non-exclusive
list of examples of such disruptions.

Section 5.01 of Notice 2013-29, set-
ting forth the Safe Harbor, provides:

Construction of a facility will be consid-
ered as having begun before January 1,
2014, if (1) a taxpayer pays or incurs
(within the meaning of Treas. Reg. §
1.461-1(a)(1) and (2)) five percent or

more of the total cost of the facility,
except as provided in section 5.01(2),
before January 1, 2014, and (2) thereaf-
ter, the taxpayer maintains continuous
efforts to advance towards completion of
the facility (as determined under section
5.02).

The exception in section 5.01(2) deals
with costs incurred by a person other than
the taxpayer under a binding written con-
tract with the taxpayer. Section 5.02(1) pro-
vides that whether a taxpayer maintains con-
tinuous efforts to advance towards
completion of the facility will be determined
by the relevant facts and circumstances.
Section 5.02(2) provides that certain disrup-
tions in the taxpayer's continuous efforts to
advance towards completion of the facility
that are beyond the taxpayer's control will
not be considered as indicating that a tax-
payer has failed to maintain continuous ef-
forts to advance towards completion of the
facility, and sets forth a non-exclusive list of
examples of such disruptions.

.02 Deemed satisfaction of Continuous
Construction/Continuous Efforts Tests. If
a facility is placed in service before Jan-
uary 1, 2016, the facility will be consid-
ered to satisfy the Continuous Construc-
tion Test (for purposes of satisfying the
Physical Work Test) or the Continuous
Efforts Test (for purposes of satisfying the
Safe Harbor). If a facility is not placed in
service before January 1, 2016, whether
the facility satisfies the Continuous Con-
struction or Continuous Efforts Tests will
be determined by the relevant facts and
circumstances, as described in section
4.06 and section 5.02 in Notice 2013-29.

## SECTION 4. MASTER CONTRACT

.01 In general. Section 4.03(2) of No-
tice 2013-29, setting forth the Physical
Work Test, provides:

If a taxpayer enters into a binding written
contract for a specific number of compo-
nents to be manufactured, constructed, or
produced for the taxpayer by another
person under a binding written contract
(a "master contract"), and then through a
new binding written contract (a "project
contract") the taxpayer assigns its rights
to certain components to an affiliated
special purpose vehicle that will own the

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facility for which such property is to be
used, work performed with respect to the
master contract may be taken into ac-
count in determining when physical
work of a significant nature begins with
respect to the facility.

.02 Master contract for Safe Harbor. The
master contract provision, as described in
section 4.03(2) of Notice 2013-29 under the
Physical Work Test, also applies for pur-
poses of the Safe Harbor.

## SECTION 5. TRANSFER OF A FACILITY

.01 In general. Notice 2013-29 did not
address the effect of a transfer of a facility
after construction has begun. Section
45(d)(1), as amended by ATRA, provides:
In the case of a facility using wind to
produce electricity, the term 'qualified
facility' means any facility owned by the
taxpayer which is originally placed in
service after December 31, 1993, and the
construction of which begins before Jan-
uary 1, 2014.

The statutory language requires only
that construction of a facility begin before
January 1, 2014. It does not require the
construction to be begun by the taxpayer
claiming the credit. If a qualified facility
satisfies either the Physical Work Test or
the Safe Harbor, a taxpayer that owns the
facility during the 10-year period begin-
ning on the date the facility was originally
placed in service may claim the PTC with
respect to that facility even if the taxpayer
did not own the facility at the time con-
struction began. Alternatively, a taxpayer
that owns the facility on the date it is
originally placed in service may elect to
claim the ITC in lieu of the PTC with
respect to that facility even if the taxpayer
did not own the facility at the time con-
struction began. Any ITC claimed on a
facility will be limited to the taxpayer's
basis in qualified property (as defined in
section 48(a)(5)(D)).

.02 Example. In August 2013, Devel-
oper acquires a parcel of land on which it
intends to build and operate a wind farm
(Facility). Developer contributes the land
to its wholly-owned limited liability com-
pany (LLC), which is disregarded as an
entity separate from its owner for federal
tax purposes, to hold and develop Facility.
In November 2013, Developer incurs 5
percent of the cost of Facility and there-

after maintains continuous efforts to ad-
vance towards the completion of Facility.
In April 2014, to finance the development
of the project, Developer sells 95 percent
of the interests in LLC to a group of
investors (Investors) who are not related
to Developer, and Developer does not
contribute sales proceeds to LLC. Under
Rev. Rul. 99-5, 1999-1 C.B. 434, Devel-
oper is treated as selling 95 percent of
each of the assets of LLC to Investors, and
immediately thereafter Developer and In-
vestors are treated as contributing their
respective 5 percent and 95 percent inter-
ests in those assets to LLC, which is now
a partnership and the owner of Facility for
federal tax purposes. In October 2015,
LLC places Facility in service. Because
Facility satisfies the Safe Harbor and as-
suming Facility is otherwise a qualified
facility under section 45(d), LLC is eligi-
ble to claim the PTC with respect to elec-
tricity generated by Facility and sold to an
unrelated party. Alternatively, LLC may
elect to claim the ITC in lieu of the PTC.

## SECTION 6. EFFECT ON OTHER DOCUMENTS

Notice 2013-29 is clarified.

## SECTION 7. DRAFTING INFORMATION

The principal author of this notice is
Brian J. Americus of the Office of Associate
Chief Counsel (Passthroughs & Special In-
dustries). For further information regarding
this notice, contact Brian J. Americus on
(202) 622-3110 (not a toll-free call).

Application of Windsor
Decision and Revenue
Ruling 2013-17 to
Employment Taxes and
Special Administrative
Procedures for Employers
to Make Adjustments or
Claims for Refund or Credit

### Notice 2013-61

#### PURPOSE

This notice provides guidance for em-
ployers and employees to make claims for

refund or adjustments (referred to in this
notice as corrections) of overpayments of
Federal Insurance Contributions Act
(FICA) taxes and Federal income tax
withholding (employment taxes) with re-
spect to certain benefits provided to same-
sex spouses and remuneration paid to
same-sex spouses resulting from the
United States Supreme Court decision in
United States v. Windsor, 570 U.S ._
133 S.Ct. 2675 (2013) and the holdings of
Rev. Rul. 2013-17, 2013-38 I.R.B. 201.

To reduce filing and reporting burdens
associated with the optional retroactive ap-
plication of the holdings of Rev. Rul. 2013-
17, the Internal Revenue Service (IRS) is
providing special administrative procedures
for employers to correct overpayments of
employment taxes for 2013 and prior years
with respect to certain same-sex spouse ben-
efits and certain remuneration paid to same-
sex spouses, including overpayments that
result from a taxpayer's retroactive applica-
tion of the holdings of Rev. Rul. 2013-17.
With respect to these overpayments for
2013, this notice provides two alternative
special administrative procedures. Under
the first alternative, employers may use the
fourth quarter 2013 Form 941, Employer's
QUARTERLY Federal Tax Return, to cor-
rect these overpayments of employment
taxes for the first three quarters of 2013.
Under the second alternative, employers
may file one Form 941-X, Adjusted Em-
ployer's QUARTERLY Federal Tax Return
or Claim for Refund, for the fourth quarter
of 2013 to correct these overpayments of
FICA taxes for all quarters of 2013.

With respect to these overpayments of
FICA taxes for years before 2013, em-
ployers can make a claim or adjustment
for all four calendar quarters of a calendar
year on one Form 941-X filed for the
fourth quarter of such year if the period of
limitations on refunds under section 6511
of the Internal Revenue Code (Code) has
not expired and, in the case of adjust-
ments, the period of limitations will not
expire within 90 days of filing the ad-
justed return. Under normal procedures,
employers are required to file a Form
941-X for each calendar quarter for which
a refund claim or adjustment is made.

The special administrative procedures
provided in this notice are optional. Em-
ployers that prefer to use the regular pro-
cedures for correcting employment tax

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overpayments related to same-sex spouse
benefits and remuneration paid to same-
sex spouses, instead of the special admin-
istrative procedures, may do so.

## BACKGROUND

Effect of Windsor and Revenue Ruling
2013-17

A number of income tax and employ-
ment tax provisions provide for exclu-
sions from gross income and wages, re-
spectively, for certain benefits provided to
the spouse of an employee. In addition,
services performed by an individual in the
employ of the individual's spouse that are
not in the course of the employer's trade
or business or that are domestic services
in the employer's private home are ex-
cepted from FICA tax under section
3121(b)(3)(B).1 Until the recent decision
of the Supreme Court in Windsor, the IRS
interpreted section 3 of the Defense of
Marriage Act (DOMA) as prohibiting it
from recognizing same-sex marriages for
purposes of these provisions. Section 3 of
DOMA provided that:

In determining the meaning of any Act
of Congress, or of any ruling, regula-
tion or interpretation of the various ad-
ministrative bureaus and agencies of
the United States, the word 'marriage'
means only a legal union between one
man and one woman as husband and
wife, and the word 'spouse' refers only
to a person of the opposite sex who is
a husband or a wife.
1 U.S.C. § 7.

As a result, employers withheld and
paid employment taxes with respect to
certain benefits provided to the same-sex
spouse of an employee because the mar-
riage was not recognized for purposes of
the Code, and the benefits were not treated
as excludable from gross income or wages
for Federal income or employment tax
purposes, respectively. Employers may
also have withheld and paid employment
taxes on amounts paid for services per-
formed by an individual in the employ of
the individual's same-sex spouse without

applying the employment tax exceptions
for certain remuneration paid to spouses.

In Windsor, the Court held that section
3 of DOMA is unconstitutional because it
violates the principles of equal protection,
and on August 29, 2013, the IRS an-
nounced the publication of Rev. Rul.
2013-17, which held:

1\. for Federal tax purposes, the terms
"spouse," "husband and wife," "husband,"
and "wife" include an individual married
to a person of the same sex if the individ-
uals are lawfully married under state law,
and the term "marriage" includes such a
marriage between individuals of the same
sex;

2\. for Federal tax purposes, the IRS
adopts a general rule recognizing a mar-
riage of same-sex individuals that was
validly entered into in a state whose laws
authorize the marriage of two individuals
of the same sex even if the married couple
is domiciled in a state that does not rec-
ognize the validity of same-sex marriages;
and

3\. for Federal tax purposes, the terms
"spouse," "husband and wife," "husband,"
and "wife" do not include individuals
(whether of the opposite sex or the same
sex) who have entered into a registered
domestic partnership, civil union, or other
similar formal relationship recognized un-
der state law that is not denominated as a
marriage under the laws of that state, and
the term "marriage" does not include such
formal relationships.

Rev. Rul. 2013-17 provides that its
holdings will be applied prospectively as
of September 16, 2013, which is the date
of publication of the ruling in the Internal
Revenue Bulletin. Except as otherwise
provided in Rev. Rul. 2013-17, taxpayers
also may rely on Rev. Rul. 2013-17 for
the purpose of filing original returns,
amended returns, adjusted returns, or
claims for credit or refund for any over-
payment of tax resulting from these hold-
ings, provided the applicable limitations
period for filing such claim under section
6511 has not expired. Rev. Rul. 2013-17
also provides that if an affected taxpayer
files an original return, amended return,

adjusted return, or claim for credit or re-
fund in reliance on Rev. Rul. 2013-17, all
items required to be reported on the return
or claim that are affected by the marital
status of the taxpayer must be adjusted to
be consistent with the marital status re-
ported on the return or claim.

Rev. Rul. 2013-17 also provides that
taxpayers may rely (subject to the condi-
tions in the preceding paragraph regarding
the applicable limitations period and con-
sistency within the return or claim) on
Rev. Rul. 2013-17 retroactively with re-
spect to any employee benefit plan or ar-
rangement or any benefit provided there-
under only for purposes of filing original
returns, amended returns, adjusted returns,
or claims for credit or refund of an over-
payment of tax concerning employment
tax and income tax with respect to
employer-provided health coverage bene-
fits or fringe benefits that were provided
by the employer and are excludable from
income under sections 106, 117(d), 119,
129, or 132 based on an individual's mar-
ital status. For purposes of the preceding
sentence, if an employee made a pre-tax
salary-reduction election for health cover-
age under a section 125 cafeteria plan
sponsored by an employer and also
elected to provide health coverage for a
same-sex spouse on an after-tax basis un-
der a group health plan sponsored by that
employer, an affected taxpayer may treat
the amounts that were paid by the em-
ployee for the coverage of the same-sex
spouse on an after-tax basis as pre-tax
salary reduction amounts.

Employers may also rely (subject to
the previously noted conditions regarding
the applicable limitations period and the
consistency requirement) on the holdings
in Rev. Rul. 2013-17 for purposes of rec-
ognizing same-sex spouses as spouses in
applying exceptions from the definition of
"employment" for employment tax pur-
poses.

1The Railroad Retirement Tax Act (RRTA) and the Federal Unemployment Tax Act (FUTA) also provide exceptions that can apply for same-sex spouse benefits and remuneration paid
to same-sex spouses. RRTA taxes are generally paid on Form CT-1, Employer's Annual Railroad Retirement Tax Act Return, and FUTA taxes are paid on Form 940, Employer's Annual
Federal Unemployment (FUTA) Tax Return, which are both annual returns. No special administrative procedures are needed to correct overpayments of taxes on same-sex spouse benefits
and remuneration paid to same-sex spouses reported on those returns. However, some RRTA taxes are paid on Form CT-2, Employee Representative's Quarterly Railroad Tax Return, which
is a quarterly return, and the special administrative procedures in this notice can be used with respect to overpayments of RRTA tax on same-sex spouse benefits reported on Form CT-2.

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### General Procedures for Corrections of Overpayments of Employment Taxes

Generally, corrections of overpay-
ments of FICA tax are made after an error
has been ascertained using the adjustment
process under section 6413 or using the
refund claim process under section 6402.
An error is ascertained when the employer
has sufficient knowledge of the error to be
able to correct it.

Under section 31.6413(a)-1(a) and
section 31.6413(a)-2(b) of the Employ-
ment Tax Regulations, before making an
adjustment of an overpayment of FICA
tax with respect to an employee, an em-
ployer generally must repay or reimburse
the employee in the amount of the over-
collection prior to the expiration of the
period of limitations on credit or refund,
and, for FICA tax overcollected in a prior
year, must also secure the employee's
written statement confirming that the em-
ployee has not made any previous claims
(or the claims were rejected) and will not
make any future claims for refund or
credit of the amount of the overcollected
FICA tax. An employer repays the em-
ployee by direct payment to the employee;
an employer reimburses an employee by
applying the amount of the overcollection
against the employee FICA tax which at-
taches to wages paid by the employer to
the employee. Section 31.6413(a)-2(c)(2)
provides that employers cannot adjust
overpayments of withheld income tax af-
ter the end of the calendar year, except in
the case of administrative errors. (An ad-
ministrative error occurs if the amount the
employer entered on Form 941 is not the
amount the employer actually withheld.)
Section 31.6413(a)-2(d)(2) provides that
no adjustment in respect of an overpay-
ment may be made if the overpayment
relates to a return period for which the
period of limitations on credit or refund of
such overpayment will expire within 90
days of filing the adjusted return.

Section 31.6402(a)-2 provides rules
under which a refund claim for an over-
payment of FICA tax may be made. Pur-
suant to § 31.6402(a)-2(a), no refund or
credit for FICA employer tax will be al-
lowed unless the employer has first repaid
or reimbursed its employee for the em-
ployee FICA tax or has secured the em-
ployee's consent to the allowance of the

claim for refund and includes a claim for
the refund of such employee tax. How-
ever, this requirement does not apply to
the extent that the employee FICA taxes
were not withheld from the employee or,
after the employer makes reasonable ef-
forts to repay or reimburse the employee
or secure the employee's consent, the em-
ployer cannot locate the employee or the
employee will not provide consent. Under
section 6414 and § 31.6414-1, no refund
to the employer is allowed for the over-
payment of withheld income tax which
the employer deducted or withheld from
an employee.

To make employment tax corrections
for overpayments (that is, to make adjust-
ments or to claim refunds), an employer
uses the "X" form that corresponds to the
return being corrected. Thus, an employer
corrects overreported taxes on a previ-
ously filed Form 941 by filing Form
941-X. Generally, a separate X form must
be filed for each taxable period.

In determining whether there has been
an overpayment of employment taxes and
the amount of any refund, credit, or ad-
justment, employers are required to take
into account the applicable wage base un-
der the social security tax portion of the
FICA tax, and the tax rates in effect for
the particular year.

Section 31.6051-1(c) requires an em-
ployer adjusting a return filed for a prior
year, or claiming a refund or credit of
FICA taxes for a prior year, to file Forms
W-2c, Corrected Wage and Tax State-
ment, for such year. Section 31.6051-1(c)
provides that the employer must file
Forms W-2c correcting Forms W-2, Wage
and Tax Statement, if an amount of em-
ployee social security or Medicare tax
shown on the Form W-2 is incorrect and is
adjusted or refunded; the amount of social
security wages or Medicare wages shown
on the Form W-2 is incorrect; the amount
shown in Box 1, Wages, tips, other com-
pensation, is incorrect; or the amount of
income tax actually withheld from the em-
ployee is incorrectly reported in Box 2,
Federal income tax withheld.

SPECIAL ADMINISTRATIVE
PROCEDURES FOR EMPLOYMENT
TAX ADJUSTMENTS AND CLAIMS
FOR REFUND

To reduce administrative burden, this
notice provides special administrative
procedures for adjustments and claims for
refunds or credits for overpayments of
employment taxes attributable to same-
sex spouse benefits, including overpay-
ments that result from a taxpayer's retro-
active application of the holdings in Rev.
Rul. 2013-17. For purposes of this notice,
"same-sex spouse benefits" refers to the
benefits specified in Rev. Rul. 2013-17
for which amended income tax returns
and adjusted employment tax returns or
claims for refund or credit may be filed.
These benefits are same-sex spouse
employer-provided health coverage and
fringe benefits that were provided by an
employer to a same-sex spouse and are
excludable from income under section
106, 117(d), 119, 129, or 132 based on an
individual's marital status. For purposes
of the preceding sentence, if an employee
made a pre-tax salary-reduction election
for health coverage under a section 125
cafeteria plan sponsored by an employer
and also elected to provide health cover-
age for a same-sex spouse on an after-tax
basis under a group health plan sponsored
by that employer, an affected taxpayer
may treat the amounts that were paid by
the employee for the coverage of the
same-sex spouse on an after-tax basis as
pre-tax salary reductions amounts. Thus,
for purposes of this notice, employment
taxes paid on after-tax amounts that were
used to purchase health coverage for an
employee's same-sex spouse under the
circumstances described in the preceding
sentence are treated as overpayments of
employment taxes.

In addition, for purposes of this notice,
"same-sex spouse benefits" includes remu-
neration for services that is excepted from
the definition of employment for FICA pur-
poses under the holdings in Rev. Rul.
2013-17 because the services are within the
exception of section 3121(b)(3)(B).

Employment Tax Returns for Third
Quarter 2013 (July, August, September)

If an employer withholds employment
taxes with respect to same-sex spouse ben-

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efits paid to or on behalf of an employee in
the third quarter of 2013, ascertains the
amount withheld on such benefits, and re-
pays or reimburses the employee for the
amount of such taxes before filing the third
quarter 2013 Form 941, the employer will
not report the wages and withholding on the
third quarter 2013 Form 941. If the em-
ployer does not repay or reimburse the em-
ployee for the amount of the overcollection
before filing the third quarter 2013 Form
941, the employer must report the amount of
the overcollection on that return and can use
one of the special administrative procedures
for 2013 described below to make an adjust-
ment or claim a refund for the overpayment.

Special Administrative Procedures for
Adjustments for 2013 on Fourth Quarter
2013 Form 941 or Fourth Quarter 2013
Form 941-X

The IRS is providing two alternative
special administrative procedures for em-
ployers that treated the value of same-sex
spouse benefits as wages on Forms 941
for the first three quarters of 2013 and that
seek to correct overpayments of employ-
ment taxes attributable to the benefits.2

(1) Under the first alternative, an em-
ployer must repay or reimburse its em-
ployees for the amount of the overcol-
lected FICA tax and the overcollected
income tax withholding with respect to
the same-sex spouse benefits for the first
three quarters of 2013 on or before De-
cember 31, 2013. After repaying or reim-
bursing the employees, the employer, in
reporting amounts on its fourth quarter
2013 Form 941, may reduce the fourth
quarter wages, tips, and other compensa-
tion reported on line 2, taxable social se-
curity wages reported on line 5a (subject
to the wage base limitation discussed be-
low), and taxable Medicare wages and tips
reported on line 5c, by the amount of the
same-sex spouse benefits treated as wages
for the first three quarters of 2013. Also,
the income tax withheld from wages, tips,
and other compensation reported on line 3
of Form 941 should be reduced by the
amount of income tax withholding with
respect to the same-sex spouse benefits

that has been repaid or reimbursed to the
employees by the end of the calendar year.
In addition, if the value of any same-sex
spouse benefits were included in taxable
wages subject to Additional Medicare Tax
withholding on line 5d, the amount of
taxable wages subject to Additional Medi-
care Tax withholding on the fourth quarter
2013 Form 941 should be reduced. By
taking advantage of this special adminis-
trative procedure, the employer will not
have to file separate Forms 941-X to cor-
rect each of the first three quarters of
2013.

Under this special administrative proce-
dure, the employer may only correct the
employer share of FICA tax that corre-
sponds to the employee share of FICA tax
that has been repaid or reimbursed to the
employees on or before December 31, 2013.

For the repayment or reimbursement of
overwithheld social security tax and the cor-
responding reduction for taxable social se-
curity wages reported on Form 941, line 5a,
the employer must take into account that
adjustments of social security tax are limited
to the tax paid on that portion of the value of
the same-sex spouse benefits that, when
added to other social security wages and tips
for the year, does not exceed the social
security wage base for 2013 ($113,700).
Accordingly, if for a particular employee
the value of same-sex spouse benefits was
included in social security wages and, after
the exclusion of the value of the same-sex
spouse benefits from wages for 2013, the
remaining social security wages of the em-
ployee are equal to or greater than $113,700,
then no refund, credit, or adjustment of so-
cial security tax can be made for 2013 for
that employee.

To ensure that use of this special ad-
ministrative procedure for the 2013 fourth
quarter Form 941 does not result in a
mismatch between total taxes reported on
line 10 (total taxes after adjustments) and
total liability for the quarter reported on
line 16 for a monthly schedule depositor
or on Schedule B (Form 941) for a semi-
weekly schedule depositor, the employer
should use the following procedures.

If the employer repays or reimburses the
employee share of FICA taxes or income

tax withholding to employees before the
fourth quarter (i.e., before October 1, 2013),
the repayment or reimbursement and the
corresponding reduction of the employer
portion of FICA tax should be reflected by
reductions in the amount reported by a
monthly schedule depositor on line 16 (Tax
liability: Month 1 (October)) or by a semi-
weekly schedule depositor on Schedule B
(Form 941), Day 1 (October 1) of the Tax
liability for Month 1. Negative numbers
must not be entered on Line 16 or Schedule
B (Form 941). If the amount of the adjust-
ment for repayments and reimbursements
exceeds the liability of the quarter reported
for Month 1 or Day 1, the employer should
apply the amount of the remaining adjust-
ment to reduce liabilities in calendar order
until the amount of the remaining adjust-
ment is completely used. For example, if the
employer's tax liability for October on line
16 would be negative (due to the adjustment
for repayments and reimbursements made
before or during the fourth quarter), the em-
ployer should not enter a negative amount
for the month. Instead, the employer should
enter zero for October and subtract the neg-
ative amount from the tax liability for No-
vember.

If the employer repays or reimburses
the employee share of FICA taxes or in-
come tax withholding to employees dur-
ing the fourth quarter (i.e., after Septem-
ber 30, 2013 and on or before December
31, 2013), the repayment or reimburse-
ment and the corresponding reduction of
the employer portion of FICA tax should
be reflected by reductions in the amount
reported on line 16 of the fourth quarter
Form 941 or Schedule B (Form 941) on
the date of the repayment or reimburse-
ment or on the next date after the date of
the repayment or reimbursement such that
it will not reduce any amount on line 16 or
Schedule B (Form 941) below zero.

(2) Under the second alternative, an
employer that does not repay or reimburse
employees for the amount of withheld
FICA and income taxes with respect to
same-sex spouse benefits provided in
2013 on or before December 31, 2013,
and thus, files the 2013 fourth quarter
Form 941 without making the adjustment,

2The same procedures are available to filers of Form 941-SS, Employer's QUARTERLY Federal Tax Return (American Samoa, Guam, the Commonwealth of Northern Mariana Islands,
and the U.S. Virgin Islands), Form 941-PR, Planilla para la Declaración Federal TRIMESTRAL del Patrono, and Form CT-2, Employee Representative's Quarterly Railroad Tax Return
(different lines are applicable on Form CT-2). The special procedures are not needed for filers of Form CT-1, Employer's Annual Railroad Retirement Tax Return, and Form 940, Employer's
Annual Federal Unemployment (FUTA) Tax Return, which are annual returns.

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may correct overpayments of FICA taxes
with respect to same-sex spouse benefits
paid in 2013 using Form 941-X. Under
this option, an employer may file one
Form 941-X for the fourth quarter of 2013
to make adjustments or claim refunds or
credits of overpayments of FICA taxes
with respect to same-sex spouse benefits
paid in all quarters of 2013, provided the
employer has satisfied the usual require-
ments for filing Form 941-X, including
repaying or reimbursing the overcollected
employee FICA tax to employees (or, for
refund claims, securing consents from em-
ployees), and obtaining the required writ-
ten statements from employees. The em-
ployer should write "WINDSOR" in dark,
bold letters across the top margin of page
1 of Form 941-X. Only corrections made
under this special administrative proce-
dure may be shown on this Form 941-X.

An employer may not make an adjust-
ment for an overpayment of income tax
withholding for a prior calendar year unless
the overpayment is attributable to an admin-
istrative error. An employer may not claim a
refund or credit for an overpayment of in-
come tax withholding if the tax was de-
ducted and withheld from the employee.
Accordingly, this second special administra-
tive procedure for 2013 cannot be used with
regard to income tax withheld from employ-
ees with respect to same-sex spouse benefits
in 2013 because an employer can use this
Form 941-X procedure only if the employer
did not repay or reimburse employees for
the amount of withheld taxes with respect to
same-sex spouse benefits provided in 2013
on or before December 31, 2013. In such
case, employees will receive credit for the
income tax withheld for purposes of deter-
mining any entitlement to a refund of in-
come tax paid with respect to same-sex
spouse benefits provided in 2013 when they
file Form 1040, U.S. Individual Income Tax
Return.

### Special Administrative Procedure for Adjustments or Claims for Refund for Years Before 2013

The IRS is also providing a special
administrative procedure for employers to
make adjustments or claims for refund or
credit of overpayments of FICA taxes
paid with respect to same-sex spouse ben-
efits for any year before 2013 for which
the applicable period of limitations on

credit or refund has not expired. Under
this procedure, the employer must take
into account the applicable social security
wage base in determining the overpay-
ment of FICA taxes for the prior year
being corrected. Under this procedure, the
employer may file one Form 941-X for the
fourth quarter of the prior year. This
fourth quarter Form 941-X would include
the adjustments or refunds for all overpay-
ments of employment taxes with respect
to same-sex spouse benefits provided dur-
ing such prior year, including overpay-
ments reflected in the Forms 941 for the
first three quarters of the year. The em-
ployer should write "WINDSOR" in dark,
bold letters across the top margin of page
1 of Form 941-X. Only corrections made
under this special administrative proce-
dure may be shown on this Form 941-X.

Although the employer may file for all
four quarters of a prior year on the fourth
quarter Form 941-X, this special adminis-
trative procedure is subject to the usual
requirements that apply in the case of cor-
rections of overpayments for prior years,
including the filing of Forms W-2c, repay-
ing or reimbursing employees for the
overwithheld taxes, and obtaining the re-
quired written statements (and consents if
applicable) from employees.

An employer may not make an adjust-
ment for an overpayment of income tax
withholding for a prior calendar year un-
less the overpayment is attributable to an
administrative error. An employer may
not claim a refund or credit for an over-
payment of income tax withholding if the
tax was deducted and withheld from the
employee. Accordingly, this special ad-
ministrative procedure for prior years can-
not be used with regard to income tax
withheld from employees with respect to
same-sex spouse benefits in prior years.
Employees may receive refunds of in-
come tax paid with respect to same-sex
spouse benefits in prior years by filing
Form 1040X, Amended U.S. Individual
Income Tax Return. As indicated above,
an employer filing a claim for refund or
credit or making adjustments for prior
years must file Forms W-2c for the prior
years. Forms W-2c will assist employees
in claiming a refund of income tax.

## DRAFTING INFORMATION

The principal author of this notice is
Alfred G. Kelley of the Office of Division
Counsel/Associate Chief Counsel (Tax
Exempt & Government Entities). For fur-
ther information regarding this notice,
contact Mr. Kelley at (202) 622-6040 (not
a toll-free call).

## Temporary Shelter for Individuals Displaced by Severe Storms, Flooding, Landslides, and Mudslides in Colorado

Notice 2013-63

The Internal Revenue Service is suspend-
ing certain requirements under § 142(d) of
the Internal Revenue Code for qualified
residential rental projects financed with
exempt facility bonds under § 142 to pro-
vide emergency housing relief needed as a
result of the devastation caused by recent
weather-related disasters in the State of
Colorado (the Disaster). The Disaster in-
cludes severe storms, flooding, landslides,
and mudslides and is more fully described
in the Federal Emergency Management
Agency's (FEMA) Notice of a Major Di-
saster Declaration for the State of Colo-
rado (Internal Agency Docket No. FEMA-
4145-DR) and all amendments thereto.

This Notice provides relief for all quali-
fied residential rental projects described
herein. For those projects that are also low-
income housing tax credit (LIHTC) proj-
ects, this Notice should be read with Notice
2013-64, I.R.B. 2013-44 (October 28,
2013), which suspends certain low-income
and non-transient requirements under § 42
to allow low-income housing credit projects
to provide emergency housing needed be-
cause of the Disaster.

## BACKGROUND

On September 14, 2013, the President
issued a major disaster declaration for the
State of Colorado because of the devastation
caused by the Disaster. The President issued
the declaration under the Robert T. Stafford
Disaster Relief and Emergency Assistance
Act, 42 U.S.C. 5121 et seq. Subsequently,
FEMA designated some jurisdictions in

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Colorado as eligible for Individual Assis-
tance (as FEMA uses that term). Because of
the widespread damage to housing caused
by the Disaster, the Service has determined
that issuers may approve the use of qualified
residential rental projects described in
§ 142(d) to temporarily house displaced in-
dividuals, as defined below, regardless of
their income, in accordance with this No-
tice. The Service has determined that the
projects to which this approval may be
given can be located in any State, regardless
of whether a major disaster declaration with
Individual Assistance has been issued for
that State.

Consistent with Notice 2013-64, the
term "displaced individual" means, for
purposes of this Notice, an individual who
resided in a jurisdiction designated for
Individual Assistance and who has been
displaced because his or her residence was
destroyed or damaged as a result of the
devastation caused by the Disaster.

## SECTION 1. SUSPENSION OF INCOME LIMITATIONS

The Service has determined that it is
appropriate to temporarily suspend certain
income limitation requirements under
§ 142(d) that apply to qualified residential
rental projects financed with tax-exempt
bonds issued by a qualified issuer under
§ 103 (Issuer). The suspension, described in
Section 3 below, is available to both quali-
fied residential rental projects under
§ 142(d) that are not subject to any LIHTC-
related requirements (Bond Projects) and to
qualified residential rental projects under
§ 142(d) that are also subject to LIHTC-
related requirements (Bond/LIHTC Proj-
ects). For purposes of this Notice, the term
"Project" refers to either a Bond Project or a
Bond/LIHTC Project.

## SECTION 2. GENERAL REQUIREMENTS

.01 Issuer Approval for Relief. If an Is-
suer that issued exempt facility bonds for a
Project desires to allow the use of the Proj-
ect to temporarily house displaced individ-
uals, the Issuer must approve that use and
must determine an appropriate period for the
temporary housing, not to extend beyond
September 30, 2014 (Temporary Housing
Period). If a Bond/LIHTC Project subject to
both Notice 2013-64 and this Notice re-

ceives approval, for purposes of § 42, for a
temporary housing period and for the sus-
pension of income limitations from a State
housing agency (as contemplated in Section
IV(2) of Notice 2013-64) and that agency is
not the Issuer, then the income limitations
under § 142(d) for that Bond/LIHTC Project
are suspended only if the project also re-
ceives the Issuer's consent for a suspension.
An Issuer that chooses to provide that con-
sent must adopt for purposes of § 142(d) the
same temporary housing period that the
agency adopted for purposes of § 42.

.02 Protection of Tenants. Existing ten-
ants in a Project whose income is at or
below an applicable income limitation un-
der § 142(d) cannot be evicted or have
their tenancy terminated as a result of
efforts to provide temporary housing for
displaced individuals.

.03 Certification and Recordkeeping
Requirements. The Project operator must
comply with the certification and record-
keeping requirements in Section 4 of this
Notice. For certification and recordkeep-
ing requirements under § 42, see Notice
2013-64.

.04 Rent Restrictions. To the extent
such rent restrictions are applicable, rents
for the low-income units that house dis-
placed individuals must not exceed the
lesser of-

(1) the maximum gross rent for that
unit under § 142(d)(4)(B); or

(2) the maximum gross rent for that
unit under § 42(g)(2).

.05 Project Must Meet All Remaining
Requirements. Except as expressly pro-
vided in this Notice, a Project continues to
be subject to all other rules and require-
ments of § 142(d) and § 103.

## SECTION 3. RELIEF FROM SECTION 142 REQUIREMENTS

.01 Qualified Project Period. Only a unit
in a Project occupied by a non-displaced
individual counts for purposes of determin-
ing the beginning of the qualified project
period under § 142(d)(2)(A). Thus, only
non-displaced individuals are counted for
determining the 1st day on which 10 percent
of the residential units in a Project are oc-
cupied under § 142(d)(2)(A). However, oc-
cupancy of a unit by any tenant (whether a
displaced individual or a non-displaced in-
dividual) in a Project counts for purposes of
determining the end of the qualified project

period under § 142(d)(2)(A)(i). If occu-
pancy by a displaced individual in a Project
causes any termination of assistance with
respect to the Project under section 8 of the
United States Housing Act of 1937, then
that termination is disregarded for determin-
ing when the qualified project period ends
under § 142(d)(2)(A)(iii).

.02 Satisfaction of the Non-Transient
Use Requirement. The occupancy of a unit
in a Project by a displaced individual during
the Temporary Housing Period is treated as
satisfying the non-transient use requirement
applicable to qualified residential rental
projects described in § 142(d). See § 1.103-
8(b)(4); see also Notice 2013-64 for sus-
pension of the non-transient use requirement
under § 42(i)(3)(B)(i).

.03 Income Qualification of Units in
Bond Projects during Temporary Housing
Period. A unit in a Bond Project occupied
by a displaced individual during the Tem-
porary Housing Period retains the income
status it had immediately before that oc-
cupancy, regardless of whether the unit
was a market-rate unit, a unit occupied by
a tenant who met an applicable income
limit, a designated low-income unit, or a
never previously occupied unit. See Rev.
Proc. 2004-39, 2004-2 C.B. 49 (treating
never previously occupied units as un-
available). This means, for example, that
if a unit in a Bond Project had been des-
ignated as a low-income unit or rented to
an individual whose income was at or
below an applicable income limit or was a
market-rate unit or an unavailable unit,
then the unit remains as such while occu-
pied by a displaced individual during the
Temporary Housing Period regardless of
the occupancy by, or income of, the dis-
placed individual. Thus, the fact that a
unit becomes occupied by a displaced in-
dividual does not affect compliance with
the 20-50 test or 40-60 test of
§ 142(d)(1)(A) and (B) (or the 25-60 test
under the special rule in § 142(d)(6)).

Under § 142(d)(3)(B), if the income of
a low-income resident of a Project rises
above a specified percentage of the appli-
cable income limit, then, for that resi-
dent's income to continue to be treated as
not exceeding the applicable income limit,
the next residential unit meeting certain
criteria to become available in the same
Project must be occupied by a new resi-
dent whose income does not exceed the

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applicable income limit (the next avail-
able unit rule). For purposes of determin-
ing compliance with the next available
unit rule, an operator of a Bond Project
may disregard the new occupancy of units
during the Temporary Housing Period by
displaced individuals, and apply the rule
solely based on new occupancy by per-
sons who are not displaced individuals.
The operator may, however, take into ac-
count a displaced individual's occupancy
for purposes of § 142(d)(3)(B) if the op-
erator obtains sufficient evidence that the
displaced individual's income does not
exceed the applicable income limit.

.04 Income Qualifications of Units in
Bond/LIHTC Projects During the Tempo-
rary Housing Period. The income status
of a unit and the income qualification of
the occupant of a unit for purposes of
§ 142(d) in a Bond/LIHTC Project occu-
pied by a displaced individual during the
Temporary Housing Period shall be
treated the same as they are for purposes
of § 42 under Notice 2013-64. For pur-
poses of determining compliance with the
next available unit rule, an operator of a
Bond/LIHTC Project may disregard the
new occupancy of units during the Tem-
porary Housing Period by displaced indi-
viduals, and apply the rule solely based on
new occupancy by persons who are not
displaced individuals. The operator may,
however, take into account a displaced
individual's occupancy for purposes of
§ 142(d)(3)(B) if the operator obtains suf-
ficient evidence that the displaced individ-
ual's income does not exceed the applica-
ble income limit.

.05 Income Qualifications when Tem-
porary Housing Period Ends. After the
end of the Temporary Housing Period, the
status as a displaced individual of an oc-
cupant remaining in a unit in a Project will
be disregarded and the status of the unit
occupied by such individual and the in-
come of such individual will be re-
evaluated as though the formerly dis-
placed individual commenced occupancy
of the unit on the day immediately follow-
ing the end of the Temporary Housing
Period. Thus, if the displaced individual
remains in the unit, the unit will be treated
as occupied for all purposes of § 142(d)
and the income of the displaced individual
will be used for determining compliance
with the requirements of § 142(d). If non-

compliance relates to continued occu-
pancy of the unit after the Temporary
Housing Period by an occupant who was a
displaced individual during the Tempo-
rary Housing Period, a 60-day period is
allowed for correction.

SECTION 4. CERTIFICATIONS AND
RECORDKEEPING

In addition to any information and cer-
tifications required by § 142(d)(7), Project
operators must maintain and certify cer-
tain information concerning each dis-
placed individual temporarily housed in
the Project. The records must contain the
following information: the name of the
displaced individual, the address of the
damaged residence of the displaced indi-
vidual, the displaced individual's social
security number, and a statement signed
under penalties of perjury by the displaced
individual that, because of damage to the
individual's residence in a jurisdiction
designated for Individual Assistance by
FEMA as a result of the devastation
caused by the Disaster, the individual re-
quires temporary housing. In addition, the
Project operator must keep accurate re-
cords of the Issuer's approval of the Proj-
ect's use for displaced individuals and the
approved Temporary Housing Period and
the dates during which displaced individ-
uals occupied units in the Project.

The recordkeeping described under
this paragraph must be included as part of
the books and records of the Project op-
erator and also must be maintained in a
manner that is consistent with any com-
pliance monitoring process imposed by
§ 142(d).

## SECTION 5. EFFECTIVE DATE

This Notice is effective September 14,
2013.

### SECTION 6. PAPERWORK REDUCTION ACT

The collection of information con-
tained in this Notice has been reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545-2244.

A Federal agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information

unless the collection of information dis-
plays a valid OMB control number.

The collection of information in this
Notice is in the section entitled "Section
4: CERTIFICATIONS AND RECORD-
KEEPING." This information is required
to enable the Service to verify whether
individuals are displaced as a result of the
devastation caused by the Disaster and
thus warrant temporary housing in vacant
units in certain Projects. The collection of
information is required to obtain a benefit.
The likely respondents are individuals and
businesses.

The estimated total annual recordkeep-
ing burden is 250 hours.

The estimated annual burden per record-
keeper is approximately 30 minutes. The
estimated number of recordkeepers is 500.

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial to the administration of the internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by § 6103.

## SECTION 7. DRAFTING INFORMATION

The principal authors of this notice are
Timothy L. Jones and Spence Hanemann
of the Office of Associate Chief Counsel
(Financial Institutions & Products). For
further information regarding this notice,
contact Mr. Hanemann at (202) 622-3980
(not a toll-free call).

## Low-Income Housing Credit Disaster Relief for Severe Storms, Flooding, Landslides, and Mudslides in Colorado

### Notice 2013-64

The Internal Revenue Service is sus-
pending certain requirements under § 42
of the Internal Revenue Code for low-
income housing credit projects to provide
emergency housing relief needed as a re-
sult of the devastation caused by recent
weather-related disasters in the State of
Colorado (the Disaster). The Disaster in-
cludes severe storms, flooding, landslides,
and mudslides and is more fully described

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in the Federal Emergency Management
Agency's (FEMA) Notice of a Major Di-
saster Declaration for the State of Colo-
rado (Internal Agency Docket No. FEMA-
4145-DR) and all amendments thereto.
This relief is being granted pursuant to the
Service's authority under § 42(n) and
§ 1.42-13(a) of the Income Tax Regula-
tions. This Notice should be read in con-
junction with Notice 2013-63, I.R.B.
2013-44 (October 28, 2013), which sus-
pends certain requirements under § 142(d)
for qualified residential rental projects fi-
nanced with exempt facility bonds under
§ 142 to provide emergency housing relief
as a result of the Disaster.

## BACKGROUND

On September 14, 2013, the President
issued a major disaster declaration for the
State of Colorado because of the devasta-
tion caused by the Disaster. The President
issued the declaration under the Robert T.
Stafford Disaster Relief and Emergency
Assistance Act, 42 U.S.C. 5121 et seq.
Subsequently, FEMA designated some ju-
risdictions in Colorado for Individual As-
sistance. Because of the damage to hous-
ing caused by the Disaster, the Service has
determined that State housing agencies
(Agencies) may provide approval to proj-
ect owners in their respective States to
provide temporary emergency housing for
displaced individuals in accordance with
this Notice. For purposes of this Notice,
the term "displaced individual" means an
individual who resided in a jurisdiction
designated for Individual Assistance and
who has been displaced because his or her
residence was destroyed or damaged as a
result of the Disaster. The Service has also
determined that the projects to which this
approval may be given may be located in
any State, regardless of whether a major
disaster declaration with Individual Assis-
tance has been issued for that State.

## I. SUSPENSION OF INCOME LIMITATIONS

The Service has determined that it is
appropriate to temporarily suspend certain
income limitation requirements under
§ 42 for certain qualified low-income
housing projects. The suspension will ap-
ply to low-income housing projects which
are approved by the Agency with jurisdic-

tion over the project (the applicable
Agency) and in which vacant units are
rented to displaced individuals. The appli-
cable Agency will determine the appropri-
ate period of temporary housing for each
project, not to extend beyond September
30, 2014 (temporary housing period).

## II. STATUS OF UNITS

A. Units in the first year of the credit
period

A displaced individual temporarily oc-
cupying a unit during the first year of the
credit period under § 42(f)(1) will be
deemed a qualified low-income tenant for
purposes of determining the project's
qualified basis under § 42(c)(1), and for
meeting the project's 20-50 test or 40-60
test as elected by the project owner under
§ 42(g)(1). After the end of the temporary
housing period established by the applica-
ble Agency, a displaced individual will no
longer be deemed a qualified low-income
tenant.

## B. Vacant units after the first year of the credit period

During the temporary housing period es-
tablished by the applicable Agency, the sta-
tus of a vacant unit (that is, market-rate or
low-income for purposes of § 42 or never
previously occupied) after the first year of
the credit period that becomes temporarily
occupied by a displaced individual remains
the same as the unit's status before the dis-
placed individual moves in. Displaced indi-
viduals temporarily occupying vacant units
will not be treated as low-income tenants
under § 42(i)(3)(A)(ii). However, even if it
houses a displaced individual, a low-income
or market rate unit that was vacant before
the effective date of this Notice will con-
tinue to be treated as a vacant low-income or
market rate unit. Similarly, a unit that was
never previously occupied before the effec-
tive date of this Notice will continue to be
treated as a unit that has never been previ-
ously occupied even if it houses a displaced
individual. Thus, the fact that a vacant unit
becomes occupied by a displaced individual
will not affect the building's applicable frac-
tion under § 42(c)(1)(B) for purposes of
determining the building's qualified basis,
nor will it affect the 20-50 test or 40-60
test of § 42(g)(1). If the income of occupants
in low-income units exceeds 140 percent of
the applicable income limitation, the tempo-
rary occupancy of a unit by a displaced

individual will not cause application of the
available unit rule under § 42(g)(2)(D)(ii).
In addition, the project owner is not required
during the temporary housing period to
make attempts to rent to low-income indi-
viduals the low-income units that house dis-
placed individuals.

## III. SUSPENSION OF NON- TRANSIENT REQUIREMENTS

The non-transient use requirement of
§ 42(i)(3)(B)(i) shall not apply to any unit
providing temporary housing to a dis-
placed individual during the temporary
housing period determined by the applica-
ble Agency.

## IV. OTHER REQUIREMENTS

All other rules and requirements of § 42
will continue to apply during the temporary
housing period established by the applicable
Agency. After the end of the temporary
housing period, the applicable income lim-
itations contained in § 42(g)(1), the avail-
able unit rule under § 42(g)(2)(D)(ii), the
nontransient requirement of § 42(i)(3)(B)(i),
and the requirement to make reasonable at-
tempts to rent vacant units to low-income
individuals shall resume. If a project owner
offers to rent a unit to a displaced individual
after the end of the temporary housing pe-
riod, the displaced individual must be certi-
fied under the requirements of § 42(i)(3)(A)(ii)
and § 1.42-5(b) and (c) to be a qualified
low-income tenant. To qualify for the relief
in this Notice, the project owner must addi-
tionally meet all of the following require-
ments:

### (1) Major Disaster Area

In the case of an individual displaced
by the Disaster, the displaced individual
must have resided in a jurisdiction desig-
nated for Individual Assistance by FEMA
as a result of the devastation caused by the
Disaster.

### (2) Agency Approval

The project owner must obtain ap-
proval from the applicable Agency for the
relief described in this Notice. The appli-
cable Agency will determine the appropri-
ate period of temporary housing for each
project, not to extend beyond September
30, 2014.

(3) Certifications and Recordkeeping
To comply with the requirements of
§ 1.42-5, project owners are required to

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maintain and certify certain information
concerning each displaced individual tem-
porarily housed in the project, specifically
the following: name, address of damaged
residence, social security number, and a
statement signed under penalties of per-
jury by the displaced individual that, be-
cause of damage to the individual's resi-
dence in a jurisdiction designated for
Individual Assistance by FEMA as a re-
sult of the Disaster, the individual requires
temporary housing. The owner must no-
tify the applicable Agency that vacant
units are available for rent to displaced
individuals.

The owner must also certify the date
the displaced individual began temporary
occupancy and the date the project will
discontinue providing temporary housing
as established by the applicable Agency.
The certifications and recordkeeping for
displaced individuals must be maintained
as part of the annual compliance monitor-
ing process with the Agency.

### (4) Rent Restrictions

Rents for the low-income units that
house displaced individuals must not ex-
ceed the existing rent-restricted rates for
the low-income units established under
§ 42(g)(2).

### (5) Protection of Existing Tenants

Existing tenants in occupied low-
income units cannot be evicted or have
their tenancy terminated as a result of
efforts to provide temporary housing for
displaced individuals.

## EFFECTIVE DATE

This Notice is effective September 14,
2013.

## PAPERWORK REDUCTION ACT

The collection of information con-
tained in this Notice has been reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545-2244.

A Federal agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid OMB control number.

The collection of information in this
Notice is in the section titled "OTHER
REQUIREMENTS" under "(3) Certifica-

tions and Recordkeeping." This informa-
tion is required to enable the Service to
verify whether individuals are displaced
as a result of the Disaster and thus warrant
temporary housing in vacant low-income
housing units. The collection of informa-
tion is required to obtain a benefit. The
likely respondents are individuals and
businesses.

The estimated total annual recordkeep-
ing burden is 300 hours.

The estimated annual burden per record-
keeper is approximately 15 minutes. The
estimated number of recordkeepers is 1200.

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial to the administration of the internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by § 6103.

## DRAFTING INFORMATION

The principal author of this Notice is
David Selig of the Office of Associate
Chief Counsel (Passthroughs & Special
Industries). For further information re-
garding this Notice, contact Mr. Selig at
(202) 622-3040 (not a toll-free call).

## 2013-2014 Special Per Diem Rates Notice 2013-65

SECTION 1. PURPOSE

This annual notice provides the 2013-
2014 special per diem rates for taxpayers
to use in substantiating the amount of or-
dinary and necessary business expenses
incurred while traveling away from home,
specifically (1) the special transportation
industry meal and incidental expenses
(M&IE) rates, (2) the rate for the inciden-
tal expenses only deduction, and (3) the
rates and list of high-cost localities for
purposes of the high-low substantiation
method.

### SECTION 2. BACKGROUND

Rev. Proc. 2011-47, 2011-42 I.R.B.
520, provides rules for using a per diem rate
to substantiate, under § 274(d) of the Inter-
nal Revenue Code and § 1.274-5 of the
Income Tax Regulations, the amount of or-

dinary and necessary business expenses
paid or incurred while traveling away from
home. Taxpayers using the rates and list of
high-cost localities provided in this notice
must comply with Rev. Proc. 2011-47. No-
tice 2012-63, 2012-42 I.R.B. 496, provides
the rates and list of high-cost localities for
the period October 1, 2012, to September
30, 2013.

Section 3.02(3) of Rev. Proc. 2011-47
provides that the term "incidental expenses"
has the same meaning as in the Federal
Travel Regulations, 41 C.F.R. 300-3.1, and
that future changes to the definition of inci-
dental expenses in the Federal Travel Reg-
ulations would be announced in the annual
per diem notice. On October 22, 2012, the
General Services Administration published
final regulations revising the definition of
incidental expenses under the Federal
Travel Regulations to include only fees and
tips given to porters, baggage carriers, hotel
staff, and staff on ships. Transportation be-
tween places of lodging or business and
places where meals are taken, and the mail-
ing cost of filing travel vouchers and paying
employer-sponsored charge card billings,
are no longer included in incidental ex-
penses. Accordingly, taxpayers using per
diem rates may separately deduct or be re-
imbursed for transportation and mailing ex-
penses.

### SECTION 3. SPECIAL M&IE RATES FOR TRANSPORTATION INDUSTRY

The special M&IE rates for taxpayers
in the transportation industry are $59 for
any locality of travel in the continental
United States (CONUS) and $65 for any
locality of travel outside the continental
United States (OCONUS). See section
4.04 of Rev. Proc. 2011-47.

#### SECTION 4. RATE FOR INCIDENTAL EXPENSES ONLY DEDUCTION

The rate for any CONUS or OCONUS
locality of travel for the incidental ex-
penses only deduction is $5 per day. See
section 4.05 of Rev. Proc. 2011-47.

#### SECTION 5. HIGH-LOW SUBSTANTIATION METHOD

1\. Annual high-low rates. For pur-
poses of the high-low substantiation
method, the per diem rates in lieu of the
rates described in Notice 2012-63 (the

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per diem substantiation method) are
$251 for travel to any high-cost locality
and $170 for travel to any other locality
within CONUS. The amount of the $251
high rate and $170 low rate that is
treated as paid for meals for purposes of
§ 274(n) is $65 for travel to any high-
cost locality and $52 for travel to any

other locality within CONUS. See sec-
tion 5.02 of Rev. Proc. 2011-47. The
per diem rates in lieu of the rates de-
scribed in Notice 2012-63 (the meal
and incidental expenses only substanti-
ation method) are $65 for travel to any
high-cost locality and $52 for travel to
any other locality within CONUS.

2\. High-cost localities. The following
localities have a federal per diem rate of
$210 or more, and are high-cost localities
for all of the calendar year or the portion
of the calendar year specified in parenthe-
ses under the key city name.

Key city

County or other defined location

Arizona

Sedona (March 1-April 30)

City limits of Sedona

California

Monterey

Monterey

(July 1-August 31)

Napa (October 1-November 30 and April 1-September 30)

Napa

San Diego

San Diego

San Francisco

San Francisco

Santa Barbara

Santa Barbara

Santa Cruz (June 1-August 31)

Santa Cruz

Santa Monica

City limits of Santa Monica

Yosemite National Park (June 1-August 31)

Mariposa

Colorado

Aspen

Pitkin

(December 1-March 31 and June 1-August 31)

Denver/Aurora

Denver, Adams, Arapahoe, and Jefferson

Steamboat Springs (December 1-March 31)

Routt

Telluride

San Miguel

(December 1-March 31 and June 1-September 30) Vail (December 1-August 31)

Eagle

District of Columbia

Washington D.C. (also the cities of Alexandria, Falls Church, and Fairfax, and the counties of Arlington and Fairfax, in Virginia; and the counties of Montgomery and Prince George's in Maryland) (See also Maryland and Virginia)

Florida

Boca Raton/Delray Beach/Jupiter (January 1-April 30)

Palm Beach/Hendry

Fort Lauderdale (January 1-May 31)

Broward

Fort Walton Beach/De Funiak Springs (June 1-July 31)

Okaloosa and Walton

Key West

Monroe

Miami

Miami-Dade

(January 1-March 31)

Naples

Collier

(January 1-April 30)

Illinois

Chicago

Cook and Lake

(October 1-November 30 and March 1-September 30) Louisiana

New Orleans (October 1-June 30)

Orleans, St. Bernard, Jefferson and Plaquemine Parishes

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Key city

County or other defined location

Maine

Bar Harbor

Hancock

(July 1-August 31)

Maryland

Baltimore City

Baltimore City

(October 1-November 30 and March 1-September 30)

Cambridge/St. Michaels

Dorchester and Talbot

(June 1-August 31)

Ocean City

Worcester

(June 1-August 31)

Washington, DC Metro Area

Montgomery and Prince George's

Massachusetts

Boston/Cambridge

Suffolk, City of Cambridge

Falmouth

City limits of Falmouth

(July 1-August 31)

Martha's Vineyard

Dukes

(July 1-August 31)

Nantucket

Nantucket

(June 1-September 30)

New Hampshire

Conway

Carroll

(July 1-August 31)

New York

Floral Park/Garden City/Great Neck

Nassau

Glens Falls

Warren

(July 1-August 31)

Lake Placid

Essex

(July 1-August 31)

Manhattan (includes the boroughs of Manhattan, Brooklyn, the Bronx, Queens and Staten Island)

Bronx, Kings, New York, Queens, Richmond

Saratoga Springs/Schenectady (July 1-August 31)

Saratoga and Schenectady

Tarrytown/White Plains/New Rochelle

Westchester

North Carolina

Kill Devil

Dare

(June 1-August 31)

Pennsylvania

Philadelphia

Philadelphia

Rhode Island

Jamestown/Middletown/Newport

Newport

(October 1-October 31 and May 1-September 30)

South Carolina

Charleston

Charleston, Berkeley and Dorchester

(March 1-May 31)

Texas

Midland

Midland

Utah

Park City

Summit

(December 1-March 31)

Virginia

Washington, DC Metro Area

Cities of Alexandria, Fairfax, and Falls Church; counties of Arlington and Fairfax

Virginia Beach

City of Virginia Beach

(June 1-August 31)

Washington

Seattle

King

Wyoming

Jackson/Pinedale (July 1-August 31)

Teton and Sublette

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3\. Changes in high-cost localities. The
list of high-cost localities in this notice
differs from the list of high-cost localities
in section 5 of Notice 2012-63.

a. The following localities have been
added to the list of high-cost localities:
Santa Cruz, California; Boca Raton/Del-
ray Beach/Jupiter, Florida; Charleston,
South Carolina; and Midland, Texas.

b. The following localities have
changed the portion of the year in which
they are high-cost localities: Monterey,
California; Telluride, Colorado; Miami,
Florida; Chicago, Illinois; and Park City,
Utah.

c. No localities have been removed
from the list of high-cost localities.

### SECTION 6. EFFECTIVE DATE

This notice is effective for per diem
allowances for lodging, meal and inciden-
tal expenses, or for meal and incidental
expenses only, that are paid to any em-
ployee on or after October 1, 2013, for
travel away from home on or after Octo-
ber 1, 2013. For purposes of computing
the amount allowable as a deduction for
travel away from home, this notice is ef-
fective for meal and incidental expenses
or for incidental expenses only paid or
incurred on or after October 1, 2013. See

sections 4.06 and 5.04 of Rev. Proc.
2011-47 for transition rules for the last 3
months of calendar year 2013.

SECTION 7. EFFECT ON OTHER
DOCUMENTS

Notice 2012-63 is superseded.
DRAFTING INFORMATION

The principal author of this notice is
Neville R. Jiang of the Office of Associate
Chief Counsel (Income Tax & Account-
ing). For further information regarding
this notice contact Mr. Jiang at (202) 622-
4970, or if after November 15, 2013, at
(202) 317-7007.

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## Part IV. Items of General Interest

Notice of Proposed
Rulemaking and Notice of
Public Hearing

### Research Expenditures

### REG-124148-05

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemak-
ing and notice of public hearing.

SUMMARY: This document proposes
regulations to amend the definition of re-
search and experimental expenditures un-
der section 174 of the Internal Revenue
Code (Code). In particular, these proposed
regulations provide guidance on the treat-
ment of amounts paid or incurred in con-
nection with the development of tangible
property, including pilot models. The reg-
ulations will affect taxpayers engaged in
research activities. This document also
provides notice of a public hearing on
these proposed regulations.

DATES: Written or electronic comments
must be received by December 5, 2013.
Requests to speak and outlines of topics to
be discussed at the public hearing sched-
uled for January 8, 2014, at 10 a.m., must
be received by December 5, 2013.

ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-124148-05), room
5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand-
delivered Monday through Friday between
the hours of 8 a.m. and 4 p.m. to CC:PA:
LPD:PR (REG-124148-05), Courier's
Desk, Internal Revenue Service, 1111 Con-
stitution Avenue, N.W., Washington, DC,
or sent electronically, via the Federal eRule-
making Portal at www.regulations.gov (in-
dicate IRS and REG-124148-05). The
public hearing will be held in the IRS Au-
ditorium, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington,
DC.

# FOR FURTHER INFORMATION

CONTACT: Concerning these proposed
regulations, David McDonnell, (202) 622-

3040; concerning submissions of com-
ments, the hearing, and/or to be placed on
the building access list to attend the hear-
ing, Oluwafunmilayo (Funmi) Taylor,
(202) 622-7180 (not toll-free numbers).

## SUPPLEMENTARY INFORMATION:

### Background and Overview of Provisions

### Section 174-Background

Section 174 was enacted as a part of
the Internal Revenue Code of 1954 to
eliminate uncertainty in the tax account-
ing treatment of research and experimen-
tal expenditures and to encourage taxpay-
ers to carry on research and
experimentation. See H.R. Rep. No.1337,
83d Cong., 2d Sess. 28 (1954); S. Rep.
No. 1622, 83d Cong., 2d Sess. 33 (1954).
Before the enactment of section 174,
courts consistently held that the law re-
quired capitalization of product research
and development costs, including produc-
tion costs of tangible property used in the
research process. Under prior law, expen-
ditures related to a taxpayer's research
and experimentation generally were capi-
talized and held in suspense until the tax-
payer could determine (1) whether or not
the research had failed; and (2) if the
research was successful, whether or not
the research resulted in property that had a
useful life determinable with reasonable
accuracy. Research and experimental ex-
penditures resulting in property with a
useful life determinable with reasonable
accuracy were amortized over the useful
life of the property or, if intangible, may
have been allocated to tangible assets. For
example, if a design developed through
research and experimentation ("appropri-
ate design") was used to produce a tangi-
ble asset that was used in the taxpayer's
trade or business or if the appropriate de-
sign was used to produce inventory or
other property held for sale to customers,
then the research costs were recovered by
an adjustment to basis at the time the
tangible property was used, sold, placed in
service, or otherwise disposed of by the
taxpayer. Where, however, projects were
not abandoned and a useful life could not
be definitely determined, taxpayers had no

means of amortizing research expendi-
tures. See H.R. Rep. No.1337, 83d Cong.,
2d Sess. 28 (1954); S. Rep. No. 1622, 83d
Cong., 2d Sess. 33 (1954). Congress ad-
dressed this issue by enacting section 174,
which allows taxpayers to either currently
deduct research or experimental expendi-
tures as they are paid or incurred or treat
them as deferred expenses amortizable
over a period not less than 60 months. See
sections 174(a) and (b). Section 174 does
not define the phrase "research or experi-
mental expenditures."

In 1957, the IRS published T.D. 6255
(the 1957 Regulations) and adopted
§1.174-2(a)(1), which defines the phrase
"research or experimental expenditures"
as expenditures "which represent research
and development costs in the experimen-
tal or laboratory sense." In 1994, the IRS
published T.D. 8562, which adopted
amendments to § 1.174-2(a)(1). The
amendments clarified the 1957 Regula-
tions by providing that the determination
of whether costs qualify as research or
experimental expenditures under section
174 depends upon whether the costs are
incident to activities intended to discover
information that would eliminate uncer-
tainty concerning the development or im-
provement of a product. Applying this
general rule, costs relating to the produc-
tion of a product after the uncertainty re-
lating to the development or improvement
of the product is eliminated do not qualify
under section 174.

### Section 174(c)-Depreciable Property

Since its enactment in 1954, section
174(c) has provided, in relevant part, that
section 174 shall not apply to any expen-
diture for the acquisition or improvement
of land, or for the acquisition or improve-
ment of property to be used in connection
with the research or experimentation and
of a character that is subject to the allow-
ance under section 167, relating to depre-
ciation, or section 611, relating to deple-
tion, except that allowances under
sections 167 and 611 will be considered as
expenditures.

Consistent with the statute, the 1957
Regulations provided that expenditures
for the acquisition or improvement of

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property that is subject to an allowance for
depreciation or depletion were not deduct-
ible under section 174 in the year of the
acquisition or improvement. Section
1.174-2(b)(1). However, in accordance
with section 174(c), the 1957 Regulations
treated depreciation deductions as section
174 expenditures to the extent that the
property to which the allowances related
was used in connection with research and
experimentation. Section 1.174-2(b)(1).

The 1957 Regulations further provided
that expenditures could qualify as re-
search or experimental expenditures even
if those expenditures resulted, as an end
product of the research and experimenta-
tion, in depreciable property to be used in
the taxpayer's trade or business. Section
1.174-2(b)(4). However, the 1957 Regu-
lations attempted to make clear that costs
resulting in depreciable property were
nonetheless required to meet the general
requirement for section 174 treatment,
namely, that amounts so expended must
be for research and experimentation
(within the meaning of §1.174-2(a)(1) of
the 1957 Regulations).

To that end, the 1957 Regulations pro-
vided, in relevant part, that amounts ex-
pended for research or experimentation do
not include the costs of the component
materials of depreciable property, the
costs of labor or other elements involved
in its construction and installation, or
costs attributable to the acquisition or im-
provement of the property. Section
1.174-2(b)(4). The 1957 Regulations pro-
vide an example where a taxpayer under-
takes to develop a new machine for use in
the taxpayer's business. The taxpayer ex-
pends $30,000 on the project of which
$10,000 represents the actual costs of ma-
terial, labor, etc., to construct the machine,
and $20,000 represents research costs that
are not attributable to the machine itself.
The example concludes that under section
174(a) the taxpayer would be permitted to
deduct the $20,000 as expenses not
chargeable to capital account, but the
$10,000 must be charged to the asset ac-
count (the machine). Section 1.174-
2(b)(4). This preamble refers to the rules
in §1.174-2(b)(1) and §1.174-2(b)(4) as
the "Depreciable Property Rule." The De-
preciable Property Rule has remained un-
changed from the rule's adoption in the
1957 Regulations.

### Explanation of Provisions and Summary of Provisions

This document contains proposed
amendments to 26 CFR part 1 under sec-
tion 174. First, these proposed regulations
provide that if expenditures qualify as re-
search or experimental expenditures, it is
irrelevant whether a resulting product is
ultimately sold or used in the taxpayer's
trade or business. Second, these proposed
regulations provide that the Depreciable
Property Rule contained in §1.174-
2(b)(4) is an application of the general
definition of research and experimental
expenditures contained in §1.174-2(a)(1)
to depreciable property. Third, these pro-
posed regulations define the term "pilot
model." Fourth, these proposed regula-
tions clarify the general rule that the costs
of producing a product after uncertainty
concerning the development or improve-
ment of a product is eliminated are not
eligible expenses under section 174 be-
cause these costs are not for research or
experimentation. Finally, these proposed
regulations provide a "shrinking-back"
provision, similar to the rule provided for
in §1.41-4(b)(2), to address situations in
which the requirements of §1.174-2(a)(1)
are met with respect to only a component
part of a larger product and are not met
with respect to the overall product itself.

### In general

Questions have been raised concerning
whether the sale of a product resulting
from otherwise qualifying research or ex-
perimental expenditures subsequently dis-
qualifies those expenditures from section
174 treatment. Specifically, it has been
argued that section 174(c) precludes sec-
tion 174 treatment in the case of a subse-
quent sale of a resulting product to a cus-
tomer, because the sale gives rise to
depreciable property in the hands of the
customer. See T.G. Missouri Company v.
Commissioner, 133 T.C. 278 (2009) (re-
jecting the Commissioner's argument that
research or experimental expenditures
were disqualified under section 174 be-
cause the product resulting from research
was sold to customers and was subject to
depreciation in the customers' hands).

The IRS and the Treasury Department
believe that an interpretation of the De-
preciable Property Rule that creates an

override to section 174 eligibility upon the
occurrence of a subsequent event (such as
a sale of a resulting product or its use in
the taxpayer's trade or business) does not
further the Congressional purpose of re-
solving accounting uncertainties and en-
couraging business investment in research
because taxpayers may not be able to
know whether an expenditure was section
174 eligible at the time the expense is paid
or incurred.

Instead, the IRS and the Treasury De-
partment believe that the Depreciable
Property Rule accomplishes two things.
First, to the extent that land or depreciable
property is used in connection with re-
search or experimentation, the rule limits
the amount that a taxpayer can treat as an
eligible section 174 expense to depletion
or depreciation deductions. Second, the
Depreciable Property Rule in §1.174-
2(b)(4) reiterates that the only expendi-
tures related to the production of depre-
ciable property that are deductible section
174 expenditures are amounts expended
for research or experimentation. Thus, for
example, where a $30,000 total cost ex-
pended on a machine includes $20,000 of
research-related labor and materials and,
after all uncertainties related to the ma-
chine are resolved, $10,000 of
construction-related labor and materials,
the $10,000 of construction-related labor
and materials is not a section 174 expen-
diture because that cost was not a research
or experimental cost within the meaning
of §1.174-2(a).

Consistent with this interpretation, the
IRS and the Treasury Department propose
the following revisions to the current reg-
ulations and provide additional examples
to further administration of the statute.

First, to counter an interpretation that
section 174 eligibility can be reversed by
a subsequent event, the proposed regula-
tions provide that the ultimate success,
failure, sale, or other use of the research or
property resulting from research or exper-
imentation is not relevant to a determina-
tion of eligibility under section 174.

Second, the proposed regulations
amend §1.174-2(b)(4) to provide that the
Depreciable Property Rule is an applica-
tion of the general definition of research
or experimental expenditures provided for
in §1.174-2(a)(1) and should not be ap-

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plied to exclude otherwise eligible expen-
ditures.

Third, the proposed regulations define
the term "pilot model" as any representa-
tion or model of a product that is produced
to evaluate and resolve uncertainty con-
cerning the product during the develop-
ment or improvement of the product. The
term includes a fully-functional represen-
tation or model of the product or a com-
ponent of a product (to the extent the
"shrinking-back" provision, described in
this preamble, applies).

Fourth, the proposed regulations clar-
ify the general rule that the costs of pro-
ducing a product after uncertainty con-
cerning the development or improvement
of a product is eliminated are not eligible
under section 174 because these costs are
not for research or experimentation.

Finally, the proposed regulations pro-
vide a "shrinking-back" provision, similar
to the rule provided in §1.41-4(b)(2), to
address situations in which the require-
ments of §1.174-2(a)(1) are met with re-
spect to only a component part of a larger
product and are not met with respect to the
overall product itself.

The proposed regulations provide new
examples applying the foregoing provi-
sions.

### Shrinking-back rule

As with business components under
section 41, research or experimental ex-
penditures may relate only to one or more
components of a larger product. Taxpay-
ers may refine the design of the product,
or even redesign components of the prod-
uct, after production of the product has
begun, particularly in the case of a large
tangible asset made up of numerous indi-
vidual components. In these situations, al-
though a basic design specification of the
product may be established, amounts paid
to eliminate uncertainty regarding the ap-
propriate design of certain components of
the product continue to qualify under sec-
tion 174. For example, the design of an
automobile may be certain except for the
appropriateness of design of its braking
system. The IRS and the Treasury Depart-
ment believe that it is inappropriate to
deny section 174 eligibility with respect to
the development and design of the braking
system simply because there is not uncer-
tainty with respect to the automobile's

general design. Accordingly, these pro-
posed regulations provide a shrinking-
back rule to ensure that section 174 eligi-
bility is preserved in these instances. The
IRS and the Treasury Department intend
for this rule to be applied and adminis-
tered in a manner that is consistent with
the principles underlying the shrinking-
back rule in §1.41-4(b)(2). Thus, for ex-
ample, the shrinking-back rule applies
only if the requirements of section 174 are
not met with respect to an overall product
(as defined in §1.174-2(a)(1)), and the
shrinking-back rule is not itself applied to
exclude research or experimental expen-
ditures from section 174 eligibility.

### Recordkeeping for section 174

The IRS and the Treasury Department
note that the rules generally applicable
under section 6001 provide sufficient de-
tail about required documentary substan-
tiation for purposes of section 174. Sec-
tion 1.6001-1(a) requires the keeping of
records sufficient to establish the amount
of deductions. The IRS may deny a de-
duction for failure to provide sufficient
records substantiating the claimed deduc-
tion.

### Proposed effective date

These regulations are proposed to ap-
ply to any taxable year ending on or after
the date of publication of a Treasury de-
cision adopting these rules as final regu-
lations in the Federal Register. Notwith-
standing the prospective effective date,
the IRS will not challenge return positions
consistent with these proposed regula-
tions. Therefore, taxpayers may rely on
these proposed regulations until the date
that the final regulations are published in
the Federal Register.

### Special Analyses

It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866, as supplemented by
Executive Order 13563. Therefore, a reg-
ulatory assessment is not required. It has
also been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations, and because the regulations
do not impose a collection of information

on small entities, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not ap-
ply. Pursuant to section 7805(f) of the
Code, this notice of proposed rulemaking
has been submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.

### Comments and Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed
original and eight (8) copies) or electronic
comments that are submitted timely to the
IRS. The Treasury Department and the
IRS request comments on all aspects of
the proposed rules. All comments will be
available for public inspection and copy-
ing.

A public hearing has been scheduled
for January 8, 2014, beginning at 10 a.m.
in the IRS Auditorium, Internal Revenue
Building, 1111 Constitution Avenue,
N.W., Washington, DC. Due to building
security procedures, visitors must enter at
the Constitution Avenue entrance. In ad-
dition, all visitors must present photo
identification to enter the building. Be-
cause of access restrictions, visitors will
not be admitted beyond the immediate
entrance area more than 30 minutes before
the hearing starts. For information about
having your name placed on the building
access list to attend the hearing, see the
"FOR FURTHER INFORMATION
CONTACT" section of this preamble.

The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written or electronic comments by
December 5, 2013 and submit an outline
of the topics to be discussed and the time
to be devoted to each topic (signed origi-
nal and eight (8) copies) by December 5,
2013. A period of 10 minutes will be
allotted to each person for making com-
ments. An agenda showing the scheduling
of the speakers will be prepared after the
deadline for receiving outlines has passed.
Copies of the agenda will be available free
of charge at the hearing.

### Drafting Information

The principal author of these proposed
regulations is David McDonnell of the

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Office of Associate Chief Counsel (Pass-
throughs and Special Industries). How-
ever, other personnel from the Treasury
Department and the IRS participated in
their development.

* * * * *

### Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:

Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.174-2 is amended as
follows:

1\. Amending paragraph (a)(1) by add-
ing a heading and adding two sentences at
the end.

2\. Redesignating paragraph (a)(2) as
paragraph (a)(3) and adding a heading to
newly designated paragraph (a)(3).

3\. Adding paragraph (a)(2).

4\. Removing paragraph (a)(7).

5\. Redesignating paragraphs (a)(8) and
(a)(9) as paragraphs (a)(10) and (a)(11),
respectively, and adding headings to
newly designated paragraphs (a)(10) and
(a)(11).

6\. Redesignating paragraphs (a)(3)
through (a)(6) as paragraphs (a)(6)
through (a)(9), respectively, and adding
headings to newly designated paragraphs
(a)(6) through (a)(9).

7\. Adding paragraphs (a)(4) and (a)(5).

8\. Amending newly designated para-
graph (a)(7) by removing the language
"(a)(3)(i)" and adding "(a)(6)(i)" in its
place.

9\. Amending newly designated para-
graph (a)(9) by removing the language
"(a)(6)" and adding "(a)(9)" in its place.

10\. Amending newly designated para-
graph (a)(11) by removing the language
"subparagraph (2) of this paragraph" and
adding "this paragraph (a)" in its place.

11\. Amending Example 2 in newly
designated paragraph (a)(11) by removing
the language "X" and adding "S" in its
place everywhere "X" appears and by re-
moving the language "Y" and adding "T"
in its place everywhere "Y" appears.

12\. Amending newly designated para-
graph (a)(11) by adding Example 3
through Example 9.

13\. Adding headings to paragraphs
(b)(1) through (b)(3).

14\. Revising paragraph (b)(4).

15\. Adding paragraph (b)(5).

16\. Adding paragraph (d).

The revisions and additions read as fol-
lows:

#### §1.174-2 Definition of research and experimental expenditures.

(a) In general. (1) Research or exper-
imental expenditures defined. * * * The
ultimate success, failure, sale, or use of
the product is not relevant to a determina-
tion of eligibility under section 174. Costs
may be eligible under section 174 if paid
or incurred after production begins but
before uncertainty concerning the devel-
opment or improvement of the product is
eliminated.

(2) Production costs. Except as pro-
vided in paragraph (a)(5) of this section
(shrinking-back rule), costs paid or in-
curred in the production of a product after
the elimination of uncertainty concerning
the development or improvement of the
product are not eligible under section 174.

(3) Product defined. * * *

(4) Pilot model defined. For purposes
of this section, the term pilot model means
any representation or model of a product
that is produced to evaluate and resolve
uncertainty concerning the product during
the development or improvement of the
product. The term includes a fully-
functional representation or model of the
product or, to the extent paragraph (a)(5)
of this section applies, a component of the
product.

(5) Shrinking-back rule. If the require-
ments of paragraph (a)(1) of this section
are not met at the level of a product (as
defined in paragraph (a)(3) of this sec-
tion), then whether expenditures represent
research and development costs is deter-
mined at the level of the component or
subcomponent of the product. The pres-
ence of uncertainty concerning the devel-
opment or improvement of certain com-
ponents of a product does not necessarily
indicate the presence of uncertainty con-
cerning the development or improvement
of other components of the product or the
product as a whole. The rule in this para-
graph (a)(5) is not itself applied as a rea-
son to exclude research or experimental
expenditures from section 174 eligibility.
The rule in this paragraph (a)(5) is to be
applied and administered in a manner that

is consistent with the principles underly-
ing the shrinking-back rule in §1.41-
4(b)(2).

(6) Research or experimental expendi-
tures-exclusions. * * *

(7) Quality control testing. * * *

(8) Expenditures for literary, histori-
cal, or similar research-cross reference.
* * *

(9) Research or experimental expendi-
tures limited to reasonable amounts. * * *

(10) Amounts paid to others for re-
search or experimentation. * * *

(11) Examples. * *

Example 3. U is engaged in the manufacture and
sale of custom machines. U contracts to design and
produce a machine to meet a customer's specifica-
tions. Because U has never designed a machine with
these specifications, U is uncertain regarding the
appropriate design of the machine, and particularly
whether features desired by the customer can be
designed and integrated into a functional machine. U
incurs a total of $31,000 on the project. Of the
$31,000, U incurs $10,000 of costs on materials and
labor to produce a model that is used to evaluate and
resolve the uncertainty concerning the appropriate
design. U also incurs $1,000 of costs using the model
to test whether certain features can be integrated into
the design of the machine. This $11,000 of costs
represents research and development costs in the
experimental or laboratory sense. After uncertainty
is eliminated, U incurs $20,000 to produce the ma-
chine for sale to the customer based on the appro-
priate design. The model produced and used to eval-
uate and resolve uncertainty is a pilot model within
the meaning of paragraph (a)(4) of this section.
Therefore, the $10,000 incurred to produce the
model and the $1,000 incurred on design testing
activities qualifies as research or experimental ex-
penditures under section 174. However, section 174
does not apply to the $20,000 that U incurred to
produce the machine for sale to the customer based
on the appropriate design. See paragraph (a)(2) of
this section (relating to production costs).

Example 4. Assume the same facts as Example 3,
except that during a quality control test of the ma-
chine, a component of the machine fails to function
due to the component's inappropriate design. U in-
curs an additional $8,000 (including design retest-
ing) to reconfigure the component's design. The
$8,000 of costs represents research and development
costs in the experimental or laboratory sense. After
the elimination of uncertainty regarding the appro-
priate design of the component, U incurs an addi-
tional $2,000 on its production. The reconfigured
component produced and used to evaluate and re-
solve uncertainty with respect to the component is a
pilot model within the meaning of paragraph (a)(4)
of this section. Therefore, in addition to the $11,000
of research and experimental expenditures previ-
ously incurred, the $8,000 incurred on design activ-
ities to establish the appropriate design of the com-
ponent qualifies as research or experimental
expenditures under section 174. However, section
174 does not apply to the additional $2,000 that U
incurred for the production after the elimination of

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uncertainty of the re-designed component based on
the appropriate design or to the $20,000 previously
incurred to produce the machine. See paragraph
(a)(2) of this section (relating to production costs).

Example 5. V is a manufacturer that designs a
new product. V incurs $5,000 to produce several
models of the product that are to be used in testing
the appropriate design before the product is mass-
produced for sale. The $5,000 of costs represents
research and development costs in the experimental
or laboratory sense. Multiple models are necessary to
test the design in a variety of different environments
(exposure to extreme heat, exposure to extreme cold,
submersion, and vibration). Upon completion of sev-
eral years of testing, V enters into a contract to sell
one of the models to a customer, and uses another
model in its trade or business. The remaining models
were rendered inoperable as a result of the testing
process. Because V produced the models to resolve
uncertainty regarding the appropriate design of the
product, the models are pilot models under para-
graph (a)(4) of this section. Therefore, the $5,000
that V incurred in producing the models qualifies as
research or experimental expenditures under section
174. See also paragraph (a)(1) of this section (ulti-
mate use is not relevant).

Example 6. W wants to improve a machine for
use in its trade or business and incurs $20,000 to
develop a new component for the machine. The
$20,000 is incurred for engineering labor and mate-
rials to produce a model of the new component that
is used to eliminate uncertainty regarding the devel-
opment of the new component for the machine. The
$20,000 of costs represents research and experimen-
tal costs in the experimental or laboratory sense.
After W completes its research and experimentation
on the new component, W incurs $10,000 for mate-
rials and labor to produce the component and incor-
porate it into the machine. The model produced and
used to evaluate and resolve uncertainty with respect
to the new component is a pilot model within the
meaning of paragraph (a)(4) of this section. There-
fore, the $20,000 incurred to produce the model and
eliminate uncertainty regarding the development of
the new component qualifies as research or experi-
mental expenditures under section 174. However,
section 174 does not apply to the $10,000 of pro-
duction costs of the component because those costs
were not incurred for research or experimentation.
See paragraph (a)(2) of this section (relating to pro-
duction costs).

Example 7. X is a manufacturer of aircraft. X is
researching and developing a new, experimental air-
craft that can take off and land vertically. To evalu-
ate and resolve uncertainty during the development
or improvement of the product and test the appro-
priate design of the experimental aircraft, X pro-
duces a working aircraft at a cost of $5,000,000. The
$5,000,000 of costs represents research and devel-
opment costs in the experimental or laboratory sense.
In a later year, X sells the aircraft. Because X pro-
duced the aircraft to resolve uncertainty regarding
the appropriate design of the product during the
development of the experimental aircraft, the aircraft
is a pilot model under paragraph (a)(4) of this sec-
tion. Therefore, the $5,000,000 of costs that X in-
curred in producing the aircraft qualifies as research
or experimental expenditures under section 174. Fur-

ther, it would not matter if X sold the pilot model or
incorporated it in its own business as a demonstra-
tion model. See paragraph (a)(1) of this section (ul-
timate use is not relevant).

Example 8. Y is a manufacturer of aircraft en-
gines. Y is researching and developing a new type of
compressor blade, a component of an aircraft engine,
to improve its existing aircraft engine design's per-
formance. To test the appropriate design of the new
compressor blade and evaluate the impact of fatigue
on the design, Y produces and installs the compres-
sor blade on an aircraft engine produced by Y. The
costs of producing and installing the compressor
blade component that Y incurred represent research
and development costs in the experimental or labo-
ratory sense. Because Y produced the compressor
blade component to resolve uncertainty regarding
the appropriate design of the component, the com-
ponent is a pilot model under paragraph (a)(4) of this
section. Therefore, the costs that Y incurred to pro-
duce and install the component qualify as research or
experimental expenditures under section 174. See
paragraph (a)(5) of this section (shrinking-back
rule). However, section 174 does not apply to Y's
costs of producing the aircraft engine on which the
component was installed. See paragraph (a)(2) of
this section (relating to production costs).

Example 9. Z is a wine producer. Z is researching
and developing a new wine production process that
involves the use of a different method of crushing
the wine grapes. In order to test the effectiveness of
the new method of crushing wine grapes, Z incurs
$2,000 in labor and materials to conduct the test on
this part of the new manufacturing process. The
$2,000 of costs represents research and development
costs in the experimental or laboratory sense. There-
fore, the $2,000 incurred qualifies as research or
experimental expenditures under section 174 be-
cause it is a cost incident to the development or
improvement of a component of a process.

(b) * * * (1) Land and other property.
* * *

(2) Expenditure resulting in deprecia-
ble property. * * *

(3) Amounts paid to others for re-
search or experimentation resulting in de-
preciable property. * * *

(4) Deductions limited to amounts ex-
pended for research or experimentation.
The deductions referred to in paragraphs
(b)(2) and (3) of this section for expendi-
tures in connection with the acquisition or
production of depreciable property to be
used in the taxpayer's trade or business
are limited to amounts expended for re-
search or experimentation within the
meaning of section 174 and paragraph (a)
of this section.

(5) Examples. The application of para-
graph (b) of this section may be illustrated
by the following examples:

Example 1. X is a tool manufacturer. X has
developed a new tool design, and orders a specially-
built machine from Y to produce X's new tool. The

machine is built upon X's order and at X's risk, and
Y does not provide a guarantee of economic utility.
There is uncertainty regarding the appropriate design
of the machine. Under X's contract with Y, X pays
$15,000 for Y's engineering and design labor,
$5,000 for materials and supplies used to develop the
appropriate design of the machine, and $10,000 for
Y's machine production materials and labor. The
$15,000 of engineering and design labor costs and
the $5,000 of materials and supplies costs represent
research and development costs in the experimental
or laboratory sense. Therefore, the $15,000 X pays Y
for Y's engineering and design labor and the $5,000
for materials and supplies used to develop the ap-
propriate design of the machine are for research or
experimentation under section 174. However, sec-
tion 174 does not apply to the $10,000 of production
costs of the machine because those costs were not
incurred for research or experimentation. See para-
graph (a)(2) of this section (relating to production
costs) and paragraph (b)(4) of this section (limiting
deduction to amounts expended for research or ex-
perimentation).

Example 2. Z is an aircraft manufacturer. Z in-
curs $5,000,000 to construct a new test bed that will
be used in the development and improvement of Z's
aircraft. No portion of Z's $5,000,000 of costs to
construct the new test bed represent research and
development costs in the experimental or laboratory
sense to develop or improve the test bed. Because no
portion of the costs to construct the new test bed
were incurred for research or experimentation, the
$5,000,000 will be considered an amount paid or
incurred in the production of depreciable property to
be used in the taxpayer's trade or business that are
not allowable under section 174. However, the al-
lowances for depreciation of the test bed are consid-
ered research and experimental expenditures of other
products, for purposes of section 174, to the extent
the test bed is used in connection with research or
experimentation of other products. See paragraph
(b)(1) of this section (depreciation allowances may
be considered research or experimental expendi-
tures).

Example 3. Assume the same facts as Example 2,
except that $50,000 of the costs of the test bed relates
to costs to resolve uncertainties regarding the new
test bed design. The $50,000 of costs represents
research and development costs in the experimental
or laboratory sense. Because $50,000 of Z's costs to
construct the new test bed was incurred for research
and experimentation, the costs qualify as research or
experimental expenditures under section 174. Para-
graph (b)(2) of this section applies to $50,000 of Z's
costs for the test bed because they are expenditures
for research or experimentation that result in depre-
ciable property to be used in the taxpayer's trade or
business. Z's remaining $4,950,000 of costs is not
allowable under section 174 because these costs
were not incurred for research or experimentation.
* * * * *

(d) Effective date. These amendments
to paragraphs (a) and (b) of this section
apply to taxable years ending on or after
the date the final regulations are published
in the Federal Register. Notwithstanding
the prospective effective date, the IRS will

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not challenge return positions consistent
with these proposed regulations. There-
fore, taxpayers may rely on these pro-
posed regulations until the date that the
final regulations are published in the Fed-
eral Register.

Beth Tucker,
Deputy Commissioner for
Operations Support.

(Filed by the Office of the Federal Register on September 5,
2013, 8:45 a.m., and published in the issue of the Federal
Register for September 6, 2013, 78 F.R. 54796)

### Notice of Proposed Rulemaking

# Limitations on the Importation of Net Built-In Losses

## REG-161948-05

AGENCY: Internal Revenue Service (IRS),
Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains
proposed regulations under sections
334(b)(1)(B) and 362(e)(1) of the Internal
Revenue Code of 1986 (Code). The pro-
posed regulations apply to certain nonrec-
ognition transfers of loss property to cor-
porations that are subject to Federal
income tax. The proposed regulations af-
fect the corporations receiving the loss
property. This document also invites com-
ments from the public regarding these
proposed regulations.

DATES: Written or electronic comments
and a request for a public hearing must be
received by December 9, 2013.

ADDRESSES: Send submissions to CC:
PA:LPD:PR (REG 161948-05), Room
5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand-
delivered Monday through Friday between
the hours of 8 a.m. and 4 p.m. to CC:PA:
LPD:PR (REG-161948-05), Courier's
Desk, Internal Revenue Service, 1111 Con-
stitution Avenue, NW, Washington, DC, or
sent electronically, via the Federal eRule-
making Portal at www.regulations.gov
(IRSREG-161948-05).

FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, John P. Stemwedel (202)
622-7550 or Theresa A. Abell (202) 622-
7000, and, concerning submissions of
comments and requests for a public hear-
ing, Oluwafunmilayo (Funmi) Taylor at
(202) 622-7180 (not toll free numbers).

## SUPPLEMENTARY INFORMATION:

### Paperwork Reduction Act

The collection of information con-
tained in this notice of proposed rulemak-
ing revises a collection of information ap-
proved by the Office of Management and
Budget in accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545-
2019. Comments on the revised collection
of information should be sent to the Office
of Management and Budget, Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, D.C. 20503,
with copies to the Internal Revenue Ser-
vice, Attn: IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington,
D.C. 20224. Comments on the collection
of information should be received by Oc-
tober 15, 2013. Comments are specifically
requested concerning:

Whether the proposed revised collec-
tion of information is necessary for the
proper performance of the functions of the
Internal Revenue Service, including
whether the information will have practi-
cal utility;

The accuracy of the estimated burden
associated with the proposed collection of
information;

How the quality, utility and clarity of
the information to be collected may be
enhanced;

How the burden of complying with the
proposed collection of information may
be minimized, including through the ap-
plication of automated collection tech-
niques or other forms of information tech-
nology; and

Estimates of capital or start-up costs and
costs of operation, maintenance, and pur-
chase of service to provide information.

The revised collection of information
in these proposed regulations is in
§§1.332-6, 1.351-3, and 1.368-3. By re-

quiring that taxpayers separately report
the fair market value and basis of property
(including stock) described in section
362(e)(1)(B) and in 362(e)(2)(A) that is
transferred in a tax-free transaction, this
revised collection of information aids in
identifying transactions within the scope
of sections 334(b)(1)(B), 362(e)(1), and
362(e)(2) and thereby facilitates the IRS'
verification that taxpayers are complying
with sections 334(b)(1)(B), 362(e)(1), and
362(e)(2). The respondents will be corpo-
rations and their shareholders.

Revised estimated total annual report-
ing burden: 375,000 hours.

Revised estimated average annual bur-
den hours per respondent: 1.25 hours.

Estimated number of respondents:
225,000 (of the originally estimated
350,000; original 0.75 hour estimate un-
changed for the remaining 125,000 re-
spondents).

Estimated frequency of responses:
once.

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

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by section 6103.

### Background

Sections 334(b)(1)(B) and 362(e)(1)
(the anti-loss importation provisions)
were enacted in the American Jobs Cre-
ation Act of 2004 (Public Law 108-357,
188 Stat. 1418 (2004)) to prevent erosion
of the corporate tax base through the im-
portation of loss in nonrecognition trans-
fers. This notice of proposed rulemaking
proposes regulations under both of these
anti-loss importation provisions.

### Explanation of provisions

1\. The Anti-loss Importation Provisions:
Sections 334(b)(1)(B) and 362(e)(1)

Section 334(b)(1)(B) applies to corpo-
rate acquisitions of loss property in liqui-
dations described in section 332 (com-

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plete liquidation of subsidiary). Section
362(e)(1) applies to corporate acquisitions
of loss property in transactions described
in section 362(a) (transactions to which
section 351 applies and acquisitions of
property as paid-in surplus or contribu-
tions to capital, each a section 362(a)
transaction) and in transactions described
in section 362(b) (reorganizations). The
application and effect of the anti-loss im-
portation provisions are materially identi-
cal, and so the proposed regulations use
the same nomenclature and operating
rules for both anti-loss importation provi-
sions.

The anti-loss importation provisions
apply when a corporation acquires prop-
erty that is described in section
362(e)(1)(B) in a transaction described in
section 332, 362(a), or 362(b), and, under
the generally applicable basis rules (other
than the anti-loss duplication rule in sec-
tion 362(e)(2)), the acquiring corporation
(Acquiring) would take the property with
an aggregate basis in excess of "value"
(generally equal to fair market value un-
der the proposed regulations; see para-
graph 1.b.ii. of this preamble). When an
anti-loss importation rule applies, Acquir-
ing's basis in each such property is equal
to the property's value. To the extent Ac-
quiring receives property in the transac-
tion that is not subject to the anti-loss
importation rules, Acquiring's basis in the
property is determined under generally
applicable basis rules, including section
362(e)(2).

Property is described in section
362(e)(1)(B) (designated “importation
property" in the proposed regulations) if
two conditions are satisfied. First, any
gain or loss recognized on a disposition of
the property would not be subject to Fed-
eral income tax in the hands of the trans-
feror immediately before the transfer. Sec-
tion 362(e)(1)(B)(i). Second, any gain or
loss recognized on a disposition of the
property would be subject to Federal in-
come tax in the hands of the transferee
immediately after the transfer. Section
362(e)(1)(B)(ii).

Since the enactment of the anti-loss
importation provisions, a number of ques-
tions have arisen concerning their appli-
cation. The principal concern has been the
determination of whether property is im-
portation property, but various other ques-

tions (discussed subsequently in this pre-
amble) have also been raised regarding
the application of the anti-loss importation
provisions and their interaction with other
rules of law. To address these issues, the
proposed regulations provide a framework
for identifying importation property and
determining whether the transfer of the
property is a transaction subject to the
anti-loss importation provisions (desig-
nated a "loss importation transaction" un-
der the proposed regulations).

#### a. Importation property

The proposed regulations use a hypo-
thetical sale analysis to identify importa-
tion property. Under this approach, the
actual tax treatment of any gain or loss
that would be recognized on a sale of the
property, first by the transferor immedi-
ately before and then by Acquiring imme-
diately after the transfer, determines
whether an individual property is impor-
tation property. If any gain or loss that
would be recognized on a hypothetical
sale of the property by the transferor im-
mediately before the transfer would not be
subject to Federal income tax in the hands
of the transferor, the first condition for
classification as importation property is
satisfied. If any gain or loss that would be
recognized on a hypothetical sale of the
property by Acquiring immediately after
the transfer would be subject to Federal
income tax in the hands of Acquiring, the
second condition for classification as im-
portation property is satisfied. Property is
importation property only if both condi-
tions are satisfied.

In general, the determination is made
by reference to the tax treatment of the
hypothetical seller of the transferred or
acquired property, that is, whether the hy-
pothetical seller would take the gain or
loss into account in determining its Fed-
eral income tax liability. This determina-
tion must take into account all relevant
facts and circumstances. The proposed
regulations include a number of examples
illustrating this approach. Thus, in one
example, a tax-exempt entity transfers
property to a taxable domestic corpora-
tion, and the determination takes into ac-
count whether the transferor, though gen-
erally tax-exempt, would nevertheless be
required to include the amount of the gain

or loss in unrelated business taxable in-
come under sections 511 through 514 of
the Code. In other examples, a foreign
corporation transfers property to a taxable
domestic corporation and the determina-
tion takes into account whether the for-
eign corporation would be required to in-
clude the amount of gain or loss under
section 864 or 897 as income effectively
connected with, or treated as effectively
connected with, the conduct of a U.S.
trade or business. Although the examples
assume there is no applicable income tax
treaty, in the case of an applicable income
tax treaty, the determination of whether
property is importation property would
take into account whether the transferor
would be taxable under the business prof-
its article or gains article of the income tax
treaty.

#### i. Partnerships, S corporations, grantor trusts as hypothetical seller

Although the general rule in the pro-
posed regulations looks solely to the tax
treatment of the hypothetical seller, a
modified rule applies if a hypothetical
seller is a partnership, a small business
corporation that has elected under section
1362(a) to be an S corporation, or a
grantor trust. In these cases, the determi-
nation is made by reference to the tax
treatment of the gain or loss as taken into
account by the partners, shareholders, or
owners of the entities. The modified rule
recognizes that, in these cases, the Code
provides that the gain or loss on the hy-
pothetical sale would be included by the
partner, shareholder, or owner, and would
not be taxable to the hypothetical seller,
irrespective of whether any amount is ac-
tually distributed to such other person. See
section 701 (partnership not subject to
tax), flush language in section
362(e)(1)(B) (partners treated as owning
partnership property); sections 1363 and
1366 (S corporation's income generally
taxable to shareholders, not S corpora-
tion); section 671 (grantor or other person
treated as owning trust property).

If an organizing instrument assigns
gain and loss to partners or beneficiaries
in different amounts, including by reason
of a special allocation under a partnership
agreement, the proposed regulations make
clear that the hypothetical sale model

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makes the determination of whether gain
or loss is subject to Federal income tax by
reference to the person to whom, under
the terms of the instrument, the hypothet-
ical gain or loss would actually be allo-
cated, taking into account the entity's net
gain or loss actually recognized in the tax
period in which the transaction occurs.

##### ii. Other pass-through entities: anti- avoidance rule

In certain circumstances, the Code per-
mits distributions to effect a similar shift-
ing of tax consequences. For example,
under sections 651 and 652, and sections
661 and 662, distributions made by a trust
are deducted from the trust's income and
included in the beneficiary's (or beneficia-
ries') income. Certain domestic corpora-
tions are also able to shift tax conse-
quences by distributing income or gain
from a property sale. These corporations
include regulated investment companies
(RICs, as defined in section 851(a)), real
estate investment trusts (REITs, as defined
in section 856(a)), and domestic corpora-
tions taxable as cooperatives (see section
1381).

The IRS and the Treasury Department
are concerned that disregarding the effects
of this shifting of tax liability would in
certain circumstances undermine the anti-
importation provisions. However, the IRS
and the Treasury Department are also con-
cerned that applying a look-through rule
in all such cases would present a signifi-
cant administrative burden.

Accordingly, the proposed regulations
contain an anti-avoidance rule that applies
to domestic trusts, estates, RICs, REITs,
and cooperatives that directly or indirectly
transfer property (including through other
such entities) in a section 362 transaction,
if the property had been directly or indi-
rectly transferred to or acquired by the
entity as part of a plan to avoid the appli-
cation of the anti-importation provisions.
For purposes of this rule, it is immaterial
who had the plan to avoid the anti-
importation provisions. When the anti-
avoidance rule applies, the domestic en-
tity, which, absent application of the anti-
avoidance rule, would be treated under
these regulations as subject to Federal in-
come tax, is treated as subject to a look-
through rule. Under the look-through rule,

the entity is presumed to distribute the
proceeds of the hypothetical sale (which,
for this purpose, are presumed to be an
amount greater than zero), and, to the full-
est extent permitted by the terms of its
organizing instrument, it is presumed to
make the distributions to persons that
would not take distributions from the en-
tity into account in determining a Federal
income tax liability. If an interest in such
an entity is held indirectly through one or
more other such entities, the principles of
this rule apply to look to the ultimate
owners of the interest. The determination
of whether the property is importation
property is then made by reference to the
deemed distributees or, in the case of
tiered entities, to the ultimate deemed dis-
tributees.

To illustrate, assume 90 percent of a
REIT's shares are owned by persons that
would not take into account any gain or
loss in determining a Federal income tax
liability and that each share has an equal
right to any distribution by the REIT. The
REIT holds property that was transferred
to the REIT as part of a plan to avoid the
application of the anti-importation rule to
a section 362 transaction. At a time when
the acquired property has a built-in loss,
the REIT transfers the property to a do-
mestic corporation in a section 362 trans-
action. In this case, the anti-avoidance
rule would apply. Thus, the REIT is pre-
sumed to distribute all the proceeds of the
hypothetical sale of the property trans-
ferred in the section 362 transaction, and
the determination of whether any gain or
loss on that hypothetical sale would be
taken into account in determining a Fed-
eral income tax liability is made by refer-
ence to the distributee REIT shareholders.
Thus, 90 percent of the property trans-
ferred in the section 362 transaction
would be importation property. Alterna-
tively, assume that the property was orig-
inally acquired (as part of a plan to avoid
the application of the anti-importation rule
to a section 362 transaction) by a trust
whose trustee has discretion to distribute
all or a portion of the trust's gain or loss to
a person that would not take any amount
of such distribution into account in deter-
mining a Federal income tax liability and,
when the property has a built-in loss, the
trust transfers the property to a domestic
corporation in a section 362 transaction.

In this case, all of the property transferred
in the section 362 transaction would be
importation property because the trustee
could distribute all of the proceeds from
the hypothetical sale to a person that
would not take the distribution into ac-
count in determining a Federal income tax
liability.

The IRS and the Treasury Department
continue to study whether a look-through
approach should be generally applied to
trusts and request comments on the need
for, and potential scope of, such a rule.

#### iii. Gain or loss affecting certain income inclusions

Practitioners have raised numerous
questions regarding the treatment of prop-
erty held by or transferred to controlled
foreign corporations (CFC), as defined in
section 957 (taking into account section
953(c)). Because the general rule looks to
the tax treatment of the hypothetical
seller, and no exception applies for CFCs,
the general operation of the proposed reg-
ulations would not treat such amounts as
subject to Federal income tax. Neverthe-
less, because the characterization of gain
or loss that would be taken into account in
determining a potential income inclusion
under section 951(a) has generated some
concern among practitioners, the pro-
posed regulations include an express pro-
vision stating that gain or loss recognized
by a CFC is not considered subject to
Federal income tax solely by reason of an
income inclusion under section 951(a).
The proposed regulations include a simi-
lar provision to clarify that gain or loss
recognized by a passive foreign invest-
ment company, as defined in section
1297(a), is also considered not subject to
Federal income tax notwithstanding that it
could affect an inclusion under section
1293(a). Comments are specifically re-
quested on this approach.

#### iv. Gain or loss taxed to more than one person

If any gain or loss realized on a hypo-
thetical sale would be includible in in-
come by more than one person, the pro-
posed regulations treat such property as
tentatively divided into separate portions
in proportion to the allocation of gain or

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loss to each person. Tentatively divided
portions are treated and analyzed in the
same manner as any other property for
purposes of applying the anti-importation
provisions. (See paragraph c. of this pre-
amble for an illustration of the application
of this rule.) Thus, the generally applica-
ble rules determine whether a portion of
tentatively divided property is importation
property, and, if the tentatively divided
portion is importation property, it is taken
into account (as described subsequently in
this preamble) with all other importation
property to determine whether the trans-
action is a loss importation transaction.

#### b. Loss importation transaction

Once the importation property has
been identified, Acquiring determines the
aggregate basis that it would have in all
importation property acquired in the trans-
action (including the tentatively divided
portions of transferred property), without
regard to the anti-loss importation provi-
sions or section 362(e)(2). If the aggregate
basis of the importation property exceeds
such property's aggregate value, the trans-
action is a loss importation transaction
and subject to the anti-loss importation
provisions. If the aggregate basis of im-
portation property does not exceed such
property's value, the anti-loss importation
provisions have no further application.

##### i. Aggregate, not transferor-by- transferor, approach

Under section 362(e)(1) and the pro-
posed regulations, the determination of
whether a section 362 transaction is a loss
importation transaction is made by refer-
ence to the net amount of built-in gain and
built-in loss in all importation property
acquired from all transferors in the trans-
action. This approach differs from the
transferor-by-transferor approach of sec-
tion 362(e)(2), which expressly focusses
on the net built-in loss transferred by a
particular transferor in a section 362(a)
transaction.

##### ii. Valuing partnership interests

In general, the anti-loss importation
rules do not take liabilities into account in
determining the value of transferred prop-

erty and, thus, whether the transfer of such
property is a transfer of loss property.

However, in both informal inquiries
and written comments, practitioners have
raised concerns about the effect of this
rule when the property transferred is an
interest in a partnership with liabilities. In
particular, practitioners are concerned that
the inclusion of a partner's share of part-
nership liabilities in outside basis may
create the appearance of a built-in loss
because partnership liabilities do not cor-
respondingly increase the value of the in-
terest. The amount of cash at which the
partnership interest would change hands
between a willing buyer and willing seller,
neither being under any compulsion to
buy or sell and both having reasonable
knowledge of relevant facts, should reflect
the appropriate measure of fair market
value. When a partnership interest is sold,
the amount realized may include a share
of partnership liabilities from which the
transferor is discharged, which is gener-
ally equal to the amount of liabilities in-
cluded in the transferor's outside basis. As
such, the sale of a partnership interest
properly accounts for the transferee part-
ner's share of partnership liabilities and
therefore, reflects the value of that part-
nership interest.

To address this issue, the proposed reg-
ulations generally adopt the approach pro-
posed by commentators and modify the
definition of "value" (generally, fair mar-
ket value) to take liabilities into account
when determining whether a partnership
interest is a loss asset. However, because
there can be differences between Trans-
feror's share of partnership liabilities and
Acquiring's share of partnership liabili-
ties, the proposed regulations provide that
the value of a partnership interest is the
sum of cash that Acquiring would receive
for such interest, increased by any
§1.752-1 liabilities (as defined in §1.752-
1(a)(4)) of the partnership that are allo-
cated to Acquiring with regard to such
transferred interest under section 752. The
proposed regulations include an example
that illustrates the application and effect
of this rule. The proposed regulations also
clarify that any section 743(b) adjustment
to be made as a result of the transaction is
made after any section 362(e) basis ad-
justment.

c. Acquiring's basis in acquired
property

If a transaction is a loss importation
transaction, Acquiring's basis in each im-
portation property received (including the
tentatively divided portions of property
determined to be importation property) is
an amount equal to value, notwithstanding
the general rules in sections 334(b)(1)(B),
362(a), and 362(b). This rule applies to all
importation property, regardless of
whether the property's value is greater or
less than its basis prior to the loss impor-
tation transaction.

Immediately following the application
of the anti-loss importation provisions
(and prior to any application of section
362(e)(2)), any property that was treated
as tentatively divided for purposes of ap-
plying these provisions ceases to be
treated as divided and is treated as one
undivided property (re-constituted prop-
erty) with a basis equal to the sum of the
bases of the portions determined under the
anti-importation provision and the bases
of all other portions determined under
generally applicable provisions (other
than section 362(e)(2)). For example, as-
sume that property is transferred in a sec-
tion 362(a) transaction and the property is
treated as tentatively divided for purposes
of applying section 362(e)(1) (see para-
graph a.iv. of this preamble). Further as-
sume that one tentatively divided portion
(basis $125, value $100) is determined to
be importation property and the other (ba-
sis $125, value $100) is not. Finally, as-
sume that, the aggregate basis of all im-
portation property transferred in the
transaction (including the $125 basis of
the tentatively divided portion) is $900
and the aggregate value of all importation
property (including the $100 value of the
tentatively divided portion) is only $800.
Thus, the importation property has a net
loss, the transaction is a loss importation
transaction, and the basis of each impor-
tation property is equal to its value. Ac-
cordingly, immediately after the applica-
tion of section 362(e)(1), the tentatively
divided property is treated as one single
property with a basis of $225 ($100 basis
in the importation portion plus $125 basis
in the non-importation portion).

If the transaction is described in sec-
tion 362(a), the transferred property (in-

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cluding the re-constituted property that
was tentatively divided for purposes of
applying section 362(e)(1)) is then aggre-
gated on a transferor-by-transferor basis
to determine whether further adjustment
will be required to the bases of loss prop-
erty under section 362(e)(2). Therefore in
the example in the preceding paragraph,
after the application of section 362(e)(1),
the provisions of section 362(e)(2) may
apply to adjust the basis of the property
further because the transfer is a section
362(a) transaction. The proposed regula-
tions include a cross-reference to section
362(e)(2) as well as examples illustrating
the application of both sections 362(e)(1)
and section 362(e)(2) to situations involv-
ing multiple transferors and multiple
properties that are not all importation
properties. Because section 362(e)(2) only
applies to transactions described in sec-
tion 362(a), section 362(e)(2) has no ap-
plication to liquidations or to reorganiza-
tions that do not include a transaction
described in section 362(a). The proposed
regulations include examples illustrating
the interaction of these provisions.

##### 2. Filing Requirements

To facilitate the administration of both
the anti-loss importation provisions and
the anti-duplication provisions in section
362(e)(2), the proposed regulations mod-
ify the reporting requirements applicable
in all affected transactions (section 332
liquidations and transactions described in
section 362(a) or section 362(b)) to re-
quire taxpayers to identify the basis and
value of property subject to those sections.

##### 3. Modifications to Liquidation Regulations

The proposed regulations also include
several modifications to the regulations
applicable to corporate liquidations.
These modifications are not changes to
current substantive law; they are intended
solely to update the regulations to reflect
certain statutory changes. The statutory
changes reflected in these modifications
include the repeal of the General Utilities
doctrine (reflected in the modification of
sections 334(a) and 337(a), and the repeal
of sections 333 and 334(c)), the removal
of former section 334(b)(2) (replaced by

section 338), and the relocation of former
section 332(c) (subsidiary indebtedness)
to current section 337(b). In response to
certain regulatory changes, the proposed
regulations also add several cross-
references to regulations under section
367 and 897 to highlight the treatment of
certain transfers between foreign corpora-
tions.

The proposed regulations do not ad-
dress the regulations under section 346
and no inference should be drawn from
the omission of a proposal under that sec-
tion.

### Effective/applicability date

These regulations are generally pro-
posed to apply to transactions occurring
on or after the date the regulations are
published as final regulations in the Fed-
eral Register, unless completed pursuant
to a binding agreement that was in effect
immediately before the date such final
regulations are published and all times
afterwards. It is also proposed that taxpay-
ers would be permitted to apply the final
regulations (when published) to transac-
tions occurring after October 22, 2004.

### Special Analyses

It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866, as supplemented by
Executive Order 13563. Therefore, a reg-
ulatory assessment is not required. It has
also been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations. Further, it is hereby certified
that these proposed regulations will not
have a significant economic impact on a
substantial number of small entities. This
certification is based on the fact that the
collection of information requirement in
these regulations modifies an existing col-
lection of information by requiring that
certain information be reported separately
instead of in the aggregate. Although there
may be an increase in reporting burden,
the increased burden is expected to be
minimal because taxpayers should have
ready access to the requested information
as the proposed regulations would not re-
quire taxpayers to report or maintain re-
cords on information that is not, in the

aggregate, already required to be reported
and maintained under the current regula-
tions. Accordingly, a Regulatory Flexibil-
ity Analysis under the Regulatory Flexi-
bility Act (5 U.S.C. chapter 6) is not
required. Pursuant to section 7805(f) of
the Code, this notice of proposed rulemak-
ing has been submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on its impact
on small business.

### Comments and Requests for Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments (a
signed original and eight (8) copies) or
electronic comments that are timely sub-
mitted to the IRS. Alternatively, taxpayers
may submit comments electronically via
the Federal e-Rulemaking Portal at www.
regulations.gov (IRS REG-161948-05).
The IRS and the Treasury Department re-
quest comments on all aspects of the pro-
posed regulations. Comments are specifi-
cally requested on the appropriate
treatment of transactions subject to both
section 367(b) and either section
334(b)(1)(B) or 362(e)(1). Comments are
also specifically requested on what effect
a basis reduction required under section
334(b)(1)(B) or section 362(e)(1) may
have on earnings and profits and any in-
clusion required under §1.367(b)-3. All
comments that are submitted by the public
will be available for public inspection and
copying at www.regulations.gov or upon
request. A public hearing may be sched-
uled if requested in writing by any person
who timely submits comments. If a public
hearing is scheduled, notice of the date,
time, and place of the hearing will be
published in the Federal Register.

### Drafting Information

The principal author of these regula-
tions is John P. Stemwedel of the Office of
Associate Chief Counsel (Corporate),
IRS. However, other personnel from the
IRS and the Treasury Department partic-
ipated in their development.

*****

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### Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:

#### PART 1-INCOME TAXES

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

Authority: 26 U.S.C. 7805

Par. 2. Section 1.332-6 is amended by
revising paragraph (a)(3) and adding a
new sentence at the end of paragraph (e)
to read as follows:

§1.332-6 Records to be kept and
information to be filed with return.

(a) * * *

(3) The fair market value and basis of
assets of the liquidating corporation that
have been or will be transferred to any
recipient corporation, aggregated as fol-
lows:

(i) Importation property distributed in a
loss importation transaction, as defined in
§1.362-3(c)(2) and (c)(3) (except that
"section 332 liquidation" is substituted for
"section 362 transaction"), respectively;

(ii) Property with respect to which gain
or loss was recognized on the distribution;
(iii) Property not described in para-
graph (a)(3)(i) or paragraph (a)(3)(ii) of
this section;

* * * * *

(e) Effective/applicability date. * * *
Paragraph (a)(3) of this section applies to
any taxable year beginning on or after
these regulations are published as final
regulations in the Federal Register, un-
less effected pursuant to a binding agree-
ment that was in effect prior to that date
and at all times thereafter.

Par. 3. Section 1.332-7 is amended by
adding a new sentence after the first sen-
tence of the paragraph to read as follows:

§1.332-7 Indebtedness of subsidiary to
parent.

\*
\*
\* See section 337(b)(1) (for any
taxable year beginning on or after these
regulations are published as final regula-
tions in the Federal Register). * * *

Par. 4. Section 1.334-1 is revised to
read as follows:

§1.334-1 Basis of property received in
liquidations.

(a) In general. Section 334 sets forth
rules for determining a distributee's basis
in property received in a distribution in
complete liquidation of a corporation. The
general rule is set forth in section 334(a)
and provides that, if property is received
in a distribution in complete liquidation of
a corporation and if gain or loss is recog-
nized on the receipt of the property, then
the distributee's basis in the property is
the fair market value of the property at the
time of the distribution. However, if prop-
erty is received in a complete liquidation
to which section 332 applies, including
property received in satisfaction of an in-
debtedness described in section 337(b)(1),
see section 334(b)(1) and paragraph (b) of
this section.

(b) Liquidations under section 332-
(1) General rule. Except as otherwise pro-
vided in paragraph (b)(2) or (b)(3) of this
section, if a corporation (P) meeting the
ownership requirements of section
332(b)(1) receives property from a subsid-
iary (S) in a complete liquidation to which
section 332 applies (section 332 liquida-
tion), including property received in a
transfer in satisfaction of indebtedness
that satisfies the requirements of section
337(b)(1), P's basis in the property re-
ceived is the same as S's basis in the
property immediately before the property
was distributed. However, see §1.460-
4(k)(3)(iv)(B)(2) for rules relating to ad-
justments to the basis of certain contracts
accounted for using a long-term contract
method of accounting that are acquired in
a section 332 liquidation.

(2) Basis in property with respect to
which gain or loss was recognized. Except
as otherwise provided in the Internal Rev-
enue Code and regulations, if S recognizes
gain or loss on the distribution of property
to P in a section 332 liquidation, P's basis
in that property is the fair market value of
the property at the time of the distribution.
Section 334(b)(1)(A) (certain tax-exempt
distributions under section 337(b)(2)); see
also, for example, §1.367(e)-2(b)(3)(i).

(3) Basis in importation property re-
ceived in loss importation transaction-
(i) Purpose. The purpose of section
334(b)(1)(B) and this paragraph (b)(3) is
to prevent P from importing a net built-in

loss in a transaction described in section
332. See paragraph (b)(3)(iii)(A) of this
section for definitions of terms used in this
paragraph (b)(3).

(ii) Determination of basis. Notwith-
standing paragraph (b)(1) of this section,
if a section 332 liquidation is a loss im-
portation transaction, P's basis in each
importation property received from S in
the liquidation is an amount that is equal
to the value of the property. The basis of
property received in a section 332 liqui-
dation that is not importation property re-
ceived in a loss importation transaction is
determined under generally applicable ba-
sis rules without regard to whether the
liquidation also involves the receipt of
importation property in a loss importation
transaction.

(iii) Operating rules-(A) In general.
For purposes of section 334(b)(1)(B) and
this paragraph (b)(3), the provisions of
§1.362-3 (basis of importation property
received in a loss importation transaction)
apply, adjusted as appropriate to apply to
section 332 liquidations. Thus, when used
in this paragraph (b)(3), the terms "impor-
tation property," "loss importation trans-
action," and "value" have the same mean-
ing as in §1.362-3(c)(2), (c)(3) and (c)(4),
respectively, except that "section 332 liq-
uidation" is substituted for "section 362
transaction." Similarly, when gain or loss
on property would be owned or treated as
owned by multiple persons, the provisions
of §1.362-3(d)(2) apply to tentatively di-
vide the property in applying this section,
substituting "section 332 liquidation" for
"section 362 transaction" and making
such other adjustments as necessary.

(B) Time for making determinations.
For purposes of section 334(b)(1)(B) and
this paragraph (b)(3)-

(1) P's basis in distributed property.
P's basis in each property S distributes to
P in the section 332 liquidation is deter-
mined immediately after S distributes
each such property;

(2) Value of distributed property. The
value of each property S distributes to P in
the section 332 liquidation is determined
immediately after S distributes the prop-
erty;

(3) Importation property. The determi-
nation of whether each property distrib-
uted by S is importation property is made

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as of the time S distributes each such
property;

(4) Loss importation transaction. The
determination of whether a section 332
liquidation is a loss importation transac-
tion is made immediately after S makes
the final liquidating distribution to P.

(iv) Examples. The examples in this
paragraph (b)(3)(iv) illustrate the applica-
tion of section 334(b)(1)(B) and the pro-
visions of this paragraph (b)(3). Unless
the facts indicate otherwise, the examples
use the following nomenclature and as-
sumptions: USP is a domestic corporation
that has not elected to be an S corporation
within the meaning of section 1361(a)(1);
FC, CFC1, and CFC2 are controlled for-
eign corporations within the meaning of
section 957(a), which are not engaged in a
U.S. trade or business, have no U.S. real
property interests, and have no other rela-
tionships, activities, or interests that
would cause their property to be subject to
Federal income taxation; there is no ap-
plicable income tax treaty; and all persons
and transactions are unrelated. All other
relevant facts are set forth in the exam-
ples:

Example 1. Basic application of this paragraph
(b)(3). (i) Distribution of importation property in a
loss importation transaction. (A) Facts. USP owns
the sole outstanding share of FC stock. FC owns
three assets, A1 (basis $40, value $50), A2 (basis
$120, value $30), and A3 (basis $140, value $20).
On Date 1, FC distributes A1, A2, and A3 to USP in
a complete liquidation that qualifies under section
332.

(B) Importation property. Under §1.362-3(d)(2),
the fact that any gain or loss recognized by a CFC
may affect an income inclusion under section 951(a)
does not alone cause gain or loss recognized by the
CFC to be treated as taken into account in determin-
ing a Federal income tax liability for purposes of this
section. Thus, if FC had sold either A1, A2, or A3
immediately before the transaction, no gain or loss
recognized on the sale would have been taken into
account in determining a Federal income tax liabil-
ity. Further, if USP had sold A1, A2, or A3 imme-
diately after the transaction, USP would take into
account any gain or loss recognized on the sale in
determining its Federal income tax liability. There-
fore, A1, A2, and A3 are all importation properties.
See paragraph (b)(3)(iii)(A) of this section and
§1.362-3(c)(2).

(C) Loss importation transaction. Immediately
after the distribution, USP's aggregate basis in the
importation properties, A1, A2, and A3, would, but
for section 334(b)(1)(B) and this section, be $300
($40 + $120 + $140) and the properties' aggregate
value would be $100 ($50 + $30 + $20). Therefore,
the importation properties' aggregate basis would
exceed their aggregate value and the distribution is a

loss importation transaction. See paragraph
(b)(3)(iii)(A) of this section and §1.362-3(c)(3).

(D) Basis of importation property distributed in
loss importation transaction. Because the importa-
tion properties, A1, A2, and A3, were transferred in
a loss importation transaction, the basis in each of
the importation properties received is equal to its
value immediately after FC distributes the property.
Accordingly, USP's basis in A1 is $50; USP's basis
in A2 is $30; and USP's basis in A3 is $20.

(ii) Distribution of both importation and non-
importation property in a loss importation transac-
tion. (A) Facts. The facts are the same as in para-
graph (i)(A) of this Example 1 except that FC is
engaged in a U.S. trade or business and A3 is used in
that U.S. trade or business.

(B) Importation property. A1 and A2 are impor-
tation properties for the reasons set forth in para-
graph (i)(B) of this Example 1. However, if FC had
sold A3 immediately before the transaction, FC
would take into account any gain or loss recognized
on the sale in determining its Federal income tax
liability. Therefore, A3 is not importation property.
See paragraph (b)(3)(iii)(A) of this section and
§1.362-3(c)(2).

(C) Loss importation transaction. Immediately
after the distribution, USP's aggregate basis in the
importation properties, A1 and A2, would, but for
section 334(b)(1)(B) and this section, be $160 ($40
\+ $120). Further, the properties' aggregate value
would be $80 ($50 + $30). Therefore, the importa-
tion properties' aggregate basis would exceed their
aggregate value and the distribution is a loss impor-
tation transaction. See paragraph (b)(3)(iii)(A) of
this section and §1.362-3(c)(3).

(D) Basis of importation property distributed in
loss importation transaction. Because the importa-
tion properties, A1 and A2, were transferred in a loss
importation transaction, the basis in each of the
importation properties received is equal to its value
immediately after FC distributes the property. Ac-
cordingly, USP's basis in A1 is $50 and USP's basis
in A2 is $30.

(E) Basis of other property. Because A3 is not
importation property distributed in a loss importation
transaction, USP's basis in A3 is determined under
generally applicable basis rules. Accordingly, USP's
basis in A3 is $140, the adjusted basis that FC had in
the property immediately before the distribution. See
section 334(b)(1).

(iii) FC not wholly owned. The facts are the same
as in paragraph (i)(A) of this Example 1 except that
USP owns only 80% of the sole outstanding class of
FC stock and the remaining 20% is owned by indi-
vidual X. Further, on Date 1 and pursuant to the plan
of liquidation, FC distributes A1 and A2 to USP and
A3 to X. A1 and A2 are importation properties, the
distribution to USP is a loss importation transaction,
and USP's bases in A1 and A2 are equal to their
value ($50 and $30, respectively) for the reasons set
forth in paragraphs (ii)(C) and (ii)(D) of this Exam-
ple 1. Under section 334(a), X's basis in A3 is $20.

(iv) Importation property, no net built in loss.
(A) Facts. The facts are the same as in paragraph
(i)(A) of this Example 1 except that the value of A2
is $230.

(B) Importation property. A1, A2, and A3, are
importation properties for the reasons set forth in
(i)(B) of this Example 1.

(C) Loss importation transaction. Immediately
after the distribution, USP's aggregate basis in the
importation properties, A1, A2, and A3, would, but
for section 334(b)(1)(B) and this section, be $300
($40 + $120 + $140). However, the properties'
aggregate value would also be $300 ($50 + $230 +
$20). Therefore, the importation properties' aggre-
gate basis would not exceed their aggregate value
and the distribution is not a loss importation trans-
action. See paragraph (b)(3)(iii)(A) of this section
and §1.362-3(c)(3).

(D) Basis of importation property not distributed
in loss importation transaction. Because the impor-
tation properties, A1, A2, and A3, were not distrib-
uted in a loss importation transaction, the basis of
each of the importation properties is determined un-
der the generally applicable basis rules. Accordingly,
immediately after the distribution, USP's basis in A1
is $40, USP's basis in A2 is $120, and USP's basis
in A3 is $140, the adjusted bases that FC had in the
properties immediately before the distribution. See
section 334(b)(1).

(v) CFC stock as importation property distrib-
uted in loss importation transaction. (A) Facts. USP
owns the sole outstanding share of FC stock. FC
owns the sole outstanding share of CFC1 stock (ba-
sis $80, value $100) and the sole outstanding share
of CFC2 stock (basis $100, value $5). On Date 1, FC
distributes its shares of CFC1 and CFC2 stock to
USP in a complete liquidation that qualifies under
section 332.

(B) Importation property. No special rule applies
to the treatment of property that is the stock of a
CFC. Thus, if FC had sold either the CFC1 share or
the CFC2 share immediately before the transaction,
no gain or loss recognized on the sale would have
been taken into account in determining a Federal
income tax liability. Further, if USP had sold either
the CFC1 share or the CFC2 share immediately after
the transaction, USP would take into account any
gain or loss recognized on the sale in determining its
Federal income tax liability. Thus, the CFC1 share
and the CFC2 share are importation property. See
paragraph (b)(3)(iii)(A) of this section and §1.362-
3(c)(2).

(C) Loss importation transaction. Immediately
after the distribution, USP's aggregate basis in im-
portation property (the CFC1 share and the CFC2
share) would, but for section 334(b)(1)(B) and this
section, be $180 ($80 + $100) and the shares' ag-
gregate value is $105 ($100 + $5). Therefore, the
importation property's aggregate basis would exceed
their aggregate value and the distribution is a loss
importation transaction. See paragraph (b)(3)(iii)(A)
of this section and §1.362-3(c)(3).

(D) Basis of importation property distributed in
loss importation transaction. Because the importa-
tion property (the CFC1 share and the CFC2 share)
was transferred in a loss importation transaction,
USP's basis in each of the shares received is equal to
its value immediately after FC distributes the shares.
Accordingly, USP's basis in the CFC1 share is $100
and USP's basis in the CFC2 share is $5.

Example 2. Multiple step liquidation. (i) Facts.
USP owns the sole outstanding share of FC stock.

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On January 1 of year 1, FC adopts a plan of liqui-
dation. FC makes the following distributions to USP
in a transaction that qualifies as a complete liquida-
tion under section 332. In year 1, FC distributes A1
and, immediately before the distribution, FC's basis
in A1 is $100 and Al's value is $120. In Year 2, FC
distributes A2, and, immediately before the distribu-
tion, FC's basis in A2 is $100 and A2's value is
$120. In year 3, in its final liquidating distribution,
FC distributes A3 and, immediately before the dis-
tribution, FC's basis in A3 is $100 and A3's value is
$120. As of the time of the final distribution, USP
had depreciated the bases of A1 and A2 to $90 and
$95, respectively; the value of A1 had appreciated to
$160; and, the value of A2 has declined to $0.

(ii) Importation property. If FC had sold either
A1, A2, or A3 immediately before it was distributed,
no gain or loss recognized on the sale would have
been taken into account in determining a Federal
income tax liability. Further, if USP had sold either
A1, A2, or A3 immediately after it was distributed,
USP would take into account any gain or loss rec-
ognized on the sale in determining its Federal in-
come tax liability. Therefore, A1, A2, and A3 are all
importation properties. See paragraph (b)(3)(iii)(A)
of this section and §1.362-3(c)(2).

(iii) Loss importation transaction. Immediately
after it was distributed, USP's basis in each of the
importation properties, A1, A2, and A3, would, but
for section 334(b)(1)(B) and this section, have been
$100. Further, immediately after each such property
was distributed, its value was $120. Thus, the prop-
erties' aggregate basis, $300, would not have ex-
ceeded the properties' aggregate value, $360. Ac-
cordingly, the distribution is not a loss importation
transaction irrespective of the fact that, when the
liquidation was completed, the properties' aggregate
basis was $285 and the properties' aggregate value
was $280. See paragraph (b)(3)(iii)(B) of this section
and §1.362-3(c)(3).

(iv) Basis of importation property not distributed
in loss importation transaction. Because the impor-
tation properties, A1, A2, and A3, were not distrib-
uted in a loss importation transaction, the basis of
each of the importation properties is determined un-
der the generally applicable basis rules. Accordingly,
USP takes each of the properties with a basis of $100
and, immediately after the final distribution, has an
adjusted basis of $90 in A1 (USP's $100 basis less
the $10 depreciation), $95 in A2 (USP's $100 basis
less the $5 depreciation), and $100 in A3. See sec-
tion 334(b).

(c) Effective/applicability date. This
section applies to any taxable year begin-
ning on or after these regulations are pub-
lished as final regulations in the Federal
Register, unless effected pursuant to a
binding agreement that was in effect prior
to that date and at all times thereafter.
However, taxpayers may apply this sec-
tion to transactions occurring after Octo-
ber 22, 2004.

Par. 5. Section 1.337-1 is added to read
as follows:

§1.337-1 Nonrecognition for property
distributed to parent in complete
liquidation of subsidiary.

(a) General rule. If section 332(a) is
applicable to the receipt of a subsidiary's
property in complete liquidation, no gain
or loss is recognized to the liquidating
subsidiary with respect to such property
(including property distributed with re-
spect to indebtedness, see section
337(b)(1) and §1.332-7), except as pro-
vided in section 337(b)(2) (distributions to
certain tax-exempt distributees), section
367(e)(2) (distributions to foreign corpo-
rations), and section 897(d) (distributions
of U.S. real property interests by foreign
corporations).

(b) Effective/applicability date. This
section applies to any taxable year begin-
ning on or after these regulations are pub-
lished as final regulations in the Federal
Register.

Par. 6. Section 1.351-3 is amended by
revising paragraphs (a)(3) and (b)(3), and
adding a sentence at the end of paragraph
(f) to read as follows:

§1.351-3 Records to be kept and
information to be filed.

(a) * * *

(3) The fair market value and basis of
the property transferred by such transferor
in the exchange, determined immediately
before the transfer and aggregated as fol-
lows:

(i) Importation property transferred in
a loss importation transaction, as defined
in §1.362-3(c)(2) and §1.362-3(c)(3), re-
spectively;

(ii) Loss duplication property as de-
fined in §1.362-4(c)(1);

(iii) Property with respect to which any
gain or loss was recognized on the transfer
(without regard to whether such property
is also identified in paragraph (a)(3)(i) or
(ii) of this section); and

(iv) Property not described in para-
graphs (a)(3)(i), (a)(3)(ii), or (a)(3)(iii) of
this section.

* * * * *

(b) * * *

(3) The fair market value and basis of
property received in the exchange, deter-
mined immediately before the transfer and
aggregated as follows:

(i) Importation property transferred in
a loss importation transaction, as defined
in §1.362-3(c)(2) and §1.362-3(c)(3), re-
spectively;

(ii) Loss duplication property as de-
fined in §1.362-4(c)(1);

(iii) Property with respect to which any
gain or loss was recognized on the transfer
(without regard to whether such property
is also identified in paragraph (b)(3)(ii) of
this section);

(iv) Property not described in para-
graphs (b)(3)(i), (b)(3)(ii), or (b)(3)(iii) of
this section; and

* * * * *

(f) Effective/applicability date.
Paragraphs (a)(3) and (b)(3) of this sec-
tion apply to any taxable year beginning
on or after these regulations are published
as final regulations in the Federal Regis-
ter, unless effected pursuant to a binding
agreement that was in effect prior to that
date and at all times thereafter.

Par. 7. Section 1.358-6 is amended by
revising paragraphs (c)(1)(i)(A),
(c)(2)(ii)(B),(c)(3)(i), (c)(3)(ii), (c)(4),
(e), (f)(1), and the first sentence of para-
graph (f)(3), and adding new paragraph
(f)(4) to read as follows:

##### §1.358-6 Stock basis in certain triangular reorganizations.

* * * * *

(c) * * *

(1) * * *

(i) * * *

(A) P acquired the T assets acquired by
S in the reorganization (and P assumed
any liabilities which S assumed or to
which the T assets acquired by S were
subject) directly from T in a transaction in
which P's basis in the T assets was deter-
mined under section 362(b) (taking into
account the provisions of section
362(e)(1)); and

* * * * *

(2) * * *

(ii) * * *

(B) Determine the basis in the T stock
acquired as if P acquired such stock from
the former T shareholders in a transaction
in which P's basis in the T stock was
determined under section 362(b) (taking
into account the provisions of section
362(e)(1) and, to the extent the transfer is

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a transaction described in section 362(a),
the provisions of section 362(e)(2)).

(3) * * *

(i) P acquired the T stock acquired by S
in the reorganization directly from the T
shareholders in a transaction in which P's
basis in the T stock was determined under
section 362(b) (taking into account the
provisions of section 362(e)(1)); and

(ii) P transferred the T stock to S in a
transaction in which P's basis in its S
stock was determined under section 358
(taking into account the provisions of sec-
tion 362(e)(2) to the extent the transfer is
a transaction described in section 362(a)).

(4) Examples. The rules of this para-
graph (c) are illustrated by the following
examples. For purposes of these exam-
ples, P, S, and T are domestic corpora-
tions, the property transferred is not im-
portation property within the meaning of
§1.362-3(c)(2) or loss duplication prop-
erty within the meaning of §1.362-
4(c)(2), P and S do not file consolidated
returns, P owns all of the shares of the
only class of S stock, the P stock ex-
changed in the transaction satisfies the
requirements of the applicable triangular
reorganization provisions, and the facts
set forth the only corporate activity.

* * * * *

(e) Cross-references-(1) Triangular
reorganizations involving members of a
consolidated group. For rules relating to
stock basis adjustments made as a result
of a triangular reorganization in which P
and S, or P and T, as applicable, are, or
become, members of a consolidated
group, see §1.1502-30. However, if a
transaction is a group structure change,
stock basis adjustments are determined
under §1.1502-31 and not under §1.1502-
30, even if the transaction also qualifies as
a reorganization otherwise subject to
§1.1502-30.

(2) Transfers of importation property
in loss importation transaction and trans-
fers of loss duplication property. For rules
relating to stock basis adjustments made
as a result of a triangular reorganization in
which the property treated as acquired by
P would be importation property received
in a loss importation transaction, see
§1.362-3. For rules relating to adjust-
ments made as a result of a triangular
reorganization that also qualifies under
section 362(a), see §1.362-4.

(3) Triangular reorganizations involv-
ing certain foreign corporations. For rules
relating to stock basis adjustments made
as a result of triangular reorganizations
involving certain foreign corporations, see
§§1.367(b)-4(b), 1.367(b)-10, and
1.367(b)-13.

(f) * * * (1) General rule. In general,
this section applies to triangular reorgani-
zations occurring on or after December
23, 1994. However, paragraphs
(c)(1)(i)(A), (c)(2)(ii)(B),(c)(3)(i), and
(c)(3)(ii) of this section apply to triangular
reorganizations occurring on or after the
date these regulations are published as
final regulations in the Federal Register.
* * * * *

(3) * * * Paragraphs (b)(2)(v) and
(e)(1) of this section shall apply to trian-
gular reorganizations occurring on or after
September 17, 2008. * * *

(4) Triangular reorganizations involv-
ing importation property acquired in loss
importation transaction or loss duplica-
tion transaction; triangular reorganiza-
tions involving certain foreign corpora-
tions. Paragraphs (e)(2) and (e)(3) of this
section shall apply to triangular reorgani-
zations occurring on or after the date these
regulations are published as final regula-
tions in the Federal Register.

Par. 8. Section 1.362-3 is added to read
as follows:

§1.362-3 Basis of importation property
acquired in loss importation transaction.

(a) Purpose. The purpose of section
362(e)(1) and this section is to prevent a
corporation (Acquiring) from importing a
net built-in loss in a transaction described
in either section 362(a) (section 351 trans-
fers, contributions to capital, or paid-in
surplus) or section 362(b) (reorganiza-
tions). See paragraph (c) of this section for
definitions of terms used in this section.

(b) Basis determinations under this
section-(1) Basis of importation prop-
erty received in loss importation transac-
tion. Notwithstanding any other provision
of law, Acquiring's basis in importation
property (as defined in paragraph (c)(2) of
this section) acquired in a loss importation
transaction (as defined in paragraph (c)(3)
of this section) is equal to the value of the
property immediately after the transac-
tion.

(2) Adjustment to basis of subsidiary
stock in triangular reorganizations. If a
corporation (P) computes its basis in stock
of a subsidiary (whether S or T) under
§1.358-6 (stock basis in certain triangu-
lar reorganizations), P's basis in property
treated as acquired by P in §1.358-6(c) is
determined under section 362(e)(1) and
this section to the extent such property, if
actually acquired by P, would be impor-
tation property acquired in a loss impor-
tation transaction. See §1.358-
6(c)(1)(i)(A), paragraphs (c)(2)(ii)(B),
and (c)(3)(i). The subsidiary's basis in the
property actually acquired in the transac-
tion is determined under applicable law
(including this section), without regard to
the amount of any adjustment to P's basis
in the subsidiary's stock. Thus, the basis
of the property in S's or T's hands may
differ from the amount of the adjustment
to P's basis in its stock of S or T.

(3) Acquiring's basis in other property
transferred. In general, Acquiring's basis
in property received in a section 362
transaction (as defined in paragraph (c)(1)
of this section) that is not determined un-
der section 362(e)(1) and this section is
determined under section 362(a) or sec-
tion 362(b). However, if the transaction is
described in section 362(a) (without re-
gard to whether it is also described in any
other section), further adjustment may be
required under section 362(e)(2). See
§1.362-4.

(c) Definitions. For purposes of this
section, the following definitions apply:

(1) Section 362 transaction. The term
section 362 transaction means any trans-
action described in section 362(a) or in
section 362(b).

(2) Importation property .- (i) General
rule. The term importation property
means any property (including separate
portions of property tentatively divided
under paragraph (e)(2) of this section)
with respect to which-

(A) Any gain or loss that would be
recognized on its sale by the transferor
immediately before the transaction (the
transferor's hypothetical sale) would not
be subject to tax imposed under any pro-
vision of subtitle A of the Internal Reve-
nue Code (Federal income tax) (taking
into account the provisions of paragraph
(d) of this section); and

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(B) Any gain or loss that would be
recognized on its sale by Acquiring im-
mediately after the transaction (Acquir-
ing's hypothetical sale) would be subject
to Federal income tax (taking into account
the provisions of paragraph (d) of this
section)

(ii) Special rules for applying this
paragraph (c)(2). See paragraph (d) of
this section for rules for determining
whether gain or loss on a hypothetical sale
would be taken into account in determin-
ing a Federal income tax liability and
paragraph (e) of this section for rules ap-
plicable when more than one person
would take such gain or loss into account.

(3) Loss importation transaction. The
term loss importation transaction means
any section 362 transaction in which Ac-
quiring's aggregate basis in all importa-
tion property received from all transferors
in the transaction would exceed the aggre-
gate value of such property immediately
after the transaction. For this purpose, Ac-
quiring's basis in property received is de-
termined without regard to this section or
section 362(e)(2).

(4) Value-(i) General rule. The term
value means fair market value.

(ii) Special rule for transfers of part-
nership interests. Notwithstanding the
general rule in paragraph (c)(4)(i) of this
section, when referring to a partnership
interest, for purposes of this section, the
term value means the sum of the cash that
Acquiring would receive for the interest,
assuming an exchange between a willing
buyer and a willing seller (neither being
under any compulsion to buy or sell and
both having reasonable knowledge of rel-
evant facts), increased by any §1.752-1
liabilities (as defined in §1.752-1(a)(4)) of
the partnership allocated to Acquiring
with regard to such transferred interest
under section 752 immediately after the
transfer to Acquiring. See §1.743-1 re-
garding the application of section 743(b)
following a section 362(e) basis reduction.

(d) Rules for determining whether gain
or loss would be taken into account in
determining a Federal income tax liabili-
ty-(1) General rule. In general, any gain
or loss that would be recognized on a
hypothetical sale described in either para-
graph (c)(2)(i) or paragraph (c)(2)(ii) of
this section is considered to be subject to
Federal income tax if, taking into account

all relevant facts and circumstances, such
gain or loss would affect or be taken into
account in determining the Federal in-
come tax liability of the transferor or Ac-
quiring, respectively. This determination
is made without regard to whether such
person has or would have any actual Fed-
eral income tax liability for the taxable
year of the transaction.

(2) Look-through rule in the case of
certain pass-through entities. Notwith-
standing the general rule in paragraph
(d)(1) of this section, the determination of
whether any gain or loss on a hypothetical
sale would be treated as subject to Federal
income tax is made by reference to the
person that would be required to include
such gain or loss in its taxable income if
the hypothetical seller is-

(i) A trust treated as owned by its
grantors or others (see section 671);

(ii) A partnership (see section 701); or

(iii) An S corporation (see sections
1363 and 1366).

(3) Controlled foreign corporations
(CFC), passive foreign investment compa-
nies (PFIC). For purposes of this section,
gain or loss that would be recognized by a
CFC (as defined in section 957(a)) or a
PFIC (as defined in section 1297(a)) is not
deemed taken into account in determining
a Federal income tax liability solely be-
cause it could affect an inclusion under
section 951(a) or section 1293(a).

(4) Look-through treatment in the case
of certain avoidance transactions. (i) Ap-
plication of section. This paragraph (d)(4)
applies if-

(A) The transferor is a domestic entity
that is a trust, estate, regulated investment
company (RIC) (as defined in section
851(a)), a real estate investment trust
(REIT) (as defined in section 856(a)), or a
cooperative (see section 1381); and

(B) The transferor transfers, directly or
indirectly, property that was transferred to
or acquired by it as part of a plan (whether
of transferor, Acquiring, or any other per-
son) to avoid the application of section
362(e)(1) and this section to a section 362
transaction.

(ii) Effect of application of section.
Notwithstanding paragraph (d)(1) of this
section, if a transferor is described in both
paragraphs (d)(4)(ii)(A) and (d)(4)(ii)(B)
of this section-

(A) The transferor is treated as though
it distributes the proceeds of the hypothet-
ical sale (which, for this purpose, are pre-
sumed to be an amount greater than zero);

(B) To the fullest extent possible under
the transferor's organizing instrument,
taking into account the beneficiaries or
owners of interests (as applicable) in the
transferor, the deemed distribution is
treated as made to a distributee or dis-
tributees that would not take distributions
from the transferor into account in deter-
mining a Federal income tax liability; and

(C) The determination of whether the
gain or loss on the hypothetical sale is
treated as subject to Federal income tax is
made by reference to the deemed distrib-
utee or distributees.

(iii) Tiered entities. If a deemed distrib-
utee is an entity described in paragraph
(d)(4)(i)(A) of this section, the determina-
tion of whether gain or loss on the hypo-
thetical sale is taken into account in de-
termining a Federal income tax liability is
made by treating the deemed distributee,
and any successive such deemed distribu-
tees, as a transferor and applying the rules
in paragraphs (d)(4)(i) and (d)(4)(ii) of
this section to its deemed distribution (and
to all successive deemed distributions),
until no deemed distributee or successive
deemed distributee is an entity described
in paragraph (d)(4)(i)(A) of this section.

(e) Special rules for gain or loss that
would be taken into account by multiple
persons-(1) In general. If gain or loss
from a disposition of property would be
includible in income by more than one
person, the property is treated as tenta-
tively divided into separate portions in
proportion to the amount of gain or loss
recognized with respect to the property
that would be allocated to each such per-
son. If an entity's organizing instrument
specially allocates gain and loss, the ten-
tative division of property under this para-
graph (e) must reflect the manner in which
gain or loss on the disposition of such
property would be allocated under the
terms of the organizing instrument, taking
into account the net gain or loss actually
recognized by the entity in that tax year.

(2) Application of section. The rules of
this section apply independently to each
tentatively divided portion to determine if
the portion is importation property. Each
tentatively divided portion that is deter-

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mined to be importation property is in-
cluded with all other importation property
in the determination of whether the trans-
action is a loss importation transaction.

(3) Acquiring's basis in property ten-
tatively divided into separate portions.
Immediately after the application of sec-
tion 362(e)(1) and this section and before
the application of section 362(e)(2), each
property treated as tentatively divided into
separate portions for purposes of applying
section 362(e)(1) and this section ceases
to be treated as tentatively divided and
Acquiring has a single, undivided basis in
such property that is equal to the sum of-

(i) The value of each tentatively di-
vided portion that is importation property,
if the transaction is a loss importation
transaction; and

(ii) Acquiring's basis in each tenta-
tively divided portion that is not importa-
tion property received in a loss importa-
tion transaction, as determined under
section 362(a) or section 362(b), as appli-
cable, and without regard to any potential
application of section 362(e)(2).

(f) Examples. The examples in this
paragraph (f) illustrate the application of
section 362(e)(1) and the provisions of
this section. Unless otherwise indicated,
the examples use the following nomencla-
ture and assumptions: A and B are U.S.
citizens. DC, DC1, and P are domestic
corporations that have not elected to be S
corporations within the meaning of sec-
tion 1361(a)(1) and that are not members
of a consolidated group. F is a foreign
individual. FP is a foreign partnership.
FC, FC1, and FC2 are foreign corpora-
tions. Unless the facts indicate otherwise,
the foreign individuals, corporations, and
partnerships are not engaged in a U.S.
trade or business, have no U.S. real prop-
erty interests, and have no other relation-
ships, activities, or interests that would
cause them, their shareholders, their part-
ners, or their property to be subject to
Federal income taxation. There is no ap-
plicable income tax treaty, and all persons
and transactions are unrelated unless the
facts indicate otherwise.

Example 1. Basic application of section. (i) Sec-
tion 351 transfer of importation property in a loss
importation transaction. (A) Facts. FC owns three
assets, A1 (basis $40, value $150), A2 (basis $120,
value $30), and A3 (basis $140, value $20). On Date
1, FC transfers A1, A2, and A3 to DC in a transac-
tion to which section 351 applies.

(B) Importation property. If FC had sold A1, A2,
or A3 immediately before the transaction, no gain or
loss recognized on the sale would have been taken
into account in determining a Federal income tax
liability. Further, if DC had sold A1, A2, or A3
immediately after the transaction, DC would take
into account any gain or loss recognized on the sale
in determining its Federal income tax liability.
Therefore, A1, A2, and A3 are all importation prop-
erties. See paragraph (c)(2) of this section.

(C) Loss importation transaction. FC's transfer
of A1, A2, and A3 is a section 362 transaction.
Furthermore, but for section 362(e)(1) and this sec-
tion and section 362(e)(2), DC's aggregate basis in
the importation properties, A1, A2, and A3, would
be $300 ($40 + $120 + $140) under section 362(a)
and the properties' aggregate value would be $200
($150 + $30 + $20). Therefore, the importation
properties' aggregate basis would exceed their ag-
gregate value and the transaction is a loss importa-
tion transaction. See paragraph (c)(3) of this section.

(D) Application of section 362(e)(1) and this
section to importation property received in loss im-
portation transaction. Because the importation prop-
erties, A1, A2, and A3, were transferred in a loss
importation transaction, paragraph (b)(1) of this sec-
tion applies and DC's basis in A1, A2, and A3 will
each be equal to the property's value ($150, $30, and
$20, respectively) immediately after the transfer.

(E) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. Taking into account the ap-
plication of section 362(e)(1) and this section, DC's
aggregate basis in the transferred properties would
not exceed their aggregate value immediately after
the transfer. Therefore, FC does not have a net
built-in loss, FC's transfer is not a loss duplication
transaction, and section 362(e)(2) does not apply to
this transaction. DC's bases in A1, A2, and A3, as
determined under paragraph (i)(D) of this Example
1, are $150, $30, and $20, respectively. Under sec-
tion 358(a), FC receives the DC stock with a basis of
$300 (the sum of FC's bases in A1, A2, and A3
immediately before the exchange).

(ii) Reorganization. The facts are the same as in
paragraph (i)(A) of this Example 1 except that, in-
stead of transferring property to DC in a section 351
exchange, FC merges with and into DC in a trans-
action described in section 368(a)(1)(A). The analy-
sis and results are the same as set forth in paragraphs
(i)(B), (i)(C), (i)(D), and (i)(E) of this Example 1,
except that, under section 358(a), FC's shareholders
will take the DC stock with a basis determined by
reference to their FC stock basis.

(iii) FC's property used in U.S. trade or busi-
ness. (A) Facts. The facts are the same as in para-
graph (i)(A) of this Example 1, except that FC is
engaged in a U.S. trade or business and uses all the
properties in that U.S. trade or business. In this case,
none of the properties would be importation property
because FC would take any gain or loss on the
disposition of the properties into account in deter-
mining its Federal income tax liability. Accordingly,
this section does not apply to the transaction.

(B) Basis of property received in transaction.
Following the application of section 362(e)(1) and

this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. Taking into account the ap-
plication of section 362(e)(1) and this section but
without taking into account the provisions of section
362(e)(2), DC's aggregate basis in the transferred
properties would be $300 ($40 + $120 + $140)
under section 362(a) and the properties' aggregate
value immediately after the transfer would be $200
($150 + $30 + $20). Therefore, FC has a net
built-in loss and FC's transfer of A1, A2, and A3 is
a loss duplication transaction. Accordingly, under
the general rule of section 362(e)(2), FC's $100 net
built-in loss ($300 aggregate basis over $200 aggre-
gate value) would be allocated proportionately (by
the amount of built-in loss in each property) to
reduce DC's basis in the loss properties, A2 and A3.
See §1.362-4. As a result, DC's basis in A2 would
be $77.14 ($120 basis under section 362(a) reduced
by $42.86, A2's proportionate share of FC's net
built-in loss, computed as $90/$210 x $100) and
DC's basis in A3 would be $82.86 ($140 basis under
section 362(a) reduced by $57.14, A3's proportion-
ate share of FC's net built-in loss, computed as
$120/$210 x $100). However, if FC and DC were to
elect under section 362(e)(2)(C) to apply the $100
basis reduction to FC's basis in the DC stock re-
ceived in the transaction, DC's bases in A2 and A3
would remain their section 362(a) bases of $120 and
$140, respectively. Under section 362(a), DC's basis
in A1 is $40 (irrespective of whether the section
362(e)(2)(C) election is made). If FC and DC do not
make a section 362(e)(2)(C) election, FC's basis in
the DC stock received in the exchange will be $300;
if FC and DC do make the election, FC's basis in the
DC stock will be $200 ($300-$100 net built-in loss).
See §1.362-4(b).

Example 2. Multiple transferors. (i) Facts. The
facts are the same as in paragraph (i)(A) of Example
1, except that FC only owns A1 (basis $40, value
$150) and A2 (basis $120, value $30) and F owns A3
(basis $140, value $20). On Date 1, FC transfers A1
and A2, and F transfers A3, to DC in a single
transaction described in section 351.

(ii) Importation property. A1 and A2 are impor-
tation properties for the reasons set forth in para-
graph (i)(B) of Example 1. A3 is also an importation
property because, if F had sold A3 immediately
before the transaction, no gain or loss recognized on
the sale would have been taken into account in
determining a Federal income tax liability, and, fur-
ther, if DC had sold A3 immediately after the trans-
action, DC would take into account any gain or loss
recognized on the sale in determining its Federal
income tax liability.

(iii) Loss importation transaction. The transfers
by FC and F are a section 362 transaction. The
transaction is a loss importation transaction for the
reasons set forth in paragraph (i)(C) of Example 1
(notwithstanding that one of the transferors, FC, did
not transfer a net built-in loss). See paragraph (c)(3)
of this section.

(iv) Application of section 362(e)(1) and this
section to importation property received in loss im-
portation transaction. Because the importation prop-
erties, A1, A2, and A3, were transferred in a loss
importation transaction, paragraph (b)(1) of this sec-
tion applies and DC's basis in A1, A2, and A3 will

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each be equal to the property's value ($150, $30, and
$20, respectively) immediately after the transfer.

(v) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. The application of section
362(e)(2) is determined separately for each trans-
feror. See §1.362-4(b). Taking into account the ap-
plication of section 362(e)(1) and this section, nei-
ther DC's aggregate basis in FC's properties nor
DC's basis in F's property would exceed the prop-
erties' respective values immediately after the trans-
action. Therefore neither FC nor F has a net built-in
loss, neither transfer is a loss duplication transaction,
and section 362(e)(2) does not apply to either trans-
fer. DC's bases in A1, A2, and A3, as determined
under paragraph (iv) of this Example 2, are $150,
$30, and $20, respectively. Under section 358(a),
FC's basis in the DC stock received is $160 ($40 +
$120) and F's basis in the DC stock received in the
exchange is $140.

Example 3. Transfer of importation and non-
importation property. (i) Facts. As in paragraph (i)
of Example 2, FC owns A1 (basis $40, value $150)
and A2 (basis $120, value $30), and F owns A3
(basis $140, value $20). In addition, A2 is a U.S. real
property interest as defined in section 897(c)(1). On
Date 1, FC transfers A1 and A2, and F transfers A3,
to DC in a single transaction described in section
351.

(ii) Importation property. A1 and A3 are impor-
tation properties for the reasons set forth in para-
graph (i)(B) of Example 1 and paragraph (i) of Ex-
ample 2, respectively. However, A2 is not
importation property because, if FC had sold A2
immediately before the transaction, FC would take
into account any gain or loss recognized on the sale
in determining its Federal income tax liability.

(iii) Loss importation transaction. FC's transfer
is a section 362 transaction. Furthermore, but for
section 362(e)(1) and this section and section
362(e)(2), DC's aggregate basis in the importation
properties, A1 and A3, would be $180 ($40 + $140)
and the properties' aggregate value would be $170
($150 + $20) immediately after the transaction.
Therefore, the importation properties' aggregate ba-
sis would exceed their aggregate value immediately
after the transaction, and the transfer is a loss im-
portation transaction.

(iv) Application of section 362(e)(1) and this
section to importation property received in loss im-
portation transaction. Because the importation prop-
erties, A1 and A3, were transferred in a loss impor-
tation transaction, paragraph (b)(1) of this section
applies and DC's basis in A1 and in A3 will each be
equal to the property's value ($150 and $20, respec-
tively) immediately after the transfer.

(v) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. The application of section
362(e)(2) is determined separately for each trans-
feror. See §1.362-4(b).

(A) FC's transfer. Taking into account the ap-
plication of section 362(e)(1) and this section but
without taking into account the provisions of section

362(e)(2), DC would have an aggregate basis of
$270 in the transferred properties ($150 in A1, as
determined under paragraph (iv) of this Example 3,
plus $120 in A2, determined under section 362(a)),
and the properties would have an aggregate value of
$180 ($150 + $30) immediately after the transfer.
Therefore, FC has a net built-in loss and FC's trans-
fer of A1 and A2 is a loss duplication transaction.
Accordingly, under the general rule of section
362(e)(2), FC's $90 net built-in loss ($270 aggregate
basis to DC over $180 aggregate value) would be
allocated proportionately to reduce DC's basis in the
loss property transferred by FC. As a result, FC's
entire net built-in loss would be allocated to A2, the
only loss property transferred by FC, and DC's basis
in A2 would be $30 ($120 basis under section 362(a)
reduced by $90 net built-in loss). However, if FC
and DC were to elect under section 362(e)(2)(C) to
apply the $90 basis reduction to FC's basis in the DC
stock received in the transaction, DC's basis in A2
would remain its section 362(a) basis of $120. DC's
basis in A1 is $150 as determined under paragraph
(iv) of this Example 3 (irrespective of whether the
section 362(e)(2)(C) election is made). If FC and DC
do not make a section 362(e)(2)(C) election, FC's
basis in the DC stock received in the exchange will
be $270; if FC and DC do make the election, FC's
basis in the DC stock will be $180 ($270-$90 net
built-in loss). See §1.362-4.

(B) F's transfer of A3. Taking into account the
application of section 362(e)(1) and this section,
DC's basis in A3, the property transferred by F,
would not exceed its value immediately after the
transfer. Therefore, F does not have a built-in loss,
F's transfer is not a loss duplication transaction, and
section 362(e)(2) does not apply to F's transfer.
DC's basis in A3, as determined under paragraph
(iv) of this Example 3, is $20. Under section 358(a),
F receives the DC stock with a basis of $140.

Example 4. Multiple transferors of non-
importation properties. (i) Facts. DC1 owns A1 (ba-
sis $40, value $150). In addition, as in Example 3,
FC owns A2 (basis $120, value $30), a U.S. real
property interest as defined in section 897(c)(1), and
F owns A3 (basis $140, value $20). On Date 1, DC1
transfers A1, FC transfers A2, and F transfers A3, to
DC in a single transaction described in section 351.

(ii) Importation property. A2 is not importation
property and A3 is importation property for the rea-
sons set forth in paragraph (ii) of Example 3 and
paragraph (i)(B) of Example 1, respectively. A1 is
not importation property because, if DC1 had sold
A2 immediately before the transaction, DC1 would
take into account any gain or loss recognized on the
sale in determining its Federal income tax liability.

(iii) Loss importation transaction. The transfer of
A1, A2, and A3 is a section 362 transaction. Fur-
thermore, but for section 362(e)(1) and this section
and section 362(e)(2), DC's basis in importation
property, A3, would be $140 and the value of the
property would be $20 immediately after the trans-
action. Therefore, the importation property's basis
would exceed value and the transfer is a loss impor-
tation transaction.

(iv) Application of section 362(e)(1) and this
section to importation property received in loss im-
portation transaction. Because the importation prop-
erty, A3, was transferred in a loss importation trans-

action, section 362(e)(1) and paragraph (b)(1) of this
section applies and DC's basis in A3 will be equal to
A3's $20 value immediately after the transfer.

(v) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. The application of section
362(e)(2) is determined separately for each trans-
feror. See §1.362-4.

(A) DC1's transfer. Taking into account the ap-
plication of section 362(e)(1) and this section, DC's
basis in A1 ($40 under section 362(a)) would not
exceed its value immediately after the transfer.
Therefore, DC1 does not have a net built-in loss,
DC1's transfer is not a loss duplication transaction,
and section 362(e)(2) does not apply to DC1's trans-
fer. DC's basis in A1, determined under section
362(a), is $40. Under section 358(a), DC1 receives
the DC stock with a basis of $40.

(B) FC's transfer. Taking into account the appli-
cation of section 362(e)(1) and this section, but with-
out taking into account the provisions of section
362(e)(2), DC would have a section 362(a) basis of
$120 in A2, which would exceed A2's $30 value
immediately after the transfer. Therefore, FC has a
net built-in loss and FC's transfer of A2 is a loss
duplication transaction. Accordingly, under the gen-
eral rule of section 362(e)(2), FC's $90 net built-in
loss (DC's $120 basis in A2 over A2's $30 value)
would be applied to reduce DC's basis in A2, the
only loss property transferred by FC. As a result,
DC's basis in A2 would be $30 ($120 basis under
section 362(a), reduced by the $90 net built-in loss).
However, if FC and DC were to elect under section
362(e)(2)(C) to apply the $90 basis reduction to FC's
basis in the DC stock received in the transaction,
DC's basis in A2 would be its $120 basis determined
under section 362(a). If FC and DC do not make a
section 362(e)(2)(C) election, FC's basis in the DC
stock received in the exchange will be $120; if FC
and DC do make the election, FC's basis in the DC
stock will be $30 ($120-$90). See §1.362-4.

(C) F's transfer. F's transfer of A3 is a transac-
tion described in section 362(a). However, taking
into account the application of section 362(e)(1) and
this section, DC's basis in A3 ($20) would not ex-
ceed its value immediately after the transfer. There-
fore, F does not have a built-in loss, F's transfer is
not a loss duplication transaction, and section
362(e)(2) does not apply to F's transfer. DC's basis
in A3, as determined under paragraph (iv) of this
Example 4, is $20. Under section 358(a), FC receives
the DC stock with a basis of $140.

Example 5. Partnership transactions. (i) Trans-
fer by foreign partnership, foreign and domestic
partners. (A) Facts. A and F are equal partners in
FP. FP owns A1 (basis $100, value $70). Under the
terms of the FP partnership agreement, FP's items of
income, gain, deduction, and loss are allocated
equally between A and F. FP transfers A1 to DC in
a transfer to which section 351 applies. No election
is made under section 362(e)(2)(C).

(B) Importation property. If FP had sold A1
immediately before the transaction, any gain or loss
recognized on the sale would be allocated to and
includible by A and F equally under the partnership
agreement. Thus, A1 is treated as tentatively divided

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into two equal portions, one treated as owned by A
and one treated as owned by F. If FP had sold A1
immediately before the transaction, any gain or loss
recognized on the portion treated as owned by A
would have been taken into account in determining a
Federal income tax liability (A's); thus A's tenta-
tively divided portion of A1 is not importation prop-
erty. However, no gain or loss recognized on the
tentatively divided portion treated as owned by F
would have been taken into account in determining a
Federal income tax liability. Further, if DC had sold
A1 immediately after the transaction, any gain or
loss recognized on the sale would have been taken
into account in determining a Federal income tax
liability (DC's); thus, F's tentatively divided portion
of A1 is importation property.

(C) Loss importation transaction. FP's transfer
of A1 is a section 362 transaction. Furthermore, but
for section 362(e)(1) and this section and section
362(e)(2), DC's basis in the importation property,
F's portion of A1, would be $50 under section 362(a)
and the property's value would be $35 immediately
after the transaction. Therefore, the importation
property's basis would exceed its value and the
transfer is a loss importation transaction.

(D) Application of section 362(e)(1) and this
section to importation property received in loss im-
portation transaction. Because the importation prop-
erty, F's tentatively divided portion of A1, was trans-
ferred in a loss importation transaction, section
362(e)(1) and paragraph (b)(1) of this section applies
and DC's basis in F's portion of Al will be equal to
its $35 value.

(E) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. Taking into account the ap-
plication of section 362(e)(1) and this section but
without taking into account the provisions of section
362(e)(2), DC's aggregate basis in A1 would be $85
(the sum of the $35 basis in F's tentatively divided
portion of A1, as determined under paragraph (i)(D)
of this Example 5, and the $50 basis in A's tenta-
tively divided portion of A1, determined under sec-
tion 362(a), see paragraph (d)(2) of this section) and
Al's value immediately after the transfer would be
$70. Therefore, FP has a net built-in loss and FP's
transfer of A1 is a loss duplication transaction. Ac-
cordingly, under the general rule of section
362(e)(2), FP's $15 net built-in loss ($85 basis over
$70 value) would be allocated to reduce DC's basis
in the loss asset, A1, the only loss property trans-
ferred by FP. As a result, DC's basis in A1 would be
$70 ($85 basis under section 362(a) and this section,
reduced by the $15 net built-in loss). Under section
358, FP's basis in the DC stock received in the
exchange will be $100. See §1.362-4.

(ii) Transfer with election to apply section
362(e)(2)(C). The facts are the same as in paragraph
(i)(A) of this Example 5, except that FP and DC elect
to apply section 362(e)(2)(C) to reduce FP's basis in
the DC stock received in the exchange. The analysis
and results are the same as in paragraphs (i)(B),
(i)(C), (i)(D), and (i)(E) of this Example 5, except
that the $15 reduction to DC's basis in Al is not
made and, as a result, DC's basis in A1 remains $85,
and FP's basis in the DC stock received in the

exchange is reduced from $100 to $85. The $15
reduction to FP's basis in DC stock reduces A's
basis in its FP interest under section 705(a)(2)(B).
See §1.362-4(f)(1).

(iii) Transfer by domestic partnership. The facts
are the same as in paragraph (i)(A) of this Example
5 except that FP is a domestic partnership. The
analysis and results are the same as in paragraphs
(i)(B), (i)(C), (i)(D), and (i)(E) of this Example 5.

(iv) Transfer of interest in partnership with lia-
bility. (A) Facts. F and two other individuals are
equal partners in FP. F's basis in its partnership
interest is $247. F's share of FP's §1.752-1 liabili-
ties (as defined in §1.752-1(a)(4)) is $150. F trans-
fers his partnership interest to DC in a transaction to
which section 351 applies. FP has no section 754
election in effect. If DC were to sell the FP interest
immediately after the transfer, DC would receive
$100 in cash or other property. In addition, taking
into account the rules under §1.752-4, DC's share of
FP's §1.152-1 liabilities (as defined in §1.752-
1(a)(4)) is $145 immediately after the transfer.

(B) Importation property. If F had sold his part-
nership interest immediately before the transaction,
no gain or loss recognized on the sale would have
been taken into account in determining a Federal
income tax liability. Further, if DC had sold the
partnership interest immediately after the transac-
tion, any gain or loss recognized on the sale would
have been taken into account in determining a Fed-
eral income tax liability. Therefore, F's partnership
interest is importation property.

(C) Loss importation transaction. F's transfer is
a section 362 transaction. However, but for section
362(e)(1) and this section and section 362(e)(2),
DC's basis in the importation property, the partner-
ship interest, determined under section 362(a) and
taking into account the rules under section 752,
would be $242 (F's $247 basis reduced by F's $150
share of FP liabilities and increased by DC's $145
share of FP liabilities) and, under § 1.362-
4(c)(12)(ii), the value of the FP interest would be
$245 (the sum of $100, the cash DC would receive if
DC immediately sold the partnership interest, and
$145, DC's share of the §1.752-1 liabilities (as de-
fined in §1.752-1(a)(4)) under section 752 immedi-
ately after the transfer to DC). Therefore, the impor-
tation property's basis ($242) would not exceed its
value ($245), and the transfer is not a loss importa-
tion transaction.

(D) Basis in property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. As described in paragraph
(iv)(C) of this Example 5, taking into account the
application of section 362(e)(1) and this section,
DC's basis in the partnership interest would not
exceed its value. Therefore, under §1.362-4, F does
not have a net built-in loss, the transfer is not a loss
duplication transaction, and section 362(e)(2) does
not apply to the transfer. DC's basis in F's partner-
ship interest is $242, determined under sections
362(a) and 752. Under section 358, taking into ac-
count the rules under section 752, F's basis in the DC
stock received in the exchange is $97 ($247 reduced
by F's $150 share of FP liabilities).

Example 6. Transactions involving tax-exempt
entities. (i) Exempt transferor. (A) Facts. InsCo is a
benevolent life insurance association of a purely
local character exempt from Federal income tax un-
der section 501(a) because it is described in section
501(c)(12). InsCo owns shares of stock of DC1
(basis $100, value $70) for investment purposes,
which are not debt-financed property (as defined in
section 514). On December 31, Year 1, InsCo trans-
fers the DC1 stock to DC in a transaction to which
section 351 applies. No election is made under sec-
tion 362(e)(2)(C).

(B) Importation property. If InsCo had sold the
DC1 stock immediately before the transaction, any
gain or loss realized would be excluded from unre-
lated business taxable income (UBTI) under section
512(b)(5), and thus no gain or loss recognized on the
sale would have been taken into account in deter-
mining Federal income tax liability. Further, if DC
had sold the DC1 stock immediately after the trans-
action, any gain or loss recognized on the sale would
have been taken into account in determining Federal
income tax liability. Therefore, the DC1 stock is
importation property.

(C) Loss importation transaction. InsCo's trans-
fer is a section 362 transaction. Furthermore, but for
section 362(e)(1) and this section and section
362(e)(2), DC's basis in importation property, the
DC1 stock, would be $100, and the stock's value
would be $70 immediately after the transaction.
Therefore, the importation property's basis would
exceed its value and the transfer is a loss importation
transaction.

(D) Application of section 362(e)(1) and this
section to importation property received in loss im-
portation transaction. Because the importation prop-
erty, the DC1 stock, was transferred in a loss impor-
tation transaction, paragraph (b)(1) of this section
applies and DC's basis in the stock will be equal to
its $70 value.

(E) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. Taking into account the ap-
plication of section 362(e)(1) and this section, DC's
basis in the DC1 stock would not exceed its value
immediately after the transaction. Therefore, InsCo
does not have a net built-in loss, InsCo's transfer is
not a loss duplication transaction, and section
362(e)(2) has no application to the transaction. DC's
basis in the DC1 stock, as determined under para-
graph (i)(D) of this Example 6, is $70. Under section
358, InsCo's basis in the DC stock received in the
exchange will be $100.

(ii) Transferor loses tax-exempt status. (A) Facts.
The facts are the same as in paragraph (i)(A) of this
Example 6 except that InsCo fails to be described in
section 501(c)(12) in Year 1.

(B) Importation property. If InsCo had sold the
DC1 stock immediately before the transaction, any
gain or loss recognized on the sale would have been
taken into account in determining a Federal income
tax liability. Therefore, the DC1 stock is not impor-
tation property and this section does not apply to the
transaction.

(C) Basis of property received in transaction.
Following the application of section 362(e)(1) and

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this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. Taking into account the ap-
plication of section 362(e)(1) and this section but
without taking into account the provisions of section
362(e)(2), DC would have a section 362(a) basis of
$100 in the stock, which would exceed its value of
$70 immediately after the transfer. Therefore, InsCo
has a net built-in loss and InsCo's transfer of the
DC1 stock is a loss duplication transaction. Accord-
ingly, under the general rule of section 362(e)(2),
InsCo's $30 net built-in loss ($100 basis over $70
value) would be allocated to reduce DC's basis in the
loss asset, the DC1 stock, the only loss property
transferred by InsCo. As a result, DC's basis in the
DC1 stock would be $70 ($100 basis under section
362(a), reduced by the $30 net built-in loss). Under
section 358, InsCo's basis in the DC stock received
in the exchange will be $100.

(iii) Transfer of property that is subject to unre-
lated business tax. (A) Facts. The facts are the same
as in paragraph (i)(A) of this Example 6 except that,
on December 31, Year 1, instead of the DC1 stock,
InsCo transfers A1 (basis $200, value $150) to DC.
A1 is an office building that InsCo owned from
January 1 to December 31 of Year 1. During the
entirety of this period, A1 constitutes debt-financed
property (as defined in section 514). Pursuant to
sections 512 and 514, InsCo would be required to
include in UBTI a portion of the gains or losses from
a sale of A1 at the end of Year 1. DC does not take
the property subject to the debt.

(B) Importation property. If InsCo had sold A1
immediately before the transaction, the gain or loss
recognized on the sale would have been taken into
account in determining a Federal income tax liabil-
ity, even though at a lesser rate of inclusion. There-
fore, A1 is not importation property and this section
does not apply to the transaction.

(C) Basis of property received in transaction.
The analysis and results are the same as in paragraph
(ii)(C) of this Example 6.

Example 7. Transactions involving CFCs. (i)
Transfer by CFC. (A) Facts. FC is a CFC with 100
shares of stock outstanding. A owns 60 of the shares
and F owns the remaining 40 shares. FC owns two
assets, A1 (basis $70, value $100), which is used in
the conduct of a U.S. trade or business, and A2 (basis
$100, value $75), which is not used in the conduct of
a U.S. trade or business. FC transfers both assets to
DC in a transaction to which section 351 applies.

(B) Importation property. If FC had sold A1
immediately before the transaction, any gain or loss
recognized on the sale would have been taken into
account in determining a Federal income tax liability
(FC's). See section 882(a). Therefore, A1 is not
importation property. If FC had sold A2 immediately
before the transaction, FC would not take the gain or
loss recognized into account in determining its Fed-
eral income tax liability, but the gain or loss could be
taken into account in determining a section 951
inclusion to FC's U.S. shareholders. However, under
paragraph (d)(3) of this section, gain or loss is not
deemed taken into account in determining a Federal
income tax liability solely because it could affect an
inclusion under section 951(a). Further, if DC had
sold A2 immediately after the transaction, any gain
or loss recognized on the sale would have been taken

into account in determining a Federal income tax
liability. Therefore, A2 is importation property.

(C) Loss importation transaction. FC's transfer
is a section 362 transaction. Furthermore, but for
section 362(e)(1) and this section and section
362(e)(2), DC's basis in the importation property,
A2, would be $100 and the property's value would
be $75 immediately after the transaction. Therefore,
the importation property's basis would exceed its
value and the transfer is a loss importation transac-
tion.

(D) Application of section 362(e)(1) and this
section to importation property received in loss im-
portation transaction. Because the importation prop-
erty, A2, was transferred in a loss importation trans-
action, paragraph (b)(1) of this section applies and
DC's basis in A2 will be equal to A2's $75 value
immediately after the transfer.

(E) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. Taking into account the ap-
plication of section 362(e)(1) and this section but
without taking into account the provisions of section
362(e)(2), DC would have an aggregate basis of
$145 in the transferred properties ($70 in A1, deter-
mined under section 362(a), plus $75 in A2, deter-
mined under this section) and the properties would
have an aggregate value of $175 ($100 + $75)
immediately after the transfer. Therefore, FC does
not have a net built-in loss, FC's transfer is not a loss
duplication transaction, and section 362(e)(2) does
not apply to the transaction. DC's basis in Al will be
$70, determined under section 362(a), and DC's
basis in A2 will be $75, as determined under para-
graph (i)(D) of this Example 7. Under the general
rule in section 358(a), FC receives the DC stock with
a basis of $170 ($70 attributable to A1 plus $100
attributable to A2).

(ii) Transfer of CFC stock. (A) Facts. The facts
are the same as in paragraph (i)(A) of this Example
7, except that A transfers its 60 shares of FC stock
(basis $80, value $105) and F transfers its 40 shares
of FC stock (basis $100, value $70) to DC in an
exchange that qualifies under section 351.

(B) Importation property. If A had sold its FC
shares immediately before the transaction, any gain
or loss recognized on the sale would have been taken
into account in determining a Federal income tax
liability (A's). Therefore, A's FC shares are not
importation property. However, if F had sold its FC
shares immediately before the transaction, no gain or
loss recognized on the sale would have been taken
into account in determining a Federal income tax
liability. Further, if DC had sold F's FC shares
immediately after the transaction, any gain or loss
recognized on the sale would have been taken into
account in determining a Federal income tax liabil-
ity. Therefore, F's FC shares are importation prop-
erty.

(C) Loss importation transaction. The transfer of
the FC shares is a section 362 transaction. Further-
more, but for section 362(e)(1) and this section and
section 362(e)(2), DC's aggregate basis in the im-
portation property, F's shares of FC stock, would be
$100 under section 362(a) and the shares' aggregate
value would be $70. Therefore, the importation

property's aggregate basis would exceed its aggre-
gate value, and the transfer is a loss importation
transaction.

(D) Application of section 362(e)(1) and this
section to importation property received in loss im-
portation transaction. Because the importation prop-
erty, F's shares of FC stock, was transferred in a loss
importation transaction, paragraph (b)(1) of this sec-
tion applies and DC's aggregate basis in the shares
will be equal to their $70 aggregate value immedi-
ately after the transfer.

(E) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. The application of section
362(e)(2) is determined separately for each trans-
feror. See §1.362-4(b).

(1) A's transfer. Taking into account the appli-
cation of section 362(e)(1) and this section, DC's
aggregate basis in the shares ($80 under section
362(a)) would not exceed the shares' value ($105)
immediately after the transaction. Therefore A does
not have a built-in loss, A's transfer is not a loss
duplication transaction, and section 362(e)(2) does
not apply to A's transfer. DC's aggregate basis in
A's shares, determined under section 362(a), is $80.
Under section 358(a), A receives the DC stock with
a basis of $80.

(2) F's transfer. Taking into account the appli-
cation of section 362(e)(1) and this section, DC's
aggregate basis in the shares would not exceed their
value immediately after the transaction. Therefore, F
does not have a built-in loss, F's transfer is not a loss
duplication transaction, and section 362(e)(2) does
not apply to F's transfer. DC's aggregate basis in F's
shares, as determined under paragraph (ii)(D) of this
Example 7, is $70. Under section 358(a), F receives
the DC stock with a basis of $100.

Example 8. Property subject to withholding tax.
(i) Facts. FC owns a share of DC1 stock (basis $100,
value $70) as an investment. FC receives dividends
on the share that are subject to Federal withholding
tax of 30 percent of the amount received under
section 881(a); under section 1442(a), DC1 must
withhold tax on the dividends paid. FC transfers the
DC1 share to DC in a transaction to which section
351 applies.

(ii) Importation property. Although any divi-
dends received with respect to the DC1 stock were
subject to withholding tax, if FC had sold the share
of stock of DC1, no gain or loss recognized on the
sale would have been taken into account in deter-
mining a Federal income tax liability. See section
865(a)(2). Further, if DC had sold the share of DC1
stock immediately after the transaction, any gain or
loss recognized on the sale would be taken into
account in determining Federal income tax liability.
Therefore, the share of DC1 stock is importation
property.

(iii) Loss importation transaction. FC's transfer
is a section 362 transaction. Furthermore, but for
section 362(e)(1) and this section and section
362(e)(2), DC's basis in the importation property,
the share of DC1 stock, would be $100 and the
share's value would be $70 immediately after the
transaction. Therefore, the share's basis would ex-

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ceed its value and the transfer is a loss importation
transaction.

(iv) Application of section 362(e)(1) and this
section to importation property received in loss im-
portation transaction. Because the importation prop-
erty, the DC1 share, was transferred in a loss impor-
tation transaction, paragraph (b)(1) of this section
applies and DC's basis in the share will be equal to
the share's $70 value.

(v) Basis of property received in transaction.
Following the application of section 362(e)(1) and
this section, the provisions of section 362(e)(2) must
be taken into account because the transfer is a sec-
tion 362(a) transaction. Taking into account the ap-
plication of section 362(e)(1) and this section, DC's
basis in the DC1 share would not exceed the share's
value immediately after the transaction. Therefore,
FC does not have a net built-in loss, FC's transfer is
not a loss duplication transaction, and section
362(e)(2) does not apply to the transaction. DC's
basis in the DC1 share, as determined under para-
graph (iv) of this Example 8, is $70. Under section
358, FC's basis in the DC stock received in the
exchange will be $100.

Example 9. Property transferred in triangular
reorganization. (i) Foreign subsidiary. (A) Facts. P
owns the sole outstanding share of stock of FC (basis
$1), FC1 owns the sole outstanding share of FC2
(basis $100), and FC2 owns one asset, A1 (basis
$100, value $20). In a forward triangular merger
described in §1.358-6(b)(2)(i), FC2 merges with
and into FC, and FC1 receives shares of P stock in
exchange for its FC2 stock. The forward triangular
merger is a transaction described in section
368(a)(2)(D) and, therefore, in section 362(b).

(B) Determining P's basis in its FC share. Pur-
suant to §1.358-6, for purposes of determining the
adjustment to P's basis in its FC shares, P is treated
as though it first received A1 in a transaction in
which its basis in A1 would be determined under
section 362(b) and then it transferred A1 to FC in a
transaction in which P's basis in its FC stock would
be determined under section 358.

(1) P's deemed acquisition and transfer of A1. If
FC2 had sold A1 for its value immediately before the
deemed transaction, no gain or loss recognized on
the sale would have been taken into account in
determining a Federal income tax liability. If P had
sold A1 immediately after the deemed transaction,
any gain or loss recognized on the sale would have
been taken into account in determining a Federal
income tax liability (P's). Therefore, with respect to
P's deemed acquisition, A1 is importation property.
Furthermore, immediately after the deemed transac-
tion, P's basis in A1, but for section 362(e)(1) and
this section and section 362(e)(2), would be $100
and Al's value is $20. Therefore, the importation
property's basis would exceed its value and the
transfer is a loss importation transaction. Accord-
ingly, P's deemed basis in A1 will be equal to Al's
$20 value.

(2) P's FC stock basis. As a result of P's deemed
transfer of A1 to FC (and applying the principles of
§1.367(b)-13), P's basis in its FC stock is increased
by its $20 deemed basis in A1. Accordingly, follow-
ing the transaction, P's basis in its share of FC stock
will be $21 (the sum of its original $1 basis and the
$20 adjustment for the deemed transfer of A1).

(C) FC's basis in A1. FC's basis in Al is deter-
mined under the rules of this section without regard
to the determination of P's adjustment to its basis in
FC stock. If FC2 had sold A1 for its value immedi-
ately before the transaction, no gain or loss recog-
nized on the sale would have been taken into account
in determining a Federal income tax liability. How-
ever, if FC had sold A1 immediately after the trans-
action, no gain or loss recognized on the sale would
have been taken into account in determining a Fed-
eral income tax liability, so A1 is not importation
property. Accordingly, this section will not apply to
the transaction. Although there is a net built-in loss
in A1, the transaction is not described in section
362(a), and so section 362(e)(2) and §1.362-4 will
not apply to the transaction. Thus, under section
362(b), FC's basis in A1 will be $100.

(D) FCI's basis in P stock. Under section 358,
FC1's basis in the P stock it receives in the exchange
will be $100.

(ii) Property transferred to U.S. subsidiary in
triangular reorganization. (A) Facts. The facts are
the same as in paragraph (i)(A) of this Example 9,
except that P also owns the sole outstanding share of
DC (basis $1) and, instead of merging into FC, FC2
merged into DC.

(B) Determining P's basis in its DC share. As
determined under paragraph (i)(B)(2) of this Exam-
ple 9, P's basis in its DC share is $21, the sum of its
original $1 basis plus the $20 adjustment for the
deemed transfer of A1.

(C) DC's basis in A1. If FC2 had sold Al for its
value immediately before the transaction, no gain or
loss recognized on the sale would have been taken
into account in determining a Federal income tax
liability. However, if DC had sold A1 immediately
after the transaction, any gain or loss recognized on
the sale would have been taken into account in
determining a Federal income tax liability, so A1 is
importation property with respect to DC. Further-
more, immediately after the transaction, DC's basis
in A1, but for section 362(e)(1) and this section and
section 362(e)(2), would be $100 and Al's value is
$20. Therefore, the importation property's basis
would exceed its value and the transfer is a loss
importation transaction. Accordingly, DC's basis in
A1 will be $20, Al's value immediately after the
transaction.

(D) FCI's basis in P stock. Under section 358,
FC1's basis in the P stock it receives in the exchange
is $100.

(g) Effective/applicability date. This
section applies to any transaction occur-
ring on or after the date these regulations
are published as final regulations in the
Federal Register, unless effected pursu-
ant to a binding agreement that was in
effect prior to that date and at all times
thereafter. However, taxpayers may apply
this section to transactions occurring after
October 22, 2004.

Par. 9. Section 1.362-4 is amended by:

1\. Revising the introductory text in
paragraph (h).

2\. Revising paragraph (h) Example 11.

3\. Adding a new sentence to the end of
paragraph (j).

The revisions and addition read as fol-
lows:

§1.362-4 Basis of loss duplication
property.

* * * * *

(h) * * * The examples in this para-
graph (h) illustrate the application of sec-
tion 362(e)(2) and the provisions of this
section. Unless the facts otherwise indi-
cate, the examples use the following no-
menclature and assumptions: X, Y, P, S,
S1, and S2 are domestic corporations; A
and B are U.S. individuals; FC1 and FC2
are foreign corporations and are not en-
gaged in a U.S. trade or business, have no
U.S. real property interests, and have no
other relationships, activities, or interests
that would cause them, their shareholders,
or their property to be subject to Federal
income taxation; there is no applicable
income tax treaty; PRS is a domestic part-
nership; no election is made under section
362(e)(2)(C); and the transferred property
is not importation property (as defined in
§1.362-3(c)(2)) and the transfers are not
loss importation transactions (as defined
in §1.362-3(c)(3)), so that the basis of no
property is determined under section
362(e)(1). All persons and transactions are
unrelated unless the facts indicate other-
wise, and all other relevant facts are set
forth in the examples. See §1.362-3(f) for
additional examples illustrating the appli-
cation of section 362(e)(2) and this sec-
tion, including to transactions that are sub-
ject to section 362(e)(2), and section
362(e)(1).

* * * * *

Example 11. Transfers of importation property
with non-importation property. (i) Single transferor,
loss importation transaction. (A) Facts. FC1 trans-
fers Asset 1 (basis $80, value $50) and Asset 2 (basis
$120, value $110) to DC in a transaction to which
section 351 applies. Asset 1 is not importation prop-
erty within the meaning of §1.362-3(c)(2). Asset 2 is
importation property within the meaning of §1.362-
3(c)(2).

(B) Application of section 362(e)(1). Immedi-
ately after the transfer, and without regard to section
362(e)(1) or section 362(e)(2) and this section, DC's
aggregate basis in importation property (Asset 2)
would be $120. The aggregate value of the importa-
tion property immediately after the transfer is $110.
Accordingly, the transaction is a loss importation
transaction within the meaning of §1.362-3(c)(3)
and, under section 362(e)(1), DC's basis in Asset 2
would equal its value, $110.

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(C) Application of section 362(e)(2) and this sec-
tion. (1) Analysis. (i) Loss duplication transaction.
FC1's transfer of Asset 1 and Asset 2 is a transaction
described in section 362(a). But for section 362(e)(2)
and this section, DC's aggregate basis in those assets
would be $190 ($80 under section 362(a) + $110
under section 362(e)(1)), which would exceed the ag-
gregate value of the assets $160 ($50 + $110) imme-
diately after the transaction. Accordingly, the transfer is
a loss duplication transaction and FC1 has a net built-in
loss of $30 ($190-$160).

(ii) Identifying loss duplication property. But for
section 362(e)(2) and this section, DC's basis in Asset
1 would be $80, which would exceed Asset 1's $50
value immediately after the transaction. Accordingly,
Asset 1 is loss duplication property. But for section
362(e)(2) and this section, DC's basis in Asset 2 would
be $110, which would not exceed Asset 2's $110 value
immediately after the transaction. Accordingly, Asset 2
is not loss duplication property.

(C) Basis in loss duplication property. DC's ba-
sis in Asset 1 is $50, computed as its $80 basis under
section 362(a) reduced by FC1's $30 net built-in
loss.

(D) Basis in other property. Under section
362(e)(1), DC's basis in Asset 2 is $110. Under
section 358(a), FC1 has an exchanged basis of $200
in the DC stock it receives in the transaction.

(ii) Multiple transferors, no importation of loss.
(A) Facts. The facts are the same as paragraph (i)(A)
of this Example 11, except that, in addition, FC2
transfers Asset 3 (basis $100, value $150) to DC as
part of the same transaction. Asset 3 is importation
property within the meaning of §1.362-3(c)(2).

(B) Application of section 362(e)(1). Immedi-
ately after the transfer, and without regard to section
362(e)(1) or section 362(e)(2) and this section, DC's
aggregate basis in importation property (Asset 2 and
Asset 3) would be $220 ($120 + $100). The aggre-
gate value of the importation property immediately
after the transfer is $260 ($110 + $150). Accord-
ingly, the transaction is not a loss importation trans-
action within the meaning of §1.362-3(c)(3) and
DC's bases in the importation property is not deter-
mined under section 362(e)(1).

(C) Application of section 362(e)(2) and this
section: FC1. Notwithstanding that the transfers by
FC1 and FC2 are pursuant to a single plan forming
one transaction, section 362(e)(2) and this section
apply to each transferor separately.

(1) Analysis. (i) Loss duplication transaction.
FC1's transfer of Asset 1 and Asset 2 is a transaction
described in section 362(a). But for section 362(e)(2)
and this section, DC's aggregate basis in those assets
would be $200 ($80 + $120), which would exceed
the aggregate value of the assets $160 ($50 + $110)
immediately after the transaction. Accordingly, the
transfer is a loss duplication transaction and FC1 has
a net built-in loss of $40 ($200-$160).

(ii) Identifying loss duplication property. But for
section 362(e)(2) and this section, DC's basis in Asset
1 would be $80, which would exceed Asset 1's $50
value immediately after the transaction. Accordingly,
Asset 1 is loss duplication property. But for section
362(e)(2) and this section, DC's basis in Asset 2 would
be $120, which would exceed Asset 2's $110 value
immediately after the transaction. Accordingly, Asset 2
is also loss duplication property.

(2) Basis in loss duplication property. DC's basis
in Asset 1 is $50, computed as its $80 basis under
section 362(a) reduced by $30, its allocable portion
of FC1's $40 net built-in loss ($80/$200 x $40).
DC's basis in Asset 2 is $110, computed as its $120
basis under section 362(a) reduced by $10, its allo-
cable portion of FC1's $40 net built-in loss ($120/
$200 x $40).

(3) Basis in other property. Under section
358(a), FC1 has an exchanged basis of $200 in the
DC stock it receives in the transaction.

(D) Application of section: FC2. FC2's transfer
of Asset 3 is not a loss duplication transaction be-
cause Asset 3's value exceeds its basis immediately
after the transaction. Accordingly, under section
362(a), DC's basis in Asset 3 is $100.
* * * * *

(j) * * * The introductory text and
Example 11 of paragraph (h) of this sec-
tion apply to transactions on or after the
date these regulations are published as
final regulations in the Federal Register
unless effected pursuant to a binding
agreement that was in effect prior to that
date and at all times thereafter; however,
taxpayers may apply such provisions to
transactions occurring after October 22,
2004.

Par. 10. Section 1.368-3 is amended
by revising paragraphs (a)(3), (b)(3) and
adding a sentence to the end of paragraph
(e) to read as follows:

§1.368-3 Records to be kept and
information to be filed with returns.

(a) * * *

(3) The value and basis of the assets,
stock or securities of the target corpora-
tion transferred in the transaction, deter-
mined immediately before the transfer and
aggregated as follows-

(i) Importation property transferred in
a loss importation transaction, as defined
in §§1.362-3(c)(2) and 1.362-3(c)(3), re-
spectively;

(ii) Loss duplication property as de-
fined in §1.362-4(c)(1);

(iii) Property with respect to which any
gain or loss was recognized on the transfer
(without regard to whether such property
is also identified in paragraph (a)(3)(i) or
(a)(3)(ii) of this section);

(iv) Property not described in para-
graphs (a)(3)(i), (a)(3)(ii) or (a)(3)(iii) of
this section; and

* * * * *

(b) * * *

(3) The value and basis of all the stock
or securities of the target corporation held

by the significant holder that is transferred
in the transaction and such holder's basis
in that stock or securities, determined im-
mediately before the transfer and aggre-
gated as follows-

(i) Stock and securities with respect to
which an election is made under section
362(e)(2)(C); and

(ii) Stock and securities not described
in paragraph (b)(3)(i) of this section.
* * * * *

(e) Effective/applicability date.
Paragraphs (a)(3) and (b)(3) of this sec-
tion apply to any taxable year beginning
on or after these regulations are published
as final regulations in the Federal Regis-
ter, unless effected pursuant to a binding
agreement that was in effect prior to that
date and at all times thereafter.

Beth Tucker,
Deputy Commissioner for
Operations Support.

(Filed by the Office of the Federal Register on September 6,
2013, 8:45 a.m., and published in the issue of the Federal
Register for September 9, 2013, 78 F.R. 54971)

### Deletions from Cumulative List of Organizations Contributions to Which are Deductible Under Section 170 of the Code

### Announcement 2013-42

The Internal Revenue Service has re-
voked its determination that the organiza-
tions listed below qualify as organizations
described in sections 501(c)(3) and
170(c)(2) of the Internal Revenue Code of
1986.

Generally, the Service will not disal-
low deductions for contributions made to
a listed organization on or before the date
of announcement in the Internal Revenue
Bulletin that an organization no longer
qualifies. However, the Service is not pre-
cluded from disallowing a deduction for
any contributions made after an organiza-
tion ceases to qualify under section
170(c)(2) if the organization has not
timely filed a suit for declaratory judg-
ment under section 7428 and if the con-
tributor (1) had knowledge of the revoca-
tion of the ruling or determination letter,
(2) was aware that such revocation was

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imminent, or (3) was in part responsible
for or was aware of the activities or omis-
sions of the organization that brought
about this revocation.

If on the other hand a suit for declara-
tory judgment has been timely filed, con-
tributions from individuals and organiza-
tions described in section 170(c)(2) that
are otherwise allowable will continue to
be deductible. Protection under section
7428(c) would begin on October 28, 2013,
and would end on the date the court first
determines that the organization is not de-
scribed in section 170(c)(2) as more par-
ticularly set forth in section 7428(c)(1).
For individual contributors, the maximum
deduction protected is $1,000, with a hus-
band and wife treated as one contributor.

This benefit is not extended to any indi-
vidual, in whole or in part, for the acts or
omissions of the organization that were
the basis for revocation.

American College of Forensic Examiners
International, Inc.
Springfield, MO
B & L Grace Foundation
Fresno, CA
Big Apple Day School
Brooklyn, NY

BuildClean
Houston, TX

Foster Care Network, Inc.
Goodyear, AZ
Generational Arts Limited
New York, NY

Help End Hunger Now Foundation
Troy, MI

IDA Foundation for Autism and
Alzheimer's Research and Solution, Inc.
Homestead, Fl

J. D. Davis Community Service, Inc.
Inglewood, CA

Joy Center, Inc.
Stuart, FL
Lifeskills 411
Richmond, CA

Music Box Lurrine Burgess, The
Los Angeles, CA

One World Hunger
Union City, CA

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## Definition of Terms

Revenue rulings and revenue procedures
(hereinafter referred to as "rulings") that
have an effect on previous rulings use the
following defined terms to describe the
effect:

Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).

Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.

Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.

Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A

and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).

Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.

Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.

Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the new
ruling does more than restate the sub-

stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.

Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.

Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.

## Abbreviations

The following abbreviations in current
use and formerly used will appear in ma-
terial published in the Bulletin.

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

G.C.M .- Chief Counsel's Memorandum.

T.D. - Treasury Decision.

TFE-Transferee.

TFR-Transferor.

T.I.R .- Technical Information Release.

TP-Taxpayer.

TR-Trust.

CY-County.

LE-Lessee.

D-Decedent.

LP-Limited Partner.

LR-Lessor.

X-Corporation.

DE-Donee.

M-Minor.

Nonacq .- Nonacquiescence.

O Organization.

P-Parent Corporation.

PHC-Personal Holding Company.

PO-Possession of the U.S.

PR-Partner.

PRS-Partnership.

PTE-Prohibited Transaction Exemption.
Pub. L .- Public Law.

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

S.P.R .- Statement of Procedural Rules.

Stat .- Statutes at Large.

T-Target Corporation.

T.C .- Tax Court.

C-Individual.

C.B .- Cumulative Bulletin.

GE-Grantee.

GP-General Partner.

GR-Grantor.

IC-Insurance Company.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

TT-Trustee.

U.S.C .- United States Code.

DC-Dummy Corporation.

Del. Order-Delegation Order.

DISC-Domestic International Sales Corporation.
DR-Donor.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

ERISA-Employee Retirement Income Security Act.
EX-Executor.

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

BK-Bank.

B.T.A .- Board of Tax Appeals.

CFR-Code of Federal Regulations.

CI-City.

COOP-Cooperative.

Y-Corporation.

Z-Corporation.

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### Numerical Finding List1

Bulletins 2013-27 through 2013-44

#### Announcements:

2013-35, 2013-27 I.R.B. 46
2013-36, 2013-33 I.R.B. 142
2013-37, 2013-34 I.R.B. 155
2013-38, 2013-36 I.R.B. 185
2013-39, 2013-35 I.R.B. 167
2013-40, 2013-38 I.R.B. 226
2013-41, 2013-40 I.R.B. 322
2013-42, 2013-44 I.R.B. 464

#### Notices:

2013-41, 2013-29 I.R.B. 60
2013-42, 2013-29 I.R.B. 61
2013-43, 2013-31 I.R.B. 113
2013-44, 2013-29 I.R.B. 62
2013-45, 2013-31 I.R.B. 116
2013-46, 2013-31 I.R.B. 117
2013-47, 2013-31 I.R.B. 120
2013-48, 2013-31 I.R.B. 120
2013-49, 2013-32 I.R.B. 127
2013-50, 2013-32 I.R.B. 133
2013-51, 2013-34 I.R.B. 153
2013-52, 2013-35 I.R.B. 159
2013-53, 2013-36 I.R.B. 173
2013-54, 2013-40 I.R.B. 287
2013-55, 2013-38 I.R.B. 207
2013-56, 2013-39 I.R.B. 262
2013-57, 2013-40 I.R.B. 293
2013-58, 2013-40 I.R.B. 294
2013-59, 2013-40 I.R.B. 297
2013-60, 2013-44 I.R.B. 431
2013-61, 2013-44 I.R.B. 432
2013-63, 2013-44 I.R.B. 436
2013-64, 2013-44 I.R.B. 438
2013-65, 2013-44 I.R.B. 440

### Proposed Regulations:

REG-124148-05, 2013-44 I.R.B. 444

REG-161948-05, 2013-44 I.R.B. 449

REG-132251-11, 2013-37

I.R.B. 191

REG-111753-12, 2013-40

I.R.B. 302

REG-112815-12, 2013-35

I.R.B. 162

REG-114122-12, 2013-35

I.R.B. 163

REG-136630-12, 2013-40 I.R.B. 303

REG-140789-12, 2013-32

I.R.B. 136

REG-144990-12, 2013-39

I.R.B. 264

REG-110732-13, 2013-43

I.R.B. 405

REG-111837-13, 2013-39

I.R.B. 266

REG-113792-13, 2013-38

I.R.B. 211

REG-115300-13, 2013-37 I.R.B. 197

### Revenue Procedures:

2013-28, 2013-27 I.R.B. 28

2013-29, 2013-33 I.R.B. 141

2013-30, 2013-36

I.R.B. 173

2013-31, 2013-38

I.R.B. 208

2013-32, 2013-28

I.R.B. 55

2013-33, 2013-38

I.R.B. 209

2013-34, 2013-43 I.R.B. 398

### Revenue Rulings:

2013-13, 2013-32 I.R.B. 124
2013-15, 2013-28 I.R.B. 47
2013-16, 2013-40 I.R.B. 275
2013-17, 2013-38 I.R.B. 201
2013-18, 2013-37 I.R.B. 186
2013-19, 2013-39 I.R.B. 240
2013-20, 2013-40 I.R.B. 272
2013-21, 2013-43 I.R.B. 396

### Treasury Decisions:

9620, 2013-27 I.R.B. 1
9621, 2013-28 I.R.B. 49
9622, 2013-30 I.R.B. 64
9623, 2013-30 I.R.B. 73
9624, 2013-31 I.R.B. 86
9625, 2013-34 I.R.B. 147
9626, 2013-34 I.R.B. 149
9627, 2013-35 I.R.B. 156
9628, 2013-36 I.R.B. 169
9629, 2013-37 I.R.B. 188
9630, 2013-38 I.R.B. 199
9631, 2013-38 I.R.B. 205
9632, 2013-39 I.R.B. 241
9633, 2013-39 I.R.B. 227
9634, 2013-40 I.R.B. 272
9635, 2013-40 I.R.B. 273
9636, 2013-43 I.R.B. 331
9637, 2013-44 I.R.B. 427

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2013-1 through 2013-26 is in Internal Revenue Bulletin
2013-26, dated June 24, 2013.

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Finding List of Current Actions on Previously Published Items1

Revenue Procedures-Continued:

Revenue Procedures-Continued:

96-30

2003-61

Bulletins 2013-27 through 2013-44

Modified by

Superseded by

Rev. Proc. 2013-32, 2013-28 I.R.B. 55

Rev. Proc. 2013-34, 2013-43 I.R.B. 398

Notices:

97-48

Revenue Rulings:

2004-23

Situation 1 superseded, Situation 2 obsoleted by

Clarified by

Rev. Proc. 2013-30, 2013-36 I.R.B. 173

58-66

Notice 2013-57, 2013-40 I.R.B. 293

2003-43

Amplified and clarified by

Rev. Rul. 2013-17, 2013-38 I.R.B. 201

2004-50

Modified and superseded by

Clarified by

Rev. Proc. 2013-30, 2013-36 I.R.B. 173

2013-17

Notice 2013-57, 2013-40 I.R.B. 293

2003-48

Supplemented by

Notice 2013-61, 2013-44 I.R.B. 432

2005-70

Obsoleted in part and superseded in part by

Obsoleted by

Rev. Proc. 2013-32, 2013-28 I.R.B. 55

Treasury Decisions:

T.D. 9633, 2013-39 I.R.B. 227

9610

2004-34

Corrected by

2012-74

Modified and clarified by

Ann. 2013-41, 2013-40 I.R.B. 322

Obsoleted by

Rev. Proc. 2013-29, 2013-33 I.R.B. 141

Notice 2013-51, 2013-34 I.R.B. 153

9612

2004-48

Corrected by

2013-16

Modified and superseded by

Ann. 2013-35, 2013-27 I.R.B. 46

Superseded by

Rev. Proc. 2013-30, 2013-36 I.R.B. 173

Notice 2013-55, 2013-38 I.R.B. 207

9622

2004-49

Corrected by

2013-29

Sections 4.01 &amp; 4.02 modified and superseded,

Ann. 2013-39, 2013-35 I.R.B. 167

Clarified by

Section 4.03 obsoleted by

Notice 2013-60, 2013-44 I.R.B. 431

Rev. Proc. 2013-30, 2013-36 I.R.B. 173

2013-36

2007-44

Appendix updated by

Modified by

Notice 2013-55, 2013-38 I.R.B. 207

Ann. 2013-37, 2013-34 I.R.B. 155

Superseded by

2007-62

Notice 2013-55, 2013-38 I.R.B. 207

Modified and superseded by Rev. Proc. 2013-30, 2013-36 I.R.B. 173

2013-39

Amplified by

2009-25

Notice 2013-47, 2013-31 I.R.B. 120

Pilot program discontinued by

2013-40

Rev. Proc. 2013-32, 2013-28 I.R.B. 55

Amplified by

Notice 2013-47, 2013-31 I.R.B. 120

2011-18

Modified and clarified by

Revenue Procedures:

Rev. Proc. 2013-29, 2013-33 I.R.B. 141

81-60

2011-49

Modified by

Modified by

Rev. Proc. 2013-32, 2013-28 I.R.B. 55

Ann. 2013-37, 2013-34 I.R.B. 155

83-59

2012-25

Modified by

Obsoleted in part by

Rev. Proc. 2013-32, 2013-28 I.R.B. 55

Rev. Proc. 2013-28, 2013-27 I.R.B. 28

86-42

2013-1

Modified by

Amplified and modified by

Rev. Proc. 2013-32, 2013-28 I.R.B. 55

Rev. Proc. 2013-32, 2013-28 I.R.B. 55

90-52

2013-3

Modified by

Amplified and modified by

Rev. Proc. 2013-32, 2013-28 I.R.B. 55

Rev. Proc. 2013-32, 2013-28 I.R.B. 55

1A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2013-1 through 2013-26 is in Internal Revenue Bulletin 2013-26, dated June 24, 2013.

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## INDEX

### Internal Revenue Bulletins 27 through 44

The abbreviation and number in parenthesis following the index
entry refer to the specific item; numbers in roman and italic type
following the parentheses refer to the Internal Revenue Bulletin in
which the item may be found and the page number on which it
appears.

Key to Abbreviations:

Ann

Announcement

CD
Court Decision

DO
Delegation Order

EO
Executive Order

PL
Public Law

PTE
Prohibited Transaction Exemption

RP
Revenue Procedure

RR
Revenue Ruling

SPR
Statement of Procedural Rules

TC
Tax Convention

TD
Treasury Decision

TDO
Treasury Department Order

### EMPLOYEE PLANS

Accommodations for nonprofit organizations with religious ob-
jections to providing contraceptive services (TD 9624) 31, 86
Credit for employee health insurance expenses of small employ-
ers (REG-113792-13) 38, 211

Employee retirement benefit plan returns required on magnetic
media (REG-111837-13) 39, 266

Exemption for religious employers from the requirement to pro-
vide coverage for contraceptive services (TD 9624) 31, 86

Proposed Regulations:

26 CFR 1.45R-1 through 1.45R-5 added (tax credit for em-
ployee health insurance expenses of small employers)
(REG-113792-13) 38, 211

26 CFR 301.6057-3 added; 301.6058-2 added; 301.6059-2
added (employee retirement benefit plan returns required
on magnetic media) (REG-111837-13) 39, 266

Qualified plans, determination letters (Ann 37) 34, 155
Qualified plans, mortality tables (Notice 49) 32, 127
Regulations:

26 CFR 54.9815-2713 added (certain preventive services
under the ACA) (TD 9624) 31, 86

26 CFR 54.9815-2713A added (certain preventive services
under the ACA) (TD 9624) 31, 86

26 CFR 301.6103 amended (disclosure of return information)
(TD 9628) 36, 169

Update to Revenue Ruling 58-66 (RR 17) 38, 201

Weighted average interest rates:

Segment rates for:
July 2013 (Notice 46) 31, 117

August 2013 (Notice 52) 35, 159

September 2013 (Notice 58) 40, 294

Wellness regulations related to rewards, plan design, and alter-
natives to avoid prohibited discrimination (TD 9620) 27, 1

## EMPLOYMENT TAX

Disclosure of return information (TD 9628) 36, 169
Disclosure of return information reflected on returns to officers
and employees of the Department of Commerce for certain
statistical purposes and related activities (TD 9631) 38, 205
Regulations:

26 CFR part 301 amended; section 301.6103(j)(1) amended;
section 301.6103(j)(1)1-T amended; revising paras.
(b)(3)(xxix), (b)(3)(xxx) and (e) (TD 9631) 38, 205

Special administrative procedures for claims for refund and
adjustments of overpayments of employment tax with respect
to same-sex spouse benefits (Notice 61) 44, 432

Update to Revenue Ruling 58-66 (RR 17) 38, 201

## ESTATE TAX

Disclosure of return information (TD 9628) 36, 169
Update to Revenue Ruling 58-66 (RR 17) 38, 201

Valuation of certain farm, etc., real property (RR 19) 39, 240

## EXCISE TAX

Accommodations for nonprofit organizations with religious ob-
jections to providing contraceptive services (TD 9624) 31, 86
Branded prescription drugs (Notice 51) 34, 153

Disclosure of return information (TD 9628) 36, 169

Disclosure of return information reflected on returns to officers
and employees of the Department of Commerce for certain
statistical purposes and related activities (TD 9631) 38, 205

Exemption for religious employers from the requirement to pro-

vide coverage for contraceptive services (TD 9624) 31, 86
Indoor tanning services; excise taxes (TD 9621) 28, 49

Information reporting by applicable large employers on health
insurance coverage (REG-136630-12) 40, 303

Regulations:

26 CFR 40.0-1 amended; 40.6302(c)-1 amended (indoor
tanning services) (TD 9621) 28, 49

26 CFR 1.150-1 amended; 1.150-1T removed; 1.171-1 amend-
ed; 1.171-1T removed; 1.197-2 amended; 1.197-2T re-
moved; 1.249-1 amended; 1.249-1T removed; 1.475(a)-4
amended; 1.475(a)-4T removed; 1.860G-2 amended;
1.860G-2T removed; 1.1001-3 amended; 1.1001-3T re-
moved; 48.4101-1 amended; 48.4101-1T removed (removal
of regulatory references to credit ratings pursuant to section
939A of the Dodd-Frank Act (TD 9637) 44, 427

26 CFR 54.9815-2713 added (certain preventive services
under the ACA) (TD 9624) 31, 86

26 CFR 54.9815-2713A added (certain preventive services
under the ACA) (TD 9624) 31, 86

26 CFR 301.6103 amended (disclosure of return information)
(TD 9628) 36, 169

Removal of regulatory references to credit ratings pursuant to
section 939A of the Dodd-Frank Act (TD 9637) 44, 427
Transition relief for 2014 under sections 6055, 6056, and 4980H
(information reporting and employer shared responsibility pro-
visions) (Notice 45) 31, 116

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## EXCISE TAX-Cont.

Wellness regulations related to rewards, plan design, and alter-
natives to avoid prohibited discrimination (TD 9620) 27, 1

## EXEMPT ORGANIZATIONS

Proposed Regulations:

53 CFR 6011-1 amended; 53.6011-1T added; 53.6071-1
amended; 53.6071-1T added (requirement of a section
4959 excise tax return and time for filing the return)
(REG-115300-13) 37, 197

Requirement of a section 4959 excise tax return and time for
filing the return (REG-115300-13) 37, 197

Requirement of a section 4959 excise tax return and time for
filing the return (TD 9629) 37, 188

Revocations (Ann 42) 44, 464

## GIFT TAX

Disclosure of return information (TD 9628) 36, 169
Update to Revenue Ruling 58-66 (RR 17) 38, 201

## INCOME TAX

Action on Decision (AOD):

Media Space v. Commissioner 32
Wilson v. Commissioner 32

Advance payments, taxable year of inclusion (RP 29) 33, 141
Application of market reforms to certain healthcare arrangements
and guidance on EAPs and section 125(f)(3) (Notice 54) 40, 287
Application of section 108(i) to partnerships and S corporations
(TD 9623) 30, 73

Average area purchase price safe-harbor guidance for 2013 (RP
28) 27, 28

Capitalization of amounts paid to acquire, produce, or improve
tangible property (TD 9636) 43, 331

Certain transfers of property to Regulated Investment Companies
(RICs) and Real Estate Investment Trusts (REITs) (TD 9626)
34, 149

Credit for employee health insurance expenses of small employ-
ers (REG-113792-13) 38, 211

Croatian per se entity (Notice 44) 29, 62

Debt that is a position in personal property that is part of a
straddle (TD 9635) 40, 273

Debt that is a position in personal property that is part of a
straddle (REG-111753-12) 40, 302

Deduction for section 179 expense, qualified real property (No-
tice 59) 40, 297

Deferred discharge of indebtedness income of corporations (TD
9622) 30, 64

Deferred original issue discount deductions (TD 9622) 30, 64
Determining the amount of taxes paid for purposes of the foreign
tax credit (TD 9634) 40, 272

Disallowance of deductions, exception for reimbursed expenses
(TD 9625) 34, 147

Disciplinary actions involving attorneys, certified public accoun-
tants, enrolled agents, and enrolled actuaries (Ann 36) 33, 142
Disclosure of return information (TD 9628) 36, 169

# INCOME TAX-Cont.

Dispositions of property subject to depreciation under section
168 (REG-110732-13) 43, 404

Energy investment tax credit (Notice 60) 44, 431

Energy production tax credit (Notice 60) 44, 431

Gift cards (RP 29) 33, 141

Guidance for seeking equitable relief under section 66(c) or
section 6015(f) (RP 34) 43, 397

Guidance regarding deferred discharge of indebtedness income
of corporations and deferred original issue discount deduc-
tions; correcting TD 9622 (Ann 39) 35, 167

Information reporting by foreign financial institutions and withhold-
ing on certain payments to foreign financial institutions and other
foreign entities; correcting TD 9610 (Ann 41) 40, 322

Installment agreements and offer in compromise user fees
(REG-144990-12) 39, 264

Insurance, effectively connected income (RP 33) 38, 209
Interest:

Investment:

Federal short-term, mid-term, and long-term rates for:
July 2013 (RR 15) 28, 47

August 2013 (RR 13) 32, 124

September 2013 (RR 18) 37, 186

October 2013 (RR 21) 43, 394

Letter rulings that address issues presented in transactions described
in sections 332, 351, 355, 368, and 1036 (RP 32) 28, 55

Limitations on duplication of net built-in losses (TD 9633) 39,
227

Limitations on importation of net built-in losses (REG-161948-
05) 44, 449

Low-income housing tax credit (Notice 47) 31, 120

Low-income housing tax credit (RP 31) 38, 208

Low-income housing tax credit (Notice 63) 44, 436

Low-income housing tax credit (Notice 64) 44, 438

Mixed straddles; straddle-by-straddle identification under section
1092(b)(2)(A)(i)(I) (TD 9627) 35, 156

Mixed straddles; straddle-by-straddle identification under section
1092(b)(2)(A)(i)(I) (REG-112815-12) 35, 162

Noncompensatory partnership options; correcting TD 9612 (Ann
35) 27, 46

Per capita payments from proceeds of settlements of Indian tribal
trust cases (Notice 55) 38, 207

Premium tax credit (REG-140789-12) 32, 136

Premium tax credit, minimum essential coverage (Notice 41) 29,
60

Proposed Regulations:

26 CFR 1.36B-0 amended (premium tax credit) (REG-
140789-12) 32, 136

26 CFR 1.36B-5 amended (premium tax credit) (REG-
140789-12) 32, 136

26 CFR 1.45R-1 through 1.45R-5 added (tax credit for em-
ployee health insurance expenses of small employers)
(REG-113792-13) 38, 211

26 CFR 1.168(i)-0; 1.168(i)-1, 1.168(i)-7 amended (dispo-
sitions of property subject to depreciation under section
168) (REG-110732-13) 43, 404

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# INCOME TAX-Cont.

26 CFR 1.332-6 amended; 1.332-7 amended; 1.334-1
amended; 1.337-1 added; 1.351-3 amended; 1.358-6
amended; 1.362-3 added; 1.362-4 amended; 1.368-3
amended (limitations on the importation of net built-in
losses (REG-161948-05) 44, 449

26 CFR 1.851-5 amended (Regulated Investment Company
controlled group regulation examples) (REG-114122-12)
35, 163

26 CFR 1.1092-1 revised (debt that is a position in personal
property that is part of a straddle) (REG-111753-12) 40,
302

26 CFR 1.1092(b)-6 added (mixed straddles; straddle-by-
straddle identification under section 1092(b)(2)(A)(i)(I))
(REG-112815-12) 35, 162

26 CFR 1.6015-5 amended (relief from joint and several
liability) (REG-132251-11) 37, 191

26 CFR 300.1 amended; 26 CFR 300.2 amended; 26 CFR
300.3 amended (installment agreements and offer in com-
promise user fees) (REG-144990-12) 39, 264

Qualified exempt facility bonds (Notice 47) 31, 120

Qualified exempt facility bonds (Notice 63) 44, 436

Qualified residential rental projects (Notice 47) 31, 120

Qualified residential rental projects (Notice 63) 44, 436

Regulated Investment Company controlled group regulation ex-
amples (REG-114122-12) 35, 163

Regulations:

26 CFR 1.108(i)-0, 26 CFR 1.108(i)-1, and 26 CFR
1.108(i)-3 added (deferred discharge of indebtedness in-
come of corporations and deferred original issue discount
deductions) (TD 9622) 30, 64

26 CFR 1.108(i)-2 added; 1.108(i)-2T removed (application
of section 108(i) to partnerships and S corporations) (TD
9623) 30, 73

26 CFR 1.150-1 amended; 1.150-1T removed; 1.171-1
amended; 1.171-1T removed; 1.197-2 amended;
1.197-2T removed; 1.249-1 amended; 1.249-1T re-
moved; 1.475(a)-4 amended; 1.475(a)-4T removed;
1.860G-2 amended; 1.860G-2T removed; 1.1001-3
amended; 1.1001-3T removed; 48.4101-1 amended;
48.4101-1T removed (removal of regulatory references to
credit ratings pursuant to section 939A of the Dodd-Frank
Act (TD 9637) 44, 427

26 CFR 1.168(i)-7, and 1.263(a)-6 added; 1.162-11,
1.165-2, 1.167(a)-7, 1.167(a)-8, 1.263(a)-0, 1.263A-0,
1.263A-1, 1.1016-3, and 602.101 amended; 1.162-3T,
1.162-4T, 1.162-11T, 1.165-2T, 1.167(a)-4T, 1.167(a)-
7T, 1.167(a)-8T, 1.168(i)-7T, 1.263(a)-0T, 1.263(a)-1T,
1.263(a)-2T, 1.263(a)-3T, 1.263(a)-6T, 1.263A-1T, and
1.1016-3 removed; 1.162-3, 1.162-4, 1.167(a)-4,
1.263(a)-1, 1.263(a)-2, and 1.263(a)-3 revised (guidance
regarding deduction and capitalization of expenditures re-
lated to tangible property) (TD 9636) 43, 331

26 CFR 1.358-2 amended; 1.362-4 amended; 1.705-1
amended; 1.1367-1 amended; 602.101 amended (limita-
tions on duplication of net built-in losses) (TD 9633) 39,
227

# INCOME TAX-Cont.

26 CFR 1.482-7 amended; 1.482-7T removed (use of differ-
ential income stream as an application of the income
method) (TD 9630) 38, 199

26 CFR 1.901-2 amended; 1.901-2T removed (determining
the amount of taxes paid for purposes of the foreign tax
credit) (TD 9634) 40, 272

26 CFR 1.1092-1 revised (debt that is a position in personal
property that is part of a straddle) (TD 9635) 40, 273

26 CFR 1.1092(b)-6T added (mixed straddles; straddle-by-
straddle identification under section 1092(b)(2)(A)(i)(I))
(TD 9627) 35, 156

26 CFR 1.1471-1 (scope of chapter 4 and definitions) (Ann
41) 40, 322

26 CFR 1.5000A-0, 1.5000A-1, 1.5000A-2, 1.5000A-3,
1.5000A-4 added; 26 CFR 602.101 amended (shared re-
sponsibility payment for not maintaining minimum essen-
tial coverage) (TD 9632) 39, 241

26 CFR 301.6103 amended (disclosure of return information)
(TD 9628) 36, 169

Relief from joint and several liability (REG-132251-11) 37, 191
Removal of regulatory references to credit ratings pursuant to
section 939A of the Dodd-Frank Act (TD 9637) 44, 427

Research expenditures (REG-124148-05) 44, 444

S corporation elections (RP 30) 36, 173

Section 5000A transition relief for employees eligible to enroll in
non-calendar year health plans (Notice 42) 29, 61

Shared responsibility payment for not maintaining minimum
essential coverage (TD 9632) 39, 241

Standard Industry Fare Level (SIFL) (RR 20) 40, 272

Timeline for implementation of the requirements under sections
1471-1474, commonly known as FATCA (Notice 43) 31, 113
Transitional penalty relief and schedule for notices of incorrect
name/TIN combinations for information returns relating to
payment card and third party network transactions (Notice 56)
39, 262

2013 marginal production rates (Notice 53) 36, 173

2013 section 43 inflation adjustment (Notice 50) 32, 134

2013-2014 special per diem rates (Notice 65) 44, 440

Underpayments and overpayments, quarter beginning October 1,
2013 (RR 16) 40, 275

Update to Revenue Ruling 58-66 (RR 17) 38, 201

Use of differential income stream as an application of the income
method and as a consideration in assessing the best method
(TD 9630) 38, 199

Wash sales, money market fund shares (Notice 48) 31, 120

# SELF-EMPLOYMENT TAX

Update to Revenue Ruling 58-66 (RR 17) 38, 201

# TAX CONVENTION

U.S .- Belgium agreement regarding OECD report on the attribu-
tion of profits to permanent establishments (Ann 38) 36, 185

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